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): February 8, 2017 (February 7, 2017)

ARLINGTON ASSET INVESTMENT CORP.

(Exact name of Registrant as specified in its charter)

Virginia	54-1873198	001-34374
(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)

(703) 373-0200

(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.

Arlington Asset Investment Corp. (the “Company”) issued a press release on February 7, 2017 announcing its financial results for the quarter ended December 31, 2016. 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 Exhibit 99.1 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 this Current Report on Form 8-K, including Exhibit 99.1 hereto, shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, as amended.

Item 7.01Regulation FD Disclosure.

The Company has posted an updated investor presentation to its website, www.arlingtonasset.com.  A copy of the slide presentation is attached as Exhibit 99.2 hereto and incorporated herein by reference.  The foregoing information is not deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in filings under the Securities Act of 1933.

Forward-Looking Statements Disclaimer

This Current Report on Form 8-K contains “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements regarding future results or expectations about our investments, interest rates, portfolio allocation, dividends, financing agreements, returns on invested capital, investment strategy, taxes, portfolio, earnings, book value, housing market, compensation, growth in capital, agency mortgage-backed security (“MBS”) spreads, prepayments, hedging instruments, duration, credit performance of private-label MBS, cash flow and benefit of deferred tax asset value.  Forward-looking statements can be identified by forward-looking language, including words such as “believes,” “anticipates,” “views,” “expects,” “estimates,” “intends,” “may,” “plans,” “projects,” “potential,” “prospective,” “will” and similar expressions, or the negative of these words. Such forward-looking statements are based on facts and conditions as they exist at the time such statements are made.  Forward-looking statements are also based on predictions as to future facts and conditions, the accurate prediction of which may be difficult and involve the assessment of events beyond our control.  Forward-looking statements are further based on various operating and return assumptions. Caution must be exercised in relying on forward-looking statements.  Due to known and unknown risks, actual results may differ materially from expectations or projections. You should carefully consider these risks when you make a decision concerning an investment in our common stock or senior notes, along with the following factors, among others, that may cause our actual results to differ materially from those described in any forward-looking statements: availability of, and our ability to deploy, capital; growing our business primarily through our current strategy of focusing on acquiring primarily agency MBS; 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 and net capital losses  to offset future taxable income, including whether our shareholder 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 these strategies; the effect of changes in prepayment rates, interest rates and default rates on our portfolio; the effect of governmental regulation and actions; our ability to roll our repurchase agreements on favorable terms, if at all; our liquidity; our asset valuation policies; our decisions with respect to, and ability to make, future dividends; investing in assets other than MBS or pursuing business activities other than investing in MBS; our ability to maintain our exclusion from the definition of “investment company” under the Investment Company Act of 1940, as amended; our decision to not elect to be taxed as a real estate investment trust under the Internal Revenue Code; competition for investment opportunities, including competition from the U.S. Department of Treasury  and the U.S. Federal Reserve, for investments in agency MBS, as well as the timing of the termination by the U.S. Federal Reserve of its purchases of agency MBS; the federal conservatorship of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and related efforts, along with any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and the federal government; mortgage loan prepayment activity, modification programs and future legislative action; changes in, and success of, our acquisition, hedging and leverage strategies, changes in our asset allocation and changes in our operational policies, all of which may be changed by us without shareholder approval; failure of sovereign or municipal entities to meet their debt obligations or a downgrade in the credit rating of such debt obligations; fluctuations of the value of our hedge instruments; fluctuating quarterly operating results; changes in laws and regulations and industry practices that may adversely affect our business; volatility of the securities markets and activity in the secondary securities markets in the United States and elsewhere; our ability to successfully expand our business into areas other than investing in MBS; changes in, and our ability to remain in compliance with, law, regulations or governmental policies affecting our business; and the factors described in the sections entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015, subsequent Quarterly Reports on Form 10-Q and other documents filed by the Company with the SEC from time to time.  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, the Company is not obligated to, and does not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Item 9.01. Financial Statements and Exhibits.

(d) Exhibits.

99.1	Arlington Asset Investment Corp. Press Release dated February 7, 2017.
99.2	Fourth Quarter 2016 Investor Presentation posted to the Company’s website.

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:  February 8, 2017
	By:		/s/ Richard E. Konzmann
	Name:		Richard E. Konzmann
	Title:		Executive Vice President, Chief Financial Officer and Treasurer

EXHIBIT INDEX

Exhibit No.	Description
99.1	Arlington Asset Investment Corp. Press Release dated February 7, 2017.
99.2	Fourth Quarter 2016 Investor Presentation posted to the Company’s website.

EX-99.1

Exhibit 99.1

Contacts:

Media: 703.373.0200 or ir@arlingtonasset.com 

Investors: Rich Konzmann at 703.373.0200 or ir@arlingtonasset.com

Arlington Asset Investment Corp. Reports Fourth Quarter and Full Year 2016 Financial Results

ARLINGTON, VA, February 7, 2017 – Arlington Asset Investment Corp. (NYSE: AI) (the “Company” or “Arlington”) today reported a net loss of $41.4 million, or $1.79 per diluted share, and non-GAAP core operating income of $14.9 million, or $0.64 per diluted share, for the quarter ended December 31, 2016. A reconciliation of non-GAAP core operating income to GAAP net income (loss) before income taxes appears at the end of this press release.

Fourth Quarter 2016 Financial Highlights

• $1.79 per diluted share of GAAP net loss

• $0.64 per diluted share of non-GAAP core operating income

• $16.21 per share of book value

• $13.11 per share of tangible book value

• $0.625 per share dividend

Full Year 2016 Financial Highlights

• $1.79 per diluted share of GAAP net loss

• $2.75 per diluted share of non-GAAP core operating income

• $2.50 per share dividend

“The results of the U.S. Presidential election and the new administration’s anticipated fiscal policies raised expectations for faster economic growth and higher inflation.  This led to a repricing of financial assets with increased demand for equity assets and a sell-off in U.S. Treasuries, driving the 10-year U.S. Treasury rate up 100 basis points during the quarter,” said J. Rock Tonkel, Jr., the Company's President and Chief Executive Officer. “The rapid rise in rates and volatility led to agency MBS spread widening during the quarter, which resulted in an underperformance of the Company’s agency MBS portfolio relative to its interest rate hedges leading to a decline in tangible book value as of year-end.  Going forward, wider agency MBS spreads and lower expected prepayment speeds associated with higher rates should lead to more attractive investment opportunities benefiting future investment returns.  Overall, the Company has continued to generate a resilient stream of consistent spread income to support dividends in a tax advantaged manner to its shareholders.”  

Other Fourth Quarter Highlights

As of December 31, 2016, the Company’s agency MBS investment portfolio totaled $4,631 million in fair value, consisting of $3,911 million of specified agency mortgage-backed securities (“MBS”) and $720 million of net long to-be-announced (“TBA”) agency MBS.  As of December 31, 2016, the Company’s $4,631 million agency MBS investment portfolio was comprised primarily of the following:

• $720 million of 3.0% coupon 30-year agency TBA agency MBS

• $2,142 million of 3.5% coupon 30-year specified agency MBS

• $1,768 million of 4.0% coupon 30-year specified agency MBS

As of December 31, 2016, the Company’s net long TBA agency MBS investment portfolio had a purchase price of $719 million and market value of $720 million, resulting in a net GAAP carrying fair value of $1 million.  Under GAAP, the gross fair value of the agency MBS underlying the Company’s TBA commitments is not recognized on the balance sheet as the Company accounts for its TBA commitments as derivative instruments.  

As of December 31, 2016, the Company’s $3,911 million specified agency MBS portfolio had a weighted average amortized cost basis of $105.55 and a weighted average market price of $104.14.  The Company’s fixed-rate agency MBS are comprised of securities backed by specified pools of mortgage loans selected for their lower propensity for prepayment.  Weighted average pay-up premiums on the Company’s agency MBS portfolio, which represent the estimated price premium of agency MBS backed by specified pools over a generic TBA agency MBS, were almost one-half a percentage point as of December 31, 2016, compared to a weighted average pay-up premium of approximately one percentage point as of September 30, 2016.  

As of December 31, 2016, the Company had $3,649 million of repurchase agreements outstanding with a weighted average rate of 96 basis points and remaining weighted average maturity of 19 days secured by an aggregate of $3,851 million of agency MBS at fair value.  

The Company enters into various hedging transactions to mitigate the interest rate sensitivity of its cost of borrowing and the value of its agency MBS portfolio including interest rate swap agreements and put and call options on 10-year U.S. Treasury note futures.  

Under the terms of the Company’s interest rate swap agreements, the Company pays semiannual interest payments based on a fixed rate and receives quarterly variable interest payments based upon the prevailing three-month London Interbank Offered Rate (“LIBOR”) on the date of reset. As of December 31, 2016, the Company had $1,375 million in notional amount of interest rate swap agreements maturing in less than 3 years with a weighted average pay fixed rate of 1.10% and a remaining weighted average maturity of 1.7 years, $350 million in notional amount of interest rate swap agreements maturing between 3 to 7 years with a weighted average pay fixed rate of 1.84% and weighted average maturity of 3.7 years, and $1,600 million in notional amount of interest rate swap agreements maturing between 7 to 10 years with a weighted average pay fixed rate of 1.93% and a remaining weighted average maturity of 9.2 years.  In addition, the Company had $375 million in notional amount of forward starting two-year interest rate swap agreements that become effective in September and October of 2017 with a weighted average pay fixed rate of 1.13%.

In addition to interest rate swap agreements, the Company also had a series of contracts whereby the Company either purchased or sold put and call options on 10-year U.S. Treasury note futures to mitigate the interest rate sensitivity of the value of its agency MBS portfolio.  As of December 31, 2016, the Company purchased contracts that provide the Company with the option to put 10-year U.S. Treasury note futures to a counterparty with an equivalent notional amount of $1,650 million that were struck at a weighted average strike price per contract that equates to a 10-year U.S. Treasury rate of approximately 2.77%, and sold contracts that provide a counterparty the option to call 10-year U.S. Treasury note futures from the Company with an equivalent notional amount of $1,000 million that were struck at a weighted average strike price per contract that equates to a 10-year U.S. Treasury rate of approximately 2.24%.  In order to limit its exposure on the sold call options from a significant fall in long-term interest rates, the Company also purchased contracts that provide the Company with the option to call 10-year U.S. Treasury note futures from a counterparty with an equivalent notional amount of $1,000 million as of December 31, 2016 that were struck at a weighted average strike price per contract that equates to a 10-year U.S. Treasury rate of approximately 2.12%.

Interest income less interest expense on short-term financing on the Company’s agency MBS portfolio for the fourth quarter of 2016 and 2015 was $16.8 million and $24.4 million, respectively.  For the quarters ended December 31, 2016 and 2015, the amortization of the Company’s net premium on its agency MBS was $9.4 million and $7.1 million, respectively, and its weighted average yield on its agency MBS was 2.55% and 2.97%, respectively. The actual weighted-average constant prepayment rate (“CPR”) for the Company’s agency MBS was 12.90% and 7.82% for the fourth quarters of 2016 and 2015, respectively.

For the quarters ended December 31, 2016 and 2015, the Company reported TBA dollar roll income of $6.4 million and $2.4 million, respectively.  TBA dollar roll income is considered the economic equivalent of investing in agency MBS financed with a repurchase agreement and is calculated as the price discount of a forward-settling purchase of a TBA agency MBS relative to the “spot” sale of the same security.   Under GAAP, the Company accounts for its TBA commitments as derivative instruments and recognizes income from TBA dollar rolls as a component of net investment gains and losses in the Company’s financial statements.  

During the fourth quarter of 2016, the Company recorded net investment losses on its agency MBS investment portfolio, inclusive of TBA derivative positions, of $162.0 million and net investment gains on its related interest rate derivative hedging instruments of $128.4 million for a net investment loss on its hedged agency portfolio of $33.6 million.  Excluding TBA dollar roll income and interest rate swap net interest expense included in non-GAAP core operating income, the Company had net investment losses on its

agency MBS investment portfolio of $168.4 million and net investment gains on its related interest rate derivative hedging instruments of $132.7 million for a net investment loss on its hedged agency portfolio of $35.7 million, or $1.54 per share.

As of December 31, 2016, the Company’s private-label MBS portfolio consisted of $1.3 million at fair value.  Interest income less interest expense on short-term financing on the Company’s private-label MBS portfolio for the fourth quarter of 2016 and 2015 was $0.5 million and $2.7 million, respectively, including non-cash accretion of $0.2 million and $1.6 million, respectively.  During the fourth quarter of 2016, the Company sold private-label MBS for sale proceeds of $18.9 million.  

Corporate Tax Structure

The Company is subject to taxation as a corporation under Subchapter C of the Internal Revenue Code of 1986, as amended.  As of December 31, 2016, the Company’s estimated net operating loss carry-forward was $95.7 million that begins to expire in 2027 and its estimated net capital loss carry-forward was $310.9 million that begins to expire in 2019.  The Company’s estimated net operating and net capital loss carry-forwards as of December 31, 2016 are subject to potential adjustments up to the time of filing the Company’s income tax returns.  For GAAP accounting purposes, as of December 31, 2016 the Company had a deferred tax asset of $73.4 million, or $3.10 per share, which reflects a substantial valuation allowance against its net capital loss carry-forwards.  During the fourth quarter of 2016, the Company recorded an increase in the valuation allowance of $32.0 million, or $1.38 per diluted share, due primarily to unrealized losses on the Company’s agency MBS portfolio.

Distributions to Shareholders

The Company has announced the tax characteristics of the distributions paid on its common stock in calendar year 2016. The Company has determined that all of its cash distributions paid to shareholders in calendar year 2016 were returns of capital.  Shareholders should receive a Form 1099-DIV containing this information from their brokers, transfer agents or other institutions.

The Company’s Board of Directors approved a distribution to common shareholders of $0.625 per share for the fourth quarter of 2016.  The distribution was paid on January 31, 2017 to shareholders of record as of December 30, 2016.

The tax characterization of the Company’s distributions to shareholders is determined annually and reported to shareholders on Form 1099-DIV after the end of the calendar year.  As a C-corporation, distributions to shareholders of current or accumulated earnings and profits are qualified dividends eligible for the 23.8% maximum federal income tax rate whereas similar distributions to shareholders by a REIT of current or accumulated earnings and profits are nonqualified dividends subject to the higher 43.4% maximum federal tax rate, inclusive of the 3.8% Medicare tax rate, on ordinary income.  Any distributions in excess of current or accumulated earnings and profits would be reported as returns of capital instead of qualified dividends.  Distributions that are classified as returns of capital are nontaxable to the extent they do not exceed a shareholder's adjusted tax basis in the Company’s stock, or as a capital gain to the extent that the amount of the distribution exceeds a shareholder's adjusted tax basis in the Company’s stock. The tax rates referenced above are with respect to fiscal year 2016.  

Conference Call

The Company will hold a conference call for investors at 9:00 A.M. Eastern Time on Wednesday, February 8, 2017 to discuss the Company’s fourth quarter and full year 2016 results.

Investors may listen to the earnings call via the internet at: http://www.arlingtonasset.com/index.php?s=19.  Replays of the earnings call will be available for 60 days via webcast at the Internet address provided above, beginning two hours after the call ends.

Additional Information

The Company will make available additional quarterly information for the benefit of its shareholders through a supplemental presentation that will be available at the Company's website, www.arlingtonasset.com.  The presentation will be available on the Webcasts and Presentations section located under the Updates & Events tab of the Company's website.

About the Company

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

Statements concerning interest rates, portfolio allocation, financing costs, portfolio hedging, prepayments, dividends, book 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 political and monetary policies, changes in default rates, changes in prepayment rates, changes in the Company’s returns, changes in the use of the Company’s tax benefits, changes in the agency MBS asset yield, changes in the Company’s monetization of net operating loss carry-forwards, changes in the Company’s ability to generate cash earnings and dividends, preservation and utilization of the Company’s net operating loss and net capital loss carry-forwards, impacts of changes to and changes by Fannie Mae and Freddie Mac, actions taken by the U.S. Federal Reserve, the Federal Housing Finance Agency and the U.S. Treasury, availability of opportunities that meet or exceed the Company’s risk adjusted return expectations, ability and willingness to make future dividends, ability to generate sufficient cash through retained earnings to satisfy capital needs, and general economic, political, regulatory and market conditions.  These and other material risks are described in the Company's Annual Report on Form 10-K for the year ended December 31, 2015 and any other documents filed by the Company with the SEC from time to time, which 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 to follow

ARLINGTON ASSET INVESTMENT CORP.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

(Unaudited)

	December 31, 2016			December 31, 2015
ASSETS
Cash and cash equivalents	$	54,794		$	36,987
Interest receivable		11,646			11,936
Mortgage-backed securities, at fair value
Agency		3,911,375			3,865,316
Private-label		1,266			130,553
Derivative assets, at fair value		74,889			12,991
Deferred tax assets, net		73,432			97,530
Deposits		11,149			29,429
Other assets		3,003			18,197
Total assets	$	4,141,554		$	4,202,939
LIABILITIES AND EQUITY
Liabilities:
Repurchase agreements	$	3,649,102		$	2,834,780
Federal Home Loan Bank advances		—			786,900
Interest payable		3,434			2,436
Accrued compensation and benefits		5,406			5,170
Dividend payable		15,739			14,504
Derivative liabilities, at fair value		9,554			553
Other liabilities		1,247			1,132
Long-term debt		73,656			73,433
Total liabilities		3,758,138			3,718,908
Equity:
Common stock		236			230
Additional paid-in capital		1,910,284			1,898,085
Accumulated other comprehensive income, net of taxes		-			12,371
Accumulated deficit		(1,527,104	)		(1,426,655	)
Total equity		383,416			484,031
Total liabilities and equity	$	4,141,554		$	4,202,939
Book value per share	$	16.21		$	21.05
Tangible book value per share (1)	$	13.11		$	16.81
Shares outstanding (in thousands) (2)		23,651			22,994
(1) Tangible book value represents total stockholders' equity less net deferred tax assets.
(2) Represents shares of Class A common stock and Class B common stock outstanding plus vested restricted stock units convertible into Class A common stock less unvested restricted Class A common stock.

ARLINGTON ASSET INVESTMENT CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

(Unaudited)

	Fiscal Year 2016
		Total Year			Fourth Quarter			Third Quarter			Second Quarter			First Quarter
Interest income
Agency mortgage-backed securities		$	97,053		$	24,073		$	23,917		$	23,408		$	25,655
Private-label mortgage-backed securities			7,910			473			1,655			2,808			2,974
Other			373			31			82			135			125
Total interest income			105,336			24,577			25,654			26,351			28,754
Interest expense
Short-term debt			24,433			7,231			6,193			5,509			5,500
Long-term debt			4,789			1,205			1,197			1,194			1,193
Total interest expense			29,222			8,436			7,390			6,703			6,693
Net interest income			76,114			16,141			18,264			19,648			22,061
Investment (loss) gain, net
Realized gain (loss) on sale of available-for-sale investments,    net			4,777			2,931			2,439			(593	)		-
Other-than-temporary impairment charges			(1,737	)		-			-			(1,638	)		(99	)
(Loss) gain on trading investments, net			(41,249	)		(122,332	)		2,468			27,665			50,950
(Loss) gain from derivative instruments, net			(31,660	)		88,285			15,196			(34,381	)		(100,760	)
Other, net			551			(87	)		619			-			19
Total investment (loss) gain, net			(69,318	)		(31,203	)		20,722			(8,947	)		(49,890	)
General and administrative expenses
Compensation and benefits			11,526			2,776			3,430			2,756			2,564
Other general and administrative expenses			9,230			1,343			1,200			4,916			1,771
Total general and administrative expenses			20,756			4,119			4,630			7,672			4,335
(Loss) income before income taxes			(13,960	)		(19,181	)		34,356			3,029			(32,164	)
Income tax provision (benefit)			27,387			22,255			15,543			(9,865	)		(546	)
Net (loss) income		$	(41,347	)	$	(41,436	)	$	18,813		$	12,894		$	(31,618	)
Basic (loss) earnings per share		$	(1.79	)	$	(1.79	)	$	0.82		$	0.56		$	(1.38	)
Diluted (loss) earnings per share		$	(1.79	)	$	(1.79	)	$	0.81		$	0.56		$	(1.38	)
Weighted average shares outstanding (in thousands)
Basic			23,051			23,167			23,038			23,003			22,994
Diluted			23,051			23,167			23,349			23,070			22,994
Other comprehensive income (loss), net of taxes
Unrealized losses on available-for-sale securities			(6,197	)	$	-		$	(221	)	$	(1,006	)	$	(4,970	)
Reclassification in investment gain (loss), net, related to    sales and other-than-temporary impairment charges on    available-for-sale securities			(6,174	)		(4,685	)		(2,324	)		775			60
Comprehensive (loss) income		$	(53,718	)	$	(46,121	)	$	16,268		$	12,663		$	(36,528	)

The following tables present information on the Company’s investment and hedge portfolio as of December 31, 2016 (unaudited, dollars in thousands):

Agency MBS:

	Fair Value
Specified agency MBS	$	3,909,452
Inverse interest-only agency MBS		1,923
Total agency MBS		3,911,375
Net long agency TBA position		720,027
Total	$	4,631,402

Specified Agency MBS:

	Unpaid Principal Balance		Net Unamortized Purchase Premiums		Amortized Cost Basis		Net Unrealized Gain (Loss)			Fair Value		Market Price		Coupon		Weighted Average Remaining Life
30-year fixed rate:
3.5%	$	2,082,197	$	107,193	$	2,189,390	$	(47,680	)	$	2,141,710	$	102.86		3.50%		8.2
4.0%		1,671,822		101,201		1,773,023		(5,304	)		1,767,719		105.74		4.00%		6.9
5.5%		21		—		21		2			23		112.19		5.50%		5.7
Total/weighted-average	$	3,754,040	$	208,394	$	3,962,434	$	(52,982	)	$	3,909,452		104.14		3.72%		7.6

Net Long Agency TBA Dollar Roll Positions:

	Notional Amount:
	Net Long (Short) Position			Implied Cost Basis			Implied Fair Value			Net Carrying Amount
30-year 3.0% coupon purchase commitments	$	725,000		$	718,887		$	720,027		$	1,140
30-year 3.5% coupon purchase commitments		25,000			25,586			25,613			27
30-year 3.5% coupon sale commitments		(25,000	)		(25,602	)		(25,613	)		(11	)
Total dollar roll positions, net	$	725,000		$	718,871		$	720,027		$	1,156

Interest Rate Swaps Currently Effective:

			Weighted-average:
	Notional Amount		Fixed Pay Rate		Variable Receive Rate		Remaining Life (Years)		Fair Value
Years to maturity:
Less than 3 years	$	1,375,000		1.10%		0.97%		1.7	$	6,470
3 to less than 7 years		350,000		1.84%		1.00%		3.7		(769	)
7 to 10 years		1,600,000		1.93%		0.96%		9.2		50,511
Total / weighted-average	$	3,325,000		1.58%		0.97%		5.5	$	56,212

Forward-Starting Interest Rate Swaps:

			Weighted-average:
	Notional Amount		Fixed Pay Rate		Term After Effective Date (Years)		Fair Value
Effective in September / October 2017	$	375,000		1.13%		2.0	$	5,154

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

	Notional Amount Long/(Short)			Weighted-average Strike Price		Implied Strike Rate (1)		Net Fair Value
Purchased put options:
January 2017 expiration	$	950,000			120.8		2.87%	$	539
February 2017 expiration		700,000			122.6		2.64%		3,281
Total / weighted average for purchased put options	$	1,650,000			121.6		2.77%	$	3,820
Sold call options:
January 2017 expiration	$	(100,000	)		126.0		2.25%	$	(141	)
February 2017 expiration		(900,000	)		126.0		2.24%		(3,765	)
Total / weighted average for sold call options	$	(1,000,000	)		126.0		2.24%	$	(3,906	)
Purchased call options:
January 2017 expiration	$	1,000,000			127.1		2.12%	$	469
								$	383

(1) The implied strike rate is estimated based upon the weighted average strike price per option contract and the price of an equivalent U.S. Treasury note futures contract.

Non-GAAP Core Operating Income

In addition to the Company’s results of operations determined in accordance with generally accepted accounting principles as consistently applied in the United States (“GAAP”), the Company also reports “non-GAAP core operating income”.  The Company defines core operating income as “economic net interest income” less “core general and administrative expenses.”

Economic Net Interest Income

Economic net interest income, a non-GAAP financial measure, represents the interest income earned net of interest expense incurred from all of our interest bearing financial instruments as well as agency MBS which underlie, and are implicitly financed through, our TBA dollar roll transactions.  Economic net interest income is comprised of the following:

• net interest income determined in accordance with GAAP;

• TBA agency MBS dollar roll income, which is calculated as the price discount of a forward-settling purchase of a TBA agency MBS relative to the “spot” sale of the same security, earned ratably over the period beginning on the settlement date of the sale and ending on the settlement date of the forward-settling purchase; and

• net interest income or expense incurred from interest rate swap agreements.

In the Company’s consolidated statements of comprehensive income prepared in accordance with GAAP, TBA agency MBS dollar roll income and the net interest income or expense incurred from 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. We believe that economic net interest income assists investors in understanding and evaluating the financial performance of the Company’s long-term-focused, net interest spread-based investment strategy, prior to the deduction of core general and administrative expenses.  

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.  For the first and second quarters of 2016, core general and administrative expenses also exclude non-recurring expenses related to the 2016 proxy contest that are in excess of those normally incurred for an annual meeting of shareholders.

Non-GAAP Core Operating Income for Fiscal Year 2016

The following table presents the Company’s computation of core operating income for fiscal year 2016 (unaudited, amounts in thousands, except per share amounts):

	Fiscal Year 2016
	Total Year			Fourth Quarter			Third Quarter			Second Quarter			First Quarter
GAAP net interest income	$	76,114		$	16,141		$	18,264		$	19,648		$	22,061
TBA dollar roll income		19,261			6,426			5,321			3,719			3,795
Interest rate swap net interest expense		(17,825	)		(4,326	)		(5,126	)		(4,376	)		(3,997	)
Economic net interest income		77,550			18,241			18,459			18,991			21,859
Core and general administrative expenses		(13,802	)		(3,326	)		(3,612	)		(3,444	)		(3,420	)
Non-GAAP core operating income	$	63,748		$	14,915		$	14,847		$	15,547		$	18,439
Non-GAAP core operating income per    diluted share	$	2.75		$	0.64		$	0.64		$	0.67		$	0.80
Weighted average diluted shares    outstanding		23,202			23,343			23,349			23,070			23,040

The following table provides a reconciliation of GAAP pre-tax net (loss) income to non-GAAP core operating income for fiscal year 2016 (unaudited, amounts in thousands):

	Fiscal Year 2016
	Total Year			Fourth Quarter			Third Quarter			Second Quarter			First Quarter
GAAP (loss) income before income taxes	$	(13,960	)	$	(19,181	)	$	34,356		$	3,029		$	(32,164	)
Less:
Total investment loss (gain), net		69,318			31,203			(20,722	)		8,947			49,890
Stock-based compensation expense		2,975			793			1,018			647			517
Non-recurring proxy contest related    expenses		3,979			-			-			3,581			398
Add back:
TBA dollar roll income		19,261			6,426			5,321			3,719			3,795
Interest rate swap net interest expense		(17,825	)		(4,326	)		(5,126	)		(4,376	)		(3,997	)
Non-GAAP core operating income	$	63,748		$	14,915		$	14,847		$	15,547		$	18,439

Non-GAAP core operating income is used by management to evaluate the financial performance of the Company’s long-term 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 stockholders.  The Company believes that non-GAAP core operating income assists investors in understanding and evaluating the financial performance of the Company’s long-term investment strategy and core business activities over periods of time as well as its earnings capacity.  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 on U.S. Treasury note futures, do not affect the computation of non-GAAP core operating income.  In addition, the Company’s calculation of non-GAAP core operating income may not be comparable to other similarly titled measures of other companies.  Therefore, the Company believes that net income and comprehensive income determined in accordance with GAAP should be considered in conjunction with non-GAAP core operating income.

Non-GAAP Core Operating Income for Fiscal Year 2015

Beginning in the first quarter of 2016, the Company retrospectively applied its revised definition of core operating income to the quarterly and annual periods of fiscal year 2015.  The Company notes, however, that the non-GAAP core operating income measures computed for prior year periods are not directly comparable to the results computed for fiscal year ended December 31, 2016 as the Company solely utilized hedging instruments other than interest rate swap agreements prior to November 2015.  The economic costs or benefits of hedging instruments other than interest rate swap agreements do not affect the computation of non-GAAP core operating income.  The results of the Company’s retrospective application of its revised definition of core operating income to fiscal year 2015 are presented in the following table (unaudited, amounts in thousands, except per share amounts):

	Fiscal Year 2015
	Total Year			Fourth Quarter			Third Quarter			Second Quarter			First Quarter
GAAP net interest income	$	102,374		$	25,807		$	26,074		$	23,711		$	26,782
TBA dollar roll income		6,743			2,353			1,896			2,235			259
Interest rate swap net interest expense		(1,282	)		(1,282	)		—			—			—
Economic net interest income		107,835			26,878			27,970			25,946			27,041
Core general and administrative expenses		(13,642	)		(3,121	)		(3,639	)		(3,575	)		(3,307	)
Non-GAAP core operating income	$	94,193		$	23,757		$	24,331		$	22,371		$	23,734
Non-GAAP core operating income per diluted share	$	4.08		$	1.03		$	1.05		$	0.97		$	1.03
Weighted average diluted shares outstanding		23,088			23,066			23,065			23,098			23,096

The following table provides a reconciliation of GAAP pre-tax net income to non-GAAP core operating income for fiscal year 2015 (unaudited, amounts in thousands):

	Fiscal Year 2015
	Total Year			Fourth Quarter			Third Quarter			Second Quarter		First Quarter
GAAP income (loss) before income taxes	$	(30,842	)	$	23,486		$	(37,133	)	$	12,248	$	(29,443	)
Less:
Total investment (gain) loss, net		118,429			(1,653	)		59,757			7,518		52,807
Stock-based compensation expense		1,145			853			(189	)		370		111
Add back:
TBA dollar roll income		6,743			2,353			1,896			2,235		259
Interest rate swap net interest expense		(1,282	)		(1,282	)		—			—		—
Non-GAAP core operating income	$	94,193		$	23,757		$	24,331		$	22,371	$	23,734

EX-99.2

Investor Presentation Fourth Quarter 2016 Exhibit 99.2

Information Related to Forward-Looking Statements This presentation contains “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements regarding future results or expectations about our investments, interest rates, portfolio allocation, dividends, financing agreements, returns on invested capital, investment strategy, taxes, portfolio, earnings, book value, housing market, compensation, growth in capital, agency MBS spreads, prepayments, hedging instruments, duration, credit performance of private-label MBS, cash flow and benefit of deferred tax asset value. Forward-looking statements can be identified by forward-looking language, including words such as “believes,” “anticipates,” “views,” “expects,” “estimates,” “intends,” “may,” “plans,” “projects,” “potential,” “prospective,” “will” and similar expressions, or the negative of these words. Such forward-looking statements are based on facts and conditions as they exist at the time such statements are made. Forward-looking statements are also based on predictions as to future facts and conditions, the accurate prediction of which may be difficult and involve the assessment of events beyond our control. Forward-looking statements are further based on various operating and return assumptions. Caution must be exercised in relying on forward-looking statements. Due to known and unknown risks, actual results may differ materially from expectations or projections. You should carefully consider these risks when you make a decision concerning an investment in our common stock or senior notes, along with the following factors, among others, that may cause our actual results to differ materially from those described in any forward-looking statements: availability of, and our ability to deploy, capital; growing our business primarily through our current strategy of focusing on acquiring primarily agency mortgage-backed securities (“MBS”); 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, and net capital losses to offset future taxable income, including whether our shareholder 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 these strategies; the effect of changes in prepayment rates, interest rates and default rates on our portfolio; the effect of governmental regulation and actions; our ability to roll our repurchase agreements on favorable terms, if at all; our liquidity; our asset valuation policies; our decisions with respect to, and ability to make, future dividends; investing in assets other than MBS or pursuing business activities other than investing in MBS; our ability to maintain our exclusion from the definition of “investment company” under the Investment Company Act of 1940, as amended; our decision to not elect to be taxed as a real estate investment trust under the Internal Revenue Code; competition for investment opportunities, including competition from the U.S. Department of Treasury and the U.S. Federal Reserve, for investments in agency MBS, as well as the timing of the termination by the U.S. Federal Reserve of its purchases of agency MBS; the federal conservatorship of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and related efforts, along with any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and the federal government; mortgage loan prepayment activity, modification programs and future legislative action; changes in, and success of, our acquisition, hedging and leverage strategies, changes in our asset allocation and changes in our operational policies, all of which may be changed by us without shareholder approval; failure of sovereign or municipal entities to meet their debt obligations or a downgrade in the credit rating of such debt obligations; fluctuations of the value of our hedge instruments; fluctuating quarterly operating results; changes in laws and regulations and industry practices that may adversely affect our business; volatility of the securities markets and activity in the secondary securities markets in the United States and elsewhere; our ability to successfully expand our business into areas other than investing in MBS; changes in, and our ability to remain in compliance with, law, regulations or governmental policies affecting our business; and the factors described in the sections entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015, subsequent Quarterly Reports on Form 10-Q and other documents filed by the Company with the SEC from time to time. 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, the Company is not obligated to, and does not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Company Overview Arlington Asset Investment Corp. (“AI” or the “Company”) is an investment firm focused on securitized residential mortgage assets Invests in high quality liquid assets with substantial interest rate hedges to protect long-term capital and to produce predictable cash flows to support consistent dividends to shareholders Internally-managed Structured as a C-corp to enhance shareholder returns and optimize investment strategy Flexible investment allocation approach to achieve highest risk-adjusted returns Invest in interest rate sensitive agency MBS issued by Fannie Mae and Freddie Mac Invest opportunistically in credit sensitive private-label MBS NYSE Ticker AI Share Price (2/7/17) $15.27 Dividend Yield (2/7/17) 16.4% Market Cap (2//17) $361 million Total Assets (12/31/16) $4.1 billion Book Value Per Share (12/31/16) $16.21 Tangible Book Value Per Share (12/31/16) $13.11

Fixed-rate agency MBS portfolio Hedged to mitigate impact of increasing interest rates as economic environment shifts Hedged agency MBS portfolio enables the Company to earn targeted investment spread over investment cycle despite mark-to-market fluctuations in book value Specified agency MBS 100% selected for prepayment protections Actual portfolio weighted average CPR of 12.90% during the fourth quarter (2) Weighted average yield of specified agency MBS of 2.55% during the fourth quarter (3) Agency MBS Investment Portfolio Overview Agency MBS Portfolio Fair Value (dollars in thousands) Represents the fair value of the agency MBS underlying forward-settling purchase or sale commitments that are accounted for as derivatives in accordance with GAAP. The net carrying amount of the commitments are included in “derivatives” on the consolidated balance sheets. Represents the weighted average of the monthly annualized CPRs published in October, November, and December 2016 for agency MBS held as of the prior month-end. Excludes TBAs. Weighted average for the quarter ended December 31, 2016. Includes net long agency TBA positions that are accounted for as derivatives in accordance with GAAP. Agency MBS Investment Portfolio by Fixed Coupon (4) As of December 31, 2016: As of September 30, 2016:

Specified Agency MBS Investment Portfolio Specified pools of loans with original balances of up to $150K. Specified pools of loans with original balances between $150K and $175K. Specified pools of loans with original balances between $175K and $200K. Specified pools of loans refinanced through the Home Affordable Refinance Program (“HARP”). Specified pools of loans originated in Texas or California. Other specified pools include low FICO loans, 100% investor occupancy status loans, high LTV loans, and seasoned loans. Average WAC represents the weighted average coupon of the underlying collateral. Average age represents the weighted average age of the underlying collateral. Actual 3-month constant prepayment rate (“CPR”) represents annualized 3-month CPR published in January 2017 for securities held as of December 31, 2016. Remaining life represents the weighted average expected remaining life of the security based on expected future CPR. Duration is derived from the Citi’s “The Yield Book” model. Duration is a measure of how much the price of an asset or liability is expected to change if interest rates move in a parallel manner and is dependent upon several subjective inputs and assumptions. Actual results could differ materially from these estimates. In addition, different models could generate materially different estimates using similar inputs and assumptions. 30-Year Fixed-Rate Agency MBS Selected for Prepayment Characteristics

TBA Agency Investment Portfolio Net long position in TBA securities represent forward-settling contracts to purchase or sell agency MBS on a generic pool basis which are accounted for as derivatives in accordance with GAAP with the net carrying amount included in “derivatives” on the balance sheet. Excludes TBA securities entered into for economic hedging purposes. Duration is derived from the Citi’s “The Yield Book” model. Duration is a measure of how much the price of an asset or liability is expected to change if interest rates move in a parallel manner and is dependent upon several subjective inputs and assumptions. Actual results could differ materially from these estimates. In addition, different models could generate materially different estimates using similar inputs and assumptions. Represents the economic equivalent of net interest income (implied interest income net of financing costs) generated from the Company’s 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). Excludes the net interest cost or benefit of any associated hedging instruments. Cost basis is based upon the contractual price of the initial TBA purchase trade of each individual series of dollar roll transactions. TBA Agency Portfolio Generates Additional Spread Income Net Long TBA Position (1) as of December 31, 2016 (dollars in thousands): TBA Dollar Roll Income (3) (dollars in thousands):

Financing Summary 14 counterparties with access to 18 total counterparties Less than 10% of equity at risk with any one counterparty 6.9% of equity at risk with largest counterparty 27.6% of equity at risk with five largest counterparties Diversified Funding Sources As of December 31, 2016 (dollars in thousands)

Hedging Summary Hedge Position Helps Mitigate Impact of Rising Rates on Agency Portfolio Interest Rate Swaps as of December 31, 2016 (dollars in thousands) Duration is derived from the Citi’s “The Yield Book” model. Duration is a measure of how much the price of an asset or liability is expected to change if interest rates move in a parallel manner and is dependent upon several subjective inputs and assumptions. Actual results could differ materially from these estimates. In addition, different models could generate materially different estimates using similar inputs and assumptions. The implied strike rate is estimated based upon the weighted average strike price per option contract and the price of an equivalent 10-year U.S. Treasury note futures contract. Options on 10-year U.S. Treasury Note Futures as of December 31, 2016 (dollars in thousands)

Portfolio Weighted Average Statistics

Book Value Sensitivity to Rates and MBS Spreads Interest rate sensitivity of agency MBS and TBA commitments is derived from The Yield Book, a third-party model. Actual results could differ significantly from these estimates. Interest rate sensitivity is based on assumptions resulting in certain limitations, including (i) an instantaneous shift in rates with no changes to the slope of the yield curve, (ii) no changes in agency MBS spreads, (iii) no changes to the investment or hedge portfolio, (iv), an interest rate of less than 0% in certain portions of the curve, and (v) no changes to the deferred tax. Agency MBS spread sensitivity is derived from The Yield Book, a third-party model. Actual results could differ significantly from these estimates. The estimated change in book value reflects an assume spread duration of 5.9 years, which is a model-based assumption that is dependent upon the size and composition of our portfolio as well as economic conditions present as of December 31, 2016. The agency MBS spread sensitivity is based on assumptions resulting in certain limitations, including (i) no changes in interest rates, (ii) no changes to the investment or hedge portfolio, (iii) and no changes to the deferred tax asset. Interest Rate Sensitivity Interest rate sensitivity is the sensitivity of book value to changes in interest rates Assumes an instantaneous parallel shock to the forward yield curve Agency MBS Spread Sensitivity Agency MBS spread sensitivity is the sensitivity to our book value to changes in agency MBS spreads

MBS Portfolio Economics MBS Portfolio Net Spread Income Return on Investable Capital (1): Total investable capital is calculated as stockholders’ equity determined in accordance with GAAP, less the net deferred tax asset, plus long-term debt. Includes interest expense incurred from short-term debt and net interest expense incurred from interest rate swap agreements that have been allocated to the Company’s specified agency MBS portfolio based upon the relative average cost basis of agency MBS during the period. Excludes the economic cost or benefit of hedging instruments other than interest rate swap agreements. Calculated based upon weighted average repurchase agreement and average investable capital balances for the period. Expressed as an annualized percentage of average investable capital for the period. Expressed as an annualized percentage of average investable capital for the period. For example, for the fourth quarter, calculated as $6.4 million in dollar roll income (representing an implied net interest spread of 2.36% on a weighted average cost basis of $1.087 billion) less the net interest expense incurred during the period from interest rate swaps allocated to the Company’s TBA dollar roll portfolio (allocated based upon the relative average cost basis of TBAs during the period) divided by average investable capital for the period (annualized). All else being equal, as the average balance of the Company’s TBA dollar roll portfolio increases, the calculated annualized return on average investable capital will increase. Core general and administrative expenses represent non-interest expenses reported within the line item “total general and administrative” of the consolidated statements of comprehensive income less stock-based compensation expense.

Our C-corp structure benefits stockholders by providing a tax-advantaged dividend as we continue to utilize our net operating loss and net capital loss carry-forwards Net operating loss carry-forward of $96MM as of December 31, 2016 Net capital loss carry-forward of $311MM as of December 31, 2016 16.4% annualized dividend yield (1) 22.0% annualized dividend yield, on a tax adjusted basis (2) Structure provides flexibility as we are not required to distribute taxable earnings to stockholders Provides option to reinvest earnings and opportunistically benefit from market dislocation Allows investment flexibility as we are not bound by any substantial restrictions Based on the Company’s Class A common stock closing price on the NYSE of $15.27 on 2/7/2016. The annual dividend rate presented is calculated by annualizing the fourth quarter of 2016 dividend payment of $0.625 per share of Class A common stock. The Company maintains a variable dividend policy and the Board of Directors, in its sole discretion, approves the payment of dividends. Actual dividends in the future may differ materially from historical practice and from the annualized dividend rate presented. The Company's distributions to shareholders of current or accumulated earnings and profits (“E&P”) are qualified dividends eligible for the 23.8% maximum federal income tax rate whereas similar distributions to shareholders by a REIT of current or accumulated E&P are nonqualified dividends subject to the higher 43.4% maximum federal income tax rate on ordinary income. Any distributions in excess of current or accumulated E&P would be reported as a return of capital instead of qualified dividends. Distributions that are classified as returns of capital are nontaxable to the extent they do not exceed a shareholder’s adjusted tax basis in the Company’s common stock, or as a capital gain to the extent that the amount of the distribution exceeds a shareholder’s adjusted tax basis in the Company’s common stock. To provide the same after-tax return to a shareholder of distributions of current or accumulated E&P eligible for the 23.8% rate on qualified dividend income and otherwise subject to the maximum marginal rate on ordinary income, a REIT would be required to pay dividends providing a 22.0% yield.  Corporate Tax Structure Provides Enhanced Shareholder Returns and Flexibility

Internally-managed structure provides operating leverage Alignment of interest between shareholders and management Eliminates inherent conflicts of interest of externally managed structures Alignment of management compensation to Company performance Annual cash incentive compensation and long-term incentive stock compensation earned based on Company and stock performance 2016 GAAP G&A expenses include a total of $4MM in non-recurring proxy contest expenses (1) Core G&A Expenses as % of Investable Capital (1)(2) – Last 12 Months Efficient Internally Managed Structure Core general and administrative expense is calculated as expenses determined in accordance with GAAP less stock compensation, 2016 proxy contest fees that are in excess of those normally incurred for an annual meeting of shareholders and legacy litigation expenses in 2011 through 2014. Average investable capital is composed of shareholders’ equity plus long-term debt less deferred tax assets, net. Annual GAAP and Core G&A Expenses (1) – Last 12 Months (in thousands)

Appendix

Balance Sheet Tangible book value represents total stockholders' equity less net deferred tax assets. Represents shares of Class A common stock and Class B common stock outstanding plus vested restricted stock units convertible into Class A common stock less unvested restricted Class A common stock.

Statement of Comprehensive Income

Non-GAAP Core Operating Income (1) Core operating income and economic net interest income are non-GAAP financial measures. These non-GAAP measures are used by management to evaluate the financial performance of the Company’s long-term 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 stockholders. The Company believes that non-GAAP core operating income and economic net interest income assist investors in understanding and evaluating the financial performance of the Company’s long-term investment strategy and core business activities over periods of time as well as its earnings capacity. A limitation of utilizing these non-GAAP financial measures 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. The Company believes that net income and comprehensive income determined in accordance with GAAP should be considered in conjunction with non-GAAP core operating income and economic net interest income. Core operating income for the fourth quarter of 2015 did not include a full quarter of interest rate swap net interest expense as the Company solely utilized hedging instruments other than interest rate swap agreements prior to late November 2015. Reconciliation of GAAP pre-tax net income to non-GAAP core operating income (dollars in thousands):

Book Value Per Share Rollforward – Fourth Quarter 2016 Tangible book value represents total stockholders' equity less net deferred tax assets. Excludes TBA dollar roll income, which is included in non-GAAP core operating income. Excludes net interest expense incurred from interest rate swap agreements, which is included in non-GAAP core operating income.

Duration Gap Duration is derived from the Citi’s “The Yield Book” model. Duration is a measure of how much the price of an asset or liability is expected to change if interest rates move in a parallel manner and is dependent upon several subjective inputs and assumptions. Actual results could differ materially from these estimates. In addition, different models could generate materially different estimates using similar inputs and assumptions. Total liability and hedge duration is expressed in asset units. Long-term debt is excluded. Weighted average duration for interest rate swap agreements includes the Company’s forward-starting interest rate swap agreements, which have an aggregate notional amount of $375 million. Net Duration Gap as of December 31, 2016 (dollars in thousands) *Note: Hedged duration gap does not reflect the economic effects of options on U.S. Treasury note futures.*

Arlington has transitioned its portfolio from private-label to agency assets to achieve the highest risk adjusted returns December 31, 2009 December 31, 2011 December 31, 2013 Agency MBS capital allocation Private-label MBS capital allocation Arlington constantly evaluates different investment opportunities to allocate capital in order to achieve the highest risk adjusted returns Arlington has actively transitioned the allocation of capital towards agency MBS as levered returns, paired with Arlington’s hedging strategy, have become more attractive As markets and housing have recovered, private-label MBS returns have fallen relative to agency MBS Arlington's increased concentration of agency MBS has enhanced its ability to prudently leverage its balance sheet December 31, 2015 December 31, 2016 Agency MBS allocated capital is composed of MBS and its related interest receivable, repo, derivative instruments, deposits, net receivable or payable for unsettled securities and cash. Private-label MBS allocated capital is composed of MBS and its related repo.

Served as a Director of AI since co-founding the Company in 1989 Served as Vice Chairman and Chief Operating Officer from 1989 to 1999, Vice Chairman and Co-Chief Executive Officer from 1999 to 2003, Co-Chairman and Co-Chief Executive Officer from 2003 to 2005, Chairman and Chief Executive Officer from 2005 to 2014 and as Executive Chairman since 2014 Over 30 years of experience Served as Chief Executive Officer since 2014, Chief Operating Officer since 2007, and a Director of AI since March 2007 From 2004 to 2007, Mr. Tonkel served as President and Head of Investment Banking at FBR & Co. Over 30 years of experience J. Rock Tonkel, Jr. President and Chief Executive Officer Richard E. Konzmann EVP and Chief Financial Officer Brian J. Bowers Chief Investment Officer and Portfolio Manager Mr. Konzmann joined the Company in March 2015 Previously, he was with American Capital, Ltd., a publicly traded private equity firm and global asset manager of alternative investment funds including residential mortgage REITs, from 2002 until March 2015, most recently as Senior Vice President, Accounting Over 25 years of experience Mr. Bowers joined the Company in 2000 Previously, he was the Chief Portfolio Strategist for BB&T Capital Markets and the Portfolio Manager/Plan Sponsor of CareFirst, Inc. Over 30 years of experience Experienced Management Team Through Numerous Cycles Eric F. Billings Executive Chairman