Arlington Asset Investment
Annual Report 2013

Plain-text annual report

Morningstar® Document Research℠ FORM 10-KArlington Asset Investment Corp. - AIFiled: February 10, 2014 (period: December 31, 2013)Annual report with a comprehensive overview of the companyThe information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The userassumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot belimited or excluded by applicable law. Past financial performance is no guarantee of future results. UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K (Mark One)x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2013OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission File Number: 001-34374 ARLINGTON ASSET INVESTMENT CORP.(Exact name of registrant as specified in its charter) Virginia 54-1873198(State or Other Jurisdiction ofIncorporation or Organization) (I.R.S. EmployerIdentification No.)1001 Nineteenth Street North,Arlington, VA 22209(Address of Principal Executive Offices) (Zip Code)(703) 373-0200(Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class of Securities Name of Each Exchange on Which RegisteredClass A Common Stock, Par Value $0.01 New York Stock ExchangeSecurities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:Yes o No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act:Yes o No xIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days:Yes x No oIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12months (or for such shorter period that the registrant was required to submit and post such files):Yes x No oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not becontained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K: xSource: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reportingcompany. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.(Check one): Large Accelerated Filer o Accelerated Filer x Non-Accelerated Filer o Smaller Reporting Company oIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):Yes o No xThe aggregate market value of the registrant’s Class A and Class B common stock held by non-affiliates computed by reference to theprice at which the registrant’s Class A common stock was last sold on June 28, 2013 was approximately $423 million. There is no publictrading market for the registrant’s Class B common stock; however, the Class B common stock is convertible into Class A common stockon a share-for-share basis.As of January 31, 2014, there were 16,047,965 shares of the registrant’s Class A common stock outstanding and 554,055 shares ofthe registrant’s Class B common stock outstanding.Documents incorporated by reference: Portions of the registrant’s Definitive Proxy Statement for the 2014 Annual Meeting ofShareholders (to be filed with the Securities and Exchange Commission no later than 120 days after the end of the registrant’s fiscal yearend) are incorporated by reference in this Annual Report on Form 10-K in response to Part III, Items 10, 11, 12, 13 and 14. Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSTABLE OF CONTENTS PageCautionary Statement About Forward-Looking Information ii PART I ITEM 1.Business 1 ITEM 1A.Risk Factors 11 ITEM 1B.Unresolved Staff Comments 29 ITEM 2.Properties 29 ITEM 3.Legal Proceedings 30 ITEM 4.Mine Safety Disclosures 30 PART II ITEM 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities 31 ITEM 6.Selected Financial Data 33 ITEM 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations 35 ITEM 7A.Quantitative and Qualitative Disclosures About Market Risk 58 ITEM 8.Financial Statements and Supplementary Data 58 ITEM 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 58 ITEM 9A.Controls and Procedures 58 ITEM 9B.Other Information 59 PART III ITEM 10.Directors, Executive Officers and Corporate Governance 60 ITEM 11.Executive Compensation 60 ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related StockholderMatters 60 ITEM 13.Certain Relationships and Related Transactions, and Director Independence 60 ITEM 14.Principal Accountant Fees and Services 60 PART IV ITEM 15.Exhibits and Financial Statement Schedules 61 Signatures 64 Index to Consolidated Financial Statements of Arlington Asset Investment Corp. F-1 i Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSCAUTIONARY STATEMENT ABOUT FORWARD-LOOKING INFORMATIONWhen used in this Annual Report on Form 10-K, in future filings with the Securities and Exchange Commission (SEC) or in pressreleases or other written or oral communications, statements which are not historical in nature, including those containing words such as“believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions, are intended to identify“forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), and, as such, may involve known and unknown risks,uncertainties and assumptions. The forward-looking statements we make in this Annual Report on Form 10-K include, but are not limitedto, statements about the following:•the availability and terms of, and our ability to deploy, capital and our ability to grow our business through a strategy focused onacquiring primarily residential mortgage-backed securities (MBS) that are either issued by U.S. government agencies or guaranteedas to principal and interest by U.S. government agencies or U.S. government sponsored agencies (agency-backed MBS), and MBSissued by private organizations (private-label MBS);•our ability to forecast our tax attributes, which are based upon various facts and assumptions, and our ability to protect and use ournet operating losses (NOLs), and net capital losses (NCLs), to offset future taxable income, including whether our shareholderrights plan (Rights Plan) will be effective in preventing an ownership change that would significantly limit our ability to utilize suchlosses;•our business, acquisition, leverage, asset allocation, operational, investment, hedging and financing strategies and the success ofthese 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 quantify and manage risk;•our ability to realize any reflation of our assets;•our liquidity;•our asset valuation policies;•our decisions with respect to, and ability to make, future dividends;•the impact of an inability of the U.S. government to reach an agreement on the national debt ceiling;•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, asamended (the 1940 Act); and•the effect of general economic conditions on our business.Forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into accountinformation currently in our possession. These beliefs, assumptions and expectations may change as a result of many possible events orfactors, not all of which are known to us or are within our control. If a change occurs, the performance of our portfolio and our business,financial condition, liquidity and results of operations may vary materially from those expressed, anticipated or contemplated in ourforward-looking statements. You should carefully consider these risks, along with the following factors that could cause actual results tovary from our forward-looking statements, before making an investment in our securities:•the overall environment for interest rates, changes in interest rates, interest rate spreads, the yield curve and prepayment rates;ii Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTS•current conditions and further adverse developments in the residential mortgage market and the overall economy;•potential risk attributable to our mortgage-related portfolios, including changes in fair value;•our use of leverage and our dependence on repurchase agreements and other short-term borrowings to finance our mortgage-relatedholdings;•the availability of certain short-term liquidity sources;•competition for investment opportunities, including competition from the U.S. Department of Treasury (U.S. Treasury) and theU.S. Federal Reserve, for investments in agency-backed MBS, as well as the reduction by the U.S. Federal Reserve of its purchasesof agency-backed MBS;•the federal conservatorship of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan MortgageCorporation (Freddie Mac) and related efforts, along with any changes in laws and regulations affecting the relationship betweenFannie Mae and Freddie Mac and the federal government;•mortgage loan prepayment activity, modification programs and future legislative action;•changes in 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;•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;•our ability to successfully expand our business into areas other than investing in MBS; and•the other important factors identified in this Annual Report on Form 10-K under the caption “Item 1A — Risk Factors.”These and other risks, uncertainties and factors, including those described elsewhere in this Annual Report on Form 10-K, could causeour actual results to differ materially from those projected in any forward-looking statements we make. All forward-looking statementsspeak 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 eventsor how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise.iii Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSITEM 1. BUSINESSUnless the context otherwise requires or indicates, all references in this Annual Report on Form 10-K to “we,” “us,” “our,” the“Company,” “AAIC,” and “Arlington Asset” refer to Arlington Asset Investment Corp. and its consolidated subsidiaries.Our CompanyArlington Asset Investment Corp. is a principal investment firm that currently acquires and holds primarily mortgage-related assets andholds certain other assets. We acquire residential mortgage-backed securities (MBS), either issued by U.S. government agencies orguaranteed as to principal and interest by U.S. government agencies or U.S. government-sponsored entities (agency-backed MBS). We alsoacquire MBS issued by private organizations (private-label MBS), subject to maintaining our exemption from regulation as an investmentcompany under the Investment Company Act of 1940, as amended (1940 Act). In the future, we may acquire and hold other types of assets,including commercial MBS, asset backed securities, other structured securities, commercial mortgage loans, commercial loans, residentialmortgage loans, and other real estate-related loans and securities. In addition, we also may pursue other business activities that will utilizeour experience in analyzing investment opportunities and applying similar portfolio management skills.We are a Virginia corporation and taxed as a C corporation for U.S. federal tax purposes. We operate primarily in the United States.Our principal executive offices are located at Potomac Tower, 1001 Nineteenth Street North, Arlington, Virginia 22209.Investment StrategyWe manage our portfolio of mortgage holdings with the goal of obtaining a high risk-adjusted return on capital. Historically, based onmarket conditions, we believe our MBS assets have provided us with higher relative risk-adjusted rates of return than most other portfolioopportunities we have evaluated. Consequently, we have maintained a high allocation of our assets and capital in this sector and havecontinued to analyze other opportunities and compare risk-adjusted returns to our MBS assets.During 2013, our principal investing strategy was to acquire and hold fixed-rate agency-backed MBS that we believed exhibitedprepayment protection and fixed- and adjustable-rate, private-label MBS. Although the interest rate (or coupon) on adjustable-rate MBSchanges over time, there are aspects of this class of security that result in the coupon being fixed for a period of time or the change in thecoupon being limited. We will seek to maintain a certain level of whole-pool agency-backed MBS, due to our view of the long-termattractiveness of the asset class and for purposes of our exemption under the 1940 Act.We evaluate the rates of return that can be achieved in each asset class and for each individual security within an asset class in whichwe participate. We then evaluate opportunities against the returns available in each of our investment alternatives and attempt to allocate ourassets and capital with an emphasis toward what we believe to be the highest risk-adjusted return available. We expect this strategy willcause us to have different allocations of capital and leverage in different market environments.We may change our acquisition strategy, leverage strategy, hedging strategy, asset allocation and operational policies at any time withoutthe consent of our shareholders, which could result in our making investments or hedges that are different from, and possibly riskier than,the investments and hedges described in this Annual Report on Form 10-K. A change in our investment, funding or hedging strategy mayincrease our exposure to interest rate and real estate market fluctuations. Our Board of Directors oversees our operational policies, includingthose with respect to our acquisitions, growth, operations, indebtedness, capitalization and variable distributions, or approves transactionsthat deviate from these policies, without a vote of, or notice to, our shareholders. Operational policy changes could adversely affect themarket value of our capital stock and our ability to make distributions to our shareholders.Liquidity, or ready access to funds, is essential to our business. Failures of similar businesses have often been attributable in large partto insufficient liquidity. Liquidity is of particular importance to our business and perceived liquidity issues may affect our counterparties’willingness to engage in transactions with us. Our liquidity could be impaired due to circumstances that we may be unable to control, suchas a general market1 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSdisruption or an operational problem that affects us or third parties. Further, our ability to sell assets may be impaired if other marketparticipants are seeking to sell similar assets at the same time or the market is experiencing significant volatility. If we cannot obtain fundingfrom third parties on attractive terms or at all, our results of operations could be negatively impacted. For a discussion of other factors thatcould affect our liquidity, see “Item 1A — Risk Factors” in this Annual Report on Form 10-K.MBS PortfolioAs of December 31, 2013, the fair value of our MBS portfolio was $1.9 billion. The yield on our MBS for the year ended December 31,2013 was 4.71%, including 10.75% on private-label MBS, with a corresponding cost of funds related to repurchase agreements of 0.45%.The yield on our MBS is calculated based upon the adjusted par value, which includes the effects of any other-than-temporary impairmentcharges recorded by us and an adjustment for any principal and interest for which collection is not probable. The yield on our MBS basedon unadjusted par value was 4.65% for the year ended December 31, 2013.The following table summarizes our principal investing portfolio including principal receivable on MBS, as of December 31, 2013(dollars in thousands): Face Amount Fair ValueTrading Agency-backed MBS Fannie Mae $961,360 $997,488 Freddie Mac 561,307 578,964 Available-for-sale Agency-backed MBS Fannie Mae 43 47 Private-label MBS Senior securities 10,201 7,066 Re-REMIC securities 475,714 334,233 Other mortgage related assets 76,305 298 Total $2,084,930 $1,918,096 Agency-Backed MBSWe acquire direct interests in residential MBS guaranteed as to principal and interest by Fannie Mae or Freddie Mac (referred to asagency-backed MBS). The market value of these securities, however, is not guaranteed by these companies. The following is a descriptionof the agency-backed MBS we currently own and may acquire in the future:•Fannie Mae MBS. The Federal National Mortgage Association (Fannie Mae) is a privately-owned, government-sponsoredcorporation organized and existing under the Federal National Mortgage Association Charter Act. Fannie Mae provides funds to themortgage market primarily by purchasing home mortgage loans from local lenders, thereby replenishing their funds for additionallending. Fannie Mae guarantees to registered holders of Fannie Mae certificates that it will distribute amounts representing scheduledprincipal and interest (at the rate provided by the Fannie Mae certificate) on the mortgage loans in the pool underlying the Fannie Maecertificate, whether or not received, and the full principal amount of any mortgage loan foreclosed or otherwise finally liquidated,whether or not the principal amount is actually received by Fannie Mae.•Freddie Mac MBS. The Federal Home Loan Mortgage Corporation (Freddie Mac) is a privately-owned, government-sponsoredenterprise created pursuant to Title III of the Emergency Home Finance Act of 1970. Freddie Mac’s principal activities currentlyconsist of the purchase of mortgage loans or participation interests in mortgage loans and the resale of the loans and participations inthe form of guaranteed MBS. Freddie Mac guarantees to holders of Freddie Mac2 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTScertificates the timely payment of interest at the applicable pass-through rate and ultimate collection of all principal on the holder’spro rata share of the unpaid principal balance of the underlying mortgage loans, but does not guarantee the timely payment ofscheduled principal on the underlying mortgage loans.Between 2007 and 2011, Fannie Mae and Freddie Mac reported substantial losses and a need for significant amounts of additionalcapital. In response to the deteriorating financial condition of Fannie Mae and Freddie Mac and the overall credit market disruption,Congress and the U.S. Treasury undertook a series of actions to stabilize these U.S. government-sponsored entities (GSEs) and thefinancial markets, generally. In July 2008, the U.S. government passed the Housing and Economic Recovery Act of 2008 (HERA), whichestablished the Federal Housing Finance Agency (FHFA), with enhanced regulatory authority over, among other things, the business ofFannie Mae and Freddie Mac. In September 2008, the FHFA placed Fannie Mae and Freddie Mac into conservatorship and, together with theU.S. Treasury, established a program designed to boost investor confidence in Fannie Mae’s and Freddie Mac’s debt and MBS. In additionto the FHFA becoming the conservator of Fannie Mae and Freddie Mac, the U.S. Treasury has taken steps to capitalize and providefinancing to Fannie Mae and Freddie Mac. The FHFA, together with the U.S. Treasury and the U.S. Federal Reserve, has also undertakenactions designed to boost investor confidence in Fannie Mae and Freddie Mac, support the availability of mortgage financing and protecttaxpayers. Despite these government actions to capitalize and provide financing to Fannie Mae and Freddie Mac, there can be no assurancethat these actions will be adequate for their needs. If these actions are inadequate, Fannie Mae and Freddie Mac could continue to sufferlosses and could fail to honor their guarantees and other obligations. If Fannie Mae and Freddie Mac were unable to satisfy their obligations,distributions to holders of Fannie Mae and Freddie Mac certificates would consist solely of payments and other recoveries on the underlyingmortgage loans and, accordingly, defaults and delinquencies on the underlying mortgage loans would adversely affect monthly distributionsto holders of these certificates. For additional discussion of how the changes to the roles of Fannie Mae and Freddie Mac and relatedgovernmental actions may adversely affect our business, see “Item 1A — Risk Factors” in this Annual Report on Form 10-K.The securities issued by Fannie Mae and Freddie Mac are not rated by any rating agency; however, they are commonly thought of ashaving an implied rating of “AAA.” There is no assurance, particularly given the downgrade of the U.S. credit rating to “AA+” byStandard & Poor’s during the quarter ended September 30, 2011 and Fitch Ratings Inc.’s announcement on October 15, 2013 that it hadplaced the U.S. credit rating on negative watch, that these securities would receive such a rating if they were ever rated by a rating agency.For a discussion of the risks relating to credit ratings, see “Item 1A — Risk Factors” in this Annual Report on Form 10-K.Private-Label MBSWe also acquire and hold non-agency, or private-label, MBS. Private-label MBS are MBS that are not issued or guaranteed by a U.S.government agency or a GSE, such as Fannie Mae or Freddie Mac. The private-label MBS in which we invest are generally backed by apool of single-family residential mortgage loans. These certificates are issued by originators of, investors in, and other owners of residentialmortgage loans, including savings and loan associations, savings banks, commercial banks, mortgage banks, investment banks andspecial purpose “conduit” subsidiaries of these institutions. While agency-backed MBS are backed by the express obligation or guarantee ofFannie Mae or Freddie Mae as described above, private-label MBS are generally supported by one or more forms of private (i.e., non-governmental) credit enhancement. These credit enhancements provide an extra layer of loss coverage in the event that losses are incurredupon foreclosure sales or other liquidations of underlying mortgaged properties in amounts that exceed the equity holder’s equity interest inthe property. Forms of credit enhancement include limited issuer guarantees, reserve funds, private mortgage guaranty pool insurance,overcollateralization and subordination. We may purchase private-label MBS without private credit enhancement. Subordination is a formof credit enhancement frequently used and involves the issuance of classes of senior and subordinated MBS to allocate losses on theunderlying mortgage loans. Typically, one or more classes of senior MBS were created during the securitization process, which weregenerally initially rated in one of the two highest rating levels by one or more nationally recognized rating agencies. However, as of December31, 2013, these MBS are generally3 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSrated below investment grade or unrated. The following is a description of the various private-label MBS we currently own or we mayacquire in the future:•Residential Prime Senior MBS. Residential prime securities are MBS backed by prime residential mortgage loans. We believeprime residential mortgage loans were generally high credit-quality loans, and generally had balances greater than conforming loanlimits. Prime securities were typically backed by loans that had relatively high weighted average FICO scores (700 or higher), lowweighted average loan-to-value ratios (75% or less), limited concentrations of investor properties, and a low percentage of loans withlow FICO scores or high loan-to-value ratios at origination. Senior securities are those interests in a securitization that have the firstright to cash flows and are last in line to absorb losses, and therefore have the least credit risk in a securitization transaction. Tofurther reduce credit risk, most, if not all, principal collected from the underlying asset pool is used to pay down the seniorsecurities until certain performance tests are satisfied. If certain performance tests are satisfied, principal payments are allocated,generally on a pro rata basis, between the senior securities and the subordinated securities.•Residential Non-Prime Senior MBS. Residential non-prime securities are MBS backed by non-prime residential mortgage loans.Non-prime residential loans included Alt-A loans, which generally had higher credit quality than subprime and lower credit qualitythan prime loans. Alt-A loans originally represented loans with alternative documentation, but the definition has shifted over time toinclude loans with additional risk characteristics and a higher percentage of investor loans. In an Alt-A loan, the borrower’s incomemay not be verified, and in some cases, may not be disclosed on the loan application. Alt-A loans may also have expanded criteriathat allow for higher debt-to-income ratios with higher accompanying loan-to-value ratios than would otherwise be permissible forprime loans. Residential non-prime senior securities are those interests in a securitization that have the first right to cash flows andare last in line to absorb losses. Delinquencies are expected to be higher than the prime senior MBS; however, the levels of credit andstructural support are also higher and, as a result, the non-prime senior MBS is expected to better withstand the higher levels ofcredit losses than subordinate securities of the same securitization. Credit support is the face amount of securities subordinate to theapplicable security that protects the security from credit losses and is generally expressed as a percentage of the securitization’sunderlying pool balance.•Residential Subordinate MBS. Subordinate securities are the interests in a securitization that are not senior interests. The mostsubordinate securities are those interests in a securitization that have the last right to cash flows and are first in line to absorb losses.Subordinate securities absorb the initial credit losses from a securitization structure, thus protecting the senior securities.Subordinate securities have a lower priority to receive principal and interest payments than the senior securities. Subordinatesecurities receive few, if any, principal payments until certain performance tests are satisfied. If certain performance tests aresatisfied, principal payments are shared between the senior securities and the subordinated securities. Subordinate securitiesgenerally receive interest payments even if they do not receive principal payments. Residential subordinate securities can be backedby prime and non-prime residential loans.•Residential Re-REMIC Support MBS. A re-REMIC MBS is a re-securitization of MBS. Depending on the structure of the re-REMIC MBS, the cash flows from, and any credit losses absorbed by, the underlying MBS are allocated among the re-REMICMBS issued in the re-securitization transaction in a variety of ways. For instance, when one or more prime residential seniorsecurities are pooled and securitized to create a two-tranche structure with a re-REMIC senior security and a re-REMIC supportsecurity, all principal payments from the underlying senior securities are directed to the re-REMIC senior security until its face valueis zero. Thereafter, all principal payments are directed to the re-REMIC support security. Credit losses, if any, are first absorbed bythe re-REMIC support security; however, these credit losses occur only when credit losses exceed the credit protection provided to theunderlying senior securities by the subordinate securities within their respective securitization structures. Both the re-REMIC seniorsecurity and the re-REMIC support security generally receive interest while any face value is outstanding.4 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSMBS differ from other forms of traditional fixed-income securities which normally provide for periodic payments of interest in fixedamounts with principal payments at maturity. Instead, MBS provide for a monthly payment that consists of both interest and principal. Ineffect, these payments are a “pass-through” of the monthly interest and principal payments made by borrowers on their mortgage loans, netof any fees paid to the servicer or guarantor of the MBS securities. In addition, outstanding principal on the MBS may be prepaid at anytime due to prepayments on the underlying mortgage loans. These differences can result in significantly greater price and yield volatility thanis the case with more traditional fixed-income securities. Whole mortgage loans and other mortgage assets share many of the characteristicsof MBS.Use of LeverageBecause of the credit and interest rate risks inherent in our strategy, we closely monitor the leverage (debt-to-equity ratio) of our MBSportfolio. However, from time to time, the leverage may increase or decrease due to several factors, including changes in the value of theunderlying portfolio holdings and the timing and amount of acquisitions or asset sales.We may reduce the amount of equity capital we have invested in agency-backed MBS or other mortgage assets by funding a portion ofthose acquisitions with repurchase agreements or other borrowing arrangements, to the extent available on favorable terms or at all. To theextent that revenue derived from those assets exceeds our interest expense and other costs of the financing, our net income will be greater thanif we had not borrowed funds and had not invested in the assets. Conversely, if the revenue from our MBS and other mortgage assets doesnot sufficiently cover the interest expense and other costs of the financing, our net income will be less or our net loss will be greater than ifwe had not borrowed funds.We currently use repurchase agreements to finance our investments in MBS. When we engage in a repurchase transaction, we initiallysell securities to the transaction counterparty under a master repurchase agreement in exchange for cash from the counterparty. Thecounterparty is obligated to resell the same securities back to us at the end of the term of the repurchase agreement, which typically is 30 to90 days, but may be up to one year. These transactions are accounted for as secured financings, and we present the investment securitiesand related funding on our consolidated balance sheet. We believe the current financial environment is primarily driven by the U.S.government’s policy of monetary easing although, as discussed later in this Annual Report on Form 10-K, this policy is gradually beingreduced by the U.S. government. Funding for agency-backed MBS through repurchase agreements continues to remain available to us atrates we consider to be attractive from multiple counterparties, and we have observed increased availability for funding for private-labelMBS through repurchase agreements.Hedging and Interest Rate and Prepayment Risk Management StrategyWe follow an interest rate risk management program intended to protect our MBS portfolio against the effects of major interest ratechanges. As part of our overall portfolio risk management, we analyze interest rate changes and prepayment trends separately andcollectively to assess their effects on our investment portfolio. Generally, our interest rate risk management program is formulated with theintent to mitigate the potential adverse effects resulting from differences in the amount and timing of rate adjustment to our assets versusthose affecting our corresponding liability. We attempt to hedge a portion of our exposure to interest rate fluctuations associated with ouragency-backed MBS primarily through the use of Eurodollar futures, interest rate swap futures and U.S. Treasury note futures. Ouragency-backed MBS hedging strategy includes an element of reliance on coupon repricing of assets in addition to hedging our liability cost.Additionally, our interest rate risk management program may encompass from time to time a number of procedures includingstructuring some borrowings to have interest rate adjustment indices and interest rate adjustment periods that, on an aggregate basis,generally correspond to the interest rate adjustment indices and interest rate adjustment periods of our adjustable-rate MBS and othermortgage assets.We adjust the average maturity and interest rate adjustment periods of our borrowings on an ongoing basis by changing the mix ofmaturities and interest rate adjustment periods as borrowings come due and are renewed. Through use of these procedures, we attempt tominimize the differences between the interest rate adjustment periods of our MBS and other mortgage assets and related borrowings that mayoccur.5 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSWe primarily use Eurodollar futures contracts to mitigate the risk of the cost of our variable rate liabilities. From time-to-time, we havepurchased and may in the future continue to purchase U.S. Treasury futures, interest rate swaps, interest rate collars, interest rate caps orfloors, forward sales, and similar financial instruments to attempt to mitigate the risk of the cost of our variable rate liabilities increasing ata faster rate than the yield on our assets during a period of rising interest rates or to mitigate prepayment risk. It is not our policy to usederivatives to speculate on interest rates. These derivative instruments have an active secondary market and are intended to provide incomeand cash flow to offset potential reduced interest income and cash flow under certain interest rate environments. We reported the derivativefinancial instruments and any related margin accounts on our consolidated balance sheets at their fair value. We may hedge as much of theinterest rate risk as our management determines is in our best interests, given the cost of the hedging transactions. This determination mayresult in our electing to bear a level of interest rate or prepayment risk that could otherwise be hedged when management believes, based onall relevant facts, that the cost of hedging exceeds the level of risk that management believes is present.We seek to build a balance sheet and undertake an interest rate risk management program that we believe are likely to generate positiveearnings and maintain an equity liquidation value sufficient to maintain operations given a variety of potential environments. Our interestrate risk management strategies also provide support for our leverage strategies. In determining our target leverage, we monitor, among otherthings, our “duration.” This is the expected percentage change in market value of our assets that would be caused by a 1% change in shortand long-term interest rates. To monitor duration and the related risks of fluctuations in the liquidation value of our equity, we model theimpact of various economic scenarios on the market value of our MBS and other mortgage assets and liabilities. See the additionaldiscussion of interest rate risk relative to our leveraged portfolio of MBS and other mortgage assets included in “Item 7 — Management’sDiscussion and Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Disclosures about MarketRisk” in this Annual Report on Form 10-K. We believe that our interest rate risk management program will allow us to maintain operationsthroughout a wide variety of potentially adverse circumstances. Nevertheless, in order to further preserve our capital base during periodswhen we believe a trend of rapidly rising interest rates has been established, we may decide to enter into or increase hedging activities or tosell assets. Each of these actions may lower our earnings and dividends in the short term to further our objective of maintaining attractivelevels of earnings and dividends over the long term. There is no assurance, however, that any of these strategies will be successful.We seek to purchase fixed-rate agency-backed MBS that exhibit some form of prepayment protection. Prepayment protection can takemany forms but includes (i) agency-backed MBS backed by mortgage loans that are originated in certain states or through the HomeAffordable Modification Program or some other government program, or (ii) high loan-to-value ratio loans. These loans are believed to haveless incentive to prepay and will result in lower overall prepayments in MBS backed by these types of loans. In 2012 and 2013, wepurchased many of our agency-backed MBS backed by higher concentration of loans that fall within these categories. We cannot be assuredthat prepayments will not increase in the future if government refinance programs target a much broader borrower base. We believe that wemaintain a cost-effective asset/liability management program to provide a level of protection against interest rate and prepayment risks.However, no strategy can completely insulate us from interest rate changes and prepayment risks. In addition, asset/liability managementinvolves transaction costs which increase dramatically as the period covered by the hedging protection increases. Therefore, we may beunable to hedge effectively our interest rate and prepayment risks.Credit Risk ManagementAlthough we do not expect to encounter credit risk in our agency-backed MBS portfolio assuming Fannie Mae and Freddie Mac remainsolvent, we are exposed to credit risk in our private-label MBS portfolio. With respect to our private-label MBS, credit support contained inthese MBS deal structures provides a level of protection from losses, as do the discounted purchase prices in the event of the return of lessthan 100% of par. We also evaluate the impact of credit risk on our acquisitions through a comprehensive review and selection process,which is predominantly focused on quantifying and pricing credit risk. We review our private-label MBS based on quantitative andqualitative analysis of the risk-adjusted returns on such acquisitions. Through modeling and scenario analysis, we seek to evaluate eachsecurity’s credit risk. Credit6 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSrisk is also monitored through our ongoing asset surveillance. Despite these measures to manage credit risk, unanticipated credit lossescould nevertheless occur which could adversely impact our operating results.Compliance, Legal, Risk Management and Internal AuditIn conducting our business, we are exposed to a range of risks including, without limitation:•Market risk. Market risk is the risk to our earnings or capital resulting from adverse changes in the values of assets resulting frommovement in market interest rates, equity prices, as well as market expectations concerning the underlying assets.•Interest rate risk. Interest rate risk is the risk of loss resulting from changes in interest rates and the resulting changes in our cashflows, including prepayments. Another component of interest rate risk is the risk to our earnings or capital resulting from adversechanges in the values of assets due to a change in the level of market interest rates, as well as market expectations concerning theunderlying assets.•Prepayment risk. Prepayment risk is the risk related to the early unscheduled payment of principal on our MBS portfolio. Theeffective yield over the remaining life of a security cannot be known for certain as the actual cash flow is not known. With the earlypayment of principal, we will not earn future interest income on that portion of the principal; therefore, decreasing the yield we hadexpected to earn at the time of purchase.•Credit risk. Credit risk is the risk of loss due to a borrower’s or institutional counterparty’s unwillingness or inability to pay itsobligations.•Operations risk. Operations risk is the risk of loss resulting from systems failure, inadequate controls, human error, fraud orunforeseen catastrophes.•Liquidity risk. Liquidity risk is the risk that we may be unable to meet our obligations as they come due because of our inability toliquidate assets or obtain funding. Liquidity risk also includes the risk of having to sell assets at a loss to generate liquid funds.•Regulatory risk. Regulatory risk is the risk of loss, including fines, penalties or restrictions in our activities from failing to complywith current or future federal, state or local laws (including federal and state securities laws), and rules and regulations pertaining tofinancial services activities, including the loss of our exclusion from regulation as an investment company under the 1940 Act.•Legal risk. Legal risk is the risk of loss, disruption or other negative effect on our operations or condition that arises fromunenforceable contracts, lawsuits, adverse judgments, or adverse governmental or regulatory actions or proceedings, or the threatthereof.•Reputational risk. Reputational risk is the risk that negative publicity regarding our business, whether true or not, will reduce ourrevenues or result in costly litigation.•Equity ownership risk. Equity ownership risk arises from making equity investments that create an ownership interest in portfoliocompanies, and is a combination of credit, market, operational, liquidity, compliance and reputation risks.For a detailed discussion of the material risks facing our company, see “Item 1A — Risk Factors” in this Annual Report on Form 10-K.We are responsible for our compliance procedures with regard to the legal and regulatory requirements of our Company and ouroperating businesses and for our procedures with regard to our exposure to market, interest rate, prepayment, credit, operations, liquidity,regulatory, legal, reputational and equity ownership risk. In addition, our internal audit personnel (staffed through an external third-partyservice firm) test and audit for compliance by our personnel with our policies and procedures. Our outside legal counsel also provides legalservice to our company, including advice on managing legal risk. The supervisory personnel in these areas have direct access to, and meetregularly with, our executive management and with the Audit Committee of our Board of Directors to ensure their independence inperforming these functions. Pursuant to its charter, the Audit Committee has oversight of the staffing, qualifications and performance of ourinternal audit function. In7 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSaddition to our internal compliance and risk management personnel, we outsource certain functions to outside consultants and attorneys fortheir expertise.Our risk management program is designed to focus on the following:•identifying, assessing and reporting on risk exposures and trends;•establishing and revising as necessary policies, procedures and risk limits;•monitoring and reporting on adherence with risk policies and limits;•developing and applying new measurement methods to the risk process as appropriate; and•approving new business initiatives.Although we believe that our risk management program and our internal controls are appropriately designed to address the risks towhich we are exposed, we cannot provide assurance that our risk management program or our internal controls will prevent or reduce suchrisks. For additional discussion of our strategy for managing interest rate risk, prepayment risk and credit risk, see “— Hedging andInterest Rate and Prepayment Risk Management Strategy” and “— Credit Risk Management” above.Accounting, Administration and OperationsOur accounting, administration and operations personnel are responsible for financial controls, internal and external financial reporting,human resources and personnel services, office operations, information technology and telecommunications systems, the processing ofsecurities transactions, and corporate communications. With the exception of payroll processing and information technology supportservices, which are performed by outside service providers, most data processing functions are performed internally.CompetitionOur success depends, in large part, on our ability to acquire MBS at favorable spreads over our borrowing costs. In acquiring theseassets, we compete with mortgage finance and specialty finance companies, savings and loan associations, banks, mortgage bankers,insurance companies, mutual funds, institutional investors, mortgage real estate investment trusts (REITs), investment banking firms,other lenders, governmental bodies and other entities. In addition, there are numerous entities with similar asset acquisition objectives andothers may be organized in the future. The effect of the existence of additional entities may be to increase competition for the available supplyof agency-backed MBS, including collateralized mortgage obligations (CMOs), private-label MBS and other mortgage-related assets suitablefor purchase by us. Moreover, our success depends on our ability to acquire MBS issued by Fannie Mae or Freddie Mac, and we cannotpredict what role Fannie Mae and Freddie Mac will play in the future housing market. The future roles of Fannie Mae and Freddie Maccould be significantly reduced and the nature of their guarantees could be considerably limited relative to historical measurements. Anychanges to the nature of the guarantees provided by Fannie Mae and Freddie Mac could redefine what constitutes an agency security andcould have broad adverse market implications and significant implications for our own business. In addition, competition is also intense forthe recruitment and retention of qualified professionals. Our ability to continue to compete effectively in our businesses will depend upon ourcontinued ability to attract new professionals and retain and motivate our existing professionals. For a further discussion of the competitivefactors affecting our business, see “Item 1A — Risk Factors” in this Annual Report on Form 10-K.Our Tax StatusWe are subject to corporate income tax on our taxable income that are not offset by our NOL and NCL carry-forwards. Even though weare able to use NOL and NCL carry-forwards against our taxable income, we still have some tax liability that is attributable to federalalternative minimum tax and state and local taxes. At December 31, 2013, we had $183.1 million of NOL carry-forwards and $50.8 millionof NCL carry-forwards. On December 31, 2013, $139.7 million of our NCL carry-forwards expired. Our NCL carry-forwards areavailable to offset taxable capital gains through 2014, and our NOL carry-forwards will begin to expire in 2027 (see Note 6 to ourconsolidated financial statements included in “Item 8 — Financial Statements and Supplementary Data”).8 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSOur ability to use our NOL and NCL carry-forwards to offset future taxable income would be severely limited if we experienced an“ownership change” under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the Code). We adopted our shareholderrights plan (the Rights Plan) on June 1, 2009 in an effort to protect against the occurrence of an “ownership change.” The Rights Plan isintended to act as a deterrent to any person or group acquiring 4.9% or more of our outstanding Class A common stock (an AcquiringPerson) without the approval of our Board of Directors. Our Rights Plan, however, does not protect against all transactions that could causean ownership change, such as dispositions by existing 5% shareholders and transactions in our Class B common stock. Accordingly, wemay experience an “ownership change” that would severely limit our ability to use our NOL and NCL carry-forwards.Our Exclusion from Regulation as an Investment CompanyWe intend to operate so as to be excluded from regulation under the 1940 Act. We rely on Section 3(c)(5)(C) of the 1940 Act, whichprovides an exclusion for entities that are “primarily engaged in purchasing or otherwise acquiring . . . interests in real estate.” Section3(c)(5)(C) provides an exclusion from registration for a company if at least 55% of its assets, on an unconsolidated basis, consist ofqualified assets such as whole loans and whole pool agency certificates, and if at least 80% of its assets, on an unconsolidated basis, arereal estate related assets. We will need to ensure not only that we qualify for an exclusion or exemption from regulation under the 1940 Act,but also that each of our subsidiaries qualifies for such an exclusion or exemption. We intend to maintain our exclusion by monitoring thevalue of our interests in our subsidiaries. We may not be successful in this regard.On September 1, 2011, the SEC issued a concept release (No. IC-29778; File No. SW7-34-11, Companies Engaged in the Business ofAcquiring Mortgages and Mortgage-Related Instruments) pursuant to which it is reviewing whether certain companies that invest in MBSand rely on the exemption from registration under Section 3(c)(5)(C) of the 1940 Act (such as our Company) should continue to be allowedto rely on such exemption from registration.If we fail to maintain our exclusion or secure a different exclusion or exemption if necessary, we may be required to register as aninvestment company, or we may be required to acquire or dispose of assets in order to meet our exemption. Any such asset acquisitions ordispositions may include assets that we would not acquire or dispose of in the ordinary course of business, may be at unfavorable pricesand result in a decline in the price of our common stock. If we are required to register under the 1940 Act, we would become subject tosubstantial regulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions withaffiliated persons (as defined in the 1940 Act), and portfolio composition, including restrictions with respect to diversification and industryconcentration and other matters. Accordingly, registration under the 1940 Act could limit our ability to follow our current investment andfinancing strategies and result in a decline in the price of our common stock.Available InformationYou may read and copy the definitive proxy materials and any other reports, statements or other information that we file with the SEC atthe SEC’s public reference room at 100 F Street, N.E., Washington, DC 20549. You may call the SEC at 1-800-SEC-0330 for furtherinformation on the public reference room. Our SEC filings are also available to the public from commercial document retrieval services andat the Internet worldwide web site maintained by the SEC at http://www.sec.gov. These SEC filings may also be inspected at the offices ofthe New York Stock Exchange (NYSE), which is located at 20 Broad Street, New York, New York 10005.Our website address is http://www.arlingtonasset.com. We make available free of charge through our website this Annual Report onForm 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant toSection 13(a) or 15(d) of the Exchange Act, as well as the annual report to shareholders and Section 16 reports on Forms 3, 4 and 5 as soonas reasonably practicable after such documents are electronically filed with, or furnished to, the SEC. In addition, our Bylaws, Statementof Business Principles (our code of ethics), Corporate Governance Guidelines, and the charters of our Audit, Compensation, andNominating and Governance Committees are available on our website and are available in print, without charge, to any shareholder uponwritten request in writing c/o our9 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSSecretary at 1001 Nineteenth Street North, Arlington, Virginia 22209. Information on our website should not be deemed to be a part of thisreport or incorporated into any other filings we make with the SEC.EmployeesAs of December 31, 2013, we had 11 employees. Our employees are not subject to any collective bargaining agreement, and we believethat we have good relations with our employees.10 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSITEM 1A. RISK FACTORSInvesting in our company involves various risks, including the risk that you might lose your entire investment. Our results ofoperations depend upon many factors including our ability to implement our business strategy, the availability of opportunities toacquire assets, the level and volatility of interest rates, the cost and availability of short- and long-term credit, financial marketconditions and general economic conditions.The following discussion concerns the material risks associated with our business. These risks are interrelated, and you shouldconsider them as a whole. Additional risks and uncertainties not presently known to us may also materially and adversely affect thevalue of our capital stock and our ability to pay dividends to our shareholders. In connection with the forward-looking statementsthat appear in this Annual Report on Form 10-K, including these risk factors and elsewhere, you should carefully review the sectionentitled “Cautionary Statement About Forward-Looking Information.”Risks Related to our Principal Investing ActivitiesThe U.S. Federal Reserve’s recent announcement that it would reduce its monthly purchases pursuant to QE3 could impact themarket for and value of the Agency-backed MBS in which we invest as well as our net asset value and net interest margin.On September 13, 2012, the U.S. Federal Reserve announced a third round of quantitative easing, or QE3, which is an open-endedprogram designed to expand the U.S. Federal Reserve’s holdings of long-term securities by purchasing an additional $40 billion of agency-backed MBS per month until key economic indicators, such as the unemployment rate, show signs of improvement. In December 2012, theU.S. Federal Reserve announced that it would begin buying $45 billion of long-term U.S. Treasury bonds each month. On December 18,2013, the U.S. Federal Reserve announced that it would reduce its purchases of agency-backed MBS by $5 billion per month and reduceits purchases of U.S. Treasury bonds by $5 billion per month beginning in January 2014.On January 29, 2014, the U.S. Federal Reserve announced that it would further reduce its purchases of agency-backed MBS by anadditional $5 billion per month and further reduce its purchase of U.S. Treasury bonds by an additional $5 billion per month beginning inFebruary 2014. These reductions, collectively, are commonly referred to as “tapering.”The immediate effect of the announcement of QE3 was an increase in agency-backed MBS prices. Since the initial price spike, pricesfor all securities have receded below the price levels that existed before the announcement of QE3. It is unclear what effect, if any, theincremental reduction in the rate of the U.S. Federal Reserve’s monthly purchases will have on the value of the agency-backed MBS inwhich we invest. However, it is possible that the market for such securities, the price of such securities and, as a result, our net asset valueand net interest margin could be negatively affected.The failure of U.S. lawmakers to reach an agreement on the national debt ceiling may materially adversely affect our business,financial condition and results of operations.On October 16, 2013, Congress passed legislation that effectively suspended the debt ceiling through February 7, 2014 to permitbroader negotiations over budget issues and the debt ceiling. In the event U.S. lawmakers fail to reach an agreement on the national debtceiling, the U.S. could default on its obligations, which could negatively impact the trading market for U.S. government securities. Thismay, in turn, negatively affect the value of our agency-backed MBS and our ability to obtain financing for our investments. As a result, itmay materially adversely affect our business, financial condition and results of operations.On August 5, 2011, Standard & Poor’s downgraded the U.S. credit rating to AA+ for the first time due to the U.S. Congress’ inabilityto reach an effective agreement on the national debt ceiling and a budget in a timely manner. Because Fannie Mae and Freddie Mac are in theconservatorship of the U.S. Government, the implicit credit rating of agency-backed MBS guaranteed by Freddie Mac, Fannie Mae orGinnie Mae were also downgraded to AA+. This downgrade increased the uncertainty regarding the credit risk of agency-backed MBS. Thecurrent U.S. debt ceiling and budget deficit concerns have increased the possibility of the credit-rating agencies further downgrading theU.S. credit rating. On October 15, 2013, Fitch Ratings Service11 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSplaced the U.S. credit rating on negative watch, warning that a failure by the U.S. Government to honor interest or principal payments onU.S. Treasury Securities would impact its decision whether to downgrade the U.S. credit rating. Fitch also stated that the manner andduration of an agreement to raise the debt ceiling and resolve the budget impasse, as well as the perceived risk of such events occurring inthe future, would weigh on its ratings.A further downgrade of the U.S. Government’s credit rating could create broader financial turmoil and uncertainty, which would weighheavily on the global banking system. Such circumstances could adversely affect our business in many ways, including but not limited toadversely impacting our ability to obtain attractive financing for our investments, increasing the cost of such financing if it is obtained,increasing the likelihood that our repurchase agreement lenders require that we post additional collateral as a result of margin calls causingus to sell assets at depressed prices in order to generate liquidity to satisfy these margin calls or to settle repurchase agreement obligations ifwe are unable to obtain new repurchase agreement borrowings when our current borrowings expire. As a result, these adverse economic andmarket conditions may also adversely affect our liquidity position, and could increase our risk of a counterparty defaulting on itsobligations. If any of these events were to occur, it could materially adversely affect our business, financial condition and results ofoperations.Adoption of the Basel III standards and other proposed supplementary regulatory standards may negatively impact our access tofinancing or affect the terms of our future financing arrangements.In response to various financial crises and the volatility of financial markets, the Basel Committee on Banking Supervision adopted theBasel III standards several years ago. The final package of Basel III reforms was approved by the G20 leaders in November 2010. InJanuary 2013, the Basel Committee agreed to delay implementation of the Basel III standards and expanded the scope of assets permitted tobe included in a bank’s liquidity measurement.U.S. regulators have elected to implement substantially all of the Basel III standards. Financial institutions will have until 2019 to fullycomply with the Basel III standards, which could cause an increase in capital requirements for, and could place constraints on, thefinancial institutions from which we borrow.Shortly after approving the Basel III standards, U.S. regulators also issued a notice of proposed rule-making calling for enhancedsupplementary leverage ratio standards, which would impose capital requirements more stringent than those of the Basel III standards forthe most systematically significant banking organizations in the U.S. The enhanced standards are currently subject to public comment, andthere can be no assurance that they will be adopted or, if adopted, that they will resemble the current proposal. Adoption and implementationof the Basel III standards and the supplemental regulatory standards proposed by U.S. regulators may negatively impact our access tofinancing or affect the terms of our future financing arrangements.Clearing facilities or exchanges upon which some of our hedging instruments are traded may increase margin requirements onour hedging instruments in the event of adverse economic developments.In response to events having or expected to have adverse economic consequences or which create market uncertainty, clearing facilities orexchanges upon which some of our hedging instruments, such as Eurodollar futures and swap futures, are traded may require us to postadditional collateral against our hedging instruments. In response to the U.S. approaching its debt ceiling without resolution and thegovernment shutdown, the Chicago Mercantile Exchange announced on October 15, 2013 that it would increase margin requirements by12% for all over-the-counter interest rate swap portfolios that its clearinghouse guaranteed. This increase was subsequently rolled back onOctober 17, 2013 upon the news that Congress passed legislation to temporarily suspend the debt ceiling and reopen the government, whichallowed time for broader negotiations concerning budgetary issues. In the event that future adverse economic developments or marketuncertainty result in increased margin requirements for our hedging instruments, it could materially adversely affect our liquidity position,business, financial condition and results of operations.12 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSContinued adverse developments in the residential mortgage market may adversely affect the value of our securities and ourability to borrow against our security assets.Since mid-2007, the residential mortgage market in the United States has experienced a variety of difficulties and changed economicconditions that may adversely affect the performance and market value of the MBS we acquire. Securities backed by residential mortgageloans originated in 2006 and 2007 have experienced a higher and earlier than expected rate of delinquencies. Additionally, MBS issued inother periods may not be performing as expected. Many MBS have been downgraded by the rating agencies in recent years and the ratingagencies may in the future downgrade MBS. As a result, the market for these securities may be adversely affected for a significant period oftime.Borrowers seeking to avoid increased monthly payments by refinancing may no longer be able to find available replacement loans atcomparably low interest rates. Borrowers who intended to sell their homes or refinance their existing mortgage loans on or before theexpiration of the fixed-rate periods on their mortgage loans may find that they cannot sell their property for an amount equal to or greater thanthe unpaid principal balance of their loans or obtain new financing at lower rates. In addition, some mortgage loans may include prepaymentpremiums that may further inhibit refinancing.Servicers of residential mortgage loans also have the authority to modify mortgage loans that are in default, or for which default isreasonably foreseeable, if such modifications are in the best interests of the holders of the mortgage securities and such modifications aredone in accordance with the terms of the relevant agreements. Loan modifications are more likely to be used when borrowers are less able torefinance or sell their homes due to market conditions, and when the potential recovery from a foreclosure is reduced due to lower propertyvalues. A significant number of loan modifications could result in a significant reduction in cash flows to the holders of the mortgagesecurities on an ongoing basis.Various federal, state and local regulatory authorities have taken or proposed actions that could hinder the ability of the servicer toforeclose promptly on defaulted mortgage loans. Any such actions may adversely affect the performance of the loans and the yield on andvalue of the mortgage securities.Investors should consider that the general market conditions discussed above may adversely affect the market value of the securities inour MBS portfolio and make it difficult or more expensive for us to borrow against those securities.The conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and regulationsaffecting the relationship between Fannie Mae and Freddie Mac and the federal government, may adversely affect our business.The agency-backed MBS in which we invest depend on a steady stream of payments on the mortgages underlying the securities. Theinterest and principal payments we receive on the agency-backed MBS that we acquire are guaranteed by Fannie Mae or Freddie Mac. FannieMae and Freddie Mac are GSEs, but their guarantees are not backed by the full faith and credit of the U.S. government.Between 2007 and 2011, Fannie Mae and Freddie Mac reported substantial losses and a need for substantial amounts of additionalcapital. In response to the deteriorating financial condition of Fannie Mae and Freddie Mac and the credit market disruption several yearsago, Congress and the U.S. Treasury have undertaken a series of actions to stabilize these GSEs and the financial markets generally. TheHousing and Economic Recovery Act was signed into law on July 30, 2008, and it established the FHFA. On September 7, 2008, the FHFAplaced Fannie Mae and Freddie Mac into conservatorship, which is a statutory process pursuant to which the FHFA operates Fannie Maeand Freddie Mac in an effort to stabilize the entities. The FHFA, together with the U.S. Treasury and the U.S. Federal Reserve, has alsoundertaken actions designed to boost investor confidence in Fannie Mae and Freddie Mac, support the availability of mortgage financingand protect taxpayers. In addition, the U.S. Treasury has taken steps to capitalize and provide financing to Fannie Mae and Freddie Macand agreed to purchase direct obligations and agency-backed MBS issued or guaranteed by Fannie Mae or Freddie Mac although the rate ofpurchases has recently been reduced via tapering.Shortly after Fannie Mae and Freddie Mac were placed in federal conservatorship, the Secretary of the U.S. Treasury, in announcing theactions, noted that the guarantee structure of Fannie Mae and Freddie Mac required examination and that changes in the structures of theentities were necessary to reduce risk to the13 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSfinancial system. The future roles of Fannie Mae and Freddie Mac could be significantly reduced and the nature of their guarantees could beeliminated or considerably limited relative to historical measurements. Any changes to the nature of the guarantees provided by Fannie Maeand Freddie Mac could redefine what constitutes agency-backed MBS, have broad adverse market implications and negatively impact us.On June 25, 2013, Senators Bob Corker (R-TN) and Mark Warner (D-VA), with Senators Mike Johanns (R-NE), Jon Tester (D-MT),Dean Heller (R-NV), Heidi Heitkamp (D-ND), Jerry Moran (R-KS) and Kay Hagan (D-NC) formally introduced the Housing FinanceReform and Taxpayer Protection Act of 2013 (Corker-Warner Bill) into the U.S. Senate. While the current draft of the Corker-Warner Billwill likely undergo significant changes as it is debated, it is expected to serve as a basis of discussion for congressional efforts to reformFannie Mae and Freddie Mac.As currently drafted, the Corker-Warner Bill has three key provisions:•the establishment of the Federal Mortgage Insurance Corporation (the FMIC);•the creation of a Mortgage Insurance Fund (the Fund); and•the wind-down of Fannie Mae and Freddie Mac.The FMIC would be a government guarantor modeled after the Federal Deposit Insurance Corporation (FDIC) in that it would collectinsurance premiums and maintain a deposit fund on all outstanding obligations. Every mortgage-backed security issued through the FMICwould have a private investor bearing the first risk of loss and holding at least $0.10 in equity capital for every dollar of risk. This privatecapital buffer would serve to protect taxpayers from the risk of default on the mortgages underlying securities issued by the FMIC. Thus,the ultimate purpose of the FMIC would be to bring in credit investors to bear the risk of default while providing liquidity, transparency andaccess to mortgage credit for the housing finance system.The Federal Housing Finance Authority (FHFA) would be abolished after the establishment of the FMIC, and all current responsibilitiesof the FHFA, as well as its resources, would be transferred to the FMIC. In particular, the Corker-Warner Bill specifies that the FMIC wouldmaintain a database of uniform loan-level information on eligible mortgages, develop standard uniform securitization agreements and overseethe common securitization platform currently being developed by the FHFA.In the event losses due to default on underlying mortgages exceed the first position losses of private credit investors in securities issuedby the FMIC, the FMIC would cover such losses out of the Fund. The Corker-Warner Bill specifies that the FMIC would endeavor to attaina reserve balance of 1.25% of the aggregate outstanding principal balance of covered securities within five years of the establishment of theFMIC and 2.50% of such amount within ten years of the establishment of the FMIC. The Fund would be paid with insurance premiums,akin to user fees, paid by private investors with various reporting and transparency requirements.As currently proposed, the Corker-Warner Bill would revoke the charters of Fannie Mae and Freddie Mac upon the establishment of theFMIC. Fannie Mae and Freddie Mac would wind down as expeditiously as possible while maximizing returns to taxpayers as their assets aresold off.On November 25, 2013, the FHFA issued a progress report with regards to the goals set forth in the FHFA White Paper and the StrategicPlan for Enterprise Conservatorships. The report stated that significant progress had been made on the development and testing of acommon securitization platform for Fannie Mae and Freddie Mac and that both entities had contracted the less liquid portions of theirportfolios. Despite this progress, the report conceded that significant impediments to the full realization of the FHFA’s stated goals remain. Ifsuch goals are achieved, it is unclear what the effects might be.There is no way to know if either proposal will become law or should one of the proposals become law if and how the enacted law willdiffer from the current draft of the bill. It is unclear how this proposal would impact housing finance, and what impact, if any, it wouldhave on companies that invest in MBS. Legislation has changed the relationship between Fannie Mae and Freddie Mac and the U.S.government and requires Fannie Mae and Freddie Mac to reduce the amount of mortgage loans they own or the amount of agency-backedMBS for which they provide guarantees. The passage of any additional new legislation affecting14 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSFannie Mae and Freddie Mac may create market uncertainty and reduce the actual or perceived credit quality of securities issued orguaranteed by the U.S. government through a new or existing successor entity to Fannie Mae and Freddie Mac. If the charters of Fannie Maeand Freddie Mac were revoked, it is unclear what effect, if any, this would have on the value of the existing Fannie Mae and Freddie Macagency-backed MBS. It is also possible that the above-referenced proposed legislation, if made law, could adversely impact the market forsecurities issued or guaranteed by the U.S. government and the spreads at which they trade. The foregoing could materially adversely affectthe pricing, supply, liquidity and value of our target assets and otherwise materially adversely affect our business, operations and financialcondition.If Fannie Mae or Freddie Mac were eliminated, or their structures were to change radically, we may not be able to acquire agency-backedMBS from these companies, which could drastically reduce the amount and type of agency-backed MBS available for investment, therebyincreasing the price of these assets. Additionally, the current credit support provided by the U.S. Treasury to Fannie Mae and Freddie Mac,and any additional credit support it may provide in the future, could have the effect of lowering the interest rate we receive from agency-backed MBS, thereby tightening the spread between the interest we earn on our portfolio and our financing costs. The effects of the currentreduction of this support from the U.S. Treasury (tapering) are not yet known. Additionally, the U.S. government could elect to stopproviding credit support of any kind to the mortgage market. If any of these events were to occur, our business, financial condition andresults of operations and our ability to pay distributions to our stockholders could be materially adversely affected.To the extent that we invest in agency-backed MBS that are guaranteed by Fannie Mae and Freddie Mac, we are subject to therisk that these GSEs may not be fully able to satisfy their guarantee obligations or that these guarantee obligations may berepudiated, which would adversely affect the value of our investment portfolio and our ability to sell or finance these securities.All the agency-backed MBS in which we invest depend on a steady stream of payments on the mortgages underlying the MBS. Theinterest and principal payments we receive on the agency-backed MBS that we acquire are guaranteed by Fannie Mae or Freddie Mac, butare not guaranteed by the U.S. government. To the extent these GSEs are not able to fully satisfy their guarantee obligations or that theseguarantee obligations are repudiated or otherwise defaulted upon, the value of our investment portfolio and our ability to sell or finance thesesecurities would be adversely affected.Market conditions and actions by governmental authorities may upset the historical relationship between interest rate changesand prepayment trends, which would make it more difficult for us to analyze our investment portfolio.Our success depends on our ability to analyze the relationship of changing interest rates on prepayments of the mortgage loans thatunderlie our MBS. Changes in interest rates and prepayments affect the market price of MBS that we intend to purchase and any MBS thatwe hold at a given time. As part of our overall portfolio risk management, we analyze interest rate changes and prepayment trends separatelyand collectively to assess their effects on our investment portfolio. In conducting our analysis, we depend on certain assumptions basedupon historical trends with respect to the relationship between interest rates and prepayments under normal market conditions. TheHomeowner Affordability and Stability Plan (HASP) announced by the U.S. Treasury in February 2009, the expansion of the HomeAffordable Refinance Program (HARP) announced by the Federal Housing Finance Agency in October 2011, and the U.S. Federal Reserve’splan to purchase long-term U.S. Treasury bonds and MBS, or “QE3” have caused, and could continue to cause, an increase in prepaymentrates. However, in recent months the U.S. Federal Reserve has announced plans to reduce the rate of its purchases via “tapering.” If thedislocations in the residential mortgage market, recent or future government actions or other developments change the way that prepaymenttrends have historically responded to interest rate changes, our ability to (i) assess the market value of our investment portfolio, (ii)implement our hedging strategies and (iii) implement techniques to reduce our prepayment rate volatility would be significantly affected. Ifwe are unable to accurately forecast interest and prepayment rates, our financial position and results of operations could be materiallyadversely affected.15 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSMortgage loan modification programs, future legislative action and changes in the requirements necessary to qualify forrefinancing a mortgage with Fannie Mae, Freddie Mac or Ginnie Mae may adversely affect the value of, and the returns on, theMBS in which we invest.During the second half of 2008, the U.S. government, through the Federal Housing Administration (FHA) and the Federal DepositInsurance Corporation (FDIC), commenced implementation of programs designed to provide homeowners with assistance in avoidingresidential mortgage loan foreclosures, including the Hope for Homeowners Act of 2008, which allows certain distressed borrowers torefinance their mortgages into FHA-insured loans. In addition, Fannie Mae and Freddie Mac instituted programs designed to assistdistressed homeowners avoid foreclosure. These and any future programs may involve, among other things, the modification of mortgageloans to reduce the principal amount of the loans or the rate of interest payable on the loans, or to extend the payment terms of the loans.In addition, in February 2009 the U.S. Treasury announced HASP, which is a multi-faceted plan intended to prevent residentialmortgage foreclosures by, among other things:•allowing certain homeowners whose homes are encumbered by Fannie Mae or Freddie Mac conforming mortgages to refinance thosemortgages into lower interest rate mortgages with either Fannie Mae or Freddie Mac;•creating the Homeowner Stability Initiative, which is intended to utilize various incentives for banks and mortgage servicers tomodify residential mortgage loans with the goal of reducing monthly mortgage principal and interest payments for certain qualifiedhomeowners; and•allowing judicial modifications of Fannie Mae and Freddie Mac conforming residential mortgage loans during bankruptcyproceedings.In September 2011, the White House announced a major plan to allow some of the 11 million homeowners who then owed more on theirmortgages than their homes were worth to refinance. In October 2011, the FHFA announced proposed changes to HARP that would expandaccess to refinancing for qualified individuals and families whose homes have lost value, among other things, increasing the HARP loan-to-value ratio above 125%. However, this would only apply to mortgages guaranteed by the GSEs. There are many challenging issues to thisproposal, notably the question as to whether a loan with a loan-to-value ratio of 125% qualifies as a mortgage or an unsecured consumerloan. The chances of this initiative’s success have created additional uncertainty in the MBS market, particularly with respect to possibleincreases in prepayment rates.On January 4, 2012, the U.S. Federal Reserve issued a white paper outlining additional ideas with regard to refinancings and loanmodifications. It is likely that loan modifications would result in increased prepayments on agency-backed MBS. See “Risks to ourBusiness — An increase in prepayment rates could negatively affect the value of our MBS purchased at a premium, which could result inreduced earnings or losses and negatively affect the cash available for distribution to our shareholders” for information relating to the impactof prepayments on our business. These initiatives, any loan modification programs and future legislative or regulatory actions, includingamendments to the bankruptcy laws, that result in the modification of outstanding mortgage loans, as well as changes in the requirementsnecessary to qualify for refinancing a mortgage with Fannie Mae, Freddie Mac or Ginnie Mae may adversely affect the value of, and thereturns on, our MBS.Declines in the market values of the securities in our MBS portfolio may adversely affect periodic reported results and creditavailability, which may reduce earnings and, in turn, cash available for distribution to our shareholders.A substantial portion of our assets are classified for accounting purposes either as “trading securities” or as “available-for-sale.”Changes in the market values of those assets will be directly charged or credited to shareholders’ equity. As a result, a decline in value mayreduce the book value of our assets. Moreover, if the decline in value of an available-for-sale security is other-than-temporary, such declinewill reduce earnings, as will a decline in the value of our securities classified as trading securities for accounting purposes.16 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSA decline in the market value of the securities in our MBS portfolio may adversely affect us particularly in instances where we haveborrowed money based on the market value of those assets. If the market value of those assets declines, the lender may require us to postadditional collateral to support the loan. If we were unable to post the additional collateral, we would have to sell the assets at a time when wemight not otherwise choose to do so. A reduction in credit available may reduce our earnings and, in turn, cash available for distribution toshareholders.Our mortgage investing strategy involves leverage, which could adversely affect our operations and negatively affect cashavailable for distribution to our shareholders.We may reduce the amount of equity capital we have invested in agency-backed MBS or other mortgage-backed assets by funding aportion of those acquisitions with repurchase agreements, commercial paper (to the extent commercial paper is available on favorable termsor at all) or other borrowing arrangements. To the extent that revenue derived from those assets exceeds our interest expense, hedging expenseand other costs of the financing, our net income will be greater than if we had not borrowed funds and had not invested in the assets.Conversely, if the revenue from our MBS and other mortgage-backed assets does not sufficiently cover the interest expense, hedging expenseand other costs of the financing, our net income will be less or our net loss will be greater than if we had not borrowed funds. Because of thecredit and interest rate risks inherent in our strategy, we closely monitor the leverage (debt-to-equity ratio) of our MBS portfolio. From time totime, our leverage ratio may increase or decrease due to several factors, including changes in the value of the underlying portfolio holdingsand the timing and amount of acquisitions.Our lenders may require us to provide additional collateral, especially when the market values for our investments decline, whichmay restrict us from leveraging our assets as fully as desired, and reduce our liquidity, earnings and cash available fordistribution to our shareholders.We currently use repurchase agreements to finance our investments in MBS. Our repurchase agreements allow the lenders, to varyingdegrees, to determine a new market value of the collateral to reflect current market conditions. If the market value of the securities pledged orsold by us to a funding source declines in value, we may be required by the lender to provide additional collateral or pay down a portion ofthe funds advanced on minimal notice, which is known as a margin call. Posting additional collateral will reduce our liquidity and limit ourability to leverage our assets, which could adversely affect our business. Additionally, in order to satisfy a margin call, we may be requiredto liquidate assets at a disadvantageous time, which could cause us to incur further losses and adversely affect our results of operations andfinancial condition, and may impair our ability to make distributions to our shareholders. In the event we do not have sufficient liquidity tosatisfy these margin calls, lending institutions can accelerate our indebtedness, increase our borrowing rates, liquidate our collateral andterminate our ability to borrow. Such a situation would likely result in a rapid deterioration of our financial condition and possiblynecessitate a filing for protection under the bankruptcy code.If we fail to maintain adequate repurchase agreement financing or to renew or replace existing borrowings upon maturity, wewill be limited in our ability to implement our principal investing activities, which will adversely affect our results of operationsand may, in turn, negatively affect the market value of our Class A common stock and our ability to make dividends to ourshareholders.We depend upon repurchase agreement financing to purchase our target assets and reach our target leverage ratio. We cannot assure youthat sufficient repurchase agreement financing will be available to us in the future on terms that are acceptable to us. Investors and financialinstitutions that lend in the securities repurchase market have tightened lending standards and some have stopped lending entirely in therepurchase market in response to the difficulties and changed economic conditions that have materially adversely affected the MBS market.If we fail to obtain adequate funding or to renew or replace existing funding upon maturity, we will be limited in our ability to implement ourbusiness strategy, which will adversely affect our results of operations and may, in turn, negatively affect the market value of our Class Acommon stock and our ability to make dividends to our shareholders.17 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSOur use of repurchase agreements may give our lenders greater rights in the event that either we or any of our lenders file forbankruptcy, which may make it difficult for us to recover our collateral.Our borrowings under repurchase agreements may qualify for special treatment under the bankruptcy code, giving our lenders theability to avoid the automatic stay provisions of the bankruptcy code and take possession of and liquidate our collateral under therepurchase agreements without delay if we file for bankruptcy. Furthermore, the special treatment of repurchase agreements under thebankruptcy code may make it difficult for us to recover our pledged assets in the event that any of our lenders file for bankruptcy. Thus,the use of repurchase agreements exposes our pledged assets to risk in the event of a bankruptcy filing by either our lenders or us. Inaddition, if the lender is a broker or dealer subject to the Securities Investor Protection Act of 1970 or an insured depository institutionsubject to the Federal Deposit Insurance Act, our ability to exercise our rights to recover our investment under a repurchase agreement or to becompensated for any damages resulting from the lender’s insolvency may be further limited by those statutes.If the lending institution under one or more of our repurchase agreements defaults on its obligation to resell the underlyingsecurity back to us at the end of the agreement term, we will lose money on our repurchase transactions.When we engage in a repurchase transaction, we initially sell securities to the transaction counterparty under a master repurchaseagreement in exchange for cash from the counterparty. The counterparty is obligated to resell the same securities back to us at the end of theterm of the repurchase agreement, which typically is 30 to 90 days, but may be up to one year. If the counterparty in a repurchasetransaction defaults on its obligation to resell the securities back to us, we will incur a loss on the transaction equal to the amount of thehaircut (assuming no change in the value of the securities). Losses incurred on our repurchase transactions would adversely affect ourearnings and our cash available for distribution to our shareholders.If we default on our obligations under our repurchase agreements, we may be unable to establish a suitable replacement facilityon acceptable terms or at all.If we default on one of our obligations under a repurchase agreement, the counterparty may terminate the agreement and cease enteringinto any other repurchase agreements with us. In that case, we would likely need to establish a replacement repurchase facility with anotherfinancial institution in order to continue to leverage our investment portfolio and carry out our investment strategy. We may be unable toestablish a suitable replacement repurchase facility on acceptable terms or at all.Changes in interest rates and adverse market conditions could negatively affect the value of our MBS investments and increasethe cost of our borrowings, which could result in reduced earnings or losses and negatively affect the cash available fordistribution to our shareholders.We acquire indirect interests in mortgage loans by purchasing MBS and we currently intend to continue this strategy. Under a normalyield curve, an investment in MBS will decline in value if long-term interest rates increase. In addition, net interest income could decrease ifthe yield curve becomes inverted or flat. Fannie Mae or Freddie Mac guarantees of the agency-backed MBS we own do not protect us fromdeclines in market value caused by changes in interest rates. Declines in market value may ultimately reduce earnings or result in losses tous, which may negatively affect cash available for distribution to our shareholders.A significant risk associated with our portfolio of mortgage-related assets is the risk that both long-term and short-term interest rates willincrease significantly. If long-term rates were to increase significantly, the market value of these MBS would decline and the duration andweighted average life of the investments would increase. We could realize a loss in the future if the MBS were sold. At the same time, anincrease in short-term interest rates would increase the amount of interest owed on the repurchase agreements we enter into in order to financethe purchase of MBS.Market values of MBS may decline without any general increase in interest rates for a number of reasons, such as increases in defaults,increases in voluntary prepayments and widening of credit spreads. If the market values of our investments were to decline for any reason,the value of your investment in our capital stock could also decline.18 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSLimitations on our access to capital could impair our liquidity and our ability to conduct our business.Liquidity, or ready access to funds, is essential to our business. Failures of similar businesses have often been attributable in large partto insufficient liquidity. Liquidity is of particular importance to our business and perceived liquidity issues may affect our clients’ andcounterparties’ willingness to engage in transactions with us. Our liquidity could be impaired due to circumstances that we may be unable tocontrol, such as a general market disruption, the payment of significant legal defense and indemnification costs, expenses, damages orsettlement amounts, or an operational problem that affects us or third parties. Further, our ability to sell assets may be impaired if othermarket participants are seeking to sell similar assets at the same time or the market is experiencing significant volatility. Our inability tomaintain adequate liquidity would materially harm our business and operations.The nature of the securities we hold exposes us to concentrated credit risk that could reduce our earnings, dividends, cash flowsand access to liquidity, and otherwise negatively affect our business.Our private-label MBS portfolio has concentrated risks with respect to residential real estate loans. In general, losses on an assetsecuring a residential real estate loan included in a securitization will be borne first by the owner of the property (i.e., the owner will first losethe equity invested in the property) and, thereafter, by mezzanine or preferred equity investors, if any, then by a cash reserve fund or letterof credit, if any, then by the first-loss holder, and then by holders of more senior securities. In the event the losses incurred upon default onthe loan exceed any equity support, reserve fund, letter of credit and classes of securities junior to those in which we invest (if any), we maynot be able to recover any or all of our investment in the securities we hold. In addition, if the underlying properties have been overvalued bythe originating appraisal or if the values subsequently declined and, as a result, less collateral is available to satisfy interest and principalpayments due on the related private-label MBS, then the first-loss securities may suffer a total loss of principal, followed by losses on thesecond-loss and so on. Any credit enhancement we may have with respect to our private-label MBS could be insufficient to protect us from acomplete loss.Our due diligence of potential investments may not reveal all of the liabilities associated with those investments and may not revealaspects of the investments which could lead to investment losses, and our ability to manage exposures to assets in which we havean indirect interest is limited.Before making certain acquisitions, we may undertake due diligence efforts with respect to various aspects of the acquisition, includinginvestigating the strengths and weaknesses of the originator or issuer of the asset and, in the case of acquisitions of private-label MBS,verifying certain aspects of the underlying assets themselves as well as other factors and characteristics that may be material to theperformance of the acquisition. In making the assessment and otherwise conducting due diligence, we rely on resources available to us and,in some cases, third party information. There can be no assurance that any due diligence process that we conduct will uncover relevant factsthat could be determinative of whether or not an investment will be successful.Moreover, our ability to manage our exposures is significantly limited by contractual and other constraints of the securitization vehiclestructures in which such assets are held.The securities and loans we own are likely to lead to variable returns.We actively manage the risks associated with acquiring, holding and disposing of MBS. No amount of risk management or mitigation,however, can change the variable nature of the cash flows, fair values of, and financial results generated by these loans and securities.Changes in the credit performance or the prepayments on the loans underlying private-label MBS and changes in interest rates impact thecash flows on these securities, and the impact could be significant for our securities with concentrated risks. Changes in cash flows lead tochanges in our return and also to potential variability in reported income.The revenue recognized on our private-label MBS is based on an estimate of the yield over the remaining life of the asset. Thus, changesin our estimates of expected cash flow from an asset will result in changes in our reported earnings on that asset in the current reportingperiod. We may be forced to recognize adverse changes in expected future cash flows as a current expense, further adding to earningsvolatility.19 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSChanges in the fair values of our MBS may have various negative effects on us, including reduced earnings, increased earningsvolatility and volatility in our book value.Fair values for our MBS can be volatile. The fair values can change rapidly and significantly and changes can result from changes ininterest rates, actual and perceived risk, supply, demand, and actual and projected cash flows and prepayments and credit performance. Adecrease in fair value may not necessarily be the result of deterioration in future cash flows. A decrease in the fair value of MBS we ownmay result in a reduction in our book value due to the accounting standards we are required to apply. Reporting a low book value could haveadverse effects even if that book value is not indicative of the actual value of our net investments in assets. The adverse effects include theinability to meet or agree upon covenants with counterparties, to enter into derivative contracts or a reduction in the market price of our ClassA common stock.Our investments are recorded at fair value based upon assumptions that are inherently subjective and involve a high degree ofmanagement judgment. Our results of operations and financial condition could be adversely affected if our determinationsregarding the fair value of our investments are materially higher than the values that we ultimately realize upon their disposal.Our current portfolio investments are, and our future portfolio investments may be, in the form of securities that are not publicly traded.The fair value of securities and other investments that are not publicly traded may not be readily determinable. In computing the fair valuesfor MBS for which there are limited observable third-party trades, we make a number of market-based assumptions, includingassumptions regarding future interest rates, prepayment rates, discount rates, credit loss rates, and the timing of credit losses. Theseassumptions are inherently subjective and involve a high degree of management judgment, and our determinations of fair value may differmaterially from the values that would have been used if a public market for these securities existed. Although we rely on our internalcalculations to compute the fair value of securities we own, we also request and consider indications of value (marks) from third-partydealers to assist us in our valuation process. The results of market disruptions over the past several years have generated fewer third-partydata points for us to consider in connection with our estimates of the fair value of our securities than were available to us in the past. Ourreported fair value may not reflect what a willing buyer would pay for those assets. Our results of operations and financial condition may beadversely affected if our determinations regarding the fair value of our investments is materially higher than the values that we ultimatelyrealize upon their disposal.Credit ratings assigned to debt securities by the credit rating agencies may not accurately reflect the risks associated with thosesecurities.We make certain acquisition decisions after factoring in a series of data, including credit rating. However, a credit rating may notaccurately reflect the risks associated with a particular debt security. Rating agencies rate certain debt securities based upon their assessmentof the safety of the receipt of principal and interest payments. Rating agencies do not consider the risks of fluctuations in fair value or otherfactors that may influence the value of debt securities and, therefore, the assigned credit rating may not fully reflect the true risks of aninvestment in securities. Also, rating agencies may fail to make timely adjustments to credit ratings based on available data or changes ineconomic outlook or may otherwise fail to make changes in credit ratings in response to subsequent events, so that our investments may bebetter or worse than the ratings indicate.The assignment of an “investment grade” rating to a security by a rating agency does not mean that there is not credit risk associatedwith the security or that the risk of a credit loss with respect to such security is remote. For example, a large number of MBS that werepreviously rated triple-A by one or more rating agencies have been downgraded, in many cases by several rating levels at one time. Adowngrade in credit rating can materially adversely affect the fair value of a security. Our assessment of the quality of an investment thatrelies, in part, on that asset’s credit rating, may prove to be inaccurate and we may incur credit losses in excess of our initial expectations.20 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSFurthermore, credit rating agencies may change their methods of evaluating credit risk and determining ratings on MBS. These changesmay occur quickly and often. The market’s ability to understand and absorb these changes, and the impact to the securitization market ingeneral, are difficult to predict. Such changes will have an impact on the amount of investment-grade and non-investment-grade securitiesthat are created or placed on the market in the future. A change in the amount of investment-grade and non-investment-grade securities thatare created or placed on the market could materially adversely impact the value of the MBS in our portfolio and potentially limit or increasethe value of MBS available for purchase in the future.New assets we acquire may not generate yields as attractive as yields on our current assets, resulting in a decline in our earningsper share over time.We believe the assets we acquire have the potential to generate attractive economic returns and GAAP yields, but acquiring assets in anuncertain economic environment poses significant risks. Potential cash flow and mark-to-market returns from new asset acquisitions couldbe negative, including both new assets that are backed by newly-originated loans, as well as new acquisitions that are backed by moreseasoned assets that may experience higher than expected levels of delinquency and default. In order to maintain and grow our portfolio sizeand our earnings, we must reinvest in new assets a portion of the cash flows we receive from principal, interest, and sales. We receivemonthly payments from many of our assets, consisting of principal and interest. Principal payments reduce the size of our current portfolioand generate cash for us. We may also sell assets from time to time as part of our portfolio management and capital recycling strategies. Ifthe assets we acquire in the future earn lower GAAP yields than the assets we currently own, our reported earnings per share will likelydecline over time as the older assets pay down, are called, or are sold.An increase in our borrowing costs relative to the interest we receive on our mortgage-related assets may adversely affect ourprofitability, which may reduce the cash available for distribution to our shareholders.As our repurchase agreements and other short-term borrowing instruments mature, we must either enter into new repurchase agreementsor sell a portion of our mortgage-related assets or other investment securities at times when we might not otherwise choose to do so. Lendersmay seek to use a new maturity date as an opportune time to demand additional terms or increased collateral requirements that could beadverse to us and harm our operations. Moreover, current conditions in the credit markets may make it impracticable to enter into newrepurchase agreements or other short-term facilities. See “Risks Related to our Business — In general, changes in market conditions couldfurther adversely and materially affect our business and the value of our capital stock could be negatively impacted.”We generally expect that the interest rates tied to our borrowings will adjust more rapidly than the interest rates tied to the assets in whichwe invest. An increase in short-term interest rates at the time that we seek to enter into new repurchase agreements would reduce the spreadbetween our returns on our mortgage-related assets and the cost of our borrowings. This change in interest rates would adversely affect ourreturns on our mortgage-related assets portfolio, which might reduce earnings and, in turn, cash available for distribution to ourshareholders.An increase in prepayment rates could negatively affect the value of our MBS purchased at a premium, which could result inreduced earnings or losses and negatively affect the cash available for distribution to our shareholders.In the case of residential mortgage loans, there are seldom any restrictions on borrowers’ abilities to prepay their loans. Homeowners tendto prepay mortgage loans more quickly when interest rates decline. Furthermore, HASP, the U.S. Federal Reserve’s mortgage purchases oflong-term U.S. Treasury bonds and MBS although the rate of such purchases is being reduced via tapering, and the expansion of HARPhave caused, and could continue to cause, an increase in prepayment rates. When interest rates decline, owners of the loans have to reinvestthe money received from the prepayments at the lower prevailing interest rates. Conversely, homeowners tend not to prepay mortgage loanswhen interest rates increase. Consequently, owners of the loans are unable to reinvest money that would have otherwise been received fromprepayments at the higher prevailing interest rates. This volatility in prepayment rates may affect our ability to maintain targeted amounts ofleverage on our mortgage-based securities portfolio and may result in reduced earnings or losses for us and negatively affect the cashavailable for distribution to our shareholders. Fannie Mae or21 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSFreddie Mac guarantees of principal and interest related to the agency-backed MBS we own do not protect us against prepayment risks.Prepayments are generally reflected as a reduction of premium, which means that prepayments may result in recognition of loss ininvestment value for us.Hedging against interest rate exposure may not completely insulate us from interest rate risk and may adversely affect ourearnings, which could adversely affect cash available for distribution to our shareholders.We engage in certain hedging transactions to limit our exposure to changes in interest rates and therefore may expose our company to therisks associated with such transactions. We have historically entered into and may enter into interest rate swap agreements, Eurodollar orU.S. Treasury futures or pursue other hedging strategies. Hedging against a decline in the values of our portfolio positions does not eliminatethe possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. However, we mayestablish other hedging positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfoliopositions. Such hedging transactions may also limit the opportunity for gain if the values of the portfolio positions should increase.Moreover, it may not be possible to hedge against an interest rate fluctuation that is so generally anticipated that we are not able to enter into ahedging transaction at an acceptable price.The success of our hedging transactions depends on our ability to accurately predict movements of interest rates and credit spreads.Therefore, while we may enter into such transactions to seek to reduce interest rate risks, unanticipated changes in interest rates may resultin poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlationbetween price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged mayvary. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and theportfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk ofloss.We currently hedge against interest rate risk. Our hedging activity will vary in scope based on the level and volatility of interest rates andprincipal prepayments, the type of MBS held, and other changing market conditions. Interest rate hedging may fail to protect or couldadversely affect us because, among other things:•interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;•available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought;•the duration of the hedge may not match the duration of the related liability;•the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell orassign our side of the hedging transaction; and•the party owing money in the hedging transaction may default on its obligation to pay.Our hedging activity may adversely affect our earnings, which could adversely affect cash available for distribution to ourshareholders.We may change our investment strategy, hedging strategy, asset allocation and operational policies without shareholder consent,which may result in riskier investments and adversely affect the market value of our Class A common stock and our ability tomake distributions to our shareholders.We may change our investment strategy, hedging strategy, asset allocation and operational policies at any time without the consent of ourshareholders, which could result in our making investments or hedges that are different from, and possibly riskier than, the investmentsand hedges described in this Annual Report on Form 10-K. A change in our investment or hedging strategy may increase our exposure tointerest rate and real estate market fluctuations. A change in our asset allocation could result in us making investments in instrumentcategories different from those described in this Annual Report on Form 10-K. Our Board of Directors oversees our operational policies,including those with respect to our acquisitions, growth, operations, indebtedness, capitalization and distributions or approves transactionsthat deviate from these22 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSpolicies without a vote of, or notice to, our shareholders. Operational policy changes could adversely affect the market value of our Class Acommon stock and our ability to make distributions to our shareholders. Investing in assets other than MBS or pursuing business activitiesother than investing in MBS may not be successful and could adversely affect our results of operations and the market value of our Class Acommon stock.Our Board of Directors does not approve each of our investment decisions.Our Board of Directors oversees our operational policies and periodically reviews our investment guidelines and our investmentportfolio. However, our Board of Directors does not review all of our proposed investments. In addition, in conducting periodic reviews, ourBoard of Directors may rely primarily on information provided to them by our management. Furthermore, transactions entered into orstructured for us by our management may be difficult or impossible to unwind by the time they are reviewed by our directors.We operate in a highly-competitive market for investment opportunities, which could make it difficult for us to purchase ororiginate investments at attractive yields and thus have an adverse effect on our business, results of operations and financialcondition.We gain access to investment opportunities only to the extent that they become known to us. Gaining access to investment opportunitiesis highly competitive. Many of our competitors are substantially larger than us and have considerably greater financial, technical andmarketing resources, more long-standing relationships, broader product offerings and other advantages. Some of our competitors may havea lower cost of funds and access to funding sources that are not available to us. Additionally, in response to the recent financial issuesaffecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, the U.S.government established programs such as the Legacy Securities Public-Private Investment Program (PPIP), which are designed, in part, torestart the market for certain of our target investments. The establishment of these or similar programs may result in increased competitionfor attractive opportunities in our target investments. It is also possible that our competitors may successfully utilize these programs, whichwould provide them with attractive debt and equity capital funding from the U.S. government. As a result of this competition, we may notbe able to purchase or originate our target investments at attractive yields, which could have an adverse effect on our business, results ofoperations and financial condition.Risks Related to our Business and StructureThe voting power of our principal shareholders and other executive officers, directors and nominees may result in corporateaction with which you do not agree and may discourage third party acquisitions of our company and prevent our shareholdersfrom receiving any premium above market price for their shares.Eric F. Billings has significant influence over our operations through his ownership of our common stock, which, as of January 31,2014, represents approximately 7.4% of the total voting power of our common stock. In addition, Mr. Billings serves as Chairman of ourBoard of Directors and as our Chief Executive Officer. As of January 31, 2014, Mr. Billings and all of our other executive officers, directorsand nominees, as a group, control approximately 9.1% of our total voting power. The extent of the influence that Mr. Billings and our otherofficers, directors and nominees have over us may have the effect of discouraging offers to acquire control of our company and maypreclude holders of our common stock from receiving any premium above market price for their shares that may be offered in connectionwith any attempt to acquire control of our company without the approval of Mr. Billings. Mr. Billings could have interests that are differentthan those of our other investors and could take or influence actions with which our other investors disagree.Our Rights Plan could inhibit a change in our control and we may not be successful in protecting our anticipated tax benefits.In June 2009, our Board of Directors implemented a Rights Plan in an effort to protect against a possible limitation on our ability to useour NOLs, NCLs and built-in losses by dissuading investors from aggregating ownership of our Class A common stock and triggering an“ownership change” for purposes of Sections 382 and 383 of the Code. The Rights Plan may not be successful in preventing an “ownershipchange” within the23 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSmeaning of Sections 382 and 383 of the Code, and we may lose all or most of the anticipated tax benefits associated with our prior losses.Under the terms of the Rights Plan, in general, if a person or group acquires or commences a tender or exchange offer for beneficialownership of 4.9% or more of the outstanding shares of our Class A common stock upon a determination by our Board of Directors (anAcquiring Person), all of our other Class A and Class B common shareholders will have the right to purchase securities from us at adiscount to such securities’ fair market value, thus causing substantial dilution to the Acquiring Person. The Rights Plan may have theeffect of inhibiting or impeding a change in control not approved by our Board of Directors and, notwithstanding its purpose, couldadversely affect our shareholders’ ability to realize a premium over the then-prevailing market price for our common stock in connectionwith such a transaction. In addition, because our Board of Directors can prevent the Rights Plan from operating, in the event our Board ofDirectors approves of an Acquiring Person, the Rights Plan gives our Board of Directors significant discretion over whether a potentialacquirer’s efforts to acquire a large interest in us will be successful. Consequently, the Rights Plan may not succeed in protecting anticipatedtax benefits and could impede transactions that would otherwise benefit our shareholders.The trading price of our Class A common stock may be adversely affected by factors outside of our control.Any negative changes in the public’s perception of the prospects for our business or the types of assets in which we invest could depressour stock price regardless of our results. The following factors, among others, could contribute to the volatility of the price of our Class Acommon stock:•actual or unanticipated variations in our quarterly results;•changes in our financial estimates by securities analysts;•conditions or trends affecting companies that make investments similar to ours;•changes in interest rate environments and the mortgage market that cause our borrowing costs to increase, our reported yields on ourMBS portfolio to decrease or that cause the value of our MBS portfolio to decrease;•changes in the market valuations of the securities in our MBS portfolio and other principal investments;•negative changes in the public’s perception of the prospects of investment or financial services companies;•changes in the regulatory environment in which our business operates;•dilution resulting from new equity issuances or the conversion of Class B common stock into Class A common stock;•general economic conditions such as a recession, or interest rate or currency rate fluctuations; and•additions or departures of our key personnel.Many of these factors are beyond our control.We may experience significant fluctuations in quarterly operating results.Our revenues and operating results may fluctuate from quarter to quarter and from year to year due to a combination of factors, many ofwhich are beyond our control, including the market value of the MBS we acquire, prepayment rates and changes in interest rates. As aresult, we may fail to meet profitability or dividend expectations, which could negatively affect the market price of our Class A commonstock and our ability to pay dividends to our shareholders.We cannot assure you that we will be able to pay dividends in the future.Pursuant to our variable dividend policy, our Board of Directors, in its sole discretion, reinstated the payment of a cash dividend during2010. However, there can be no assurances that they will continue to do so. The amount and timing of any distributions we may make arein the sole discretion of our Board of Directors.24 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSLitigation involving our company could result in significant legal expenses and have a material adverse effect on our business,financial condition, results of operations and cash flows.As described under “Item 3 — Legal Proceedings” in this Annual Report on Form 10-K, we may in the future become subject tolitigation. Such litigation may result in significant defense costs and potentially significant judgments against us, some of which are not, orcannot be, insured against. We cannot predict the ultimate outcome of any litigation, and cannot estimate the likelihood or potential dollaramount of any adverse results. We may be unable to accurately estimate our exposure to litigation risk when we record balance sheet reservesfor probable loss contingencies. As a result, any reserves we establish to cover any settlements or judgments, if any, may not be sufficient tocover our actual financial exposure, which may have a material impact on our results of operations or financial condition. In the event of anadverse judgment in any action or proceeding, we may be required to pay damages or penalties, or other remedies may be imposed upon us,which could have a material adverse impact upon our financial position, results of operations and cash flows and could also cause ussignificant reputational harm, which in turn could seriously harm our business and prospects.Indemnification obligations to certain of our current and former directors and officers may increase the costs to us of legalproceedings involving our company.Our charter contains a provision that limits the liability of our directors and officers to us and our shareholders for money damages,except for liability resulting from willful misconduct or a knowing violation of the criminal law or any federal or state securities law. Ourcharter also requires us to indemnify our directors and officers in connection with any liability incurred by them in connection with anyaction or proceeding (including any action by us or in our right) to which they are or may be made a party by reason of their service in thoseor other capacities if the conduct in question was in our best interests and the person was acting on our behalf or performing services for us,unless the person engaged in willful misconduct or a knowing violation of the criminal law. The Virginia Stock Corporation Act requires aVirginia corporation (unless its charter provides otherwise, which our charter does not) to indemnify a director or officer who has beensuccessful, on the merits or otherwise, in the defense of any proceeding to which he is made a party by reason of his service in that capacity.In addition, we have entered into indemnification agreements with certain of our current and former directors and officers under whichwe are generally required to indemnify them against liability incurred by them in connection with any action or proceeding to which they areor may be made a party by reason of their service in those or other capacities, if the conduct in question was in our best interests and theperson was conducting themselves in good faith (subject to certain exceptions, including liabilities arising from willful misconduct, aknowing violation of the criminal law or receipt of an improper benefit).In the future we may be the subject of indemnification assertions under our charter, Virginia law or these indemnification agreements byour current and former directors and officers who are or may become party to any action or proceeding. We maintain directors’ and officers’insurance policies that may limit our exposure and enable us to recover a portion of any amounts paid with respect to such obligations.However, if our coverage under these policies is reduced, denied, eliminated or otherwise not available to us, our potential financial exposurewould be increased. The maximum potential amount of future payments we could be required to make under these indemnificationobligations could be significant. Amounts paid pursuant to our indemnification obligations could adversely affect our financial results andthe amount of cash available for distribution to our shareholders.Loss of our exclusion from regulation as an investment company under the 1940 Act would adversely affect us and may reducethe market price of our shares.We rely on Section 3(c)(5)(C) for our exclusion from the registration requirements of the 1940 Act. This provision requires that 55% ofour assets, on an unconsolidated basis, consist of qualifying assets, such as agency whole pool certificates and 80% of our assets, on anunconsolidated basis, consist of qualifying assets or real estate-related assets. We will need to ensure not only that we qualify for anexclusion or exemption from regulation under the 1940 Act, but also that each of our subsidiaries qualifies for such an exclusion orexemption. We intend to maintain our exclusion by monitoring the value of our interests in our subsidiaries. We may not be successful inthis regard.25 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSOn September 1, 2011, the SEC issued a concept release (No. IC-29778; File No. SW7-34-11, Companies Engaged in the Business ofAcquiring Mortgages and Mortgage-Related Instruments) pursuant to which it is reviewing whether certain companies that invest in MBSand rely on the exemption from registration under Section 3(c)(5)(C) of the 1940 Act (such as our company) should continue to be allowed torely on such exemption from registration.If we fail to maintain our exclusion and another exclusion or exemption is not available, we may be required to register as an investmentcompany, or we may be required to acquire or dispose of assets in order to meet our exemption. Any such asset acquisitions or dispositionsmay include assets that we would not acquire or dispose of in the ordinary course of business, may be at unfavorable prices and result in adecline in the price of our Class A common stock. If we are required to register under the 1940 Act, we would become subject to substantialregulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions with affiliatedpersons (as defined in the 1940 Act), and portfolio composition, including restrictions with respect to diversification and industryconcentration and other matters. Accordingly, registration under the 1940 Act could limit our ability to follow our current investment andfinancing strategies and result in a decline in the price of our Class A common stock.Failure to obtain and maintain an exemption from being regulated as a commodity pool operator could subject us to additionalregulation and compliance requirements and may result in fines and other penalties which could materially adversely affect ourbusiness, financial condition and results of operations.The Dodd-Frank Act established a comprehensive new regulatory framework for derivative contracts commonly referred to as “swaps.”As a result, any investment fund that trades in swaps or other derivatives may be considered a “commodity pool,” which would cause itsoperators (in some cases the fund’s directors) to be regulated as “commodity pool operators,” or CPOs. Under rules adopted by the U.S.Commodity Futures Trading Commission (CFTC) for which the compliance date generally was December 31, 2012 as to those funds thatbecome commodity pools solely because of their use of swaps, CPOs must by then have filed an application for registration with theNational Futures Association (NFA) and have commenced and sustained good faith efforts to comply with the Commodity Exchange Actand CFTC’s regulations with respect to capital raising, disclosure, reporting, recordkeeping and other business conduct applicable for theiractivities as CPOs as if the CPOs were in fact registered in such capacity (which also requires compliance with applicable NFA rules).However, the CFTC’s Division of Swap Dealer and Intermediary Oversight issued a no-action letter saying, although it believes thatmortgage REITs are properly considered commodity pools, it would not recommend that the CFTC take enforcement action against theoperator of a mortgage REIT who does not register as a CPO if, among other things, the mortgage REIT limits the initial margin andpremiums required to establish its swaps, futures and other commodity interest positions to not more than five percent (5%) of its totalassets, the mortgage REIT limits the net income derived annually from those commodity interest positions which are not qualifying hedgingtransactions to less than five percent (5%) of its gross income and interests in the mortgage REIT are not marketed to the public as or in acommodity pool or otherwise as or in a vehicle for trading in the commodity futures, commodity options or swaps markets.We use hedging instruments in conjunction with our investment portfolio and related borrowings to reduce or mitigate risks associatedwith changes in interest rates, mortgage spreads, yield curve shapes and market volatility. These hedging instruments include interest rateswaps, interest rate futures and options on interest rate futures. We do not currently engage in any speculative derivatives activities or othernon-hedging transactions using swaps, futures or options on futures. We do not use these instruments for the purpose of trading incommodity interests, and we do not consider our company or its operations to be a commodity pool as to which CPO registration orcompliance is required. We have claimed the relief afforded by the above-described no-action letter. Consequently, we will be restricted tooperating within the parameters discussed in the no-action letter and will not enter into hedging transactions covered by the no-action letter ifthey would cause us to exceed the limits set forth in the no-action letter. However, there can be no assurance that the CFTC will agree that weare entitled to the no-action letter relief claimed.The CFTC has substantial enforcement power with respect to violations of the laws over which it has jurisdiction, including their anti-fraud and anti-manipulation provisions. For example, the CFTC may suspend or revoke the registration of or the no-action relief afforded toa person who fails to comply with commodities laws and regulations, prohibit such a person from trading or doing business with registeredentities, impose26 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTScivil money penalties, require restitution and seek fines or imprisonment for criminal violations. In the event that the CFTC staff does notprovide the no action letter relief we requested or asserts that we are not entitled to the mortgage REIT no-action letter relief claimed or ifCFTC otherwise determines that CPO registration and compliance is required of us, we may be obligated to furnish additional disclosuresand reports, among other things. Further, a private right of action exists against those who violate the laws over which the CFTC hasjurisdiction or who willfully aid, abet, counsel, induce or procure a violation of those laws. In the event that we fail to comply with statutoryrequirements relating to derivatives or with the CFTC’s rules thereunder, including the mortgage REIT no-action letter described above, wemay be subject to significant fines, penalties and other civil or governmental actions or proceedings, any of which could have a materiallyadverse effect on our business, financial condition and results of operations.Rapid changes in the values of our investments may make it more difficult for us to maintain our exemption from the 1940 Act.Changes in the market value or income potential of certain of our investments may prevent us from maintaining our exemption from the1940 Act. We may have to make investment decisions that we otherwise would not make absent the 1940 Act requirements, which mayadversely affect our business, financial condition and results of operations.We face competition for personnel, which could adversely affect our business and in turn negatively affect the market price of ourClass A common stock and our ability to pay dividends to our shareholders.We are dependent on the highly-skilled, and often highly-specialized, individuals we employ. Retention of specialists to manage ourportfolio is particularly important to our prospects. Competition for the recruiting and retention of employees may increase elements of ourcompensation costs. We may not be able to recruit and hire new employees with our desired qualifications in a timely manner. Ourincentives may be insufficient to recruit and retain our employees. Increased compensation costs could adversely affect the amount of cashavailable for distribution to shareholders and our failure to recruit and retain qualified employees could materially and adversely affect ourfuture operating results.We are dependent upon a small number of key senior professionals and loss of any of these individuals could adversely affectour financial results which may, in turn, negatively affect the market price of our Class A common stock and our ability to paydividends to our shareholders.We currently do not have employment agreements with most of our senior officers and other key professionals. We cannot guarantee thatwe will continue to have access to members of our senior management team or other key professionals. The loss of any members of oursenior management and other key professionals could materially and adversely affect our operating results.We are highly dependent upon communications and information systems operated by third parties, and systems failures couldsignificantly disrupt our business, which may, in turn, negatively affect the market price of our Class A common stock and ourability to pay dividends to our shareholders.Our business is highly dependent upon communications and information systems that allow us to monitor, value, buy, sell, financeand hedge our investments. These systems are primarily operated by third parties and, as a result, we have limited ability to ensure theircontinued operation. Furthermore, in the event of systems failure or interruption, we will have limited ability to affect the timing and successof systems restoration. Any failure or interruption of our systems or third-party trading or information systems could cause delays or otherproblems in our securities trading activities, including MBS trading activities, which could have a material adverse effect on our operatingresults and negatively affect the market price of our Class A common stock and our ability to pay dividends to our shareholders.If we issue additional debt securities or other equity securities that rank senior to our common stock for the purposes of dividingand liquidating distributions, our operations may be restricted and we will be exposed to additional risk and the market price ofour Class A common stock could be adversely affected.If we decide to issue additional debt securities in the future, it is likely that such securities will be governed by an indenture or otherinstrument containing covenants restricting our operating flexibility. Additionally, any convertible or exchangeable or other securitiesregistered pursuant to our shelf registration27 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSstatement that we issue in the future may have rights, preferences and privileges more favorable than those of our Class A common stock orshares of preferred stock, if issued, could have a preference on liquidating distributions or a preference on dividend payments that couldlimit our ability to make a dividend distribution to the holders of our Class A common stock. We, and indirectly our shareholders, will bearthe cost of issuing and servicing such securities. Holders of debt securities may be granted specific rights, including but not limited to, theright to hold a perfected security interest in certain of our assets, the right to accelerate payments due under the indenture, rights to restrictdividend payments, and rights to approve the sale of assets. Such additional restrictive covenants, operating restrictions and preferentialdividends could have a material adverse effect on our operating results and negatively affect the market price of our Class A common stockand our ability to pay distributions to our shareholders.Future decreases in the Company’s book value attributable to deferred tax assets may reduce the market price of our shares.As disclosed elsewhere throughout this Annual Report on Form 10-K, our book value per share of $33.10 as of December 31, 2013reflects $9.95 per share related to the deferred tax assets on our balance sheet. As we benefit from the utilization of the deferred tax assets orthese deferred tax assets expire without being utilized in future periods, our corresponding book value attributable to the deferred tax assetsutilized will be reduced by the same amount and the reported GAAP net income will also be reduced for the corresponding income tax effect,which could negatively affect the market price of our Class A common stock and our ability to pay dividends to our shareholders.Tax Risks of our Business and StructureOur ability to use NOL carry-forwards and NCL carry-forwards to reduce our taxable income may be limited.We revoked our status as a REIT effective as of January 1, 2009, in part to maximize the use of potential tax benefits flowing from ourexisting NOLs and NCLs. We believe that the NOL is realizable within the 20 years carry-forward period. We believe that a portion of theNCL is realizable and to the extent that is not, a valuation allowance has been recorded. Although we believe that a significant portion of ourNOLs will be utilized to offset the taxable income, no assurance can be provided that we will have taxable income or gains in the future toapply against our remaining NOLs and NCLs.In addition, our NOL and NCL carry-forwards may be limited by Sections 382 and 383 of the Code if we experience an “ownershipchange.” In general, an “ownership change” occurs if 5% shareholders increase their collective ownership of the aggregate amount of theoutstanding shares of our company by more than 50 percentage points looking back over the relevant testing period. If an ownership changeoccurs, our ability to use our NOLs, NCLs and certain recognized built-in losses to reduce our taxable income in a future year would belimited to a Section 382 limitation equal to the fair market value of our stock immediately prior to the ownership change multiplied by thelong-term tax-exempt interest rate in effect for the month of the ownership change. The long-term tax-exempt rate for February 2014 is 3.56%.In the event of an ownership change, NOLs and NCLs that exceed the Section 382 limitation in any year will continue to be allowed ascarry-forwards for the remainder of the carry-forward period and such losses can be used to offset taxable income for years within the carry-forward period subject to the Section 382 limitation in each year. However, if the carry-forward period for any NOL or NCL were to expirebefore that loss had been fully utilized, the unused portion of that loss would be lost. The carry-forward period for NOLs is 20 years fromthe year in which the losses giving rise to the NOLs were incurred, and the carry-forward period for NCLs is five years from the year inwhich the losses giving rise to the NCLs were incurred. Our use of new NOLs or NCLs arising after the date of an ownership change wouldnot be affected by the Section 382 limitation (unless there were another ownership change after those new losses arose).On June 1, 2009, our Board of Directors adopted the Rights Plan in an effort to protect against the occurrence of an ownership change.The Rights Plan is intended to act as a deterrent to any person or group acquiring 4.9% or more of our outstanding Class A common stockwithout the approval of our Board of Directors. Shareholders who own 4.9% or more of our outstanding Class A common stock as of theclose of business on June 5, 2009 will not trigger the Rights Plan so long as they do not (i) acquire any additional28 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSshares of Class A common stock or (ii) fall under 4.9% ownership of Class A common stock and then re-acquire additional shares so thatthey own 4.9% or more of the Class A common stock. The Rights Plan does not exempt any future acquisitions of Class A common stockby such persons. Any Rights held by an Acquiring Person are void and may not be exercised. No Person shall be an Acquiring Personunless our Board of Directors shall have affirmatively determined, in its sole and absolute discretion, within ten (10) business days (orsuch later time as the Board of Directors may determine) after such person has otherwise met the requirements of becoming an AcquiringPerson, that such person shall be an Acquiring Person. The Rights Plan, however, does not protect against all transactions that could causean ownership change, such as dispositions by existing 5% shareholders and transactions in our Class B common stock. The Rights Planwas ratified by the shareholders in June 2010.Based on our knowledge of our stock ownership, we do not believe that an ownership change has occurred since our losses weregenerated. Accordingly, we believe that at the current time there is no annual limitation imposed on our use of our NOLs and NCLs to reducefuture taxable income. The determination of whether an ownership change has occurred or will occur is complicated and depends on changesin percentage stock ownership among shareholders. Other than the Rights Plan, there are currently no restrictions on the transfer of ourstock that would discourage or prevent transactions that could cause an ownership change, although we may adopt such restrictions in thefuture. As discussed above, the Rights Plan is intended to discourage transactions that could cause an ownership change. The Rights Plan,however, does not protect against all transactions that could cause an ownership change. In addition, we have not obtained, and currently donot plan to obtain, a ruling from the Internal Revenue Service, regarding our conclusion as to whether our losses are subject to any suchlimitations. Furthermore, we may decide in the future that it is necessary or in our interest to take certain actions that could result in anownership change. Therefore, no assurance can be provided as to whether an ownership change has occurred or will occur in the future.Preserving the ability to use our NOLs and NCLs may cause us to forgo otherwise attractive opportunities.Limitations imposed by Sections 382 and 383 of the Code may discourage us from, among other things, redeeming our stock or issuingadditional stock to raise capital or to acquire businesses or assets. Accordingly, our desire to preserve our NOLs and NCLs may cause us toforgo otherwise attractive opportunities.If we elect in the future to be treated as a REIT, complying with the REIT requirements may cause us to forego otherwiseattractive opportunities.Beginning with our 2014 taxable year, we will be eligible to elect to be treated as a REIT. We might make such election for variousreasons. For example, if we are limited in our ability to use our NOLs and NCLs under Sections 382 and 383 of the Code, we may electREIT status to eliminate corporate level tax on our income that we distribute to our stockholders. To qualify as a REIT for federal income taxpurposes, we would be required to continually satisfy tests concerning, among other things, the sources of our income, the nature anddiversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. In order to meet these tests, wemay be required to forego attractive business or investment opportunities. Thus, compliance with the REIT requirements may hinder ourability to operate solely on the basis of maximizing profits. In addition, in order to qualify as a REIT, an entity must distribute to itsstockholders, each calendar year, at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paidand excluding net capital gain. As a result, if we elect to be treated as a REIT, we generally will be required to distribute our earnings to ourstockholders rather than retaining our earnings for reinvestment in our business. The decision to elect REIT status is in the sole discretion ofour Board of Directors, and no assurance can be given that we will, or will not, elect such status for 2014 or in the future.ITEM 1B. UNRESOLVED STAFF COMMENTSNone.ITEM 2. PROPERTIESOur principal executive offices are located at Potomac Tower, 1001 Nineteenth Street North, Arlington, Virginia 22209.We sublease office space to Billings Capital Management, LLC (BCM) which is an investment management company owned andoperated by Eric F. Billings, our Chairman and Chief Executive Officer, and29 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTShis sons. The lease term is month-to-month, based on pro-rata share of the space occupied by BCM. The lease payments to us totaled $44thousand for the year ended December 31, 2013.ITEM 3. LEGAL PROCEEDINGSWe are from time to time involved in civil lawsuits, legal proceedings and arbitration matters relating to our business that we consider tobe in the ordinary course. There can be no assurance that these matters individually or in aggregate will not have a material adverse effect onour financial condition or results of operations in a future period. We are also subject to the risk of litigation, including litigation that may bewithout merit. As we intend to actively defend such litigation, significant legal expenses could be incurred. An adverse resolution of anyfuture litigation against us could materially affect our financial condition, results of operations and liquidity. Furthermore, we operate inhighly-regulated markets that currently are under intense regulatory scrutiny, and we have received, and we expect in the future that we mayreceive, inquiries and requests for documents and information from various federal, state and foreign regulators. In addition, one or more ofour subsidiaries have received requests to repurchase loans from various parties in connection with the former securitization businessconducted by a subsidiary. We believe that the continued scrutiny of MBS, structured financed and derivative market participantsincreases the risk of additional inquiries and requests from regulatory or enforcement agencies and other parties. We cannot provide anyassurance that these inquiries and requests will not result in further investigation of or the initiation of a proceeding against us or that, if anysuch investigation or proceeding were to arise, it would not materially adversely affect our Company.ITEM 4. MINE SAFETY DISCLOSURESNot applicable.30 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSPART IIITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIESOur Class A common stock is listed on the NYSE under the symbol “AI.” The following table shows the high and low sales prices ofour Class A common stock during each fiscal quarter during the years ended December 31, 2013 and 2012. Price Range of Class ACommon Stock High LowYear Ended December 31, 2013 Fourth Quarter $27.58 $22.79 Third Quarter 27.28 22.50 Second Quarter 29.65 24.92 First Quarter 26.97 21.24 Year Ended December 31, 2012 Fourth Quarter 24.21 17.84 Third Quarter 25.49 21.59 Second Quarter 23.93 20.85 First Quarter 25.19 20.24 On January 31, 2014, there were approximately 250 record holders of our Class A common stock. There is no established publictrading market for our Class B common stock, and on January 31, 2014, there were approximately 17 record holders of our Class Bcommon stock. If declared, Class B shares receive dividends in the same amounts and on the same dates as Class A shares.Pursuant to our variable dividend policy, our Board of Directors evaluates dividends on a quarterly basis and, in its sole discretion,approves the payment of dividends. Our dividend payments, if any, may vary significantly from quarter to quarter. The Board of Directorsapproved and we declared and paid the following dividends for 2013: Quarter Ended Dividend Amount Declaration Date Record Date Pay DateDecember 31 $0.875 December 19 December 31 January 31, 2014 September 30 0.875 September 18 September 30 October 31 June 30 0.875 June 17 June 28 July 31 March 31 0.875 March 15 March 28 April 30 The Board of Directors approved and we declared and paid the following dividends for 2012: Quarter Ended Dividend Amount Declaration Date Record Date Pay DateDecember 31 $0.875 December 5 December 17 December 31 September 30 0.875 September 13 September 28 October 31 June 30 0.875 June 15 June 29 July 31 March 31 0.875 March 16 March 26 April 30 Purchases of Equity Securities by the IssuerDuring the three and twelve months ended December 31, 2013, we did not repurchase any shares of our Class A common stock.Stock Comparison GraphThe following graph compares the change in the cumulative total shareholder return for our Class A common stock from December 31,2008 to December 31, 2013 as calculated by Securities Industry Analytics, LLC, with the comparable cumulative return of two indices: theStandard & Poor’s (S&P) 500 Stock Index31 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSand our Peer Group Index. Our Peer Group Index is consistent with the peer group approved by the Compensation Committee of our Boardof Directors based on the size of market capitalization and/or lines of business.Our Class A common stock trades on the NYSE. The graph assumes $100 invested on December 31, 2008 in our Class A commonstock and $100 invested at the same time in each of the above-mentioned indexes. The comparison assumes that all dividends are reinvested.Comparison of 5-Year Cumulative Total Return Among Arlington Asset Investment Corp.,the Peer Group Index, and the S&P 500 Index AAICPrices(1) AAICIndexed PeerGroup(2) S&P 500IndexedDecember 31, 2008 $3.40 $100.00 $100.00 $100.00 December 31, 2009 15.23 447.94 107.63 126.38 December 31, 2010 23.99 748.85 182.77 145.38 December 31, 2011 21.33 747.53 158.27 148.47 December 31, 2012 20.77 882.94 248.53 172.14 December 31, 2013 26.39 1,242.59 324.65 227.79 (1)Closing price of our Class A common stock on the NYSE on the last trading day of each year as shown adjusted for the impact of 1-for-20 reverse stock split effective on October 6, 2009.(2)Our Peer Group Index includes the following companies: American Capital, Ltd., Arbor Realty Trust, Inc., Blackstone Mortgage Trust(acquired Capital Trust, Inc.), Dynex Capital, Inc., Hercules Technology Growth Capital, Inc., Kohlberg Capital Corporation, MainStreet Capital Corporation, MCG Capital Corporation, NewStar Financial, Inc., NorthStar Realty Finance Corp., RAIT FinancialTrust, Redwood Trust, Inc., and Resource America, Inc. Capital Trust, Inc. was removed from the peer group index and replaced byBlackstone Mortgage Trust because Capital Trust, Inc. was acquired by Blackstone Mortgage Trust during 2013. FirstCity FinancialCorporation was removed from the peer group index as it was acquired by Hotspurs Holdings LLC.32 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSITEM 6. SELECTED FINANCIAL DATASELECTED CONSOLIDATED FINANCIAL INFORMATION(Dollars in thousands, except per share amounts) Year Ended December 31, 2013 2012(4) 2011 2010 2009Consolidated Statements of Operations Interest income Interest on MBS $87,016 $64,153 $52,380 $39,566 $13,940 Dividends — — — — 112 Other interest income 3 1 165 1 27 Total interest income 87,019 64,154 52,545 39,567 14,079 Interest expense Interest on short-term debt 6,899 4,475 2,043 593 495 Interest on long-term debt 1,630 490 465 562 3,150 Total interest expense 8,529 4,965 2,508 1,155 3,645 Net interest income 78,490 59,189 50,037 38,412 10,434 Other (loss) income, net Investment (loss) gain, net (47,745) (10,723) (19,166) 3,328 3,926 Other loss, net (15) (15) (14) (14) (151) Gain on extinguishment of long-term debt — — — — 160,435 Total other (loss) income, net (47,760) (10,738) (19,180) 3,314 164,210 Income from continuing operations beforeother expenses 30,730 48,451 30,857 41,726 174,644 Other expenses Compensation and benefits 11,195 10,339 10,065 10,660 14,366 Professional services 2,561 4,118 1,833 1,263 7,053 Business development 145 136 121 97 6,577 Occupancy and equipment 427 467 374 388 538 Communications 191 202 197 204 246 Other operating expenses 2,072 2,184 1,599 2,022 5,709 Total other expenses 16,591 17,446 14,189 14,634 34,489 Income from continuing operations beforeincome taxes 14,139 31,005 16,668 27,092 140,155 Income tax (benefit) provision (35,322) (152,937) 1,495 506 9,522 Net income from continuing operations, net oftaxes 49,461 183,942 15,173 26,586 130,633 Loss from discontinued operations, net of taxes — — — — (25,547) Net income 49,461 183,942 15,173 26,586 105,086 Net loss attributable to noncontrollinginterest — — — — (11,459) Net income attributable to Arlington AssetInvestment Corp. shareholders $49,461 $183,942 $15,173 $26,586 $116,545 33 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTS December 31, 2013 2012(4) 2011 2010 2009Consolidated Balance Sheet Data Assets Cash and cash equivalents $48,628 $35,837 $20,018 $12,412 $10,123 Receivables Interest 5,173 4,869 2,366 2,345 2,011 Sold securities receivable — 26,773 41,321 — — Other 212 644 11 219 20 Investments Mortgage-backed securities, at fair value Available-for-sale 341,346 199,156 179,566 252,909 295,600 Trading 1,576,452 1,556,440 636,872 174,055 — Other investments 2,065 2,347 2,946 8,287 2,580 Derivative assets, at fair value 8,424 — 504 — — Deferred tax assets, net 165,851 154,418 — — — Deposits 45,504 85,652 71,079 4,748 2,589 Prepaid expenses and other assets 1,311 159 377 358 726 Total assets $2,194,966 $2,066,295 $955,060 $455,333 $313,649 Liabilities Repurchase agreements $1,547,630 $1,497,191 $647,977 $190,220 $126,830 Interest payable 774 582 504 187 124 Accrued compensation and benefits 5,584 1,542 6,177 7,201 5,921 Dividend payable 14,630 — 6,785 4,655 — Derivative liabilities, at fair value 33,129 76,850 63,024 2,398 — Purchased securities payable — — 15,820 2,555 — Accounts payable, accrued expenses andother liabilities 1,391 17,837 16,401 16,373 13,904 Long-term debt 40,000 15,000 15,000 15,000 16,857 Total liabilities 1,643,138 1,609,002 771,688 238,589 163,636 Equity Common stock and additional paid-incapital 1,727,564 1,638,193 1,508,790 1,506,048 1,507,474 Accumulated other comprehensive income,net of taxes 53,190 39,006 38,367 63,495 7,015 Accumulated deficit (1,228,926) (1,219,906) (1,363,785) (1,352,799) (1,364,476) Total equity 551,828 457,293 183,372 216,744 150,013 Total liabilities and equity $2,194,966 $2,066,295 $955,060 $455,333 $313,649 Statistical Data Basic earnings per share(3) $3.09 $18.02 $1.97 $3.44 $15.19 Diluted earnings per share(3) $3.06 $17.96 $1.96 $3.38 $14.89 Book value per share(1)(3) $33.10 $34.65 $23.67 $28.46 $19.54(2) Total employees(1) 11 11 10 10 10 Return on average assets 2% 13% 2% 7% 25% Return on average equity 10% 74% 7% 15% 65% Dividend payout ratio 113% 20% 172% 55% — Average Equity to assets ratio 24% 18% 24% 46% 38% Basic weighted average shares outstanding (inthousands)(3) 15,990 10,205 7,720 7,734 7,675 Diluted weighted average shares outstanding(in thousands)(3) 16,189 10,242 7,741 7,873 7,825 Cash dividends per common share(3) $3.50 $3.50 $3.375 $1.90 $— 34 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTS(1)As of end of the period reported.(2)Excludes employee stock and purchase loan receivable shares of 80 shares pledged as collateral as of December 31, 2009.(3)Reflects the impact of 1-for-20 reverse stock split effective on October 6, 2009.(4)Reflects revisions to correct an immaterial error in the tax rate applied to calculate our deferred tax assets. See Note 10, “Revisions toPreviously Reported Financial Statements,” of Notes to Consolidated Financial Statements included elsewhere in this Report on Form 10-K.ITEM7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONSOverviewArlington Asset Investment Corp. is a principal investment firm that currently acquires and holds primarily mortgage-related assets andholds certain other assets. We acquire residential mortgage-backed securities (MBS), either issued by U.S. government agencies orguaranteed as to principal and interest by U.S. government agencies or U.S. government-sponsored entities (agency-backed MBS). We alsoacquire MBS issued by private organizations (private-label MBS), subject to maintaining our exemption from regulation as an investmentcompany under the Investment Company Act of 1940, as amended (1940 Act). In the future, we may acquire and hold other types of assets,including commercial MBS, asset backed securities, other structured securities, commercial mortgage loans, commercial loans, residentialmortgage loans, and other real estate-related loans and securities. In addition, we also may pursue other business activities that will utilizeour experience in analyzing investment opportunities and applying similar portfolio management skills.When we use the terms “Arlington Asset,” “AAIC,” “we” “us” “our” and “the Company,” we mean Arlington Asset Investment Corp.and its consolidated subsidiaries. We are a Virginia corporation and taxed as a C corporation for federal income tax purposes. We operate inthe United States.Factors that Affect our Results of Operations and Financial ConditionOur business is materially affected by a variety of industry and economic factors, including:•conditions in the global financial markets and economic conditions generally;•changes in interest rates and prepayment rates;•actions taken by the U.S. government, U.S. Federal Reserve and the U.S. Treasury;•changes in laws and regulations and industry practices;•actions taken by ratings agencies with respect to the U.S.’s credit rating; and•other market developments.Adverse market conditions and actions by governmental authorities could adversely affect our business in many ways, including butnot limited to making it more difficult for us to analyze our investment portfolio, reducing the market value of our MBS portfolio, adverselyaffecting our ability to maintain targeted amounts of leverage on our MBS portfolio and successfully implement our hedging strategy, andlimiting our ability to follow our current investment and financing strategies. While uncertain, these potentially adverse market conditionsand actions by governmental authorities may adversely affect our liquidity, financial position and results of operations. We have been andwill continue to evaluate the potential impact of recent government actions, including developments relating to various state and federalgovernment actions affecting the market price of MBS, related derivative securities, and interest rates. For further discussions on howmarket conditions and government actions may adversely affect our business, see “Item 1A — Risk Factors.”Our MBS portfolio is affected by general U.S. residential real estate market conditions and the overall U.S. economic environment. Inparticular, our MBS strategy and the performance of our MBS portfolio is influenced by the specific characteristics of these markets,including prepayment rates, credit losses, interest rates and the interest rate yield curve. Our results of operations with respect to our MBSportfolio primarily depend on, among other things, the level of our interest income and the amount and cost of borrowings we35 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSmay obtain by pledging our investment portfolio as collateral for the borrowings. Our borrowing cost varies based on changes in interestrates and changes in the amount we can borrow, which is generally based on the fair value of the MBS portfolio and the advance rate thelenders are willing to lend against the collateral provided.The payment of principal and interest on the agency-backed MBS that we acquire and hold is guaranteed by the Federal Home LoanMortgage Corporation (Freddie Mac) or the Federal National Mortgage Association (Fannie Mae). The payment of principal and interest onagency-backed MBS issued by Freddie Mac or Fannie Mae is not guaranteed by the U.S. government. Any failure to honor its guarantee ofagency-backed MBS by Freddie Mac or Fannie Mae or any downgrade of securities issued by Freddie Mac or Fannie Mae by the ratingagencies could cause a significant decline in the value of and cash flow from any agency-backed MBS we own that are guaranteed by suchentity.Current Market Conditions and TrendsIn September 2012, the U.S. Federal Reserve announced a third round of quantitative easing, known as QE3, pursuant to which itwould purchase additional agency-backed MBS at a pace of $40 billion per month until further notice. The U.S. Federal Reserve alsoannounced that it would maintain its policy of reinvesting principal payments from its existing holdings of agency-backed MBS into newpurchases of agency-backed MBS until the employment rate, among other economic indicators, showed signs of improvement. The U.S.Federal Reserve further stated that it would maintain the target range for the Federal Funds Rate between zero and 0.25% through at least mid-2015, which is six months longer than previously announced. The U.S. Federal Reserve provided further guidance to the market inDecember 2012 that it intended to keep the Federal Funds Rate close to zero while the unemployment rate is above 6.5% and as long asinflation does not rise above 2.5%. In December 2012, the U.S. Federal Reserve also announced that it would initially begin purchasing $45billion of long-term U.S. Treasury bonds each month and noted that such amount may increase in the future.The economic news for the fourth quarter of 2013 was dominated by speculation over when the U.S. Federal Reserve would announcethe tapering of QE3. On December 18, 2013, the U.S. Federal Reserve announced that it would reduce its purchases of agency-backed MBSby $5 billion per month and reduce its purchases of U.S. Treasury bonds by $5 billion per month beginning in January 2014. On January29, 2014, the U.S. Federal Reserve announced that it would further reduce its purchases of agency-backed MBS by an additional $5billion per month and further reduce its purchase of U.S. Treasury bonds by an additional $5 billion per month beginning in February2014. These reductions, collectively, are commonly referred to as “tapering.”Given the low inflation projections, the U.S. government’s monetary policy, including the timing of tapering asset purchases, will likelybe dependent on actual growth in employment rather than inflation concerns. It’s important to note that over the past several years, actualemployment growth has been consistently below the U.S. Federal Reserve’s projections. While there are signs of a recovery, uncertaintycontinues to dominate the market, due to the continued low interest rate environment and actions by the U.S. Federal Reserve. We believe thegeneral business environment will continue to be challenging in 2014 and future periods. Our growth outlook is dependent, in part, on thestrength of the financial markets, the impact of fiscal and monetary policy actions by the United States and other countries, the overallmarket value of U.S. equities and liquidity in the financial system. Depending on recent market developments and movements, we mayseek to re-align our strategy and our portfolio. We will continue to closely monitor the developments in the market and evaluate theopportunities across the spectrum in the mortgage industry and other types of assets and seek the highest risk-adjusted returns for ourcapital.We believe the limited liquidity and volatility in the credit markets will continue while the markets seek to determine the rightequilibrium levels for benchmark interest rates as the U.S. Federal Reserve stimulus leaves the market place.Recent Government ActivityOn June 25, 2013, Senators Bob Corker (R-TN) and Mark Warner (D-VA), with Senators Mike Johanns (R-NE), Jon Tester (D-MT),Dean Heller (R-NV), Heidi Heitkamp (D-ND), Jerry Moran (R-KS) and Kay Hagan (D-NC) formally introduced the Housing FinanceReform and Taxpayer Protection Act of 201336 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTS(Corker-Warner Bill) into the U.S. Senate. While the current draft of the Corker-Warner Bill will likely undergo significant changes as it isdebated, it is expected to serve as a basis of discussion for congressional efforts to reform Fannie Mae and Freddie Mac.As currently drafted, the Corker-Warner Bill has three key provisions:•the establishment of the Federal Mortgage Insurance Corporation (the FMIC);•the creation of a Mortgage Insurance Fund (the Fund); and•the wind-down of Fannie Mae and Freddie Mac.The FMIC would be a government guarantor modeled after the Federal Deposit Insurance Corporation (FDIC) in that it would collectinsurance premiums and maintain a deposit fund on all outstanding obligations. Every mortgage-backed security issued through the FMICwould have a private investor bearing the first risk of loss and holding at least $0.10 in equity capital for every dollar of risk. This privatecapital buffer would serve to protect taxpayers from the risk of default on the mortgages underlying securities issued by the FMIC. Thus,the ultimate purpose of the FMIC would be to bring in credit investors to bear the risk of default while providing liquidity, transparency andaccess to mortgage credit for the housing finance system.The Federal Housing Finance Authority (FHFA) would be abolished after the establishment of the FMIC, and all current responsibilitiesof the FHFA, as well as its resources, would be transferred to the FMIC. In particular, the Corker-Warner Bill specifies that the FMIC wouldmaintain a database of uniform loan-level information on eligible mortgages, develop standard uniform securitization agreements and overseethe common securitization platform currently being developed by the FHFA.In the event losses due to default on underlying mortgages exceed the first position losses of private credit investors in securities issuedby the FMIC, the FMIC would cover such losses out of the Fund. The Corker-Warner Bill specifies that the FMIC would endeavor to attaina reserve balance of 1.25% of the aggregate outstanding principal balance of covered securities within five years of the establishment of theFMIC and 2.50% of such amount within ten years of the establishment of the FMIC. The Fund would be paid with insurance premiums,akin to user fees, paid by private investors with various reporting and transparency requirements.As currently proposed, the Corker-Warner Bill would revoke the charters of Fannie Mae and Freddie Mac upon the establishment of theFMIC. Fannie Mae and Freddie Mac would wind down as expeditiously as possible while maximizing returns to taxpayers as their assets aresold off.On November 25, 2013, the FHFA issued a progress report with regards to the goals set forth in the FHFA White Paper and the StrategicPlan for Enterprise Conservatorships. The report stated that significant progress had been made on the development and testing of acommon securitization platform for Fannie Mae and Freddie Mac and that both entities had contracted the less liquid portions of theirportfolios. Despite this progress, the report conceded that significant impediments to the full realization of the FHFA’s stated goals remain. Ifsuch goals are achieved, it is unclear what the effects might be.There is no way to know if either proposal will become law or should one of the proposals become law if and how the enacted law willdiffer from the current draft of the bill. It is unclear how this proposal would impact housing finance, and what impact, if any, it wouldhave on companies that invest in MBS. The passage of any new legislation affecting Fannie Mae and Freddie Mac may create marketuncertainty and reduce the actual or perceived credit quality of securities issued or guaranteed by the U.S. government through a new orexisting successor entity to Fannie Mae and Freddie Mac. If the charters of Fannie Mae and Freddie Mac were revoked, it is unclear whateffect, if any, this would have on the value of the existing Fannie Mae and Freddie Mac agency-backed MBS. It is also possible that theabove-referenced proposed legislation, if made law, could adversely impact the market for securities issued or guaranteed by the U.S.government and the spreads at which they trade. The foregoing could materially adversely affect the pricing, supply, liquidity and value ofour target assets and otherwise materially adversely affect our business, operations and financial condition.37 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSExecutive SummaryGiven the uncertainty around the U.S. Federal Reserve policies and reversal or tapering of QE3, coupled with uncertainly regarding theability of U.S. lawmakers to reach an agreement on the national debt ceiling, the market in 2013 was characterized by increased market andinterest rate volatility. As a result, we experienced increased fluctuations in our asset prices and hedge positions during the year endedDecember 31, 2013. Current economic indicators and trends in underlying credit and housing data suggests continued improvement in2014. We will continue to review the allocation of our available capital to maximize return to our shareholders.During the year ended December 31, 2013, we continued to raise additional capital through equity and debt offerings. On March 13,2013, we completed a public offering of 3,450,000 shares of Class A common stock, including 450,000 shares of Class A common stockpurchased by the underwriters pursuant to an option granted by us to cover over-allotments, at a public offering price of $25.50 per share,for net proceeds of $87.0 million after deducting underwriting discounts and commissions and expenses. On May 1, 2013, we completed apublic offering of $25.0 million aggregate principal amount of 6.625% Senior Notes due 2023 (Senior Notes) and received net proceeds ofapproximately $24.0 million after payment of underwriting commissions and expenses. The Senior Notes will mature on May 1, 2023, andmay be redeemed in whole or in part at any time and from time to time at our option on or after May 1, 2016 at a redemption price equal tothe principal amount redeemed plus accrued and unpaid interest. The interest payments on the Senior Notes are payable quarterly onFebruary 1, May 1, August 1, and November 1 of each year.We believe that our MBS portfolio continued to perform well during the year ended December 31, 2013. The overall value of our agency-backed MBS portfolio increased, primarily as a result of increased acquisitions of agency-backed MBS with proceeds of the offeringsinvested on a leveraged basis, QE3, and the low interest rate environment, and the value of our private-label MBS portfolio held steady,primarily from an expected improvement in credit performance in general. As discussed above, unlike the prior quantitative easingprograms, QE3 is more open-ended which we consider a significant change. This has affected MBS products by increasing the price ofthese bonds. However, these actions by the U.S. Federal Reserve have caused some concern that the effect of lower borrowing costs willincrease the prepayments of the existing MBS population. This in turn, has caused MBS with prepayment protection attributes, such asmost of our MBS positions, to increase in value. While we benefit from the increase in price, it may result in decreases in yields and netspread. Following its December 18, 2013 announcement that it would reduce its purchases of agency-backed MBS by $5 billion per monthand reduce its purchases of U.S. Treasury bonds by $5 billion per month, the U.S. Federal Reserve on January 29, 2014, announced thatit would further reduce its purchases of agency-backed MBS by an additional $5 billion per month and further reduce its purchase of U.S.Treasury bonds by an additional $5 billion per month. While we have not seen an immediate effect of these announcements on the value ofour MBS portfolio, the longer term impact is not yet known. We will continue to monitor the market movements and impact on our MBSportfolio.Continued expectations of stabilization and improvement in the housing market, increased liquidity and available leverage havestabilized prices for our private-label MBS, particularly among re-REMIC mezzanine securities. Our re-REMIC securities are predominantlyheld in the subordinate tranches. We will continue to closely monitor the performance of these securities.Based on the improvements we have observed in the general economic indicators and trends in underlying credit and housing data, wehave reallocated some of our available capital to the private-label MBS portfolio during the year. We continued to evaluate the opportunitiesacross the MBS industry and seek the highest risk-adjusted returns for our capital, and to strengthen our position and to maximize return toour shareholders. We evaluated and prioritized the risk-adjusted return we expect to receive on every asset based upon a current cash yieldperspective as well as from a total yield perspective that includes expected reflation, which is defined as an increase in value between theamortized cost basis and the par value of the security. Historically, based on market conditions, we believe our MBS assets have providedus with higher relative risk-adjusted rates of return than most other portfolio opportunities we have evaluated. We intend to continue toevaluate acquisition opportunities against the returns available in each of our asset alternatives and endeavor to allocate our assets andcapital with an emphasis toward what we believe will generate the highest risk-adjusted return available. This strategy may cause us to havedifferent allocations of capital in different38 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSenvironments. We believe we have constructed an MBS portfolio with attractive characteristics and will continue to monitor relative valuebetween the various classes of MBS and may re-allocate our portfolio at any time based on management’s view of the market. We alsobelieve the strategy of maintaining our combined portfolio, agency-backed MBS and private-label MBS, allows us to mitigate riskexposures in a sometimes unexpected and volatile environment.Effective December 31, 2013, we contributed 40 of our private-label MBS with $367.6 million in face value in a taxable contribution(Contribution) to Rosslyn REIT Trust. Rosslyn REIT Trust (formerly known as FBR REIT Asset Trust) was formed on December 27,2007 as a Maryland real estate investment trust and will elect to be taxed as a REIT for U.S. federal income tax purposes effective January1, 2014. We own all the common shares of Rosslyn REIT Trust and all of the preferred shares are owned by outside investors. TheContribution resulted in taxable capital gains of $68.0 million. We utilized NCL carry-forwards to offset the capital gain recognized on theContribution for tax purposes.As of December 31, 2013, we had net deferred tax assets of $165.9 million, net of $15.9 million in valuation allowance on ourdeferred tax assets attributable to NCLs that are expected to expire in 2014. Our evaluation of the reasonableness of our valuation allowanceon deferred tax assets is an on-going process. The evaluation includes an assessment of both the positive and negative evidences such ashistorical results of operations and future projections, the size of the MBS portfolio, net yield and comparison of management’s forecasts toactual results. For the year ended December 31, 2013, we determined that the positive evidences described below out-weighed the negativeevidences and that it is more-likely-than-not that the deferred tax assets will be realized based on our forecast of future net income, whichprovides support for not recording the valuation allowance on certain deferred tax assets resulted from NOLs and other temporary items. Wehave generated taxable income of $31.0 million, $45.6 million, and $47.2 million during the years ended December 31, 2011, 2012, and2013, respectively, demonstrating a positive and consistent earnings trend over the three year period ended December 31, 2013. We cannotassure you, however, that these deferred tax assets will in fact be realized. See “Item 1A — Risk Factors — Future decreases in theCompany’s book value attributable to deferred tax assets may reduce the market price of our shares.” in this Annual Report on Form 10-K.Our book value per share of $33.10 as of December 31, 2013 reflects $9.95 per share related to the deferred tax assets on our balancesheet. As we benefit from the utilization of the deferred tax assets in future periods or those deferred tax assets expire without being utilized,the corresponding book value attributable to the deferred tax assets utilized will be reduced by the same amount and the reported GAAP netincome will also be reduced for the corresponding income tax effect.As we previously disclosed, we are subject to examination by the U.S. Internal Revenue Service (IRS), and other taxing jurisdictions. InMarch 2013, an IRS examination of the tax years 2009 and 2010 was completed without any adjustment. With the completion of the IRSexamination and the expiration of the statute of limitation on the 2009 state tax return, we reversed $12.8 million of unrecognized tax benefitsrelated to an uncertain tax position and $3.4 million of related accrued interest during the year ended December 31, 2013.During the preparation of the 2013 consolidated financial statements, we concluded that the federal tax rate used to calculate deferred taxassets as of December 31, 2012 was incorrect and should have been lower than the statutory rate given the effects of recognizing a U.S.federal deferred income tax liability associated with state deferred tax assets. Although the impact of this change was not material to theconsolidated financial statements as of and for the year ended December 31, 2012, we revised our previously reported consolidated financialstatements and disclosures as of and for the year ended December 31, 2012. See Note 10, “Revisions to Previously Reported FinancialStatements,” of Notes to Consolidated Financial Statements included elsewhere in this Report on Form 10-K.For the year ended December 31, 2013, we had net income of $49.5 million, or $3.06 per share (diluted), compared to $183.9 million,or $17.96 per share (diluted), for the year ended December 31, 2012. As of December 31, 2013, our book value per share was $33.10. Inaddition to the release of $91.2 million and $162.5 million, respectively, of valuation allowance on certain deferred tax assets that wasincluded in net income during the years ended December 31, 2013 and 2012, our net income includes net interest income of39 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTS$78.5 million for the year ended December 31, 2013 compared to net interest income of $59.2 million for the year ended December 31,2012. Our other expenses decreased to $16.6 million during the year ended December 31, 2013 compared to $17.4 million for the yearended December 31, 2012.The following is a summary of our net income for the periods indicated: Year Ended December 31,(Dollars in thousands) 2013 2012 2011Net interest income $78,490 $59,189 $50,037 Other loss, net (47,760) (10,738) (19,180) Other expenses 16,591 17,446 14,189 Income before income taxes 14,139 31,005 16,668 Income tax (benefit) provision (35,322) (152,937) 1,495 Net income $49,461 $183,942 $15,173 In addition to the financial results reported in accordance with generally accepted accounting principles as consistently applied in theUnited States (GAAP), we calculated non-GAAP core operating income for the years ended December 31, 2013 and 2012. Our non-GAAPcore operating income for the years ended December 31, 2013 and 2012 was $67.2 million and $50.3 million, respectively. In determiningcore operating income, we excluded certain legacy litigation expenses and the following non-cash expenses: (1) compensation costs associatedwith stock-based awards, (2) accretion of MBS purchase discounts adjusted for contractual interest and principal repayments in excess ofproportionate invested capital, (3) unrealized mark-to-market adjustments on the trading MBS and hedge instruments, (4) other-than-temporary impairment charges recognized, (5) non-cash income tax provisions, and (6) benefit from the reversal of previously accruedfederal and state tax liability and accrued interest related to uncertain tax positions. This non-GAAP measurement is used by management toanalyze and assess the operating results and dividends. We believe that this non-GAAP measurement assists investors in understanding theimpact of these non-core items and non-cash expenses on our performance and provides additional clarity around our forward earningscapacity and trends. A limitation of utilizing this non-GAAP measure is that the GAAP accounting effects of these events do in fact reflectthe underlying financial results of our business and these effects should not be ignored in evaluating and analyzing our financial results.Therefore, we believe net income on a GAAP basis and core operating income on a non-GAAP basis should be considered together.The following is a reconciliation of GAAP net income to non-GAAP core operating income for the years ended December 31, 2013 and2012 (dollars in thousands): Year Ended December 31, 2013 2012GAAP net income $49,461 $183,942 Adjustments Legacy litigation expenses(1) 1,061 2,627 Stock compensation 2,546 998 Non-cash interest income related to purchase discount accretion(2) (4,743) (5,644) Net unrealized mark-to-market loss on trading MBS and hedge instruments 53,812 7,352 Other-than-temporary impairment charges 1,354 15,708 Release of valuation allowance on deferred tax assets and non-cash income tax provisionsand benefit, net (20,051) (154,635) Benefit from the reversal of tax liability and accrued interest related to uncertain taxposition (16,212) — Non-GAAP core operating income $67,228 $50,348 (1)Legacy litigation expenses relate to legal matters pertaining to events related to business activities the Company completed or exited in orprior to 2009 — primarily debt extinguishment, sub-prime mortgage origination and securitization and broker/dealer operations.(2)Non-cash interest income related to purchase discount accretion represents interest income recognized in excess of cash receipts related tocontractual interest income and principal repayments in excess of proportionate invested capital.40 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSAs of December 31, 2013, our agency-backed MBS consisted of $1.5 billion in face value with a cost basis of $1.6 billion and wasfair valued at $1.6 billion. Our agency-backed MBS had a weighted-average coupon of 4.08% and a weighted-average cost of funding of0.39% at December 31, 2013. During the year ended December 31, 2013, we received proceeds of $914.2 million from the sale of $861.1million in face value of our agency-backed MBS, realizing $25.8 million in net losses, or realized net losses of $16.2 million from theacquisition price.In the normal course of our operations, we utilize financial instruments to hedge economic risk. These instruments may include interestrate swaps, Eurodollar futures, swap futures, and U.S. Treasury futures contracts, put options and certain commitments to purchase andsell MBS. The 10-year swap futures are uniquely designed to replicate the over-the-counter swap economics and are valued based upon thedifference between a series of semi-annual fixed interest payments and quarterly floating interest payments based on the 3-month U.S. DollarLIBOR rate, over the term to maturity. While 10-year swap futures mature or roll on a quarterly basis, the change in value represents theimpact of the change in the underlying interest indices during the term. As a result, the 10-year swap futures exhibit longer duration and aresensitive to changes in interest rates. Due to the shorter term maturity, the fluctuations in the value of these derivatives may be volatile andare included in GAAP income as unrealized gains or losses until such time as they are terminated or expire, whereupon they are included inGAAP income as realized gains or losses and Non-GAAP core operating income as gains or losses.We have entered into Eurodollar futures to mitigate the interest rate sensitivity which directly impacts our cost of borrowing and themarket value of our agency-backed MBS. The Eurodollar futures mature through September 30, 2018 and have a lifetime weighted-averagerate of 2.93%, as compared to a lifetime weighted-average market rate of 2.25% as of December 31, 2013. The value of these five-year hedgeinstruments is expected to fluctuate inversely relative to the agency-backed MBS portfolio and decrease in value during periods of declininginterest rates and/or widening mortgage spreads. Conversely, during periods of increasing rates and/or tightening mortgage spreads, theseinstruments are expected to increase in value. The cost of these Eurodollar hedges will increase over their five-year term. The swap futuresmature in March 2014 and have a weighted-average rate of 3.14%, as compared to a weighted-average market rate of 3.19% as of December31, 2013.As of December 31, 2013, our private-label MBS portfolio consisted of $485.9 million in face value with an amortized cost basis of$278.7 million and was fair valued at $341.3 million. The unamortized net discount on our private-label MBS portfolio was $207.2 millionas of December 31, 2013. During the year ended December 31, 2013, we recognized net interest income of $25.5 million, representing a10.3% annualized yield, including coupon and accretion of purchase discount based on the current accretable yield rate, from our private-label MBS portfolio. During 2013, we received proceeds of $69.3 million from the sale of $102.1 million in face value of our private-labelMBS, realizing $17.5 million in gains.For available-for-sale, private-label MBS securities that have been acquired at discounts to face value due in part to credit deteriorationsince origination, we re-evaluate the undiscounted expected future cash flows and the changes in cash flows from those originally projectedat the time of purchase or last revised for each security. For those securities in an unrealized loss position, we recognized $1.3 million and$0.1 million in other-than-temporary impairment (OTTI) charges on our private-label MBS portfolio and on an investment in agencyinterest-only MBS, respectively, during 2013. The OTTI charges represent the difference between the carrying value and the net presentvalue of expected future cash flows discounted using the current yield used for income recognition purposes, as compared to fair valuewhich is discounted using the current expected market rate in accordance with GAAP for the securities acquired at discount due to creditdeterioration since origination. As a result, the OTTI charges are greater than the difference between the carrying value and fair value. TheseOTTI charges do not represent additional credit deterioration but the change in timing of cash flow projection primarily due to higher thanprojected actual cash flows during the earlier periods. In addition, these OTTI charges do not affect non-GAAP core operating income orbook value, but do reduce our net income and lower the accounting basis used to record future discount accretion.41 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSPrincipal Investing PortfolioThe following table summarizes our principal investing portfolio including principal receivable on MBS, as of December 31, 2013(dollars in thousands): Face Amount Fair ValueTrading Agency-backed MBS Fannie Mae $961,360 $997,488 Freddie Mac 561,307 578,964 Available-for-sale Agency-backed MBS Fannie Mae 43 47 Private-label MBS Senior securities 10,201 7,066 Re-REMIC securities 475,714 334,233 Other mortgage related assets 76,305 298 Total $2,084,930 $1,918,096 Operating IncomeOur operating income consists primarily of net interest income, net investment gains and losses, and investment fund earnings.ExpensesInterest expense includes the costs of our repurchase agreement borrowings and long-term debt securities.Compensation and benefits expense includes base salaries as well as incentive compensation. Salaries, payroll taxes and employeebenefits are relatively fixed in nature. In addition, compensation and benefits expense includes estimated performance-based incentivecompensation, including the discretionary component that is more likely-than not to be paid and non-cash expenses associated with allstock-based awards granted to employees.Professional services expense includes accounting, legal and consulting fees. Many of these expenses, such as legal fees, are to a largeextent variable related to level of transactions, ongoing litigation and initiatives.Business development expense includes primarily travel and entertainment expenses.Occupancy and equipment expense includes rental costs for our facilities and depreciation and amortization of equipment and software.These expenses are largely fixed in nature.Communications expenses include voice, data and internet service fees, and data processing costs.Other operating expenses include professional liability and property insurance, directors’ fees including cash and stock awards,printing and copying, business licenses and taxes, offices supplies, penalties and fees, charitable contributions and other miscellaneousoffice expenses, if any.42 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSResults of OperationsComparison of the years ended December 31, 2013 and 2012We reported net income of $49.5 million for the year ended December 31, 2013 compared to $183.9 million for the year ended December31, 2012. Net income included the following results for the periods indicated (dollars in thousands): Year Ended December 31, 2013 2012Interest income $87,019 $64,154 Interest expense 8,529 4,965 Net interest income 78,490 59,189 Other loss, net Investment loss, net (47,745) (10,723) Other loss (15) (15) Total other loss, net (47,760) (10,738) Other expenses 16,591 17,446 Income before income taxes 14,139 31,005 Income tax benefit (35,322) (152,937) Net income $49,461 $183,942 Net income decreased $134.4 million to $49.5 million for the year ended December 31, 2013 from $183.9 million for the year endedDecember 31, 2012. The decrease in net income is due to the following changes:Net Interest IncomeNet interest income increased $19.3 million (32.6%) to $78.5 million for the year ended December 31, 2013 from $59.2 million for theyear ended December 31, 2012. The increase is primarily the result of fully deploying our investable capital generated from the capital raisedfrom our public offerings in 2013 on a leveraged basis to our MBS portfolio. The components of income from our principal investmentactivities, net of related interest expense are as follows (dollars in thousands): Year Ended December 31, 2013 2012Net interest income $80,120 $59,679 Investment loss, net (47,745) (10,723) The components of net interest income from our MBS related portfolio is summarized in the following table (dollars in thousands): Year Ended December 31, 2013 2012 AverageBalance Income(Expense) Yield(Cost) AverageBalance Income(Expense) Yield(Cost)Agency-backed MBS $1,599,589 $60,386 3.78% $971,725 $39,705 4.09% Private-label MBS Senior securities 5,435 893 16.43% 7,787 1,319 16.94% Re-REMIC securities 241,880 25,693 10.62% 140,890 23,007 16.33% Other investments 427 44 10.37% 1,054 122 11.57% $1,847,331 87,016 4.71% $1,121,456 64,153 5.72% Other(1) 3 1 87,019 64,154 Repurchase agreements $1,515,137 (6,899) (0.45)% $953,152 (4,475) (0.46)% Net interest income/spread $80,120 4.26% $59,679 5.26% (1)Includes interest income on cash and other miscellaneous interest-earning assets.43 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSThe increase in net interest income of $20.4 million is primarily due to the increases in our MBS portfolio from the deployment ofcapital raised from our public offerings during 2012 and 2013 on a leveraged basis. The decreases in interest rates in the MBS portfolio andrelated repurchase agreements did not materially impact the change in net interest income for the year ended December 31, 2013 from the yearended December 31, 2012. Interest income from other investments represents interest on interest-only MBS securities.Interest expense related to repurchase agreements increased $2.4 million (53.3%) to $6.9 million for the year ended December 31, 2013from $4.5 million for the year ended December 31, 2012 due to the increase in the repurchase agreement borrowings. Our repurchaseborrowings increased primarily as a result of leveraging the net proceeds raised from our public offerings of common stock in 2013 inconnection with the investment of such net proceeds. Interest expense unrelated to our principal investing activity relates to long-term debt.These costs increased to $1.6 million for the year ended December 31, 2013 from $0.5 million for the year ended December 31, 2012 due tothe increase in long-term debt outstanding as a result of the Senior Notes.Other Loss, NetTotal other loss, net, increased $37.1 million to a loss of $47.8 million for the year ended December 31, 2013 from a loss of $10.7million for the year ended December 31, 2012 primarily due to an increase in net investment losses as follows (dollars in thousands): Year Ended December 31, 2013 2012Realized gains on sale of available-for-sale investments, net $17,458 $9,813 Available-for-sale and cost method securities — OTTI charges (1,354) (15,708) (Losses) gains on trading investments, net (122,163) 22,280 Gains (losses) from derivative instruments, net 58,003 (28,755) Other, net 311 1,647 Investment loss, net $(47,745) $(10,723) The realized gains on sale of available-for-sale investments, net, recognized for the year ended December 31, 2013 and 2012 wereprimarily the result of $69.3 million and $34.1 million of proceeds received, respectively, from the sales of $102.1 million and $53.5million in face value of MBS, respectively. We recorded a net gain of $17.5 million and $9.8 million from these sales for the years endedDecember 31, 2013 and 2012, respectively.We recorded OTTI charges of $1.3 million and $15.2 million for the years ended December 31, 2013 and 2012, respectively, onavailable-for-sale, private-label MBS, with a cost basis of $11.7 million and $49.4 million, respectively. The OTTI charges represent thedifference between the carrying value and the net present value of expected future cash flows discounted using the current yield used forincome recognition purposes, as compared to fair value which is discounted using the current expected market rate in accordance withGAAP for the securities acquired at discount due to credit deterioration since origination. These OTTI charges do not represent additionalcredit deterioration but the change in timing of cash flow projection primarily due to higher than projected actual cash flows during theearlier periods. For the years ended December 31, 2013 and 2012, we recorded OTTI charges of $0.1 million and $0.5 million, respectively,on an investment in agency interest-only MBS.The losses on trading investments, net, recognized for the year ended December 31, 2013 were primarily the result of net losses of $25.8million from sales and net mark-to-market loss adjustments of $96.4 million. The losses on trading investments, net, recognized for theyear ended December 31, 2013, also reflects net realized losses of $16.2 million on the sold securities from the acquisition price andchanges in net unrealized mark-to-market loss adjustments of $106.0 million during the year. The gains on trading investments, net,recognized for the year ended December 31, 2012 were primarily the result of net gains of $4.8 million from sales and net mark-to-marketgain adjustments of $17.5 million. The gains on trading investments, net,44 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSrecognized for the year ended December 31, 2012, also reflects net realized gains of $15.3 million on the sold securities from the acquisitionprice and changes in net unrealized mark-to-market gain adjustments of $7.0 million during the year.The gains from derivative instruments recognized for the year ended December 31, 2013 were the result of net realized gains of $45.4million and net unrealized mark-to-market gain adjustments of $12.6 million. Gains from derivative instruments recognized for the yearended December 31, 2013 also reflects net gains of $5.9 million from closed derivative instruments from the acquisition price and changesin net unrealized mark-to-market gain adjustments of $52.1 million during the year. Losses from derivative instruments recognized for theyear ended December 31, 2012 were the result of net realized losses of $2.3 million and net unrealized mark-to-market loss adjustments of$26.5 million. Losses from derivative instruments recognized for the year ended December 31, 2012 also reflects net losses of $14.7 millionfrom closed derivative instruments from the acquisition price and changes in net unrealized mark-to-market loss adjustments of $14.1million during the year. The value of our hedge instruments is expected to fluctuate inversely relative to the change in value of the agency-backed MBS portfolio.Other, net primarily reflects proceeds received from the assignment of a claim that related to an agency-backed MBS under a repurchaseagreement maintained with Lehman Brothers Inc. during the Lehman Brothers Holdings Inc. bankruptcy proceedings for the year endedDecember 31, 2012.Other ExpensesOther expenses decreased by $0.8 million (4.6%) from $17.4 million for the year ended December 31, 2012 to $16.6 million for theyear ended December 31, 2013. The decrease is primarily a result of decreases in legal expenses offset by increases in compensationexpenses.Income Tax BenefitTotal income tax benefit decreased from a benefit of $152.9 million for the year ended December 31, 2012 to a benefit of $35.3 millionfor the year ended December 31, 2013. The decrease in income tax benefit was due primarily to: $91.2 million in release of valuationallowance on certain deferred tax assets offset by an expiration of $57.3 million of NCL carry-forwards; reversal of $16.2 million inreserve for federal and state tax benefits and related accrued interest related to an uncertain tax position; and $14.4 million of other changesin deferred tax assets for the year ended December 31, 2013 as compared to $162.5 million in release of valuation allowance on certaindeferred tax assets for the year ended December 31, 2012. As a result, our effective tax rate during years ended December 31, 2013 and 2012were lower than the statutory tax rate. The net deferred tax assets, which are partially offset by a valuation allowance, include NOLs, whichare available to offset the current and future taxable income. We recorded an expected tax liability for the period due to the expected alternativeminimum taxes.Comparison of the years ended December 31, 2012 and 2011We reported net income of $183.9 million for the year ended December 31, 2012 compared to $15.2 million for the year endedDecember 31, 2011. Net income included the following results for the periods indicated (dollars in thousands): Year Ended December 31, 2012 2011Interest income $64,154 $52,545 Interest expense 4,965 2,508 Net interest income 59,189 50,037 Other loss, net Investment loss, net (10,723) (19,166) Other loss (15) (14) Total other loss, net (10,738) (19,180) Other expenses 17,446 14,189 Income before income taxes 31,005 16,668 Income tax (benefit) provision (152,937) 1,495 Net income $183,942 $15,173 45 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSNet income increased $168.7 million to $183.9 million for the year ended December 31, 2012 from $15.2 million for the year endedDecember 31, 2011 primarily due to the release of $162.5 million in the valuation allowance on certain deferred tax assets as previouslydiscussed and the following changes:Net interest income increased $9.2 million (18.4%) to $59.2 million for the year ended December 31, 2012 from $50.0 million for theyear ended December 31, 2011. The increase is primarily the result of fully deploying our investable capital on a leveraged basis to ourMBS portfolio. See additional yield analysis below.Investment loss, net, decreased $8.5 million to a loss of $10.7 million for the year ended December 31, 2012 from a loss of $19.2million for the year ended December 31, 2011. See below for additional discussion on the components of investment gains and losses for therespective periods.The following table summarizes the components of income from our principal investment activities, net of related interest expense(dollars in thousands): Year Ended December 31, 2012 2011Net interest income $59,679 $50,502 Investment loss, net (10,723) (19,166) The components of net interest income from our MBS related portfolio is summarized in the following table (dollars in thousands): Year Ended December 31, 2012 2011 AverageBalance Income(Expense) Yield (Cost) AverageBalance Income(Expense) Yield (Cost)Agency-backed MBS $971,725 $39,705 4.09% $556,097 $24,931 4.48% Private-label MBS Senior securities 7,787 1,319 16.94% 13,676 1,750 12.80% Re-REMIC securities 140,890 23,007 16.33% 136,500 25,421 18.62% Other investments 1,054 122 11.57% 1,923 278 14.48% $1,121,456 64,153 5.72% $708,196 52,380 7.40% Other 1 165 64,154 52,545 Repurchase agreements $953,152 (4,475) (0.46)% $559,086 (2,043) (0.36)% Net interest income/spread $59,679 5.26% $50,502 7.04% The change in the composition of our MBS portfolio and related increase in net interest income by $9.2 million from the year endedDecember 31, 2011 to the year ended December 31, 2012 was primarily due to the deployment of capital raised from our public offeringsduring the year ended December 31, 2012 primarily into our agency-backed MBS portfolio. Interest income from other investmentsrepresents interest on interest-only MBS securities.46 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSAs discussed above, we reported net investment loss of $10.7 million for the year ended December 31, 2012 compared to reported netinvestment loss of $19.2 million for the year ended December 31, 2011. The following table summarizes the components of net investmentloss (dollars in thousands): Year Ended December 31, 2012 2011Realized gains on sale of available-for-sale investments, net $9,813 $14,894 Available-for-sale and cost method securities – other-than-temporary impairment charges (15,708) (1,223) Gains on trading investments, net 22,280 31,837 Losses from derivative instruments, net (28,755) (64,625) Other, net 1,647 (49) Investment loss, net $(10,723) $(19,166) We recorded other-than-temporary impairment charges of $15.2 million and $1.2 million for the year ended December 31, 2012 and2011, respectively, related to changes in expected credit performance on available-for-sale, private-label MBS, with a cost basis of $49.4million and $11.1 million, respectively, prior to recognizing the other-than-temporary impairment charges. For the year ended December 31,2012, we recorded other-than-temporary impairment charges of $0.5 million on an investment in interest-only MBS. No other-than-temporary impairment charges on investments in interest-only MBS were recognized during the year ended December 31, 2011.The realized gains on sale of available-for-sale investments, net, recognized for the year ended December 31, 2012 and 2011 wereprimarily the result of $34.1 million and $79.2 million of proceeds received, respectively, from the sales of $53.5 million and $119.0million in face value of MBS, respectively. We recorded a net gain of $9.8 million and $13.0 million from these sales for the year endedDecember 31, 2012 and 2011, respectively. We also realized net gains from the sale of other investments of $1.9 million for the year endedDecember 31, 2011.The gains on trading investments, net, recognized for the year ended December 31, 2012 were primarily the result of net gains of $4.8million from sales and net mark-to-market gain adjustments of $17.5 million. The gains on trading investments, net, recognized for theyear ended December 31, 2012, also reflects net realized gains of $15.3 million on the sold securities from the acquisition price and changesin net unrealized mark-to-market gain adjustments of $7.0 million during the year. The gains on trading investments, net, recognized for theyear ended December 31, 2011 were primarily the result of net gains of $3.9 million from sales and net mark-to-market gain adjustments of$27.9 million. The gains on trading investments, net, recognized for the year ended December 31, 2011, also reflects net realized gains of$3.1 million on the sold securities from the acquisition price and changes in net unrealized mark-to-market gain adjustments of $28.7million during the year.Losses from derivative instruments recognized for the year ended December 31, 2012 were the result of net realized losses of $2.3million and net unrealized mark-to-market loss adjustments of $26.5 million. Losses from derivative instruments recognized for the yearended December 31, 2012 also reflects net losses of $14.7 million from closed derivative instruments from the acquisition price and changesin net unrealized mark-to-market loss adjustments of $14.1 million during the year. Losses from derivative instruments recognized for theyear ended December 31, 2011 were the result of net realized losses of $4.5 million and net unrealized mark-to-market loss adjustments of$60.1 million. Losses from derivative instruments recognized for the year ended December 31, 2011 also reflects net gains of $3.3 millionfrom closed derivative instruments from the acquisition price and changes in net unrealized mark-to-market loss adjustments of $67.9million during the year ended December 31, 2011. The value of our hedge instruments is expected to fluctuate inversely relative to the changein value of the agency-backed MBS portfolio.Other, net primarily reflects proceeds received from the assignment of a claim that related to an agency-backed MBS under a repurchaseagreement maintained with Lehman Brothers Inc. during the Lehman Brothers Holdings Inc. bankruptcy proceedings for the year endedDecember 31, 2012.47 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSInterest expense unrelated to our principal investing activity relates to long-term debt. We recognized interest expense costs of $0.5 millionfor the years ended December 31, 2012 and 2011.Other expenses increased by $3.2 million (22.5%) from $14.2 million for the year ended December 31, 2011 to $17.4 million for theyear ended December 31, 2012 primarily as a result of an increase in legal costs related to the SEC inquiry and Hildene litigation. The bothcases have been resolved favorably without material financial impact.Total income tax benefit increased from a provision of $1.5 million for the year ended December 31, 2011 to a benefit of $152.9 millionfor the year ended December 31, 2012 primarily as a result of the release of $162.5 million in valuation allowance on certain deferred taxassets. Our effective tax rate was 9.0% for the year ended December 31, 2011 as compared to (493.3)% for the same period in 2012. Duringthe years ended December 31, 2012 and 2011, ordinary taxable income was subject to alternative minimum tax. Our effective tax ratesduring these periods differed from statutory rates primarily due to the expected use of federal and state net operating losses (NOLs) to offsetour taxable income earned during those periods. Our NOLs had been recorded as deferred tax assets. We recorded an expected tax liability forthese periods due to taxable income for the years ended December 31, 2012 and 2011 that is anticipated to be subject to the alternativeminimum tax. Limitations prevent us from using our NOLs to fully offset our taxable income for alternative minimum tax purposes.Further, the discrete period reporting of accrued interest and penalties on unrecognized tax positions as of December 31, 2012 remains amajor contributor of the total tax expense.Liquidity and Capital ResourcesLiquidity is a measurement of our ability to meet potential cash requirements including ongoing commitments to repay borrowings, fundinvestments, and for other general business purposes. Our primary sources of funds for liquidity consist of short-term borrowings (e.g.,repurchase agreements), principal and interest payments on MBS and proceeds from sales of MBS. Other sources of liquidity includeproceeds from the offering of common stock, preferred stock, debt securities or other securities registered pursuant to our effective shelfregistration statement filed with the SEC.Liquidity, or ready access to funds, is essential to our business. Liquidity is of particular importance to our business and perceivedliquidity issues may affect our counterparties’ willingness to engage in transactions with us. Our liquidity could be impaired due tocircumstances that we may be unable to control, such as a general market disruption or an operational problem that affects us or thirdparties. Further, our ability to sell assets may be impaired if other market participants are seeking to sell similar assets at the same time. Ifwe cannot obtain funding from third parties or from our subsidiaries, our results of operations could be negatively impacted.Potential future sources of liquidity for us include existing cash balances, borrowing capacity through margin accounts and repurchaseagreements and cash flows from operations, future issuances of common stock, preferred stock, debt securities or other securities registeredpursuant to our shelf registration statement. Funding for agency-backed MBS through repurchase agreements continues to be available to usat rates we consider to be attractive from multiple counterparties, and we have observed increased availability for funding for private-labelMBS through repurchase agreements.To gain additional flexibility in accessing capital markets for, among other things, the acquisition of MBS and other assets, therepayment of outstanding indebtedness, the pursuit of growth initiatives that may include acquisitions, working capital, and for liquidityneeds, we filed a shelf registration statement on Form S-3 (File No. 333-171537) with the SEC on January 4, 2011 (the 2011 ShelfRegistration).Pursuant to the 2011 Shelf Registration statement, on March 13, 2013, we completed a public offering of 3,450,000 shares of Class Acommon stock, including 450,000 shares purchased by the underwriters pursuant to an option granted by us to cover over-allotments, at apublic offering price of $25.50 per share, for net proceeds of $87.0 million, after deducting underwriting discounts and commissions andexpenses. During the year ended December 31, 2012, we completed two public offerings of 5,468,250 shares of Class A common stock,including 713,250 shares purchased by the underwriters pursuant to an option granted by us to cover over-allotments, for net proceeds of$129.3 million, after deducting underwriting discounts and commissions and expenses.48 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSOn May 1, 2013, we completed a public offering of $25.0 million aggregate principal amount of 6.625% Senior Notes due 2023 andreceived net proceeds of approximately $24.0 million after payment of underwriting commissions and expenses. The Senior Notes willmature on May 1, 2023, and may be redeemed in whole or in part at any time and from time to time at our option on or after May 1, 2016 ata redemption price equal to the principal amount redeemed plus accrued and unpaid interest. The interest payments on the Senior Notes arepayable quarterly on February 1, May 1, August 1, and November 1 of each year.On May 24, 2013, we entered into separate equity distribution agreements (the Equity Distribution Agreements) with each of RBCCapital Markets, LLC, JMP Securities LLC, Ladenburg Thalmann & Co. Inc. and MLV & Co. LLC (Equity Sales Agents), pursuant towhich we may offer and sell, from time to time, up to 1,750,000 shares of the Company’s Class A common stock. Pursuant to the EquityDistribution Agreements, shares of our common stock may be offered and sold through the Equity Sales Agents in transactions that aredeemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, including sales made directly on the NYSEor sales made to or through a market maker other than on an exchange or, subject to the terms of a written notice from the Company, inprivately negotiated transactions. As of December 31, 2013, we had not issued any shares of the Company’s Class A common stock underthe Equity Distribution Agreements.The 2011 Shelf Registration statement expired on January 20, 2014. On January 22, 2014 we filed a shelf registration statement on FormS-3 (File No. 333-193478) with the SEC (the 2014 Shelf Registration) that was declared effective by the SEC on February 5, 2014. The2014 Shelf Registration statement will permit us to issue and publicly distribute various types of securities, including Class A commonstock, preferred stock, debt securities, warrants and units, or any combination of such securities, from time to time, in one or moreofferings, up to an aggregate amount of $750.0 million.Sources of FundingWe believe that our existing cash balances, investments in private-label MBS, net investments in agency-backed MBS, cash flows fromoperations, borrowing capacity and other sources of liquidity will be sufficient to meet our cash requirements for at least the next 12 months.We have obtained, and believe we will be able to continue to obtain, short-term financing in amounts and at interest rates consistent with ourfinancing objectives. We may, however, seek debt or equity financings, in public or private transactions, to provide capital for corporatepurposes and/or strategic business opportunities, including possible acquisitions, joint ventures, alliances or other business arrangementswhich could require substantial capital outlays. Our policy is to evaluate strategic business opportunities, including acquisitions anddivestitures, as they arise. There can be no assurance that we will be able to generate sufficient funds from future operations, or raisesufficient debt or equity on acceptable terms, to take advantage of investment opportunities that become available. Should our needs everexceed these sources of liquidity, we believe that most of our investments could be sold, in most circumstances, to provide cash. However,we may be required to sell our assets in such instances at depressed prices.As of December 31, 2013, our liabilities totaled $1.6 billion. In addition to other payables and accrued expenses, our indebtednessconsisted of repurchase agreements and long-term debt. As of December 31, 2013, we had $40.0 million of total long-term debt. Our trustpreferred securities with a principal amount of $15.0 million outstanding as of December 31, 2013 accrues and requires payment of interestquarterly at annual rates of three-month LIBOR plus 2.25% to 3.00% and matures between 2033 and 2035. Our Senior Notes with aprincipal amount of $25.0 million outstanding as of December 31, 2013 accrues and requires payment of interest quarterly at an annual rateof 6.625% and mature on May 1, 2023. As of December 31, 2013, our debt-to-equity leverage ratio was 2.9 to 1.We also have short-term financing facilities that are structured as repurchase agreements with various financial institutions to primarilyfund our portfolio of agency-backed MBS. As of December 31, 2013, the weighted-average interest rate under these agreements was 0.45%.Our repurchase agreements include provisions contained in the standard master repurchase agreement as published by the SecuritiesIndustry and Financial Markets Association and may be amended and supplemented in accordance with industry standards for repurchasefacilities. Our repurchase agreements include financial covenants, with which the failure to49 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTScomply would constitute an event of default under the applicable repurchase agreement. Similarly, each repurchase agreement includesevents of insolvency and events of default on other indebtedness. As provided in the standard master repurchase agreement as typicallyamended, upon the occurrence of an event of default or termination event the applicable counterparty has the option to terminate allrepurchase transactions under such counterparty’s repurchase agreement and to demand immediate payment of any amount due from us tothe counterparty.Under our repurchase agreements, we may be required to pledge additional assets to our repurchase agreement counterparties in the eventthe estimated fair value of the existing pledged collateral under such agreements declines and such lenders demand additional collateral (i.e.,a margin call), which may take the form of additional securities or cash. Margin calls on repurchase agreements collateralized by our MBSinvestments primarily result from events such as declines in the value of the underlying mortgage collateral caused by factors such as risinginterest rates or prepayments.To date, we have not had any margin calls on our repurchase agreements that we were not able to satisfy with either cash or additionalpledged collateral. However, should we encounter increases in interest rates or prepayments, margin calls on our repurchase agreementscould result in a material adverse change in our liquidity position.In the event that market conditions are such that we are unable to obtain financing for our investments in MBS in amounts and atinterest rates consistent with our financing objectives, to the extent deemed appropriate, we may use cash to finance our investments or wemay liquidate such investments. Accordingly, depending on market conditions, we may incur significant losses on any such sales of MBS.The following table provides information regarding our outstanding repurchase agreement borrowings as of the dates and periodsindicated (dollars in thousands): December 31, 2013 2012Outstanding balance $1,547,630 $1,497,191 Weighted-average rate 0.45% 0.52% Weighted-average term to maturity 13.2 days 14.5 days Maximum amount outstanding at any month-end during the period $1,801,383 $1,497,191 AssetsOur principal assets consist of MBS, cash and cash equivalents, receivables, deposits, long-term investments and deferred tax assets.As of December 31, 2013, liquid assets consisted primarily of cash and cash equivalents of $48.6 million and net investments in MBS of$370.2 million. Cash equivalents consist primarily of money market funds invested in debt obligations of the U.S. government. Our totalassets increased from $2.1 billion at December 31, 2012 to $2.2 billion as of December 31, 2013. The increase in total assets reflects thedeployment of capital raised from our public offerings during the year ended December 31, 2013 on a leveraged basis into our MBSportfolio. As of December 31, 2013, the total par and fair value of the MBS portfolio was $2.0 billion and $1.9 billion, respectively. As ofDecember 31, 2013, the weighted average coupon of the portfolio was 3.90%.Cash FlowsAs of December 31, 2013, our cash and cash equivalents totaled $48.6 million representing a net increase in the balance of $12.8million from $35.8 million as of December 31, 2012.Cash provided by operating activities of $61.4 million during 2013 was offset by net cash outflows of $166.2 million from investingactivities and net cash inflows of $117.6 million from financing activities. Cash provided by operating activity was attributable primarilyto net income.Our investing activities during 2013 included proceeds from sales of, and receipt of principal payments from, MBS totaling $1.2billion. These cash inflows were offset by $1.4 billion used to purchase MBS during 2013. Our financing activities during 2013 reflectednet proceeds from repurchase agreement borrowings of $50.4 million and net proceeds from completed public offerings of $111.0 millionoffset by $43.9 million in dividends paid.50 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSAs of December 31, 2012, our cash and cash equivalents totaled $35.8 million representing a net increase in the balance of $15.8million from $20.0 million as of December 31, 2011.Cash provided by operating activities of $25.7 million during 2012 was offset by net cash outflows of $940.7 million from investingactivities and net cash inflows of $930.8 million from financing activities. Cash provided by operating activity was attributable primarilyto cash operating income and net changes in operating assets and liabilities.Our investing activities during 2012 included proceeds from sales of, and receipt of principal payments from, MBS totaling $476.2million. These cash inflows were offset by $1.4 billion used to purchase MBS during 2012. Our financing activities during 2012 reflectednet proceeds from repurchase agreement borrowings of $849.2 million and net proceeds from completed public offerings of Class Acommon stock of $129.2 million offset by $46.8 million in dividends paid.DividendsPursuant to our variable dividend policy, our Board of Directors evaluates dividends on a quarterly basis and, in its sole discretion,approves the payment of dividends. Our dividend payments, if any, may vary significantly quarter to quarter. The Board of Directorsapproved and we declared and paid the following dividends for 2013: Quarter Ended Dividend Amount Declaration Date Record Date Pay DateDecember 31 $0.875 December 19 December 31 January 31, 2014 September 30 0.875 September 18 September 30 October 31 June 30 0.875 June 17 June 28 July 31 March 31 0.875 March 15 March 28 April 30 The Board of Directors approved and we declared and paid the following dividends for 2012: Quarter Ended Dividend Amount Declaration Date Record Date Pay DateDecember 31 $0.875 December 5 December 17 December 31 September 30 0.875 September 13 September 28 October 31 June 30 0.875 June 15 June 29 July 31 March 31 0.875 March 16 March 26 April 30 The Board of Directors approved and we declared and paid the following dividends for 2011: Quarter Ended Dividend Amount Declaration Date Record Date Pay DateDecember 31 $0.875 December 21 December 31 January 31, 2012 September 30 0.875 September 19 September 30 October 31 June 30 0.875 June 23 July 5 July 29 March 31 0.750 March 24 April 4 April 29 Contractual ObligationsWe have contractual obligations to make future payments in connection with borrowings and non-cancelable lease agreements and othercontractual commitments. The following table sets forth these contractual obligations by fiscal year (in thousands): 2014 2015 2016 2017 2018 Thereafter TotalBorrowings(1) $— $— $— $— $— $40,000 $40,000 Minimum rental and other contractualcommitments(2) 256 15 446 458 471 980 2,626 $256 $15 $446 $458 $471 $40,980 $42,626 (1)This table excludes interest payments to be made on our long-term debt securities. Based on the weighted average interest rate of 3.00%,approximately $113.6 thousand in accrued interest on the current outstanding principal will be paid for the quarter ending March 31,2014 on the $15.0 million of trust51 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSpreferred debt. Interest on the trust preferred debt is based on the 3-month LIBOR; therefore, actual coupon interest will likely differ fromthis estimate. The trust preferred debt will mature beginning in October 2033 through July 2035. As of December 31, 2013,approximately $414.1 thousand in accrued interest on the current outstanding principal will be paid for the quarter ending March 31,2014 on the $25.0 million of Senior Notes. The Senior Notes have an annual interest rate of 6.625% and will mature on May 1, 2023.(2)Equipment and office rent expense for 2013, 2012 and 2011 was $242.9 thousand, $262.7 thousand and $173.3 thousand,respectively.We also have short-term repurchase agreement liabilities of $1.5 billion as of December 31, 2013. See Note 4 to the financial statementsfor further information.Off-Balance Sheet Arrangements and Other CommitmentsFrom time to time in the ordinary course of our business, we may enter into contractual arrangements with third parties that includeindemnification obligations of varying scope and terms. In addition, in the past, we have entered into indemnification agreements withcertain of our current and former directors and officers under which we are generally required to indemnify them against liability incurredby them in connection with any action or proceeding to which they are or may be made a party by reason of their service in those or othercapacities. Our charter and the Virginia Stock Corporation Act also generally require us to indemnify our directors and officers against anyliability incurred by them in connection with any action or proceeding to which they are or may be made a party by reason of their service inthose or other capacities, subject to certain exceptions. In the future we may be the subject of indemnification assertions under our charter,Virginia law or these indemnification agreements by our current or former directors and officers who are or may become party to any actionor proceeding.We maintain directors’ and officers’ insurance policies that may limit our exposure and enable us to recover a portion of any amountspaid with respect to such obligations. However, it is not possible to determine the maximum potential amount of exposure under theseindemnification obligations due to the varying terms of such obligations, the limited history of prior indemnification claims, the uniquefacts and circumstances involved in connection with each particular contractual arrangement and each potential future claim forindemnification and the contingency of any potential liabilities upon the occurrence of events that are not reasonably determinable. Suchindemnification agreements may not be subject to maximum loss clauses and the maximum potential amount of future payments we couldbe required to make under these indemnification obligations could be significant. See “Item 1A — Risk Factors” in this Annual Report onForm 10-K.As of December 31, 2013 and 2012, we did not maintain any relationships with unconsolidated entities or financial partnerships, suchas entities often referred to as structured finance, or special purpose or variable interest entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, as of December 31, 2013 and 2012, we had notguaranteed any obligations of unconsolidated entities or entered into any commitment or intent to provide funding to any such entities. SeeNote 9 to our consolidated financial statements under “Item 8 — Financial Statements and Supplementary Data.”Quantitative and Qualitative Disclosures about Market RiskMarket risk generally represents the risk of loss through a change in realizable value that can result from a change in the prices ofsecurities, a change in the value of financial instruments as a result of changes in interest rates, a change in the volatility of interest rates or achange in the credit rating of an issuer. We monitor market and business risk, including credit, interest rate, equity, operations, liquidity,compliance, legal, reputational, and equity ownership risks through a number of control procedures designed to identify and evaluate thevarious risks to which our business and assets are exposed. See “Item 1 — Business” in this Annual Report on Form 10-K for discussionof our risk management strategies.We are exposed to the following market risks as a result of our investments in MBS and equity investments.52 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSCredit RiskAlthough we do not expect to encounter credit risk in our agency-backed MBS portfolio assuming Fannie Mae and Freddie Mac remainsolvent, we are exposed to credit risk in our private-label MBS portfolio. With respect to our private-label MBS, credit support contained inthese MBS deal structures provides a level of protection from losses, as do the discounted purchase prices in the event of the return of lessthan 100% of par. We also evaluate the impact of credit risk on our investments through a comprehensive investment review and selectionprocess, which is predominantly focused on quantifying and pricing credit risk. We review our private-label MBS based on quantitativeand qualitative analysis of the risk-adjusted returns on such investments. Through modeling and scenario analysis, we seek to evaluateeach investment’s credit risk. Credit risk is also monitored through our ongoing asset surveillance. Despite these measures to manage creditrisk, unanticipated credit losses could nevertheless occur, which could adversely impact our operating results.Our private-label MBS are generally purchased at a discount. We estimate the future expected cash flows based on our observation ofcurrent information and events and applying a number of assumptions related to prepayment rates, interest rates, default rates, and thetiming and amount of credit losses on each security. These assumptions are difficult to predict as they are subject to uncertainties andcontingencies related to future events that may impact our estimates and interest income.The following table represents certain statistics of our private-label MBS portfolio as of and for the year ended December 31, 2013: SeniorSecurities Re-REMICSecurities TotalPrivate-LabelSecuritiesYield (% of amortized cost) 16.4% 10.6% 10.8% Average cost (% of face value) 61.7% 53.6% 53.8% Weighted average coupon 2.4% 3.4% 3.3% Delinquencies greater than 60 plus days 26.9% 15.6% 15.8% Credit enhancement — 0.3% 0.3% Severity (three months average) 26.4% 37.5% 37.3% Constant prepayment rate (three months average) 12.6% 14.2% 14.2% Key credit and prepayment measures in our private-label MBS portfolio reflected improvement during the year ended December 31,2013. Total 60 day plus delinquencies in our private-label MBS portfolio decreased to 15.8% at December 31, 2013 from 18.5% atDecember 31, 2012 and trailing three month average loss severities on liquidated loans decreased to 37.3% at December 31, 2013 from45.8% at December 31, 2012.The table that follows shows the expected change in fair value for our current private-label MBS related to our principal investingactivities under several hypothetical credit loss scenarios. Our private-label MBS are classified as Level 3 assets of the fair value hierarchyas they are valued using present value techniques based on estimated cash flows of the security taking into consideration variousassumptions derived by management and used by other market participants. These assumptions include, among others, interest rates,prepayment rates, discount rates, credit loss rates, and the timing of cash flows and credit losses. Credit default and loss severity rates cansignificantly affect the prices of private-label MBS. While it is impossible to project the exact amount of changes in value, the table belowillustrates the impact a 10% increase and a 10% decrease in the credit default and loss severity rates from those used as our valuationassumptions would have on the value of our total assets and our book value as of December 31, 2013. The changes in rates are assumed tooccur instantaneously. Actual changes in market conditions are likely to be different from these assumptions (dollars in thousands, exceptper share amounts).53 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTS December 31, 2013 Value Value with10%Increase inDefault Rate PercentChange Value with10%Decrease inDefault Rate PercentChange Value with10%Increase inLossSeverityRate PercentChange Value with10%Decrease inLossSeverityRate PercentChangeAssets Private-label MBS $341,299 $334,889 (1.88)% $347,889 1.93% $333,248 (2.36)% $349,365 2.36% Agency-backed MBS 1,576,499 1,576,499 — 1,576,499 — 1,576,499 — 1,576,499 — Other 277,168 277,168 — 277,168 — 277,168 — 277,168 — Total assets $2,194,966 $2,188,556 (0.29)% $2,201,556 0.30% $2,186,915 (0.37)% $2,203,032 0.37% Liabilities $1,643,138 $1,643,138 — $1,643,138 — $1,643,138 — $1,643,138 — Equity 551,828 545,418 (1.16)% 558,418 1.19% 543,777 (1.46)% 559,894 1.46% Total liabilities andequity $2,194,966 $2,188,556 (0.29)% $2,201,556 0.30% $2,186,915 (0.37)% $2,203,032 0.37% Book value per share $33.10 $32.72 (1.16)% $33.50 1.19% $32.62 (1.46)% $33.58 1.46% Interest Rate RiskLeveraged MBSWe are also subject to interest rate risk in our MBS portfolio. Some of our MBS positions are financed with repurchase agreements,which are interest rate sensitive financial instruments. We are exposed to interest rate risk that fluctuates based on changes in the level orvolatility of interest rates and mortgage prepayments and in the shape and slope of the yield curve. We attempt to hedge a portion of ourexposure to interest rate fluctuations through the use of Eurodollar futures, U.S. Treasury note futures, and swap futures. Thecounterparties to our derivative agreements at December 31, 2013 are U.S. financial institutions. We assess and monitor the counterparties’non-performance risk and credit risk on a regular basis.Our primary risk is related to changes in both short- and long-term interest rates, which affect us in several ways. As interest ratesincrease, the market value of the MBS may be expected to decline, prepayment rates may be expected to go down, and duration may beexpected to extend. An increase in interest rates is beneficial to the market value of our derivative instruments. For example, for interest rateswap futures, the cash flows from receiving the floating rate portion increase and the fixed-rate paid remains the same under this scenario. Ifinterest rates decline, the reverse is true for MBS, paying fixed and receiving floating interest rate swaps, interest rate caps, and Eurodollarand U.S. Treasury futures.The table that follows shows the expected change in fair value for our current MBS and derivatives related to our principal investingactivities under several hypothetical interest-rate scenarios. Interest rates are defined by the U.S. Treasury yield curve. The changes in ratesare assumed to occur instantaneously. It is further assumed that the changes in rates occur uniformly across the yield curve and that thelevel of LIBOR changes by the same amount as the yield curve. Actual changes in market conditions are likely to be different from theseassumptions.Changes in value are measured as percentage changes from their respective values presented in the column labeled “Value.”Management’s estimate of change in value for MBS is based on the same assumptions it uses to manage the impact of interest rates on theportfolio. Actual results could differ significantly from these estimates. For MBS, the estimated change in value of the MBS reflects aneffective duration of 5.29 in a rising interest rate environment and 4.76 in a declining interest rate environment.The effective durations are based on observed market value changes, as well as management’s own estimate of the effect of interest ratechanges on the fair value of the investments including assumptions regarding prepayments based, in part, on age of and interest rate on themortgages underlying the MBS, prior exposure to refinancing opportunities, and an overall analysis of historical prepayment patterns undera variety of past interest rate conditions (dollars in thousands, except per share amounts).54 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTS December 31, 2013 Value Value with 100Basis PointIncrease inInterest Rates Percent Change Value with 100Basis PointDecrease inInterest Rates Percent ChangeAssets MBS $1,917,798 $1,816,366 (5.29)% $2,009,167 4.76% Derivative asset 8,424 97,371 1,055.88% (78,498) (1,031.84)% Other 268,744 268,744 — 268,744 — Total assets $2,194,966 $2,182,481 (0.57)% $2,199,413 0.20% Liabilities Repurchase agreements $1,547,630 $1,547,630 — $1,547,630 — Derivative liability 33,129 30,703 (7.32)% 39,161 18.21% Other 62,379 62,379 — 62,379 — Total liabilities 1,643,138 1,640,712 (0.15)% 1,649,170 0.37% Equity 551,828 541,769 (1.82)% 550,243 (0.29)% Total liabilities and equity $2,194,966 $2,182,481 (0.57)% $2,199,413 0.20% Book value per share $33.10 $32.50 (1.82)% $33.01 (0.29)% Equity Price RiskAlthough limited, we are exposed to equity price risk as a result of our investments in equity securities and investment partnerships.Equity price risk changes as the volatility of equity prices changes or the values of corresponding equity indices change.While it is impossible to exactly project what factors may affect the prices of equity sectors and how much the effect might be, the tablebelow illustrates the impact a 10% increase and a 10% decrease in the price of the equities held by us would have on the value of our totalassets and our book value as of December 31, 2013 (dollars in thousands, except per share amounts). December 31, 2013 Value Value with10% Increasein Price PercentChange Value with10% Decreasein Price PercentChangeAssets Equity and cost method investment $1,767 $1,944 10.00% $1,590 (10.00)% Other 2,193,199 2,193,199 — 2,193,199 — Total assets $2,194,966 $2,195,143 0.01% $2,194,789 (0.01)% Liabilities $1,643,138 $1,643,138 — $1,643,138 — Equity 551,828 552,005 0.03% 551,651 (0.03)% Total liabilities and equity $2,194,966 $2,195,143 0.01% $2,194,789 (0.01)% Book value per share $33.10 $33.11 0.03% $33.09 (0.03)% Except to the extent that we sell our equity securities or other investments, or a decrease in their fair value is deemed to be other-than-temporary, an increase or decrease in the fair value of those assets will not directly affect our earnings; however, an increase or decrease inthe value of equity method investments will directly affect our earnings.Inflation RiskVirtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence ourperformance far more than inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates.Our financial statements are prepared in accordance with GAAP and our distributions are determined by our Board of Directors in its solediscretion pursuant to our variable dividend policy; in each case, our activities and balance sheet are measured with reference to fair valuewithout considering inflation.55 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSCritical Accounting PoliciesOur financial statements are prepared in conformity with GAAP and follow general practices within the industries in which we operate.The preparation of our financial statements requires us to make estimates and assumptions. These estimates and assumptions affect thereported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses duringthe reporting period. Although we base our estimates and assumptions on historical experience, when available, and on various other factorsthat we believe to be reasonable under the circumstances, management exercises significant judgment in the final determination of ourestimates. Actual results may differ from these estimates.Our significant accounting policies are presented in Note 2 to our consolidated financial statements included under “Item 8 — FinancialStatements and Supplementary Data.” Our most critical policies that are both very important to the portrayal of our financial condition andresults of operations and require management’s most difficult, subjective or complex judgments or estimates, are discussed below.Principal Investing SecuritiesWe account for our investments in MBS as either available-for-sale or trading investments pursuant to accounting principles related toaccounting for certain investments in debt and equity securities. Although we generally intend to hold our MBS until maturity, we may,from time to time, sell any of our MBS as part of the overall management of our business. The available-for-sale designation provides uswith the flexibility to sell our MBS in order to act on potential market opportunities or changes in economic conditions to ensure futureliquidity and to meet other general corporate purposes as they arise. These investments are carried at fair value with resulting unrealizedgains and losses on available-for-sale securities reflected in accumulated other comprehensive income (loss) in the consolidated balancesheets and unrealized gains and losses on trading securities reflected in net investment gain (loss) in the consolidated statements ofcomprehensive income.The accounting principles related to fair value measurements define fair value as the price that would be received to sell an asset or paidto transfer a liability in an orderly transaction between market participants at the measurement date, not adjusted for transaction costs.These accounting principles also establish a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fairvalue into three broad levels giving the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and thelowest priority to unobservable inputs (Level 3) as described below:Level 1 Inputs — Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible by us;Level 2 Inputs — Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable,either directly or indirectly; andLevel 3 Inputs — Unobservable inputs for the asset or liability, including significant assumptions and other market participants.Our agency-backed MBS, which are guaranteed by Fannie Mae or Freddie Mac, and AAA-rated private-label MBS, if any, are generallyclassified within Level 2 of the fair value hierarchy as they are valued using quoted market prices provided by a broker or dealer, oralternative pricing sources with reasonable levels of price transparency. The independent brokers and dealers providing market prices arethose who make markets in these financial instruments.We classify other private-label MBS within Level 3 of the fair value hierarchy because they trade infrequently and, therefore, have littleor no price transparency. We utilize present value techniques based on estimated cash flows of the instrument taking into considerationvarious assumptions derived by management and used by other market participants. These assumptions are corroborated by evidence suchas historical data, risk characteristics, transactions in similar instruments, and completed or pending transactions, when available.Establishing market value is inherently subjective given the volatile and sometimes illiquid markets for these private-label MBS andrequires us to make a number of assumptions, including assumptions about the future of interest rates, prepayment rates, discount rates,credit loss rates, and the timing of cash flows and credit losses. The assumptions we apply are specific to each security. Although we relyon our internal56 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTScalculations to compute the fair value of these private-label MBS, we request and consider indications of value (mark) from third-partydealers to assist us in our valuation process.ImpairmentsWe evaluate available-for-sale securities for OTTI charges at least on a quarterly basis, and more frequently when economic or marketconcerns warrant such evaluation. In general, when the fair value of an available-for-sale security is less than its amortized cost at thereporting date, the security is considered impaired. In evaluating these available-for-sale securities for OTTI, consideration is given to (1) thelength of time and the extent to which the fair value has been lower than carrying value, (2) the severity of the decline in fair value, (3) thefinancial condition and near-term prospects of the issuer, (4) our intent to sell, and (5) whether it is more-likely-than-not we would berequired to sell the security before anticipated recovery.If we intend to sell an impaired security, or it is more likely than not that we will be required to sell the impaired security before itsanticipated recovery, then we must recognize an OTTI through charges to earnings equal to the entire difference between the investmentsecurity’s amortized cost and its fair value at the reporting date. If we do not expect to sell an other-than-temporarily impaired security, onlythe portion of the OTTI related to credit losses is recognized through charges to earnings with the remainder recognized through otheraccumulated comprehensive income/(loss) on the consolidated balance sheet. Impairments recognized through other comprehensiveincome/(loss) do not impact earnings. Following the recognition of an OTTI through earnings, a new cost basis is established for theinvestment security and may not be adjusted for subsequent recoveries in fair value through earnings. However, OTTI recognized throughcharges to earnings may be accreted back to the amortized cost basis of the investment security on a prospective basis through interestincome. The determination as to whether an OTTI exists and, if so, the amount of credit impairment recognized in earnings is subjective, assuch determination is based on factual information available at the time of assessment as well as our estimate of the future performance andcash flow projections. As a result, the timing and amount of OTTIs constitute material estimates that are susceptible to significant change.For available-for-sale, private-label MBS securities that have been acquired at discounts to face value due in part to credit deteriorationsince origination, we re-evaluate the undiscounted expected future cash flows and the changes in cash flows from those originally projectedat the time of purchase or when last revised. The discount rate used to calculate the present value of expected future cash flows is the currentyield used for income recognition purposes as compared to the discount rate used to calculate the fair value of the investment security is thecurrent expected market rate. For those securities in an unrealized loss position, the difference between the carrying value and the net presentvalue of expected future cash flows is recorded as other-than-temporary impairment charges through our statement of comprehensive income.Accounting for Purchase Premiums and Discounts on MBS Securities and Interest IncomeOur interest income includes the contractual coupon payments and amortization of purchase premiums and accretion of discounts, ifany, on our available-for-sale MBS portfolio and contractual coupon payments on our trading MBS portfolio. Purchase premiums ordiscounts, if any, on our trading MBS portfolio are accounted for under mark-to-market accounting and the changes in value are recordedin investment gain (loss), net, on the statement of comprehensive income.Interest income on the private-label MBS that were purchased at a discount to face value is recognized based on the security’s expectedeffective interest rate. At acquisition, the accretable yield is calculated as the difference between the undiscounted expected cash flows and thepurchase price which is expected to be accreted into interest income over the remaining life of the security on a level-yield basis. Thedifference between the contractually required payments and the undiscounted expected cash flows represents the non-accretable difference.Based on actual payment activities and changes in estimates of undiscounted expected future cash flows, the accretable yield and the non-accretable difference can change over time. Significant increases in the amount or timing of undiscounted expected future cash flows arerecognized prospectively as an adjustment to the accretable yield.57 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSAccounting for TaxesWe provided for income taxes using the asset and liability method. Deferred tax assets and liabilities represent the differences between thefinancial statement and income tax bases of assets and liabilities using enacted tax rates. The measurement of net deferred tax assets isadjusted by a valuation allowance if, based on our evaluation, it is more-likely-than-not that they will not be realized. We recognize taxpositions in the financial statements only when it is more-likely-than-not that the position will be sustained upon examination by the relevanttaxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefitthat will more-likely-than-not be realized upon settlement. A liability is established for differences between positions taken in a tax return andthe financial statements.Recently Issued Accounting PronouncementsOn July 18, 2013, the FASB issued Accounting Standards Update 2013-11, Income Taxes (Topic 740), Presentation of anUnrecognized Tax Benefit When a Net Operating Loss Carry-forward, a Similar Tax Loss, or a Tax Credit Carry-forward Exists. Thisstandard requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carry-forward that would apply insettlement of the uncertain tax positions. Under the new standard, unrecognized tax benefits will be netted against all available same-jurisdiction loss or other tax carry-forward that would be utilized, rather than only against carry-forwards that are created by theunrecognized tax benefits. This standard will be effective for the Company beginning on January 1, 2014. We do not expect a significantimpact on our financial positions as a result of adoption of these new requirements.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKThe information set forth under Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results ofOperations — Quantitative and Qualitative Disclosures about Market Risk” in this Annual Report on Form 10-K is hereby incorporated byreference into this Item 7A.ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAThe information required by this item appears in a subsequent section of this report. See “Index to Consolidated Financial Statements ofArlington Asset Investment Corp.” on page F-1.ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURENone.ITEM 9A. CONTROLS AND PROCEDURESDisclosure Controls and ProceduresOur management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), evaluated the effectiveness of thedesign and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Actof 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, our CEO and CFO have concluded thatas of December 31, 2013, our disclosure controls and procedures, as designed and implemented, (i) were effective in ensuring thatinformation is made known to our management, including our CEO and CFO, by our officers and employees, as appropriate to allowtimely decisions regarding required disclosure and (ii) were effective in ensuring that information the Company must disclose in its reportsunder the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periodsprescribed by the SEC’s rules and forms.Management’s Report on Internal Control over Financial ReportingManagement of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internalcontrol over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, as aprocess designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by theCompany’s Board of58 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSDirectors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes thosepolicies and procedures that:•pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of theassets of the Company;•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordancewith generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordancewith authorizations of management and directors of the Company; and•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of theCompany’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections ofany evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes inconditions or that the degree of compliance with the policies or procedures may deteriorate.The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31,2013. In making this assessment, the Company’s management used criteria set forth by the Committee of Sponsoring Organizations of theTreadway Commission (COSO) in Internal Control-Integrated Framework (1992 version).Based on management’s assessment, the Company’s management has concluded that, as of December 31, 2013, the Company’sinternal control over financial reporting was effective based on criteria in Internal Control-Integrated Framework issued by the COSO(1992 version).The effectiveness of the Company’s internal control over financial reporting was audited by PricewaterhouseCoopers LLP, anindependent registered public accounting firm, as stated in their report which appears on page F-2 of this Annual Report on Form 10-K.Changes in Internal Control over Financial ReportingThere have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2013that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.ITEM 9B. OTHER INFORMATIONNone.59 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSPART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information required by Part III, Item 10 of this Annual Report on Form 10-K will be provided in the Definitive Proxy Statementrelating to our 2014 Annual Meeting of Shareholders (our 2014 Proxy Statement) and is hereby incorporated by reference.ITEM 11. EXECUTIVE COMPENSATIONThe information required by Part III, Item 11 of this Annual Report on Form 10-K will be provided in our 2014 Proxy Statement and ishereby incorporated by reference.ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERSThe information required by Part III, Item 12 of this Annual Report on Form 10-K will be provided in our 2014 Proxy Statement and ishereby incorporated by reference.ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by Part III, Item 13 of this Annual Report on Form 10-K will be provided in our 2014 Proxy Statement and ishereby incorporated by reference.ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESThe information required by Part III, Item 14 of this Annual Report on Form 10-K will be provided in our 2014 Proxy Statement and ishereby incorporated by reference.60 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSPART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES(a) (1) Financial Statements. The Arlington Asset Investment Corp. consolidated financial statements for the year ended December 31,2013, included in “Item 8 — Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K, are incorporated byreference into this Part IV, Item 15:•Report of Independent Registered Public Accounting Firm (page F-2)•Consolidated Balance Sheets — Years ended 2013 and 2012 (page F-3)•Consolidated Statements of Comprehensive Income — Years ended 2013, 2012 and 2011 (page F-4)•Consolidated Statements of Changes in Equity — Years ended 2013, 2012 and 2011 (page F-5)•Consolidated Statements of Cash Flows — Years ended 2013, 2012 and 2011 (page F-8)•Notes to Consolidated Financial Statements (page F-9)(2) Financial Statement Schedules. All schedules are omitted because they are not required or because the information is shown in thefinancial statements or notes thereto.(3) Exhibits ExhibitNumber Exhibit Title3.01 Amended and Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 tothe Registrant’s Quarterly Report on Form 10-Q filed on November 9, 2009).3.02 Amended and Restated Bylaws, as amended (incorporated by reference to Exhibit 3.1 to the Registrant’sCurrent Report on Form 8-K filed on July 28, 2011).4.01 Indenture dated as of May 1, 2013 between the Company and Wells Fargo Bank, National Association,as trustee (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filedon May 1, 2013).4.02 First Supplemental Indenture dated as of May 1, 2013 between the Company and Wells Fargo Bank,National Association, as trustee (incorporated by reference to Exhibit 4.2 of the Company’s CurrentReport on Form 8-K filed on May 1, 2013).4.03 Subordinated Indenture (open ended).4.04 Form of Senior Note (incorporated by reference to the Company’s Registration Statement on Form S-3(133-171537).4.05 Form of 6.625% Senior Notes due 2023 (incorporated by reference to Exhibit 4.3 to Current Report onForm 8-K filed by the Registrant on May 1, 2013).4.06 Form of Certificate for Class A Common Stock (incorporated by reference to Exhibit 4.01 of the AnnualReport on Form 10-K filed with the SEC on February 24, 2010).4.07 Shareholder Rights Agreement, dated June 5, 2009 (incorporated by reference to Exhibit4.1 of theCurrent Report on Form 8-K filed with the SEC on June 5, 2009).4.08 Form of Certificate of Designation.***10.01 Friedman, Billings, Ramsey Group, Inc. 2004 Long-Term Incentive Plan (incorporated by reference toAppendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on April 29, 2004).*10.02 Friedman, Billings, Ramsey Group, Inc. 1997 Stock and Annual Incentive Plan (incorporated byreference to Exhibit 10.06 to Amendment No. 2 to the Registration Statement on Form S-1 (File No. 333-39107) filed by Friedman, Billings, Ramsey Group, Inc. on December 19, 1997).*61 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTS ExhibitNumber Exhibit Title10.03 Friedman, Billings, Ramsey Group, Inc. Non-Employee Director Stock Compensation Plan(incorporated by reference to Exhibit 10.07 to Amendment No. 2 to the Registration Statement on Form S-1 (File No. 333-39107) filed by Friedman, Billings, Ramsey Group, Inc. on December 19, 1997).*10.04 Friedman, Billings, Ramsey Group, Inc. Amended and Restated Non-Employee Director StockCompensation Plan (incorporated by reference to Exhibit 10.04 to the Registrant’s Annual Report on Form10-K filed on February 23, 2012).*10.05 Arlington Asset Investment Corp. 2011 Long-Term Incentive Plan (incorporated by reference to Exhibit10.1 to the Registrant’s Current Report on Form 8-K filed on June 6, 2011).*10.06 Form of Restricted Stock Unit Agreement under Arlington Asset Investment Corp. 2011 Long-TermIncentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-Kfiled on June 6, 2011).*10.07 Form of Restricted Stock Award Agreement under Arlington Asset Investment Corp. 2011 Long-TermIncentive Plan (incorporated by reference to Exhibit 10.07 to the Registrant’s Annual Report on Form 10-K, filed on February 23, 2012).*10.08 Form of Indemnification Agreement (incorporated by reference to Exhibit 10.08 to the Registrant’s AnnualReport on Form 10-K, filed on February 23, 2012).*10.09 Form of Performance Share Unit Award Agreement under Arlington Asset Investment Corp. 2011 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form8-K filed on August 16, 2012).10.10 Equity Distribution Agreement, dated May 24, 2013, by and between the Company and RBC CapitalMarkets, LLC (incorporated by reference to Exhibit 1.1 to the Registrant’s Current Report on Form 8-Kfiled on May 28, 2013).10.11 Equity Distribution Agreement, dated May 24, 2013, by and between the Company and JMP SecuritiesLLC (incorporated by reference to Exhibit 1.2 to the Registrant’s Current Report on Form 8-K filed onMay 28, 2013).10.12 Equity Distribution Agreement, dated May 24, 2013, by and between the Company and LadenburgThalmann & Co. Inc. (incorporated by reference to Exhibit 1.3 to the Registrant’s Current Report onForm 8-K filed on May 28, 2013).10.13 Equity Distribution Agreement, dated May 24, 2013, by and between the Company and MLV & Co.LLC (incorporated by reference to Exhibit 1.4 to the Registrant’s Current Report on Form 8-K filed onMay 28, 2013).11.01 Statement regarding Computation of Per Share Earnings (included in Part II, Item 8, and Note 2 to theRegistrant’s Consolidated Financial Statements).†12.01 Computation of Ratio of Earnings to Fixed Charges.†21.01 List of Subsidiaries of the Registrant.†23.01 Consent of PricewaterhouseCoopers LLP.†24.01 Power of Attorney (included on the signature page to this Annual Report on Form 10-K and incorporatedby reference herein).†31.01 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant toSection 302 of the Sarbanes-Oxley Act of 2002.†31.02 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant toSection 302 of the Sarbanes-Oxley Act of 2002.†32.01 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.†62 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTS ExhibitNumber Exhibit Title32.02 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.† 101.INS INSTANCE DOCUMENT**101.SCH SCHEMA DOCUMENT**101.CAL CALCULATION LINKBASE DOCUMENT**101.LAB LABELS LINKBASE DOCUMENT**101.PRE PRESENTATION LINKBASE DOCUMENT**101.DEF DEFINITION LINKBASE DOCUMENT**†Filed herewith.*Compensatory plan or arrangement.**Submitted electronically herewith. Attached as Exhibit 101 are the following materials from the Company’s Annual Report on Form 10-Kfor the fiscal year ended December 31, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated BalanceSheets at December 31, 2013 and December 31, 2012; (ii) Consolidated Statements of Comprehensive Income for the years endedDecember 31, 2013, 2012 and 2011; (iii) Consolidated Statements of Changes in Equity for the years ended December 31, 2013, 2012and 2011; and (iv) Consolidated Statements of Cash Flows for the years ended 2013, 2012 and 2011. Pursuant to Rule 406T ofRegulation S-T this data is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of theSecurities Act of 1933, is deemed not filed for purposes of section 18 of the Securities and Exchange Act of 1934, and otherwise is notsubject to liability under these sections.***To be filed by amendment or as an exhibit to a report filed under the Securities Exchange Act of 1934 and incorporated herein byreference.63 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized. ARLINGTON ASSET INVESTMENT CORP.Date: February 10, 2014 By:/s/ ERIC F. BILLINGSEric F. BillingsChief Executive OfficerPOWER OF ATTORNEYKNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Eric F.Billings and Kurt R. Harrington and each of them as his true and lawful attorney-in-fact and agent, with full power of substitution andresubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Reporton Form 10-K for the fiscal year ended December 31, 2013, and to file the same, with all exhibits thereto, and any other documents inconnection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power andauthority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intentsand purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them,or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons onbehalf of the registrant and in the capacities and on the dates indicated. Signature Title Date/s/ ERIC F. BILLINGSERIC F. BILLINGS Chairman, Chief Executive Officer and Director (PrincipalExecutive Officer) February 10, 2014/s/ J. ROCK TONKEL, JR.J. ROCK TONKEL, JR. President, Chief Operating Officer and Director February 10, 2014/s/ KURT R. HARRINGTONKURT R. HARRINGTON Executive Vice President and Chief Financial Officer(Principal Financial Officer) February 10, 2014/s/ DANIEL J. ALTOBELLODANIEL J. ALTOBELLO Director February 10, 2014/s/ DANIEL E. BERCEDANIEL E. BERCE Director February 10, 2014/s/ DAVID W. FAEDERDAVID W. FAEDER Director February 10, 2014/s/ PETER A. GALLAGHERPETER A. GALLAGHER Director February 10, 2014/s/ RALPH S. MICHAEL IIIRALPH S. MICHAEL III Director February 10, 201464 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSFINANCIAL STATEMENTS OF ARLINGTON ASSET INVESTMENT CORP.Index to Arlington Asset Investment Corp. Consolidated Financial Statements PageReport of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of December 31, 2013 and 2012 F-3 Consolidated Statements of Comprehensive Income for the years ended December 31, 2013, 2012 and 2011 F-4 Consolidated Statements of Changes in Equity for the years ended December 31, 2013, 2012 and 2011 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011 F-8 Notes to Consolidated Financial Statements F-9 F-1 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSReport of Independent Registered Public Accounting FirmTo The Board of Directors and Shareholders ofArlington Asset Investment Corp.In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of comprehensive income, ofchanges in equity and of cash flows present fairly, in all material respects, the financial position of Arlington Asset Investment Corp. and itssubsidiaries (the Company) at December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the threeyears in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,2013, based on criteria established in Internal Control — Integrated Framework (1992 version) issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, formaintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financialreporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is toexpress opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free ofmaterial misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits ofthe financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statementpresentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financialreporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in thecircumstances. We believe that our audits provide a reasonable basis for our opinions.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) providereasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations ofmanagement and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections ofany evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes inconditions, or that the degree of compliance with the policies or procedures may deteriorate./s/ PricewaterhouseCoopers LLPMcLean, Virginia February 10, 2014F-2 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. CONSOLIDATED BALANCE SHEETS(Dollars in thousands, except per share amounts) December 31, 2013 2012ASSETS Cash and cash equivalents $48,628 $35,837 Receivables Interest 5,173 4,869 Sold securities receivable — 26,773 Other 212 644 Mortgage-backed securities, at fair value Available-for-sale 341,346 199,156 Trading 1,576,452 1,556,440 Other investments 2,065 2,347 Derivative assets, at fair value 8,424 — Deferred tax assets, net 165,851 154,418 Deposits 45,504 85,652 Prepaid expenses and other assets 1,311 159 Total assets $2,194,966 $2,066,295 LIABILITIES AND EQUITY Liabilities: Repurchase agreements $1,547,630 $1,497,191 Interest payable 774 582 Accrued compensation and benefits 5,584 1,542 Dividend payable 14,630 — Derivative liabilities, at fair value 33,129 76,850 Accounts payable, accrued expenses and other liabilities 1,391 17,837 Long-term debt 40,000 15,000 Total liabilities 1,643,138 1,609,002 Commitments and contingencies (Note 7) — — Equity: Preferred stock, $0.01 par value, 25,000,000 shares authorized, none issued andoutstanding — — Class A common stock, $0.01 par value, 450,000,000 shares authorized,16,047,965 and 12,560,970 shares issued and outstanding, respectively 160 126 Class B common stock, $0.01 par value, 100,000,000 shares authorized, 554,055shares issued and outstanding 6 6 Additional paid-in capital 1,727,398 1,638,061 Accumulated other comprehensive income, net of taxes of $9,436 and $407,respectively 53,190 39,006 Accumulated deficit (1,228,926) (1,219,906) Total equity 551,828 457,293 Total liabilities and equity $2,194,966 $2,066,295 The accompanying notes are an integral part of these consolidated financial statements.F-3 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(Dollars in thousands except per share amounts) Year Ended December 31, 2013 2012 2011Interest income $87,019 $64,154 $52,545 Interest expense Interest on short-term debt 6,899 4,475 2,043 Interest on long-term debt 1,630 490 465 Total interest expense 8,529 4,965 2,508 Net interest income 78,490 59,189 50,037 Other loss, net Investment loss, net (47,745) (10,723) (19,166) Other loss (15) (15) (14) Total other loss, net (47,760) (10,738) (19,180) Operating income before other expenses 30,730 48,451 30,857 Other expenses Compensation and benefits 11,195 10,339 10,065 Professional services 2,561 4,118 1,833 Business development 145 136 121 Occupancy and equipment 427 467 374 Communications 191 202 197 Other operating expenses 2,072 2,184 1,599 Total other expenses 16,591 17,446 14,189 Income before income taxes 14,139 31,005 16,668 Income tax (benefit) provision (35,322) (152,937) 1,495 Net income $49,461 $183,942 $15,173 Basic earnings per share $3.09 $18.02 $1.97 Diluted earnings per share $3.06 $17.96 $1.96 Weighted-average shares outstanding (in thousands) Basic 15,990 10,205 7,720 Diluted 16,189 10,242 7,741 Other comprehensive income, net of taxes Unrealized gains (losses) for the period on available-for-sale securities(net of taxes of $12,664, $(1,215), and $-0-, respectively) $19,894 $(1,909) $(11,253) Reclassification Included in investment loss, net, in the statement of comprehensiveincome related to sales of available-for-sale securities (net of taxesof $4,162, $4,488, and $-0-, respectively) (6,537) (7,050) (15,098) Included in investment loss, net, in the statement of comprehensiveincome related to other-than-temporary charges on available-for-salesecurities (net of taxes of $527, $6,110, and $-0-, respectively) 827 9,598 1,223 Comprehensive income $63,645 $184,581 $(9,955) The accompanying notes are an integral part of these consolidated financial statements.F-4 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY(Dollars in thousands) Class ACommonStock (#) Class AAmount($) Class BCommonStock (#) Class BAmount($) AdditionalPaid-InCapital AccumulatedOtherComprehensiveIncome AccumulatedDeficit TotalBalances, December 31, 2010 7,106,330 $71 566,112 $6 $1,505,971 $63,495 $(1,352,799) $216,744 Net income — — — — — — 15,173 15,173 Issuance of Class A common stock 29,147 — — — 545 — — 545 Repurchase of Class A common stock (8,910) — — — (229) — — (229) Forfeitures of Class A common stock (27,231) — — — (770) — — (770) Amortization of Class A common sharesissued as stock-based awards — — — — 601 — — 601 Reclassification of restricted stock units issued asstock based awards — — — — 2,595 — — 2,595 Other comprehensive income Net change in unrealized gain on available-for-sale investment securities, (net of taxes of $-0-) — — — — — (25,128) — (25,128) Dividends declared — — — — — — (26,159) (26,159) Balances, December 31, 2011 7,099,336 $71 566,112 $6 $1,508,713 $38,367 $(1,363,785) $183,372 The accompanying notes are an integral part of these consolidated financial statements.F-5 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY – (continued)(Dollars in thousands) Class ACommonStock (#) Class AAmount($) Class BCommonStock (#) Class BAmount($) AdditionalPaid-InCapital AccumulatedOtherComprehensiveIncome AccumulatedDeficit TotalBalances, December 31, 2011 7,099,336 $71 566,112 $6 $1,508,713 $38,367 $(1,363,785) $183,372 Net income — — — — — — 183,942 183,942 Conversion of Class B shares toClass A shares 12,057 — (12,057) — — — — — Issuance of Class A common stock 5,493,750 55 — — 129,194 — — 129,249 Repurchase of Class A common stock (41,790) — — — (786) — — (786) Forfeitures of Class A common stock (2,383) — — — (55) — — (55) Amortization of Class A commonshares issued as stock-basedawards — — — — 995 — — 995 Other comprehensive income Net change in unrealized gain onavailable-for-sale investmentsecurities, (net of taxes of $407) — — — — — 639 — 639 Dividends declared — — — — — — (40,063) (40,063) Balances, December 31, 2012 12,560,970 $126 554,055 $6 $1,638,061 $39,006 $(1,219,906) $457,293 The accompanying notes are an integral part of these consolidated financial statements.F-6 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY – (continued)(Dollars in thousands) Class ACommonStock (#) Class AAmount($) Class BCommonStock (#) Class BAmount($) AdditionalPaid-InCapital AccumulatedOtherComprehensiveIncome AccumulatedDeficit TotalBalances, December 31, 2012 12,560,970 $126 554,055 $6 $1,638,061 $39,006 $(1,219,906) $457,293 Net income — — — — — — 49,461 49,461 Issuance of Class A common stock 3,492,667 34 — — 86,930 — — 86,964 Repurchase of Class A common stock — — — — — — — — Forfeitures of Class A common stock (5,672) — — — (142) — — (142) Amortization of Class A common sharesissued as stock-based awards — — — — 2,549 — — 2,549 Other comprehensive income Net change in unrealized gain on available-for-sale investment securities, (net of taxes of$9,029) — — — — — 14,184 — 14,184 Dividends declared — — — — — — (58,481) (58,481) Balances, December 31, 2013 16,047,965 $160 554,055 $6 $1,727,398 $53,190 $(1,228,926) $551,828 The accompanying notes are an integral part of these consolidated financial statements.F-7 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS(Dollars in thousands) Year Ended December 31, 2013 2012 2011Cash flows from operating activities Net income $49,461 $183,942 $15,173 Adjustments to reconcile net income to net cash provided by operatingactivities Investment loss, net 47,745 10,723 19,166 Net discount accretion on mortgage-backed securities (9,302) (9,888) (10,867) Deferred tax provision 70,727 7,884 — Release of valuation allowance on deferred tax assets (91,189) (162,281) — Reversal of unrecognized tax benefit related to uncertain tax position andrelated accrued interest (16,212) — — Depreciation and amortization 5 47 48 Other 2,455 567 636 Changes in operating assets Interest receivable (304) (2,503) (1,254) Other receivables 432 (389) 211 Prepaid expenses and other assets 3,600 750 1,490 Changes in operating liabilities Accounts payable and accrued expenses (92) 1,457 1,091 Accrued compensation and benefits 4,042 (4,634) 1,568 Net cash provided by operating activities 61,368 25,675 27,262 Cash flows from investing activities Purchases of available-for-sale mortgage-backed securities (167,682) (54,709) (17,190) Purchases of trading mortgage-backed securities (1,221,387) (1,359,536) (695,486) Proceeds from sales of available-for-sale mortgage-backed securities 69,337 34,102 79,212 Proceeds from sales of trading mortgage-backed securities 914,155 352,437 201,352 Receipt of principal payments on available-for-salemortgage-backed securities 5,238 6,628 10,864 Receipt of principal payments on trading mortgage-backed securities 165,056 83,038 37,688 Proceeds from (payments for) derivatives and deposits, net 42,210 (29,814) (72,390) Payments for purchased securities payable — (15,820) (2,555) Proceeds from sold securities receivable 26,773 41,321 — Other 132 1,668 6,321 Net cash used in investing activities (166,168) (940,685) (452,184) Cash flows from financing activities Proceeds from repurchase agreements, net 50,439 849,214 457,756 Proceeds from stock issuance, net 86,964 129,249 — Proceeds from long-term debt issuance, net 24,038 — — Dividends paid (43,850) (46,848) (24,029) Repurchase of common stock — (786) (229) Repayments of short-term debt — — (970) Net cash provided by financing activities 117,591 930,829 432,528 Net increase in cash and cash equivalents 12,791 15,819 7,606 Cash and cash equivalents, beginning of year 35,837 20,018 12,412 Cash and cash equivalents, end of year $48,628 $35,837 $20,018 Supplemental Cash Flow Information Cash payments for interest $8,272 $4,888 $2,190 Cash payments for taxes $667 $833 $708 The accompanying notes are an integral part of these consolidated financial statements.F-8 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)Note 1. Organization and Nature of Operations:Arlington Asset Investment Corp. and its consolidated subsidiaries (the Company or AAIC), formerly known as Friedman, Billings,Ramsey Group, Inc. (FBR Group), is a Virginia corporation. The Company acquires and holds mortgage-related and other assets. TheCompany’s portfolio consists primarily of agency-backed mortgage-backed securities (agency-backed MBS) and private-label residentialmortgage-backed securities (private-label MBS).Note 2. Summary of Significant Accounting Policies:Principles of ConsolidationThe consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accountsand transactions have been eliminated in consolidation. Certain amounts in the consolidated financial statements and notes for prior periodshave been reclassified to conform to the current year’s presentation. These reclassifications had no impact on the previously reported netincome, other comprehensive income, total assets or total liabilities.Use of EstimatesThe preparation of the Company’s financial statements, in conformity with accounting principles generally accepted in the UnitedStates of America (GAAP), requires the Company to make estimates and assumptions affecting the reported amounts of assets andliabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although theCompany based the estimates and assumptions on historical experience, when available, market information, and on various other factorsthat the Company believes to be reasonable under the circumstances, management exercises significant judgment in the final determinationof the estimates. Actual results may differ from these estimates.Cash EquivalentsCash equivalents include demand deposits with banks, money market accounts and highly liquid investments with original maturitiesof three months or less that are not held for sale in the ordinary course of business. As of December 31, 2013 and 2012, approximately 89%and 97%, respectively, of the Company’s cash equivalents were invested in money market funds that invest primarily in U.S. Treasuriesand other securities backed by the U.S. government.Financial InstrumentsMBS transactions are recorded as purchases and sales on the date the securities are settled unless the transaction qualifies as a regular-way trade, in which case the transactions are accounted for as purchases or sales on a trade date basis. Any amounts payable or receivablefor unsettled trades are recorded as “sold securities receivable” or “purchased securities payable” in the consolidated balance sheets.Investments in MBS and marketable equity securities, if any, are classified as either available-for-sale or trading investments pursuantto accounting principles related to accounting for certain investments in debt and equity securities. These investments are carried at fairvalue with resulting unrealized gains and losses on available-for-sale securities reflected in accumulated other comprehensive income (loss)in the consolidated balance sheets and unrealized gains and losses on trading securities reflected in investment gain (loss), net, in theconsolidated statements of comprehensive income. Investments in equity securities of non-public companies are carried at cost.Although the Company generally intends to hold its MBS until maturity, it may, from time to time, sell any of its MBS as part of theoverall management of its business. The available-for-sale designation provides the Company with the flexibility to sell its MBS in order toact on potential market opportunities or changes in economic conditions to ensure future liquidity and to meet other general corporatepurposes as they arise.F-9 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)Note 2. Summary of Significant Accounting Policies: – (continued)ImpairmentsThe Company evaluates available-for-sale securities for other-than-temporary impairment at least on a quarterly basis, and morefrequently when economic or market concerns warrant such evaluation. In general, when the fair value of an available-for-sale security isless than its amortized cost at the reporting date, the security is considered impaired. In evaluating these available-for-sale securities for other-than-temporary impairment (OTTI), consideration is given to (1) the length of time and the extent to which the fair value has been lower thancarrying value, (2) the severity of the decline in fair value, (3) the financial condition and near-term prospects of the issuer, (4) theCompany’s intent to sell, and (5) whether it is more-likely-than-not the Company would be required to sell the security before anticipatedrecovery.If the Company intends to sell an impaired security, or it is more likely than not that it will be required to sell the impaired securitybefore its anticipated recovery, then the Company must recognize an OTTI through charges to earnings equal to the entire difference betweenthe investment security’s amortized cost and its fair value at the reporting date. If the Company does not expect to sell an other-than-temporarily impaired security, only the portion of the OTTI related to credit losses is recognized through charges to earnings with theremainder recognized through other accumulated comprehensive income/(loss) on the consolidated balance sheet. Impairments recognizedthrough other comprehensive income/(loss) do not impact earnings. Following the recognition of an OTTI through earnings, a new cost basisis established for the investment security and may not be adjusted for subsequent recoveries in fair value through earnings. However, OTTIrecognized through charges to earnings may be accreted back to the amortized cost basis of the investment security on a prospective basisthrough interest income. The determination as to whether an OTTI exists and, if so, the amount of credit impairment recognized in earningsis subjective, as such determination is based on factual information available at the time of assessment as well as the Company’s estimatesof the future performance and cash flow projections. As a result, the timing and amount of OTTIs constitute material estimates that aresusceptible to significant change.For available-for-sale, private-label MBS securities that have been acquired at discounts to face value due in part to credit deteriorationsince origination, the Company re-evaluates the undiscounted expected future cash flows and the changes in cash flows from thoseoriginally projected at the time of purchase or when last revised. The discount rate used to calculate the present value of expected future cashflows is the current yield used for income recognition purposes as compared to the discount rate used to calculate the fair value of theinvestment security is the current expected market rate. For those securities in an unrealized loss position, the difference between the carryingvalue and the net present value of expected future cash flows is recorded as other-than-temporary impairment charges through theCompany’s statement of comprehensive income.Fair Value of Financial InstrumentsThe accounting principles related to fair value measurements define fair value as the price that would be received to sell an asset or paidto transfer a liability in an orderly transaction between market participants at the measurement date, not adjusted for transaction costs.Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 820, Fair Value Measurements andDisclosures (ASC 820), establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value intothree broad levels giving the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowestpriority to unobservable inputs (Level 3) as described below:Level 1 Inputs — Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible by the Company;Level 2 Inputs — Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable,either directly or indirectly; andF-10 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)Note 2. Summary of Significant Accounting Policies: – (continued)Level 3 Inputs — Unobservable inputs for the asset or liability, including significant assumptions of the Company and other marketparticipants.The Company determines fair values for the following assets and liabilities:Mortgage-backed securities (MBS), at fair value — Agency-backed MBS — The Company’s agency-backed MBS, the principal and interest payments on which are guaranteed by theFederal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac), are generally classifiedwithin Level 2 of the fair value hierarchy as they are valued after considering quoted market prices provided by a broker or dealer, oralternative pricing sources with reasonable levels of price transparency. The Company reviews broker or pricing service quotes to determinewhether the quotes are relevant, for example, whether an active market exists to provide price transparency or whether the quote is anindicative price or a binding offer. The independent brokers and dealers providing market prices are those who make markets in orspecialists with expertise in the valuation of these financial instruments.Private-label MBS — The Company classifies private-label MBS within Level 3 of the fair value hierarchy because they tradeinfrequently and, therefore, have little or no price transparency. The Company utilizes present value techniques based on estimated cashflows of the instrument taking into consideration various assumptions derived by management and other assumptions used by other marketparticipants. These assumptions are corroborated by evidence such as historical data, risk characteristics, transactions in similarinstruments, and completed or pending transactions, when available. The significant inputs in the Company’s valuation process includedefault rate, loss severity, prepayment rate and discount rate. In general, significant increases (decreases) in default rate, loss severity ordiscount rate, in isolation, would result in a significantly lower (higher) fair value measurement. However, significant increases (decreases)in prepayment rate may result in a significantly higher (lower) fair value measurement. It is difficult to generalize the interrelationshipsbetween these significant inputs as the actual results could differ considerably on an individual security basis. For example, an increase inthe default rate may not increase the loss severity rate if actual losses are lower than the average. Also, changes in discount rates may begreatly influenced by market expectation at any given point based upon many variables not directly related to the MBS market. Therefore,each significant input is closely analyzed to ascertain the reasonableness for the Company’s valuation purposes.Establishing fair value is inherently subjective given the volatile and sometimes illiquid markets for these private-label MBS andrequires management to make a number of assumptions, including assumptions about the future of interest rates, prepayment rates,discount rates, credit loss rates, and the timing of cash flows and credit losses. The assumptions the Company applies are specific to eachsecurity. Although the Company relies on the internal calculations to compute the fair value of these private-label MBS, the Companyrequests and considers indications of value (mark) from third-party dealers and the actual sales of private-label MBS to assist in thevaluation process and calibrate our model.Other investments — The Company’s other investments, which is classified within Level 3 of the fair value hierarchy, consists ofinvestments in equity securities, investment funds, interest-only MBS, and other MBS-related securities.Derivative instruments — In the normal course of the Company’s operations, the Company is a party to various financial instrumentsthat are accounted for as derivatives in accordance with ASC 815, Derivatives and Hedging (ASC 815). The derivative instruments thattrade in active markets or exchanges are classified within Level 1 of the fair value hierarchy because they are valued using quoted marketprices. Other derivative instruments are generally classified within Level 2 of the fair value hierarchy because they are valued using brokeror dealer quotations, which are model-based calculations based on market-based inputs,F-11 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)Note 2. Summary of Significant Accounting Policies: – (continued)including, but not limited to, contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates andcorrelations of such inputs.Other — Cash and cash equivalents, interest receivable, deposits, other receivable, interest payable, accounts payable, accruedexpenses and other liabilities are reflected in the consolidated balance sheets at their amortized cost, which approximates fair value because ofthe short term nature of these instruments, and classified within Level 1 of the fair value hierarchy except for certain cash equivalents thatare held in money market funds, which are classified within Level 2 of the fair value hierarchy. — Sold securities receivable, repurchase agreements and purchased securities payable are reflected in the consolidated balance sheetsat the cost basis, which approximates fair value because of the short term nature of these instruments, and classified within Level 2 of thefair value hierarchy. — Long-term debt represents remaining balances of trust preferred debt and senior debt issued by the Company. Trust preferred debtis classified within Level 3 of the fair value hierarchy as the fair value is determined after considering quoted market prices provided by abroker or dealer. The independent broker or dealer providing market prices are those who make markets in or specialists with expertise inthe valuation of these financial instruments. The Company’s senior debt, which is publicly traded on the New York Stock Exchange, isclassified within Level 1 of the fair value hierarchy.The estimated fair values of the Company’s financial instruments are as follows: December 31, 2013 December 31, 2012 CarryingAmount Estimated FairValue CarryingAmount EstimatedFair ValueFinancial assets Cash and cash equivalents $48,628 $48,628 $35,837 $35,837 Interest receivable 5,173 5,173 4,869 4,869 Sold securities receivable — — 26,773 26,773 Other receivables 212 212 644 644 MBS Agency-backed MBS 1,576,499 1,576,499 1,556,510 1,556,510 Private-label MBS Senior securities 7,066 7,066 7,519 7,519 Re-REMIC securities 334,233 334,233 191,567 191,567 Derivative assets 8,424 8,424 — — Other investments 2,065 2,065 2,347 2,347 Deposits 45,504 45,504 85,652 85,652 Financial liabilities Repurchase agreements 1,547,630 1,547,630 1,497,191 1,497,191 Interest payable 774 774 582 582 Long-term debt 40,000 36,620 15,000 15,000 Derivative liabilities 33,129 33,129 76,850 76,850 Accounts payable, accrued expenses and otherliabilities 1,391 1,391 17,837 17,837 F-12 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)Note 2. Summary of Significant Accounting Policies: – (continued)Repurchase AgreementsSecurities sold under agreements to repurchase, which are treated as financing transactions for financial reporting purposes, arecollateralized by MBS and are carried at their contractual amounts, including accrued interest, as specified in the respective agreements.Under the repurchase agreements, the Company pledges its securities as collateral to secure the borrowing, which is equal in value to aspecified percentage of the fair value of the pledged collateral, while the Company retains beneficial ownership of the pledged collateral. Atthe maturity of a repurchase financing, the Company is required to repay the borrowing and receives back its pledged collateral from thecounterparty. The counterparty to the repurchase agreements may require that the Company pledge additional securities or cash as additionalcollateral to secure borrowings when the value of the collateral declines.Interest Income and Purchase Premiums and Discounts on MBS SecuritiesInterest income includes contractual coupon payments and the amortization of purchase premiums and accretion of discounts, if any,on the available-for-sale MBS portfolio. Interest income also includes contractual coupon payments on the trading MBS portfolio. Purchasepremiums or discounts, if any, on the trading MBS portfolio are accounted for under mark-to-market accounting and the changes in valueare recorded in investment gain (loss), net, on the statement of comprehensive income.Interest income on the private-label MBS that were purchased at a discount to face value is recognized based on the security’s expectedeffective interest rate. At acquisition, the accretable yield is calculated as the difference between the undiscounted expected cash flows and thepurchase price which is expected to be accreted into interest income over the remaining life of the security on a level-yield basis. Thedifference between the contractually required payments and the undiscounted expected cash flows represents the non-accretable difference.Based on actual payment activities and changes in estimates of undiscounted expected future cash flows, the accretable yield and the non-accretable difference can change over time. Significant increases in the amount or timing of undiscounted expected future cash flows arerecognized prospectively as an adjustment to the accretable yield.Stock-Based CompensationThe Company accounts for stock-based compensation in accordance with accounting principles related to share-based payment whichrequires fair value method of accounting. Under the fair value based method, compensation cost is measured at the grant date based on thevalue of the award and is recognized over the service period, which is usually the vesting period. Expected forfeitures are included indetermining share-based employee compensation cost. Share-based awards that do not require future services are expensed immediately.Performance-Based Long-Term Incentive ProgramOn August 13, 2012, the Compensation Committee of the Board of Directors of the Company adopted a performance-based long-termincentive program (Performance-based Program) that provides for the issuance of two types of performance share units (PSUs) from time totime pursuant to the Company’s 2011 Plan.The Compensation Committee established performance goals under the Performance-based Program. The awards under the Performance-based Program comprise of two types of PSUs: Combined Net Worth Units (Book Value PSUs) and Total Shareholder Return Units (TSRPSUs). The Book Value PSUs are eligible to vest based on the compound annualized growth in the Company’s book value per share (i.e.,book value change plus dividends on a reinvested basis) during the applicable performance period. The TSR PSUs are eligible to vest basedon the Company’s compound annualized total shareholder return (i.e., share price change plus dividends on a reinvested basis) during theapplicable performance period.F-13 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)Note 2. Summary of Significant Accounting Policies: – (continued)The Company accounts for the Performance-based Program in accordance with ASC 718. Therefore, the Book Value PSUs are valuedat the grant date market value and the estimated compensation cost is recorded over the vesting period. The Company estimates the numberof shares to be issued under the Book Value PSUs on a quarterly basis based on the actual and projected results for the remaining vestingperiod and any adjustments required are recognized retrospectively and over the remaining vesting period.The Total Shareholder Return PSUs are also valued at the time of grant based on valuation model and the estimated compensation costis recorded over the vesting period using straight-line basis. The valuation of the Total Shareholder Return PSUs is performed using Monte-Carlo simulation model (Model) using various assumptions including beginning average price, expected volatility, dividend equivalents,dividend yield, and risk-free rate of return. The Model projects stock prices on a daily basis assuming 250 trading days per year. TheModel generates many future stock price paths to construct a distribution of where future stock prices might be. No remeasurement ofcompensation expense is required for the Total Shareholder Return PSUs.The compensation costs are reversed if an employee is terminated prior to completing the required service period. The estimated shares tobe granted under the Performance-based Program are included in the calculation of diluted Earnings Per Share.Income TaxesIncome taxes are provided for using the asset and liability method. Deferred tax assets and liabilities represent the differences between thefinancial statement and income tax bases of assets and liabilities using enacted tax rates. The measurement of net deferred tax assets isadjusted by a valuation allowance if, based on the Company’s evaluation, it is more-likely-than-not that they will not be realized. TheCompany recognizes tax positions in the financial statements only when it is more-likely-than-not that the position will be sustained uponexamination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured atthe largest amount of benefit that will more-likely-than-not be realized upon settlement. A liability is established for differences betweenpositions taken in a tax return and the financial statements.The Company is subject to federal alternative minimum tax (AMT) and state and local taxes on its taxable income and gains that are notoffset by the net operating loss (NOL) and net capital loss (NCL) carry-forwards.Other Comprehensive IncomeComprehensive income includes net income as currently reported by the Company on the consolidated statements of comprehensiveincome adjusted for other comprehensive income. Other comprehensive income for the Company represents changes in unrealized gains andlosses related to the Company’s MBS and other mortgage related assets accounted for as available-for-sale with changes in fair valuerecorded through shareholders’ equity.Earnings Per ShareBasic earnings per share includes no dilution and is computed by dividing net income or loss available to common shareholders by theweighted-average number of common shares outstanding for the respective period. Diluted earnings per share includes the impact of dilutivesecurities such as stock options, unvested shares of restricted stock and performance share units. The following table presents thecomputations of basic and diluted earnings per share for the years ended December 31, 2013, 2012 and 2011:F-14 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)Note 2. Summary of Significant Accounting Policies: – (continued) Year Ended December 31, 2013 2012 2011 Basic Diluted Basic Diluted Basic DilutedWeighted average shares outstandingCommon stock (in thousands) 15,990 15,990 10,205 10,205 7,720 7,720 Stock options, performance share units, andunvested restricted stock(in thousands) — 199 — 37 — 21 Weighted average common and commonequivalent shares outstanding (inthousands) 15,990 16,189 10,205 10,242 7,720 7,741 Net income applicable to common stock $49,461 $49,461 $183,942 $183,942 $15,173 $15,173 Net income per common share $3.09 $3.06 $18.02 $17.96 $1.97 $1.96 As of December 31, 2011 there were 650 options to purchase shares of common stock outstanding. There were no outstanding optionsto purchases shares of common stock at December 31, 2013 and 2012. The diluted earnings per share for the years ended December 31,2013, 2012 and 2011 did not include the antidilutive effect of 26,218, 27,808 and 23,443 shares, respectively, of awarded restricted stockunits, stock options, and restricted stock.Recent Accounting PronouncementsOn July 18, 2013, the FASB issued Accounting Standards Update 2013-11, Income Taxes (Topic 740), Presentation of anUnrecognized Tax Benefit When a Net Operating Loss Carry-forward, a Similar Tax Loss, or a Tax Credit Carry-forward Exists. Thisstandard requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carry-forward that would apply insettlement of the uncertain tax positions. Under the new standard, unrecognized tax benefits will be netted against all available same-jurisdiction loss or other tax carry-forward that would be utilized, rather than only against carry-forwards that are created by theunrecognized tax benefits. This standard will be effective for the Company beginning on January 1, 2014. The Company does not expect asignificant impact on its financial positions as a result of adoption of these new requirements.F-15 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)Note 3. Financial Instruments:Fair Value HierarchyThe following tables set forth financial instruments accounted for under ASC 820 by level within the fair value hierarchy as ofDecember 31, 2013 and December 31, 2012. As required by ASC 820, assets and liabilities that are measured at fair value are classified intheir entirety based on the lowest level of input that is significant to the fair value measurement.Financial Instruments Measured at Fair Value on a Recurring Basis December 31, 2013 Total Level 1 Level 2 Level 3MBS, at fair value Trading Agency-backed MBS $1,576,452 $— $1,576,452 $— Available-for-sale Agency-backed MBS 47 — 47 — Private-label MBS Senior securities 7,066 — — 7,066 Re-REMIC securities 334,233 — — 334,233 Total available-for-sale 341,346 — 47 341,299 Total MBS 1,917,798 — 1,576,499 341,299 Derivative assets, at fair value 8,424 8,088 336 — Derivative liabilities, at fair value (33,129) (32,156) (973) — Interest-only MBS, at fair value 298 — — 298 Total $1,893,391 $(24,068) $1,575,862 $341,597 December 31, 2012 Total Level 1 Level 2 Level 3MBS, at fair value Trading Agency-backed MBS $1,556,440 $— $1,556,440 $— Available-for-sale Agency-backed MBS 70 — 70 — Private-label MBS Senior securities 7,519 — — 7,519 Re-REMIC securities 191,567 — — 191,567 Total available-for-sale 199,156 — 70 199,086 Total MBS 1,755,596 — 1,556,510 199,086 Derivative liabilities, at fair value (76,850) (76,850) — — Interest-only MBS, at fair value 478 — — 478 Total $1,679,224 $(76,850) $1,556,510 $199,564 The total financial assets measured and reported at fair value on a recurring basis and classified within Level 3 were $341,597, or15.56% and $199,564, or 9.66%, of the Company’s total assets as of December 31, 2013 and 2012, respectively.There were no transfers of securities in or out of Levels 1, 2 or 3 during the years ended December 31, 2013 and 2012.F-16 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)Note 3. Financial Instruments: – (continued)Level 3 Financial Instruments Measured at Fair Value on a Recurring BasisThe fair value of the Company’s Level 3, available-for-sale, private-label MBS was $341,299 and $199,086 as of December 31, 2013and 2012, respectively. These securities are primarily senior and re-REMIC tranches in securitization trusts issued between 2005 and 2010.The senior securities represent interests in securitizations that have the first right to cash flows and absorb losses last. The re-REMICsecurities represent interests in re-securitizations of senior MBS and pro-rata mezzanine securities. For re-REMIC securities, the cash flowsfrom, and any credit losses absorbed by, the underlying MBS are allocated among the re-REMIC securities issued in the re-securitizationtransactions based on the re-REMIC structure. For example, prime and non-prime residential senior securities have been resecuritized tocreate a two-tranche structure with a re-REMIC senior security and a re-REMIC subordinated security. In these re-REMIC securities, allprincipal payments from the underlying securities are directed to the re-REMIC senior security until the face value is fully paid off.Thereafter, all principal payments are directed to the re-REMIC subordinated security. For pro-rata mezzanine securities, principal paymentsfrom the underlying MBS are typically allocated concurrently and proportionally to the mezzanine securities along with senior securities.The re-REMIC subordinated and mezzanine securities absorb credit losses, if any, first; however, these credit losses occur only when creditlosses exceed the credit protection provided to the underlying securities. Senior, re-REMIC and mezzanine securities receive interest while anyface value is outstanding.The Company’s senior securities and re-REMIC securities were collateralized by residential Prime and Alt-A mortgage loans and had thefollowing weighted-averages, based on face value, as of the dates indicated: December 31, 2013 2012Original loan-to-value 69% 70% Original FICO score 725 730 Three-month prepayment rate 14% 17% Three-month loss severities 37% 46% Weighted average coupon 3.34% 4.40% The significant unobservable inputs for the valuation model include the following weighted-averages, based on face value, as of thedates indicated: December 31, 2013 December 31, 2012 SeniorSecurities Re-REMICSecurities SeniorSecurities Re-REMICSecuritiesDiscount rate 6.00% 6.55% 6.50% 7.43% Default rate 9.30% 3.62% 9.30% 5.00% Loss severity rate 50.00% 44.82% 60.00% 46.60% Prepayment rate 16.30% 11.69% 16.30% 13.75% The ranges of the significant unobservable inputs for the valuation model were as follows as of the dates indicated: December 31, 2013 December 31, 2012 SeniorSecurities Re-REMICSecurities SeniorSecurities Re-REMIC SecuritiesDiscount rate 6.00% 6.00 – 10.00% 6.50% 6.50 – 13.25% Default rate 9.30% 0.95 – 9.60% 9.30% 0.95 – 11.10% Loss severity rate 50.00% 29.15 – 57.50% 60.00% 28.26 – 57.50% Prepayment rate 16.30% 6.40 – 19.00% 16.30% 6.95 – 20.40% F-17 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)Note 3. Financial Instruments: – (continued)The tables below set forth a summary of changes in the fair value and gains and losses of the Company’s Level 3 financial assets andliabilities that are measured at fair value on a recurring basis for the years ended December 31, 2013 and 2012. Year Ended December 31, 2013 SeniorSecurities Re-REMICSecurities TotalBeginning balance, January 1, 2013 $7,519 $191,567 $199,086 Total net gains (losses) Included in earnings — 16,526 16,526 Included in other comprehensive income (254) 23,469 23,215 Purchases — 167,682 167,682 Sales — (69,337) (69,337) Payments, net (1,092) (21,362) (22,454) Accretion of discount 893 25,688 26,581 Ending balance, December 31, 2013 $7,066 $334,233 $341,299 The amount of net gains (losses) for the period included in earningsattributable to the change in unrealized gains (losses) relating to Level 3assets still held at the reporting date $— $(1,270) $(1,270) Year Ended December 31, 2012 SeniorSecurities Re-REMICSecurities TotalBeginning balance, January 1, 2012 $9,311 $170,116 $179,427 Total net gains (losses) Included in earnings (2,463) (2,898) (5,361) Included in other comprehensive income 994 45 1,039 Purchases — 54,709 54,709 Sales — (34,102) (34,102) Payments, net (1,642) (19,310) (20,952) Accretion of discount 1,319 23,007 24,326 Ending balance, December 31, 2012 $7,519 $191,567 $199,086 The amount of net gains (losses) for the period included in earningsattributable to the change in unrealized gains (losses) relating to Level 3assets still held at the reporting date $(2,463) $(12,711) $(15,174) Gains and losses included in earnings for the years ended December 31, 2013 and 2012 are reported in the following statement ofcomprehensive income line descriptions: Other Loss, Investment Loss, net 2013 2012Total gains (losses) included in earnings for the period $16,526 $(5,361) Change in unrealized gains (losses) relating to Level 3 assets still held at thereporting date $(1,270) $(15,174) F-18 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)Note 3. Financial Instruments: – (continued)Level 3 Financial Instruments Measured at Fair Value on a Non-Recurring BasisThe Company also measures certain financial assets at fair value on a non-recurring basis. Adjustments to the fair value of these assetsusually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets due to impairments. Due to thenature of these financial assets, enterprise values are primarily used to value these financial assets. In determining the enterprise value, theCompany analyzes various financial, performance and market factors to estimate fair value, including where applicable, market tradingactivity. As a result, these financial assets are classified within Level 3 of the fair value hierarchy. As of December 31, 2013 and 2012, thesefinancial assets are classified within the other investments category, represent the Company’s interest in non-public equity securities andinvestment funds and are valued at $1,767 and $1,869, respectively. For the years ended December 31, 2013 and 2012, the Companyrecorded a loss of $177 and $64, respectively, in the carrying value of these financial assets.MBS, at Fair ValueMBS, at fair value(1)(2), consisted of the following as of the dates indicated: December 31, 2013 December 31, 2012 FairValue NetUnamortizedPremium(Discount) Percentof TotalFairValue WeightedAverageLife WeightedAverageRating(3) FairValue NetUnamortizedPremium(Discount) Percentof TotalFairValue WeightedAverageLife WeightedAverageRating(3)Trading Fannie Mae $997,488 $— 52.01% 9.4 AAA $1,083,810 $— 61.73% 4.9 AAA Freddie Mac 578,964 — 30.19% 9.6 AAA 472,630 — 26.92% 5.1 AAA Available-for-sale: Agency-backed Fannie Mae 47 — — 5.8 AAA 70 — 0.01% 2.8 AAA Private-label Seniorsecurities 7,066 (4,789) 0.37% 4.8 C- 7,519 (6,519) 0.43% 5.2 C Re-REMICsecurities 334,233 (202,450) 17.43% 11.4 NR 191,567 (164,422) 10.91% 11.4 NR $1,917,798 $(207,239) 100.00% $1,755,596 $(170,941) 100.00% (1)The Company’s MBS portfolio was primarily comprised of fixed-rate MBS at December 31, 2013 and 2012. The weighted-averagecoupon of the MBS portfolio at December 31, 2013 and 2012 was 3.90% and 4.11%, respectively.(2)As of December 31, 2013 and 2012, the Company’s MBS investments with a fair value of $1,673,911 and $1,615,421, respectively,were pledged as collateral for repurchase agreements.(3)The securities issued by Fannie Mae and Freddie Mac are not rated by any rating agency; however, they are commonly thought of ashaving an implied rating of “AAA.” There is no assurance, particularly given the downgrade of the U.S. credit rating to “AA+” byStandard & Poors during the quarter ended September 30, 2011 and Fitch Ratings Inc.’s announcement on October 15, 2013 that it hadplaced the U.S. credit rating on negative watch, that these securities would receive such a rating if they were ever rated by a ratingagency. The weighted-average rating of the Company’s private-label senior securities is calculated based on face value of the securities.The Company has generally purchased private-label MBS at a discount. The Company, at least on a quarterly basis, estimates thefuture expected cash flows based on the Company’s observation of current information and events and applies a number of assumptionsrelated to prepayment rates, interest rates, default rates, loss severity rates, and the timing and amount of cash flows and credit losses.These assumptions areF-19 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)Note 3. Financial Instruments: – (continued)difficult to predict as they are subject to uncertainties and contingencies related to future events that may impact the Company’s estimatesand its interest income.Interest income on the private-label MBS that were purchased at a discount to face value is recognized based on the security’s expectedeffective interest rate. At acquisition, the accretable yield is calculated as the difference between the undiscounted expected cash flows and thepurchase price which is expected to be accreted into interest income over the remaining life of the security on a level-yield basis. Thedifference between the contractually required payments and the undiscounted expected cash flows represents the non-accretable difference.Based on actual payment activities and changes in estimates of undiscounted expected future cash flows, the accretable yield and the non-accretable difference can change over time. Significant increases in the amount or timing of undiscounted expected future cash flows arerecognized prospectively as an adjustment to the accretable yield.The following table presents the changes in the accretable yield on available-for-sale, private-label MBS for the years ended December31, 2013 and 2012: Year Ended December 31, 2013 2012Beginning balance $207,853 $194,619 Accretion of discount (26,581) (24,326) Reclassifications, net 46,319 (3,928) Acquisitions 150,646 81,074 Sales (67,729) (39,586) Ending balance $310,508 $207,853 For the available-for-sale, private-label MBS acquired during the year ended December 31, 2013 and 2012, the contractually requiredpayments receivable, the cash flow expected to be collected, and the fair value at the acquisition date were as follows for the periodsindicated: Year Ended December 31, 2013 2012Contractually required payments receivable $420,500 $187,237 Cash flows expected to be collected 318,328 135,547 Basis in acquired securities 167,682 54,474 The Company’s available-for-sale MBS are carried at fair value in accordance with ASC 320, Debt and Equity Securities (ASC 320),the securities with resulting unrealized gains and losses reflected as other comprehensive income or loss. Gross unrealized gains and losseson these securities were the following as of the dates indicated: December 31, 2013 AmortizedCost/Cost Basis(1) Unrealized Fair Value Gains LossesAgency-backed MBS $43 $4 $— $47 Private-label MBS Senior securities 5,412 1,654 — 7,066 Re-REMIC securities 273,264 60,970 (1) 334,233 Total $278,719 $62,628 $(1) $341,346 (1)The amortized cost of MBS includes unamortized net discounts of $207,239 at December 31, 2013.F-20 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)Note 3. Financial Instruments: – (continued) December 31, 2012 Amortized Cost/Cost Basis(1) Unrealized Fair Value Gains LossesAgency-backed MBS $64 $6 $— $70 Private-label MBS Senior securities 5,611 1,908 — 7,519 Re-REMIC securities 154,067 37,500 — 191,567 Total $159,742 $39,414 $— $199,156 (1)The amortized cost of MBS includes unamortized net discounts of $170,941 at December 31, 2012.For the years ended December 31, 2013 and 2012, the Company recorded other-than-temporary impairment charges of $1,270 and$15,174, respectively, as a component of investment loss, net, on the consolidated statements of comprehensive income related todeterioration in credit quality on available-for-sale, private-label MBS with a cost basis of $11,688 and $49,367, respectively, prior torecognizing the other-than-temporary impairment charges.The following table presents a summary of other-than-temporary impairment charges included in earnings for the periods indicated andcumulative other-than-temporary impairment charges recognized on the MBS held as of the dates indicated: Year Ended December 31, 2013 2012Cumulative other-than-temporary impairment, beginning balance $23,768 $8,594 Additions Other-than-temporary impairments not previously recognized 380 13,986 Increases related to other-than-temporary impairments on securities withpreviously recognized other-than-temporary impairments 890 1,188 Reductions Decreases related to other-than-temporary impairments on sold securitieswith previously recognized other-than-temporary impairments (1,375) — Cumulative other-than-temporary impairment ending balance $23,663 $23,768 The following table presents the results of sales of MBS for the periods indicated: Year Ended December 31, 2013 2012 Agency-BackedMBS Private-LabelMBS Agency-BackedMBS Private-LabelMBSProceeds from sales $914,155 $69,337 $379,271 $34,102 Gross gains 1,619 17,458 5,223 9,813 Gross losses 27,406 — 395 — F-21 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)Note 3. Financial Instruments: – (continued)Other InvestmentsThe Company’s other investments consisted of the following as of the dates indicated: December 31, 2013 2012Interest-only MBS $298 $478 Non-public equity securities 975 975 Investments funds 792 894 Total other investments $2,065 $2,347 For the years ended December 31, 2013 and 2012, the Company recorded other-than-temporary impairment charges of $84 and $534,respectively, as a component of investment loss, net, on the consolidated statements of comprehensive income on an investment in interest-only MBS.Note 4. Borrowings:Repurchase AgreementsThe Company has entered into repurchase agreements to fund its investments in MBS. Securities sold under agreements to repurchase,which are treated as financing transactions for financial reporting purposes, are collateralized by MBS and are carried at their contractualamounts, including accrued interest, as specified in the respective agreements. Under the repurchase agreements, the Company pledges itssecurities as collateral to secure the borrowing, which is equal in value to a specified percentage of the fair value of the pledged collateral,while the Company retains beneficial ownership of the pledged collateral. The counterparty to the repurchase agreements may require that theCompany pledge additional securities or cash as additional collateral to secure borrowings when the value of the collateral declines.As of December 31, 2013, the Company had no amount at risk with a single repurchase agreement counterparty or lender greater than10% of equity. As of December 31, 2012, the amount at risk related to $482,097 of repurchase agreements with Credit Suisse Securities(USA) LLC was $50,171 or 10.97% of the Company’s equity with a weighted average maturity of 15 days. The following table providesinformation regarding the Company’s outstanding repurchase agreement borrowings as of the dates and periods indicated: December 31, 2013 2012Outstanding balance $1,547,630 $1,497,191 Value of assets pledged as collateral Agency-backed MBS 1,556,763 1,547,760 Private-label MBS 117,148 67,661 Net amount(1) 126,281 118,230 Weighted-average rate 0.45% 0.52% Weighted-average term to maturity 13.2 days 14.5 days Weighted-average outstanding balance during the year ended $1,515,137 $953,152 Weighted-average rate during the year ended 0.45% 0.46% (1)Net amount represents the value of collateral in excess of corresponding repurchase obligation. The amount of collateral at-risk is limitedto the outstanding repurchase obligation and not the entire collateral balance.F-22 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)Note 4. Borrowings: – (continued)Long-Term DebtAs of December 31, 2013 and 2012, the Company had $40,000 and $15,000, respectively, of outstanding long-term debentures. OnMay 1, 2013, the Company completed a public offering of $25,000 of its 6.625% Senior Notes due in 2023 and received net proceeds of$24,038 after payment of underwriting discounts and commissions and expenses. These Senior Notes will mature on May 1, 2023, andmay be redeemed in whole or in part at any time and from time to time at the Company’s option on or after May 1, 2016, at a redemptionprice equal to the principal amount redeemed plus accrued and unpaid interest. The interest payments on these Senior Notes are payablequarterly on February 1, May 1, August 1, and November 1 of each year, beginning on August 1, 2013. These Senior Notes are publiclytraded on the New York Stock Exchange under the ticker symbol “AIW”. The Company’s long-term debentures consisted of the followingas of the dates indicated: December 31, 2013 December 31, 2012 Senior Notes Trust Preferred Debt Senior Notes Trust Preferred DebtOutstanding Principal $25,000 $15,000 $— $15,000 Annual Interest Rate 6.625% LIBOR+2.25-3.00% — LIBOR+2.25-3.00% Interest Payment Frequency Quarterly Quarterly — Quarterly Weighted-Average Interest Rate 6.625% 2.99% — 3.09% Maturity May 1,2023 2033 – 2035 — 2033 – 2035 Early Redemption Date May 1,2016 2008 – 2010 — 2008 – 2010 Note 5. Derivative Financial Instruments and Hedging Activities:In the normal course of its operations, the Company is a party to financial instruments that are accounted for as derivative financialinstruments in accordance with ASC 815. These instruments may include interest rate swaps, Eurodollar futures, swap futures, and U.S.Treasury futures contracts, put options and certain commitments to purchase and sell MBS. The exchange traded derivatives such asEurodollar futures and swap futures are cash settled on a daily basis. The Company may be required to pledge collateral for marginrequirements with third-party custodians in connection with certain derivative transactions. These transactions are not under master nettingagreements.During the years ended December 31, 2013 and 2012, the Company entered into various financial contracts to hedge certain MBS andrelated borrowings and other long-term debt. These financial contracts are not designated as hedges under ASC 815. The changes in fairvalue on these derivatives are recorded to net investment (loss) gain, net, in the statement of comprehensive income. For the years endedDecember 31, 2013 and 2012, the Company recorded net gains (losses) of $58,003 and $(28,755), respectively, on these derivatives. TheCompany held the following derivative instruments as of the dates indicated: December 31, 2013 December 31, 2012 Notional Amount FairValue Notional Amount FairValueNo hedge designation Eurodollar futures Derivative assets $8,758,000 $4,361 $— $— Derivative liabilities 6,787,000 (30,638) 17,525,000 (76,850) Total Eurodollar futures(1) 15,545,000 (26,277) 17,525,000 (76,850) 10-year swap futures Derivative assets 635,500 3,727 — — Derivative liabilities 31,000 (18) — — Total 10-year swap futures(2) 666,500 3,709 — — 5-year U.S. Treasury note futures(3) 100,000 (1,500) — — Commitment to purchase MBS(4) 169,511 (973) — — Commitment to sell MBS(5) 125,000 336 F-23 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)Note 5. Derivative Financial Instruments and Hedging Activities: – (continued)(1)The $15,545,000 total notional amount of Eurodollar futures contracts as of December 31, 2013 represents the accumulation ofEurodollar futures contracts that mature on a quarterly basis between 2014 and 2018. As of December 31, 2013, the Companymaintained $34,749 as a deposit and margin against the open Eurodollar futures contracts.(2)The total notional amount of $666,500 represents the accumulation of 10-year swap futures that mature in March 2014. As ofDecember 31, 2013, the Company maintained $8,774 as a deposit and margin against the open swap futures contracts.(3)The total notional amount of $100,000 represents the accumulation of 5-year U.S. Treasury note futures that mature in March 2014. Asof December 31, 2013, the Company maintained $1,981 as a deposit and margin against the open 5-year U.S. Treasury note futurescontracts.(4)The total notional amount of commitment to purchase MBS represents forward commitments to purchase fixed-rate MBS securities.(5)The total notional amount of commitment to sell MBS represents forward commitments to sell fixed-rate MBS securities.Note 6. Income Taxes:The Company is taxed as a C corporation for U.S. federal tax purposes.The (benefit) provision for income taxes from operations consists of the following for the years ended December 31, 2013, 2012 and2011: 2013 2012 2011Federal $(20,075) $(115,321) $698 State (15,247) (37,616) 797 $(35,322) $(152,937) $1,495 Current $(14,860) $1,889 $1,495 Deferred (20,462) (154,826) — $(35,322) $(152,937) $1,495 Deferred tax assets and (liabilities) consisted of the following as of December 31, 2013 and 2012: 2013 2012Unrealized investment gains and losses $99,689 $54,761 Accrued compensation 459 (266) Accrued other estimated liabilities 4,012 3,868 AMT credit 6,328 5,383 Net operating loss carry-forward 75,059 94,423 Unrealized gain on AFS securities (25,677) (16,160) Investment gain on non-hedge designated derivatives 9,149 5,274 Federal liability on state deferred tax assets (8,611) (7,863) Other, net 523 5,158 Capital loss carry-forward 20,809 116,918 Valuation allowance on capital loss carry-forward (15,889) (107,078) Net deferred tax asset $165,851 $154,418 F-24 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)Note 6. Income Taxes: – (continued)The (benefit) provision for income taxes results in effective tax rates that differ from the federal statutory rates. The reconciliation of theCompany and its subsidiaries income tax attributable to net income computed at federal statutory rates to income tax expense was: December 31, 2013 2012 2011Federal income tax at statutory rate $4,949 $10,852 $5,853 State income taxes 849 1,813 1,357 Executive compensation — — 1,075 Effect of stock based compensation — — 1,330 Expiration of capital loss carryover 57,254 37,935 66,439 Reversal of unrecognized tax benefit related to uncertain taxposition and related accrued interest, and related AMTcredits (11,028) — — Federal liability on state deferred tax assets 1,237 7,884 — Other, net 2,606 945 294 Valuation allowance (91,189) (212,366) (74,853) Total income tax (benefit) provision $(35,322) $(152,937) $1,495 During the year ended December 31, 2012, the Company recorded $152,937 of income tax benefit as a result of releasing $162,519 ofvaluation allowance previously provided for certain deferred tax assets. The amount of the valuation allowance released by the Companyrepresents a portion of deferred tax assets that was deemed more-likely-than-not that the Company will realize the benefits based on theanalysis where the positive evidences outweighed the negative evidences. The Company’s framework for assessing the recoverability ofdeferred tax assets required consideration of all available evidence, including:•the sustainability of recent operating profitability;•the predictability of future operating profitability of the character necessary to realize the deferred tax assets; and•the carry-forward periods for the net operating loss and capital loss carry-forwards.The determination to release valuation allowance as of December 31, 2012 was based upon the Company meeting the criteria in theframework.Effective December 31, 2013, the Company contributed 40 of its private-label MBS with $367,642 in face value in a taxablecontribution (Contribution) to Rosslyn REIT Trust. Rosslyn REIT Trust (formerly known as FBR REIT Asset Trust) was formed onDecember 27, 2007 as a Maryland real estate investment trust and will elect to be taxed as a REIT for U.S. federal income tax purposeseffective January 1, 2014. The Company owns all the common shares of Rosslyn REIT Trust and all of the preferred shares are owned byoutside investors. The Contribution resulted in taxable capital gains of $68,041. The Company utilized net capital loss carry-forwards tooffset the capital gain recognized on the Contribution for tax purposes.With the completion of IRS examination of the Company’s tax years 2009 and 2010 without any adjustment and the expiration of thestatute of limitation on 2009 state tax return, the Company reversed $12,810 of unrecognized tax benefits related to an uncertain tax positionand $3,402 of related accrued interest during the year ended December 31, 2013. The Company also reversed deferred taxes associated withaccrued interest and AMT credits of $5,184 related to the unrecognized tax benefits previously recorded.F-25 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)Note 6. Income Taxes: – (continued)As of December 31, 2013, the Company had an NCL carry-forward of $50,754 that can be used to offset future capital gains. Thesecapital losses expire in 2014, and are available to offset tax capital gains through 2014. In addition, as of December 31, 2013, the Companyhad an NOL carry-forward of $183,070, which can be used to offset future taxable income. The NOL carry-forward will begin to expire in2027. The valuation allowance relates to the estimated amount of NCLs that will expire unused in 2014.A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: 2013 2012Balance at January 1 $12,810 $12,810 Additions based on tax positions related to the current year — — Additions for tax positions of prior years — — Reductions for tax positions of prior years (12,810) — Settlements — — Balance at December 31 $— $12,810 As of December 31, 2013, the Company has assessed the need for a reserve against its uncertain tax positions and has made thedetermination that such reserve is not necessary.The Company is subject to examination by the U.S. Internal Revenue Service (IRS), and state and local authorities in jurisdictionswhere the Company has significant business operations. An IRS examination of the Company’s tax years 2009 and 2010 was completedwithout any adjustment.Note 7. Commitments and Contingencies:Contractual ObligationsThe Company has contractual obligations to make future payments in connection with borrowings and non-cancelable lease agreementsand other contractual commitments. The following table sets forth these contractual obligations by fiscal year: 2014 2015 2016 2017 2018 Thereafter TotalBorrowings(1) $— $— $— $— $— $40,000 $40,000 Minimum rental and other contractualcommitments(2) 256 15 446 458 471 980 2,626 $256 $15 $446 $458 $471 $40,980 $42,626 (1)This table excludes interest payments to be made on the Company’s long-term debt securities. Based on the weighted average interest rateof 3.00%, approximately $114 in accrued interest on the current outstanding principal will be paid for the quarter ending March 31,2014 on the $15,000 of trust preferred debt. Interest on the trust preferred debt is based on the 3-month LIBOR; therefore, actual couponinterest will likely differ from this estimate. The trust preferred debt will mature beginning in October 2033 through July 2035. As ofDecember 31, 2013, approximately $414 in accrued interest on the current outstanding principal will be paid for the quarter endingMarch 31, 2014 on the $25,000 of Senior Notes. The Senior Notes have an annual interest rate of 6.625% and will mature on May 1,2023.(2)Equipment and office rent expense for 2013, 2012 and 2011 was $243, $263 and $173, respectively.The Company also has short-term repurchase agreement liabilities of $1,547,630 as of December 31, 2013. See Note 4 for furtherinformation.F-26 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)Note 8. Shareholders’ Equity:The Company has authorized share capital of 450,000,000 shares of Class A common stock, par value $0.01 per share; 100,000,000shares of Class B common stock, par value $0.01 per share; and 25,000,000 shares of undesignated preferred stock. Holders of the ClassA and Class B common stock are entitled to one vote and three votes per share, respectively, on all matters voted upon by the shareholders.Shares of Class B common stock convert to shares of Class A common stock at the option of the Company in certain circumstancesincluding (i) upon sale or other transfer, (ii) at the time the holder of such shares of Class B common stock ceases to be affiliated with theCompany and (iii) upon the sale of such shares in a registered public offering. The Company’s Board of Directors has the authority,without further action by the shareholders, to issue preferred stock in one or more series and to fix the terms and rights of the preferredstock. Such actions by the Board of Directors could adversely affect the voting power and other rights of the holders of common stock.Preferred stock could thus be issued quickly with terms that could delay or prevent a change in control of the Company or make removal ofmanagement more difficult. At present, the Company has no plans to issue any preferred stock.Equity OfferingDuring the years ended December 31, 2013 and 2012, the Company completed public offerings as follows: Closing date of the offering March 26, 2012 September 26, 2012 March 13, 2013 Shares sold to public 1,755,000 3,000,000 3,000,000 Shares sold pursuant to the underwriterover-allotment 263,250 450,000 450,000 Total shares of Class A common stock 2,018,250 3,450,000 3,450,000 Public offering price per share $23.90 $24.80 $25.50 Net proceeds(1) $46,015 $83,234 $86,964 (1)Net of underwriting discounts and commissions and expenses.DividendsPursuant to the Company’s variable dividend policy, the Board of Directors evaluates dividends on a quarterly basis and, in its solediscretion, approves the payment of dividends. The Company’s dividend payments, if any, may vary significantly from quarter to quarter.The Board of Directors has approved and the Company has declared the following dividends to date in 2013: Quarter Ended Dividend Amount Declaration Date Record Date Pay DateDecember 31 $0.875 December 19 December 31 January 31, 2014 September 30 0.875 September 18 September 30 October 31 June 30 0.875 June 17 June 28 July 31 March 31 0.875 March 15 March 28 April 30 F-27 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)Note 8. Shareholders’ Equity: – (continued)The Board of Directors approved and the Company declared and paid the following dividends for 2012: Quarter Ended Dividend Amount Declaration Date Record Date Pay DateDecember 31 $0.875 December 5 December 17 December 31 September 30 0.875 September 13 September 28 October 31 June 30 0.875 June 15 June 29 July 31 March 31 0.875 March 16 March 26 April 30 Long-Term Incentive PlanOn April 13, 2011, the Board of Directors adopted the Arlington Asset Investment Corp. 2011 Long-Term Incentive Plan (2011 Plan).The 2011 Plan was approved by the Company’s shareholders and became effective on June 2, 2011.Under the 2011 Plan, shares of Class A common stock of the Company may be issued to employees, directors, consultants andadvisors of the Company and its affiliates. The maximum number of shares authorized for issuance under the 2011 Plan is equal to500,000 shares plus any shares that remained available for issuance under the Friedman, Billings, Ramsey Group, Inc. 2004 Long-TermIncentive Plan, the Friedman, Billings, Ramsey Group, Inc. 1997 Stock and Annual Incentive Plan and the Amended and RestatedFriedman, Billings, Ramsey Group, Inc. Non-Employee Director Stock Compensation Plan (the Prior Plans) at the time the 2011 Planbecame effective. As of June 2, 2011, 45,097 shares remained available for grants under the Prior Plans.Under the 2011 Plan, the Compensation Committee of the Company’s Board of Directors may grant options, stock appreciation rights(SARs), restricted stock and restricted stock units (RSUs), other stock-based awards, and performance awards. However, no participantmay be granted (i) options or SARs covering more than 250,000 shares in any calendar year or (ii) restricted stock, RSUs, performanceawards and/or other stock-based awards denominated in shares covering more than 250,000 shares in any calendar year. These share limitsare subject to adjustment in the event of any merger, reorganization, consolidation, recapitalization, stock dividend, stock split, reversestock split, spin-off, extraordinary cash dividend or similar transactions or other change in corporate structure affecting the shares. Inaddition, the maximum dollar value payable to any participant in any calendar year with respect to awards valued with reference to property(including cash) other than shares is $10,000. The 2011 Plan will terminate on the tenth anniversary of its effective date unless soonerterminated by the Board of Directors. The Company uses a fair value based measurement method in accounting for all share based paymenttransactions.Performance-Based Long-Term Incentive ProgramOn August 13, 2012, the Compensation Committee of the Board of Directors of the Company adopted a performance-based long-termincentive program (Performance-based Program) that provides for the issuance of two types of performance share units (PSUs) pursuant tothe Company’s 2011 Plan.The Compensation Committee established performance goals under the Performance-based Program. Two types of PSUs may beawarded under the Performance-based Program: Book Value PSUs and Total Shareholder Return Units (TSR PSUs). The Book ValuePSUs are eligible to vest based on the compound annualized growth in the Company’s book value per share (i.e., book value change plusdividends on a reinvested basis) during the applicable performance period. The TSR PSUs are eligible to vest based on the Company’scompound annualized total shareholder return (i.e., share price change plus dividends on a reinvested basis) during the applicableperformance period.F-28 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)Note 8. Shareholders’ Equity: – (continued)PSUs do not have any voting rights. No dividends are paid on outstanding PSUs during the applicable performance period. Instead,dividend equivalents are accrued on outstanding PSUs during the applicable performance period, deemed invested in shares of Class Acommon stock and are paid out in shares of Class A common stock at the end of the performance period to the extent that the underlyingPSUs vest. Upon settlement, vested PSUs are converted into shares of the Company’s Class A common stock on a one-for-one basis. ThePSUs and dividend equivalents are settled in whole shares of Class A common stock with a cash payment in lieu of any fractional share.The right to receive shares of Class A common stock upon vesting of PSUs at the end of the applicable performance period is subject toboth continued employment and the achievement of the Company performance goals established by the Compensation Committee. Theemployment requirement, but not the performance requirement, is waived in the event the awardee dies, becomes disabled or retires;provided, however, that if the awardee dies, becomes disabled or retires before the first anniversary of the grant date, the number of PSUsthat are earned under the performance targets are pro-rated. If an awardee is terminated without “cause,” the Compensation Committee, in theexercise of its discretion, determines whether any of the PSUs have been earned, provided that the Compensation Committee may notapprove a payout that exceeds the number of PSUs earned under the performance targets. In the event of a change of control, the number ofPSUs that are earned for each performance period are determined immediately prior to the change of control based on actual performance andvests subject to continued employment for the remainder of the original performance period, subject to accelerated vesting in certaincircumstances.Except as described above or as the Compensation Committee at any time may otherwise determine, an awardee will forfeit the right toany PSUs if he or she terminates employment before the payment date.On August 13, 2012, the Compensation Committee of the Board of Directors of the Company approved the initial grant of 30,177 BookValue PSUs and 41,735 TSR PSUs to the participants in the Performance-based Program.For the initial grant, the Compensation Committee awarded PSUs with an aggregate grant date fair value equal to 75% of the awardee’sbase salary, with 50% of the total grant date fair value represented by Book Value PSUs and 50% of the total grant date fair valuerepresented by TSR PSUs. To facilitate the implementation of the Performance-based Program, the Compensation Committee establishedboth a two-year and three-year performance period for the initial grant of PSUs. A portion of the Book Value PSUs and TSR PSUs will beeligible for vesting at the end of the second year following the grant date, and a portion of the Book Value PSUs and TSR PSUs will beeligible for vesting at the end of the third year following the grant date. The actual number of shares of Class A common stock that will beissued to each participant at the end of the applicable performance period will vary between 0% and 200% of the number of PSUs granted,depending on performance results. If the threshold level of performance goals are not achieved, no PSUs are earned. If the initial performancethreshold is met, participants earn 50% of the granted PSUs for Company performance at the threshold level, 100% of the granted PSUs forCompany performance at the target level and 200% of the granted PSUs for Company performance at the maximum level, with linearinterpolation for achievement falling between the performance levels.On July 1, 2013, the Compensation Committee of the Board of Directors of the Company approved a grant of 34,221 Book Value PSUsand 34,567 TSR PSUs to the participants in the Performance-based Program (2013 PSU Grants).For the 2013 PSU Grants, the Compensation Committee awarded PSUs with an aggregate grant date fair value equal to 100% of theawardee’s base salary, with 50% of the total grant date fair value represented by Book Value PSUs and 50% of the total grant date fair valuerepresented by TSR PSUs. The Compensation Committee established a three-year performance period for the 2013 PSU Grants. The BookValue PSUs and TSR PSUs will be eligible for vesting at the end of the third year following the grant date. The actual numberF-29 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)Note 8. Shareholders’ Equity: – (continued)of shares of Class A common stock that will be issued to each participant at the end of the applicable performance period will vary between0% and 250% of the number of PSUs granted, depending on performance results. If the threshold level of performance goals are notachieved, no PSUs are earned. If the initial performance threshold is met, participants earn 50% of the granted PSUs for Companyperformance at the threshold level, 100% of the granted PSUs for Company performance at the target level and 250% of the granted PSUsfor Company performance at the maximum level, with linear interpolation for achievement falling between the performance levels.The Company recorded $1,485 and $287 in compensation expenses related to the Performance-based Program during the years endedDecember 31, 2013 and 2012, respectively.Restricted StockThe Company grants restricted common shares to employees that vest ratably over a three year period or cliff-vest after two to threeyears for various purposes based on continued employment over these specified periods. As of December 31, 2013 and 2012, a total of57,673 and 34,835 shares, respectively, of such restricted Class A common stock were outstanding with unamortized deferredcompensation of $838 and $507, respectively. A summary of these unvested restricted stock awards is presented below: Number ofShares Weighted-averageGrant-dateFair Value Weighted-averageRemainingVested PeriodShare Balance as of December 31, 2010 132,246 59.40 0.2 Granted 14,000 27.66 — Forfeitures (15) 125.00 — Vestitures (131,025) 58.80 — Share Balance as of December 31, 2011 15,206 35.40 2.0 Granted 25,500 22.99 — Forfeitures — — — Vestitures (5,871) 47.60 — Share Balance as of December 31, 2012 34,835 24.24 2.2 Granted 36,000 26.74 — Forfeitures — — — Vestitures (13,162) 24.65 — Share Balance as of December 31, 2013 57,673 25.71 2.0 For the years ended December 31, 2013, 2012, and 2011, the Company recognized $632, $279 and $576, respectively, ofcompensation expense related to this restricted stock plan.F-30 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)Note 8. Shareholders’ Equity: – (continued)In addition, as part of the Company’s satisfaction of incentive compensation earned for past service under the Company’s variablecompensation programs, employees may receive restricted Class A common stock in lieu of cash payments. These restricted Class Acommon stock shares are issued to an irrevocable trust and are not returnable to the Company. No such shares were issued in 2013, 2012and 2011. A summary of the undistributed restricted stock issued to the trust is presented below: Number ofShares Weighted-averageGrant-date FairValue Weighted-averageRemainingVesting PeriodShare Balance as of December 31, 2010 10,806 285.00 0.2 Shares issued to Trust — — — Shares distributed from Trust (1,651) 56.00 — Share Balance as of December 31, 2011 9,155 310.40 0.0 Shares issued to Trust — — — Shares distributed from Trust — — — Share Balance as of December 31, 2012 9,155 310.40 0.0 Shares issued to Trust — — — Shares distributed from Trust — — — Share Balance as of December 31, 2013 9,155 310.40 0.0 Director Stock Compensation PlanThe Company also grants options, stock or restricted stock units (RSUs) in lieu of or in addition to annual director fees to non-employee directors. The Board approved annual awards of RSUs equal in value to $80 to each director to be made in conjunction with theannual shareholders meeting. On June 6, 2013, the non-employee directors received an annual grant of an aggregate of 14,525 RSUs havingan aggregate grant date fair value of $400 based on the closing sale price of the Class A common stock on the New York Stock Exchange onJune 6, 2013 of $27.53. In addition to the annual grant of RSUs, the Company also granted 1,091 additional RSUs to the non-employeedirectors in lieu of certain cash payments for services as Lead Independent Director or as a chairman of one of the Board’s standingcommittees. Vested RSUs are convertible to Class A common stock upon the director ceasing to be a member of the Board. All options,stock and RSUs awarded to non-employee directors are non-transferable other than by will or the laws of descent and distribution. During2013, 2012, and 2011, the Company granted 15,616, 20,204 and 17,255 RSUs, respectively. For the years ended December 31, 2013,2012, and 2011, the Company recognized $430, $431 and $436, respectively, of director fees related to these RSUs.Share RepurchasesFrom time to time, the Company repurchases shares of its Class A common stock under a share repurchase program authorized by theBoard of Directors in July 2010 (Repurchase Program), pursuant to which the Company is authorized to repurchase up to 500,000 shares ofits Class A common stock.F-31 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)Note 8. Shareholders’ Equity: – (continued)Repurchases under the Repurchase Program may be made from time to time on the open market and in private transactions atmanagement’s discretion in accordance with applicable federal securities laws. The timing of repurchases and the exact number of shares ofClass A common stock to be repurchased will depend upon market conditions and other factors. The Repurchase Program is funded usingthe Company’s cash on hand and cash generated from operations. The Repurchase Program has no expiration date and may be suspendedor terminated at any time without prior notice.The following table summarizes the Company’s share repurchase activities for the periods indicated: Year Ended 2013 2012 2011Shares repurchased — 41,790 8,910 Total cost $— $786 $229 Average price $— $18.79 $25.70 As of December 31, 2013, and 2012, 205,485 shares of Class A common stock remain available for repurchases under the RepurchaseProgram.Conversion of Class B Common Stock to Class A Common StockDuring the year ended December 31, 2012, several holders of the Company's common stock converted an aggregate of 12,057 shares ofClass B common stock into 12,057 shares of Class A common stock. Holders of shares of Class A common stock are entitled to one votefor each share on all matters voted on by shareholders, and the holders of shares of Class B common stock are entitled to three votes pershare on all matters voted on by shareholders. Under the Company's Articles of Incorporation, shares of Class B common stock areconvertible into shares of Class A common stock on a one-for-one basis. There were no conversions of shares of Class B common stockinto shares of Class A common stock during the year ended December 31, 2013.Note 9. Financial Instruments with Off-Balance-Sheet Risk and Credit Risk:As of December 31, 2013 and 2012, the Company had not entered into any transactions involving financial instruments that wouldexpose the Company to significant related off-balance-sheet risk.Note 10. Revisions to Previously Reported Financial Statements:During the preparation of the 2013 consolidated financial statements, the Company concluded that the federal tax rate used to calculatedeferred tax assets as of December 31, 2012 was incorrect and should have been lower than the statutory rate given the effects of recognizinga U.S. federal deferred income tax liability associated with state deferred tax assets. Although the impact of this change was not material tothe consolidated financial statements as of and for the year ended December 31, 2012, the Company revised its previously reportedconsolidated financial statements and disclosures as of and for the year ended December 31, 2012. The following tables set forth the effectedline items within the Company’s previously reported consolidated financial statements as of and for the year ended December 31, 2012. December 31, 2012 As PreviouslyReported Adjustment As RevisedConsolidated Balance Sheet Deferred tax asset $162,281 $(7,863) $154,418 Total assets 2,074,158 (7,863) 2,066,295 Accumulated other comprehensive income, net of taxes 38,985 21 39,006 Accumulated deficit (1,212,022) (7,884) (1,219,906) Total equity 465,156 (7,863) 457,293 Total liabilities and equity 2,074,158 (7,863) 2,066,295 F-32 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)Note 10. Revisions to Previously Reported Financial Statements: – (continued) Year Ended December 31, 2012 As PreviouslyReported Adjustment As RevisedConsolidated Statement of Comprehensive Income Income tax benefit $(160,821) $7,884 $(152,937) Net income 191,826 (7,884) 183,942 Earnings per share – Basic 18.80 (0.78) 18.02 Earnings per share – Diluted 18.73 (0.77) 17.96 Other comprehensive income, net of taxes Unrealized gains (losses) for the period on available-for-salesecurities, net of taxes (1,843) (66) (1,909) Comprehensive income 192,444 (7,863) 184,581 Year Ended December 31, 2012 As PreviouslyReported Adjustment As RevisedConsolidated Statement of Changes in Equity Net income $191,826 $(7,884) $183,942 Net change in unrealized gain on available-for-sale securities, net oftaxes 618 21 639 Accumulated other comprehensive income, net of taxes 38,985 21 39,006 Accumulated deficit (1,212,022) (7,884) (1,219,906) Total equity 465,156 (7,863) 457,293 Year Ended December 31, 2012 As PreviouslyReported Adjustment As RevisedConsolidated Statement of Cash Flows Net income $191,826 $(7,884) $183,942 Deferred tax provision — 7,884 7,884 Note 11. Quarterly Data (Unaudited):The following tables set forth selected information for each of the fiscal quarters during the years ended December 31, 2013 and 2012.The selected quarterly data is derived from unaudited financial statements of the Company and has been prepared on the same basis as theannual, audited financial statements to include, in the opinion of management, all adjustments (consisting of only normal recurringadjustments) necessary for fair statement of the results for such periods.Note: The sum of quarterly earnings per share amounts may not equal full year earnings per share amounts due to differing averageoutstanding shares amounts for the respective periods. Net InterestIncome NetIncome BasicEarningsPer Share DilutedEarningsPer Share2013 First Quarter $16,724 $3,177 $0.23 $0.23 Second Quarter 20,925 3,194 0.19 0.19 Third Quarter 20,681 3,093 0.19 0.18 Fourth Quarter 20,160 39,997(1) 2.40 2.36 Total Year $78,490 $49,461 3.09 3.06 F-33 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTSARLINGTON ASSET INVESTMENT CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)Note 11. Quarterly Data (Unaudited): – (continued) Net InterestIncome NetIncome BasicEarningsPer Share DilutedEarningsPer Share2012 First Quarter $12,546 $10,762 $1.37 $1.37 Second Quarter 14,914 2,144 0.22 0.22 Third Quarter 14,271 3,123 0.31 0.31 Fourth Quarter 17,458 167,913 12.70 12.62 Total Year $59,189 $183,942 18.02 17.96 (1)Reflects $185 increase in net income as a result of an out of period adjustment that is related to the immaterial revision as disclosed inNote 10, Revisions to Previously Reported Financial Statements, for the first three quarters of the year ended December 31, 2013.F-34Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit 12.01 Arlington Asset Investment Corp.Computation of Ratio of Earnings to Fixed Charges(dollars in thousands) Year Ended December 31, 2013 2012 2011 2010 2009 Pre-tax income from continuing operationsadjusted to exclude income or loss fromequity investees $14,253 $30,788 $16,753 $27,087 $140,981 Distributed income of equity investees 90 384 266 222 326 Fixed charges: Interest expense and amortization of debtdiscount and premium on all indebtedness 8,529 4,965 2,508 1,155 3,645 Rentals 81 88 58 54 77 Total fixed charges $8,610 $5,053 $2,566 $1,209 $3,722 Pre-tax income from continuing operationsadjusted to exclude income or loss fromequity investees plus fixed charges anddistributed income of equity investees $22,953 $36,225 $19,585 $28,518 $145,029 Ratio of earnings to fixed charges 2.7 7.2 7.6 23.6 39.0 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit 21.01 List of Subsidiaries of the Registrant Rosslyn REIT TrustAAIC Georgetown, LLCAAIC Potomac, LLC Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit 23.01 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-104475 and 333-174669) and Form S-3 (No333-193478) of Arlington Asset Investment Corp. of our report dated February 10, 2014 relating to the financial statements and the effectiveness of internalcontrol over financial reporting, which appears in this Annual Report on Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP McLean, Virginia February 10, 2014 Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Exhibit 31.01CERTIFICATIONI, Eric F. Billings, certify that:1.I have reviewed this Annual Report on Form 10-K of Arlington Asset Investment Corp.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which such statements were made, not misleading with respect tothe period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in allmaterial respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented inthis report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange ActRules 13a-15(f) and 15d-15(f)) for the registrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made knownto us by others within those entities, particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’smost recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or isreasonably likely to materially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing theequivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control our financial reporting. February 10, 2014 /S/ ERIC F. BILLINGSERICF. BILLINGSChief Executive OfficerSource: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Exhibit 31.02CERTIFICATIONI, Kurt R. Harrington, certify that:1.I have reviewed this Annual Report on Form 10-K of Arlington Asset Investment Corp.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which such statements were made, not misleading with respect tothe period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in allmaterial respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented inthis report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange ActRules 13a-15(f) and 15d-15(f)) for the registrant and have:(a)Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made knownto us by others within those entities, particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’smost recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or isreasonably likely to materially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing theequivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting. February 10, 2014 /S/ KURT R. HARRINGTONKURT R. HARRINGTONExecutive Vice President, Chief Financial Officer, andChief Accounting Officer(Principal Financial Officer)Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Exhibit 32.01CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report on Form 10-K of Arlington Asset Investment Corp. (the Company) for the year ended December31, 2013, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Eric F. Billings, Chief Executive Officerof the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:(1)the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. February 10, 2014 /S/ ERIC F. BILLINGSERIC F. BILLINGSChief Executive OfficerSource: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Exhibit 32.02CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report on Form 10-K of Arlington Asset Investment Corp. (the Company) for the year ended December31, 2013, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Kurt R. Harrington, Chief FinancialOfficer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:(1)the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. February 10, 2014 /S/ KURT R. HARRINGTONKURT R. HARRINGTONExecutive Vice President, Chief Financial Officer, andChief Accounting Officer(Principal Financial Officer)Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Source: Arlington Asset Investment Corp., 10-K, February 10, 2014Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.

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