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Franklin BSP Realty TrustMorningstar® Document Research℠ FORM 10-KArlington Asset Investment Corp. - AIFiled: February 16, 2018 (period: December 31, 2017)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)☒☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2017OR☐☐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 $0.017.00% Series B Cumulative Perpetual Redeemable Preferred Stock New York Stock ExchangeNew York Stock Exchange6.625% Senior Notes due 20236.75% Senior Notes due 2025 New York Stock ExchangeNew 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 ☐ No ☒Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act: Yes ☐ No ☒Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☒ No ☐Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit andpost such files): Yes ☒ No ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K:☒Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growthcompany. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.(Check one): Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ (Do not check if a small reporting company) Small reporting company ☐ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒The aggregate market value of the registrant’s Class A common stock held by non-affiliates computed by reference to the last reported price at which the registrant’s Class Acommon stock was sold on the New York Stock Exchange on June 30, 2017 was $347 million.As of January 31, 2018, there were 28,140,721 shares of the registrant’s Class A common stock outstanding and no shares of the registrant’s Class B common stockoutstanding.Documents incorporated by reference: Portions of the registrant’s Definitive Proxy Statement for the 2018 Annual Meeting of Shareholders (to be filed with the Securitiesand Exchange Commission no later than 120 days after the end of the registrant’s fiscal year end) are incorporated by reference in this Annual Report on Form 10-K in response toPart II, Item 5 and Part III, Items 10, 11, 12, 13 and 14. iSource: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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 PageCautionary Statement About Forward-Looking Information iii PART I ITEM 1. Business 1ITEM 1A. Risk Factors 9ITEM 1B. Unresolved Staff Comments 25ITEM 2. Properties 26ITEM 3. Legal Proceedings 26ITEM 4. Mine Safety Disclosures 26 PART II ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 27ITEM 6. Selected Financial Data 30ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 31ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 52ITEM 8. Financial Statements and Supplementary Data 54ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 54ITEM 9A. Controls and Procedures 54ITEM 9B. Other Information 55 PART III ITEM 10. Directors, Executive Officers and Corporate Governance 56ITEM 11. Executive Compensation 56ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 56ITEM 13. Certain Relationships and Related Transactions, and Director Independence 56ITEM 14. Principal Accountant Fees and Services 56 PART IV ITEM 15. Exhibits and Financial Statement Schedules 56Signatures 59Index to Consolidated Financial Statements of Arlington Asset Investment Corp. F-1 iiSource: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. CAUTIONARY 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 press releases or otherwritten 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 meaningof Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the“Exchange Act”), and, as such, may involve known and unknown risks, uncertainties and assumptions. The forward-looking statements we make in thisAnnual Report on Form 10-K include, but are not limited to, statements about the following: •the availability and terms of, and our ability to deploy, capital and our ability to grow our business through our current strategy focused onacquiring primarily residential mortgage-backed securities (“MBS”) that are either issued by U.S. government agencies or guaranteed as toprincipal and interest by U.S. government agencies or U.S. government sponsored agencies (“agency MBS”), and MBS issued by privateorganizations (“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 our netoperating losses (“NOLs”) and net capital losses (“NCLs”) to offset future taxable income, including whether our shareholder rights plan(“Rights Plan”) will be effective in preventing an ownership change that would significantly limit our ability to utilize such losses; •our business, acquisition, leverage, asset allocation, operational, investment, hedging and financing strategies and the success of thesestrategies; •the effect of changes in prepayment rates, interest rates and default rates on our portfolio; •the effect of governmental regulation and actions on our business, including, without limitation, changes to monetary and fiscal policy and taxlaws; •our ability to quantify and manage risk; •our ability to roll our repurchase agreements on favorable terms, if at all; •our liquidity; •our asset valuation policies; •our decisions with respect to, and ability to make, future dividends; •investing in assets other than MBS or pursuing business activities other than investing in MBS; •our ability to maintain our exclusion from the definition of “investment company” under the Investment Company Act of 1940, as amended(the “1940 Act”); •our decision to not elect to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code; and •the effect of general economic conditions on our business.Forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account informationcurrently in our possession. These beliefs, assumptions and expectations may change as a result of many possible events or factors, not all of which are knownto us or are within our control. If a change occurs, the performance of our portfolio and our business, financial condition, liquidity and results of operationsmay vary materially from those expressed, anticipated or contemplated in our forward-looking statements. You should carefully consider these risks, alongwith the following factors that could cause actual results to vary from our forward-looking statements, before making an investment in our securities: •the overall environment for interest rates, changes in interest rates, interest rate spreads, the yield curve and prepayment rates, including thetiming of increases in the Federal Funds rate by the U.S. Federal Reserve; •current conditions and further adverse developments in the residential mortgage market and the overall economy; •potential risk attributable to our mortgage-related portfolios, including changes in fair value; •our use of leverage and our dependence on repurchase agreements and other short-term borrowings to finance our mortgage-related holdings; •the availability of certain short-term liquidity sources; •competition for investment opportunities;iiiSource: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. •the U.S. Federal Reserve’s balance sheet normalization program of gradually reducing its reinvestment of principal payments of U.S. Treasurysecurities and agency MBS; •the federal conservatorship of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation(“Freddie Mac”) and related efforts, along with any changes in laws and regulations affecting the relationship between Fannie Mae and FreddieMac and the federal government; •mortgage loan prepayment activity, modification programs and future legislative action; •changes in, and success of, our acquisition, hedging and leverage strategies, changes in our asset allocation and changes in our operationalpolicies, all of which may be changed by us without shareholder approval; •failure of sovereign or municipal entities to meet their debt obligations or a downgrade in the credit rating of such debt obligations; •fluctuations of the value of our hedge instruments; •fluctuating quarterly operating results; •changes in laws and regulations and industry practices that may adversely affect our business; •volatility of the securities markets and activity in the secondary securities markets in the United States and elsewhere; •our ability to successfully expand our business into areas other than investing in MBS and our expectations of the returns of expanding intoany such areas; 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 cause our actualresults to differ materially from those projected in any forward-looking statements we make. All forward-looking statements speak only as of the date onwhich they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect us. Except as requiredby law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events orotherwise. ivSource: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. ITEM 1. BUSINESSUnless the context otherwise requires or indicates, all references in this Annual Report on Form 10-K to “Arlington Asset” refer to Arlington AssetInvestment Corp., and all references to “we,” “us,” “our,” and the “Company,” refer to Arlington Asset Investment Corp. and its consolidated subsidiaries.Our CompanyWe are an investment firm that focuses on acquiring and holding a levered portfolio of residential mortgage-backed securities (“MBS”), consisting ofagency MBS and private-label MBS. Agency MBS include residential mortgage pass-through certificates for which the principal and interest payments areguaranteed by a U.S. government agency or government sponsored enterprise (“GSE”), such as the Federal National Mortgage Association (“Fannie Mae”)and the Federal Home Loan Mortgage Corporation (“Freddie Mac”). Private-label MBS, or non-agency MBS, include residential MBS that are notguaranteed by a GSE or the U.S. government. As of December 31, 2017, nearly all of our investment capital was allocated to agency MBS. We leverage prudently our investment portfolio so as to increase potential returns to our shareholders. We fund our investments primarily throughshort-term financing arrangements, principally though repurchase agreements. We enter into various hedging transactions to mitigate the interest ratesensitivity of our cost of borrowing and the value of our MBS portfolio.We are a Virginia corporation and taxed as a C corporation for U.S. federal tax purposes. We are an internally managed company and do not have anexternal investment advisor.Investment StrategyWe manage our investment portfolio with the goal of obtaining a high risk-adjusted return on capital. We evaluate the rates of return that can beachieved in each asset class and for each individual security within an asset class in which we invest. We then evaluate opportunities against the returnsavailable in each of our investment alternatives and attempt to allocate our assets and capital with an emphasis toward what we believe to be the highest risk-adjusted return available. We expect this strategy will cause us to have different allocations of capital and leverage in different market environments.Based on current market conditions, we believe our residential MBS portfolio has provided us with higher relative risk-adjusted rates of return thanmost other investment opportunities we have evaluated. Consequently, we have allocated all of our capital in this sector and have continued to analyze otheropportunities and compare risk-adjusted returns to residential MBS assets. Within our residential MBS investment portfolio, we have gradually increased ourinvestment capital allocation to agency MBS from private-label MBS. Currently, we believe that investments in agency MBS will provide a higher risk-adjusted return as compared to private-label MBS. As of December 31, 2017, nearly all of our investment capital was allocated to agency MBS. In the future, we may invest in other types of residential mortgage assets such as residential mortgage loans, mortgage servicing rights and GSE creditrisk transfer securities, as well as other types of assets, including commercial MBS, asset backed securities, other structured securities, commercial mortgageloans, commercial loans, and other real estate-related loans and securities. In addition, we also may pursue other business activities that would utilize ourexperience in analyzing investment opportunities and applying similar portfolio management skills. We may change our investment strategy at any timewithout the consent of our shareholders; accordingly, in the future, we could make investments or enter into hedging transactions that are different from, andpossibly riskier than, the investments and associated hedging transactions described in this Annual Report on Form 10-K.1Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. MBS PortfolioThe following table summarizes our MBS investment portfolio at fair value as of December 31, 2017 and 2016 (dollars in thousands): December 31, 2017 December 31, 2016 Specified agency MBS $4,054,424 $3,909,452 Inverse interest-only agency MBS — 1,923 Total agency MBS 4,054,424 3,911,375 Net long agency TBA dollar roll positions (1) 1,296,978 720,027 Total agency investment portfolio 5,351,402 4,631,402 Private-label MBS — 1,173 Private-label interest-only MBS 76 93 Total private-label investment portfolio 76 1,266 Total MBS investment portfolio $5,351,478 $4,632,668 (1)Represents the fair value of the agency MBS which underlie our TBA forward purchase and sale commitments executed as dollar roll transactions. Inaccordance with GAAP, our TBA forward purchase and sale commitments are reflected on the consolidated balance sheets as a component of“derivative assets, at fair value” and “derivative liabilities, at fair value,” with a collective net asset carrying value of $609 and $1,156 as ofDecember 31, 2017 and 2016, respectively.Agency MBSAgency MBS consist of residential pass-through certificates that are securities representing undivided interests in “pools” of mortgage loans securedby residential real property. The monthly payments of both principal and interest of the securities are guaranteed by a U.S. government agency or GSE toholders of the securities, in effect “passing through” the monthly payments made by the individual borrowers on the mortgage loans that underlie thesecurities plus “guarantee payments” made in the event of any defaults on such mortgage loans, net of fees paid to the issuer/guarantor and servicers of theunderlying mortgage loans, to the holders of the securities. Mortgage pass-through certificates distribute cash flows from the underlying collateral on a prorata basis among the holders of the securities. Although the principal and interest payments are guaranteed by a U.S. government agency or GSE to thesecurity holder, the market value of the agency MBS is not guaranteed by a U.S. government agency or GSE.The agency MBS that we primarily invest in are Fannie Mae and Freddie Mac agency MBS. Fannie Mae and Freddie Mac are stockholder-ownedcorporations chartered by Congress with a public mission to provide liquidity, stability, and affordability to the U.S. housing market. Fannie Mae andFreddie Mac are currently regulated by the Federal Housing Finance Agency (“FHFA”), the U.S. Department of Housing and Urban Development (“HUD”),the U.S. Securities and Exchange Commission (“SEC”), and the U.S. Department of the Treasury (“U.S. Treasury”), and are currently operating under theconservatorship of the FHFA. The U.S. Treasury has agreed to support the continuing operations of Fannie Mae and Freddie Mac with any necessary capitalcontributions while in conservatorship. However, the U.S. government does not guarantee the securities, or other obligations, of Fannie Mae or Freddie Mac.Fannie Mae and Freddie Mac operate in the secondary mortgage market. They provide funds to the mortgage market by purchasing residentialmortgages from primary mortgage market institutions, such as commercial banks, savings and loan associations, mortgage banking companies,seller/servicers, securities dealers and other investors. Through the mortgage securitization process, they package mortgage loans into guaranteed MBS forsale to investors, such as us, in the form of pass-through certificates and guarantee the payment of principal and interest on the securities or on the underlyingloans held within the securitization trust in exchange for guarantee fees. The underlying loans must meet certain underwriting standards established byFannie Mae and Freddie Mac (referred to as “conforming loans”) and may be fixed or adjustable rate loans with original terms to maturity generally up to 40years.Agency MBS differ from other forms of traditional fixed-income securities which normally provide for periodic payments of interest in fixed amountswith principal payments at maturity. Instead, agency MBS provide for a monthly payment that consists of both interest and principal. In addition,outstanding principal on the agency MBS may be prepaid, without penalty, at par at any time due to prepayments on the underlying mortgage loans. Thesedifferences can result in significantly greater price and yield volatility than is the case with more traditional fixed-income securities.As of December 31, 2017, the Company’s agency MBS portfolio was generally comprised of securities collateralized by pools of fixed rate mortgagesthat have original terms to maturity of 30 years. In the future, we may also invest in agency MBS collateralized by adjustable-rate mortgage loans (“ARMs”),hybrid ARMs, or loans with original terms to maturity of 15 or 20 years.2Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. We may also invest in agency MBS through agency collateralized mortgage obligations (“CMO”), which are structured securities representingdivided interests in the cash flows of underlying agency residential pass-through certificates. Agency CMOs consist of multiple classes of securities, calledtranches, which have different maturities, coupon rates, and payment priorities designed to meet the risk and yield appetites of various classes of investors.CMOs also include “stripped” securities, whereby certain tranche holders receive only interest payments from the underlying securities while other trancheholders receive only principal payments.We purchase agency MBS either in initial offerings or in the secondary market through broker-dealers or similar entities. We may also utilize to-be-announced (“TBA”) forward contracts in order to invest in agency MBS or to hedge our investments. A TBA security is a forward contract for the purchase orthe sale of agency securities at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date, but the particularagency securities to be delivered are not identified until shortly before the TBA settlement date. We may also choose, prior to settlement, to move thesettlement of these securities out to a later date by entering into an offsetting position (referred to as a “pair off”), net settling the paired off positions for cash,and simultaneously entering into a similar TBA contract for a later settlement date, which is commonly collectively referred to as a “dollar roll” transaction.Private-Label MBSWe have and, depending upon market conditions, may in the future invest in private-label MBS, which are residential MBS that are not issued orguaranteed by a U.S. government agency or a GSE. Private-label MBS are often referred to as non-agency MBS. The private-label MBS in which we mayinvest are generally backed by a pool of single-family residential mortgage loans. These certificates are issued by originators of, investors in, and otherowners of residential mortgage loans, including savings and loan associations, savings banks, commercial banks, mortgage banks, investment banks andspecial purpose “conduit” subsidiaries of these institutions. Private-label MBS can carry a significantly higher level of credit exposure relative to the creditexposure of agency MBS. The private-label MBS in which we may invest are generally non-investment grade or not rated by major rating agencies.While agency MBS are backed by the express obligation or guarantee of a U.S. government agency or GSE as described above, private-label MBS aregenerally only supported by one or more forms of private (i.e., non-governmental) credit enhancement. These credit enhancements provide an extra layer ofloss coverage in the event that losses are incurred upon foreclosure sales or other liquidations of underlying mortgaged properties in amounts that exceed theequity holder’s equity interest in the property. Forms of credit enhancement include limited issuer guarantees, reserve funds, private mortgage guaranty poolinsurance, overcollateralization and subordination. Subordination is a form of credit enhancement frequently used and involves the issuance of classes ofMBS that are subordinate to senior class MBS and, accordingly, are the first to absorb credit losses realized on the underlying mortgage loans. In addition,private-label MBS are generally purchased at a discount to par value, which may provide further protection to credit losses of the underlying residentialmortgage loan collateral.Private-label MBS are backed by pools of residential mortgages that can be composed of prime or non-prime mortgage loans. Prime mortgage loansare residential mortgage loans that generally conform to the underwriting guidelines of a U.S. government agency or a GSE but that do not carry any creditguarantee from either a U.S. government agency or a GSE. Jumbo prime mortgage loans are prime mortgage loans that conform to such underwritingguidelines except with respect to maximum loan size. Non-prime mortgage loans are residential mortgage loans that do not meet all of the underwritingguidelines of a U.S. government agency or a GSE. Consequently, these loans may carry higher credit risk than prime mortgage loans. Non-prime mortgageloans may have been originated through programs that allow borrowers to qualify for a mortgage loan with reduced or alternative forms of documentation.Non-prime mortgage loans include loans commonly referred to as alternative A-paper (“Alt-A”) or as subprime. Alt-A mortgage loans are generallyconsidered riskier than prime mortgage loans and less risky than subprime mortgage loans. Alt-A mortgage loans are typically characterized by borrowerswith less than full documentation, lower credit scores and higher loan-to-value ratios and include a higher percentage of investment properties as collateral.Subprime mortgage loans are considered to be of the lowest credit quality. These loans may also include “option-ARM” loans, which contain a featureproviding the borrower the option, within certain constraints, to make lesser payments than otherwise required by the stated interest rate for a number ofyears, leading to negative amortization and increased loan balances.Private-label MBS are generally issued by a securitization trust referred to as a Real Estate Mortgage Investment Conduit (“REMIC”). Thesecuritization trust will generally issue both senior and subordinated interests. Senior securities are those interests in a securitization that have the first rightto cash flows and are last in line to absorb losses, and, therefore, have the least credit risk in a securitization transaction. In general, most, if not all, principalcollected from the underlying mortgage loan pool is used to pay down the senior securities until certain performance tests are satisfied. If certain performancetests are satisfied, principal payments are allocated, generally on a pro rata basis, between the senior securities and the subordinated securities. Conversely,the most subordinate securities are those interests in a securitization that have the last right to cash flows and are first in line to absorb losses. Subordinatesecurities absorb the initial credit losses from a securitization structure, thus protecting the senior securities. Subordinate securities generally receive interestpayments even if they do not receive principal payments.3Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. In addition, private-label MBS also may include a re-securitization of MBS which is also referred to as a “re-REMIC” security. For example, a re-REMIC security may consist of re-securitized senior classes of REMIC securities. In turn, the collateral of these senior class REMIC securities consists of theunderlying residential mortgage loans. The re-REMIC securitization trust will generally issue both senior and subordinated interests similar to a REMICsecuritization trust. A subordinated interest in a re-securitized senior class of REMIC securities may also be referred to as a “mezzanine” interest.Financing StrategyWe use leverage to finance a portion of our MBS portfolio and to seek to increase potential returns to our shareholders. To the extent that revenuederived from our MBS portfolio exceeds our interest expense and other costs of the financing, our net income will be greater than if we had not borrowedfunds and had not invested in the assets. Conversely, if the revenue from our MBS portfolio does not sufficiently cover the interest expense and other costs ofthe financing, our net income will be less or our net loss will be greater than if we had not borrowed funds.Because of the interest rate risk inherent to our agency MBS investment strategy and, to extent we invest in private-label MBS, the credit risksinherent to such investment strategy, we closely monitor the leverage (debt-to-equity ratio) of our MBS portfolio. Our leverage may vary from time to timedepending upon several factors, including changes in the value of the underlying MBS and hedge portfolio, changes in investment allocation betweenagency MBS and private-label MBS, the timing and amount of investment purchases or sales, and our assessment of risk and returns.We finance our investments in MBS using short-term secured borrowings, which primarily consist of repurchase agreements. We have also issued, andmay issue in the future, long-term unsecured notes as an additional source of financing.When we engage in a repurchase transaction, we initially sell securities to the counterparty under a master repurchase agreement in exchange for cashfrom the counterparty. The counterparty is obligated to resell the same securities back to us at the end of the term of the repurchase agreement, whichtypically is 30 to 90 days, but may have maturities as short as one day or as long as one year. Amounts available to be borrowed under our repurchaseagreements are dependent upon lender collateral requirements and the lender’s determination of the fair value of the securities pledged as collateral, whichfluctuates with changes in interest rates, credit quality and liquidity conditions within the investment banking, mortgage finance and real estate industries. Inaddition, our counterparties apply a “haircut” to our pledged collateral, which means our collateral is valued, for the purposes of the repurchase transaction,at less than market value. Under our repurchase agreements, we typically pay a floating rate based on the London Interbank Offered Rate (“LIBOR”), plus orminus a fixed spread. These transactions are accounted for as secured financings, and we present the investment securities and related funding on ourconsolidated balance sheets.We may also seek to obtain other sources of financing depending on market conditions. We may finance the acquisition of agency MBS by enteringinto TBA dollar roll transactions in which we would sell a TBA contract for current month settlement and simultaneously purchase from the samecounterparty a similar TBA contract for a forward settlement date. Prior to the forward settlement date, we may choose to roll the position out to a later dateby entering into an offsetting TBA position, net settling the paired off positions for cash, and simultaneously entering into a similar TBA contract for a latersettlement date. In such transactions, the TBA contract purchased for a forward settlement date is priced at a discount to the TBA contract sold forsettlement/pair-off in the current month. This difference (or discount) is referred to as the “price drop.” As discussed in “Non-GAAP Core Operating Income—Economic Net Interest Income,” we believe this price drop is the economic equivalent of net interest carry income (interest income less implied financingcost) earned from the underlying agency MBS over the roll period, which is commonly referred to as “dollar roll income.” Consequently, dollar rolltransactions represent a form of off-balance sheet financing. In evaluating our overall leverage at risk, we consider both our on-balance and off-balance sheetfinancing.Risk Management StrategyIn conducting our business, we are exposed to market risks, including interest rate, prepayment, extension, spread, credit, liquidity and regulatoryrisks. We use a variety of strategies to manage a portion of our exposure to these risks to the extent we believe to be prudent, taking into account ourinvestment strategy and the cost of any hedging transactions. As a result, we may not hedge certain interest rate, prepayment, extension, or credit risks if webelieve that bearing such risks enhances our return relative to our risk/return profile. Our hedging instruments are generally not designed to protect our netbook value from “spread risk” (also referred to as “basis risk”), which is the risk of an increase of the spread between the market yield on our agency MBS andthe benchmark yield on U.S. Treasury securities or interest rate swaps. •Interest Rate RiskWe hedge some of our exposure to potential interest rate mismatches between the interest we earn on our long-term investments and the interestwe pay on our short-term borrowings. We enter into various hedging transactions to mitigate the4Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. interest rate sensitivity of our cost of borrowing and the value of our MBS portfolio. Because a majority of our funding is in the form of repurchaseagreements, our financing costs fluctuate based on short-term interest rate indices, such as LIBOR. Because the vast majority of our investments areassets that have fixed rates of interest and generally mature in up to 30 years, the interest we earn on these assets generally does not move in tandemwith the interest rates that we pay on our repurchase agreements, which generally have a maturity of less than 90 days. In addition, as interest rates rise,the fair value of our fixed-rate agency MBS may be expected to decline. We may experience reduced income, losses, or a significant reduction in ourbook value due to adverse interest rate movements. In order to attempt to mitigate a portion of such risk, we utilize certain hedging techniques toattempt to economically “lock in” a portion of the net spread between the interest we earn on our assets and the interest we pay on our financing costsand to protect our net book value. Additionally, because prepayments on residential mortgages generally accelerate when interest rates decrease and slow when interest ratesincrease, mortgage securities typically exhibit “negative convexity”. In other words, certain mortgage securities in which we invest may increase invalue to a lesser degree than similar duration bonds, or even fall in value, as interest rates decline. Conversely, certain mortgage securities in which weinvest may decrease in value to a greater degree than similar duration bonds as interest rates increase. In order to manage this risk, we monitor, amongother things, the “duration gap” between our mortgage assets and our hedge portfolio as well as our convexity exposure. Duration is an estimate of therelative expected percentage change in market value of our mortgage assets or our hedge portfolio that would be caused by a parallel change in shortand long-term interest rates. Convexity exposure relates to the way the duration of our mortgage assets or our hedge portfolio changes when theinterest rate or prepayment environment changes.The value of our mortgage assets may also be adversely impacted by fluctuations in the shape of the yield curve or by changes in the market'sexpectation about the volatility of future interest rates. We analyze our exposure to non-parallel changes in interest rates and to changes in themarket's expectation of future interest rate volatility and take actions to attempt to mitigate these exposures. •Prepayment RiskBecause residential borrowers have the option to prepay their mortgage loans at par at any time, we face the risk that we will experience a returnof principal on our investments more quickly than anticipated, which we refer to as prepayment risk. Prepayment risk generally increases when interestrates decline. In this scenario, our financial results may be adversely affected as we may have to re-invest that principal at potentially lower yields.We may purchase securities that have a higher interest rate than the then-prevailing market interest rate. In exchange for this higher interestrate, we may pay a premium to par value to acquire such securities. In accordance with GAAP, we amortize this premium as a reduction to interestincome under the contractual effective interest method such that a proportional amount of the unamortized premium is amortized as principalprepayments occur. If a security is prepaid in whole or in part at a faster rate than originally expected, we will amortize the purchase premium at afaster pace, resulting in a lower effective return on our investment than originally expected.We also may purchase securities that have a lower interest rate than the then-prevailing market interest rate. In exchange for this lower interestrate, we may pay a discount to par value to acquire such securities. In accordance with GAAP, we accrete this discount as an increase to interestincome under the contractual effective interest method such that a proportional amount of the unamortized discount is accreted as principalprepayments occur. If a security is prepaid in whole or in part at a slower rate than originally expected, we will accrete the purchased discount at aslower pace resulting in a lower effective return on our investment than originally expected. •Extension RiskBecause residential borrowers have the option to make only scheduled payments on their mortgage loans, rather than prepay their mortgageloans, we face the risk that a return of capital on our investment will occur more slowly than anticipated, which we refer to as extension risk. Extensionrisk generally increases when interest rates rise. In this scenario, our financial results may be adversely affected as we may have to finance ourinvestments at potentially higher costs without the ability to reinvest principal into higher yielding securities. •Spread Risk Because the spread between the market yield on our investments and benchmark interest rates, such as U.S. Treasury rates and interest rateswap rates, may vary, we are exposed to spread risk. The inherent spread risk associated with our agency MBS and the resulting fluctuations in fairvalue of these securities can occur independent of interest rates and may relate to other factors impacting the mortgage and fixed income markets, suchas actual or anticipated monetary policy actions by the U.S. Federal Reserve, liquidity, or changes in market participants’ required rates of return ondifferent assets. Consequently,5Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. while we use interest rate derivative instruments to attempt to protect our net book value against changes in benchmark interest rates, such instrumentstypically will not mitigate spread risk and, therefore, the value of our agency MBS and our net book value could decline. •Credit RiskTo the extent we invest in private-label MBS, we accept mortgage credit exposure at levels we deem prudent within the context of our overallinvestment strategy. We may retain all or a portion of the credit risk on the loans underlying private-label MBS in which we may invest. We seek tomanage this risk through prudent asset selection, pre-acquisition due diligence, post-acquisition performance monitoring, and the sale of assets forwhich we identify negative credit trends. Additionally, we vary the percentage mix of our private-label and agency MBS investments in an effort toactively adjust our credit exposure and to improve the risk/return profile of our investment portfolio. •Liquidity RiskLiquidity risk is the risk that we may be unable to meet our obligations as they come due because of our inability to liquidate assets or obtainfunding. Liquidity risk also includes the risk of having to sell assets at a loss to generate liquid funds. •Regulatory RiskRegulatory risk is the risk of loss, including fines, penalties or restrictions in our activities from failing to comply with current or future federal,state or local laws (including federal and state securities laws), and rules and regulations pertaining to financial services activities, including the lossof our exclusion from regulation as an investment company under the 1940 Act.The principal instruments that we use to hedge a portion of our exposure to interest rate, prepayment and extension risks are interest rate derivativeinstruments primarily consisting of interest rate swaps, U.S. Treasury note futures, options on U.S. Treasury note futures and options on agency MBS. We alsomay use other interest rate derivative instruments such as Eurodollar futures, interest rate swap futures, interest rate swaptions, and short TBA positions, fromtime to time.In addition to the hedging instruments discussed above, we also manage our exposure to interest rate, prepayment and extension risk through assetselection. We generally seek to invest in agency MBS that are specifically selected for their relatively lower propensity for prepayment. The pools ofresidential mortgage loans securing these agency MBS are commonly referred to as “specified pools.” These specified pools may include mortgage loans that(i) have low loan balances, (ii) are originated through the Home Affordable Refinance Program (“HARP”) or some other government program, (iii) areoriginated in certain states or geographic areas, (iv) have high loan-to-value ratios, (v) are the obligations of borrowers with credit scores that fall toward thelower end of the range of GSEs’ underwriting standards, or (vi) are secured by investor properties. The borrowers of these mortgage loans are believed to haveless incentive to refinance. Accordingly, agency MBS collateralized by mortgage loans with these characteristics are believed to be better “protected” fromprepayment risk than agency MBS collateralized by more generic pools of mortgage loans. In general, agency MBS backed by specified pools trade at a pricepremium over generic agency TBA securities. As of December 31, 2017, our on-balance sheet agency MBS portfolio is comprised primarily of securitiesbacked by specified pools selected for their lower prepayment characteristics.The risk management actions we take may lower our earnings and dividends in the short term to further our objective of maintaining attractive levelsof earnings and dividends over the long term. In addition, some of our hedges are intended to provide protection against larger rate moves and, as a result,may be relatively ineffective for smaller changes in interest rates. There can be no certainty that our projections of our exposures to interest rate, prepayment,extension, credit or other risks will be accurate or that our hedging activities will be effective and, therefore, actual results could differ materially.CompetitionOur success depends, in large part, on our ability to acquire MBS at favorable spreads over our borrowing costs. In acquiring these assets, we competewith mortgage finance and specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds,institutional investors, mortgage real estate investment trusts, investment banking firms, other lenders, the U.S. Treasury, Fannie Mae, Freddie Mac, othergovernmental bodies, and other entities. In addition, there are numerous entities with similar asset acquisition objectives and others may be organized in thefuture which may increase competition for the available supply of MBS that meet our investment objectives. Additionally, our investment strategy isdependent on the amount of financing available to us in the repurchase agreement market, which may also be impacted by competing borrowers. Ourinvestment strategy will be adversely impacted if we are not able to secure financing on favorable terms, if at all. In addition, competition is intense for therecruitment and retention of qualified professionals. Our ability to continue to compete effectively in our6Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. businesses will depend upon our continued ability to attract new professionals and retain and motivate our existing professionals. For a further discussion ofthe competitive factors affecting our business, see “Item 1A - Risk Factors” in this Annual Report on Form 10-K.Our Tax StatusArlington Asset is subject to taxation as a corporation under Subchapter C of the Internal Revenue Code of 1986, as amended (the “Code”). As ofDecember 31, 2017, the Company had estimated net operating loss (“NOL”) carryforwards of $61 million that can be used to offset future taxable ordinaryincome. The Company’s NOL carryforwards begin to expire in 2027. As of December 31, 2017, the Company also had estimated net capital loss (“NCL”)carryforwards of $314 million that can be used to offset future net capital gains. The scheduled expirations of the Company’s NCL carryforwards are $137million in 2019, $103 million in 2020, $70 million in 2021, and $4 million in 2021. Through December 31, 2017, the Company was subject to the federalalternative minimum tax (“AMT”). However, beginning January 1, 2018, the Company is no longer subject to federal AMT. As of December 31, 2017, theCompany also had AMT credit carryforwards of $9 million that can be used to offset future regular tax liabilities. For the tax years 2018, 2019 and 2020, tothe extent that AMT credit carryovers exceed the regular tax liability, 50% of the excess AMT credit carryforwards would be refundable in that year with anyremaining AMT credit carryforwards fully refundable in 2021.The Company’s ability to use its NOLs, NCLs and built-in losses would be limited if it experienced an “ownership change” under Section 382 of theCode. In general, an “ownership change” would occur if there is a cumulative change in the ownership of the Company’s common stock of more than 50% byone or more “5% shareholders” during a three-year period. The Board of Directors adopted and the Company’s shareholders approved a shareholder rightsagreement (“Rights Plan”) in an effort to protect against a possible limitation on the Company’s ability to use its NOL carryforwards, NCL carryforwards, andbuilt-in losses under Sections 382 and 383 of the Code. The Rights Plan was adopted to dissuade any person or group from acquiring 4.9% or more of theCompany’s outstanding Class A common stock without the approval of the Board of Directors and triggering an “ownership change” as defined by Section382. 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, which provides anexclusion for entities that are “primarily engaged in purchasing or otherwise acquiring . . . interests in real estate.” Section 3(c)(5)(C) as interpreted by thestaff of the SEC provides an exclusion from registration for a company if at least 55% of its assets, on an unconsolidated basis, consist of qualified assets suchas whole loans and whole pool agency certificates, and if at least 80% of its assets, on an unconsolidated basis, are real estate related assets. We will need toensure 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 anexclusion or exemption. We intend to maintain our exclusion by monitoring the value of our interests in our subsidiaries. We may not be successful in thisregard.If we fail to maintain our exclusion or secure a different exclusion or exemption if necessary, we may be required to register as an investment company,or we may be required to acquire or dispose of assets in order to meet our exemption. Any such asset acquisitions or dispositions may include assets that wewould not acquire or dispose of in the ordinary course of business, may be at unfavorable prices and result in a decline in the price of our common stock. If weare required to register under the 1940 Act, we would become subject to substantial regulation with respect to our capital structure (including our ability touse leverage), management, operations, transactions with affiliated persons (as defined in the 1940 Act), and portfolio composition, including restrictionswith respect to diversification and industry concentration and other matters. Accordingly, registration under the 1940 Act could limit our ability to followour current investment and financing 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 at the SEC’spublic reference room at 100 F Street, N.E., Washington, DC 20549. You may call the SEC at 1-800-SEC-0330 for further information on the public referenceroom. Our SEC filings are also available to the public from commercial document retrieval services and at the internet website maintained by the SEC athttp://www.sec.gov. These SEC filings may also be inspected at the offices of the 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 on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of theExchange Act, as well as the annual report to shareholders and Section 16 reports on Forms 3, 4 and 5 as soon as reasonably practicable after such documentsare electronically filed with, or furnished to, the SEC. In addition, our Bylaws, Statement of Business Principles (our code of ethics), Corporate GovernanceGuidelines, and the charters of our Audit, Compensation, and Nominating and Governance Committees are available on our website and are available inprint, without charge, to any shareholder upon written request in writing c/o our Secretary at 1001 Nineteenth Street North, Arlington, Virginia7Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. 22209. Information on our website should not be deemed to be a part of this report or incorporated into any other filings we make with the SEC.EmployeesAs of December 31, 2017, we had 12 employees. Our employees are not subject to any collective bargaining agreement, and we believe that we havegood relations with our employees.8Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. ITEM 1A. RISK FACTORSInvesting in our company involves various risks, including the risk that you might lose your entire investment. Our results of operations depend upon manyfactors including our ability to implement our business strategy, the availability of opportunities to acquire assets, the level and volatility of interest rates,the cost and availability of short- and long-term credit, financial market conditions and general economic conditions.The following discussion concerns the material risks associated with our business. These risks are interrelated, and you should consider them as a whole.Additional risks and uncertainties not presently known to us may also materially and adversely affect the value of our capital stock and our ability to paydividends to our shareholders. In connection with the forward-looking statements that appear in this Annual Report on Form 10-K, including these riskfactors and elsewhere, you should carefully review the section entitled “Cautionary Statement About Forward-Looking Information.”Risks Related to our Investing and Financing ActivitiesChanges in interest rates and adverse market conditions could negatively affect the value of our MBS investments and increase the cost of our borrowings,which could result in reduced earnings or losses and negatively affect the cash available for distribution to our shareholders.Our investment portfolio consists primarily of fixed-rate agency MBS with long-term maturities. The majority of our funding is in the form ofrepurchase agreements with short-term maturities with a floating interest rate based on LIBOR. We are exposed to interest rate risk that fluctuates based onchanges in the level or volatility of interest rates and in the shape and slope of the yield curve. Under a normal yield curve, long-term interest rates arehigher relative to short-term interest rates. In certain instances, the yield curve can become inverted when the short-term interest rates are higher than thelong-term interest rates. A significant risk associated with our portfolio of mortgage-related assets is the risk that both long-term and short-term interest rates will increasesignificantly. If long-term rates were to increase significantly, the market value of fixed-rate agency MBS would decline and the duration and weightedaverage life of these MBS would increase. We could realize a loss in the future if the agency MBS in our portfolio are sold. If short-term interest rates were toincrease, the financing costs on the repurchase agreements we enter into in order to finance the purchase of MBS would increase, thereby decreasing netinterest margin if all other factors remain constant.Hedging against interest rate exposure may not completely insulate us from interest rate risk and may adversely affect our earnings, which could adverselyaffect cash available for distribution to our shareholders.We engage in certain hedging transactions to limit our exposure from the adverse effects of changes in interest rates on the borrowing costs of ourshort-term financing agreements and the value of our fixed-rate agency MBS investment portfolio, and therefore may expose our company to the risksassociated with such transactions. We have historically entered into and may enter into interest rate swap agreements, U.S. Treasury note futures, Eurodollarfutures, interest rate swap futures, options on U.S. Treasury note futures, options on agency MBS, TBAs or may pursue other hedging strategies. Our hedgingactivities are generally designed to limit certain exposures and not to eliminate them. Hedging against a decline in the values of our portfolio positions doesnot eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. Such hedgingtransactions may also limit the opportunity for gain if the values of the portfolio positions should increase. Moreover, it may not be possible to hedge againstan interest rate fluctuation that is so generally anticipated that we are not able to enter into a hedging transaction at an acceptable price.There are no perfect hedging strategies, and interest rate hedging may fail to protect us from loss. The success of our hedging transactions depends onour ability to accurately predict movements of interest rates and credit spreads. In addition, the degree of correlation between price movements of theinstruments used in a hedging strategy and price movements in the portfolio positions being hedged may vary. Moreover, for a variety of reasons, we may notseek to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation mayprevent us from achieving the intended hedge and expose us to risk of loss. Furthermore, our hedging strategies may adversely affect us because hedgingactivities involve costs that we incur regardless of the effectiveness of the hedging activity, which may decrease our net interest margin. Our hedging activitywill vary in scope based on the level and volatility of interest rates and principal prepayments, the amount of leverage, the type of MBS held, and otherchanging market conditions.Interest rate hedging may fail to protect or could adversely 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;9Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. •the duration of the hedge may not match the duration of the related asset or liability; •the party owing money in the hedging transaction may default on its obligation to pay.Our hedging activity may adversely affect our earnings and result in volatile fluctuations in the fair value of our hedges, net income and book valueper share, which could adversely affect cash available for distribution to our shareholders and the value of your investment in our securities.Our hedging strategies are generally not designed to mitigate spread risk.When the market spread widens between the yield on our mortgage assets and benchmark interest rates, our net book value could decline if the fairvalue of our mortgage assets falls by more than the offsetting fair value increases on our hedging instruments tied to the underlying benchmark interest ratesor if the fair value of our mortgage assets do not increase as much as the fair value decreases on our hedging instruments. We refer to this scenario as anexample of “spread risk” or “basis risk.” The spread risk associated with our mortgage assets and the resulting fluctuations in fair value of these securities canoccur independently of changes in benchmark interest rates and may relate to other factors impacting the mortgage and fixed income markets, such as actualor anticipated monetary policy actions by the Federal Reserve, market liquidity, or changes in required rates of return on different assets. Consequently, whilewe use various interest rate hedging instruments to attempt to protect against moves in interest rates, such instruments typically will not protect our net bookvalue against spread risk, which could adversely affect our financial condition and results of operations.Declines in the market values of our MBS portfolio may adversely affect our financial condition, results of operations, and market price of our Class Acommon stock, Series B Preferred Stock or Senior Notes.Our MBS investments are recorded at fair value with changes in fair value reported in net income. As a result, a decline in the fair value of ourinvestments would reduce our net income and book value per share. Fair values for our MBS investments can be volatile. The fair values can change rapidlyand significantly and changes can result from various factors, including changes in interest rates, actual and perceived risk, supply, demand, expectedprepayment rates, and actual and projected credit performance. Declines in the market values of our MBS portfolio would adversely affect our financialcondition, results of operations, and market price of our Class A common stock, Series B Preferred Stock or Senior Notes.Our mortgage investing strategy involves leverage, which could adversely affect our operations and negatively affect cash available for distribution to ourshareholders.We may increase our investment exposure in MBS or other investment opportunities by funding a portion of those acquisitions with repurchaseagreements or other borrowing arrangements. To the extent that revenue derived from such levered assets exceeds our interest expense, hedging expense andother costs of the financing, our net income will be greater than if we had not borrowed funds and had not invested in such assets on a leveraged basis.Conversely, if the revenue from our MBS does not sufficiently cover the interest expense, hedging expense and other costs of the financing, our net incomewill be less or our net loss will be greater than if we had not borrowed funds. Because of the credit and interest rate risks inherent in our strategy, we closelymonitor the leverage of our MBS portfolio. From time to time, our leverage ratio may increase or decrease due to several factors, including changes in thevalue of the underlying portfolio, changes in investment allocations and the timing and amount of acquisitions.An increase in our borrowing costs relative to the interest we receive on our assets may impair our profitability and thus our cash available for distributionto our shareholders.As our repurchase agreements and other short-term borrowings mature, we must either enter into new borrowings or liquidate certain of ourinvestments at times when we might not otherwise choose to do so. Lenders may also seek to use a maturity date as an opportune time to demand additionalterms or increased collateral requirements that could be adverse to us and harm our operations. Due to the short-term nature of our repurchase agreements usedto finance our MBS investments, our borrowing costs are particularly sensitive to changes in short-term interest rates. An increase in short-term interest rateswhen we seek new borrowings would reduce the spread between our returns on our assets and the cost of our borrowings. This would reduce the returns on ourassets, which might reduce earnings and in turn cash available for distribution to our shareholders.Differences in the stated maturity of our fixed-rate assets and short-term borrowings may adversely affect our profitability.We rely primarily on short-term, variable rate borrowings to acquire fixed-rate securities with long-term maturities. The relationship between short-term and longer-term interest rates is often referred to as the “yield curve.” Ordinarily, short-term interest rates are lower than longer-term interest rates. Ifshort-term interest rates rise disproportionately relative to longer-term interest rates, resulting in a “flattening” of the yield curve, our borrowing costs mayincrease more rapidly than the interest income earned on our10Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. assets. Because our investments generally bear interest at longer-term rates than we pay on our borrowings under our repurchase agreements, a flattening ofthe yield curve would tend to decrease our net interest income and the market value of our investment portfolio. Additionally, to the extent cash flows frominvestments that return scheduled and unscheduled principal are reinvested, the spread between the yields on the new investments and available borrowingrates may decline, which would likely decrease our net income. It is also possible that short-term interest rates may exceed longer-term interest rates (a yieldcurve “inversion”), in which event, our borrowing costs may exceed our interest income and we could incur operating losses and our ability to makedistributions to our shareholders could be hindered.Our lenders may require us to provide additional collateral, especially when the market values for our investments decline, which may restrict us fromleveraging our assets as fully as desired, and reduce our liquidity, earnings and cash available for distribution to our shareholders.We currently use repurchase agreements to finance our investments in residential 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 or sold by us to afunding source declines in value, we may be required by the lender to provide additional collateral or pay down a portion of the funds advanced on minimalnotice, which is known as a margin call. Posting additional collateral will reduce our liquidity and limit our ability to leverage our assets, which couldadversely affect our business. Additionally, in order to satisfy a margin call, we may be required to liquidate assets at a disadvantageous time, which couldcause us to incur further losses and adversely affect our results of operations and financial condition, and may impair our ability to make distributions to ourshareholders. In the event we do not have sufficient liquidity to satisfy these margin calls, lending institutions can accelerate our indebtedness, increase ourborrowing rates, liquidate our collateral and terminate our ability to borrow. Such a situation would likely result in a rapid deterioration of our financialcondition and possibly necessitate a filing for protection under the bankruptcy code.If we fail to maintain adequate financing through repurchase agreements or to renew or replace existing borrowings upon maturity, we will be limited inour ability to implement our investing activities, which will adversely affect our results of operations and may, in turn, negatively affect the market value ofour Class A common stock, Series B Preferred Stock or Senior Notes and our ability to make dividends to our shareholders.We depend upon repurchase agreement financing to purchase our target assets and reach our target leverage ratio. We cannot assure you that sufficientrepurchase agreement financing will be available to us in the future on terms that are acceptable to us. Our lenders also may revise their eligibilityrequirements for the types of assets they are willing to finance or the terms of such financings based on, among other factors, the regulatory environment andtheir perceived risk. If we fail to obtain adequate funding or to renew or replace existing funding upon maturity, we will be limited in our ability toimplement our business strategy, which will adversely affect our results of operations and may, in turn, negatively affect the market value of our Class Acommon stock, Series B Preferred Stock or Senior Notes and our ability to make dividends to our shareholders.New assets we acquire may not generate yields as attractive as yields on our current assets, resulting in a decline in our earnings over time.We receive monthly cash flows consisting of principal and interest payments from many of our assets. Principal payments reduce the size of ourcurrent portfolio (i.e., reduce the amount of our long-term assets) and generate cash for us. We may also sell assets from time to time as part of our portfoliomanagement and capital reallocation strategies. In order to maintain and grow our portfolio size and our earnings, we must reinvest in new assets a portion ofthe cash flows we receive from principal and interest payments and asset sales. New investment opportunities may not generate the same investment returns asour current investment portfolio. If the assets we acquire in the future earn lower returns than the assets we currently own, our reported earnings will likelydecline over time as the older assets pay down, are called, or are sold.Clearing facilities or exchanges upon which some of our hedging instruments are traded may increase margin requirements on our hedging instruments inthe event of adverse economic developments.Our interest rate hedging agreements typically require that we pledge collateral on such agreements. We exchange collateral with the counterparties toour interest rate hedging instruments at least on a daily basis based upon daily changes in fair value (also known as “variation margin”) as measured by thecentral clearinghouse through which those derivatives are cleared. In addition, the central clearinghouse requires market participants to deposit and maintainan “initial margin” amount which is determined by the clearinghouse and is generally intended to be set at a level sufficient to protect the clearinghouse fromthe maximum estimated single-day price movement in that market participant’s contracts. The clearing exchanges have the sole discretion to determine thevalue of derivative instruments. In the event of a margin call, we must generally provide additional collateral on the same business day. In response to eventshaving or expected to have adverse economic consequences or which create market uncertainty, clearing facilities or exchanges upon which our hedginginstruments are traded may require us to pledge additional collateral against our hedging instruments. In the event that future adverse economicdevelopments or market uncertainty result in increased margin requirements for11Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. our hedging instruments, it could materially adversely affect our liquidity position, business, financial condition and results of operations.Our agency MBS investments that are guaranteed by Fannie Mae and Freddie Mac are subject to the risk that these GSEs may not be fully able to satisfytheir guarantee obligations or that these guarantee obligations may be repudiated, which would adversely affect the value of our investment portfolio andour ability to sell or finance these securities.All of the agency MBS in which we invest depend on a steady stream of payments on the mortgages underlying the MBS. The interest and principalpayments we receive on agency MBS issued by Fannie Mae or Freddie Mac are guaranteed by these GSEs, but are not guaranteed by the U.S. government. Tothe extent these GSEs are not able to fully satisfy their guarantee obligations or that these guarantee obligations are repudiated or otherwise defaulted upon,the value of our investment portfolio and our ability to sell or finance these securities would be adversely affected.The conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and regulations affecting the relationshipbetween Fannie Mae and Freddie Mac and the federal government, may adversely affect our business.The payments of principal and interest we receive on the agency MBS in which we invest are guaranteed by Fannie Mae and Freddie Mac. Theguarantees of agency MBS created by Fannie Mae and Freddie Mac are not backed by the full faith and credit of the United States. In response to the general market instability, and more specifically, the financial condition of Fannie Mae and Freddie Mac, the Housing andEconomic Recovery Act of 2008 established the FHFA as the new regulator for Fannie Mae and Freddie Mac. In 2008, the FHFA, together with the U.S.Treasury and the U.S. Federal Reserve, announced a comprehensive plan to boost investor confidence in Fannie Mae and Freddie Mac, support theavailability of mortgage financing and protect taxpayers. Under this plan, the FHFA placed Fannie Mae and Freddie Mac into conservatorship, which is astatutory process pursuant to which the FHFA operates Fannie Mae and Freddie Mac in an effort to stabilize the entities. As part of these actions, the U.S.Treasury has agreed to support the continuing operations of Fannie Mae and Freddie Mac with any necessary capital contributions up to a maximum capitalcommitment to each GSE while in conservatorship. Although the U.S. Treasury has committed to support the positive net worth of Fannie Mae and FreddieMac, the two GSEs could default on their guarantee obligations, which would materially and adversely affect the value of our agency MBS.In addition, the future roles of Fannie Mae and Freddie Mac could be significantly reduced or eliminated 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 Mae and Freddie Maccould redefine what constitutes agency MBS, have broad adverse market implications and negatively impact us. The FHFA and both houses of Congresshave each discussed and considered separate measures intended to restructure the U.S. housing finance system and the operations of Fannie Mae and FreddieMac. The passage of any additional new legislation affecting Fannie Mae and Freddie Mac may create market uncertainty and reduce the actual or perceivedcredit quality of securities issued or guaranteed by the U.S. government through a new or existing successor entity to Fannie Mae and Freddie Mac. If thecharters of Fannie Mae and Freddie Mac were revoked, it is unclear what effect, if any, this would have on the value of the existing Fannie Mae and FreddieMac agency MBS. We anticipate debate and discussion on residential housing and mortgage reform to continue throughout 2018; however, we cannot becertain if any housing and/or mortgage-related legislation will emerge from committee, be approved by Congress, or be affected by any executive actionsand, if so, what the effect will be on our business.The impact to the agency MBS market of the implementation of a common securitization platform for agency securities is uncertain.The FHFA established a goal of developing a new secondary mortgage infrastructure for Fannie Mae and Freddie Mac referred to as the commonsecuritization platform (“CSP”). To achieve this strategic goal, Fannie Mae and Freddie Mac formed a joint venture, Common Securitization Solutions, LLC(“CSS”), to develop and operate a CSP that will support the GSE’s single-family mortgage securitization activities, including the issuance by both GSEs of acommon, single mortgage-backed security (“Single Security”). The Single Security would finance the same types of fixed-rate mortgages that currently backagency MBS eligible for delivery into the TBA market. The two principal objectives of the FHFA of undertaking this initiative are to establish a single,liquid market for agency MBS issued by both GSEs that are backed by fixed-rate loans and to maintain the liquidity of this market over time, includingreducing the trading value disparities between Fannie Mae and Freddie Mac agency MBS. CSS is currently in the process of developing the CSP and SingleSecurity. The GSEs and CSS expect to complete the Single Security initiative and issue the first Single Security in the second quarter of 2019 with the impacton forward trading in the TBA market to commence in the first quarter of 2019. Prior to the implementation of the Single Security initiative, we will need toplan and prepare our internal operational and investment procedures to accommodate the new Single Security. If the objectives of the Single Securityinitiative is fully realized, it is uncertain what the effects might be on the agency MBS market and its impact on the Company’s investments in agency MBS.12Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. Market conditions may disrupt the historical relationship between interest rate changes and prepayment trends, which would make it more difficult for usto analyze our investment portfolio.Our success depends on our ability to analyze the relationship of changing interest rates on prepayments of the mortgage loans that underlie our MBS.Changes in interest rates and prepayments affect the market price of MBS that we intend to purchase and any MBS that we hold at a given time. As part of ouroverall portfolio risk management, we analyze interest rate changes and prepayment trends separately and collectively to assess their effects on ourinvestment portfolio. In conducting our analysis, we depend on certain assumptions based upon historical trends with respect to the relationship betweeninterest rates and prepayments under normal market conditions. Dislocations in the residential mortgage market and other developments may change the waythat prepayment trends have historically responded to interest rate changes and, consequently, may negatively impact our ability to (i) assess impact of futurechanges in interest rates and prepayments on the market value of our investment portfolio, (ii) implement our hedging strategies, and (iii) implementtechniques to reduce our prepayment rate volatility would be significantly affected. If we are unable to accurately forecast interest and prepayment rates, ourfinancial position and results of operations could be materially adversely affected.Changes in prepayment rates may adversely affect our profitability and are difficult to predict.Our investment portfolio includes securities backed by pools of residential mortgage loans. For securities backed by pools of residential mortgageloans, we receive income, generally, from the payments that are made by the borrowers of the underlying mortgage loans. When borrowers prepay theirmortgage loans at rates that are faster or slower than expected, it results in prepayments that are faster or slower than expected on our investments. Thesefaster or slower than expected payments may adversely affect our profitability. We may purchase securities that have a higher interest rate than the then-prevailing market interest rate. In exchange for this higher interest rate, wemay pay a premium to par value to acquire such securities. In accordance with GAAP, we amortize this premium as a reduction to interest income under thecontractual interest method so that a proportional amount of the unamortized premium is amortized as principal prepayments occur. If a security is prepaid inwhole or in part at a faster rate than originally expected, we will amortize the purchased premium at a faster pace resulting in a lower effective return on ourinvestment than originally expected.We also may purchase securities that have a lower interest rate than the then-prevailing market interest rate. In exchange for this lower interest rate, wemay pay a discount to par value to acquire such securities. In accordance with GAAP, we accrete this discount as an increase to interest income under thecontractual interest method so that a proportional amount of the unamortized discount is accreted as principal prepayments occur. If a security is prepaid inwhole or in part at a slower rate than originally expected, we will accrete the purchased discount at a slower pace resulting in a lower effective return on ourinvestment than originally expected.Moreover, if prepayment rates decrease due to a rising interest rate environment, the average life or duration of our fixed-rate assets will generally beextended. This could have a negative impact on our results from operations, as the maturities of our interest rate hedges are fixed and will, therefore, cover asmaller percentage of our funding exposure on our MBS assets to the extent that the average lives of the mortgages underlying such MBS increase due toslower prepayments.Homeowners tend to prepay mortgage loans more quickly when interest rates decline. Although prepayment rates generally increase when interestrates fall and decrease when interest rates rise, changes in prepayment rates are difficult to predict. Prepayments may also occur as the result of animprovement in the borrower’s ability to refinance the loan as a result of home price appreciation or wage growth. Prepayments can also occur whenborrowers sell the property and use the sale proceeds to prepay the mortgage as part of a physical relocation or when borrowers default on their mortgages andthe mortgages are prepaid from the proceeds of a foreclosure sale of the property. Fannie Mae and Freddie Mac will generally, among other conditions,purchase mortgages that are 120 days or more delinquent from holders of such mortgages when the cost of guarantee payments to such holders, includingadvances of interest at the loan coupon rate, exceeds the cost of holding the nonperforming loans in their portfolios. Consequently, prepayment rates alsomay be affected by conditions in the housing and financial markets, which may result in increased delinquencies on mortgage loans, the GSEs’ cost ofcapital, general economic conditions and the relative interest rates on fixed and adjustable rate loans, which could lead to an acceleration of the payment ofthe related principal. Furthermore, changes in the GSEs’ policies regarding the repurchase of delinquent loans can materially impact prepayment rates. Inaddition, the introduction of new government programs could increase the availability of mortgage credit to a large number of homeowners in the UnitedStates, which could impact the prepayment rates for the entire MBS market, and in particular for agency MBS. Any new programs or changes to existingprograms could cause substantial uncertainty around the magnitude of changes in prepayment speeds.Faster or slower than expected prepayments may adversely affect our profitability and cash available for distribution to our shareholders and aredifficult to predict.The reduction of the Federal Reserve’s portfolio of U.S. Treasury securities and agency MBS may adversely affect the price and return associated withagency MBS.13Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. In October 2014, the Federal Reserve ended its large scale purchases of U.S. Treasury securities and agency MBS under its quantitative easingprograms designed to support the mortgage markets and stimulate the economy. However, the Federal Reserve continued to reinvest all principal paymentsfrom its U.S. Treasury and agency MBS. In October 2017 the Federal Reserve initiated a balance sheet normalization policy of gradually reducing itsreinvestment of principal payments of U.S. Treasury securities and agency MBS. Under its balance sheet normalization policy, principal payments receivedby the Federal Reserve are reinvested only to the extent they exceed gradually rising caps until it determines that the Federal Reserve is holding no moresecurities than necessary to implement monetary policy efficiently and effectively. We cannot predict the impact of the implementation of the Federal Reserve’s balance sheet normalization policy could have on the prices andliquidity of agency MBS or on mortgage spreads relative to interest rate hedges tied to benchmark interest rates. However, during periods in which theFederal Reserve reduces or ceases reinvestment of principal payments or undertakes outright sales of its securities portfolio, the price of agency MBS and U.S.Treasury securities will likely decline, mortgage spreads will likely widen, refinancing volumes will likely be lower and market volatility will likely behigher than would have been absent such actions and our net book value could be adversely affected.It may be uneconomical to “roll” our TBA dollar roll transactions or we may be unable to meet margin calls on our TBA commitments, which couldnegatively affect our financial condition and results of operations. We may utilize TBA dollar roll transactions as a means of investing in and financing agency MBS. TBA contracts enable us to purchase or sell, forfuture delivery, agency MBS with certain principal and interest terms and certain types of collateral, but the particular agency MBS to be delivered are notidentified until shortly before the TBA settlement date. Prior to settlement of the TBA contract, we may choose to move the settlement of the securities out toa later date by entering into an offsetting position (referred to as a “pair off”), net settling the paired off positions for cash, and simultaneously purchasing asimilar TBA contract for a later settlement date, collectively referred to as a “dollar roll.” The agency RMBS purchased for a forward settlement date under theTBA contract are typically priced at a discount to agency MBS for settlement in the current month. This difference (or discount) is referred to as the “pricedrop.” As discussed under “Non-GAAP Core Operating Income—Economic Net Interest Income” below, we believe this price drop is the economicequivalent of net interest carry income on the underlying agency MBS over the roll period (interest income less implied financing cost), which is commonlyreferred to as “dollar roll income.” Consequently, dollar roll transactions and such forward purchases of agency RMBS represent a form of off-balance sheetfinancing.Under certain market conditions, TBA dollar roll transactions may result in negative carry income whereby the agency MBS purchased for a forwardsettlement date under the TBA contract are priced at a premium to agency MBS for settlement in the current month. Under such conditions, it may beuneconomical to roll our TBA positions prior to the settlement date and we could have to take physical delivery of the underlying securities and settle ourobligations for cash. We may not have sufficient funds or alternative financing sources available to settle such obligations.In addition, our TBA contracts are subject to master securities forward transaction agreements published by SIFMA as well as supplemental terms andconditions with each counterparty. Under the terms of these agreements, we may be required to pledge collateral to our counterparty in the event the fairvalue of our agency MBS commitments decline and such counterparty demands collateral through a margin call. Negative carry income on TBA dollar roll transactions or failure to procure adequate financing to settle our obligations or meet margin calls under ourTBA contracts could result in defaults or force us to sell assets under adverse market conditions or through foreclosure and adversely affect our financialcondition and results of operations.Recent changes to the U.S. Federal income tax code could have a material impact on the residential mortgage market, which could impact the pricing ofresidential MBS.On December 22, 2017, the President signed the Tax Cuts and Jobs Act, which provides for substantial changes to the taxation of individuals andcorporations with an effective date of January 1, 2018. For individual taxpayers, the changes included, among others, lower ordinary income tax rates, higherstandard deductions, and suspension or modification of several itemized deductions. The changes to the categories of itemized deductions include a limit todeductions of state and local income and property taxes of $10,000 and a modification to the amount of residential mortgage interest that would bedeductible. The new rule would limit the deduction available for mortgage interest by reducing the amount of debt that can qualify from $1 million to$750,000, however mortgage debt borrowed prior to December 15, 2017 would not be affected by the reduction. In addition, home equity mortgage interestis no longer deductible. Many of the changes affecting individual taxpayers would cease to apply after December 31, 2025 and would revert to their pre-2018form with future legislation required to make the provisions effective beyond 2025. As a result of these changes, it is expected that the number of individualtaxpayers that itemize deductions will decrease significantly causing the income tax benefits of residential home ownership to decline materially. It is likelythat these factors could result in a decline in the pricing of residential real estate as well as alter the prepayment patterns of residential mortgages, whichcould have a significant impact on the pricing and returns of residential MBS. 14Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. Our use of repurchase agreements may give our lenders greater rights in the event that either we or any of our lenders file for bankruptcy, which may makeit difficult for us to recover our collateral.Our borrowings under repurchase agreements may qualify for special treatment under the bankruptcy code, giving our lenders the ability to avoid theautomatic stay provisions of the bankruptcy code and take possession of and liquidate our collateral under the repurchase agreements without delay if we filefor bankruptcy. Furthermore, the special treatment of repurchase agreements under the bankruptcy code may make it difficult for us to recover our pledgedassets 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 abankruptcy filing by either our lenders or us. In addition, if the lender is a broker or dealer subject to the Securities Investor Protection Act of 1970 or aninsured depository institution subject to the Federal Deposit Insurance Act, our ability to exercise our rights to recover our investment under a repurchaseagreement or to be compensated 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 underlying security back to us at the endof 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 repurchase agreement inexchange for cash from the counterparty. The counterparty is obligated to resell the same securities back to us at the end of the term of the repurchaseagreement, which typically is 30 to 90 days, but may have terms from one day to up to three years or more. The cash we receive when we initially sell thecollateral is less than the value of the collateral, which is referred to as the “haircut.” If the counterparty in a repurchase transaction defaults on its obligationto resell the securities back to us, we will incur a loss on the transaction equal to the amount of the haircut (assuming no change in the value of the securities).Losses incurred on our repurchase transactions would adversely affect our earnings 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 facility on acceptable terms or atall.If we default on one of our obligations under a repurchase agreement, the counterparty may terminate the agreement and cease entering into any otherrepurchase agreements with us. In that case, we would likely need to establish a replacement repurchase facility with another financial institution in order tocontinue to leverage the assets in our investment portfolio and to carry out our investment strategy. We may be unable to establish a suitable replacementrepurchase facility on acceptable terms or at all.Despite current indebtedness levels, we may still be able to incur substantially more debt, which could have important consequences to you.As of December 31, 2017, we had total unsecured indebtedness (excluding payables, derivative liabilities and recourse liability) of $75.3 million,which includes $25.0 million in principal amount of our 6.625% senior notes due 2023, $35.3 million in principal amount of our 6.75% senior notes due2025, and $15.0 million in principal amount of subordinated unsecured long-term debentures due between 2033 and 2035. Our level of indebtedness couldhave important consequences to you, because: •it could affect our ability to satisfy our financial obligations; •a substantial portion of our cash flows from operations will have to be dedicated to interest and principal payments and may not beavailable for operations, expansion, acquisitions or general corporate or other purposes; •it may impair our ability to obtain additional debt or equity financing in the future; •it may limit our ability to refinance all or a portion of our indebtedness on or before maturity; •it may limit our flexibility in planning for, or reacting to, changes in our business and industry; and •it may make us more vulnerable to downturns in our business, our industry or the economy in general.Our operations may not generate sufficient cash to enable us to service our debt. If we fail to make payment on the senior notes, we could default onthe senior notes.Limitations 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 part to insufficientliquidity. Liquidity is of particular importance to our business and perceived liquidity issues may affect our counterparties’ willingness to engage intransactions with us. Our liquidity could be impaired due to circumstances that we may be unable to control, such as a general market disruption, the paymentof significant legal defense and indemnification costs, expenses, damages or settlement amounts, or an operational problem that affects us or third parties.Further, our ability to sell assets may be15Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. impaired if other market 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.Our due diligence of potential investments may not reveal all of the liabilities associated with those investments and may not reveal aspects of theinvestments which could lead lower expected investment returns or investment losses.Before making certain investments, we may undertake due diligence efforts with respect to various aspects of the acquisition, including investigatingthe 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 theunderlying securities, loans or properties themselves as well as other factors and characteristics that may be material to the performance of the investment. Inmaking the assessment and otherwise conducting due diligence, we rely on resources available to us and, in some cases, third party information. There can beno assurance that any due diligence process that we conduct will uncover relevant facts that could be determinative of whether or not an investment will besuccessful.We may invest in private-label MBS that may be illiquid and have a higher risk of loss of default, which could result in significant losses to us.As of December 31, 2017, nearly all of our investment capital was allocated to agency MBS. However, in prior years a significant amount of ourinvestment capital was allocated to private-label MBS, and we may increase our allocation of investment capital to private-label MBS in future periods. Residential mortgage loans underlying private-label MBS are secured by residential property and are subject to risks of delinquency, foreclosure andloss. The ability of a borrower to repay a loan secured by residential property is dependent upon the income of the borrower. In the event of a default under amortgage loan, the holder of the mortgage loan bears the risk of loss of principal to the extent of any deficiency between the value of the collateral and theprincipal and accrued interest of the mortgage loan. We may invest in private-label MBS collateralized by pools of non-prime mortgage loans. In general, non-prime mortgage loans are loans that havebeen originated using underwriting standards that do not conform to the underwriting guidelines of Fannie Mae and Freddie Mac. Non-prime mortgage loansmay experience delinquency, foreclosure, bankruptcy and loss rates that are higher than those experienced by mortgage loans underwritten in a moretraditional manner.We may also invest in private-label MBS that are non-investment grade, which means that major rating agencies rate them below the top fourinvestment-grade rating categories (i.e., “AAA” through “BBB”). Non-investment grade, private-label MBS tend to be less liquid, may have a higher risk ofdefault and may be more difficult to value than investment grade bonds. The lack of liquidity for certain asset classes that we may invest in may make itdifficult for us to sell such investments should the need or desire arise.We may also invest in subordinated tranches of private-label MBS, which are subordinated classes of securities in a structure of securitiescollateralized by a pool of mortgage loans and, accordingly, are the first or among the first classes of securities in such a structure to bear the loss upon arestructuring or liquidation of the underlying collateral and the last to receive payment of interest and principal. Furthermore, our private-label MBS mayalso consist of subordinate classes of re-securitized senior class MBS. Such subordinated interests generally are not actively traded and may not provideholders thereof with liquid investments.Our investments are recorded at fair value based upon assumptions that are inherently subjective, and our results of operations and financial conditioncould be adversely affected if our determinations regarding the fair value of our investments are materially higher than the values that we ultimatelyrealize upon their disposal.We measure the fair value of our investments quarterly, in accordance with guidance set forth in FASB Accounting Standards Codification (“ASC”)Topic 820, Fair Value Measurements and Disclosures. Ultimate realization of the value of an asset depends to a great extent on economic and otherconditions that are beyond our control. Further, fair value is only an estimate based on good faith judgment of the price at which an investment can be soldbecause market prices of investments can only be determined by negotiation between a willing buyer and seller. If we were to liquidate a particular asset, therealized value may be more than or less than the amount at which such asset is valued. Accordingly, the value of our Class A common stock, Series BPreferred Stock and Senior Notes could be adversely affected by our determinations regarding the fair value of our investments, whether in the applicableperiod or in the future. Additionally, such valuations may fluctuate over short periods of time.Our determination of the fair value of our agency MBS is based on price estimates provided by third-party pricing services. In general, pricing servicesheavily disclaim their valuations. Depending on the complexity and liquidity of a security, valuations of the same security can vary substantially from onepricing service to another. Private-label MBS trade infrequently and may be considered illiquid. To the extent we invest in private-label MBS, ourdetermination of the fair value is based on significant unobservable inputs based on various assumptions made by management of the Company. Thesesignificant unobservable inputs may include assumptions regarding future interest rates, prepayment rates, discount rates, credit loss rates, and the timing ofcredit losses. These assumptions are inherently subjective and involve a high degree of management judgment, and our determinations of fair value maydiffer materially16Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. from the values that would have been used if a public market for these securities existed. Therefore, our results of operations for a given period could beadversely affected if our determinations regarding the fair market value of these investments are materially different than the values that we ultimately realizeupon their disposal.Credit ratings may not reflect all risks, are not recommendations to buy or hold the Senior Notes or our other senior unsecured debt that we may issue fromtime to time, and may be subject to revision, suspension or withdrawal at any time.One or more independent credit rating agencies may assign and maintain credit ratings to our Senior Notes and other indebtedness that we may offerfrom time to time. The credit ratings reflect rating agencies’ assessment of our ability to perform our obligations under the Senior Notes, including anassessment of credit risks in determining the likelihood that payments will be made when due under such debt. The ratings may not reflect the potentialimpact of all risks related to the structure, market, risk and other factors relating to, and that may affect the value of, such securities. A credit rating is not arecommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal by the rating agency at any time. Ratings do notreflect market prices or suitability of a security for a particular investor. No assurance can be given that a credit rating will remain constant for any givenperiod of time or that a credit rating will not be lowered or withdrawn entirely by the credit rating agency if, in its judgment, circumstances in the future sowarrant. A suspension, reduction or withdrawal at any time of the credit rating assigned to the Senior Notes by one or more of the credit rating agencies mayadversely affect the cost and terms and conditions of our financings and could adversely affect the value and trading of the Senior Notes, as well as other ofour senior unsecured debt that we may issue from time to time.We may change our investment strategy, hedging strategy, asset allocation and operational policies without shareholder consent, which may result inriskier investments and adversely affect the market value of our Class A common stock, Series B Preferred Stock and Senior Notes and our ability to makedistributions 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 investment or hedge decisions that are different from, and possibly riskier than, the investments and hedgesdescribed in this Annual Report on Form 10-K. A change in our investment or hedging strategy may increase our exposure to interest rate and real estatemarket fluctuations. A change in our asset allocation could result in us making investments in securities, assets or business different from those described inthis 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 transactions that deviate from these policies without a vote of, or notice to, ourshareholders. Operational policy changes could adversely affect the market value of our Class A common stock, Series B Preferred Stock or Senior Notes andour ability to make distributions to our shareholders. Investing in assets other than residential MBS or pursuing business activities other than investing inresidential MBS may not be successful and could adversely affect our results of operations and the market value of our Class A common stock, Series BPreferred Stock or Senior Notes. We may enter into new lines of business, acquire other companies or engage in other strategic initiatives, each of which may result inadditional risks and uncertainties in our businesses.We may pursue growth through acquisitions of other companies or other strategic initiatives that may require approval by our Board of Directors,stockholders, or both. To the extent we pursue strategic investments or acquisitions, undertake other strategic initiatives or consider new lines of business,we will face numerous risks and uncertainties, including risks associated with: 17Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. •the availability of suitable opportunities; •the level of competition from other companies that may have greater financial resources; •our ability to value potential acquisition opportunities accurately and negotiate acceptable terms for those opportunities; •the required investment of capital and other resources; •the lack of availability of financing and, if available, the terms of any financings; •the possibility that we have insufficient expertise to engage in such activities profitably or without incurring inappropriate amounts ofrisk; •the diversion of management’s attention from our core businesses; •assumption of liabilities in any acquired business; •the disruption of our ongoing businesses; •the increasing demands on or issues related to combining or integrating operational and management systems and controls; •compliance with additional regulatory requirements; and •costs associated with integrating and overseeing the operations of the new businesses. Entry into certain lines of business may subject us to new laws and regulations with which we are not familiar, or from which we are currently exempt,and may lead to increased litigation and regulatory risk. In addition, if a new business generates insufficient revenues or if we are unable to efficientlymanage our expanded operations, our results of operations will be adversely affected. Our strategic initiatives may include joint ventures, in which case wewill be subject to additional risks and uncertainties in that we may be dependent upon, and subject to liability, losses or reputational damage relating to,systems, controls and personnel that are not under our control.Our Board of Directors does not approve each of our investment, financing and hedging decisions.Our Board of Directors oversees our operational policies and periodically reviews our investment guidelines and our investment portfolio. However,our Board of Directors does not review all of our proposed investments. In addition, in conducting periodic reviews, our Board of Directors may rely primarilyon information provided to them by our management. Furthermore, transactions entered into or structured for us by our management may be difficult orimpossible to unwind by the time they are reviewed by our Board of Directors.We operate in a highly-competitive market for investment opportunities, which could make it difficult for us to purchase or originate investments atattractive yields and thus have an adverse effect on our business, results of operations and financial condition.We gain access to investment opportunities only to the extent that they become known to us. Gaining access to investment opportunities is highlycompetitive. Many of our competitors are substantially larger than us and have considerably greater financial, technical and marketing resources, more long-standing relationships, broader product offerings and other advantages. Some of our competitors may have a lower cost of funds and access to fundingsources that are not available to us. As a result of this competition, we may not be able to purchase or originate our target investments at attractive yields,which could have an adverse effect on our business, results of operations and financial condition.Risks Related to our Business and StructureOur Rights Plan could inhibit a change in our control.We have a Rights Plan designed to protect against a possible limitation on our ability to use our NOLs, NCLs and built-in losses by dissuadinginvestors from aggregating ownership of our Class A common stock and triggering an “ownership change” for purposes of Sections 382 and 383 of the Code.Under the terms of the Rights Plan, in general, if a person or group acquires or commences a tender or exchange offer for beneficial ownership of 4.9% or moreof the outstanding shares of our Class A common stock upon a determination by our Board of Directors (an “Acquiring Person”), all of our other Class Acommon shareholders will have the right to purchase securities from us at a discount to such securities’ fair market value, thus causing substantial dilution tothe Acquiring Person. The Rights Plan may have the effect of inhibiting or impeding a change in control not approved by our Board of Directors18Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. and, notwithstanding its purpose, could adversely affect our shareholders’ ability to realize a premium over the then-prevailing market price for our commonstock in connection with 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 potential acquirer’s efforts toacquire a large interest in us will be successful. Consequently, the Rights Plan could impede transactions that would otherwise benefit our shareholders.The trading price of our Class A common stock, Series B Preferred Stock or Senior Notes 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 depress our stockprice regardless of our results. The following factors, among others, could contribute to the volatility of the price of our Class A common stock, Series BPreferred Stock or Senior Notes: •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 our MBSportfolio 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 or changes in federal fiscal or monetary policies; •dilution resulting from new equity issuances; •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 of which arebeyond our control, including the market value of the MBS we acquire, the performance of our hedging instruments, prepayment rates and changes in interestrates. As a result, we may fail to meet profitability or dividend expectations, which could negatively affect the market price of our Class A common stock,Series B Preferred Stock and Senior Notes and our ability to pay dividends to our shareholders.We cannot assure you that we will pay dividends in the future.Pursuant to our variable dividend policy, our Board of Directors evaluates dividends on a quarterly basis and, in its sole discretion, approves thepayment of dividends. Our Board of Directors is not obligated to maintain a minimum dividend payment level and the amount of our dividend mayfluctuate. Our dividend policy differs from many of our competitors who qualify as REITs that must distribute to their shareholders at least 90% of their REITtaxable income each taxable year. As a corporation that is taxed as a C corporation for U.S. federal tax purposes, we do not have any minimum distributionrequirements. There can be no assurances that our Board of Directors will continue to approve the payment of future dividends at the current levels, if any atall. We may pay distributions to shareholders that are considered a return of capital for U.S. federal income tax purposes.We may pay distributions to shareholders that may include a return of capital. To the extent that our Board of Directors decides to pay adistribution in excess of our current or accumulated earnings and profits, such distributions would generally be considered a return of capital for U.S. federalincome tax purposes. A return of capital reduces the basis of a stockholder’s investment in our common stock to the extent of such basis and is treated as acapital gain thereafter.19Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. Indemnification obligations to certain of our current and former directors and officers may increase the costs to us of legal proceedings involving ourcompany.Our charter contains a provision that limits the liability of our directors and officers to us and our shareholders for money damages, except for liabilityresulting from willful misconduct or a knowing violation of the criminal law or any federal or state securities law. Our charter also requires us to indemnifyour directors and officers in connection with any liability incurred by them in connection with any action or proceeding (including any action by us or in ourright) to which they are or 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 andthe 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 a Virginia corporation (unless its charter provides otherwise, which our charter does not) to indemnify a directoror officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he is made a party by reason of his service in thatcapacity.In addition, we have entered into indemnification agreements with certain of our current and former directors and officers under which we aregenerally required to indemnify them against liability incurred by them in connection with any action or proceeding to which they are or may be made aparty by reason of their service in those or other capacities, if the conduct in question was in our best interests and the person was conducting themselves ingood faith (subject to certain exceptions, including liabilities arising from willful misconduct, a knowing violation of the criminal law or receipt of animproper benefit).In the future we may be the subject of indemnification assertions under our charter, Virginia law or these indemnification agreements by our currentand former directors and officers who are or may become party to any action or proceeding. We maintain directors’ and officers’ insurance policies that maylimit 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 isreduced, denied, eliminated or otherwise not available to us, our potential financial exposure would be increased. The maximum potential amount of futurepayments we could be required to make under these indemnification obligations could be significant. Amounts paid pursuant to our indemnificationobligations could adversely affect our financial results and the 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 reduce the market price of ourshares.We rely on Section 3(c)(5)(C) of the 1940 Act 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 an unconsolidated basis,consist of qualifying assets or real estate-related assets. We will need to ensure not only that we qualify for an exclusion or exemption from regulation underthe 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.If we fail to maintain our exclusion and another exclusion or exemption is not available, we may be required to register as an investment company, orwe may be required to acquire or dispose of assets in order to meet our exemption. Any such asset acquisitions or dispositions may include assets that wewould not acquire or dispose of in the ordinary course of business, may be at unfavorable prices and result in a decline in the price of our Class A commonstock, Series B Preferred Stock or Senior Notes. If we are required to register as an investment company 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 with affiliatedpersons (as defined in the 1940 Act), and portfolio composition, including restrictions with respect to diversification and industry concentration and othermatters. Accordingly, registration under the 1940 Act could limit our ability to follow our current investment and financing strategies and result in a declinein the price of our Class A common stock, Series B Preferred Stock or Senior Notes.Failure to obtain and maintain an exemption from being regulated as a commodity pool operator could subject us to additional regulation andcompliance requirements and may result in fines and other penalties which could materially adversely affect our business, financial condition and resultsof operations.The Dodd-Frank Act established a comprehensive new regulatory framework for derivative contracts commonly referred to as “swaps.” As a result, anyinvestment fund that trades in swaps or other derivatives may be considered a “commodity pool,” which would cause its operators (in some cases the fund’sdirectors) to be regulated as “commodity pool operators,” or CPOs. Under rules adopted by the U.S. Commodity Futures Trading Commission (“CFTC”) forwhich the compliance date generally was December 31, 2012 as to those funds that become commodity pools solely because of their use of swaps, CPOs mustby then have filed an application for registration with the National Futures Association (“NFA”) and have commenced and sustained good faith efforts tocomply with the Commodity Exchange Act and CFTC’s regulations with respect to capital raising, disclosure, reporting, recordkeeping and other businessconduct applicable for their activities as CPOs as if the CPOs were in fact registered in such capacity (which also requires compliance with applicable NFArules). However, the CFTC’s Division of Swap Dealer and20Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. Intermediary Oversight issued a no-action letter saying, although it believes that mortgage REITs are properly considered commodity pools, it would notrecommend that the CFTC take enforcement action against the operator of a mortgage REIT who does not register as a CPO if, among other things, themortgage REIT limits the initial margin and premiums required to establish its swaps, futures and other commodity interest positions to not more than fivepercent (5%) of its total assets, the mortgage REIT limits the net income derived annually from those commodity interest positions which are not qualifyinghedging transactions 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 associated with changesin interest rates, yield curve shapes and market volatility. These hedging instruments may include interest rate swaps, interest rate swap futures, Eurodollarfutures, U.S. Treasury note futures and options of futures. We do not currently engage in any speculative derivatives activities or other non-hedgingtransactions using swaps, futures or options on futures. We do not use these instruments for the purpose of trading in commodity interests, and we do notconsider our company or its operations to be a commodity pool as to which CPO registration or compliance is required. We have claimed the relief affordedby the above-described no-action letter. Consequently, we will be restricted to operating within the parameters discussed in the no-action letter and will notenter into hedging transactions covered by the no-action letter if they would cause us to exceed the limits set forth in the no-action letter. However, there canbe no assurance that the CFTC will agree that we are 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 to a person who fails to complywith commodities laws and regulations, prohibit such a person from trading or doing business with registered entities, impose civil money penalties, requirerestitution and seek fines or imprisonment for criminal violations. In the event that the CFTC staff does not provide the no action letter relief we requested orasserts that we are not entitled to the mortgage REIT no-action letter relief claimed or if CFTC otherwise determines that CPO registration and compliance isrequired of us, we may be obligated to furnish additional disclosures and reports, among other things. Further, a private right of action exists against thosewho violate the laws over which the CFTC has jurisdiction or who willfully aid, abet, counsel, induce or procure a violation of those laws. In the event thatwe fail to comply with statutory requirements relating to derivatives or with the CFTC’s rules thereunder, including the mortgage REIT no-action letterdescribed above, we may be subject to significant fines, penalties and other civil or governmental actions or proceedings, any of which could have amaterially adverse effect on 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 our Class A common stock,Series B Preferred Stock or Senior Notes 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 our portfolio isparticularly important to our prospects. Competition for the recruiting and retention of employees may increase elements of our compensation costs. We maynot be able to recruit and hire new employees with our desired qualifications in a timely manner. Our incentives may be insufficient to recruit and retain ouremployees. Increased compensation costs could adversely affect the amount of cash available for distribution to shareholders and our failure to recruit andretain qualified employees could materially and adversely affect our future operating results.We are dependent upon a small number of key senior professionals and the loss of any of these individuals could adversely affect our financial resultswhich may, in turn, negatively affect the market price of our Class A common stock and Senior Notes and our ability to pay dividends to our shareholders.We currently do not have employment agreements with any of our senior officers and other key professionals. We cannot guarantee that we willcontinue to have access to members of our senior management team or other key professionals. The loss of any members of our senior management and otherkey 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 could significantly disrupt ourbusiness, which may, in turn, negatively affect the market price of our Class A common stock, Series B Preferred Stock and Senior Notes and our ability topay dividends to our shareholders.Our business is highly dependent upon communications and information systems that allow us to monitor, value, buy, sell, finance and hedge ourinvestments. These systems are primarily operated by third parties and, as a result, we have limited ability to ensure their continued operation. Furthermore, inthe event of systems failure or interruption, we will have limited ability to affect the timing and success of systems restoration. Any failure or interruption ofour systems or third-party trading or information systems could cause delays or other problems in our securities trading activities, which could have amaterial adverse effect on our operating results and negatively affect the market price of our Class A common stock, Series B Preferred Stock and Senior Notesand our ability to pay dividends to our shareholders.21Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. If we issue additional debt securities or other equity securities that rank senior to our common stock, our operations may be restricted and we will beexposed to additional risk and the market price of our Class A common stock, Series B Preferred Stock and Senior Notes 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 other instrumentcontaining covenants restricting our operating flexibility. Additionally, any convertible or exchangeable or other securities registered pursuant to our shelfregistration statement that we issue in the future may have rights, preferences and privileges more favorable than those of our Class A common stock. Alsoadditional shares of preferred stock, if issued, could have a preference on liquidating distributions or a preference on dividend payments that could limit ourability to make a dividend distribution to the holders of our Class A common stock. We, and indirectly our shareholders, will bear the cost of issuing andservicing such securities. Holders of debt securities may be granted specific rights, including but not limited to, the right to hold a perfected security interestin certain of our assets, the right to accelerate payments due under the indenture, rights to restrict dividend payments, and rights to approve the sale of assets.Such additional restrictive covenants, operating restrictions and preferential dividends could have a material adverse effect on our operating results andnegatively affect the market price of our Class A common stock, Series B Preferred Stock and Senior Notes and our ability to pay distributions to ourshareholders.Changes in banks’ inter-bank lending rate reporting practices or the method pursuant to which LIBOR is determined may adversely affect the value of thefinancial obligations to be held or issued by us that are linked to LIBOR.LIBOR and other indices which are deemed “benchmarks” are the subject of recent national, international, and other regulatory guidance andproposals for reform. Some of these reforms are already effective while others are still to be implemented. These reforms may cause such benchmarks toperform differently than in the past, or have other consequences which cannot be predicted. In particular, regulators and law enforcement agencies in the U.K.and elsewhere are conducting criminal and civil investigations into whether the banks that contribute information to the British Bankers’ Association (the“BBA”) in connection with the daily calculation of LIBOR may have been under-reporting or otherwise manipulating or attempting to manipulate LIBOR. Anumber of BBA member banks have entered into settlements with their regulators and law enforcement agencies with respect to this alleged manipulation ofLIBOR. Actions by the regulators or law enforcement agencies, as well as ICE Benchmark Administration (the current administrator of LIBOR), may result inchanges to the manner in which LIBOR is determined or the establishment of alternative reference rates. For example, on July 27, 2017, the U.K. FinancialConduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021.At this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or any other reforms to LIBORthat may be implemented in the U.K. or elsewhere. Uncertainty as to the nature of such potential changes, alternative reference rates or other reforms mayadversely affect the market for or value of any securities on which the interest or dividend is determined by reference to LIBOR, loans, derivatives and otherfinancial obligations or on our overall financial condition or results of operations. More generally, any of the above changes or any other consequentialchanges to LIBOR or any other “benchmark” as a result of international, national or other proposals for reform or other initiatives or investigations, or anyfurther uncertainty in relation to the timing and manner of implementation of such changes, could have a material adverse effect on the value of and return onany securities based on or linked to a “benchmark.”Future sales of shares of our common stock may depress the price of our shares.We cannot predict the effect, if any, of future sales of our common stock or the availability of shares for future sales on the market price of our commonstock. Any sales of a substantial number of our shares in the public market, or the perception that sales might occur, may cause the market price of our sharesto decline.Tax Risks of our Business and StructureWe may not be able to generate future taxable income to fully utilize our tax benefits.We recognize the expected future tax benefit from a deferred tax asset when the tax benefit is considered more likely than not to be realized.Otherwise, a valuation allowance is applied against the deferred tax asset. Assuming the recoverability of a deferred tax asset requires management to makesignificant estimates related to expectations of future taxable income. Estimates of future taxable income are based on forecasted cash flow from operations,the character of expected income or loss as either ordinary or capital and the application of existing tax laws in each jurisdiction. To the extent that futurecash flows and the amount or character of taxable income differ significantly from estimates, our ability to realize the deferred tax asset could be impacted. Tothe extent our estimates of our ability to realize our tax benefits change, we would be required to record changes to our valuation allowance applied againstour deferred tax asset. In addition, our NOL carryforwards begin to expire in 2027 and our NCL carryforwards begin to expire in 2019. We may not generatesufficient taxable income of the appropriate tax character to fully utilize these carryforwards prior to their expiration. To the extent that our NOL or NCLcarryforwards expire unutilized, we would be required to write off the corresponding deferred tax asset. If we were to increase our valuation allowancesagainst our deferred tax asset or if we were to write off expired loss22Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. carryforwards, our net income and net book value would be adversely impacted. For additional discussion regarding our ability to utilize our tax benefits, see“Management’s Discussion and Analysis of Financial Condition and Results of Operations – Income Tax Provision.”Our ability to use our tax benefits could be substantially limited if we experience an “ownership change.”Our NOL and NCL carryforwards and certain recognized built-in losses may be limited by Sections 382 and 383 of the Code if we experience an“ownership change.” 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 change occurs, ourability to use our NOLs, NCLs and certain recognized built-in losses to reduce our taxable income in a future year would be limited to a Section 382limitation equal to the fair market value of our stock immediately prior to the ownership change multiplied by the long-term tax-exempt interest rate in effectfor the month of the ownership change. The long-term tax-exempt rate for February 2018 is 1.97%. In the event of an ownership change, NOLs and NCLs thatexceed the Section 382 limitation in any year will continue to be allowed as carryforwards for the remainder of the carryforward period and such losses can beused to offset taxable income for years within the carryforward period subject to the Section 382 limitation in each year. However, if the carryforward periodfor any NOL or NCL were to expire before that loss had been fully utilized, the unused portion of that loss would be lost. Our use of new NOLs or NCLsarising after the date of an ownership change would not be affected by the Section 382 limitation (unless there were another ownership change after thosenew losses arose).We have a Rights Plan designed to protect against the occurrence of an ownership change. The Rights Plan is intended to act as a deterrent to anyperson or group acquiring 4.9% or more of our outstanding Class A common stock without the approval of our Board of Directors. See “Risks Related to ourBusiness and Structure - Our Rights Plan could inhibit a change in our control” for information on our Rights Plan. The Rights Plan, however, does notprotect against all transactions that could cause an ownership change, such as public issuances and repurchases of shares of Class A common stock. TheRights Plan may not be successful in preventing an ownership change within the meaning of Sections 382 and 383 of the Code, and we may lose all or mostof the anticipated tax benefits associated with our prior losses.Based on our knowledge of our stock ownership, we do not believe that an ownership change has occurred since our losses were generated.Accordingly, we believe that at the current time there is no annual limitation imposed on our use of our NOLs and NCLs to reduce future taxable income. Thedetermination of whether an ownership change has occurred or will occur is complicated and depends on changes in percentage stock ownership amongshareholders. Other than the Rights Plan, there are currently no restrictions on the transfer of our stock that would discourage or prevent transactions thatcould cause an ownership change, although we may adopt such restrictions in the future. As discussed above, the Rights Plan is intended to discouragetransactions that could cause an ownership change. In addition, we have not obtained, and currently do not plan to obtain, a ruling from the Internal RevenueService, regarding our conclusion as to whether our losses are subject to any such limitations. Furthermore, we may decide in the future that it is necessary orin our interest to take certain actions that could result in an ownership change. Therefore, no assurance can be provided as to whether an ownership changehas 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, repurchasing our stock or issuing additionalstock to raise capital or to acquire businesses or assets. Accordingly, our desire to preserve our NOLs and NCLs may cause us to forgo otherwise attractiveopportunities.Our ability to deduct our interest expense could be limited.The Tax Cuts and Jobs Act imposes limitations on the deductibility of business interest expense. The new business interest expense limitation appliesto net interest expense (i.e., interest expense in excess of interest income). Any disallowed interest expense may generally be carried forward to future taxableyears, subject to additional requirements and limitations. Because our activities generate substantial amounts of interest income, it is anticipated that thedeductibility of our interest expense generally will not be impacted by the new limitation. However, there can be no complete assurance that our activitieswill not produce net interest expense, the deductibility of which is limited by the new rules.If we elect in the future to be treated as a REIT, complying with the REIT requirements may cause us to forego otherwise attractive opportunities, mayresult in higher income tax rates on dividends you may receive, and could result in a reduction in our net book value.We revoked our status as a REIT effective January 1, 2009, in part to maximize the use of tax benefits associated with our NOLs and NCLs. In thefuture, we might make an election again to be taxed as a REIT for various business reasons, including if we no longer have the benefit of NOL carryforwards.To qualify as a REIT for federal income tax purposes, we would be required to23Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute toour shareholders and the ownership of our stock. In order to meet these tests, we may be required to forego attractive business or investment opportunities.Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits. In addition, in order to qualify as aREIT, an entity must distribute to its shareholders, each calendar year, at least 90% of its REIT taxable income, determined without regard to the deductionfor dividends paid and excluding net capital gain. As a result, if we elect to be treated as a REIT, we generally will be required to distribute most of ourearnings to our shareholders rather than having the option to retain our earnings for reinvestment in our business.Currently as a C corporation, distributions to our shareholders of current or accumulated earnings and profits are “qualified dividends” whereas similardistributions to shareholders of a REIT are nonqualified dividends. Qualified dividends to domestic shareholders that are individuals, trusts or estates aresubject to the same federal income tax rates as long-term capital gains for which the current maximum rate is 23.8% (inclusive of the 3.8% Medicaretax). Nonqualified dividends are subject to the higher federal income tax rate on ordinary income for which the current maximum rate is 40.8% (inclusive ofthe 3.8% Medicare tax). However, effective January 1, 2018, shareholders that are individuals, trusts and estates may deduct up to 20% of dividends from aREIT, subject to certain limitations, resulting in a current maximum effective rate of 33.4% (inclusive of the 3.8% Medicare tax). If we were to elect to betreated as a REIT, future dividends you receive could be subjected to a higher tax rate. If our dividends are subject to a higher tax rate, the market value of ourcommon stock could also be adversely affected.If we were to elect in the future to be treated as a REIT, any remaining net deferred tax asset would likely need to be written off for GAAP accountingpurposes. As a result, our net income and net book value could be adversely affected upon our election to be taxed as a REIT.The decision to elect REIT status is in the sole discretion of our Board of Directors, and no assurance can be given that we will, or will not, elect suchstatus for 2018 or in the future.If we elect in the future to be treated as a REIT, our ability to invest in and dispose of agency securities through forward settling transactions could belimited by our REIT status.We purchase a substantial portion of our agency MBS through contracts for forward settling transactions, including TBAs. In certain instances, ratherthan take delivery of the agency MBS subject to a contract for a forward settling transaction, we will dispose of the contract for a forward settling transactionthrough a dollar roll transaction in which we agree to purchase similar securities in the future at a predetermined price or otherwise, which may result in therecognition of income or gains.If our Board of Directors were to decide that we should elect REIT status, we would have to satisfy certain gross income requirements on an annualbasis and certain asset requirements as the close of each calendar quarter. For one of the gross income requirements, at least 75% of our gross income for eachtaxable year, excluding gross income from sales of inventory or dealer property and certain hedging transactions, generally must be derived from investmentsrelating to real property or mortgages on real property, including interest income derived from mortgage loans secured by real property, rents from realproperty, dividends from other REITs, and gains from the sale of real estate assets, as well as temporary investments. For one of the asset requirements, at least75% of the value of our total assets must be represented by some combination of “real estate assets”, cash, cash items, U.S. government securities, and, undersome circumstances, stock or debt instruments purchased with new capital. For this purpose, real estate assets generally include residential MBS andmortgage loans. Under one of the additional asset requirements, the value of any one issuer’s securities that we could own may not exceed 5% of the value ofour total assets. The law is unclear regarding whether contracts for forward settling transactions will be qualifying assets for the 75% asset test and whether income andgains from dispositions of contracts for forward settling transactions will be qualifying income for the 75% gross income test. If we elect in the future to betreated as a REIT, until such time as we seek and receive a favorable private letter ruling from the Internal Revenue Service (the "IRS"), or we are advised bycounsel that contracts for forward settling transactions should be treated as qualifying assets for purposes of the 75% asset test, we would need to limit our netinvestment in contracts for forward settling transactions and any non-qualifying assets to no more than 25% of our assets at the end of any calendar quarterand would need to limit our investments in contracts for forward settling transactions with a single counterparty to no more than 5% of our total assets at theend of any calendar quarter. Further, until such time as we seek and receive a favorable private letter ruling from the IRS or we are advised by counsel thatincome and gains from the disposition of contracts for forward settling transactions should be treated as qualifying income for purposes of the 75% grossincome test, we would need to limit our gains from dispositions of contracts for forward settling transactions and any non-qualifying income to no more than25% of our gross income for each calendar year.Accordingly, our ability to purchase agency MBS through contracts for forward settling transactions, including TBAs, and to dispose of contracts forforward settling transactions, through dollar roll transactions or otherwise, could be limited if we were to elect to be taxed as a REIT. Moreover, even if we areadvised by counsel that contracts for forward settling transactions should be treated as24Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. qualifying assets or that income and gains from dispositions of contracts for forward settling transactions should be treated as qualifying income, it ispossible that the IRS could successfully take the position that such assets are not qualifying assets and such income is not qualifying income.In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of U.S. federal income tax laws applicableto investments similar to an investment in shares of our common stock. The Tax Cuts and Jobs Act significantly changes the U.S. federal income tax lawsapplicable to businesses and their owners. Technical corrections or other amendments to the Tax Cuts and Jobs Act or administrative guidance interpretingthe Tax Cuts and Jobs Act may be forthcoming at any time. We cannot predict the long-term effect of the Tax Cuts and Jobs Act or any future law changes onus or our shareholders. Any such changes could have an adverse effect on the market value of our securities or our ability to make dividends to ourshareholders.ITEM 1B. UNRESOLVED STAFF COMMENTSNone. 25Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. ITEM 2. PROPERTIESOur executive and administrative office is located at 1001 Nineteenth Street North, Arlington, Virginia 22209. We lease our office space.We sublease office space to Billings Capital Management, LLC (“BCM”), which is an investment management company owned and operated by EricF. Billings, our Executive Chairman of the Board of Directors, and his sons. The lease term is month-to-month, based on the pro-rata share of the spaceoccupied by BCM. The lease payments to us totaled approximately $110 thousand for the year ended December 31, 2017.ITEM 3. LEGAL PROCEEDINGSWe are from time to time involved in civil lawsuits, legal proceedings and arbitration matters that we consider to be in the ordinary course of ourbusiness. There can be no assurance that these matters individually or in the aggregate will not have a material adverse effect on our financial condition orresults of operations in a future period. We are also subject to the risk of litigation, including litigation that may be without merit. As we intend to activelydefend such litigation, significant legal expenses could be incurred. An adverse resolution of any future litigation against us could materially affect ourfinancial condition, results of operations and liquidity. Furthermore, we operate in highly-regulated markets that currently are under intense regulatoryscrutiny, and we have received, and we expect in the future that we may receive, inquiries and requests for documents and information from various federal,state and foreign regulators. In addition, one or more of our subsidiaries have received requests to repurchase loans from various parties in connection withthe former securitization business conducted by a subsidiary. We believe that the continued scrutiny of MBS, structured finance, and derivative marketparticipants increases 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 any suchinvestigation or proceeding were to arise, it would not materially adversely affect our Company.ITEM 4. MINE SAFETY DISCLOSURESNot applicable. 26Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. PART IIITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIESQuarterly Stock Prices and Dividend DeclarationsOur Class A common stock is listed on the NYSE under the symbol “AI.” As of January 31, 2018, there were approximately 118 record holders of ourClass A common stock. However, most of the shares of our Class A common stock are held by brokers and other institutions on behalf of shareholders. Thefollowing table shows the high and low sales prices of our Class A common stock during each fiscal quarter during the years ended December 31, 2017 and2016. Price Range of Class A Common Stock High Low Year Ended December 31, 2017 Fourth Quarter $12.87 $10.93 Third Quarter 13.95 12.43 Second Quarter 15.17 13.59 First Quarter 15.59 13.46 Year Ended December 31, 2016 Fourth Quarter 17.13 14.08 Third Quarter 15.71 12.61 Second Quarter 14.04 11.99 First Quarter 13.82 9.42 There is no established public trading market for our Class B common stock. As of December 31, 2017, there were no shares of Class B common stockissued and outstanding. For the periods presented below, to the extent there were shares of Class B common stock outstanding, holders of shares of our ClassB common stock received dividends in the same amounts and on the same dates as holders of shares of our Class A common stock.Pursuant to the Company’s variable dividend policy for its common stock, the Board of Directors evaluates common stock dividends on a quarterlybasis and, in its sole discretion, approves the payment of dividends. The Company’s common stock dividend payments, if any, may vary significantly fromquarter to quarter. In addition, holders of our 7.00% Series B Cumulative Perpetual Redeemable Preferred Stock are entitled to receive cumulative cashdividends at a rate of 7.00% per annum of its liquidation preference before holders of our common stock are entitled to receive any dividends. The Board ofDirectors has approved and the Company declared and paid the following dividends on its common stock in 2017: Quarter Ended Dividend Amount Declaration Date Record Date Pay DateDecember 31 $0.550 December 14 December 29 January 31, 2018September 30 0.550 September 14 September 29 October 31June 30 0.550 June 16 June 30 July 31March 31 0.625 March 14 March 31 April 28 The Board of Directors approved and the Company declared and paid the following dividends on its common stock in 2016: Quarter Ended Dividend Amount Declaration Date Record Date Pay DateDecember 31 $0.625 December 16 December 30 January 31, 2017September 30 0.625 September 15 September 30 October 31June 30 0.625 June 17 June 30 July 29March 31 0.625 March 15 March 31 April 29 Securities Authorized for Issuance Under Equity Compensation PlansInformation about securities authorized for issuance under our equity compensation plans is incorporated by reference from our Definitive ProxyStatement for the 2018 Annual Meeting of Shareholders.Purchases of Equity Securities by the IssuerThe Company’s Board of Directors authorized a share repurchase program pursuant to which the Company may repurchase up to 2,000,000 shares ofClass A common stock (the “Repurchase Program”). Repurchases under the Repurchase Program may be made27Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. from time to time on the open market and in private transactions at management’s discretion in accordance with applicable federal securities laws. The timingof repurchases and the exact number of shares of Class A common stock to be repurchased will depend upon market conditions and other factors. TheRepurchase Program is funded using the Company’s cash on hand and cash generated from operations. The Repurchase Program has no expiration date andmay be suspended or terminated at any time without prior notice. There were no shares repurchased by the Company under the Repurchase Program duringthe year ended December 31, 2017. As of December 31, 2017, there remain available for repurchase 1,951,305 shares of Class A common stock under theRepurchase Program. Performance GraphThe following graph compares the cumulative total shareholder return for our Class A common stock from December 31, 2012 to December 31, 2017with the comparable cumulative return of the Standard & Poor’s (“S&P”) 500 Stock Index and the FTSE NAREIT Mortgage REIT Index. The FTSE NAREITMortgage REIT Index is a free-float adjusted, market capitalization-weighted index of U.S. mortgage REITs, which include all tax-qualified REITs with morethan 50% of total assets invested in mortgage loans or MBS secured by interests in real property.The graph assumes $100 invested on December 31, 2012 in our Class A common stock and $100 invested at the same time in each of the above-mentioned indices, assuming that all dividends are reinvested. AI S&P 500Index FTSE NAREITMortgage REITIndex December 31, 2012 $100.00 $100.00 $100.00 December 31, 2013 145.32 132.36 97.84 December 31, 2014 166.91 150.43 115.31 December 31, 2015 98.28 152.51 105.30 December 31, 2016 131.58 170.70 129.18 December 31, 2017 124.05 207.92 154.72 28Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. ITEM 6. SELECTED FINANCIAL DATASELECTED CONSOLIDATED FINANCIAL INFORMATION(Dollars in thousands, except per share amounts) Year Ended December 31, 2017 2016 2015 2014 2013 Consolidated Statement of Comprehensive Income Data (audited) Interest income $121,248 $105,336 $121,263 $105,577 $72,233 Interest expense 51,514 29,222 18,889 11,391 8,529 Net interest income 69,734 76,114 102,374 94,186 63,704 Investment gain (loss), net 5,874 (69,318) (118,429) (20,287) (32,557)General and administrative expenses 18,570 20,756 14,787 18,499 17,008 Income (loss) before income taxes 57,038 (13,960) (30,842) 55,400 14,139 Income tax provision (benefit) 39,603 27,387 38,561 47,647 (38,684)Net income (loss) 17,435 (41,347) (69,403) 7,753 52,823 Dividend on preferred stock (251) — — — — Net income (loss) available (attributable) to common stock 17,184 (41,347) (69,403) 7,753 52,823 Other comprehensive (loss) income, net of taxes — (12,371) (23,501) (10,397) 11,743 Comprehensive income (loss) $17,435 $(53,718) $(92,904) $(2,644) $64,566 Basic earnings (loss) per common share $0.67 $(1.79) $(3.02) $0.39 $3.30 Diluted earnings (loss) per common share $0.66 $(1.79) $(3.02) $0.38 $3.26 December 31, 2017 2016 2015 2014 2013 Consolidated Balance Sheet Data (audited) Agency MBS, at fair value $4,054,424 $3,911,375 $3,865,316 $3,414,340 $1,576,499 Private-label MBS, at fair value 76 1,266 130,553 267,437 341,299 Deferred tax assets, net 800 48,829 72,927 101,004 142,691 Total assets 4,160,529 4,116,951 4,178,336 3,992,295 2,170,873 Short-term secured debt 3,667,181 3,649,102 3,621,680 3,179,775 1,547,630 Long-term unsecured debt 73,880 73,656 73,433 39,167 39,067 Total stockholders’ equity 386,317 358,813 459,428 620,671 528,668 Other Financial Data (unaudited) Book value per common share (1) $13.43 $15.17 $19.98 $27.02 $31.71 Tangible book value per common share (2) $13.40 $13.11 $16.81 $22.62 $23.15 Market price per share of Class A common stock (3) $11.78 $14.82 $13.23 $26.61 $26.39 Cash dividends declared per common share $2.275 $2.50 $3.00 $3.50 $3.50 (1)Book value per share is calculated as total shareholders’ equity less the preferred stock liquidation preference divided by common sharesoutstanding. Common shares outstanding includes shares of Class A common stock and Class B common stock outstanding plus vested restrictedstock units convertible into shares of Class A common stock less unvested restricted shares of Class A common stock.(2)Tangible book value represents total shareholders’ equity less the preferred stock liquidation preference and net deferred tax assets.(3)Represents the last reported sale price of the Company’s Class A common stock on the NYSE as of the year ended on the indicated date. 29Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOverviewWe are an investment firm that focuses on acquiring and holding a levered portfolio of residential mortgage-backed securities (“MBS”), consisting ofagency MBS and private-label MBS. Agency MBS include residential mortgage pass-through certificates for which the principal and interest payments areguaranteed by a U.S. government agency or government sponsored enterprise (“GSE”), such as the Federal National Mortgage Association (“Fannie Mae”)and the Federal Home Loan Mortgage Corporation (“Freddie Mac”). Private-label MBS, or non-agency MBS, include residential MBS that are notguaranteed by a GSE or the U.S. government. As of December 31, 2017, nearly all of our investment capital was allocated to agency MBS.We leverage prudently our investment portfolio so as to increase potential returns to our shareholders. We fund our investments primarily throughshort-term financing arrangements, principally through repurchase agreements. We enter into various hedging transactions to mitigate the interest ratesensitivity of our cost of borrowing and the value of our MBS portfolio.We are a Virginia corporation and taxed as a C corporation for U.S. federal tax purposes. We are an internally managed company and do not have anexternal investment advisor.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; •conditions in the residential real estate and mortgage markets; •actions taken by the U.S. government, U.S. Federal Reserve, the U.S. Treasury and foreign central banks; •changes in laws and regulations and industry practices; and •other market developments.Current Market Conditions and Trends The 2017 year opened with expectations for faster economic growth and higher inflation driven by the anticipated pro-growth economic policies ofthe administration of President Trump, including potential income tax reform, infrastructure spending and deregulation. In response, the forward guidance ofthe Federal Open Market Committee (“FOMC”) at the beginning of the year signaled three increases to the federal funds rate during the year. Although theFOMC raised the targeted federal funds rate twice in the first half of the year, market participants began to lower their expectations for additional interest rateincreases in the second half of the year due to weakening inflation expectations, waning likelihood of potential pro-economic growth policies along withgeopolitical risks from North Korea and uncertainty of the economic impact from hurricane damage. However, during the fourth quarter, the passage ofincome tax reform, strong employment data and the potential for additional pro-growth economic policies once again raised expectations for faster economicgrowth and higher inflation. In response, the FOMC raised the targeted federal funds rate once again in December 2017 with expectations of additionalincreases in 2018. The 10-year U.S. Treasury rate was 2.41% as of December 31, 2017, only a four basis point decrease from the prior year end and reaching a high of2.63% and a low of 2.04% during fiscal year 2017. The U.S. Treasury rate curve continued to flatten during the year as the spread between the 2-year and 10-year U.S. Treasury rate narrowed 74 basis points with the short-end outpacing the long-end of the interest rate curve. The spread between 10-year U.S.Treasury rates and interest rate swaps widened by ten basis points during fiscal year 2017 with the 10-year swap rate ending at 2.40% on December 31,2017. In general, the interest rate volatility during the 2017 calendar year could be characterized as low, particularly as compared to recent years. In thisenvironment, the price of agency MBS outperformed U.S. Treasuries and interest rate swaps resulting in modest spread tightening. On December 22, 2017, the President signed the Tax Cuts and Jobs Act, which provides for substantial changes to the federal taxation of individualsand corporations with an effective date of January 1, 2018. For corporate tax payers, the changes include, among others, a decrease in the federal income taxrate from 35.0% to 21.0%, a change in international taxation from a worldwide tax system to a territorial tax system, and elimination or modification ofcertain deductions. For individual taxpayers, the changes include, among others, lower ordinary income tax rates, higher standard deductions, and suspensionor modification of several itemized deductions. The changes to the categories of itemized deductions include a limit to state and local income and propertytax deductions30Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. of $10,000 and a modification to the amount of residential mortgage interest that would be deductible. The new rule would limit the deduction available formortgage interest by reducing the amount of debt that can qualify from $1 million to $750,000; however, mortgage debt acquired prior to December 15, 2017would not be affected by the reduction. Importantly to the agency MBS market, borrowers of mortgage loans that serve as collateral for agency MBS shouldnot be affected by the revised mortgage interest limitation, as the current GSE baseline and high cost area conforming loan limits are $453,100 and $679,650,respectively. Many of the changes affecting individual taxpayers would cease to apply after December 31, 2025 and would revert to their pre-2018 form withfuture legislation required to make the provisions effective beyond 2025. As a result of these changes, it is expected that the number of individual taxpayersthat itemize deductions will decrease significantly causing the income tax benefits of residential home ownership to decline materially. It is likely that thesefactors could result in a decline in the pricing of residential real estate as well as alter the prepayment patterns of residential mortgages, which could have asignificant impact on the pricing and returns of residential MBS. On December 13, 2017, the FOMC announced that it was raising the target federal funds rate range by 25 basis points to 1.25% to 1.50% representingthe fourth 25 basis point rate increase over a one-year period. On January 31, 2018, the FOMC announced that it was maintaining its target federal funds rateat 1.25% to 1.50%. The FOMC commented that the labor market has continued to strengthen and the economic activity has been rising at a solid rate. In itsJanuary 31, 2018 statement, the FOMC stated that it continues to expect that, with further gradual adjustments in the stance of monetary policy, economicactivity will expand at a moderate pace and labor market conditions will remain strong. The FOMC also stated that it expects inflation to move up in thenext year and stabilize around 2% over the medium term. The FOMC commented further that it expects that economic conditions will evolve in a mannerthat will warrant further gradual increases in the federal funds rate, and will likely remain, for some time, below levels that are expected to prevail in thelonger run. Based on federal fund futures prices, the market is currently expecting that the FOMC will raise the target federal funds rate three more times witha possibility of an additional fourth hike during 2018. On June 14, 2017, the FOMC announced that it would implement a balance sheet normalization policy by gradually decreasing its reinvestment ofU.S. Treasury securities and agency MBS. More specifically, principal payments received by the Federal Reserve would be reinvested only to the extent theyexceed gradually rising caps until the FOMC determines that the Federal Reserve is holding no more securities than necessary to implement monetary policyefficiently and effectively. In October 2017, the FOMC commenced this balance sheet normalization program. General current market sentiment is thatmortgage spreads may widen during 2018 due to an expected reduction in the demand for agency MBS as the Federal Reserve executes its quantitativetightening policy, which would result in potential attractive investment opportunities in agency MBS. The Chair of the Board of Governors of the Federal Reserve System has significant influence over monetary policy and is appointed by the U.S.President subject to confirmation by the U.S. Senate. On November 2, 2017, President Trump nominated Jerome H. Powell, an existing member of the Boardof Governors, to be the next Chair upon the end of Chair Janet L. Yellen’s term on February 3, 2018. On January 23, 2018, the Senate Banking Committeevoted to recommend Mr. Powell as the next Chair and his four-year term commenced on February 3, 2018. Prepayment speeds in the residential mortgage market during fiscal year 2017 decreased from the prior year driven primarily by a decline inrefinancing volumes due to an increase in mortgage rates. Housing prices continue to improve as evidenced by the S&P CoreLogic Case-Shiller U.S.National Home Price NSA index reporting a 6.2% annual gain in November 2017 and the overall index continuing to reach a historical high eachmonth. Housing prices continue to rise faster than inflation as the demand for homes has exceeded the supply of homes driven by low inventories of new orexisting homes for sale as well as affordable available financing from historically low mortgage rates and low unemployment. Looking forward, with homeprices rising faster than wages and inflation, some areas could see potential home buyers compelled to look at renting as an option. 31Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. The following table presents certain key market data as of the dates indicated: December 31,2016 March 31,2017 June 30,2017 September 30,2017 December 31,2017 Change - FourthQuarter 2017 30-Year FNMA Fixed Rate MBS (1) 3.0%$99.20 $99.23 $99.83 $100.27 $100.05 $(0.22)3.5% 102.33 102.36 102.67 103.05 102.73 (0.32)4.0% 104.98 104.95 105.14 105.27 104.61 (0.66)4.5% 107.39 107.30 107.27 107.33 106.42 (0.91) U.S. Treasury Rates (UST) 2-year UST 1.19% 1.26% 1.38% 1.48% 1.89% 0.41%3-year UST 1.45% 1.49% 1.55% 1.62% 1.98% 0.36%5-year UST 1.93% 1.92% 1.89% 1.94% 2.21% 0.27%7-year UST 2.25% 2.21% 2.14% 2.17% 2.33% 0.16%10-year UST 2.45% 2.39% 2.31% 2.33% 2.41% 0.08%2-year to 10-year UST Spread 1.26% 1.13% 0.93% 0.85% 0.52% (0.33)% Interest Rate Swap Rates 2-year Swap 1.45% 1.62% 1.62% 1.74% 2.08% 0.34%3-year Swap 1.69% 1.81% 1.75% 1.86% 2.17% 0.31%5-year Swap 1.98% 2.05% 1.96% 2.00% 2.24% 0.24%7-year Swap 2.16% 2.22% 2.11% 2.14% 2.31% 0.17%10-year Swap 2.34% 2.38% 2.28% 2.29% 2.40% 0.11%2-year Swap to 2-year USTSpread 0.26% 0.36% 0.24% 0.26% 0.19% (0.07)%10-year Swap to 10-year USTSpread (0.11)% (0.01)% (0.03)% (0.04)% (0.01)% 0.03% London Interbank Offered Rates (LIBOR) 1-month LIBOR 0.77% 0.98% 1.22% 1.23% 1.56% 0.33%3-month LIBOR 1.00% 1.15% 1.30% 1.33% 1.69% 0.36% (1)Generic 30-year FNMA TBA price information, sourced from Bloomberg, provided for illustrative purposes only and is not meant to be reflective ofthe fair value of securities held by the Company.Recent Regulatory ActivityThe recently passed tax law informally known as the Tax Cuts and Jobs Act made many significant changes to the U.S. federal income tax lawsapplicable to businesses and their owners. Pursuant to the Tax Cuts and Jobs Act, among other changes, as of January 1, 2018, (1) the federal income tax rateapplicable to corporations is reduced to 21%, (2) the corporate alternative minimum tax is repealed and (3) the backup withholding rate is reduced to24%. In addition, the long-term tax-exempt rate for February 2018 is 1.97%.We expect vigorous debate and discussion in a number of other areas, including residential housing and mortgage reform, fiscal policy, monetarypolicy and healthcare, to continue over the next few years; however, we cannot be certain if or when any specific proposal or policy might be announced,emerge from committee or be approved by Congress, and if so, what the effects on us may be.Executive SummaryThe following are some key financial highlights for the year ended December 31, 2017:•$13.43 per share common share of GAAP book value as of December 31, 2017, a decrease of 11.5% from the prior year, primarily driven by a decrease inthe Company’s net deferred tax asset of $2.03 per share •$13.40 per common share of tangible book value as of December 31, 2017, an increase of 2.2% from the prior year •$2.275 of declared dividends per common share, resulting in an economic gain of 19.6% measured as the change in tangible book value per share plusdividends declared during the year •$0.66 per diluted common share of net income •$2.18 per diluted common share of pre-tax net income •$2.26 per diluted common share of non-GAAP core operating income (1) •Net interest income of $69.7 million compared to $76.1 million in the prior year, driven primarily by:32Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. oa 46 basis point increase in weighted average short-term secured financing costs resulting primarily from hikes in the targeted federal fundsrate from the Federal Reserve, partially offset by ohigher weighted average asset yields on our investments in agency MBS (2.84% versus 2.70%) resulting from lower prepayment rates (9.26%constant prepayment rate versus 11.29%) •Economic net interest income, which includes TBA dollar roll income and net interest expense incurred from interest rate swaps, of $73.7 millioncompared to $77.6 million in the prior year (1) As of December 31, 2017, our agency MBS investment portfolio totaled $5,351 million, comprised of $4,054 million of specified agency MBS and$1,297 million of net commitments to purchase TBA agency MBS. During the year ended December 31, 2017, we increased our agency MBS investmentallocation to TBA agency MBS to take advantage of higher risk adjusted returns in the TBA dollar roll market as compared to owning specified agency MBSfinanced with repurchase agreement financing. We generated TBA dollar roll income of $21.3 million during the year ended December 31, 2017 compared to$19.3 million in the prior year. For GAAP reporting purposes, TBA dollar roll income is reported as a component of our investment gain (loss), net on ourconsolidated statements of comprehensive income and is not a component of our net interest income.As of December 31, 2017, we had $3,667 million of repurchase agreement financing outstanding. We maintain a substantial hedge position consistingprimarily of interest rate swaps coupled with short positions in U.S. Treasury note futures to mitigate the interest rate sensitivity of our cost of borrowing andthe value of our fixed-rate agency MBS portfolio over the long-term. As of December 31, 2017, we had $3,600 million in notional amount of interest rateswaps with a weighted average fixed pay rate of 1.67% and a weighted average maturity of 5.1 years, which has the economic effect of locking into a fixedcost of funding on our repurchase agreement funding for the term of the interest rate swap agreements and, thereby, mitigating the impact of rising interestrates on the cost of the our borrowings. For GAAP reporting purposes, the net interest income earned or expense incurred from interest rate swap agreements isreported as a component of our investment gain (loss), net on our consolidated statements of comprehensive income and is not a component of our netinterest income. Excluding TBA dollar roll income and interest rate swap net interest expense included in non-GAAP core operating income, we had net investmentlosses on our investment portfolio of $1.9 million and net investment gains on our related interest rate hedging instruments of $3.8 million for a netinvestment gain on our hedged investment portfolio of $1.9 million, or $0.07 per diluted common share, for the year ended December 31, 2017.We continue to utilize our tax benefits afforded to us as a C corporation that allow us to shield substantially all of our income from taxes. As ofDecember 31, 2017, we had NOL carryforwards of $60.7 million, NCL carryforwards of $314.3 million and AMT credit carryforwards of $9.1 million. From aGAAP accounting perspective, we had a net deferred tax asset of $0.8 million, or $0.03 per common share, as of December 31, 2017. As of December 31,2017, we have recognized a full valuation allowance against our deferred tax assets that are expected to be capital in nature. During the year endedDecember 31, 2017, we recorded an increase to our valuation allowance against our deferred tax asset of $0.64 per diluted common share to fully reserve ourdeferred tax assets that are expected to be capital in nature. (1)For further information on the use of non-GAAP core operating income and economic net interest income, which are non-GAAP financial measures,see “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Non-GAAP Core Operating Income.”Portfolio OverviewThe following table summarizes our MBS investment portfolio at fair value as of December 31, 2017 and 2016 (dollars in thousands): December 31, 2017 December 31, 2016 Specified agency MBS $4,054,424 $3,909,452 Inverse interest-only agency MBS — 1,923 Total agency MBS 4,054,424 3,911,375 Net long agency TBA dollar roll positions (1) 1,296,978 720,027 Total agency investment portfolio 5,351,402 4,631,402 Private-label MBS — 1,173 Private-label interest-only MBS 76 93 Total private-label investment portfolio 76 1,266 Total MBS investment portfolio $5,351,478 $4,632,66833Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. (1)Represents the fair value of the agency MBS which underlie our TBA forward purchase and sale commitments executed as dollar roll transactions. Inaccordance with GAAP, our TBA forward purchase and sale commitments are reflected on the consolidated balance sheets as a component of“derivative assets, at fair value” and “derivative liabilities, at fair value,” with a collective net asset carrying value of $609 and $1,156 as ofDecember 31, 2017 and 2016, respectively.Agency MBS Investment PortfolioOur specified agency MBS consisted of the following as of December 31, 2017 (dollars in thousands): UnpaidPrincipalBalance NetUnamortizedPurchasePremiums AmortizedCost Basis NetUnrealizedGain (Loss) Fair Value Market Price Coupon WeightedAverageExpectedRemainingLife 30-year fixed rate: 3.5% $1,009,752 $47,932 $1,057,684 $(17,716) $1,039,968 $102.99 3.50% 7.6 4.0% 2,658,650 154,153 2,812,803 (8,920) 2,803,883 105.46 4.00% 6.4 4.5% 196,961 14,446 211,407 (855) 210,552 106.90 4.50% 5.0 5.5% 19 — 19 2 21 111.00 5.50% 5.7 Total/weighted-average $3,865,382 $216,531 $4,081,913 $(27,489) $4,054,424 104.89 3.90% 6.5 UnpaidPrincipalBalance NetUnamortizedPurchasePremiums AmortizedCost Basis NetUnrealizedGain (Loss) Fair Value Market Price Coupon WeightedAverageExpectedRemainingLife Fannie Mae $1,950,323 $109,680 $2,060,003 $(16,540) $2,043,463 $104.78 3.88% 6.5 Freddie Mac 1,915,059 106,851 2,021,910 (10,949) 2,010,961 105.01 3.91% 6.5 Total/weighted-average $3,865,382 $216,531 $4,081,913 $(27,489) $4,054,424 104.89 3.90% 6.5 The actual CPR for the Company’s agency MBS was 9.26% for the year ended December 31, 2017 compared to 11.29% for the year endedDecember 31, 2016. As of December 31, 2017, the Company’s agency MBS was comprised of securities specifically selected for their relatively lowerpropensity for prepayment, which includes approximately 90% in specified pools of low balance loans while the remainder includes specified pools of loansoriginated in certain geographical areas, loans refinanced through the U.S. Government sponsored Home Affordable Refinance Program (“HARP”) or withother characteristics selected for their relatively lower propensity for prepayment.Our agency MBS investment portfolio also includes net long TBA positions, which are primarily the result of executing sequential series of “dollarroll” transactions that are settled on a net basis. In accordance with GAAP, we account for our net long TBA positions as derivative instruments. Informationabout the Company’s net long TBA positions as of December 31, 2017 is as follows (dollars in thousands): Notional Amount:Long (Short)Position (1) ImpliedCost Basis (2) ImpliedFair Value (3) Net CarryingAmount (4) 3.0% 15-year MBS purchase commitments $250,000 $254,873 $254,766 $(107)3.5% 30-year MBS purchase commitments 1,015,000 1,041,496 1,042,212 716 Total net long agency TBA dollar roll positions $1,265,000 $1,296,369 $1,296,978 $609 (1)“Notional amount” represents the unpaid principal balance of the underlying agency MBS.(2)“Implied cost basis” represents the contractual forward price for the underlying agency MBS.(3)“Implied fair value” represents the current fair value of the underlying agency MBS.(4)“Net carrying amount” represents the difference between the implied cost basis and the current fair value of the underlying MBS. This amount isreflected on the Company’s consolidated balance sheets as a component of “derivative assets, at fair value” and “derivative liabilities, at fair value.”34Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. Economic Hedging InstrumentsThe Company attempts to hedge a portion of its exposure to interest rate fluctuations associated with its agency MBS primarily through the use ofinterest rate derivatives. Specifically, these interest rate derivatives are intended to economically hedge changes, attributable to changes in benchmarkinterest rates, in agency MBS fair values and future interest cash flows on the Company’s short-term financing arrangements. As of December 31, 2017, theinterest rate derivative instruments used by the Company were centrally cleared interest rate swap agreements and exchange-traded 5-year and 10-year U.S.Treasury note futures.The Company’s interest rate swap agreements represent agreements to make semiannual interest payments based upon a fixed interest rate and receivequarterly variable interest payments based upon the prevailing three-month LIBOR on the date of reset. Information about the Company’s outstandinginterest rate swap agreements that were in effect as of December 31, 2017 is as follows (dollars in thousands): Weighted-average: NotionalAmount FixedPay Rate VariableReceive Rate Net Receive(Pay) Rate RemainingLife (Years) Fair Value Years to maturity: Less than 3 years $1,300,000 1.28% 1.51% 0.23% 1.8 $(248)3 to less than 7 years 700,000 1.87% 1.48% (0.39)% 3.9 (454)7 to 10 years 1,600,000 1.90% 1.55% (0.35)% 8.3 (2,636)Total / weighted-average $3,600,000 1.67% 1.52% (0.15)% 5.1 $(3,338) In addition to interest rate swap agreements, the Company also has exchange-traded U.S. Treasury note futures that are short positions that mature ona quarterly basis. Upon the maturity date of these futures contracts in March 2018, the Company has the option to either net settle each contract in cash in anamount equal to the difference between the current fair value of the underlying U.S. Treasury note and the contractual sale price inherent to the futurescontract, or to physically settle the contract by delivering the underlying U.S. Treasury note. Information about the Company’s outstanding U.S. Treasurynote futures contracts as of December 31, 2017 is as follows (dollars in thousands): Maturity date NotionalAmount FairValue 5-year U.S. Treasury note futures March 2018 $21,600 $(20)10-year U.S. Treasury note futures March 2018 650,000 (1,321) Results of OperationsNet Interest IncomeNet interest income determined in accordance with GAAP primarily represents the interest income recognized from our investments in specifiedagency MBS and private-label MBS (including the amortization of purchase premiums and accretion of purchase discounts), net of the interest expenseincurred from repurchase agreement financing arrangements or other short- and long-term borrowing transactions.Net interest income determined in accordance with GAAP does not include TBA agency MBS dollar roll income, which we believe represents theeconomic equivalent of net interest income generated from our investments in non-specified fixed-rate agency MBS, nor does it include the implied netinterest income or expense of our interest rate swap agreements, which are not designated as hedging instruments for financial reporting purposes. In ourconsolidated statements of comprehensive income prepared in accordance with GAAP, TBA agency MBS dollar roll income and the implied net interestincome or expense incurred from our interest rate swap agreements are reported as a component of the overall periodic change in the fair value of derivativeinstruments within the line item “gain (loss) from derivative instruments, net” of the “investment gain (loss), net” section.Investment Gain (Loss), Net“Investment gain (loss), net” primarily consists of periodic changes in the fair value (whether realized or unrealized) of investments in MBS classifiedas trading securities, periodic changes in the fair value (whether realized or unrealized) of derivative instruments, gains (losses) realized upon the sale ofinvestments in MBS classified as available-for-sale, and other-than-temporary impairment charges for investments in MBS classified as available-for-sale.35Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. General and Administrative Expenses“Compensation and benefits expense” includes base salaries, annual cash incentive compensation, and non-cash stock-based compensation. Annualcash incentive compensation is based on meeting estimated annual performance measures and discretionary components. Non-cash stock-basedcompensation includes expenses associated with stock-based awards granted to employees, including the Company’s performance share units to namedexecutive officers that are earned only upon the attainment of Company performance measures over the relevant measurement period.“Other general and administrative expenses” primarily consists of the following: •professional services expenses, including accounting, legal and consulting fees; •insurance expenses, including liability and property insurance; •occupancy and equipment expense, including rental costs for our facilities, and depreciation and amortization of equipment and software; •fees and commissions related to transactions in interest rate derivative instruments; •Board of Director fees; and •other operating expenses, including information technology expenses, business development costs, public company reporting expenses, proxysolicitation expenses, corporate registration fees, office supplies and other miscellaneous expenses.Comparison of the years ended December 31, 2017 and 2016The following table presents the total comprehensive income (loss) reported for the years ended December 31, 2017 and 2016, respectively (dollars inthousands, except per share amounts): Year Ended December 31, 2017 2016 Interest income $121,248 $105,336 Interest expense 51,514 29,222 Net interest income 69,734 76,114 Investment gain (loss), net 5,874 (69,318)General and administrative expenses 18,570 20,756 Income (loss) before income taxes 57,038 (13,960)Income tax provision 39,603 27,387 Net income (loss) 17,435 (41,347)Dividend on preferred stock (251) — Net income (loss) available (attributable) to common stock 17,184 (41,347)Other comprehensive loss, net of taxes — (12,371)Comprehensive income (loss) $17,435 $(53,718)Diluted earnings (loss) per common share $0.66 $(1.79)Weighted-average diluted common shares outstanding 26,011 23,051GAAP Net Interest IncomeNet interest income determined in accordance with GAAP (“GAAP net interest income”) decreased $6.4 million, or 8.4%, from $76.1 million for theyear ended December 31, 2016 to $69.7 million for the year ended December 31, 2017. The decrease from the comparative period is primarily attributable toa 46 basis point increase in the average interest costs of our short-term secured financing arrangements due primarily to an increase in prevailing benchmarkshort-term interest rates, partially offset by an increase in the average balance and asset yields of our specified agency MBS. 36Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. The components of GAAP net interest income from our MBS portfolio, excluding interest expense on long-term unsecured debt, is summarized in thefollowing table for the periods indicated (dollars in thousands): Year Ended December 31, 2017 2016 AverageBalance Income(Expense) Yield(Cost) AverageBalance Income(Expense) Yield(Cost) Agency MBS $4,258,079 $120,968 2.84% $3,597,293 $97,053 2.70%Private-label MBS 788 101 12.73% 74,889 7,910 10.56%Other — 179 — 373 $4,258,867 121,248 2.85% $3,672,182 105,336 2.87%Short-term secured debt $3,950,139 (46,648) (1.16)% $3,426,579 (24,433) (0.70)%Net interest income/spread $74,600 1.69% $80,903 2.17%Net interest margin 1.75% 2.20% The effects of changes in the composition of our investments on our GAAP net interest income from our MBS investment activities are summarizedbelow (dollars in thousands): Year Ended December 31, 2017 vs. Year Ended December 31, 2016 Rate Volume Total Change Agency MBS $6,087 $17,828 $23,915 Private-label MBS 17 (7,826) (7,809)Other (194) — (194)Short-term secured debt (18,481) (3,734) (22,215) $(12,571) $6,268 $(6,303) Economic Net Interest IncomeEconomic net interest income, a non-GAAP financial measure, represents the interest income earned net of the interest expense incurred from all ofour interest bearing financial instruments as well as the agency MBS which underlie, and are implicitly financed through, our TBA dollar roll transactions.Economic net interest income is comprised of the following: (i) net interest income determined in accordance with GAAP, (ii) TBA agency MBS “dollar roll”income, and (iii) net interest income or expense incurred from interest rate swap agreements. We believe that economic net interest income assists investors inunderstanding and evaluating the financial performance of the Company’s long-term-focused, net interest spread-based investment strategy, prior to thededuction of core general and administrative expenses. A full description of each of the three aforementioned components of economic net interest income isincluded within the “Non-GAAP Core Operating Income” section of this document.The components of our economic net interest income are summarized in the following table for the periods indicated (dollars in thousands): Year Ended December 31, 2017 2016 AverageBalance Income(Expense) Yield(Cost) AverageBalance Income(Expense) Yield(Cost) Agency MBS $4,258,079 $120,968 2.84% $3,597,293 $97,053 2.70%TBA dollar rolls (1) 985,610 21,291 2.16% 788,338 19,261 2.44%Private-label MBS 788 101 12.73% 74,889 7,910 10.56%Other — 179 — 373 Short-term secured debt 3,950,139 (46,648) (1.16)% 3,426,579 (24,433) (0.70)%Interest rate swaps (2) 3,472,936 (17,334) (0.50)% 2,096,001 (17,825) (0.85)%Long-term unsecured debt 73,778 (4,866) (6.60)% 73,554 (4,789) (6.51)%Economic net interest income/margin (3) $73,691 1.50% $77,550 1.88% 37Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. (1) TBA dollar roll average balance (average cost basis) is based upon the contractual price of the initial TBA purchase trade ofeach individual series of dollar roll transactions. TBA dollar roll income is net of implied financing costs. (2)Interest rate swap cost represents the weighted average net pay rate in effect for the period. (3)Economic net interest margin rate excludes interest on long-term unsecured debt. The effects of changes in the composition of our investments on our economic net interest income from our MBS investment and related funding andhedging activities are summarized below (dollars in thousands): Year Ended December 31, 2017 vs. Year Ended December 31, 2016 Rate Volume Total Change Agency MBS $6,087 $17,828 $23,915 TBA dollar rolls (2,791) 4,821 2,030 Private-label MBS 17 (7,826) (7,809)Other (194) — (194)Short-term secured debt (18,481) (3,734) (22,215)Interest rate swaps 12,201 (11,710) 491 Long-term unsecured debt (62) (15) (77) $(3,223) $(636) $(3,859) Economic net interest income for 2017 decreased relative 2016 due primarily to: •Higher financing costs of our short-term secured financing arrangements and implied TBA financing drivenprimarily by an increase in prevailing benchmark short-term interest rates, partially offset by higher variable legreceive rates on our interest rate swap agreements; and •A higher ratio of the weighted average notional amount of interest rate swap agreements relative to the weightedaverage of our short-term secured borrowings (88% for the year ended December 31, 2017 as compared to 61% forthe year ended December 31, 2016). During 2016, a greater proportion of our overall hedging instrumentpopulation was allocated to instruments other than interest rate swaps, such as 10-year U.S. Treasury note futures.The economic cost or benefit of hedging instruments other than interest rate swap agreements do not affect thecomputation of economic net interest income; accordingly, economic net interest income computed for 2017 isnot directly comparable to the amount computed for 2016.Investment Gain (Loss), NetAs prevailing longer-term interest rates increase (decrease), the fair value of our investments in fixed rate agency MBS and TBA commitmentsgenerally decreases (increases). Conversely, the fair value of our interest rate derivative hedging instruments increases (decreases) in response to increases(decreases) in prevailing interest rates. While our interest rate derivative hedging instruments are designed to mitigate the sensitivity of the fair value of ouragency MBS portfolio to fluctuations in interest rates, they are not generally designed to mitigate the sensitivity of our net book value to spread risk, whichis the risk of an increase of the market spread between the yield on our agency MBS and the benchmark yield on U.S. Treasury securities or interest rateswaps. Accordingly, irrespective of fluctuations in interest rates, an increase (decrease) in MBS spreads will generally result in the underperformance(outperformance) of the values of agency MBS relative to interest rate hedging instruments.The following table presents information about the gains and losses recognized due to the changes in the fair value of our agency MBS, TBAtransactions, and interest rate derivative instruments for the periods indicated (dollars in thousands): 38Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. Year Ended December 31, 2017 2016 Gains (losses) on trading investments, net $2,424 $(41,249)TBA and specified agency MBS commitments, net: TBA dollar roll income 21,291 19,261 Other losses from TBA and specified agency MBS commitments, net (4,580) (28,805)Total gains (losses) on TBA and specified agency MBS commitments, net 16,711 (9,544)Interest rate derivatives: Net interest expense on interest rate swaps (17,334) (17,825)Other gains (losses) from interest rate derivative instruments, net 3,847 (4,291)Total losses on interest rate derivatives, net (13,487) (22,116)Realized gains on sale of available-for-sale investments, net — 4,777 OTTI Charge on available-for-sale securities — (1,737)Other, net 226 551 Investment gain (loss), net $5,874 $(69,318)During the year ended December 31, 2017, MBS spreads narrowed slightly which resulted in a moderate outperformance of our investments in agencyMBS and TBA commitments relative to our interest rate hedging instruments. During the year ended December 31, 2016, MBS spreads widened whichresulted in the underperformance of our investments in agency MBS and TBA commitments relative to our interest rate hedging instruments.General and Administrative ExpensesGeneral and administrative expenses decreased by $2.2 million, or 10.6%, from $20.8 million for the year ended December 31, 2016 to $18.6 millionfor the year ended December 31, 2017.Compensation and benefits expensed increased by $1.7 million, or 14.8%, from $11.5 million for the year ended December 31, 2016 to $13.2 millionfor the year ended December 31, 2017. The increase in compensation and benefits expenses for the year ended December 31, 2017 is mostly attributable toincreases in long-term performance oriented stock-based compensation. Employee stock-based compensation increased by $1.0 million for the year endedDecember 31, 2017 compared to the prior year primarily due to an increase in performance-based stock-based compensation due to improvement in theexpected achievement of the specific performance criteria.Other general and administrative expenses decreased by $3.8 million, or 41.3%, from $9.2 million for the year ended December 31, 2016 to $5.4million for the year ended December 31, 2017, primarily due to non-recurring proxy contest related expenses in the prior year. During the year endedDecember 31, 2016, we incurred $4.0 million in expenses stemming from the 2016 proxy contest that are in excess of the level of expenses normally incurredfor an annual meeting of shareholders.Income Tax ProvisionWe recognized an income tax provision of $39.6 million and $27.4 million for the years ended December 31, 2017 and 2016, respectively. Theincome tax provision for the years ended December 31, 2017 and 2016 includes an increase in the valuation allowance against the deferred tax assets of$16.8 million and $35.6 million, respectively. During the year ended December 31, 2017, the Company determined that it should record a full valuationallowance against its deferred tax assets that are capital in nature consisting of its NCL carryforwards and temporary GAAP to tax differences that areexpected to result in capital losses in future periods. The increase to the valuation allowance during the year ended December 31, 2017 is attributableprimarily to the determination to record a full valuation allowance instead of a partial valuation allowance against its deferred tax assets that are capital innature. The increase to the valuation allowance during the year ended December 31, 2016 is attributable primarily to net capital losses generated during theperiod. A valuation allowance is provided against the deferred tax asset if, based on our evaluation, it is more-likely-than-not that some or all of the deferredtax assets will not be realized. All available evidence, both positive and negative, is considered in our determination for whether a valuation allowance fordeferred tax assets is needed. Items considered in determining our valuation allowance include expectations of future earnings of the appropriate taxcharacter, recent historical financial results, tax planning strategies, the length of statutory carryforward periods and the expected timing of the reversal oftemporary differences.Other Comprehensive LossOther comprehensive loss was $0 and $12.4 million for the years ended December 31, 2017 and 2016, respectively. For the year ended December 31,2016, other comprehensive loss included net unrealized holding losses of $10.1 million on the available-for-sale MBS portfolio, net of a tax benefit of $3.9million, $7.2 million of reversal of prior period net unrealized gains upon the sale of39Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. available-for-sale MBS, and $1.7 million of other-than-temporary impairment charges on available-for-sale securities, net of a tax provision of $0.7 million. Comparison of the years ended December 31, 2016 and 2015The following table presents the total comprehensive loss reported for the years ended December 31, 2016 and 2015, respectively (dollars inthousands, except per share amounts): Year Ended December 31, 2016 2015 Interest income $105,336 $121,263 Interest expense 29,222 18,889 Net interest income 76,114 102,374 Investment loss, net (69,318) (118,429)General and administrative expenses 20,756 14,787 Loss before income taxes (13,960) (30,842)Income tax provision 27,387 38,561 Net loss (41,347) (69,403)Dividend on preferred stock — — Net loss attributable to common stock (41,347) (69,403)Other comprehensive loss, net of taxes (12,371) (23,501)Comprehensive loss $(53,718) $(92,904)Diluted loss per common share $(1.79) $(3.02)Weighted-average diluted common shares outstanding 23,051 23,002GAAP Net Interest IncomeGAAP net interest income decreased $26.3 million, or 25.7%, from $102.4 million for the year ended December 31, 2015 to $76.1 million for the yearended December 31, 2016. The decrease is primarily attributable to (i) a meaningful increase in the proportion of our agency MBS portfolio represented bynet long positions in non-specified TBA securities (which are accounted for as derivative instruments) with a corresponding reduction in the proportionrepresented by specified agency MBS, (ii) lower asset yields on the Company’s agency MBS driven by higher relative prepayments in the current year, and(iii) a 29 basis point increase in the average interest costs of our short-term financing arrangements for the year ended December 31, 2016 relative to the prioryear, due primarily to an increase in prevailing benchmark short-term interest rates. As previously noted, TBA dollar roll income is not included in netinterest income determined in accordance with GAAP.The components of GAAP net interest income from our MBS portfolio, excluding interest expense on unsecured long-term debt, are summarized in thefollowing table (dollars in thousands): Year Ended December 31, 2016 2015 AverageBalance Income(Expense) Yield(Cost) AverageBalance Income(Expense) Yield(Cost) Agency MBS $3,597,293 $97,053 2.70% $3,697,789 $105,914 2.86%Private-label MBS 74,889 7,910 10.56% 159,853 15,342 9.60%Other — 373 — 7 $3,672,182 105,336 2.87% $3,857,642 121,263 3.14%Short-term secured debt $3,426,579 (24,433) (0.70)% $3,516,830 (14,701) (0.41)%Net interest income/spread $80,903 2.17% $106,562 2.73%Net interest margin 2.20% 2.76%40Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. The effects of changes in the composition of our investments on our GAAP net interest income from our MBS investment activities are summarizedbelow (dollars in thousands): Year Ended December 31, 2016 vs. Year Ended December 31, 2015 Rate Volume Total Change MBS: Agency MBS $(6,036) $(2,825) $(8,861)Private-label MBS 1,440 (8,872) (7,432)Total MBS (4,596) (11,697) (16,293)Other — 366 366 Short-term secured debt (10,058) 326 (9,732) $(14,654) $(11,005) $(25,659) During the year ended December 31, 2016, the percentage allocation of our total agency MBS portfolio to net long position in TBA securities andspecified agency MBS was 18% and 82%, respectively, as compared to 6% and 94%, respectively, for the year ended December 31, 2015, as illustrated by thefollowing table (dollars in thousands): Year Ended December 31, 2016 2015 Average Balance Relative Allocation Average Balance Relative Allocation Specified agency MBS $3,597,293 82% $3,697,789 94%Net long TBA position (1) 788,338 18% 237,442 6%Total agency MBS portfolio $4,385,631 100% $3,935,231 100% (1)Net long TBA position average balance (average cost basis) is based upon the contractual price of the initial TBA purchase trade of each individualseries of dollar roll transactions.As a result of the substantial increase in our TBA portfolio, TBA dollar roll income increased $12.6 million to $19.3 million for the year endedDecember 31, 2016 from $6.7 million for the year ended December 31, 2015. When adjusting our net interest income determined in accordance with GAAPto include TBA dollar roll income (which is net of implied financing costs), the total net spread income earned from our aggregate MBS investment portfoliofor the year ended December 31, 2016 decreased by $13.1 million (or 11.6%) million relative to the prior year. The reduction in total spread income in thecurrent year periods relative to the prior year periods is due primarily to (i) a reduction in asset revenues driven by relatively higher prepayments on ourspecified agency MBS resulting a lower weighted average yield on those assets as well as (ii) an increase in the costs of our short-term financing arrangementsand the implied financing costs of our TBA dollar rolls driven primarily by an increase in prevailing short-term interest rates. The following tables provide acomparison of GAAP interest income, GAAP net interest income (excluding interest expense from long-term debt), and TBA dollar roll income for periodsindicated (dollars in thousands): 41Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. For the Year Ended December 31, Increase (Decrease) Expressed in: 2016 2015 Amount Percentage GAAP interest income $105,336 $121,263 $(15,927) (13.13)%TBA dollar roll income (1) 19,261 6,743 12,518 185.64%GAAP interest income plus TBA dollar roll income 124,597 128,006 (3,409) (2.66)%Interest expense on short-term debt 24,433 14,701 9,732 66.20%Net interest income plus TBA dollar roll income $100,164 $113,305 $(13,141) (11.60)%(1)TBA dollar roll income is net of implied financing costs.Interest expense related to long-term debt was $4.8 million and $4.2 million for the years ended December 31, 2016 and 2015, respectively. Theincrease in interest expense on long-term debt is attributable to the issuance of $35.3 million of senior notes in March 2015.Investment Gain (Loss), NetAs prevailing longer-term interest rates increase (decrease), the fair value of our investments in fixed rate agency MBS and TBA commitmentsgenerally decreases (increases). Conversely, the fair value of our interest rate derivative hedging instruments increases (decreases) in response to increases(decreases) in prevailing interest rates. While our interest rate derivative hedging instruments are designed to mitigate the sensitivity of the fair value of ouragency MBS portfolio to fluctuations in interest rates, they are not generally designed to mitigate the sensitivity of our net book value to spread risk, whichis the risk of an increase of the market spread between the yield on our agency MBS and the benchmark yield on U.S. Treasury securities or interest rateswaps. Accordingly, irrespective of fluctuations in interest rates, an increase (decrease) in MBS spreads will generally result in the underperformance(outperformance) of the values of agency MBS relative to interest rate hedging instruments.The following table presents information about the gains and losses recognized due to the changes in the fair value of our agency MBS, TBAtransactions, and interest rate derivative instruments for the periods indicated (dollars in thousands): Year Ended December 31, 2016 2015 (Losses) gains on trading investments, net $(41,249) $(31,058)TBA and specified agency MBS commitments, net: TBA dollar roll income 19,261 6,743 Other losses from TBA and specified agency MBS commitments, net (28,805) (5,059)Total (losses) gains on TBA and specified agency MBS commitments, net (9,544) 1,684 Interest rate derivatives: Net interest expense on interest rate swaps (17,825) (1,282)Other losses from interest rate derivative instruments, net (4,291) (105,145)Total losses on interest rate derivatives, net (22,116) (106,427)Realized gains on sale of available-for-sale investments, net 4,777 17,725 OTTI Charge on available-for-sale securities (1,737) (2,417)Other, net 551 2,064 Investment loss, net $(69,318) $(118,429) During the years ended December 31, 2016 and 2015, MBS spreads widened which resulted in the underperformance of our investments in agencyMBS and TBA commitments relative to our interest rate hedging instruments.General and Administrative ExpensesGeneral and administrative expenses increased by $6.0 million, or 40.5%, from $14.8 million for the year ended December 31, 2015 to $20.8 millionfor the year ended December 31, 2016.Compensation and benefits expensed increased by $1.8 million, or 18.6%, from $9.7 million for the year ended December 31, 2015 to $11.5 millionfor the year ended December 31, 2016. The increase in compensation and benefits expense is attributable primarily to an increase in long-term performanceoriented stock-based compensation. Employee stock-based compensation increased by $1.9 million from $0.6 million for the year ended December 31, 2015to $2.5 million for the year ended December 31, 2016. During the year ended December 31, 2015, the Company did not achieve certain performancemeasures for certain of the Company’s42Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. performance share units granted to executive officers, which resulted in the reversal of stock-based compensation expense that had been recognized in priorperiods.Other general and administrative expenses increased by $4.1 million, or 80.4%, from $5.1 million for the year ended December 31, 2015 to $9.2million for the year ended December 31, 2016, primarily due to non-recurring proxy contest related expenses. During the year ended December 31, 2016, weincurred $4.0 million in expenses stemming from the 2016 proxy contest that are in excess of the level of expenses normally incurred for an annual meetingof shareholders. In March 2016, Imation Corp., an IT data storage and data security company, acting in concert with the Clinton Group, Inc. (together,“Imation Group”) nominated a controlling slate of five candidates to stand for election to our eight-member board of directors at the 2016 annual meeting ofshareholders. As of the record date for the 2016 meeting, the Imation Group owned collectively 11,000 shares of our Class A common stock, representing lessthan 0.05% of our outstanding common stock. At our annual shareholder meeting on June 9, 2016, our shareholders overwhelmingly voted to elect all of oureight director nominees. In connection with the proxy contest, we incurred non-recurring legal fees, financial advisory fees, proxy solicitor fees, mailing andprinting costs of proxy solicitation materials, and other costs in excess of the level of expenses normally incurred for an annual meeting of shareholders.Income Tax ProvisionWe recognized an income tax provision of $27.4 million and $38.6 million for the years ended December 31, 2016 and 2015, respectively. Theincome tax provision for the years ended December 31, 2016 and 2015 includes an increase in the valuation allowance against the deferred tax assets of$35.6 million and $56.4 million, respectively. The increase in the valuation allowance against the deferred tax assets for the years ended December 31, 2016and 2015 is due mostly to net capital losses generated during the periods primarily as a result of realized and unrealized losses on certain of our economicinterest rate hedging instruments. The valuation allowance represents the portion of our net capital loss carryforward that is more-likely-than-not to expireunutilized.Other Comprehensive LossOther comprehensive loss was $12.4 million and $23.5 million for the years ended December 31, 2016 and 2015, respectively. For the year endedDecember 31, 2016, other comprehensive loss included net unrealized holding losses of $10.1 million on the available-for-sale MBS portfolio, net of a taxbenefit of $3.9 million, $7.2 million of reversal of prior period net unrealized gains upon the sale of available-for-sale MBS, and $1.7 million of other-than-temporary impairment charges on available-for-sale securities, net of a tax provision of $0.7 million.For the year ended December 31, 2015, other comprehensive loss included net unrealized holding losses of $11.3 million on the available-for-saleMBS portfolio, net of a tax benefit of $4.3 million, $23.0 million of reversal of prior period net unrealized gains upon the sale of available-for-sale MBS, netof a tax benefit of $5.1 million, and $2.4 million of other-than-temporary impairment charges on available-for-sale securities, net of a tax provision of $0.9million.Non-GAAP Core Operating IncomeIn addition to the results of operations determined in accordance with generally accepted accounting principles as consistently applied in the UnitedStates (“GAAP”), we reported “non-GAAP core operating income.” We define core operating income as “economic net interest income” less “core general andadministrative expenses.”Economic Net Interest IncomeEconomic net interest income, a non-GAAP financial measure, represents the interest income earned net of the interest expense incurred from all of ourinterest bearing financial instruments as well as the agency MBS which underlie, and are implicitly financed through, our TBA dollar roll transactions.Economic net interest income is comprised of the following: periodic (i) net interest income determined in accordance with GAAP, (ii) TBA agency MBS“dollar roll” income, and (iii) net interest income or expense incurred from interest rate swap agreements.We believe that economic net interest income assists investors in understanding and evaluating the financial performance of the Company’s long-term-focused, net interest spread-based investment strategy, prior to the deduction of core general and administrative expenses. •Net interest income determined in accordance with GAAP. Net interest income determined in accordance with GAAP primarily represents theinterest income recognized from our investments in specified agency MBS and private-label MBS (including the amortization of purchasepremiums and accretion of purchase discounts), net of the interest expense incurred from repurchase agreement financing arrangements or othershort- and long-term borrowing transactions.43Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. •TBA agency MBS dollar roll income. Dollar roll income represents the economic equivalent of net interest income (implied interest income netof financing costs) generated from our investments in non-specified fixed-rate agency MBS, executed through sequential series of forward-settling purchase and sale transactions that are settled on a net basis (known as “dollar roll” transactions). Dollar roll income is generated as aresult of delaying, or “rolling,” the settlement of a forward-settling purchase of a TBA agency MBS by entering into an offsetting “spot” saleprior to the settlement date, net settling the “paired-off” positions in cash, and contemporaneously entering another forward-settling purchase ofa TBA agency MBS of the same essential characteristics for a later settlement date at a price discount relative to the spot sale. The price discountof the forward-settling purchase relative to the contemporaneously executed spot sale reflects compensation for the interest income (inclusive ofexpected prepayments) that, at the time of sale, is expected to be foregone as a result of relinquishing beneficial ownership of the MBS from thesettlement date of the spot sale until the settlement date of the forward purchase, net of implied repurchase financing costs. We calculate dollarroll income as the excess of the spot sale price over the forward-settling purchase price, and recognize this amount ratably over the periodbeginning on the settlement date of the sale and ending on the settlement date of the forward purchase. In our consolidated statements ofcomprehensive income prepared in accordance with GAAP, TBA agency MBS dollar roll income is reported as a component of the overallperiodic change in the fair value of TBA forward commitments within the line item “gain (loss) from derivative instruments, net” of the“investment gain (loss), net” section. •Net interest income earned or expense incurred from interest rate swap agreements. We utilize interest rate swap agreements to economicallyhedge a portion of our exposure to variability in future interest cash flows, attributable to changes in benchmark interest rates, associated withfuture roll-overs of our short-term financing arrangements. Accordingly, the net interest income earned or expense incurred (commonly referred toas “net interest carry”) from our interest rate swap agreements in combination with interest expense recognized in accordance with GAAPrepresents our effective “economic interest expense.” In our consolidated statements of comprehensive income prepared in accordance withGAAP, the net interest income earned or expense incurred from interest rate swap agreements is reported as a component of the overall periodicchange in the fair value of derivative instruments within the line item “gain (loss) from derivative instruments, net” of the “investment gain(loss), net” section.Core General and Administrative ExpensesCore general and administrative expenses are non-interest expenses reported within the line item “total general and administrative expenses” of theconsolidated statements of comprehensive income less stock-based compensation expense. For the year ended December 31, 2016, core general andadministrative expenses also exclude non-recurring expenses related to the 2016 proxy contest that are in excess of those normally incurred for an annualmeeting of shareholders.Non-GAAP Core Operating IncomeThe following table presents our computation of non-GAAP core operating income for the years ended December 31, 2017 and 2016, respectively(amounts in thousands, except per share amounts): For the Year Ended December 31, 2017 2016 GAAP net interest income$69,734 $76,114 TBA dollar roll income 21,291 19,261 Interest rate swap net interest expense (17,334) (17,825)Economic net interest income 73,691 77,550 Core general and administrative expenses (14,644) (13,802)Preferred stock dividend (251) — Non-GAAP core operating income$58,796 $63,748 Non-GAAP core operating income per diluted common share$2.26 $2.75 Weighted average diluted common shares outstanding 26,011 23,202 The following table provides a reconciliation of GAAP pre-tax net income (loss) to non-GAAP core operating income for the years endedDecember 31, 2017 and 2016, respectively (amounts in thousands):44Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. For the Year Ended December 31, 2017 2016 GAAP income (loss) before income taxes$57,038 $(13,960)Less: Total investment (gain) loss, net (5,874) 69,318 Stock-based compensation expense 3,926 2,975 Non-recurring proxy contest related expenses — 3,979 Preferred stock dividend (251) — Add back: TBA dollar roll income 21,291 19,261 Interest rate swap net interest expense (17,334) (17,825)Non-GAAP core operating income$58,796 $63,748 Non-GAAP core operating income is used by management to evaluate the financial performance of the Company’s long-term-focused, net interestspread-based investment strategy and core business activities over periods of time as well as assist with the determination of the appropriate level of periodicdividends to common stockholders. In addition, we believe that non-GAAP core operating income assists investors in understanding and evaluating thefinancial performance of the Company’s long-term-focused, net interest spread-based investment strategy and core business activities over periods of time aswell as its earnings capacity.Periodic fair value gains and losses recognized with respect to our investments in MBS and our economic hedging instruments, which are reported inline item “total investment gain (loss), net” of our consolidated statements of comprehensive income, are excluded from the computation of non-GAAP coreoperating income as such gains on losses are not reflective of the economic interest income earned or interest expense incurred from our interest-bearingfinancial assets and liabilities during the indicated reporting period. Because our long-term-focused investment strategy for our agency MBS investmentportfolio is to generate a net interest spread on the leveraged assets while prudently hedging periodic changes in the fair value of those assets attributable tochanges in benchmark interest rates, we generally expect the fluctuations in the fair value of our agency MBS investments and our economic hedginginstruments to largely offset one another over time.A limitation of utilizing this non-GAAP financial measure is that the effect of accounting for “non-core” events or transactions in accordance withGAAP does, in fact, reflect the financial results of our business and these effects should not be ignored when evaluating and analyzing our financial results.For example, the economic cost or benefit of hedging instruments other than interest rate swap agreements, such as U.S. Treasury note futures or options, donot affect the computation of non-GAAP core operating income. In addition, our calculation of non-GAAP core operating income may not be comparable toother similarly titled measures of other companies. Therefore, we believe that non-GAAP core operating income should be considered as a supplement to,and in conjunction with, net income and comprehensive income determined in accordance with GAAP.Liquidity and Capital ResourcesLiquidity is a measurement of our ability to meet potential cash requirements including ongoing commitments to repay borrowings, fund investments,meet margin calls on our short-term borrowings and hedging instruments, and for other general business purposes. Our primary sources of funds for liquidityconsist of existing cash balances, short-term borrowings (for example, repurchase agreements), principal and interest payments from our investments in MBS,and proceeds from sales of MBS. Other sources of liquidity include proceeds from the offering of common stock, preferred stock, debt securities, or othersecurities registered pursuant to our effective shelf registration statement filed with the Securities and Exchange Commission (“SEC”).Liquidity, or ready access to funds, is essential to our business. Perceived liquidity issues may affect our counterparties’ willingness to engage intransactions with us. Our liquidity could be impaired due to circumstances that we may be unable to control, such as a general market disruption or anoperational problem that affects us or third parties. Further, our ability to sell assets may be impaired if other market participants are seeking to sell similarassets at the same time. If we cannot obtain funding from third parties or from our subsidiaries, our results of operations could be negatively impacted.As of December 31, 2017, our debt-to-equity leverage ratio was 9.7 to 1 measured as the ratio of the sum of our total debt to our shareholders’ equity asreported on our consolidated balance sheet. In evaluating our liquidity and leverage ratios, we also monitor our “at risk” short-term financing to investablecapital ratio. Our “at risk” short-term financing to investable capital ratio is measured as the ratio of the sum of our short-term recourse financing (i.e.repurchase agreement financing), net payable or receivable for unsettled securities and net contractual forward price of our TBA commitments less our cashand cash equivalents compared to our investable capital. Our investable capital is calculated as the sum of our tangible stockholders’ equity and long-termunsecured debt. Tangible stockholders’ equity is measured as our stockholders’ equity less our net deferred tax asset, and our long-term unsecured45Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. debt is measured as our long-term unsecured debt excluding any unamortized issuance costs. As of December 31, 2017, our “at risk” short-term recoursefinancing to investable capital ratio was 10.7 to 1. Cash FlowsAs of December 31, 2017, our cash and cash equivalents totaled $21.6 million representing a net decrease of $33.2 million from $54.8 million as ofDecember 31, 2016. Cash provided by operating activities of $88.0 million during 2017 was attributable primarily to net interest income less our general andadministrative expenses. Our cash used in investing activities of $147.7 million during 2017 relates primarily to purchases of agency MBS, partially offset bysales of agency and private-label MBS, principal payments received on agency MBS, and proceeds received related to our interest rate hedges. Our cashprovided by financing activities of $26.5 million during 2017 relates primarily to net proceeds from repurchase agreements used to finance a portion of theMBS portfolio and proceeds from issuance of common and preferred stock, partially offset by dividend payments to stockholders.Sources of FundingWe believe that our existing cash balances, net investments in MBS, cash flows from operations, borrowing capacity, and other sources of liquiditywill be sufficient to meet our cash requirements for at least the next twelve months. We may, however, seek debt or equity financings, in public or privatetransactions, to provide capital for corporate purposes and/or strategic business opportunities, including possible acquisitions, joint ventures, alliances orother business arrangements which could require substantial capital outlays. Our policy is to evaluate strategic business opportunities, including acquisitionsand divestitures, as they arise. There can be no assurance that we will be able to generate sufficient funds from future operations, or raise sufficient debt orequity on acceptable terms, to take advantage of investment opportunities that become available. Should our needs ever exceed these sources of liquidity, webelieve that substantially most of our investments could be sold, in most circumstances, to provide cash. However, we may be required to sell our assets insuch instances at depressed prices.As of December 31, 2017, liquid assets consisted primarily of cash and cash equivalents of $21.6 million and net investments in MBS of $387.3million. Cash equivalents consist primarily of money market funds invested in debt obligations of the U.S. government. The Company’s net investments inMBS is calculated as the sum of the Company’s total MBS investments at fair value and receivable for sold MBS, less the sum of the repurchase agreementsoutstanding and payable for purchased MBS.Debt CapitalLong-Term Unsecured DebtAs of December 31, 2017, we had $73.9 million of total long-term debt, net of unamortized debt issuance costs of $1.4 million. Our trust preferred debtwith a principal amount of $15.0 million outstanding as of December 31, 2017 accrues and requires payment of interest quarterly at annual rates of three-month LIBOR plus 2.25% to 3.00% and matures between 2033 and 2035. Our 6.625% Senior Notes due 2023 with a principal amount of $25.0 millionoutstanding as of December 31, 2017 accrue and require payment of interest quarterly at an annual rate of 6.625% and mature on May 1, 2023. Our 6.75%Senior Notes due 2025 with a principal amount of $35.3 million outstanding as of December 31, 2017 accrue and require payment of interest quarterly at anannual rate of 6.75% and mature on March 15, 2025.Repurchase AgreementsWe have short-term financing facilities that are structured as repurchase agreements with various financial institutions to fund our investments inMBS. We have obtained, and believe we will be able to continue to obtain, short-term financing in amounts and at interest rates consistent with our financingobjectives. Funding for MBS through repurchase agreements continues to be available to us at rates we consider to be attractive from multiple counterparties.Our repurchase agreements include provisions contained in the standard master repurchase agreement as published by the Securities Industry andFinancial Markets Association (“SIFMA”) and may be amended and supplemented in accordance with industry standards for repurchase facilities. Ourrepurchase agreements include financial covenants, with which the failure to comply would constitute an event of default under the applicable repurchaseagreement. Similarly, each repurchase agreement includes events of insolvency and events of default on other indebtedness as similar financial covenants. Asprovided in the standard master repurchase agreement as typically amended, upon the occurrence of an event of default or termination, the applicablecounterparty has the option to terminate all repurchase transactions under such counterparty’s repurchase agreement and to demand immediate payment ofany amount due from us to the counterparty.Under our repurchase agreements, we may be required to pledge additional assets to our repurchase agreement counterparties in the event theestimated fair value of the existing pledged collateral under such agreements declines and such lenders demand additional collateral (commonly referred toas a “margin call”), which may take the form of additional securities or cash. Margin calls on repurchase agreements collateralized by our MBS investmentsprimarily result from events such as declines in the value of the46Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. underlying mortgage collateral caused by factors such as rising interest rates or prepayments. Our repurchase agreements generally provide that valuations forMBS securing our repurchase agreements are to be obtained from a generally recognized source agreed to by both parties. However, in certain circumstancesand under certain of our repurchase agreements, our lenders have the sole discretion to determine the value of the MBS securing our repurchase agreements.In such instances, our lenders are required to act in good faith in making determinations of value. Our repurchase agreements generally provide that in theevent of a margin call, we must provide additional securities or cash on the same business day that the margin call is made if the lender provides us noticeprior to the margin notice deadline on such day.To date, we have not had any margin calls on our repurchase agreements that we were not able to satisfy with either cash or additional pledgedcollateral. However, should we encounter increases in interest rates or prepayments, margin calls on our repurchase agreements could result in a materialadverse change in our liquidity position.Our repurchase agreements generally mature within 30 to 60 days, but may have maturities as short as one day and as long as one year. In the eventthat market conditions are such that we are unable to continue to obtain repurchase agreement financing for our investments in MBS in amounts and atinterest rates consistent with our financing objectives, we may liquidate such investments and may incur significant losses on any such sales of MBS.The following table provides information regarding our outstanding repurchase agreement borrowings as of dates and periods indicated (dollars inthousands): December 31, 2017 December 31, 2016 Pledged with agency MBS: Repurchase agreements outstanding $3,667,181 $3,649,102 Agency MBS collateral, at fair value 3,858,815 3,851,269 Net amount (1) 191,634 202,167 Weighted-average rate 1.56% 0.96%Weighted-average term to maturity 12.6 days 19.3 days Maximum amount outstanding at any month-end during the period $4,292,755 $3,653,114 (1)Net amount represents the value of collateral in excess of corresponding repurchase obligation. The amount of collateral at-risk is limited to theoutstanding repurchase obligation and not the entire collateral balance.To limit our exposure to counterparty risk, we diversify our repurchase agreement funding across multiple counterparties and by counterparty region.As of December 31, 2017, we had outstanding repurchase agreement balances with 16 counterparties and have master repurchase agreements in place with atotal of 21 counterparties located throughout North America, Europe and Asia. As of December 31, 2017, no more than 5.8% of our stockholders’ equity wasat risk with any one counterparty, with the top five counterparties representing 24.3% of our stockholders’ equity. The table below includes a summary of ourrepurchase agreement funding by number of counterparties and counterparty region as of December 31, 2017: Number ofCounterparties Percent of RepurchaseAgreement Funding North America 11 68.0%Europe 1 8.0%Asia 4 24.0% 16 100.0%Derivative InstrumentsIn the normal course of our operations, we are a party to financial instruments that are accounted for as derivative financial instruments including (i)interest rate derivative instruments such as interest rate swaps, Eurodollar futures, interest rate swap futures, U.S. Treasury note futures, put and call options onU.S. Treasury note futures, and options on agency MBS, and (ii) derivative instruments that economically serve as investments such as TBA contracts.Interest Rate Derivative InstrumentsWe exchange cash variation margin with the counterparties to our interest rate derivative instruments at least on a daily basis based upon dailychanges in fair value as measured by the central clearinghouse through which those derivatives are cleared. In addition, the central clearinghouse requiresmarket participants to deposit and maintain an “initial margin” amount which is47Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. determined by the clearinghouse and is generally intended to be set at a level sufficient to protect the clearinghouse from the maximum estimated single-dayprice movement in that market participant’s contracts. The clearing exchanges have the sole discretion to determine the value of derivative instruments. Inthe event of a margin call, we must generally provide additional collateral on the same business day. To date, we have not had any margin calls on ourderivative agreements that we were not able to satisfy. However, if we encounter significant decreases in long-term interest rates, margin calls on ourderivative agreements could result in a material adverse change in our liquidity position.As of December 31, 2017, we had outstanding interest rate swaps and U.S. Treasury note futures with the following aggregate notional amount, net fairvalue and corresponding margin held in collateral deposit with the custodian (in thousands): December 31, 2017 Notional Amount Net Fair Value Collateral Deposit Interest rate swaps $3,600,000 $(3,338) $46,218 U.S. Treasury note futures 671,600 (1,341) 6,960 TBA Dollar Roll TransactionsTBA dollar roll transactions represent a form of off-balance sheet financing accounted for as derivative instruments. In a TBA dollar roll transaction,we do not intend to take physical delivery of the underlying agency MBS and will generally enter into an offsetting position and net settle the paired offposition in cash. However, under certain market conditions, it may be uneconomical for us to roll our TBA contracts into future months and we may need totake or make physical delivery of the underlying securities. If we were required to take physical delivery to settle a long TBA contract, we would have to fundour total purchase commitment with cash or other financing sources and our liquidity position could be negatively impacted.Our TBA commitments and our commitments to purchase and sell specified agency MBS are subject to master securities forward transactionagreements published by SIFMA as well as supplemental terms and conditions with each counterparty. Under the terms of these agreements, we may berequired to pledge collateral to our counterparty in the event the fair value of our agency MBS commitments decline and such counterparty demandscollateral through a margin call. Margin calls on agency MBS commitments are generally caused by factors such as rising interest rates or prepayments. Ouragency MBS commitments provide that valuations for our commitments and any pledged collateral are to be obtained from a generally recognized sourceagreed to by both parties. However, in certain circumstances, our counterparties have the sole discretion to determine the value of the agency MBScommitment and any pledged collateral. In such instances, our counterparties are required to act in good faith in making determinations of value. In theevent of a margin call, we must generally provide additional collateral on the same business day.Equity CapitalCommon Equity Distribution AgreementsOn May 24, 2013, the Company entered into separate common equity distribution agreements (the “Prior Equity Distribution Agreements”) withequity sales agents RBC Capital Markets, LLC, JMP Securities LLC, Ladenburg Thalmann & Co. Inc. and MLV & Co. LLC pursuant to which the Companymay offer and sell, from time to time, up to 1,750,000 shares of the Company’s Class A common stock. On February 23, 2017, the Company terminated thePrior Equity Distribution Agreements. On February 22, 2017, the Company entered into new separate common equity distribution agreements (the “NewEquity Distribution Agreements”) with equity sales agents JMP Securities LLC, FBR Capital Markets & Co., JonesTrading Institutional Services LLC andLadenburg Thalmann & Co. Inc. pursuant to which the Company may offer and sell, from time to time, up to 6,000,000 shares of the Company’s Class Acommon stock.Pursuant to the common equity distribution agreements, shares of the Company’s common stock may be offered and sold through the equity salesagents in transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, including sales made directlyon the NYSE or sales made to or through a market maker other than on an exchange or, subject to the terms of a written notice from the Company, in privatelynegotiated transactions.The following table provides information about the issuances of common stock under the common equity distribution agreements for the periodsindicated (dollars in thousands): 48Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. Year Ended Year Ended Class A Common Stock Issuances December 31, 2017 December 31, 2016 Shares issued 4,472,083 595,342 Weighted average public offering price $13.88 $16.57 Net proceeds (1) $61,213 $9,675 (1)Net of selling commissions and expenses.As of December 31, 2017, the Company had 1,528,717 shares of Class A common stock available for sale under the New Equity DistributionAgreements.Preferred StockIn May 2017, the Company completed an initial public offering in which 135,000 shares of its 7.00% Series B Cumulative Perpetual RedeemablePreferred Stock (the “Series B Preferred Stock”) were issued to the public at a public offering price of $24.00 per share for proceeds net of underwritingdiscounts and commissions and expenses of $3.0 million. The Series B Preferred Stock is publicly traded on the New York Stock Exchange under the tickersymbol “AI PrB”.The Series B Preferred Stock has no stated maturity, is not subject to any sinking fund and will remain outstanding indefinitely unless repurchased orredeemed by the Company. Holders of Series B Preferred Stock have no voting rights, except under limited conditions, and are entitled to receive acumulative cash dividend at a rate of 7.00% per annum of their $25.00 per share liquidation preference before holders of common stock are entitled to receiveany dividends. Shares of Series B Preferred Stock are redeemable at $25.00 per share, plus accumulated and unpaid dividends (whether or not authorized ordeclared) exclusively at our option commencing on May 12, 2022 or earlier upon the occurrence of a change in control. Dividends are payable quarterly inarrears on the 30th day of each December, March, June and September. As of December 31, 2017, we had declared and paid all required quarterly dividendson our Series B Preferred Stock.Preferred Equity Distribution AgreementOn May 16, 2017, the Company entered into a preferred equity distribution agreement (the “Series B Preferred Equity Distribution Agreement”) withJonesTrading Institutional Services LLC (the “Series B Preferred Equity Agent”), pursuant to which the Company may offer and sell, from time to time, up to1,865,000 shares of the Company’s Series B Preferred Stock. Pursuant to the Series B Preferred Equity Distribution Agreement, shares of the Company’sSeries B Preferred stock may be offered and sold through the Series B Preferred Equity Sales Agent in transactions that are deemed to be “at the market”offerings as defined in Rule 415 under the Securities Act of 1933, including sales made directly on the NYSE or sales made to or through a market makerother than on an exchange or, subject to the terms of a written notice from the Company, in privately negotiated transactions.The following table provides information about the issuances of preferred stock under the Series B Preferred Equity Distribution Agreement (dollarsin thousands): Year Ended Series B Preferred Stock Issuances December 31, 2017 Shares issued 168,291 Weighted average public offering price $24.95 Net proceeds (1) $4,090 (1)Net of selling commissions and expenses.As of December 31, 2017, the Company had 1,696,709 shares of Series B Preferred stock available for sale under the Series B Preferred EquityDistribution Agreement.Common Share Repurchase ProgramThe Company’s Board of Directors authorized a share repurchase program pursuant to which the Company may repurchase up to 2.0 million shares ofits Class A common stock. As of December 31, 2017, 1,951,305 shares of Class A common stock remain available for repurchase under the repurchaseprogram.Common Stock DividendsPursuant to our variable dividend policy, our Board of Directors evaluates on a quarterly basis and, in its sole discretion, approves the payment ofdividends on our common stock. Our dividend payments, if any, may vary significantly quarter to quarter.49Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. Contractual ObligationsWe have contractual obligations to make future payments in connection with long-term unsecured debt and non-cancelable lease agreements andother contractual commitments. The following table sets forth these contractual obligations by fiscal year (in thousands): 2018 2019 2020 2021 2022 Thereafter Total Long-term debt maturities $— $— $— $— $— $75,300 $75,300 Interest on long-term debt (1) 4,655 4,655 4,655 4,655 4,655 13,285 36,560 Minimum rental commitments 471 483 497 — — — 1,451 $5,126 $5,138 $5,152 $4,655 $4,655 $88,585 $113,311 (1)Includes interest on (i) $25.0 million of Senior Notes due 2023 with a fixed annual interest rate of 6.625% that will mature on May 1, 2023 and (ii)$35.3 million of Senior Notes due 2025 with a fixed annual interest rate of 6.75% that will mature on March 15, 2025. Also includes interest on $15.0million of trust preferred debt with variable interest rates indexed to three-month LIBOR and reset quarterly. Interest on trust preferred debt is basedupon a weighted-average interest rate of 4.11%, which represents the weighted-average contractual interest rate in effect as of December 31, 2017. Thetrust preferred debt will mature beginning in October 2033 through July 2035.Off-Balance Sheet Arrangements and Other CommitmentsAs of December 31, 2017, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to asstructured finance, or special purpose or variable interest entities (“VIEs”), established for the purpose of facilitating off-balance sheet arrangements or othercontractually narrow or limited purposes. Our economic interests held in unconsolidated VIEs are limited in nature to those of a passive holder of MBS issuedby a securitization trust. As of December 31, 2016, we had not consolidated for financial reporting purposes any securitization trusts as we do not have thepower to direct the activities that most significantly impact the economic performance of such entities. Further, as of December 31, 2017, we had notguaranteed any obligations of unconsolidated entities or entered into any commitment or intent to provide funding to any such entities. See Note 14 to ourconsolidated financial statements under “Item 8 - Financial Statements and Supplementary Data.” Critical Accounting EstimatesThe preparation of financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) requires theCompany to make estimates and assumptions that affect amounts reported in the consolidated financial statements. Although the Company bases theseestimates and assumptions on historical experience and all other information available as of the time that the financial statements are prepared, such estimatesfrequently require management to exercise significant subjective judgment about matters that are inherently uncertain. Actual results may differ from theseestimates, which could have a significant and potentially adverse effect on our financial condition, results of operations, and cash flows. A summary of oursignificant accounting policies is included in “Note 3. Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements. Our most critical accounting estimates, which are those accounting estimates that require the highest degree of management judgment due to theinherent level of estimation uncertainty, relate to the measurement of the fair value of our investments in agency MBS and income taxes.Fair Value of Investments in Agency MBSInputs to fair value measurements of the Company’s investments in agency MBS include price estimates obtained from third-party pricing services. Indetermining fair value, third-party pricing services use a market approach. The inputs used in the fair value measurements performed by the third-partypricing services are based upon readily observable transactions for securities with similar characteristics (such as issuer/guarantor, coupon rate, statedmaturity, and collateral pool characteristics) occurring on the measurement date. The Company makes inquiries of the third party pricing sources tounderstand the significant inputs and assumptions used to determine prices. The Company reviews the various third-party fair value estimates and performsprocedures to validate their reasonableness, including comparison to recent trading activity for similar securities and an overall review for consistency withmarket conditions observed as of the measurement date. Changes in the market environment that may occur over the holding period of our agency MBSinvestments may cause the gains or losses that are ultimately realized to differ from those currently recognized in our consolidated financial statements basedupon their current valuations.50Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. Income TaxesDeferred tax assets and liabilities reflect the impact of temporary differences between the carrying amount of assets and liabilities pursuant to theapplication of GAAP and their respective tax bases and are stated at tax rates expected to be in effect when the taxes are actually paid or recovered. Deferredtax assets are also recorded for net operating loss carryforwards, net capital loss carryforwards and any tax credit carryforwards. We recognize the expectedfuture tax benefit from a deferred tax asset when the tax benefit is considered more likely than not to be realized. Otherwise, a valuation allowance is appliedagainst the deferred tax asset.Assuming the recoverability of a deferred tax asset requires management to make significant estimates related to expectations of future taxableincome. Estimates of future taxable income are based on forecasted cash flow from operations, the character of expected income or loss as either ordinary orcapital and the application of existing tax laws in each jurisdiction. To the extent that future cash flows and the amount or character of taxable income differsignificantly from our estimates, our ability to realize the deferred tax asset could be impacted. To the extent our estimates of our ability to realize our taxbenefits change, we would be required to record changes to our valuation allowance applied against our deferred tax asset. In addition, our NOLcarryforwards begin to expire in 2027 and our NCL carryforwards begin to expire in 2019. If we are not able to generate sufficient taxable income of theappropriate tax character to fully utilize these carryforwards prior to their expiration, we would be required to write off the corresponding deferred tax asset. Ifwe were to increase our valuation allowances against our deferred tax asset or if we were to write off expired loss carryforwards for which a valuationallowance had not been previously recognized, our financial position and results of operations would be adversely impacted.Recently Issued Accounting PronouncementsRefer to “Note 3. Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements for a summary of recently issuedaccounting pronouncements and their effect on our consolidated financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKMarket risk is the exposure to loss resulting from changes in market factors such as interest rates, foreign currency exchange rates, commodity prices,equity prices and other market changes that affect market risk sensitive instruments. The primary market risks that we are exposed to are interest rate risk,prepayment risk, extension risk, spread risk, liquidity risk and regulatory risk. See “Item 1 - Business” in this Annual Report on Form 10-K for discussion ofour risk management strategies related to these market risks. The following is additional information regarding certain of these market risks.Interest Rate RiskWe are exposed to interest rate risk in our MBS portfolio. Our investments in MBS are financed with short-term borrowing facilities such as repurchaseagreements, which are interest rate sensitive financial instruments. Our exposure to interest rate risk fluctuates based upon changes in the level and volatilityof interest rates, mortgage prepayments, and in the shape and slope of the yield curve, among other factors. Through the use of interest rate derivativeinstruments, we attempt to economically hedge a portion of our exposure to changes, attributable to changes in benchmark interest rates, in certain MBS fairvalues and future interest cash flows on our short-term financing arrangements. Our primary interest rate derivatives include interest rate swaps as well as U.S.Treasury note futures, options on U.S. Treasury note futures, and options on agency MBS. Historically, we have also utilized Eurodollar futures and interestrate swap futures.Changes in both short- and long-term interest rates affect us in several ways, including our financial position. As interest rates increase, the fair valueof fixed-rate agency MBS may be expected to decline, prepayment rates may be expected to decrease and duration may be expected to extend. However, anincrease in interest rates results in an increase in the fair value of our interest rate derivative instruments. Conversely, if interest rates decline, the fair value offixed-rate agency MBS is generally expected to increase while the fair value of our interest rate derivatives is expected to decline.The tables that follow illustrate the estimated change in fair value for our current investments in agency MBS and derivative instruments under severalhypothetical scenarios of interest rate movements. For the purposes of this illustration, interest rates are defined by the U.S. Treasury yield curve. Changes infair value are measured as percentage changes from their respective fair values presented in the column labeled “Value.” Our estimate of the change in the fairvalue of agency MBS is based upon the same assumptions we use to manage the impact of interest rates on the portfolio. The interest rate sensitivity of ouragency MBS and TBA commitments is derived from The Yield Book, a third-party model. Actual results could differ significantly from these estimates. Theeffective durations are based on observed fair value changes, as well as our own estimate of the effect of interest rate changes on the fair value of theinvestments, including assumptions regarding prepayments based, in part, on age and interest rate of the mortgages underlying the MBS, prior exposure torefinancing opportunities, and an overall analysis of historical prepayment patterns under a variety of historical interest rate conditions.The interest rate sensitivity analyses illustrated by the tables that follow have certain limitations, most notably the following:51Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. •The 50 and 100 basis point upward and downward shocks to interest rates that are applied in the analyses represent parallel shocks to the forwardyield curve. The analyses do not consider the sensitivity of stockholders’ equity to changes in the shape or slope of the forward yield curve. •The analyses assume that spreads remain constant and, therefore, do not reflect an estimate of the impact that changes in spreads would have onthe value of our MBS investments or our LIBOR-based derivative instruments, such as our interest rate swap agreements. •The analyses assume a static portfolio and do not reflect activities and strategic actions that management may take in the future to manageinterest rate risk in response to significant changes in interest rates or other market conditions. •The analyses do not reflect any changes in the value of our net deferred tax asset, including any changes to the assumptions that would beincorporated into the determination of the deferred tax asset valuation allowance.These analyses are not intended to provide a precise forecast. Actual results could differ materially from these estimates (dollars in thousands, exceptper share amounts). December 31, 2017 Value Value with 50Basis PointIncrease inInterest Rates Value with 50Basis PointDecrease inInterest Rates Agency MBS $4,054,424 $3,960,919 $4,121,083 TBA commitments 609 (30,279) 21,236 U.S. Treasury note futures (1,341) 24,517 (27,199)Interest rate swaps (3,338) 78,233 (84,909)Equity available to common stock 378,735 361,771 358,593 Book value per common share $13.43 $12.83 $12.72 Book value per common share percent change (4.47)% (5.29)% December 31, 2017 Value Value with 100Basis PointIncrease inInterest Rates Value with 100Basis PointDecrease inInterest Rates Agency MBS $4,054,424 $3,848,025 $4,161,291 TBA commitments 609 (67,641) 32,249 U.S. Treasury note futures (1,341) 50,375 (53,057)Interest rate swaps (3,338) 159,804 (166,480)Equity available to common stock 378,735 318,943 302,385 Book value per common share $13.43 $11.31 $10.72 Book value per common share percent change (15.79)% (20.18)% Spread RiskOur investments in MBS expose us to “spread risk.” Spread risk, also known as “basis risk,” is the risk of an increase in the spread between marketparticipants’ required rate of return (or “market yield”) on our MBS and prevailing benchmark interest rates, such as the U.S. Treasury or interest rate swaprates.The spread risk inherent to our investments in agency MBS and the resulting fluctuations in fair value of these securities can occur independent ofchanges in prevailing benchmark interest rates and may relate to other factors impacting the mortgage and fixed income markets, such as actual or anticipatedmonetary policy actions by the U. S. Federal Reserve, liquidity, or changes in market participants’ required rates of return on different assets. While we useinterest rate derivative instruments to attempt to mitigate the sensitivity of our net book value to changes in prevailing benchmark interest rates, suchinstruments are generally not designed to mitigate spread risk inherent to our investment in agency MBS. Consequently, the value of our agency MBS and,in turn, our net book value, could decline independent of changes in interest rates. The tables that follow illustrate the estimated change in fair value for our investments in agency MBS and TBA commitments under severalhypothetical scenarios of agency MBS spread movements. Changes in fair value are measured as percentage changes52Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. from their respective fair values presented in the column labeled “Value.” The sensitivity of our agency MBS and TBA commitments to changes in MBSspreads is derived from The Yield Book, a third-party model. The analysis to follow reflects an assumed spread duration for our investment in agency MBS of5.4 years, which is a model-based assumption that is dependent upon the size and composition of our investment portfolio as well as economic conditionspresent as of December 31, 2017.These analyses are not intended to provide a precise forecast. Actual results could differ materially from these estimates (dollars in thousands, exceptper share amounts). December 31, 2017 Value Value with 10Basis PointIncrease in AgencyMBS Spreads Value with 10Basis PointDecrease in AgencyMBS Spreads Agency MBS $4,054,424 $4,032,448 $4,076,400 TBA commitments 609 (6,098) 7,315 Equity available to common stock 378,735 350,052 407,418 Book value per common share $13.43 $12.41 $14.45 Book value per common share percent change (7.57)% 7.57% December 31, 2017 Value Value with 25Basis PointIncrease in AgencyMBS Spreads Value with 25Basis PointDecrease in AgencyMBS Spreads Agency MBS $4,054,424 $3,999,483 $4,109,365 TBA commitments 609 (16,157) 17,374 Equity available to common stock 378,735 307,028 450,441 Book value per common share $13.43 $10.89 $15.97 Book value per common share percent change (18.93)% 18.93%Inflation RiskVirtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance farmore than inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our financial statements areprepared in accordance with GAAP and our distributions are determined by our Board of Directors in its sole discretion pursuant to our variable dividendpolicy; in each case, our activities and balance sheet are measured with reference to fair value without considering inflation. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAThe information required by this item appears in a subsequent section of this report. See “Index to Arlington Asset Investment Corp. ConsolidatedFinancial Statements” on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.ITEM 9A. CONTROLS AND PROCEDURESDisclosure Controls and ProceduresOur management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of the design andoperation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as ofthe end of the period covered by this report. Based on that evaluation, our CEO and CFO have concluded that as of December 31, 2017, our disclosurecontrols and procedures, as designed and implemented, (i) were effective in ensuring that information is made known to our management, including our CEOand CFO, by our officers and employees, as appropriate to allow timely decisions regarding required disclosure and (ii) were effective in ensuring thatinformation the Company must disclose in its reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized andreported within the time periods prescribed by the SEC’s rules and forms.53Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. Management’s Report on Internal Control over Financial ReportingManagement of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control overfinancial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, as a process designed by, or under thesupervision of, the Company’s principal executive and principal financial officers and effected by the Company’s Board of Directors, management and otherpersonnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles and includes those policies and procedures that: •pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of theCompany; •provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance withauthorizations of management and directors of the Company; and •provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assetsthat 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 of anyevaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degreeof 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, 2017. Inmaking this assessment, the Company’s management used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission(“COSO”) in Internal Control-Integrated Framework (2013 version). Based on management’s assessment, the Company’s management has concluded thatthe Company’s internal control over financial reporting was effective as of December 31, 2017.The effectiveness of the Company’s internal control over financial reporting was audited by PricewaterhouseCoopers LLP, an independent registeredpublic 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, 2017 that havematerially affected, or are reasonably likely to materially affect, our internal control over financial reporting.ITEM 9B. OTHER INFORMATIONNone. 54Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. PART 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 Statement relating to our2018 Annual Meeting of Shareholders (our 2018 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 2018 Proxy Statement and is herebyincorporated by reference.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSThe information required by Part III, Item 12 of this Annual Report on Form 10-K will be provided in our 2018 Proxy Statement and is herebyincorporated 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 2018 Proxy Statement and is herebyincorporated 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 2018 Proxy Statement and is herebyincorporated by reference. PART 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, 2017, includedin “Item 8 - Financial Statements and Supplementary Data”, of this Annual Report on Form 10-K, are incorporated by reference into this Part IV, Item 15: •Report of Independent Registered Public Accounting Firm (page F-2) •Consolidated Balance Sheets as of December 31, 2017 and 2016 (page F-3) •Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015 (page F-4) •Consolidated Statements of Changes in Equity for the years ended December 31, 2017, 2016 and 2015 (page F-5) •Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015 (page F-7) •Notes to Consolidated Financial Statements (page F-8)(2) Financial Statement Schedules. All schedules are omitted because they are not required or because the information is shown in the financialstatements or notes thereto.(3) Exhibits ExhibitNumber Exhibit Title3.01 Amended and Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report onForm 10-Q filed on November 9, 2009).3.02 Articles of Amendment to the Amended and Restated Articles of Incorporation designating the shares of 7.00% Series B Cumulative PerpetualRedeemable Preferred Stock, $0.01 par value per share (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement onForm 8-A filed on May 9, 2017).3.03 Amended and Restated Bylaws, as amended (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed onJuly 28, 2011).55Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. ExhibitNumber Exhibit Title3.04 Amendment No. 1 to the Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Registrant’sCurrent Report on Form 8-K filed on February 4, 2015).3.05 Amendment No. 2 to the Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on October 26, 2016).4.01 Form of Indenture governing the Senior Debt Securities by and between the Company and The Bank of New York Mellon, as Trustee(incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-3 (File No. 333-215384) filed on December 30,2016).4.02 Form of Indenture governing the Subordinated Debt Securities by and between the Company and The Bank of New York Mellon, as Trustee(incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-3 (File No. 333-215384) filed on December 30,2016).4.03 Indenture dated as of May 1, 2013 between the Company and Wells Fargo Bank, National Association, as trustee (incorporated by reference toExhibit 4.1 of the Company’s Current Report on Form 8-K filed on May 1, 2013).4.04 First Supplemental Indenture dated as of May 1, 2013 between the Company and Wells Fargo Bank, National Association, as trustee(incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed on May 1, 2013).4.05 Form of Senior Note. (incorporated by reference to Exhibit 4.5 to the Company’s Registration Statement on Form S-3 (File No. 333-215384) filedon December 30, 2016).4.06 Form of Subordinated Note. (incorporated by reference to Exhibit 4.6 to the Company’s Registration Statement on Form S-3 (File No. 333-215384) filed on December 30, 2016).4.07 Form of 6.625% Senior Notes due 2023 (incorporated by reference to Exhibit 4.3 to Current Report on Form 8-K filed by the Company onMay 1, 2013).4.08 Form of Certificate for Class A common stock (incorporated by reference to Exhibit 4.01 of the Annual Report on Form 10-K filed with the SECon February 24, 2010).4.09 Shareholder Rights Agreement, dated June 5, 2009 (incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K filed with theSEC on June 5, 2009).4.10 Second Supplemental Indenture, dated as of March 18, 2015, between the Company, Wells Fargo Bank, National Association, as Trustee andThe Bank of New York Mellon, as Series Trustee (incorporated by reference to Exhibit 4.3 to the Company’s Form 8-A filed on March 18, 2015).4.11 Form of 6.750% Notes due 2025 (incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-K filed by the Company onMarch 17, 2015).4.12 Form of specimen certificate representing the shares of 7.00% Series B Perpetual Redeemable Preferred Stock (incorporated by reference toExhibit 4.1 to the Company’s Registration Statement on Form 8-A filed on May 9, 2017).10.01 Friedman, Billings, Ramsey Group, Inc. 2004 Long-Term Incentive Plan (incorporated by reference to Appendix A to the Registrant’s DefinitiveProxy Statement on Schedule 14A filed on April 29, 2004).*10.02 Friedman, Billings, Ramsey Group, Inc. 1997 Stock and Annual Incentive Plan (incorporated by reference to Exhibit 10.06 to Amendment No. 2to the Registration Statement on Form S-1 (File No. 333-39107) filed by Friedman, Billings, Ramsey Group, Inc. on December 19, 1997).*10.03 Friedman, Billings, Ramsey Group, Inc. Non-Employee Director Stock Compensation Plan (incorporated by reference to Exhibit 10.07 toAmendment No. 2 to the Registration Statement on Form S-1 (File No. 333-39107) filed by Friedman, Billings, Ramsey Group, Inc. on December19, 1997).*10.04 Friedman, Billings, Ramsey Group, Inc. Amended and Restated Non-Employee Director Stock Compensation Plan (incorporated by reference toExhibit 10.04 to the Registrant’s Annual Report on Form 10-K filed on February 23, 2012).*10.05 Arlington Asset Investment Corp. 2011 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Reporton Form 8-K filed on June 6, 2011).*10.06 Arlington Asset Investment Corp. 2014 Long-Term Incentive Plan (incorporated by reference to the Registrant’s Registration Statement on FormS-8 filed on July 15, 2014).10.07 Form of Restricted Stock Unit Agreement under Arlington Asset Investment Corp. 2014 Long-Term Incentive Plan (incorporated by reference tothe Registrant’s Registration Statement on Form S-8 filed on July 15, 2014).10.08 Form of Restricted Stock Award Agreement under Arlington Asset Investment Corp. 2014 Long-Term Incentive Plan (incorporated by referenceto the Registrant’s Registration Statement on Form S-8 filed on July 15, 2014).10.09 Form of Performance Share Unit Award Agreement under Arlington Asset Investment Corp. 2014 Long-Term Incentive Plan (incorporated byreference to the Registrant’s Registration Statement on Form S-8 filed on July 15, 2014).10.10 Form of Change in Control Continuity Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-Kfiled on January 27, 2017).*10.11 Form of Indemnification Agreement (incorporated by reference to Exhibit 10.08 to the Registrant’s Annual Report on Form 10-K, filed onFebruary 23, 2012).*10.12 Equity Distribution Agreement, dated February 22, 2017, by and between the Company and JMP Securities LLC (incorporated by reference toExhibit 1.1 to the Registrant’s Current Report on Form 8-K filed on February 22, 2017).10.13 Equity Distribution Agreement, dated February 22, 2017, by and between the Company and FBR Capital Markets & Co. (incorporated byreference to Exhibit 1.2 to the Registrant’s Current Report on Form 8-K filed on February 22, 2017).56Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. ExhibitNumber Exhibit Title10.14 Equity Distribution Agreement, dated February 22, 2017, by and between the Company and JonesTrading Institutional Services LLC(incorporated by reference to Exhibit 1.3 to the Registrant’s Current Report on Form 8-K filed on February 22, 2017).10.15 Equity Distribution Agreement, dated February 22, 2017, by and between the Company and Ladenburg Thalmann & Co. Inc. (incorporated byreference to Exhibit 1.4 to the Registrant’s Current Report on Form 8-K filed on February 22, 2017).10.16 Equity Distribution Agreement, dated May 16, 2017, by and between the Company and JonesTrading Institutional Services LLC (incorporatedby reference to Exhibit 1.1 of the Registrant’s Current Report on Form 8-K filed on May 17, 2017).11.01 Statement regarding Computation of Per Share Earnings (included in Part II, Item 8, and Note 3 to the Registrant’s Consolidated FinancialStatements).†12.01 Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.†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 incorporated by reference herein).†31.01 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of2002.†31.02 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of2002.†32.01 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002.†32.02 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002.†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-K for the fiscalyear ended December 31, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31,2017 and December 31, 2016; (ii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015; (iii)Consolidated Statements of Changes in Equity for the years ended December 31, 2017, 2016 and 2015; and (iv) Consolidated Statements of CashFlows for the years ended December 31, 2017, 2016 and 2015. 57Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized. ARLINGTON ASSET INVESTMENT CORP. Date: February 16, 2018 By: /s/ RICHARD E. KONZMANN Richard E. Konzmann Executive Vice President, Chief Financial Officer andTreasurer POWER OF ATTORNEYKNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints J. Rock Tonkel, Jr. andRichard E. Konzmann and each of them as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in hisname, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K for the fiscal year ended December 31,2017, and to file the same, with all exhibits thereto, and any other documents in connection therewith, with the Securities and Exchange Commission,granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done inand about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-factand 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 on behalf of theregistrant and in the capacities and on the dates indicated. Signature Title Date /s/ J. ROCK TONKEL, JR. President, Chief Executive Officer and Director February 16, 2018J. ROCK TONKEL, JR. (Principal Executive Officer) /s/ RICHARD E. KONZMANN Executive Vice President, Chief Financial Officer and Treasurer February 16, 2018RICHARD E. KONZMANN (Principal Financial Officer) /s/ BENJAMIN J. STRICKLER Vice President, Chief Accounting Officer and Controller February 16, 2018BENJAMIN J. STRICKLER (Principal Accounting Officer) /s/ ERIC F. BILLINGS Executive Chairman of the Board February 16, 2018ERIC F. BILLINGS /s/ DANIEL J. ALTOBELLO Director February 16, 2018DANIEL J. ALTOBELLO /s/ DANIEL E. BERCE Director February 16, 2018DANIEL E. BERCE /s/ DAVID W. FAEDER Director February 16, 2018DAVID W. FAEDER /s/ PETER A. GALLAGHER Director February 16, 2018PETER A. GALLAGHER /s/ RALPH S. MICHAEL III Director February 16, 2018RALPH S. MICHAEL III /s/ ANTHONY P. NADER III Director February 16, 2018ANTHONY P. NADER III 58Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. FINANCIAL STATEMENTS OF ARLINGTON ASSET INVESTMENT CORP.Index to Arlington Asset Investment Corp. Consolidated Financial Statements PageReport of Independent Registered Public Accounting Firm F-2Consolidated Balance Sheets as of December 31, 2017 and 2016 F-4Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015 F-5Consolidated Statements of Changes in Equity for the years ended December 31, 2017, 2016 and 2015 F-6Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015 F-8Notes to Consolidated Financial Statements F-9 F-1Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. Report of Independent Registered Public Accounting FirmTo The Board of Directors and Shareholders ofArlington Asset Investment Corp. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Arlington Asset Investment Corp. and its subsidiaries (the “Company”) as of December31, 2017 and 2016, and the related consolidated statements of comprehensive income, of changes in equity and of cash flows for each of the three years in theperiod ended December 31, 2017, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited theCompany's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as ofDecember 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 inconformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all materialrespects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework(2013) issued by the COSO. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, andfor its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over FinancialReporting under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internalcontrol over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board(United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonableassurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internalcontrol over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financialstatements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles usedand significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internalcontrol over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performingsuch other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. F-2Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate. /s/ PricewaterhouseCoopers LLP McLean, VA February 16, 2018 We have served as the Company’s auditor since 2002. F-3Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. ARLINGTON ASSET INVESTMENT CORP.CONSOLIDATED BALANCE SHEETS(Dollars in thousands, except share amounts) December 31, 2017 2016 ASSETS Cash and cash equivalents $21,614 $54,794 Interest receivable 12,546 11,646 Mortgage-backed securities, at fair value Agency 4,054,424 3,911,375 Private-label 76 1,266 Derivative assets, at fair value 763 74,889 Deferred tax assets, net 800 48,829 Deposits, net 59,103 11,149 Other assets 11,203 3,003 Total assets $4,160,529 $4,116,951 LIABILITIES AND STOCKHOLDERS’ EQUITY Liabilities: Repurchase agreements $3,667,181 $3,649,102 Interest payable 4,418 3,434 Accrued compensation and benefits 5,015 5,406 Dividend payable 17,550 15,739 Derivative liabilities, at fair value 4,833 9,554 Other liabilities 1,335 1,247 Long-term unsecured debt 73,880 73,656 Total liabilities 3,774,212 3,758,138 Commitments and contingencies (Note 11) Stockholders’ Equity: Preferred stock, $0.01 par value, 25,000,000 shares authorized, 303,291 and -0- shares issued and outstanding, respectively (liquidation preference of $7,582 and $-0-, respectively) 7,108 — Class A common stock, $0.01 par value, 450,000,000 shares authorized, 28,140,721 and 23,607,111 shares issued and outstanding, respectively 281 236 Class B common stock, $0.01 par value, 100,000,000 shares authorized, -0- and 20,256 shares issued and outstanding, respectively — — Additional paid-in capital 1,974,941 1,910,284 Accumulated deficit (1,596,013) (1,551,707)Total stockholders’ equity 386,317 358,813 Total liabilities and stockholders’ equity $4,160,529 $4,116,951 The accompanying notes are an integral part of these consolidated financial statements. F-4Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(Dollars in thousands except per share amounts) Year Ended December 31, 2017 2016 2015 Interest income Agency mortgage-backed securities $120,968 $97,053 $105,914 Private-label mortgage-backed securities 101 7,910 15,342 Other 179 373 7 Total interest income 121,248 105,336 121,263 Interest expense Short-term secured debt 46,648 24,433 14,701 Long-term unsecured debt 4,866 4,789 4,188 Total interest expense 51,514 29,222 18,889 Net interest income 69,734 76,114 102,374 Investment gain (loss), net Gain (loss) on trading investments, net 2,424 (41,249) (31,058)Gain (loss) from derivative instruments, net 3,224 (31,660) (104,743)Realized gain on sale of available-for-sale investments, net — 4,777 17,725 Other-than-temporary impairment charges — (1,737) (2,417)Other, net 226 551 2,064 Total investment gain (loss), net 5,874 (69,318) (118,429)General and administrative expenses Compensation and benefits 13,203 11,526 9,719 Other general and administrative expenses 5,367 9,230 5,068 Total general and administrative expenses 18,570 20,756 14,787 Income (loss) before income taxes 57,038 (13,960) (30,842)Income tax provision 39,603 27,387 38,561 Net income (loss) 17,435 (41,347) (69,403)Dividend on preferred stock (251) — — Net income (loss) available (attributable) to common stock $17,184 $(41,347) $(69,403)Basic earnings (loss) per common share $0.67 $(1.79) $(3.02)Diluted earnings (loss) per common share $0.66 $(1.79) $(3.02)Weighted-average common shares outstanding (in thousands) Basic 25,649 23,051 23,002 Diluted 26,011 23,051 23,002 Other comprehensive income (loss), net of taxes Unrealized losses on available-for-sale securities (net of taxes of $-0-, $(3,946), and $(4,281), respectively) $— $(6,197) $(7,033)Reclassification Included in investment gain (loss), net, related to sales of available-for-sale securities (net of taxes of $-0-, $40, and $(5,095), respectively) — (7,235) (17,945)Included in investment gain (loss), net, related to other-than-temporary impairment charges on available-for-sale securities (net of taxes of $-0-, $676, $940, respectively) — 1,061 1,477 Comprehensive income (loss) $17,435 $(53,718) $(92,904) The accompanying notes are an integral part of these consolidated financial statements. F-5Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY(Dollars in thousands) Class ACommonStock (#) Class AAmount($) Class BCommonStock (#) Class BAmount($) AdditionalPaid-InCapital AccumulatedOtherComprehensiveIncome AccumulatedDeficit Total Balances, December 31, 2014 22,860,922 $229 105,869 $1 $1,897,027 $35,872 $(1,312,458) $620,671 Net loss — — — — — — (69,403) (69,403)Conversion of Class B common stock to Class A common stock 3,653 — (3,653) — — — — — Issuance of Class A common stock under stock-based compensation plans 97,651 — — — — — — — Repurchase of Class A common stock (48,695) — — — (593) — — (593)Repurchase of Class A common stock under stock-based compensation plans (38,712) — — — (572) — — (572)Stock-based compensation — — — — 1,145 — — 1,145 Income tax benefit from stock-based compensation — — — — 1,078 — — 1,078 Other comprehensive loss — — — — — (23,501) — (23,501)Dividends declared (1) — — — — — — (69,397) (69,397)Balances, December 31, 2015 22,874,819 $229 102,216 $1 $1,898,085 $12,371 $(1,451,258) $459,428 Class ACommonStock (#) Class AAmount($) Class BCommonStock (#) Class BAmount($) AdditionalPaid-InCapital AccumulatedOtherComprehensiveIncome AccumulatedDeficit Total Balances, December 31, 2015 22,874,819 $229 102,216 $1 $1,898,085 $12,371 $(1,451,258) $459,428 Net loss — — — — — — (41,347) (41,347)Conversion of Class B common stock to Class A common stock 81,960 1 (81,960) (1) — — — — Issuance of Class A common stock 595,342 6 — — 9,669 — — 9,675 Issuance of Class A common stock under stock-based compensation plans 73,457 — — — — — — — Repurchase of Class A common stock under stock-based compensation plans (18,467) — — — (269) — — (269)Stock-based compensation — — — — 2,974 — — 2,974 Income tax provision from stock-based compensation — — — — (175) — — (175)Other comprehensive loss — — — — — (12,371) — (12,371)Dividends declared (1) — — — — — — (59,102) (59,102)Balances, December 31, 2016 23,607,111 $236 20,256 $— $1,910,284 $— $(1,551,707) $358,813 The accompanying notes are an integral part of these consolidated financial statements. F-6Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY – (continued)(Dollars in thousands) PreferredStock (#) PreferredAmount($) Class ACommonStock (#) Class AAmount($) Class BCommonStock (#) Class BAmount($) AdditionalPaid-InCapital AccumulatedOtherComprehensiveIncome AccumulatedDeficit Total Balances, December 31,2016 — $— 23,607,111 $236 20,256 $— $1,910,284 $— $(1,551,707) $358,813 Net income — — — — — — — — 17,435 17,435 Conversion of Class B common stock to Class A common stock — — 20,256 — (20,256) — — — — — Issuance of Class A common stock — — 4,472,083 45 — — 61,168 — — 61,213 Issuance of Class A common stock under stock-based compensation plans — — 74,000 — — — — — — — Issuance of Series B preferred stock 303,291 7,108 — — — — — — — 7,108 Repurchase of Class A common stock under stock-based compensation plans — — (32,729) — — — (437) — — (437)Stock-based compensation — — — — — — 3,926 — — 3,926 Dividends declared (1) — — — — — — — — (61,741) (61,741)Balances, December 31,2017 303,291 $7,108 28,140,721 $281 — $— $1,974,941 $— $(1,596,013) $386,317 (1)The Board of Directors approved and the Company declared and paid dividends of $3.00, $2.50, and $2.275 per common share for the years endedDecember 31, 2015, 2016, and 2017, respectively. The accompanying notes are an integral part of these consolidated financial statements. F-7Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. CONSOLIDATED STATEMENTS OF CASH FLOWS(Dollars in thousands) Year Ended December 31, 2017 2016 2015 Cash flows from operating activities Net income (loss) $17,435 $(41,347) $(69,403)Adjustments to reconcile net income (loss) to net cash provided by operating activities Net investment (gain) loss, net (5,874) 69,318 118,429 Net premium amortization on mortgage-backed securities 33,353 28,810 24,877 Deferred tax provision 38,897 27,330 36,399 Other 3,497 2,709 558 Changes in operating assets Interest receivable (900) 290 (1,235)Other assets 717 1,759 754 Changes in operating liabilities Interest payable and other liabilities 1,296 (531) 1,456 Accrued compensation and benefits (391) 236 (897)Net cash provided by operating activities 88,030 88,574 110,938 Cash flows from investing activities Purchases of private-label mortgage-backed securities — (5,357) (2,870)Purchases of agency mortgage-backed securities (3,137,435) (2,917,361) (2,040,883)Proceeds from sales of private-label mortgage-backed securities 1,268 124,962 130,138 Proceeds from sales of agency mortgage-backed securities 2,482,703 2,302,011 1,057,842 Receipt of principal payments on private-label mortgage-backed securities 17 496 2,077 Receipt of principal payments on agency mortgage-backed securities 480,661 495,852 467,770 Proceeds from (payments for) derivatives and deposits, net 24,674 (66,278) (109,225)Other 432 15,855 (14,112)Net cash used in investing activities (147,680) (49,820) (509,263)Cash flows from financing activities Proceeds from (repayments of) repurchase agreements, net 18,079 814,323 (344,995)(Repayments of) proceeds from Federal Home Loan Bank advances, net — (786,900) 786,900 Proceeds from issuance of common stock 61,213 9,675 — Proceeds from issuance of preferred stock 7,108 — — Proceeds from long-term debt issuance, net — — 34,063 Excess tax (provisions) benefits associated with stock-based awards — (175) 1,192 Dividends paid (59,930) (57,870) (75,087)Repurchase of common stock — — (593)Net cash provided by (used in) financing activities 26,470 (20,947) 401,480 Net (decrease) increase in cash and cash equivalents (33,180) 17,807 3,155 Cash and cash equivalents, beginning of year 54,794 36,987 33,832 Cash and cash equivalents, end of year $21,614 $54,794 $36,987 Supplemental cash flow information Cash payments for interest $50,306 $28,000 $17,353 Cash payments for taxes $28 $322 $433 Non-cash investing activity: Receipt of non-public equity securities upon dissolution of investee fund $— $619 $— The accompanying notes are an integral part of these consolidated financial statements. F-8Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. ARLINGTON ASSET INVESTMENT CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts) Note 1. Organization and Nature of OperationsArlington Asset Investment Corp. (“Arlington Asset”) and its consolidated subsidiaries (unless the context otherwise provides, collectively, the“Company”) is an investment firm that acquires and holds residential mortgage-related assets, primarily comprised of residential mortgage-backed securities(“MBS”). The Company’s investments in residential MBS include (i) residential mortgage pass-through certificates for which the principal and interestpayments are guaranteed by a government-sponsored enterprise (“GSE”) such as the Federal National Mortgage Association (“Fannie Mae”) or the FederalHome Loan Mortgage Corporation (“Freddie Mac”), which are collectively referred to as “agency MBS,” and (ii) residential MBS issued by privateinstitutions for which the principal and interest payments are not guaranteed by a GSE, which are referred to as “private-label MBS” or “non-agency MBS.” Note 2. Basis of PresentationThe consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) andinclude the accounts of Arlington Asset and all other entities in which the Company has a controlling financial interest. All intercompany accounts andtransactions have been eliminated in consolidation.The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect amountsreported in the consolidated financial statements. Although the Company bases these estimates and assumptions on historical experience and all otherreasonably available information that the Company believes to be relevant under the circumstances, such estimates frequently require management toexercise significant subjective judgment about matters that are inherently uncertain. Actual results may differ from these estimates.Certain amounts in the consolidated financial statements and notes for prior periods have been reclassified to conform to the current year’spresentation. These reclassifications had no impact on the previously reported net income, other comprehensive income, total assets or total liabilities. Note 3. Summary of Significant Accounting PoliciesCash EquivalentsCash equivalents include demand deposits with banks, money market accounts and highly liquid investments with original maturities of three monthsor less. As of December 31, 2017 and 2016, approximately 98% and 99%, respectively, of the Company’s cash equivalents were invested in money marketfunds that invest primarily in U.S. Treasuries and other securities backed by the U.S. government.Investment Security Purchases and SalesPurchases and sales of investment securities are recorded on the settlement date of the transfer unless the trade qualifies as a “regular-way” trade andthe associated commitment qualifies for an exemption from the accounting guidance applicable to derivative instruments. A regular-way trade is aninvestment security purchase or sale transaction that is expected to settle within the period of time following the trade date that is prevalent or traditional forthat specific type of security. Any amounts payable or receivable for unsettled security trades are recorded as “sold securities receivable” or “purchasedsecurities payable” in the consolidated balance sheets.Interest Income Recognition for Investments in Agency MBSThe Company recognizes interest income for its investments in agency MBS by applying the “interest method” permitted by GAAP, wherebypurchase premiums and discounts are amortized and accreted, respectively, as an adjustment to contractual interest income accrued at each security’s statedcoupon rate. The interest method is applied at the individual security level based upon each security’s effective interest rate. The Company calculates eachsecurity’s effective interest rate at the time of purchase by solving for the discount rate that equates the present value of that security's remaining contractualcash flows (assuming no principal prepayments) to its purchase price. Because each security’s effective interest rate does not reflect an estimate of futureprepayments, the Company refers to this manner of applying the interest method as the “contractual effective interest method.” When applying thecontractual effective interest method to its investments in agency MBS, as principal prepayments occur, a proportional amount of theF-9Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. unamortized premium or discount is recognized in interest income such that the effective interest rate on the remaining security balance is unaffected.Interest Income Recognition for Investments in Private-Label MBSThe Company’s investments in private-label MBS were generally acquired at significant discounts to their par values due in large part to anexpectation that the Company will be unable to collect all of the contractual cash flows of the securities. Investments in private-label MBS acquired prior to2015 were classified as available-for-sale, all of which had been sold as of December 31, 2016. The Company has elected to classify its investments inprivate-label MBS acquired in 2015 or later as trading securities. Interest income from investments in private-label MBS is recognized using a prospectivelevel-yield methodology which is based upon each security’s effective interest rate. The amount of periodic interest income recognized is determined byapplying the security’s effective interest rate to its amortized cost basis or reference amount. At the time of acquisition, the security’s effective interest rate iscalculated by solving for the single discount rate that equates the present value of the Company’s best estimate of the amount and timing of the cash flowsexpected to be collected from the security to its purchase price. To prepare its best estimate of cash flows expected to be collected, the Company develops anumber of assumptions about the future performance of the pool of mortgage loans that serve as collateral for its investment, including assumptions about thetiming and amount of prepayments and credit losses.In each subsequent quarterly reporting period, the amount and timing of cash flows expected to be collected from the security are re-estimated basedupon current information and events. The following table provides a description of how periodic changes in the estimate of cash flows expected to becollected affect interest income recognition prospectively for investments in private-label MBS that are classified as available-for-sale and trading securities,respectively: Effect on Interest Income Recognition for Investments in Private-Label MBSClassified as:Scenario: Available-for-Sale TradingA positive change in cash flowsoccurs. Actual cash flows exceed priorestimates and/or a positivechange occurs in the estimate ofexpected remaining cash flows. If the positive change in cash flows is deemed significant,a revised effective interest rate is calculated and appliedprospectively such that the positive change is recognizedas incremental interest income over the remaining life ofthe security. This revised effective interest rate is alsoused in subsequent periods to determine if any declines inthe fair value of that security are other-than-temporary. A revised effective interest rate is calculated and appliedprospectively such that the positive change in cash flows isrecognized as incremental interest income over the remaininglife of the security. An adverse change in cashflows occurs. Actual cash flows fall short ofprior estimates and/or an adversechange occurs in the estimate ofexpected remaining cash flows. The security’s effective interest rate is unaffected. If anadverse change in cash flows occurs for a security that isimpaired (that is, its fair value is less than its amortizedcost basis), the impairment is considered other-than-temporary due to the occurrence of a credit loss. If a creditloss occurs, the Company writes-down the amortized costbasis of the security to an amount equal to the presentvalue of cash flows expected to be collected, discountedat the security’s existing effective interest rate, andrecognizes a corresponding other-than-temporaryimpairment charge in earnings as a component of“investment gain (loss), net.” The amount of periodic interest income recognized over theremaining life of the security will be reduced accordingly.Specifically, if an adverse change in cash flows occurs for asecurity that is impaired (that is, its fair value is less than itsreference amount), the reference amount to which thesecurity’s existing effective interest rate will be prospectivelyapplied will be reduced to the present value of cash flowsexpected to be collected, discounted at the security’s existingeffective interest rate. If an adverse change in cash flowsoccurs for a security that is not impaired, the security’seffective interest rate will be reduced accordingly and appliedon a prospective basis. Other Comprehensive IncomeComprehensive income includes net income as currently reported by the Company on the consolidated statements of comprehensive income adjustedfor other comprehensive income. Other comprehensive income for the Company represents periodic unrealized holding gains and losses related to theCompany’s investments in MBS classified as available-for-sale. Accumulated unrealized holding gains and losses for available-for-sale MBS are reclassifiedinto net income as a component of “investment gain (loss), net” upon (i) sale or realization, or (ii) the occurrence of an other-than-temporary impairment. Asof December 31, 2016 all of the Company’s investments in MBS are classified as trading securities. Accordingly, all unrealized gains and losses related to theCompany’s investments in MBS during 2017 have been recognized in net income.F-10Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. Earnings Per ShareBasic earnings per share includes no dilution and is computed by dividing net income or loss applicable to common stock by the weighted-averagenumber of common shares outstanding for the respective period. Diluted earnings per share includes the impact of dilutive securities such as unvested sharesof restricted stock and performance share units. The following tables present the computations of basic and diluted earnings (loss) per share for the periodsindicated: Year Ended December 31, (Shares in thousands) 2017 2016 2015 Basic weighted-average common shares outstanding 25,649 23,051 23,002 Performance share units and unvested restricted stock 362 — — Diluted weighted-average common shares outstanding 26,011 23,051 23,002 Net income (loss) attributable to common stock $17,184 $(41,347) $(69,403)Basic earnings (loss) per common share $0.67 $(1.79) $(3.02)Diluted earnings (loss) per common share $0.66 $(1.79) $(3.02) The diluted loss per share for the years ended December 31, 2016 and 2015 did not include the antidilutive effect of 150,996 and 86,372 shares,respectively, of unvested shares of restricted stock and performance share units.Other Significant Accounting PoliciesThe Company’s other significant accounting policies are described in the following notes: Investments in agency MBS, subsequent measurementNote 4Investments in private-label MBS, subsequent measurementNote 5BorrowingsNote 6To-be-announced agency MBS transactions, including “dollar rolls”Note 7Derivative instrumentsNote 7Balance sheet offsettingNote 8Fair value measurementsNote 9Income taxesNote 10Stock-based compensationNote 13 Recent Accounting PronouncementsThe following table provides a brief description of recently issued accounting pronouncements and their actual or expected effect on the Company’sconsolidated financial statements: StandardDescriptionDate ofAdoptionEffect on the ConsolidatedFinancial StatementsRecently Adopted Accounting GuidanceASU No. 2016-07, Simplifyingthe Transition to the EquityMethod of Accounting (Topic323)This amendment eliminates the requirement that when aninvestment qualifies for use of the equity method as a result ofan increase in the level of ownership interest or degree ofinfluence, an investor must adjust the investment, results ofoperations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during allprevious periods that the investment had been held.January 1, 2017The adoption of ASU No. 2016-07 didnot impact the Company’sconsolidated financial statements. ASU No. 2016-09, Improvementsto Employee Share-BasedPayment Accounting (Topic 718)This amendment was issued with the objective of simplifyingseveral aspects of the accounting for share-based paymenttransactions, including the income tax consequences,classification of awards as either equity or liabilities, andclassification on the statement of cash flows. Some of theareas for simplification apply only to nonpublic entities.January 1, 2017The adoption of ASU No. 2016-07 didnot have a material impact on theCompany’s consolidated financialstatements.F-11Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. StandardDescriptionDate ofAdoptionEffect on the ConsolidatedFinancial Statements Recently Issued Accounting Guidance Not Yet AdoptedASU No. 2015-14, Revenue fromContracts with Customers(Topic 606): Deferral of theEffective DateThis amendment defers the effective date of ASU No. 2014-09for all entities by one year. ASU No. 2014-09 requires entities to recognize revenue todepict the transfer of promised goods or services to customersin amounts that reflect the consideration to which the entityexpects to be entitled in exchange for those goods or services.Revenue recognition with respect to financial instruments isnot within the scope of ASU No. 2014-09.January 1, 2018The Company does not expect thatthe adoption of ASU No. 2015-14 willhave a material impact on itsconsolidated financial statements. ASU No. 2016-01, Recognitionand Measurement of FinancialAssets and Financial Liabilities(Subtopic 825-10)This amendment makes targeted changes to certain aspects ofguidance applicable to financial assets and financialliabilities. The amendment primarily affects accounting forcertain equity investments, financial liabilities measuredunder the fair value option, and certain financial instrumentpresentation and disclosure requirements. Accounting forinvestments in debt securities and financial liabilities notmeasured under the fair value option is largely unaffected bythis amendment.January 1, 2018ASU No. 2016-01 requires entities tomeasure investments in equitysecurities at fair value, unless fairvalue measurement is impractical,with changes in fair value recognizedin current period earnings. Upon theadoption of ASU No. 2016-01, theCompany will recognize thedifference between the fair value of itsinvestments in equity securitiescurrently carried at their historicalcost (net of impairments) and thesecurities’ fair value as a cumulative-effect adjustment to the balance sheetas of January 1, 2018. As ofDecember 31, 2017, the Company’sinvestments in equity securitiesmeasured at cost have a balance sheetcarrying value of $1,236 and anestimated fair value of $5,362. Basedon these amounts, the adoption of thisamendment would result in anestimated cumulative-effect increaseof $4,126 in stockholders’ equity. Subsequent to January 1, 2018, allchanges in the estimated fair value ofsuch instruments will be recognizedin net income. ASU No. 2016-02, Leases(Topic 842)This amendment replaces the existing lease accounting modelwith a revised model. The primary change effectuated by therevised lease accounting model is the recognition of leaseassets and lease liabilities by lessees for those leases classifiedas operating leases.January 1, 2019The Company is currently evaluatingthe impact of this amendment on itsconsolidated financial statements. F-12Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. StandardDescriptionDate ofAdoptionEffect on the ConsolidatedFinancial StatementsASU No. 2016-13, FinancialInstruments - Credit Losses(Topic 606)The amendments in this update require financial assetsmeasured at amortized cost as well as available-for-sale debtsecurities to be measured for impairment on the basis of thenet amount expectedto be collected. Credit losses are to be recognized through anallowance for credit losses, which differs from the direct write-down of the amortized cost basis currently required for other-than-temporary impairments of investments in debtsecurities. This update also makes substantial changes to themanner in which interest income is to be recognized forfinancial assets acquired with a more-than-insignificantamount of credit deterioration since origination. This update will not affect the accounting for investments indebt securities that are classified as trading securities.January 1, 2019As of December 31, 2017, all of theCompany’s investments in debtsecurities are classified as tradingsecurities. Accordingly, the Companydoes not expect ASU No. 2016-13 tohave a material impact on itsconsolidated financial statements. ASU No. 2016-15, Classificationof Certain Cash Receipts andCash Payments (Topic 230)This amendment was issued to reduce diversity in practicewith respect to eight various statement of cash flow reportingissues for which existing GAAP is either unclear or does notprovide specific guidance.January 1, 2018The Company does not expect thatthe adoption of ASU No. 2016-15 willhave a material impact on theclassification of cash inflows oroutflows within its consolidatedstatement of cash flows.ASU No. 2017-08, PremiumAmortization of PurchasedCallable Debt Securities(Subtopic 310-20)This amendment requires purchase premiums for investmentsin debt securities that are noncontingently callable by theissuer (at a fixed price and preset date) to be amortized to theearliest call date. Previously, purchase premiums for suchinvestments were permitted to be amortized to theinstrument’s maturity date.January 1, 2020 Investments in prepayable financialassets, such as residential MBS, forwhich the embedded call options arenot held by the issuer are not withinthe scope of ASU No. 2017-08.Accordingly, the Company does notexpect the adoption of ASU No. 2017-08 to have a material effect on itsconsolidated financial statements. ASU No. 2017-12, TargetedImprovements to Accounting forHedging Activities (Topic 815)This update made several targeted amendments to existingGAAP with the objectives of facilitating (i) financialreporting that more closely reflects entities’ risk managementstrategies and (ii) greater ease of understanding andinterpreting the effects of hedge accounting an entities’reported results.January 1, 2019Hedge accounting pursuant to GAAPis an elective, rather than a required,accounting model. The Companydoes not currently elect to applyhedge accounting and, at this time,does not plan to elect to apply hedgeaccounting in thefuture. Accordingly, at this time, theCompany does not expect ASU No.2017-12 will have an effect on itsconsolidated financial statements. Note 4. Investments in Agency MBSThe Company’s investments in agency MBS are reported in the accompanying consolidated balance sheets at fair value. As of December 31, 2017 and2016, the Company had $4,054,424 and $3,911,375, respectively, of fair value in agency MBS classified as trading securities. As of December 31, 2017, all of the Company’s investments in agency MBS represent undivided (or “pass-through”) beneficial interests in specifiedpools of fixed-rate mortgage loans. As of December 31, 2016, the Company’s portfolio of investments in agency MBS also includes investments in inverseinterest-only agency MBS with an aggregate fair value of $1,923. The Company’sF-13Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. investments in inverse interest-only agency MBS represent beneficial interests in a portion of the interest cash flows of an underlying pool of pass-throughagency MBS collateralized by adjustable-rate mortgage loans. All periodic changes in the fair value of trading agency MBS that are not attributed to interest income are recognized as a component of “investmentgain (loss), net” in the accompanying consolidated statements of comprehensive income. The following table provides additional information about thegains and losses recognized as a component of “investment gain (loss), net” in the Company’s consolidated statements of comprehensive income for theperiods indicated with respect to investments in agency MBS classified as trading securities: Year Ended December 31, 2017 2016 2015 Net gains (losses) recognized in earnings for: Agency MBS still held at period end $(1,621) $(62,363) $(26,543)Agency MBS sold during the period 3,987 21,714 (4,465)Total $2,366 $(40,649) $(31,008) The Company also invests in and finances fixed-rate agency MBS on a generic pool basis through sequential series of to-be-announced securitytransactions commonly referred to as “dollar rolls.” Dollar rolls are accounted for as a sequential series of derivative instruments. Refer to “Note 7. DerivativeInstruments” for further information about dollar rolls. Note 5. Investments in Private-Label MBSThe Company’s investments in private-label MBS are reported in the accompanying consolidated balance sheets at fair value. Investments in private-label MBS acquired prior to 2015 were classified as available-for-sale, all of which had been sold as of December 31, 2016. The Company has elected toclassify its investments in private-label MBS acquired in 2015 or later as trading securities. As of December 31, 2017 and 2016, the Company heldinvestments in private-label MBS with a fair value of $76 and $1,266, respectively, all of which were classified as trading securities. Available-for-Sale Private-Label MBSPeriodic changes in the fair value of the Company’s available-for-sale private-label MBS that are not attributed to interest income or other-than-temporary impairments represent unrealized holding gains and losses. Unrealized holding gains and losses are accumulated in other comprehensive incomeuntil the securities are sold. As of December 31, 2017 and 2016, the Company had no available-for-sale private-label MBS.Upon the sale of available-for-sale private-label MBS, any gains or losses accumulated in other comprehensive income are recognized in earnings as acomponent of “investment gain (loss), net.” The Company uses the specific identification method to determine the realized gain or loss that is recognized inearnings upon the sale of an available-for-sale private-label MBS.The following table presents the results of sales of available-for-sale private-label MBS for the periods indicated: Year Ended December 31, 2017 2016 2015 Proceeds from sales $— $113,983 $130,138 Gross realized gains — 5,819 18,145 Gross realized losses — 1,042 420 Accretable YieldThe excess of the Company’s estimate of undiscounted future cash flows expected to be collected over the security’s amortized cost basis representsthat security’s accretable yield. The accretable yield is expected to be recognized as interest income over the remaining life of the security on a level-yieldbasis. The difference between undiscounted future contractual cash flows and undiscounted future expected cash flows represents the non-accretabledifference. Based on actual payments received and/or changes in the estimate of future cash flows expected to be collected, the accretable yield and the non-accretable difference can change over time. Actual cash collections that exceed prior estimates and/or positive changes in the Company’s periodic estimate ofexpected future cash flows result in a reclassification of non-accretable difference to accretable yield. Conversely, actual cash collections thatF-14Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. fall short of prior estimates and/or adverse changes in the Company’s periodic estimate of expected future cash flows result in a reclassification of accretableyield to non-accretable difference.The following table presents the changes in the accretable yield solely for available-for-sale private-label MBS for the periods indicated: Year Ended December 31, 2017 2016 Beginning balance $— $85,052 Accretion — (6,744)Reclassifications, net — (11,853)Eliminations in consolidation — (3,515)Sales — (62,940)Ending balance $— $— Other-than-Temporary ImpairmentsThe Company evaluates available-for-sale MBS for other-than-temporary impairment on a quarterly basis. When the fair value of an available-for-salesecurity is less than its amortized cost at the quarterly reporting date, the security is considered impaired. Impairments determined to be other-than-temporaryare recognized as a direct write-down to the security’s amortized cost basis with a corresponding charge recognized in earnings as a component of“investment gain (loss), net.” An impairment is considered other-than-temporary when (i) the Company intends to sell the impaired security, (ii) the Companymore-likely-than not will be required to sell the impaired security prior to the recovery of its amortized cost basis, or (iii) a credit loss exists. A credit lossexists when the present value of the Company’s estimate of the cash flows expected to be collected from the security, discounted at the security’s existingeffective interest rate, is less than the security’s amortized cost basis.If the Company intends to sell an impaired security or it more-likely-than-not will be required to sell an impaired security before recovery of itsamortized cost basis, the Company writes-down the amortized cost basis of the security to an amount equal to the security’s fair value and recognizes acorresponding other-than-temporary impairment charge in earnings as a component of “investment gain (loss), net.” If a credit loss exists for an impairedsecurity that the Company does not intend to sell nor will it likely be required to sell prior to recovery, the Company writes-down the amortized cost basis ofthe security to an amount equal to the present value of cash flows expected to be collected, discounted at the security’s existing effective interest rate, andrecognizes a corresponding other-than-temporary impairment charge in earnings as a component of “investment gain (loss), net.”For the years ended December 31, 2017, 2016, and 2015, the Company recorded credit related other-than-temporary impairment charges of $-0- and$1,737, and $2,417, respectively, as a component of “investment gain (loss), net” on the consolidated statements of comprehensive income on certainavailable-for-sale private-label MBS. The following table presents a summary of cumulative credit related other-than-temporary impairment chargesrecognized on the available-for-sale private-label MBS held as of the dates indicated: Year Ended December 31, 2017 2016 Cumulative credit related other-than-temporary impairments, beginning balance $— $14,017 Additions for: Securities for which other-than-temporary impairments have not previously occurred — 1,737 Securities with previously recognized other-than-temporary impairments — — Reductions for sold or matured securities — (15,754)Cumulative credit related other-than-temporary impairments, ending balance $— $— F-15Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. Trading Private-Label MBSPeriodic changes in the fair value of investments in trading private-label MBS that are not attributable to interest income are recognized as acomponent of “investment gain (loss), net” in the Company’s consolidated statements of comprehensive income. The following table provides additionalinformation about the gains and losses recognized as a component of “investment gain (loss), net” for the periods indicated with respect to investments inprivate-label MBS classified as trading securities: Year Ended December 31, 2017 2016 2015 Net gains (losses) recognized in earnings for: Private-label MBS still held at period end $58 $(379) $(50)Private-label MBS sold during the period — (221) — Total $58 $(600) $(50) Note 6. BorrowingsRepurchase AgreementsThe Company finances the purchase of MBS through repurchase agreements, which are accounted for as collateralized borrowing arrangements. In arepurchase transaction, the Company sells MBS to a counterparty under a master repurchase agreement in exchange for cash and concurrently agrees torepurchase the same security at a future date in an amount equal to the cash initially exchanged plus an agreed-upon amount of interest. MBS sold underagreements to repurchase remain on the Company’s consolidated balance sheets because the Company maintains effective control over such securitiesthroughout the duration of the arrangement. Throughout the contractual term of a repurchase agreement, the Company recognizes a “repurchase agreement”liability on its consolidated balance sheets to reflect the obligation to repay to the counterparty the proceeds received upon the initial transfer of the MBS.The difference between the proceeds received by the Company upon the initial transfer of the MBS and the contractually agreed-upon repurchase price isrecognized as interest expense over the term of the repurchase arrangement on a level-yield basis.Amounts borrowed pursuant to repurchase agreements are equal in value to a specified percentage of the fair value of the pledged collateral. TheCompany retains beneficial ownership of the pledged collateral throughout the term of the repurchase agreement. The counterparty to the repurchaseagreements may require that the Company pledge additional securities or cash as additional collateral to secure borrowings when the value of the collateraldeclines.As of December 31, 2017 and 2016, the Company had no amount at risk with a single repurchase agreement counterparty or lender greater than 10%of equity. The following table provides information regarding the Company’s outstanding repurchase agreement borrowings as of the dates indicated: December 31, 2017 December 31, 2016 Pledged with agency MBS: Repurchase agreements outstanding $3,667,181 $3,649,102 Agency MBS collateral, at fair value 3,858,815 3,851,269 Net amount (1) 191,634 202,167 Weighted-average rate 1.56% 0.96%Weighted-average term to maturity 12.6 days 19.3 days (1)Net amount represents the value of collateral in excess of corresponding repurchase obligation. The amount of collateral at-risk is limited to theoutstanding repurchase obligation and not the entire collateral balance.The following table provides information regarding the Company’s outstanding repurchase agreement borrowings during the years endedDecember 31, 2017 and 2016: December 31, 2017 December 31, 2016 Weighted-average outstanding balance $3,950,139 $3,391,465 Weighted-average rate 1.16% 0.70% F-16Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. Long-Term Unsecured DebtAs of December 31, 2017 and 2016, the Company had $73,880 and $73,656, respectively, of outstanding long-term unsecured debentures, net ofunamortized debt issuance costs of $1,420 and $1,644, respectively. The Company’s long-term unsecured debentures consisted of the following as of thedates indicated: December 31, 2017 December 31, 2016 SeniorNotes Due 2025 SeniorNotes Due 2023 TrustPreferred Debt SeniorNotes Due 2025 SeniorNotes Due 2023 TrustPreferred Debt Outstanding Principal $35,300 $25,000 $15,000 $35,300 $25,000 $15,000 Annual Interest Rate 6.75% 6.625% LIBOR+2.25 - 3.00 % 6.75% 6.625% LIBOR+2.25 - 3.00 % Interest Payment Frequency Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Weighted-Average Interest Rate 6.75% 6.625% 4.11% 6.75% 6.625% 3.63%Maturity March 15, 2025 May 1, 2023 2033 - 2035 March 15, 2025 May 1, 2023 2033 - 2035 Early Redemption Date March 15, 2018 May 1, 2016 2008 - 2010 March 15, 2018 May 1, 2016 2008 - 2010 The Senior Notes due 2023 and the Senior Notes due 2025 are publicly traded on the New York Stock Exchange under the ticker symbols “AIW”and “AIC,” respectively. The Senior Notes due 2023 and Senior Notes due 2025 may be redeemed in whole or in part at any time and from time to time at theCompany’s option on or after May 1, 2016 and March 15, 2018, respectively, at a redemption price equal to the principal amount plus accrued and unpaidinterest. The indenture governing these Senior Notes contains certain covenants, including limitations on the Company’s ability to merge or consolidate withother entities or sell or otherwise dispose of all or substantially all of the Company’s assets. Note 7. Derivative InstrumentsIn the normal course of its operations, the Company is a party to financial instruments that are accounted for as derivative instruments. Derivativeinstruments are recorded at fair value as either “derivative assets” or “derivative liabilities” in the consolidated balance sheets, with all periodic changes infair value reflected as a component of “investment gain (loss), net” in the consolidated statements of comprehensive income. Cash receipts or paymentsrelated to derivative instruments are classified as investing activities within the consolidated statements of cash flows.Types and Uses of Derivative InstrumentsInterest Rate DerivativesMost of the Company’s derivative instruments are interest rate derivatives that are intended to economically hedge changes, attributable to changesin benchmark interest rates, in certain MBS fair values and future interest cash flows on the Company’s short-term financing arrangements. Interest ratederivatives include centrally cleared interest rate swaps, exchange-traded instruments, such as Eurodollar futures, interest rate swap futures, U.S. Treasury notefutures and options on futures, and nonexchange-traded instruments such as options on agency MBS. While the Company uses its interest rate derivatives toeconomically hedge a portion of its interest rate risk, it has not designated such contracts as hedging instruments for financial reporting purposes.The Company exchanges cash “variation margin” with the counterparties to its interest rate derivative instruments at least on a daily basis based upondaily changes in fair value as measured by the Chicago Mercantile Exchange (“CME”), the central clearinghouse through which those derivatives arecleared. In addition, the CME requires market participants to deposit and maintain an “initial margin” amount which is determined by the CME and isgenerally intended to be set at a level sufficient to protect the CME from the maximum estimated single-day price movement in that market participant’scontracts.F-17Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. Receivables recognized for the right to reclaim cash initial margin posted in respect of interest rate derivative instruments are included in the lineitem “deposits, net” in the accompanying consolidated balance sheets. Prior to January 1, 2017, the daily exchange of variation margin associated withcentrally cleared derivative instruments was considered a pledge of collateral. For these prior periods, receivables recognized for the right to reclaim cashvariation margin posted in respect of interest rate derivative instruments are included in the line item “deposits, net” in the accompanying consolidatedbalance sheets. The Company elected to offset any payables recognized for the obligation to return cash variation margin received from an interest ratederivative instrument counterparty against receivables recognized for the right to reclaim cash initial margin posted by the Company to that samecounterparty.Beginning on January 1, 2017, as a result of a CME amendment to their rule book which governs their central clearing activities, the daily exchangeof variation margin associated with a centrally cleared derivative instrument is legally characterized as the daily settlement of the derivative instrument itself,as opposed to a pledge of collateral. Accordingly, beginning in 2017, the Company accounts for the daily receipt or payment of variation margin associatedwith its centrally cleared interest rate swaps as a direct reduction to the carrying value of the interest rate swap derivative asset or liability, respectively.Beginning in 2017, the carrying amount of centrally cleared interest rate swaps reflected in the Company’s consolidated balance sheets is equal to theunsettled fair value of such instruments; because variation margin is exchanged on a one-day lag, the unsettled fair value of such instruments represents thechange in fair value that occurred on the last day of the reporting period.To-Be-Announced Agency MBS Transactions, Including “Dollar Rolls”In addition to interest rate derivatives that are used for interest rate risk management, the Company is a party to derivative instruments thateconomically serve as investments, such as forward contracts to purchase fixed-rate “pass-through” agency MBS on a non-specified pool basis, which areknown as to-be-announced (“TBA”) contracts. A TBA contract is a forward contract for the purchase or sale of a fixed-rate agency MBS at a predeterminedprice, face amount, issuer, coupon, and stated maturity for settlement on an agreed upon future date. The specific agency MBS that will be delivered to satisfythe TBA trade is not known at the inception of the trade. The Company accounts for TBA contracts as derivative instruments because the Company cannotassert that it is probable at inception and throughout the term of an individual TBA contract that its settlement will result in physical delivery of theunderlying agency MBS, or the individual TBA contract will not settle in the shortest time period possible.The Company’s agency MBS investment portfolio includes net purchase (or “net long”) positions in TBA securities, which are primarily the result ofexecuting sequential series of “dollar roll” transactions. The Company executes dollar roll transactions as a means of investing in and financing non-specified fixed-rate agency MBS. Such transactions involve effectively delaying (or “rolling”) the settlement of a forward purchase of a TBA agency MBS byentering into an offsetting sale prior to the settlement date, net settling the “paired-off” positions in cash, and contemporaneously entering another forwardpurchase of a TBA agency MBS of the same characteristics for a later settlement date. TBA securities purchased for a forward settlement month are generallypriced at a discount relative to TBA securities sold for settlement in the current month. This discount, often referred to as the dollar roll “price drop,” reflectscompensation for the net interest income (interest income less financing costs) that is foregone as a result of relinquishing beneficial ownership of the MBSfor the duration of the dollar roll (also known as “dollar roll income”). By executing a sequential series of dollar roll transactions, the Company is able tocreate the economic experience of investing in an agency MBS, financed with a repurchase agreement, over a period of time. Forward purchases and sales ofTBA securities are accounted for as derivative instruments in the Company’s financial statements. Accordingly, dollar roll income is recognized as acomponent of “investment gain (loss), net” along with all other periodic changes in the fair value of TBA commitments.In addition to transacting in net long positions in TBA securities for investment purposes, the Company may also, from time to time, transact in netsale (or “net short”) positions in TBA securities for the purpose of economically hedging a portion of the sensitivity of the fair value of the Company’sinvestments in agency MBS to changes in interest rates.Receivables recognized for the right to reclaim cash collateral posted by the Company in respect of TBA transactions is included in the line item“deposits, net” in the accompanying consolidated balance sheets. Liabilities recognized for the obligation to return cash collateral received by the Companyin respect of TBA transactions is included in the line item “other liabilities” in the accompanying consolidated balance sheets.In addition to TBA transactions, the Company may, from time to time, enter into commitments to purchase or sell specified agency MBS that do notqualify as regular-way security trades. Such commitments are also accounted for as derivative instruments.F-18Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. Derivative Instrument Population and Fair ValueThe following table presents the fair value of the Company’s derivative instruments as of the dates indicated: December 31, 2017 December 31, 2016 Assets Liabilities Assets Liabilities Interest rate swaps $— $(3,338) $63,315 $(1,949)5-year U.S. Treasury note futures — (20) — — 10-year U.S. Treasury note futures — (1,321) — — Options on 10-year U.S. Treasury note futures — — 4,289 (3,906)TBA commitments 763 (154) 7,285 (3,699)Total $763 $(4,833) $74,889 $(9,554) Interest Rate SwapsThe Company’s interest rate swap agreements represent agreements to make semiannual interest payments based upon a fixed interest rate and receivequarterly variable interest payments based upon the prevailing three-month LIBOR on the date of reset. The following table presents information about the Company’s interest rate swap agreements that were in effect as of December 31, 2017: Weighted-average: NotionalAmount FixedPay Rate VariableReceive Rate Net Receive(Pay) Rate RemainingLife (Years) Fair Value Years to maturity: Less than 3 years $1,300,000 1.28% 1.51% 0.23% 1.8 $(248)3 to less than 7 years 700,000 1.87% 1.48% (0.39)% 3.9 (454)7 to 10 years 1,600,000 1.90% 1.55% (0.35)% 8.3 (2,636)Total / weighted-average $3,600,000 1.67% 1.52% (0.15)% 5.1 $(3,338) The following table presents information about the Company’s interest rate swap agreements that were in effect as of December 31, 2016: Weighted-average: NotionalAmount FixedPay Rate VariableReceive Rate Net (Pay) Rate RemainingLife (Years) Fair Value Years to maturity: Less than 3 years $1,375,000 1.10% 0.97% (0.13)% 1.7 $6,470 3 to less than 7 years 350,000 1.84% 1.00% (0.84)% 3.7 (769)7 to 10 years 1,600,000 1.93% 0.96% (0.97)% 9.2 50,511 Total / weighted-average $3,325,000 1.58% 0.97% (0.61)% 5.5 $56,212 The following table presents information about the Company’s forward-starting interest rate swap agreements that had yet to take effect as ofDecember 31, 2016: Weighted-average: Notional Amount FixedPay Rate Term After EffectiveDate (Years) Fair Value Effective in September / October 2017 $375,000 1.13% 2.0 $5,154 U.S. Treasury Note FuturesThe Company’s 5-year and 10-year U.S. Treasury note futures held as of December 31, 2017, are short positions with an aggregate notional amountof $21,600 and $650,000, respectively, that mature in March 2018. Upon the maturity date of these futures contracts, the Company has the option to eithernet settle each contract in cash in an amount equal to the difference between the then-current fair value of the underlying 5-year or 10-year U.S. Treasury noteand the contractual sale price inherent to the futures contract,F-19Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. or to physically settle the contract by delivering the underlying 5-year or 10-year U.S. Treasury note. The Company held no U.S. Treasury note futures as ofDecember 31, 2016.Options on 10-year U.S. Treasury Note FuturesThe Company purchases and sells exchange-traded options on 10-year U.S. Treasury note futures contracts with the objective of economicallyhedging a portion of the sensitivity of its investments in agency MBS to significant changes in interest rates. The Company may purchase put options whichprovide the Company with the right to sell 10-year U.S. Treasury note futures to a counterparty, and the Company may also write call options that provide acounterparty with the option to buy 10-year U.S. Treasury note futures from the Company. In order to limit its exposure on its interest rate derivativeinstruments from a significant decline in long-term interest rates, the Company may also purchase contracts that provide the Company with the option to buy,or call, 10-year U.S. Treasury note futures from a counterparty. The options may be exercised at any time prior to their expiry, and if exercised, may be netsettled in cash or through physical receipt or delivery of the underlying futures contracts.As of December 31, 2017, the Company had no outstanding options on 10-year U.S. Treasury note futures contracts. Information about the Company’soutstanding options on 10-year U.S. Treasury note futures contracts as of December 31, 2016 is as follows: NotionalAmountLong/(Short) Weighted-averageStrike Price Implied StrikeRate (1) Net Fair Value Purchased put options: January 2017 expiration $950,000 120.8 2.87% $539 February 2017 expiration 700,000 122.6 2.64% 3,281 Total / weighted average for purchased put options $1,650,000 121.6 2.77% $3,820 Sold call options: January 2017 expiration $(100,000) 126.0 2.25% $(141)February 2017 expiration (900,000) 126.0 2.24% (3,765)Total / weighted average for sold call options $(1,000,000) 126.0 2.24% $(3,906)Purchased call options: January 2017 expiration $1,000,000 127.1 2.12% $469 $383(1)The implied strike rate is estimated based upon the weighted average strike price per contract and the price of an equivalent 10-year U.S. Treasurynote futures contract.TBA CommitmentsThe following tables present information about the Company’s TBA commitments as of the dates indicated: December 31, 2017 Notional Amount:Purchase (Sale)Commitment ContractualForward Price Market Price NetFair Value Dollar roll positions: 3.0% 15-year MBS purchase commitments $250,000 $254,873 $254,766 $(107)3.5% 30-year MBS purchase commitments 1,015,000 1,041,496 1,042,212 716 Total TBA commitments, net $1,265,000 $1,296,369 $1,296,978 $609F-20Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. December 31, 2016 Notional Amount:Purchase (Sale)Commitment ContractualForward Price Market Price NetFair Value Dollar roll positions: 3.0% 30-year MBS purchase commitments $725,000 $718,887 $720,027 $1,140 3.5% 30-year MBS purchase commitments 25,000 25,586 25,613 27 3.5% 30-year MBS sale commitments (25,000) (25,602) (25,613) (11)Total dollar roll positions, net 725,000 718,871 720,027 1,156 TBA commitments serving as economic hedges: 3.5% 30-year MBS purchase commitments 600,000 608,601 614,719 6,118 3.5% 30-year MBS sale commitments (600,000) (611,031) (614,719) (3,688)Total economic hedges, net — (2,430) — 2,430 Total TBA commitments, net $725,000 $716,441 $720,027 $3,586 Derivative Instrument Gains and LossesThe following table provides information about the derivative gains and losses recognized within the periods indicated: For the Year Ended December 31, 2017 2016 Interest rate derivatives: Interest rate swaps: Net interest expense (1) $(17,334) $(17,825)Unrealized gains, net 17,791 57,206 Losses realized upon early termination (13,441) (300)Total interest rate swap (losses) gains, net (12,984) 39,081 U.S. Treasury note futures, net 6,054 (63,235)Options on U.S. Treasury note futures, net (6,302) 2,063 Other, net (255) (25)Total interest rate derivative losses, net (13,487) (22,116)TBA and specified agency MBS commitments: TBA dollar roll income (2) 21,291 19,261 Other losses on agency MBS commitments, net (4,580) (28,805)Total gains (losses) on agency MBS commitments, net 16,711 (9,544)Total derivative gains (losses), net $3,224 $(31,660) (1)Represents the periodic net interest settlement incurred during the period (often referred to as “net interest carry”). Beginning in 2017, also includes“price alignment interest” income earned or expense incurred on cumulative variation margin paid or received, respectively, associated with centrallycleared interest rate swap agreements.(2)Represents the price discount of forward-settling TBA purchases relative to a contemporaneously executed “spot” TBA sale, which economicallyequates to net interest income that is earned ratably over the period beginning on the settlement date of the sale and ending on the settlement date ofthe forward-settling purchase.F-21Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. Derivative Instrument ActivityThe following tables summarize the volume of activity, in terms of notional amount, related to derivative instruments for the periods indicated: For the Year Ended December 31, 2017 Beginning ofPeriod Additions ScheduledSettlements EarlyTerminations End of Period Interest rate swaps $3,700,000 $1,275,000 $(250,000) $(1,125,000) $3,600,000 5-year U.S. Treasury note futures — 221,600 (200,000) — 21,600 10-year U.S. Treasury note futures — 2,146,100 (1,496,100) — 650,000 Purchased put options on 10-year U.S. Treasury note futures 1,650,000 2,540,000 (4,190,000) — — Sold call options on 10-year U.S. Treasury note futures 1,000,000 2,450,000 (3,450,000) — — Purchased call options on 10-year U.S. Treasury note futures 1,000,000 3,350,000 (4,350,000) — — Purchased put options on agency MBS — 900,000 (900,000) — — Commitments to purchase (sell) MBS, net 725,000 12,925,000 (12,385,000) — 1,265,000 For the Year Ended December 31, 2016 Beginning ofPeriod Additions ScheduledSettlements EarlyTerminations End of Period Interest rate swaps $1,500,000 $2,575,000 $— $(375,000) $3,700,000 10-year U.S. Treasury note futures 1,335,000 1,482,500 (2,230,000) (587,500) — Purchased put options on 10-year U.S. Treasury note futures — 11,214,500 (9,564,500) — 1,650,000 Sold call options on 10-year U.S. Treasury note futures — 3,450,000 (2,450,000) — 1,000,000 Purchased call options on 10-year U.S. Treasury note futures — 2,620,000 (1,620,000) — 1,000,000 Put options on Eurodollar futures 4,000,000 — (4,000,000) — — Commitments to purchase (sell) MBS, net 375,000 9,850,441 (9,500,441) — 725,000 Cash Collateral Posted and Received for Derivative Instruments and Other Financial InstrumentsThe following table presents information about the cash collateral posted and received by the Company in respect of its derivative and other financialinstruments, which is included in the line item “deposits, net” in the accompanying consolidated balance sheets, for the dates indicated: December 31, 2017 December 31, 2016 Cash collateral posted for: Interest rate swaps (cash initial margin) $46,218 $65,728 U.S. Treasury note futures and options on U.S. Treasury note futures (cash initial margin) 6,960 5,314 Unsettled MBS trades and TBA commitments, net 5,925 1,474 Total cash collateral posted 59,103 72,516 Cash collateral received for interest rate swaps (1) — (61,367)Total cash collateral posted, net $59,103 $11,149 (1)Beginning in 2017, the Company accounts for the daily receipt or payment of cash variation margin associated with centrally cleared interestrate swaps as a legal settlement of the derivative instrument itself, as opposed to a pledge of collateral. F-22Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. Note 8. Offsetting of Financial Assets and LiabilitiesThe agreements that govern certain of the Company’s derivative instruments and collateralized short-term financing arrangements provide for a rightof setoff in the event of default or bankruptcy with respect to either party to such transactions. The Company presents derivative assets and liabilities as wellas collateralized short-term financing arrangements on a gross basis. Receivables recognized for the right to reclaim cash initial margin posted in respect of interest rate derivative instruments are included in the lineitem “deposits, net” in the accompanying consolidated balance sheets. Prior to January 1, 2017, the daily exchange of variation margin associated withcentrally cleared derivative instruments was considered a pledge of collateral. For these prior periods, receivables recognized for the right to reclaim cashvariation margin posted in respect of interest rate derivative instruments are included in the line item “deposits, net” in the accompanying consolidatedbalance sheets. The Company elected to offset any payables recognized for the obligation to return cash variation margin received from an interest ratederivative instrument counterparty against receivables recognized for the right to reclaim cash initial margin posted by the Company to that samecounterparty. Beginning on January 1, 2017, as a result of a CME amendment to their rule book which governs their central clearing activities, the daily exchangeof variation margin associated with a centrally cleared derivative instrument is legally characterized as the daily settlement of the derivative instrument itself,as opposed to a pledge of collateral. Accordingly, beginning in 2017, the Company accounts for the daily receipt or payment of variation margin associatedwith its centrally cleared interest rate swaps as a direct reduction to the carrying value of the interest rate swap derivative asset or liability, respectively.Beginning in 2017, the carrying amount of centrally cleared interest rate swaps reflected in the Company’s consolidated balance sheets is equal to theunsettled fair value of such instruments; because variation margin is exchanged on a one-day lag, the unsettled fair value of such instruments represents thechange in fair value that occurred on the last day of the reporting period. The following tables present information, as of the dates indicated, about the Company’s derivative instruments, short-term borrowing arrangements,and associated collateral, including those subject to master netting (or similar) arrangements: As of December 31, 2017 Gross AmountRecognized Amount Offsetin theConsolidatedBalance Sheets Net AmountPresented in theConsolidatedBalance Sheets Gross Amount Not Offset in theConsolidated Balance Sheets NetAmount FinancialInstruments (1) CashCollateral (2) Assets: Derivative instruments: TBA commitments $763 $— $763 $— $— $763 Total derivative instruments 763 — 763 — — 763 Total assets $763 $— $763 $— $— $763 Liabilities: Derivative instruments: Interest rate swaps $3,338 $— $3,338 $— $(3,338) $— U.S. Treasury note futures 1,341 — 1,341 — (1,341) — TBA commitments 154 — 154 — (154) — Total derivative instruments 4,833 — 4,833 — (4,833) — Repurchase agreements 3,667,181 — 3,667,181 (3,667,181) — — Total liabilities $3,672,014 $— $3,672,014 $(3,667,181) $(4,833) $—F-23Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. As of December 31, 2016 Gross AmountRecognized Amount Offsetin theConsolidatedBalance Sheets Net AmountPresented in theConsolidatedBalance Sheets Gross Amount Not Offset in theConsolidated Balance Sheets NetAmount FinancialInstruments (1) CashCollateral (2) Assets: Derivative instruments: Options on U.S. Treasury note futures $4,289 $— $4,289 $(3,906) $— $383 Interest rate swaps 63,315 — 63,315 (1,949) (61,366) — TBA commitments 7,285 — 7,285 — — 7,285 Total derivative instruments 74,889 — 74,889 (5,855) (61,366) 7,668 Deposits, net 72,516 (61,367) 11,149 — — 11,149 Total assets $147,405 $(61,367) $86,038 $(5,855) $(61,366) $18,817 Liabilities: Derivative instruments: Options on U.S. Treasury note futures $3,906 $— $3,906 $(3,906) $— $— Interest rate swaps 1,949 — 1,949 (1,949) — — TBA commitments 3,699 — 3,699 — (1,474) 2,225 Total derivative instruments 9,554 — 9,554 (5,855) (1,474) 2,225 Deposits, net 61,367 (61,367) — — — — Repurchase agreements 3,649,102 — 3,649,102 (3,649,102) — — Total liabilities $3,720,023 $(61,367) $3,658,656 $(3,654,957) $(1,474) $2,225 (1)Does not include the fair value amount of financial instrument collateral pledged in respect of repurchase agreements that exceeds the associatedliability presented in the consolidated balance sheets.(2)Does not include the amount of cash collateral pledged in respect of derivative instruments that exceeds the associated derivative liability presentedin the consolidated balance sheets. Note 9. Fair Value MeasurementsFair 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 paid to transfer aliability in an orderly transaction between market participants at the measurement date. Financial Accounting Standards Board Accounting StandardsCodification Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy that prioritizes the inputs to valuation techniques usedto measure fair value into three broad levels, giving the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and 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 the Company at themeasurement date; Level 2 Inputs - Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directlyor indirectly; and Level 3 Inputs - Unobservable inputs for the asset or liability, including significant judgments made by the Company about the assumptions thata market participant would use.The Company measures the fair value of the following assets and liabilities:Mortgage-backed securitiesAgency MBS - The Company’s investments in agency MBS are classified within Level 2 of the fair value hierarchy. Inputs to fair value measurementsof the Company’s investments in agency MBS include price estimates obtained from third-party pricing services. In determining fair value, third-partypricing services use a market approach. The inputs used in the fair value measurements performed by the third-party pricing services are based upon readilyobservable transactions for securities with similar characteristicsF-24Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. (such as issuer/guarantor, coupon rate, stated maturity, and collateral pool characteristics) occurring on the measurement date. The Company makes inquiriesof the third-party pricing sources to understand the significant inputs and assumptions used to determine prices. The Company reviews the various third-partyfair value estimates and performs procedures to validate their reasonableness, including comparison to recent trading activity for similar securities and anoverall review for consistency with market conditions observed as of the measurement date.Private-label MBS - The Company’s investments in private-label MBS are classified within Level 3 of the fair value hierarchy as private-label MBStrade infrequently and, therefore, the measurement of their fair value requires the use of significant unobservable inputs. In determining fair value, theCompany primarily uses an income approach as well as market approaches. The Company utilizes present value techniques based on the estimated futurecash flows of the instrument taking into consideration various assumptions derived by management based on their observations of assumptions used bymarket participants. These assumptions are corroborated by evidence such as historical collateral performance data, evaluation of historical collateralperformance data for other securities with comparable or similar risk characteristics, and observed completed or pending transactions in similar instruments,when available. The significant inputs to the Company’s valuation process include collateral default, loss severity, prepayment, and discount rates (i.e., therate of return demanded by market participants as of the measurement date). In general, significant increases (decreases) in default, loss severity, or discountrate assumptions, in isolation, would result in a significantly lower (higher) fair value measurement. However, significant increases (decreases) in prepaymentrate assumptions, in isolation, may result in a significantly higher (lower) fair value measurement depending upon the instrument’s specific characteristicsand the overall payment structure of the issuing securitization vehicle. It is difficult to generalize the interrelationships between these significant inputs asthe actual results could differ considerably on an individual security basis. Therefore, each significant input is closely analyzed to ascertain itsreasonableness for the Company’s purposes of fair value measurement.Measuring fair value is inherently subjective given the volatile and sometimes illiquid markets for these private-label MBS and requires managementto make a number of judgments about the assumptions that a market participant would use, including assumptions about the timing and amount of futurecash flows as well as the rate of return required by market participants. The assumptions the Company applies are specific to each security. Although theCompany relies on its internal calculations to estimate the fair value of these private-label MBS, the Company considers indications of value from actualsales of similar private-label MBS to assist in the valuation process and to calibrate the Company’s models.Derivative instrumentsExchange-traded derivative instruments - Exchange-traded derivative instruments, which include Eurodollar futures, U.S. Treasury note futures,interest rate swap futures, and options on futures, are classified within Level 1 of the fair value hierarchy as they are measured using quoted prices foridentical instruments in liquid markets.Interest rate swaps - Interest rate swaps are classified within Level 2 of the fair value hierarchy. The fair values of the Company’s centrally clearedinterest rate swaps are measured using the daily valuations reported by the clearinghouse through which the instrument was cleared. In performing its end-of-day valuations, the clearinghouse constructs forward interest rate curves (for example, three-month LIBOR forward rates) from its specific observations of thatday’s trading activity. The clearinghouse uses the applicable forward interest rate curve to develop a market-based forecast of future remaining contractuallyrequired cash flows for each interest rate swap. Each market-based cash flow forecast is then discounted using the overnight index swap rate curve (sourcedfrom the Federal Reserve Bank of New York) to determine a net present value amount which represents the instrument’s fair value. The Company reviews thevaluations reported by the clearinghouse on an ongoing basis and performs procedures using readily available market data to independently verify theirreasonableness.Forward-settling purchases and sales of TBA securities - Forward-settling purchases and sales of TBA securities are classified within Level 2 of thefair value hierarchy. The fair value of each forward-settling TBA contract is measured using price estimates obtained from a third-party pricing service, whichare based upon readily observable transaction prices occurring on the measurement date for forward-settling contracts to buy or sell TBA securities with thesame guarantor, contractual maturity, and coupon rate for delivery on the same forward settlement date as the contract under measurement.OtherLong-term unsecured debt - As of December 31, 2017 and 2016, the carrying value of the Company’s long-term unsecured debt was $73,880 and$73,656, respectively, net of unamortized debt issuance costs, and consists of Senior Notes and trust preferred debt issued by the Company. The Company’sestimate of the fair value of long-term unsecured debt is $70,314 and $66,489 as of December 31, 2017 and 2016, respectively. The Company’s Senior Notes,which are publicly traded on the New York Stock Exchange, are classified within Level 1 of the fair value hierarchy. Trust preferred debt is classified withinLevel 2 of the fair value hierarchy as the fair value is estimated based on the quoted prices of the Company’s publicly traded Senior Notes.F-25Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. Investments in equity securities of non-public companies and investment funds - As of December 31, 2017 and 2016, the Company had investments inequity securities and investment funds with a carrying amount of $1,675 and $1,918, respectively, which are included in the line item “other assets” in theaccompanying consolidated balance sheets. As of December 31, 2017 and 2016, $439 and $533, respectively, of these investments represent securities forwhich the Company elected the “fair value option” at the time that the securities were initially recognized on the Company’s consolidated balance sheets;the Company measures the fair value of these securities on a recurring basis, recognizing the periodic change in fair value in earnings. The remaining $1,236and $1,385 in investments in equity securities of non-public companies and investment funds as of December 31, 2017 and 2016, respectively, weremeasured at cost, net of impairments. The Company’s estimate of the fair value of investments in equity securities and investment funds is $5,801 and$6,034 as of December 31, 2017 and 2016, respectively. Investments in equity securities and investment funds are classified within Level 3 of the fair valuehierarchy. The fair values of the Company’s investments in equity securities and investment funds are not readily determinable. Accordingly, for itsinvestments in equity securities, the Company estimates fair value by estimating the enterprise value of the investee and then waterfalls the enterprise valueover the investee’s securities in the order of their preference relative to one another. To estimate the enterprise value of the investee, the Company usestraditional valuation methodologies, including the consideration of recent investments in, or tender offers for, the equity securities of the investee. For itsinvestments in investment funds, the Company estimates fair value based upon the investee’s net asset value per share.Financial assets and liabilities for which carrying value approximates fair value - Cash and cash equivalents, deposits, receivables, repurchaseagreements, payables, and other assets and liabilities are reflected in the consolidated balance sheets at their cost, which, due to the short-term nature of theseinstruments and their limited inherent credit risk, approximates fair value.Fair Value HierarchyFinancial Instruments Measured at Fair Value on a Recurring BasisThe following tables set forth financial instruments measured at fair value by level within the fair value hierarchy as of December 31, 2017 and 2016.Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. December 31, 2017 Total Level 1 Level 2 Level 3 MBS Trading: Agency MBS $4,054,424 $— $4,054,424 $— Private-label MBS 76 — — 76 Total MBS 4,054,500 — 4,054,424 76 Derivative assets 763 — 763 — Derivative liabilities (4,833) (1,341) (3,492) — Other assets 439 — — 439 Total $4,050,869 $(1,341) $4,051,695 $515 December 31, 2016 Total Level 1 Level 2 Level 3 MBS Trading: Agency MBS $3,911,375 $— $3,911,375 $— Private-label MBS 1,266 — — 1,266 Total MBS 3,912,641 — 3,911,375 1,266 Derivative assets 74,889 4,289 70,600 — Derivative liabilities (9,554) (3,906) (5,648) — Other assets 533 — — 533 Total $3,978,509 $383 $3,976,327 $1,799 There were no transfers of financial instruments into or out of Levels 1, 2 or 3 during the years ended December 31, 2017 and 2016.F-26Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. Level 3 Financial Assets and LiabilitiesThe following table provides information about the significant unobservable inputs used to measure the fair value of the Company’s private-labelMBS as of the dates indicated: December 31, 2017 December 31, 2016 Weighted-average (1) Range Weighted-average (1) RangeDiscount rate — — 6.50% 6.50 - 6.50 %Default rate — — 2.25% 2.25 - 2.25 %Loss severity rate — — 45.00% 45.00 - 45.00 %Total prepayment rate (including defaults) — — 10.25% 10.25 - 10.25 % (1)Based on face value.The table below sets forth an attribution of the change in the fair value of the Company’s Level 3 investments that are measured at fair value on arecurring basis for the periods indicated: Year Ended December 31, 2017 2016 Beginning balance $1,799 $130,553 Total net gains (losses) Included in investment gain (loss), net (35) 2,973 Included in other comprehensive income — (15,601)Purchases — 5,357 Sales (1,268) (124,962)Payments, net (82) (4,431)Accretion of discount 101 7,910 Ending balance $515 $1,799 Net unrealized gains (losses) included in earnings for the period for Level 3 assets still held at the reporting date $(93) $(465) Note 10. Income TaxesArlington Asset is subject to taxation as a corporation under Subchapter C of the Internal Revenue Code of 1986, as amended (the “Code”). As ofDecember 31, 2017, the Company had estimated net operating loss (“NOL”) carryforwards of $60,681 that can be used to offset future taxable ordinaryincome. The Company’s NOL carryforwards begin to expire in 2027. As of December 31, 2017, the Company had estimated net capital loss (“NCL”)carryforwards of $314,277 that can be used to offset future net capital gains. The scheduled expirations of the Company’s NCL carryforwards are $136,840 in2019, $102,927 in 2020, $70,319 in 2021 and $4,191 in 2022. Income taxes are provided for using the asset and liability method. Deferred tax assets and liabilities reflect the impact of temporary differencesbetween the carrying amount of assets and liabilities pursuant to the application of GAAP and their respective tax bases and are stated at tax rates expected tobe in effect when the taxes are actually paid or recovered. Deferred tax assets are also recorded for NOL carryforwards, NCL carryforwards and any tax creditcarryforwards.On December 22, 2017, the President signed the Tax Cuts and Jobs Act, which provides for substantial changes to the federal taxation of individualsand corporations with an effective date of January 1, 2018. For corporate taxpayers, the federal income tax rate was lowered from 35.0% to 21.0%. Theeffects of changes in tax laws and rates on deferred tax assets and liabilities are required to be recognized in the period in which the legislation is enacted as adiscrete item within the income tax provision. As a result of the decrease in the federal tax rate, the Company recorded an additional income tax provision of$409 during the year ended December 31, 2017. Through December 31, 2017, the Company was subject to federal alternative minimum tax (“AMT”) on its taxable income and gains that are not offsetby its NOL and NCL carryforwards with any AMT credit carryforwards available to offset future regular tax liabilities. As part of the Tax Cuts and Jobs Act,the corporate AMT is repealed for tax years beginning after December 31, 2017 with any AMT credit carryforward after that date continuing to be availableto offset a taxpayer’s future regular tax liability. In addition, for tax years beginning in 2018, 2019 and 2020, to the extent that AMT credit carryforwardsexceed the regular tax liability, 50% of the excess AMT credit carryforwards would be refundable in that year with any remaining AMT credit carryforwardsfully refundableF-27Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. in 2021. As a result, the realizability of the Company’s AMT credit carryforward is now certain and will be now be realized as either a cash refund or as anoffset to future regular tax liabilities or a combination of both. Accordingly, the Company reclassified its AMT credit carryforward from net deferred taxassets to a receivable. As of December 31, 2017, the Company had AMT credit carryforwards of $9,133 included in other assets on the accompanyingconsolidated balance sheets.A valuation allowance is provided against the deferred tax asset if, based upon the Company’s evaluation, it is more-likely-than-not that some or allof the deferred tax assets will not be realized. All available evidence, both positive and negative, is incorporated into the determination of whether avaluation allowance for deferred tax assets is appropriate. Items considered in the valuation allowance determination include expectations of future earningsof the appropriate tax character, recent historical financial results, tax planning strategies, the length of statutory carryforward periods and the expectedtiming of the reversal of temporary differences. As of December 31, 2017, the Company determined that it should record a full valuation allowance against its deferred tax assets that are capital innature, which consists of its NCL carryforwards and temporary GAAP to tax differences that are expected to result in capital losses in future periods. As ofDecember 31, 2017, the Company determined that it should not record any valuation allowance against its deferred tax assets that are ordinary in nature,which consists of its NOL carryforwards and temporary GAAP to tax differences that are expected to result in deductions from ordinary income in futureperiods. For the year ended December 31, 2017, the Company recorded an increase to its valuation allowance of $16,761.As of December 31, 2016, the Company determined that it should record a partial valuation allowance against its deferred tax assets that are capital innature, which consisted of its NCL carryforwards and temporary GAAP to tax differences that are expected to result in capital losses in future periods. As ofDecember 31, 2016, the Company determined that it should not record any valuation allowance against its deferred tax assets that are ordinary in nature,which consists of its NOL and tax credit carryforwards, and temporary GAAP to tax differences that are expected to result in deductions from ordinary incomein future periods. For the year ended December 31, 2016, the Company recorded an increase to its valuation allowance of $35,637.Deferred tax assets and liabilities consisted of the following as of dates indicated: December 31, 2017 December 31, 2016 Ordinary deferred tax assets: NOL carryforward $15,619 $37,238 AMT credit carryforward — 8,427 Deferred net loss on designated derivatives 4,381 1,386 Stock-based compensation 1,999 2,426 Other, net 19 208 Total ordinary deferred tax assets 22,018 49,685 Ordinary deferred tax liabilities: Net unrealized gain on designated derivatives (21,218) (25,145)Ordinary deferred tax assets, net 800 24,540 Capital deferred tax assets: NCL carryforward 80,895 120,939 Net unrealized loss on investments 23,431 44,253 Valuation allowance (104,326) (140,903)Total capital deferred tax assets, net — 24,289 Total deferred tax assets, net $800 $48,829 The provision for income taxes from operations consists of the following for the years ended December 31, 2017, 2016 and 2015: 2017 2016 2015 Federal $33,495 $23,163 $32,613 State 6,108 4,224 5,948 Total income tax provision $39,603 $27,387 $38,561 Current $706 $232 $970 Deferred 38,897 27,155 37,591 Total income tax provision $39,603 $27,387 $38,561F-28Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. The provision for income taxes results in effective tax rates that differ from the federal statutory rates. The reconciliation of the Company and itssubsidiaries’ income tax attributable to net income computed at federal statutory rates to the provision for income taxes for the years ended December 31,2017, 2016, and 2015 were as follows: 2017 2016 2015 Federal income tax at statutory rate $19,963 $(4,886) $(10,795)State income taxes, net of federal benefit 2,224 (544) (1,203)Change in enacted tax rate 409 — — Losses on available-for sale MBS acquired prior to 2012 — (2,838) (3,987)Tax character adjustments — — (1,934)Other, net 246 18 45 Valuation allowance 16,761 35,637 56,435 Total income tax provision $39,603 $27,387 $38,561 The Company recognizes uncertain tax positions in the financial statements only when it is more-likely-than-not that the position will be sustainedupon examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largestamount of benefit that will more-likely-than-not be realized upon settlement. A liability is established for differences between positions taken in a tax returnand the financial statements. As of December 31, 2017 and 2016, the Company assessed the need for recording a provision for any uncertain tax position andhas made the determination that such provision is not necessary.The Company is subject to examination by the IRS and state and local authorities in jurisdictions where the Company has significant businessoperations. The Company’s federal tax returns for 2014 and forward remain subject to examination by the IRS. Note 11. Commitments and ContingenciesContractual ObligationsThe Company has contractual obligations to make future payments in connection with long-term debt and non-cancelable lease agreements. Thefollowing table sets forth these contractual obligations by fiscal year: 2018 2019 2020 2021 2022 Thereafter Total Long-term debt maturities $— $— $— $— $— $75,300 $75,300 Minimum rental commitments 471 483 497 — — — 1,451 $471 $483 $497 $— $— $75,300 $76,751 Note 12. Shareholders’ EquityCommon StockThe Company has authorized share capital of 450,000,000 shares of Class A common stock, par value $0.01 per share, and 100,000,000 shares ofClass B common stock, par value $0.01 per share. Holders of the Class A and Class B common stock are entitled to one vote and three votes per share,respectively, on all matters voted upon by the shareholders. Shares of Class B common stock are convertible into shares of Class A common stock on a one-for-one basis at the option of the Company in certain circumstances including either (i) upon sale or other transfer, or (ii) at the time the holder of such sharesof Class B common stock ceases to be employed by the Company. During the years ended December 31, 2017 and 2016, holders of the Company's Class B common stock converted an aggregate of 20,256 and 81,960shares of Class B common stock into 20,256 and 81,960 shares of Class A common stock, respectively. As of December 31, 2017, all remaining shares ofClass B common stock had been exchanged for shares of the Company’s Class A common stock. Common Stock DividendsPursuant to the Company’s variable dividend policy for its common stock, the Board of Directors evaluates common stock dividends on a quarterlybasis and, in its sole discretion, approves the payment of dividends. The Company’s common stock dividend payments, if any, may vary significantly fromquarter to quarter. The Board of Directors has approved and the Company declared and paid the following dividends on its common stock in 2017: F-29Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. Quarter Ended Dividend Amount Declaration Date Record Date Pay DateDecember 31 $0.550 December 14 December 29 January 31, 2018September 30 0.550 September 14 September 29 October 31June 30 0.550 June 16 June 30 July 31March 31 0.625 March 14 March 31 April 28The Board of Director approved and the Company declared and paid the following dividends for 2016: Quarter Ended Dividend Amount Declaration Date Record Date Pay DateDecember 31 $0.625 December 16 December 30 January 31, 2017September 30 0.625 September 15 September 30 October 31June 30 0.625 June 17 June 30 July 29March 31 0.625 March 15 March 31 April 29Common Equity Distribution AgreementsOn May 24, 2013, the Company entered into separate common equity distribution agreements (the “Prior Equity Distribution Agreements”) withequity sales agents RBC Capital Markets, LLC, JMP Securities LLC, Ladenburg Thalmann & Co. Inc. and MLV & Co. LLC pursuant to which the Companymay offer and sell, from time to time, up to 1,750,000 shares of the Company’s Class A common stock. On February 23, 2017, the Company terminated thePrior Equity Distribution Agreements. On February 22, 2017, the Company entered into new separate common equity distribution agreements (the “NewEquity Distribution Agreements”) with equity sales agents JMP Securities LLC, FBR Capital Markets & Co., JonesTrading Institutional Services LLC andLadenburg Thalmann & Co. Inc. pursuant to which the Company may offer and sell, from time to time, up to 6,000,000 shares of the Company’s Class Acommon stock.Pursuant to the common equity distribution agreements, shares of the Company’s common stock may be offered and sold through the equity salesagents in transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, including sales made directlyon the NYSE or sales made to or through a market maker other than on an exchange or, subject to the terms of a written notice from the Company, in privatelynegotiated transactions.The following table provides information about the issuances of common stock under the common equity distribution agreements for the periodsindicated: Year Ended Year Ended Class A Common Stock Issuances December 31, 2017 December 31, 2016 Shares issued 4,472,083 595,342 Weighted average public offering price $13.88 $16.57 Net proceeds (1) $61,213 $9,675 (1)Net of selling commissions and expenses.As of December 31, 2017, the Company had 1,528,717 shares of Class A common stock available for sale under the New Equity DistributionAgreements.Common Share Repurchase ProgramThe Company’s Board of Directors authorized a share repurchase program pursuant to which the Company may repurchase up to 2,000,000 shares ofClass A common stock (the “Repurchase Program”). Repurchases under the Repurchase Program may be made from time to time on the open market and inprivate transactions at management’s discretion in accordance with applicable federal securities laws. The timing of repurchases and the exact number ofshares of Class A common stock to be repurchased will depend upon market conditions and other factors. The Repurchase Program is funded using theCompany’s cash on hand and cash generated from operations. The Repurchase Program has no expiration date and may be suspended or terminated at anytime without prior notice. There were no shares repurchased by the Company under the Repurchase Program during the years ended December 31, 2017 and2016. As of December 31, 2017, there remain available for repurchase 1,951,305 shares of Class A common stock under the Repurchase Program.F-30Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. Preferred StockThe Company has authorized share capital of 2,000,000 shares of 7.00% Series B Cumulative Perpetual Redeemable Preferred Stock (the “Series BPreferred Stock”), par value of $.01 per share, and 100,000 authorized and unissued shares designated as Series A Junior Preferred Stock, and 22,900,000shares of undesignated preferred stock. The Company’s Board of Directors has the authority, without further action by the shareholders, to issue additionalpreferred stock in one or more series and to fix the terms and rights of the preferred stock.In May 2017, the Company completed an initial public offering in which 135,000 shares of its Series B Preferred Stock were issued to the public ata public offering price of $24.00 per share for proceeds net of underwriting discounts and commissions and expenses of $3,018. The Series B Preferred Stockis publicly traded on the New York Stock Exchange under the ticker symbol “AI PrB.”The Series B Preferred Stock has no stated maturity, is not subject to any sinking fund and will remain outstanding indefinitely unless repurchased orredeemed by the Company. Holders of Series B Preferred Stock have no voting rights, except under limited conditions, and are entitled to receive acumulative cash dividend at a rate of 7.00% per annum of their $25.00 per share liquidation preference before holders of common stock are entitled to receiveany dividends. Shares of Series B Preferred Stock are redeemable at $25.00 per share, plus accumulated and unpaid dividends (whether or not authorized ordeclared) exclusively at our option commencing on May 12, 2022 or earlier upon the occurrence of a change in control. Dividends are payable quarterly inarrears on the 30th day of each December, March, June and September. As of December 31, 2017, we had declared and paid all required quarterly dividendson our Series B Preferred Stock.Preferred Equity Distribution AgreementOn May 16, 2017, the Company entered into a preferred equity distribution agreement (the “Series B Preferred Equity Distribution Agreement”) withJonesTrading Institutional Services LLC (the “Series B Preferred Equity Agent”), pursuant to which the Company may offer and sell, from time to time, up to1,865,000 shares of the Company’s Series B Preferred Stock. Pursuant to the Series B Preferred Equity Distribution Agreement, shares of the Company’sSeries B Preferred stock may be offered and sold through the Series B Preferred Equity Sales Agent in transactions that are deemed to be “at the market”offerings as defined in Rule 415 under the Securities Act of 1933, including sales made directly on the NYSE or sales made to or through a market makerother than on an exchange or, subject to the terms of a written notice from the Company, in privately negotiated transactions.The following table provides information about the issuances of preferred stock under the Series B Preferred Equity Distribution Agreement: Year Ended Series B Preferred Stock Issuances December 31, 2017 Shares issued 168,291 Weighted average public offering price $24.95 Net proceeds (1) $4,090(1)Net of selling commissions and expenses.As of December 31, 2017, the Company had 1,696,709 shares of Series B Preferred stock available for sale under the Series B Preferred EquityDistribution Agreement.Shareholder Rights AgreementThe Board of Directors adopted and the Company’s shareholders approved a shareholder rights agreement (“Rights Plan”). Under the terms of theRights Plan, in general, if a person or group acquires or commences a tender or exchange offer for beneficial ownership of 4.9% or more of the outstandingshares of our Class A common stock upon a determination by our Board of Directors (an “Acquiring Person”), all of our other Class A and Class B commonshareholders will have the right to purchase securities from us at a discount to such securities’ fair market value, thus causing substantial dilution to theAcquiring Person.The Board of Directors adopted the Rights Plan in an effort to protect against a possible limitation on the Company’s ability to use its NOLcarryforwards, NCL carryforwards, and built-in losses under Sections 382 and 383 of the Code. The Company’s ability to use its NOLs, NCLs and built-inlosses would be limited if it experienced an “ownership change” under Section 382 of the Code. In general, an “ownership change” would occur if there is acumulative change in the ownership of the Company’s common stock of more than 50% by one or more “5% shareholders” during a three-year period. TheRights Plan was adopted to dissuade any person or group from acquiring 4.9% or more of the Company’s outstanding Class A common stock, each, anAcquiring Person, without the approval of the Board of Directors and triggering an “ownership change” as defined by Section 382.F-31Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. The Rights Plan and any outstanding rights will expire at the earliest of (i) June 4, 2019, (ii) the time at which the rights are redeemed or exchangedpursuant to the Rights Plan, (iii) the repeal of Section 382 and 383 of the Code or any successor statute if the Board of Directors determines that the RightsPlan is no longer necessary for the preservation of the applicable tax benefits, and (iv) the beginning of a taxable year to which the Board of Directorsdetermines that no applicable tax benefits may be carried forward. Note 13. Long-Term Incentive PlanThe Company provides its employees and its non-employee directors with long-term incentive compensation in the form of stock-based awards. OnApril 7, 2014, the Board of Directors adopted the Arlington Asset Investment Corp. 2014 Long-Term Incentive Plan (the “2014 Plan”), which was approvedby the Company’s shareholders and became effective on July 15, 2014.Under the 2014 Plan, a maximum number of 2,000,000 shares of Class A common stock of the Company, subject to adjustment as set forth in the 2014Plan, were authorized for issuance and may be issued to employees, directors, consultants and advisors of the Company and its affiliates. As of December 31,2017, 1,787,172 shares remained available for issuance under the 2014 Plan. The 2014 Plan replaced the Arlington Asset Investment Corp. 2011 Long-TermIncentive Plan (the “2011 Plan”). No additional grants will be made under the 2011 Plan. However, previous grants under the 2011 Plan will remain in effectsubject to the terms of the 2011 Plan and the applicable award agreement, and shares of Class A common stock may be issued under the 2011 Plan. The sharesof Class A common stock to be issued under the 2011 Plan are subject to the achievement of performance measures and/or vesting. As of December 31, 2017,269,283 shares remained available for issuance under the 2011 Plan.Under the 2014 Plan, the Compensation Committee of the Company’s Board of Directors may grant restricted stock, restricted stock units (“RSUs”),performance stock units (“PSUs”), stock options, stock appreciation rights (“SARs”) and/or other stock-based awards. However, no participant may be granted(i) stock options or SARs during any twelve-month period covering more than 300,000 shares or (ii) restricted stock, RSUs, PSUs and/or other stock-basedawards denominated in shares that are intended to qualify as performance based compensation under Section 162(m) that permit the participant to earn morethan 300,000 shares for each twelve months in the vesting or period on which performance is measured (“Performance Period”). These share limits are subjectto adjustment in the event of any merger, reorganization, consolidation, recapitalization, stock dividend, stock split, reverse stock split, spin-off,extraordinary cash dividend or similar transaction or other change in corporate structure affecting the share. In addition, during any calendar year noparticipant may be granted performance awards that are denominated in cash and that are intended to qualify as performance based compensation underSection 162(m) under which more than $10,000 may be earned for each twelve months in the Performance Period. Each of the individual award limitsdescribed in this paragraph will be multiplied by two during the first calendar year in which the participant commences employment with the Company andits affiliates. The 2014 Plan will terminate on the tenth anniversary of its effective date unless sooner terminated by the Board of Directors.Stock-based compensation costs are initially measured at the estimated fair value of the awards on the grant date developed using appropriatevaluation methodologies, as adjusted for estimates of future award forfeitures. Valuation methodologies used and subsequent expense recognition isdependent upon each award’s service and performance conditions.As a result of ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718), beginning on January 1, 2017, theCompany records excess tax benefits and provisions from the tax deduction of stock-based awards as a component of income tax provision or benefitpresented in the consolidated statements of comprehensive income. Prior to January 1, 2017, excess tax benefits from the tax deduction of stock-based awardsexceeding the stock-based compensation recorded in accordance with GAAP were recorded as an increase to additional paid-in capital. Conversely, if the taxdeduction of stock-based awards was less than the stock-based compensation recorded in accordance with GAAP, it was recorded as a decrease to additionalpaid-in capital to the extent of previously accumulated excess tax benefits recorded in additional paid-in capital with any remaining amount recorded asadditional income tax provision. The gross windfall tax benefit was presented in the consolidated statements of cash flows as financing cash inflows.Performance Stock Unit AwardsCompensation costs for PSUs subject to nonmarket-based performance conditions (i.e. performance not predicated on changes in the Company’s stockprice) are measured at the closing stock price on the dates of grant, adjusted for the probability of achieving certain benchmarks included in the performancemetrics. These initial cost estimates are recognized as expense over the requisite performance periods, as adjusted for changes in estimated, and ultimatelyactual, performance and forfeitures. Compensation costs for components of PSUs subject to market-based performance conditions (i.e. performance predicatedon changes in the Company’s stock price) are measured at the dates of grant using a Monte Carlo simulation model which incorporates into the valuation theinherent uncertainty regarding the achievement of the market-based performance metrics. These initial valuation amounts are recognized as expense over therequisite performance periods, subject only to adjustments for changes in estimated, and ultimately actual, forfeitures.F-32Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. The Company has granted performance stock units to executive officers of the Company that are convertible into shares of Class A common stockfollowing the applicable performance periods. The performance goals established by the Compensation Committee are based on (i) the compound annualizedgrowth in the Company’s book value per share (i.e., book value change with such adjustments as determined and approved by the Compensation Committeeplus dividends on a reinvested basis) during the applicable performance period (“Book Value PSUs’), (ii) the compound annualized total shareholder return(i.e., share price change plus dividends on a reinvested basis) during the applicable performance period (“TSR PSUs”), and (iii) annual return on equityduring the applicable performance period (“ROE PSUs’).The Compensation Committee of the Board of Directors of the Company approved the following PSU grants for the periods indicated: December 31, 2017 2016 2015 Book Value PSUs granted 57,732 71,926 45,054 Book Value PSU grant date fair value per share $13.58 $12.93 $19.56 TSR PSUs granted 23,787 80,173 58,169 TSR PSU grant date fair value per share $16.48 $11.60 $15.15 ROE PSUs granted 57,732 — — ROE PSU grant date fair value per share $13.58 $— $— For the Company’s Book Value PSUs and ROE PSUs, the grant date fair value per share is based on the close price on the date of grant. For theCompany’s TSR PSUs, the grant date fair value per share is based on a Monte Carlo simulation model. The following assumptions, determined as of the dateof grant, were used in the Monte Carlo simulation model to measure the grant date fair value per share of the Company’s TSR PSUs for the periods indicated: TSR PSUs Granted in: 2017 2016 2015 Closing stock price on date of grant $13.58 $12.93 $19.56 Beginning average stock price on date of grant (1) $14.53 $13.40 $20.82 Expected volatility (2) 24.03% 24.78% 21.72%Dividend yield (3) 0.00% 0.00% 0.00%Risk-free rate (4) 1.52% 0.71% 1.08% (1)Based upon the 30 trading days prior to and including the date of grant.(2)Based upon the most recent three-year volatility as of the date of grant.(3)Dividend equivalents are accrued during the performance period and deemed reinvested in additional stock units, which are to be paid out at the endof the performance period to the extent the underlying PSU is earned. Applying dividend yield assumption of 0.00% in the Monte Carlo simulation ismathematically equivalent to reinvesting dividends on a continuous basis and including the value of the dividends in the final payout.(4)Based upon the yield of a U.S. Treasury bond with a three-year maturity as of the date of grant.The vesting of the PSUs is subject to both continued employment under the terms of the award agreement and the achievement of the Companyperformance goals established by the Compensation Committee. For Book Value PSU and TSR PSU awards granted during the three years endedDecember 31, 2017, the Compensation Committee established a three-year performance period. The actual number of shares of Class A common stock thatwill be issued to each participant at the end of the applicable performance period will vary between 0% and 250% of the number of Book Value PSUs andTSR PSUs granted, depending on performance results. If the minimum threshold level of performance goals is not achieved, no Book Value PSUs or TSRPSUs are earned. To the extent the performance results are between the minimum threshold level and maximum level of performance goals, between 50% to250% of the number of Book Value PSUs and TSR PSUs granted are earned. Upon settlement, vested Book Value PSUs and TSR PSUs are converted intoshares of the Company’s Class A common stock on a one-for-one basis. For the ROE PSU awards granted during the year ended December 31, 2017, the Compensation Committee established a one-year performanceperiod. Any ROE PSUs earned at the end of the one-year performance period would be converted into an equal number of shares of restricted stock that willvest on the third anniversary of the original ROE PSU grant date subject to both continued employment under the terms of the award agreement. If thethreshold level of performance goals is not achieved, no ROE PSUs are earned. PSUs do not have any voting rights. No dividends are paid on outstanding PSUs during the applicable performance period. Instead, dividendequivalents are accrued on outstanding PSUs during the applicable performance period, deemed invested in sharesF-33Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. of Class A common stock and are paid out in shares of Class A common stock at the end of the performance period to the extent that the underlying PSUsvest.For the years ended December 31, 2017, 2016, and 2015, the Company recognized $2,263, $1,266 and $(560), respectively, of compensation expenserelated to PSU awards. For the year ended December 31, 2015, the compensation expense included a reversal of $1,474 of expense recognized in prior periodsdue to a reduction in the number of PSUs expected to vest based on deterioration in performance metrics. As of December 31, 2017 and 2016, the Companyhad unrecognized compensation expense related to PSU awards of $4,485 and $3,591, respectively. The unrecognized compensation expense as ofDecember 31, 2017 is expected to be recognized over a weighted average period of 2.0 years. For the year ended December 31, 2015, the intrinsic value ofPSU awards that vested were $716. There were no PSU awards that vested for the years ended December 31, 2017 and 2016.Employee Restricted Stock AwardsCompensation costs for restricted stock awards subject only to service conditions are measured at the closing stock price on the dates of grant and arerecognized as expense on a straight-line basis over the requisite service periods for the awards, as adjusted for changes in estimated, and ultimately actual,forfeitures.The Company grants restricted common shares to employees that vest ratably over a three-year period or cliff-vest after two to four years based oncontinued employment over these specified periods. A summary of these unvested restricted stock awards is presented below: Number of Shares Weighted-averageGrant-date FairValue Weighted-average RemainingVested Period Share Balance as of December 31, 2014 117,112 26.54 1.9 Granted 58,000 14.35 — Forfeitures (6,668) 26.34 — Vestitures (36,669) 25.63 — Share Balance as of December 31, 2015 131,775 21.44 2.0 Granted 73,457 14.67 — Forfeitures — — — Vestitures (43,341) 21.04 — Share Balance as of December 31, 2016 161,891 18.47 1.4 Granted 74,000 12.74 — Forfeitures — — — Vestitures (73,050) 20.00 — Share Balance as of December 31, 2017 162,841 15.18 1.3 For the years ended December 31, 2017, 2016, and 2015, the Company recognized $1,172, $1,197 and $1,207, respectively, of compensation expenserelated to restricted stock awards. As of December 31, 2017 and 2016, the Company had unrecognized compensation expense related to restricted stockawards of $1,284 and $1,512, respectively. The unrecognized compensation expense as of December 31, 2017 is expected to be recognized over a weightedaverage period of 1.3 years. For the years ended December 31, 2017, 2016 and 2015, the intrinsic value of restricted stock awards that vested were $970, $630and $646, respectively.In addition, as part of the Company’s satisfaction of incentive compensation earned for past service under the Company’s variable compensationprograms, employees may receive restricted Class A common stock in lieu of cash payments. These restricted Class A common stock shares are issued to anirrevocable trust and are not returnable to the Company. No such shares were issued in 2017, 2016 and 2015. As of December 31, 2017 and 2016, theCompany had 9,155 vested shares of the undistributed restricted stock issued to the trust.Director Restricted Stock UnitsCompensation costs for RSU awards subject only to service conditions are measured at the closing stock price on the dates of grant and are recognizedas expense on a straight-line basis over the requisite service periods for the awards, as adjusted for changes in estimated, and ultimately actual, forfeitures.Compensation costs for RSUs that do not require future service conditions are expensed immediately.The Company’s non-employee directors are compensated in both cash and RSUs. RSUs awarded under the Company’s 2014 Plan vest immediately onthe award grant date and are convertible into shares of Class A common stock. For RSUs granted under theF-34Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. Company’s 2014 Plan and 2011 Plan, the RSUs are convertible into shares of Class A common stock at the later of the date the non-employee director ceasesto be a member of the Company’s Board or the first anniversary of the grant date. For RSUs granted under prior long-term incentive plans, the RSUs areconvertible into shares of Class A common stock one year after the non-employee director ceases to be a member of the Company’s Board. The RSUs do nothave any voting rights but are entitled to cash dividend equivalent payments. As of December 31, 2017, the Company had 218,964 RSUs outstanding. Asummary of the RSUs grants is presented below for the periods indicated: December 31, 2017 2016 2015 RSUs granted 33,540 37,007 25,506 Grant date fair value $14.31 $13.78 $20.78 The grant date fair value is based on the closing price of the Class A common stock on the New York Stock Exchange on the date of grant. For theyears ended December 31, 2017, 2016 and 2015, the Company recognized $491, $511 and $496, respectively, of director fees related to these RSUs. Note 14. Financial Instruments with Off-Balance-Sheet Risk and Credit RiskAs of December 31, 2017, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance, or special purpose or variable interest entities (“VIEs”), established for the purpose of facilitating off-balance sheetarrangements or other contractually narrow or limited purposes. The Company’s economic interests held in unconsolidated VIEs are limited in nature to thoseof a passive holder of MBS issued by a securitization trust. As of December 31, 2017, the Company had not consolidated for financial reporting purposes anysecuritization trusts as the Company does not have the power to direct the activities that most significantly impact the economic performance of such entities.Further, as of December 31, 2017, the Company had not guaranteed any obligations of unconsolidated entities or entered into any commitment or intent toprovide funding to any such entities. Note 15. Revisions to Previously Reported Financial StatementsDuring the second quarter of 2017, the Company concluded that the previously reported deferred tax assets, net, and accumulated deficit wereincorrect for the three months ended March 31, 2017 and for the five fiscal years ended December 31, 2016 with a corresponding effect on the previouslyreported income tax benefit and net income for the fiscal year ended December 31, 2012. Although the impact of this change was not material to theconsolidated financial statements for the five fiscal years ended December 31, 2016 and for the three months ended March 31, 2017, the Company hasrevised its previously reported consolidated financial statements for those periods to reflect the cumulative impact of the errors. The following tables set forththe affected line items within the Company’s previously reported consolidated financial statements for the periods indicated: As of December 31, 2016 As PreviouslyReported Adjustment As Revised Consolidated Balance Sheets: Deferred tax assets, net $73,432 $(24,603) $48,829 Total assets 4,141,554 (24,603) 4,116,951 Accumulated deficit (1,527,104) (24,603) (1,551,707)Total stockholders' equity 383,416 (24,603) 358,813 Total liabilities and stockholders' equity 4,141,554 (24,603) 4,116,951 F-35Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. As of December 31, 2015 As PreviouslyReported Adjustment As Revised Consolidated Balance Sheets: Deferred tax assets, net $97,530 $(24,603) $72,927 Total assets 4,202,939 (24,603) 4,178,336 Accumulated deficit (1,426,655) (24,603) (1,451,258)Total stockholders' equity 484,031 (24,603) 459,428 Total liabilities and stockholders' equity 4,202,939 (24,603) 4,178,336 As of December 31, 2014 As PreviouslyReported Adjustment As Revised Consolidated Statements of Changes in Equity: Accumulated deficit (1,287,855) (24,603) (1,312,458)Total stockholders' equity 645,274 (24,603) 620,671 Note 16. Quarterly Data (Unaudited)The following tables set forth selected information for each of the fiscal quarters during the years ended December 31, 2017 and 2016. The selectedquarterly data is derived from unaudited financial statements of the Company and has been prepared on the same basis as the annual, audited financialstatements to include, in the opinion of management, all adjustments (consisting of only normal recurring adjustments) necessary for fair statement of theresults for such periods.The sum of quarterly earnings per share amounts may not equal full year earnings per share amounts due to differing average outstanding sharesamounts for the respective periods. Fiscal Year 2017 TotalYear FourthQuarter ThirdQuarter SecondQuarter FirstQuarter Interest income $121,248 $30,609 $28,835 $31,461 $30,343 Interest expense 51,514 14,952 13,968 12,528 10,066 Net interest income 69,734 15,657 14,867 18,933 20,277 Investment gain (loss), net 5,874 10,238 13,368 (15,970) (1,762)General and administrative expenses 18,570 4,947 4,544 4,154 4,925 Income (loss) before income taxes 57,038 20,948 23,691 (1,191) 13,590 Income tax provision 39,603 13,707 823 16,737 8,336 Net income (loss) 17,435 7,241 22,868 (17,928) 5,254 Dividend on preferred stock (251) (133) (83) (35) — Net income (loss) available (attributable) to common stock $17,184 $7,108 $22,785 $(17,963) $5,254 Basic earnings (loss) per common share $0.67 $0.25 $0.86 $(0.74) $0.22 Diluted earnings (loss) per common share $0.66 $0.25 $0.85 $(0.74) $0.22F-36Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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. Fiscal Year 2016 TotalYear FourthQuarter ThirdQuarter SecondQuarter FirstQuarter Interest income $105,336 $24,577 $25,654 $26,351 $28,754 Interest expense 29,222 8,436 7,390 6,703 6,693 Net interest income 76,114 16,141 18,264 19,648 22,061 Investment (loss) gain, net (69,318) (31,203) 20,722 (8,947) (49,890)General and administrative expenses 20,756 4,119 4,630 7,672 4,335 (Loss) income before income taxes (13,960) (19,181) 34,356 3,029 (32,164)Income tax provision (benefit) 27,387 22,255 15,543 (9,865) (546)Net (loss) income (41,347) (41,436) 18,813 12,894 (31,618)Dividend on preferred stock — — — — — Net (loss) income (attributable) available to common stock $(41,347) $(41,436) $18,813 $12,894 $(31,618)Basic (loss) earnings per common share $(1.79) $(1.79) $0.82 $0.56 $(1.38)Diluted (loss) earnings per common share $(1.79) $(1.79) $0.81 $0.56 $(1.38) F-37Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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 12.01Arlington Asset Investment Corp.Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends(dollars in thousands) Year Ended December 31, Ratio of earnings to fixed charges: 2017 2016 2015 2014 2013 Pre-tax income (loss) available (attributable) to common stock adjusted to exclude income or loss from equity investees $56,460 $(14,512) $(32,403) $55,189 $14,253 Distributed income of equity investees 477 809 1,628 413 90 Fixed charges: Interest expense and amortization of debt discount and premium on all indebtedness 51,514 29,222 18,889 11,391 8,529 Rentals 88 87 92 83 81 Total fixed charges $51,602 $29,309 $18,981 $11,474 $8,610 Pre-tax income (loss) available (attributable) to common stock adjusted to exclude income or loss from equity investees plus fixed charges and distributed income of equity investees $108,539 $15,606 $(11,794) $67,076 $22,953 Ratio of earnings to fixed charges 2.1 (A) (A) 5.8 2.7 Year Ended December 31, Ratio of earnings to combined fixed charges and preferred stock dividends: 2017 2016 2015 2014 2013 Pre-tax income (loss) available (attributable) to common stock adjusted to exclude income or loss from equity investees $56,460 $(14,512) $(32,403) $55,189 $14,253 Distributed income of equity investees 477 809 1,628 413 90 Preferred stock dividends 251 — — — — Fixed charges: Interest expense and amortization of debt discount and premium on all indebtedness 51,514 29,222 18,889 11,391 8,529 Rentals 88 87 92 83 81 Total fixed charges $51,602 $29,309 $18,981 $11,474 $8,610 Pre-tax income (loss) available (attributable) to common stock adjusted to exclude income or loss from equity investees plus fixed charges, distributed income of equity investees and dividends on preferred stock $108,790 $15,606 $(11,794) $67,076 $22,953 Ratio of earnings to fixed charges 2.1 (A) (A) 5.8 2.7 (A)For the years ended December 31, 2016 and 2015, the ratio coverage in the period was less than 1:1. The Company would have had to generateadditional earnings of $13,703 and $30,775, respectively, to achieve coverage of 1:1 in those periods. Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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 21.01List of Significant Subsidiaries of the Registrant Name State of Incorporation Key Bridge Insurance, LLC Tennessee Rosslyn REIT Trust Maryland Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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 23.01CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-104475, 333-174669 and 333-197442) andForm S-3 (No. 333-215384) of Arlington Asset Investment Corp. of our report dated February 16, 2018 relating to the financial statements and theeffectiveness of internal control over financial reporting, which appears in this Annual Report on Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP McLean, Virginia February 16, 2018 Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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, J. Rock Tonkel, Jr., 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 necessary to makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period coveredby this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as definedin Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-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 known to usby 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 designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements 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 conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably 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’s internalcontrol over financial reporting. February 16, 2018 /s/ J. ROCK TONKEL, JR. J. Rock Tonkel, Jr. President and Chief Executive Officer(Principal Executive Officer) Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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, Richard E. Konzmann, 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 necessary to makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period coveredby this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as definedin Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-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 known to usby 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 designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements 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 conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably 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’s internalcontrol over financial reporting. February 16, 2018 /s/ RICHARD E. KONZMANN Richard E. Konzmann Executive Vice President, Chief Financial Officer, and Treasurer (Principal Financial Officer) Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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 December 31, 2017, asfiled with the Securities and Exchange Commission on the date hereof (the Report), I, J. Rock Tonkel, Jr., Chief Executive Officer 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 16, 2018 /s/ J. ROCK TONKEL, JR. J. Rock Tonkel, Jr. President and Chief Executive Officer(Principal Executive Officer) Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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 December 31, 2017, asfiled with the Securities and Exchange Commission on the date hereof (the Report), I, Richard E. Konzmann, Chief Financial Officer 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 16, 2018 /s/ RICHARD E. KONZMANN Richard E. Konzmann Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) Source: Arlington Asset Investment Corp., 10-K, February 16, 2018Powered 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 16, 2018Powered 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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