Arlington Asset Investment Corp. (NYSE: AI) reported net income available to common shareholders of $9.5 million, or $0.26 per diluted common share, and non-GAAP core operating income of $0.4 million, or $0.01 per diluted common share, for the quarter ended June 30, 2020. A reconciliation of non-GAAP core operating income to GAAP net income (loss) appears at the end of this press release.

Second Quarter 2020 Financial Highlights

• $0.26 per diluted common share of GAAP net income
• $0.01 per diluted common share of non-GAAP core operating income
• $5.63 per common share of book value
• 1.2 to 1 "at risk" short term secured financing to investable capital ratio

"The Company is encouraged by the performance of its investment portfolio and resulting 7% economic return during the second quarter as market conditions improved and volatility decreased with the support of aggressive Federal monetary and fiscal policies," said J. Rock Tonkel, Jr., the Company's President and Chief Executive Officer. "The Company's results benefited from spread tightening and attractive investments made during the quarter while still maintaining leverage near 1x and retaining the financial flexibility to capture the benefit of opportunities that may arise across sectors as economic and market conditions evolve over the coming quarters."

Other Second Quarter Highlights

As of June 30, 2020, the Company's mortgage investment portfolio totaled $651 million at fair value, consisting of $502 million of agency MBS and $149 million of mortgage credit investments. Based on investable capital, the Company has allocated 62% and 38% of its capital to its agency MBS and mortgage credit investment strategies, respectively, as of June 30, 2020.

The Company's agency MBS consist of residential mortgage pass-through certificates for which the principal and interest payments are guaranteed by either a U.S. government sponsored enterprise ("GSE"), such as the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), or by a U.S. government agency, such as the Government National Mortgage Association ("Ginnie Mae"). The Company's mortgage credit investments generally include mortgage loans secured by residential or commercial real property, MBS collateralized by residential or commercial mortgage loans ("non-agency MBS"), and securities or loans collateralized by mortgage servicing rights ("MSRs").

As of June 30, 2020, the Company's $502 million agency MBS investment portfolio at fair value was comprised entirely of specified agency MBS as follows:

• $230 million of 2.5% coupon 30-year agency MBS
• $192 million of 3.0% coupon 30-year agency MBS
• $23 million of 3.5% coupon 30-year agency MBS
• $17 million of 4.0% coupon 30-year agency MBS
• $40 million of 4.5% coupon 30-year agency MBS

As of June 30, 2020, the Company's $502 million specified agency MBS portfolio had a weighted average amortized cost basis of $104.02 and a weighted average market price of $106.64. The Company's fixed-rate agency MBS are comprised of securities backed by specified pools of mortgage loans selected for their lower propensity for prepayment. Weighted average pay-up premiums on the Company's agency MBS portfolio, which represent the estimated price premium of agency MBS backed by specified pools over a generic to-be-announced ("TBA") agency MBS, were approximately 1.42 percentage points as of June 30, 2020, compared to 0.56 percentage points as of March 31, 2020.

During the second quarter of 2020, the Company purchased agency MBS totaling $229 million and sold agency MBS for gross sale proceeds of $315 million for a net realized gain of $12 million.

As of June 30, 2020, the Company's $149 million mortgage credit investment portfolio at fair value was comprised of the following:

• $64 million of financing collateralized by MSRs
• $45 million commercial mortgage loan
• $18 million of non-agency MBS collateralized by residential mortgage loans
• $12 million of non-agency MBS collateralized by commercial mortgage loans
• $10 million of non-agency MBS collateralized by business purpose residential mortgage loans

During the second quarter of 2020, the Company purchased mortgage credit investments totaling $107 million and sold mortgage credit investments for gross sale proceeds of $39 million for a net realized loss of $7 million.

As of June 30, 2020, the Company had a total of $427 million of repurchase agreements outstanding. As of June 30, 2020, the Company had $395 million of repurchase agreements outstanding with a weighted average rate of 0.22% and remaining weighted average maturity of 14 days secured by an aggregate of $415 million of agency MBS at fair value, which includes $29 million at sale price of unsettled agency MBS sale commitments included in the line item "sold securities receivable" in the Company's financial statements. As of June 30, 2020, the Company had a $32 million repurchase agreement outstanding with a rate of 3.00% and remaining maturity of 316 days secured by a $45 million commercial mortgage loan at fair value. As of June 30, 2020, the Company did not have any repurchase agreements outstanding secured by non-agency MBS or loans or securities collateralized by MSRs.

The Company's "at risk" short-term secured financing to investable capital ratio was 1.2 to 1 as of June 30, 2020 compared to 1.5 to 1 as of March 31, 2020. The Company's "at risk" short-term secured financing to investable capital is measured as the ratio of the sum of the Company's repurchase agreement financing, net payable or receivable for unsettled securities and net contractual price of TBA commitments less cash and cash equivalents compared to the Company's investable capital measured as the sum of the Company's shareholders' equity and long-term unsecured debt. During the second quarter of 2020, the Company satisfied all of its margin calls under its repurchase agreement financing arrangements in the normal course of business.

GAAP net interest income was $3.8 million for the second quarter of 2020 compared to $9.1 million for the first quarter of 2020, including the amortization of the Company's net premium on its agency MBS of $2.0 million for the second quarter of 2020 compared to $4.4 million for the first quarter of 2020. The Company's weighted average yield on its agency MBS was 2.11% for the second quarter of 2020 compared to 2.82% for the first quarter of 2020, and the actual weighted-average constant prepayment rate ("CPR") for the Company's agency MBS was 19.67% for the second quarter of 2020 compared to 10.84% for the first quarter of 2020. The Company's weighted average cost of repurchase agreement funding secured by agency MBS was 0.65% during the second quarter of 2020 compared to 1.81% during the first quarter of 2020. The Company's weighted average cost of repurchase agreement funding secured by mortgage credit investments was 3.29% during the second quarter of 2020 compared to 3.41% during the first quarter of 2020.

The Company enters into various hedging transactions to mitigate the interest rate sensitivity of its cost of borrowing and the value of its agency MBS portfolio including interest rate swap agreements, U.S. Treasury note futures, put and call options on U.S. Treasury note futures, and options on agency MBS. Under GAAP, the Company has not designated these transactions as hedging instruments for financial reporting purposes and therefore all gains and losses on its hedging instruments are recorded as net investment gains and losses in the Company's financial statements.

Under the terms of the Company's interest rate swap agreements, the Company pays semiannual interest payments based on a fixed rate and receives quarterly variable interest payments based upon the prevailing three-month London Interbank Offered Rate ("LIBOR") on the date of reset. As of June 30, 2020, the Company had $50 million in notional amount of interest rate swap agreements with a weighted average pay fixed rate of 0.64% and a remaining weighted average maturity of 9.8 years. The Company's weighted average net pay rate of its interest rate swap agreements was 0.02% during the second quarter of 2020 compared to an average net receive rate of 0.03% during the first quarter of 2020. As of June 30, 2020, the total notional amount of the Company's interest rate swaps was 12% of the Company's outstanding repurchase agreement funding and net TBA purchase commitments with a net duration gap of 0.2 years.

Economic net interest income was $3.9 million for the second quarter of 2020 compared to $9.8 million for the first quarter of 2020. Economic net interest income is comprised of net interest and other income determined in accordance with GAAP, TBA dollar roll income and net interest income or expense from interest rate swaps. Economic net interest income is a non-GAAP financial measure that is described later in this press release.

Excluding TBA dollar roll income, the Company had net investment gains of $4.4 million on its agency MBS investment portfolio and $5.8 million on its mortgage credit and other investment portfolio for the second quarter of 2020. On its interest rate hedging instruments, the Company had net investment losses of $0.6 million, excluding interest rate swap net interest expense. This results in a net investment gain on the Company's total investment and hedge portfolio of $9.6 million, or $0.26 per diluted common share, for the second quarter of 2020.

During the second quarter of 2020, the Company repurchased 1.1 million shares of its common stock for a purchase cost of $3.0 million.

Distributions to Shareholders

The Company's Board of Directors approved distributions to its Series B and Series C preferred shareholders of $0.4375 per share and $0.515625 per share, respectively, for the second quarter of 2020. The distributions were paid on June 30, 2020 to shareholders of record as of June 19, 2020. As previously disclosed, consistent with the Company's intent to raise cash and strengthen its balance sheet, the Company's Board of Directors determined not to declare a dividend on its common stock for the second quarter of 2020. The Company's Board of Directors will continue to evaluate the payment of dividends as market conditions evolve, and no definitive determination has been made at this time regarding the declaration of future dividends.

The Company intends to elect to be taxed as a REIT for its taxable year ended December 31, 2019 upon the filing of its tax return for such taxable year. The Company is organized and operated in a manner that will allow it to qualify as a REIT for U.S. federal income tax purposes and currently intends to continue to be organized and operated in such a manner. As a REIT, distributions to shareholders will generally be taxable as ordinary income that are not eligible to be taxed as qualified dividends. However, a portion of such distributions may be designated as long-term capital gain dividends to the extent that such portion is attributable to the Company's sale of capital assets held for more than one year. Non-corporate taxpayers may deduct up to 20% of dividends received from a REIT that are not designated as capital gain dividends or qualified dividend income, subject to certain limitations. Distributions in excess of the Company's current and accumulated earnings and profits will be treated as a tax-free return of capital to the extent of each shareholder's tax basis in the Company's stock and as capital gain thereafter.

About the Company

Arlington Asset Investment Corp. (NYSE: AI) currently invests primarily in mortgage-related and other assets and intends to elect to be taxed as a REIT upon filing its tax return for its taxable year ending December 31, 2019. The Company is headquartered in the Washington, D.C. metropolitan area. For more information, please visit www.arlingtonasset.com.