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 7, 2018 (February 6, 2018)

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))

Indicate by check mark whether the registrant is an emerging growth company as defined in as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).

Emerging growth company ☐

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. ☐

Item 2.02. Results of Operations and Financial Condition.

Arlington Asset Investment Corp. (the “Company”) issued a press release on February 6, 2018 announcing its financial results for the quarter and full year ended December 31, 2017. 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.

Item 8.01Other Events.

The Company reported net income attributable to common shareholders of $7.1 million, or $0.25 per diluted common share, and non-GAAP core operating income of $16.5 million, or $0.58 per diluted common share, for the quarter ended December 31, 2017.  The Company reported book value of $13.43 per common share and tangible book value of $13.40 per common share as of December 31, 2017.  

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, 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 securities, 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, 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 most recent

Annual Report on Form 10-K, 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 6, 2018.
99.2	Fourth Quarter 2017 Investor Presentation.

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 7, 2018
	By:		/s/ Richard E. Konzmann
	Name:		Richard E. Konzmann
	Title:		Executive Vice President, Chief Financial Officer and Treasurer

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 2017 Financial Results

ARLINGTON, VA, February 6, 2018 – Arlington Asset Investment Corp. (NYSE: AI) (the “Company” or “Arlington”) today reported net income available to common shareholders of $7.1 million, or $0.25 per diluted common share, income before income taxes available to common shareholders of $20.8 million, or $0.73 per diluted common share, and non-GAAP core operating income of $16.5 million, or $0.58 per diluted common share, for the quarter ended December 31, 2017. 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 2017 Financial Highlights

• $0.25 per diluted common share of GAAP net income, including a $0.48 per diluted common share income tax provision

• $0.73 per diluted common share of GAAP pre-tax income

• $0.58 per diluted common share of non-GAAP core operating income

• $13.43 per common share of book value

• $13.40 per common share of tangible book value

• $0.55 per common share dividend

Full Year 2017 Financial Highlights

• $0.66 per diluted common share of GAAP net income, including a $1.52 per diluted common share income tax provision

• $2.18 per diluted common share of GAAP pre-tax income

• $2.26 per diluted common share of non-GAAP core operating income

• $2.275 per common share dividend

“Arlington produced strong results for both the fourth quarter and the year delivering a 20% economic return to shareholders in 2017, measured as the change in tangible book value per common share plus common share dividends, through an environment in which the Federal Reserve raised short-term interest rates 100 basis in twelve months,” said J. Rock Tonkel, Jr., the Company's President and Chief Executive Officer.  “The Company’s earnings for the fourth quarter benefited from lower prepayment speeds leading to higher yields on agency mortgage-backed securities (“MBS”) as well as lower net funding costs, demonstrating the benefit of the Company’s substantial interest rate hedge position.  As of year-end, the notional amount of the Company’s interest rate swaps was 98% of its outstanding repurchase agreement financing.  The maturities of the Company’s interest rate swaps are well matched to the expected life of the Company’s agency MBS funded with repurchase agreement financing, which mitigates the impact of rising interest rates on the Company’s spread earnings.  In addition, available agency MBS spread returns on new investments have improved since the start of the year, further muting the impact of rising interest rates on the Company’s spread earnings.  The Company continues to believe that its hedged agency MBS investment portfolio is well positioned to deliver attractive risk-adjusted returns to shareholders on a tax advantaged basis.”

Other Fourth Quarter Highlights

As of December 31, 2017, the Company’s agency MBS investment portfolio totaled $5,351 million in fair value, consisting of $4,054 million of specified agency MBS and $1,297 million of net long to-be-announced (“TBA”) agency MBS.  As of December 31, 2017, the Company’s $5,351 million agency MBS investment portfolio was comprised of the following:

• $255 million of 3.0% coupon 15-year agency MBS

• $2,082 million of 3.5% coupon 30-year agency MBS

• $2,804million of 4.0% coupon 30-year agency MBS

• $210 million of 4.5% coupon 30-year agency MBS

As of December 31, 2017, the Company’s $4,054 million specified agency MBS portfolio had a weighted average amortized cost basis of $105.60 and a weighted average market price of $104.89.  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 approximately six-tenths of a percentage point as of December 31, 2017, relatively unchanged from September 30, 2017.

As of December 31, 2017, the Company’s net long TBA agency MBS investment portfolio had a purchase price of $1,296 million and market value of $1,297 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, 2017, the Company had $3,667 million of repurchase agreements outstanding with a weighted average rate of 1.56% and remaining weighted average maturity of 13 days secured by an aggregate of $3,859 million of agency MBS at fair value.  

Interest income less interest expense on short-term secured financing on the Company’s agency MBS portfolio was $16.8 million for the fourth quarter of 2017 compared to $16.0 million for the third quarter of 2017, including the amortization of the Company’s net premium on its agency MBS of $8.6 million for the fourth quarter of 2017 compared to $8.8 million for the third quarter of 2017.  The Company’s weighted average yield on its agency MBS was 2.86% for the fourth quarter of 2017 compared to 2.80% for the third quarter of 2017, and the actual weighted-average constant prepayment rate (“CPR”) for the Company’s agency MBS was 9.55% for the fourth quarter of 2017 compared to 10.29% for the third quarter of 2017.  The Company’s weighted average cost of repurchase agreement funding was 1.37% during the fourth quarter of 2017 compared to 1.31% during the third quarter of 2017.

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, U.S. Treasury note futures, put and call options on 10-year U.S. Treasury note futures, and options on agency MBS.  

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, 2017, the Company had $3,600 million in notional amount of interest rate swap agreements with a weighted average pay fixed rate of 1.67% and a remaining weighted average maturity of 5.1 years.  The Company’s weighted average net pay rate of its interest rate swap agreements was 0.28% during the fourth quarter of 2017 compared to 0.47% during the third quarter of 2017.

In addition to interest rate swap agreements, the Company held $650 million in equivalent notional amount of short positions in 10-year U.S. Treasury note futures that were purchased during the fourth quarter of 2017 when the 10-year U.S. Treasury rate was 2.35% and held $21.6 million in equivalent notional amount of short positions in 5-year U.S. Treasury note futures that were purchased during the fourth quarter of 2017 when the 5-year U.S. Treasury rate was 2.06%.  

The Company reported TBA dollar roll income of $7.2 million for the fourth quarter of 2017 compared to $6.4 million for the third quarter of 2017.  The implied weighted-average net interest spread of the Company’s TBA dollar rolls was 1.98% for the fourth quarter of 2017 compared to 2.10% for the third quarter of 2017.  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.  

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 investment portfolio of $28.5 million and net investment gains on its related interest rate derivative hedging instruments of $34.0 million for a net investment gain on its hedged investment portfolio of $5.5 million, or $0.19 per diluted common share for the fourth quarter of 2017.

Income Taxes

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, 2017, the Company estimated its net operating loss (“NOL”) carryforward at $60.7 million that begins to expire in 2027, its net capital loss (“NCL”) carryforward at $314.3 million that begins to expire in 2019, and its alternative minimum tax (“AMT”) credit carryforward at $9.1 million that does not expire.  The Company’s estimated loss and tax credit carry-forwards as ofDecember 31, 2017 are subject to potential adjustments up to the time of filing the Company’s income tax returns.  

On December 22, 2017, the President signed the Tax Cuts and Jobs Act, which provides for substantial changes to the taxation of individuals and corporations with an effective date of January 1, 2018.  For corporate tax payers, the federal income tax rate was lowered from 35% to 21%.  Under GAAP accounting, the Company is required to recognize the effects of changes in tax laws and rates on deferred tax assets and liabilities in the period the legislation is enacted.  As a result of the decrease in the Company’s effective tax rate, the Company recorded a charge to its income tax provision of $0.4 million in the fourth quarter of 2017.  The Tax Cuts and Jobs Act does not have an impact on the amount of the Company’s existing NOL and NCL carryforwards or its ability to utilize them.

As part of the Tax Cuts and Jobs Act, the corporate AMT is repealed for tax years beginning after December 31, 2017.  Any AMT credit carryforward after that date can be continued to be utilized to offset the taxpayer’s regular tax liability.  Further, for 2018 through 2020, to the extent that AMT credit carryforwards exceed the regular tax liability, 50% of the excess AMT credit carryforwards would be refundable in cash with any remaining AMT credit carryforwards fully refundable in 2021.  Since the ultimate collectability of the AMT credit carryforward is now certain with a significant portion of it likely to be realized through a cash refund, the Company has reclassified its AMT credit carryforward from net deferred tax asset to other assets on its consolidated balance sheet as of December 31, 2017.  For GAAP purposes, the Company had a net deferred tax asset of $0.8 million, or $0.03 per common share, and an AMT credit carryforward within other assets on its consolidated balance sheet of $9.1 million, or $0.32 per common share as of December 31, 2017.

Distributions to Shareholders

The Company’s Board of Directors approved a distribution to common shareholders of $0.55 per share for the fourth quarter of 2017.  The distribution was paid on January 31, 2018 to shareholders of record as of December 29, 2017.  The Company’s Board of Directors also approved a distribution to its Series B preferred shareholders of $0.4375 per share for the fourth quarter of 2017.  The distribution was paid on January 2, 2018 to shareholders of record as of December 11, 2017.

The Company has also announced the tax characteristics of the distributions paid to its common and preferred shareholders in calendar year 2017.  The Company’s distributions paid to common shareholders in 2017 of $2.35 per share consisted of $1.266051 per share of qualified dividends and $1.083949 per share as a return of capital.  The Company’s distributions paid to its Series B preferred shareholders in 2017 of $0.6755 per share were all qualified dividends.  Shareholders should receive a Form 1099-DIV containing this information from their brokers, transfer agents or other institutions.  The fourth quarter of 2017 distributions to the Company’s common and preferred shareholders paid in January 2018 will be reported as a 2018 distribution for federal income tax purposes.  

As a C corporation, distributions to common and preferred 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 effective federal tax rate for 2017 (33.4% maximum effective federal tax rate beginning January 1, 2018), each 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.

Conference Call

The Company will hold a conference call for investors at 8:30 A.M. Eastern Time on Wednesday, February 7, 2018 to discuss the Company’s fourth quarter and full year 2017 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, utilization of loss carryforwards 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 and other assumptions underlying our estimates related to our projections of future core earnings, 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 carryforwards, 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 carryforwards, 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 most recent Annual Report on Form 10-K 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. 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 the Company.  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.

Financial data to follow

ARLINGTON ASSET INVESTMENT CORP.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

(Unaudited)

	December 31, 2017			September 30, 2017
ASSETS
Cash and cash equivalents	$	21,614		$	26,368
Interest receivable		12,546			12,428
Sold securities receivable		—			92,882
Mortgage-backed securities, at fair value
Agency		4,054,424			3,994,515
Private-label		76			54
Derivative assets, at fair value		763			4,177
Deferred tax assets, net		800			23,453
Deposits, net		59,103			59,317
Other assets		11,203			2,405
Total assets	$	4,160,529		$	4,215,599
LIABILITIES AND EQUITY
Liabilities:
Repurchase agreements	$	3,667,181		$	3,694,838
Interest payable		4,418			2,813
Accrued compensation and benefits		5,015			4,210
Dividend payable		17,550			17,044
Derivative liabilities, at fair value		4,833			7,146
Purchased securities payable		—			21,962
Other liabilities		1,335			1,190
Long-term unsecured debt		73,880			73,824
Total liabilities		3,774,212			3,823,027
Equity:
Preferred stock (liquidation preference of $7,582 and $7,375, respectively)		7,108			6,904
Common stock		281			280
Additional paid-in capital		1,974,941			1,972,463
Accumulated deficit		(1,596,013	)		(1,587,075	)
Total equity		386,317			392,572
Total liabilities and equity	$	4,160,529		$	4,215,599
Book value per common share (1)	$	13.43		$	13.71
Tangible book value per common share (2)	$	13.40		$	12.88
Common shares outstanding (in thousands) (3)		28,197			28,094
(1) Book value per common share is calculated as total equity less the preferred stock liquidation preference divided by common shares outstanding.
(2) Tangible book value per common share is calculated as total equity less the preferred stock liquidation preference and net deferred tax assets divided by common shares outstanding.
(3) Represents common shares outstanding plus vested restricted stock units convertible into common stock less unvested restricted common stock.

ARLINGTON ASSET INVESTMENT CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

(Unaudited)

	Year Ended			Three Months Ended
	December 31, 2017			December 31, 2017			September 30, 2017			June 30, 2017			March 31, 2017
Interest income
Agency mortgage-backed securities	$	120,968		$	30,514		$	28,771		$	31,397		$	30,286
Private-label mortgage-backed securities		101			19			2			43			37
Other		179			76			62			21			20
Total interest income		121,248			30,609			28,835			31,461			30,343
Interest expense
Short-term secured debt		46,648			13,727			12,748			11,314			8,859
Long-term unsecured debt		4,866			1,225			1,220			1,214			1,207
Total interest expense		51,514			14,952			13,968			12,528			10,066
Net interest income		69,734			15,657			14,867			18,933			20,277
Investment gain (loss), net
Gain (loss) on trading investments, net		2,424			(23,208	)		13,996			15,855			(4,219	)
Gain (loss) from derivative instruments, net		3,224			33,169			(572	)		(31,678	)		2,305
Other, net		226			277			(56	)		(147	)		152
Total investment gain (loss), net		5,874			10,238			13,368			(15,970	)		(1,762	)
General and administrative expenses
Compensation and benefits		13,203			3,505			3,449			2,804			3,445
Other general and administrative expenses		5,367			1,442			1,095			1,350			1,480
Total general and administrative expenses		18,570			4,947			4,544			4,154			4,925
Income (loss) before income taxes		57,038			20,948			23,691			(1,191	)		13,590
Income tax provision		39,603			13,707			823			16,737			8,336
Net income (loss)		17,435			7,241			22,868			(17,928	)		5,254
Dividend on preferred stock		(251	)		(133	)		(83	)		(35	)		—
Net income (loss) available (attributable) to    common stock	$	17,184		$	7,108		$	22,785		$	(17,963	)	$	5,254
Basic earnings (loss) per common share	$	0.67		$	0.25		$	0.86		$	(0.74	)	$	0.22
Diluted earnings (loss) per common share	$	0.66		$	0.25		$	0.85		$	(0.74	)	$	0.22
Weighted average common shares outstanding (in    thousands)
Basic		25,649			28,192			26,377			24,319			23,652
Diluted		26,011			28,580			26,856			24,319			23,897

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.  

Non-GAAP Core Operating Income Results

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

	Year Ended			Three Months Ended
	December 31, 2017			December 31, 2017			September 30, 2017			June 30, 2017			March 31, 2017
GAAP net interest income	$	69,734		$	15,657		$	14,867		$	18,933		$	20,277
TBA dollar roll income		21,291			7,171			6,424			4,298			3,398
Interest rate swap net interest expense		(17,334	)		(2,434	)		(4,198	)		(5,293	)		(5,409	)
Economic net interest income		73,691			20,394			17,093			17,938			18,266
Core general and administrative expenses		(14,644	)		(3,768	)		(3,171	)		(3,681	)		(4,024	)
Preferred stock dividend		(251	)		(133	)		(83	)		(35	)		—
Non-GAAP core operating income	$	58,796		$	16,493		$	13,839		$	14,222		$	14,242
Non-GAAP core operating income per    diluted common share	$	2.26		$	0.58		$	0.52		$	0.58		$	0.60
Weighted average diluted common    shares outstanding		26,011			28,580			26,856			24,552			23,897

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

	Year Ended			Three Months Ended
	December 31, 2017			December 31, 2017			September 30, 2017			June 30, 2017			March 31, 2017
GAAP income (loss) before income taxes	$	57,038		$	20,948		$	23,691		$	(1,191	)	$	13,590
Less:
Total investment (gain) loss, net		(5,874	)		(10,238	)		(13,368	)		15,970			1,762
Stock-based compensation expense		3,926			1,179			1,373			473			901
Preferred stock dividend		(251	)		(133	)		(83	)		(35	)		—
Add back:
TBA dollar roll income		21,291			7,171			6,424			4,298			3,398
Interest rate swap net interest expense		(17,334	)		(2,434	)		(4,198	)		(5,293	)		(5,409	)
Non-GAAP core operating income	$	58,796		$	16,493		$	13,839		$	14,222		$	14,242

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 common 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.

The following tables present information on the Company’s investment and hedge portfolio as of December 31, 2017 (unaudited, dollars in thousands):

Agency MBS:

	Fair Value
Specified agency MBS	$	4,054,424
Net long agency TBA position		1,296,978
Total	$	5,351,402

Specified Agency MBS:

	Unpaid Principal Balance		Net Unamortized Purchase Premiums		Amortized Cost Basis		Net Unrealized Gain (Loss)			Fair Value		Market Price		Coupon			Weighted Average Expected Remaining Life
30-year fixed rate:
3.5%	$	1,009,752	$	47,932	$	1,057,684	$	(17,716	)	$	1,039,968	$	102.99		3.50	%		7.6
4.0%		2,658,650		154,153		2,812,803		(8,920	)		2,803,883		105.46		4.00	%		6.4
4.5%		196,961		14,446		211,407		(855	)		210,552		106.90		4.50	%		5.0
5.5%		19		—		19		2			21		111.00		5.50	%		5.7
Total/weighted-average	$	3,865,382	$	216,531	$	4,081,913	$	(27,489	)	$	4,054,424		104.89		3.90	%		6.5

Net Long Agency TBA Positions:

	Notional Amount:
	Net Long (Short) Position		Implied Cost Basis		Implied Fair Value		Net Carrying Amount
3.0% 15-year MBS purchase commitments	$	250,000	$	254,873	$	254,766	$	(107	)
3.5% 30-year MBS purchase commitments		1,015,000		1,041,496		1,042,212		716
Total TBA commitments, net	$	1,265,000	$	1,296,369	$	1,296,978	$	609

Interest Rate Swap Agreements:

			Weighted-average:
	Notional Amount		Fixed Pay Rate			Variable Receive Rate			Net Receive (Pay) Rate			Remaining Life (Years)		Fair Value
Years to maturity:
Less than 3 years	$	1,300,000		1.28	%		1.51	%		0.23	%		1.8	$	(248	)
3 to less than 7 years		700,000		1.87	%		1.48	%		(0.39	)%		3.9		(454	)
7 to 10 years		1,600,000		1.90	%		1.55	%		(0.35	)%		8.3		(2,636	)
Total / weighted-average	$	3,600,000		1.67	%		1.52	%		(0.15	)%		5.1	$	(3,338	)

U.S. Treasury Note Futures:

	Maturity Date	Notional Amount		Net Fair Value
5-year U.S. Treasury note futures	March 2018	$	21,600	$	(20	)
10-year U.S. Treasury note futures	March 2018		650,000		(1,321	)

The following table presents information about the components of the Company’s net deferred tax assets as of December 31, 2017 and September 30, 2017 (unaudited, dollars in thousands):

	As of December 31, 2017						As of September 30, 2017
	Gross Amount			Tax Effected			Gross Amount			Tax Effected
Ordinary deferred tax assets:
NOL carryforward	$	60,681		$	15,619		$	69,720		$	27,121
AMT credit carryforward (1)		—			—			8,952			8,952
Deferred net loss on designated derivatives		17,020			4,381			17,268			6,717
Stock-based compensation		7,768			1,999			6,589			2,563
Net unrealized gain on designated derivatives		(82,434	)		(21,218	)		(56,651	)		(22,037	)
Other, net		72			19			351			137
Total ordinary deferred tax assets, net		3,107			800			46,229			23,453
Capital deferred tax assets:
NCL carryforward		314,276			80,895			309,751			120,493
Net unrealized loss on investments		91,030			23,431			82,135			31,951
Valuation allowance		(405,306	)		(104,326	)		(391,886	)		(152,444	)
Total capital deferred tax assets, net		—			—			—			—
Total deferred tax assets, net	$	3,107		$	800		$	46,229		$	23,453

(1) In response to the Tax Cuts and Jobs Act’s repeal of corporate AMT and its associated refund provisions applicable to existing AMT credits, in the fourth quarter of 2017, the Company reclassified its AMT credit carryforward from “deferred tax assets, net” to “other assets” on its consolidated balance sheets.

EX-99.2

Investor Presentation Fourth Quarter 2017 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 most recent Annual Report on Form 10-K, 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 Investment firm focused on securitized residential mortgage assets Invest 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 other asset classes NYSE Ticker AI Share Price (2/6/18) $10.20 Book Value Per Common Share (12/31/17) $13.43 Tangible Book Value Per Common Share (12/31/17) $13.40 GAAP Net Income per Diluted Share (Q4 17) $0.25 Non-GAAP Core Operating Income per Diluted Share (Q4 17) $0.58 Return on Investable Capital (Q4 17) (1) 14.79% Dividend per Common Share (Q4 17) $0.55 Dividend Yield (2/6/18) 21.6% Market Cap (2/6/18) $287 million Total Investment Portfolio (12/31/17) $5.4 billion (1) See slide 10.

Publicly Traded Capital Class A Common Stock Ticker: AI Exchange: NYSE Market Capitalization: $287 million (1) Annual Dividend Yield: 21.6% (1) Senior Notes Due 2023 Ticker: AIW Exchange: NYSE Per Annum Interest Rate: 6.625% Payable Quarterly Maturity Date: May 1, 2023 Senior Notes Due 2025 Ticker: AIC Exchange: NYSE Per Annum Interest Rate: 6.75% Payable Quarterly Maturity Date: March 15, 2025 Series B Cumulative Perpetual Redeemable Preferred Stock Ticker: AI PrB Exchange: NYSE Per Annum Dividend Rate: 7.00% Payable Quarterly (1) As of February 6, 2018.

As of December 31, 2017: $5.35 Billion Fair Value As of September 30, 2017: $5.39 Billion Fair Value Agency MBS Investment Portfolio Allocation Specified Pool vs. TBA Allocation (1) Includes the fair value of the agency MBS underlying forward-settling “to-be-announced (“TBA”) purchase or sale commitments that are accounted for as derivative instruments in accordance with GAAP. The difference between the contractual forward price of the Company’s TBA commitments and the fair value of the underlying MBS is reflected on the Company’s consolidated balance sheets as a component of “derivative assets, at fair value” or “derivative liabilities, at fair value.” By Fixed Coupon Rate (1) As of September 30, 2017: As of December 31, 2017 :

Agency MBS Quarterly Balances and Yields TBA dollar roll transactions involve delaying, or “rolling,” the settlement of a forward-settling purchase of a TBA agency MBS by entering into an offsetting “spot” sale prior to the settlement date, net settling the “paired-off” positions in cash, and contemporaneously entering another forward-settling purchase of a TBA agency MBS of the same essential characteristics for a later settlement date at a price discount relative to the “spot” sale. Cost basis is based upon the contractual price of the initial TBA purchase trade of each individual series of dollar roll transactions. Asset yield calculated based upon future cash flow estimates obtain from Citi’s the Yield Book, a third-party model, for an illustrative 4.0% coupon specified pool purchased on January 31, 2018. Assumes agency MBS is 100% financed with a one-month repurchase agreement. TBA dollar roll net interest spread based upon the “price drop” between the February and March settlement of a 3.5% coupon TBA as of January 31, 2018. Estimated TBA Dollar Roll Advantage as of January 31, 2018

Financing Summary 16 counterparties with access to 21 total counterparties Less than 10% of equity at risk with any one counterparty 6% of equity at risk with largest counterparty 24.3% of equity at risk with five largest counterparties Favorable repo financing costs Spread between average one-month LIBOR and average repo financing rate remains low relative to recent historical periods Diversified Funding Sources As of December 31, 2017 (dollars in thousands):

Hedging Summary Hedge Position Helps Mitigate Impact of Rising Rates on Value of Fixed-Rate Agency Portfolio and Short-Term Funding Costs Interest Rate Swaps as of December 31, 2017 (dollars in thousands): Duration is calculated based upon each interest rate swap’s “DV01” (a valuation metric illustrating the dollar value of a one basis point increase in interest rates) as reported by the Chicago Mercantile Exchange, the clearinghouse through which those instruments were centrally cleared. 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. 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. U.S. Treasury Note Futures as of December 31, 2017 (dollars in thousands):

Interest rate swap book well matched to repo funding balance for the life of the portfolio Hedged agency MBS portfolio exhibits durable net interest spread in a wide range of interest rate environments over its life Excludes the Company’s TBA dollar roll position. Illustrative repurchase agreement balances in future periods are based upon outstanding balances as of December 31, 2017 reflecting paydown of agency MBS collateral based on projected agency MBS balances based upon cash flow and prepayment estimates derived from Citi’s The Yield Book model. Illustrative interest rate swap notional amounts in future periods are based upon the contractual maturity dates of the Company’s interest rate swap agreements in place as of December 31, 2017. Illustrative agency MBS asset yields in future periods are based upon cash flow and prepayment estimates derived from Citi’s The Yield Book model. Illustrative repurchase agreement and interest rate swap receive rates are assumed to be equal to 1.75% and 2.75%, respectively, in all future periods of the illustration.

Portfolio Weighted Average Statistics Calculated as the total of the following, expressed as an annualized percentage of the total agency MBS weighted average cost basis for the period: GAAP interest income from agency MBS, plus TBA dollar roll income, less agency MBS repurchase agreement interest expense, less interest rate swap net interest expense.

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 unsecured debt. Includes interest expense incurred from repurchase agreement financing 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. Excludes implied financing of TBA dollar rolls. 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 of 2017, calculated as $7.2 million in dollar roll income (representing an implied net interest spread of 1.98% on a weighted average cost basis of $1.5 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 (and vice versa). Core general and administrative expenses represent non-interest expenses reported within the line item “total general and administrative expenses” of the consolidated statements of comprehensive income less stock-based compensation expense.

Non-GAAP Core Operating Income (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. A reconciliation of non-GAAP core operating income to GAAP pre-tax income is provided on slide 18. Non-GAAP Core Operating Income Per Diluted Share Rollforward – Q4 2017 vs. Q3 2017

Common and preferred stock dividends of a C-corp are qualified dividends whereas similar dividends of a REIT are non-qualified dividends (1) Net operating loss carryforward of $61MM as of December 31, 2017 Net capital loss carryforward of $314MM as of December, 2017 AMT credit carryforward of $9MM as of December 31, 2017 Net deferred tax asset of $0.8MM as of December 31, 2017 Full valuation allowance against net deferred tax assets that are capital in tax nature 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 a 33.4% maximum effective federal income tax rate on ordinary income effective January 1, 2018, each inclusive of the 3.8% Medicare tax. 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 stock, or as a capital gain to the extent that the amount of the distribution exceeds a shareholder’s adjusted tax basis in the common stock. Corporate Structure Provides Enhanced Shareholder Returns and Flexibility 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 carryforwards Provides option to reinvest earnings and opportunistically benefit from market dislocation Allows investment flexibility as we are not bound by any substantial restrictions C-corp structure provides flexibility as we are not required to distribute taxable earnings to stockholders Internally managed structure provides operating leverage Operating expense leverage improves as the Company grows and increases scale Opportunity to improve return on equity to shareholders with new capital 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

Appendix

Consistent Quarterly Dividend to Shareholders Excess post-crisis returns on Non-agency MBS Partial migration of capital to agency MBS Continued capital reallocation to agency MBS Pre-Fed Rate Hikes Reallocation to agency MBS complete Post-Fed Rate Hikes

Market Data (1)(2) 30-Year FNMA fixed rate price information is provided for illustrative purposes only and represents generic FNMA TBA prices and is not meant to be reflective of securities held by the Company. Source: Bloomberg

Balance Sheet Book value per common share is calculated as total equity less the preferred stock liquidation preference divided by common shares outstanding. Tangible book value represents total stockholders' equity less net deferred tax assets and the preferred stock liquidation preference. Represents shares of common stock outstanding plus vested restricted stock units convertible into common stock less unvested restricted common stock.

Statement of Comprehensive Income

Non-GAAP Core Operating Income Reconciliation (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. Reconciliation of GAAP pre-tax net income to non-GAAP core operating income:

Book Value Per Share Rollforward – Fourth Quarter 2017 Tangible book value represents total stockholders' equity less net deferred tax assets and the preferred stock liquidation preference. Calculated based upon weighted average diluted shares outstanding during the quarter. 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. In response to the Tax Cuts and Jobs Act’s repeal of corporate alternative minimum tax (“AMT”) and its associated refund provisions applicable to existing AMT credits, in the fourth quarter of 2017, the Company reclassified its AMT credit carryforward from “deferred tax assets, net” to “other assets” on its consolidated balance sheets.

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. Other specified pools include pools of loans refinanced through the Home Affordable Refinance Program (“HARP”), low FICO loans, 100% investor occupancy status loans, high LTV loans, and seasoned loans. WAC represents the weighted average coupon of the underlying collateral. Loan 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 2018 for securities held as of December 31, 2017. Remaining life represents the weighted average expected remaining life of the security based on expected future CPR as estimated by Citi’s “The Yield Book” model. 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 MBS Investment Portfolio Net long position in TBA securities represents forward-settling contracts to purchase or sell agency MBS on a generic pool basis. TBA commitments are accounted for as derivative instruments in accordance with GAAP. The difference between the contractual forward price of the Company’s TBA commitments and the fair value of the underlying MBS is reflected on the Company’s consolidated balance sheets as a component of “derivative assets, at fair value” or “derivative liabilities, at fair value.” 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. Net Long TBA Position (1) as of December 31, 2017 (dollars in thousands):

Book Value Sensitivity to Interest Rates 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. Excludes long-term debt. 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, and (v) no changes to the deferred tax asset. Reflects agency MBS and associated repurchase agreements, interest receivable, interest payable on repurchase agreements, interest rate swaps and associated initial margin. Reflects TBA commitments, U.S. Treasury note futures, and initial margin posted in respect of U.S. Treasury note futures. Net Duration Gap Interest Rate Sensitivity

Book Value Sensitivity to MBS Spreads 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 assumed spread weighted average duration of 5.4 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, 2017. 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. Reflects agency MBS and associated repurchase agreements, interest receivable, interest payable on repurchase agreements, interest rate swaps and associated initial margin. Reflects TBA commitments, U.S. Treasury note futures, and initial margin posted in respect of U.S. Treasury note futures. Source: Bloomberg MBS Spread Sensitivity Historical MBS to U.S. Treasury Spread (4) 109 bps 137 bps 61 bps on 1/30/2018 72 bps on 1/30/2018

Well Matched Hedging Can Protect Profitability Through Various Rate Environments Mortgage investment spreads fluctuate based on economic and U.S. Federal Reserve cycles The Company utilizes interest rate swaps to lock into an investment spread for defined period Mortgage principal paydowns are reinvested at current investment spreads Mortgage investment spreads have historically never been negative even in periods of inverted U.S. Treasury yield curves Historical Spread Between Current Coupon Agency MBS and LIBOR

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, 2017 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.