Interest Rates and Economic Indicators - The 10-year U.S. Treasury rate increased by 67 basis points to 3.01% as of June 30, 2022[212]. - The average primary mortgage rate rose by 103 basis points to 5.70% as of June 30, 2022[214]. - The Consumer Price Index increased by 9.1% for the twelve-month period ending June 30, 2022, marking the largest increase in over 40 years[214]. - The Federal Open Market Committee raised the federal funds rate by a total of 225 basis points from 0.75%-1.00% to 2.25%-2.50% between May and July 2022[214]. - The U.S. Federal Reserve is expected to continue raising interest rates, with market expectations of an additional 100 basis points in the next six months[214]. Mortgage Market and Valuation - The Standard & Poor's CoreLogic Case-Shiller U.S. National Home Price NSA index reported a 19.7% annual gain in May 2022[214]. - Prepayment speeds in the fixed-rate residential mortgage market decreased during the second quarter of 2022 due to rising primary mortgage rates[214]. - Valuation multiples of mortgage servicing rights (MSRs) increased during the second quarter of 2022 driven by declining prepayment speed expectations[214]. - The spread between the market yield on agency mortgage-backed securities (MBS) and benchmark interest rates widened during the second quarter of 2022[214]. Company Financials and Investments - The total invested capital as of June 30, 2022, was $707.3 million, with a capital allocation of $296 million across various investment strategies[227]. - The credit investment portfolio as of June 30, 2022, included a $29.5 million commercial mortgage loan and $138.9 million in non-agency MBS or ABS investments[233]. - The company had $120.3 million of MSR financing receivable investments at fair value as of June 30, 2022, with an amortized cost basis of $74.9 million and an unrealized gain of $45.4 million[230]. - The company had outstanding repurchase agreements of $329,994,000 as of June 30, 2022, with a weighted-average rate of 1.96% and a weighted-average term to maturity of 30.2 days[292]. Preferred Stock and Debt - The Series C Preferred Stock had a liquidation preference of $26.1 million and was entitled to a cumulative cash dividend at a fixed rate of 8.250% per annum until March 30, 2024, after which it would be based on three-month LIBOR plus a spread of 5.664%[224]. - The company has $86.2 million in total long-term unsecured debt, including $34.9 million in 6.75% Senior Notes due 2025 and $37.8 million in 6.00% Senior Notes due 2026[296]. - The company’s debt-to-equity leverage ratio was 3.5 to 1 as of June 30, 2022, indicating a significant level of leverage[279]. Operational Performance - Net operating income for Q2 2022 was $4,526, a decrease of 11% from $5,087 in Q2 2021[253]. - Interest and other income for Q2 2022 was $8,763, an increase of 24.4% from $7,045 in Q2 2021[253]. - The company reported a net loss attributable to common stock of $(400) in Q2 2022, compared to a net loss of $(7,782) in Q2 2021[253]. - The company experienced a loss on agency MBS investments of $10.6 million for the three months ended June 30, 2022, compared to a gain of $7.1 million for the same period in 2021[266]. Risk Management - The company is exposed to interest rate risk, with significant impacts on the value of fixed-rate agency MBS and SFR investments due to fluctuations in interest rates[316]. - The company manages interest rate risk through investment allocation and hedging instruments, including interest rate swaps and U.S. Treasury note futures[316]. - The company acknowledges credit risk exposure due to non-guaranteed credit investments, which may lead to substantial losses if mortgage loan performance declines[327]. - The company employs prudent asset selection and ongoing performance monitoring to manage credit risk exposure[331]. Future Outlook and Commitments - The company has commitments to acquire 25 additional properties for a total purchase price of $9.0 million[237]. - The company is in the process of selling 376 properties for $131.9 million, with an investment cost basis of $113.0 million[238]. - The company intends to distribute 100% of its taxable income to shareholders, adhering to REIT distribution requirements[311]. - Forward-looking statements include expectations regarding capital deployment and business growth strategies focused on acquiring residential MBS and credit investments[333].

Economic Indicators - As of March 31, 2022, the 10-year U.S. Treasury rate was 2.34%, an increase of 83 basis points from the previous quarter[165]. - The Consumer Price Index rose by 1.2% in the first quarter of 2022, with an annual increase of 8.5%[165]. - The Federal Open Market Committee raised the federal funds rate by 25 basis points to a range of 0.25% to 0.50% and anticipates ongoing increases[166]. - Housing prices showed a significant annual gain of 19.8% as reported by the Standard & Poor's CoreLogic Case-Shiller U.S. National Home Price NSA index in February 2022[166]. Company Financials - As of March 31, 2022, the total invested capital was $636.6 million, with MSR financing receivables accounting for $139.2 million[176][178]. - The company reported a net loss attributable to common stock for the three months ended March 31, 2022, was $3.443 million, compared to a net loss of $6.763 million for the same period in 2021[199]. - Economic net interest income from financial assets was $6,474,000 for the three months ended March 31, 2022, compared to $5,035,000 for the same period in 2021, reflecting a 28.7% increase[207]. - The company reported net interest income/spread of $5,942,000 for the three months ended March 31, 2022, compared to $4,909,000 for the same period in 2021[207]. Investment Portfolio - The credit investment portfolio included a $29.6 million commercial mortgage loan and $53.5 million in non-agency MBS or ABS investments[180]. - As of March 31, 2022, the agency MBS investment portfolio had an unpaid principal balance of $304.666 million, with a net unrealized loss of $22.667 million[186]. - The annualized prepayment rate for the agency MBS was 9.01% for the three months ended March 31, 2022, with approximately 79% of the portfolio in specified pools of low balance loans[187]. Debt and Leverage - As of March 31, 2022, the company's debt-to-equity leverage ratio was 3.2 to 1, and the "at risk" leverage ratio was 1.3 to 1[233]. - The company had outstanding repurchase agreement borrowings of $284.9 million as of March 31, 2022, with a weighted-average rate of 0.54% and a weighted-average term to maturity of 37.6 days[246]. - The outstanding principal balance of long-term unsecured debt was $86.1 million as of March 31, 2022, with various senior notes maturing between 2025 and 2035[250]. Risk Factors - The company is subject to various risks including changes in interest rates, economic conditions, and regulatory changes that may affect its financial performance[164]. - Key risks include changes in interest rates, the overall environment for mortgage markets, and the impact of U.S. Federal Reserve monetary policy[289]. - Changes in laws and regulations affecting the business are considered significant risks[290]. Operational Performance - Net operating income from investments in financial assets increased by $1.0 million, or 20.4%, from $4.9 million for the three months ended March 31, 2021, to $5.9 million for the same period in 2022[202]. - General and administrative expenses for the three months ended March 31, 2022, were $3.284 million, compared to $2.637 million for the same period in 2021[199]. - The company reported a net operating loss of $800,000 from SFR properties for the three months ended March 31, 2022, due to property costs incurred prior to lease commencement[210]. Shareholder Information - The company intends to distribute 100% of its taxable income to shareholders, subject to REIT distribution requirements[264]. - The company repurchased 1,009,566 shares of common stock for a total purchase price of $3.5 million during the three months ended March 31, 2022[261]. - As of March 31, 2022, the company had Series B Preferred Stock outstanding with a liquidation preference of $9.5 million and Series C Preferred Stock with a liquidation preference of $27.9 million[262]. Future Outlook - The ongoing COVID-19 pandemic poses uncertainty and economic impact on the company's business, financial condition, and results of operations[286]. - Future expansion into areas beyond investing in MBS is anticipated, with expectations of returns from such expansions[289]. - The company acknowledges that actual results could differ significantly from estimates due to various market conditions and assumptions[271].

Financial Performance and Strategy - The company had estimated net operating loss (NOL) carryforwards of $165.0 million as of December 31, 2021, which can offset future taxable ordinary income[40]. - The company intends to distribute 100% of its taxable income to maintain its REIT status, which requires an annual distribution of at least 90% of REIT taxable income[33]. - The company may leverage its equity capital in its single-family rental (SFR) investment strategy up to approximately 3.0 to 1[29]. Risk Management - The company is exposed to various market risks, including interest rate risk, prepayment risk, and credit risk, and employs hedging instruments to manage these risks[30]. - The company has a risk management strategy that includes monitoring overall leverage levels and asset selection to mitigate market risks[30]. - The company manages credit risk through prudent asset selection and ongoing performance monitoring, but there is no guarantee that these measures will be successful[274]. - The company utilizes interest rate hedging instruments, including swaps and U.S. Treasury note futures, to manage interest rate risk[266]. REIT Compliance - The company must satisfy income tests, including deriving at least 75% of gross income from real property investments to qualify as a REIT[34][35]. - The company must ensure that at least 75% of its assets are represented by real estate assets to maintain its REIT qualification[36]. Market Competition - The company competes with various entities, including mortgage finance companies and institutional investors, for targeted investments[31]. Asset Valuation and Sensitivity - The fair value of agency MBS as of December 31, 2021, was $483,927, with a projected decrease to $470,976 under a 50 basis point increase in interest rates and an increase to $494,278 under a 50 basis point decrease[269]. - MSR financing receivables were valued at $125,018, projected to increase to $134,736 with a 50 basis point increase in interest rates and decrease to $112,155 with a 50 basis point decrease[269]. - The book value per common share was $6.16, with a projected decrease to $6.15 under a 50 basis point increase in interest rates and a decrease to $6.00 under a 50 basis point decrease[269]. - The company is exposed to spread risk, which is the risk of an increase in the spread between market participants' required rate of return and prevailing benchmark interest rates[271]. - The estimated change in fair value for agency MBS under a 10 basis point increase in agency spreads is projected to decrease to $480,974, while a decrease in spreads would increase the value to $486,880[272]. - Under a 25 basis point increase in agency spreads, the value of agency MBS is projected to decrease to $476,546, while a decrease in spreads would increase the value to $491,308[273]. - The effective durations for the agency MBS and TBA commitments are derived from The Yield Book, indicating sensitivity to interest rate changes[270]. - The analysis of interest rate sensitivity assumes a static portfolio and does not account for future management actions in response to market conditions[270]. Workforce - The company has a total of 11 employees as of December 31, 2021, and focuses on maintaining a discrimination-free workplace[44].

Investment Strategy - Arlington Asset Investment Corp. focuses on investing in mortgage-related assets and residential real estate, with capital allocated to agency MBS, MSR-related assets, mortgage credit investments, and single-family residential properties [169]. - The company leverages its investment portfolio prudently to increase potential returns, primarily funding investments through short-term financing arrangements [171]. - The company is internally managed and does not have an external investment advisor, allowing for direct control over investment strategies [171]. - The company has diversified its repurchase agreement funding across eight counterparties, with no more than 4.0% of stockholders' equity at risk with any one counterparty [277]. - The company may seek additional debt or equity financing for strategic business opportunities, including acquisitions [265]. Economic Environment - The Federal Open Market Committee (FOMC) maintains a target range for the federal funds rate at 0% to 0.25% and continues its asset purchase program, buying at least $80 billion in Treasury securities and $40 billion in agency MBS monthly [176]. - The impacts of the COVID-19 pandemic and changes in interest rates are significant factors affecting the company's results of operations [172]. - The ongoing COVID-19 pandemic poses uncertainty and economic impact on the company's financial condition and operations [320]. - Key risks include changes in interest rates, the overall environment for mortgage markets, and the impact of U.S. Federal Reserve monetary policy [322]. Financial Performance - GAAP net interest income increased by $0.6 million, or 15.8%, from $3.8 million for the three months ended September 30, 2020, to $4.4 million for the three months ended September 30, 2021 [224]. - GAAP net interest income decreased by $3.4 million, or 20.4%, from $16.7 million for the nine months ended September 30, 2020, to $13.3 million for the nine months ended September 30, 2021 [224]. - The company reported a net loss attributable to common stock of $981 million for the three months ended September 30, 2021, compared to net income of $4,033 million for the same period in 2020 [223]. - The company experienced an investment loss of $(1,313) million for the three months ended September 30, 2021, compared to a gain of $3,952 million for the same period in 2020 [223]. - Non-GAAP core operating income for the three months ended September 30, 2021, was $1,900,000, up from $973,000 in the same period of 2020, reflecting a growth of 95.3% [254]. Interest Rate and Market Risks - The company is exposed to interest rate risk in its agency MBS portfolio, which is financed with short-term borrowing facilities [302]. - The company faces spread risk, which is the risk of an increase in the spread between market yields on mortgage investments and prevailing benchmark interest rates [310]. - The sensitivity of Agency MBS and TBA commitments to changes in MBS spreads is based on an assumed spread duration of 6.3 years [312]. - The company has credit risk exposure due to mortgage credit investments that do not carry a credit guarantee from a GSE or government agency [316]. - The company attempts to manage credit risk through prudent asset selection and ongoing performance monitoring [318]. Asset Management - The company's mortgage investment portfolio at fair value as of September 30, 2021, totaled $849.946 million, with agency MBS and net long TBA commitments accounting for $659.968 million [198]. - As of September 30, 2021, the company had $112.8 million in MSR financing receivable investments at fair value, with an amortized cost basis of $104.4 million and an unrealized gain of $8.4 million [203]. - The mortgage credit investment portfolio included a $29.8 million commercial mortgage loan and $37.9 million in non-agency MBS investments, with a total unpaid principal balance of $72.4 million [210]. - The company had commitments to acquire 75 properties for an aggregate purchase price of $19.9 million as of September 30, 2021 [215]. - The company has committed a total minimum of $50 million in capital for MSR financing, with $25 million expiring on December 31, 2023, and another $25 million expiring on April 1, 2024 [288]. Shareholder and Capital Management - The company repurchased 1,059,980 shares of Class A common stock for a total purchase price of $4.1 million during the three months ended September 30, 2021 [295]. - The company has 11,302,160 shares of Class A common stock available for sale under common equity distribution agreements as of September 30, 2021 [294]. - The Series C Preferred Stock has a liquidation preference of $27.9 million and pays a cumulative cash dividend at a fixed rate of 8.250% per annum until March 30, 2024 [297]. - The company intends to distribute 100% of its taxable income as a REIT, which requires an annual distribution of 90% of its REIT taxable income [299]. - The company's debt-to-equity leverage ratio as of September 30, 2021, was 2.9 to 1, indicating a significant reliance on debt financing [261]. Regulatory and Compliance - The transition from LIBOR to SOFR is being addressed, with the New York LIBOR Legislation providing a statutory remedy for contracts referencing USD LIBOR [185]. - The fallback provisions for interest rate swap agreements based on LIBOR were amended to include SOFR adjustments, but the impact of these changes remains uncertain [188]. - The company emphasizes the importance of maintaining qualification as a REIT for federal income tax purposes [322]. - Changes in laws and regulations, as well as industry practices, may adversely impact the company's business operations [322]. - The company does not intend to update or revise forward-looking statements unless required by law [322].

Investment Strategy - Arlington Asset Investment Corp. focuses primarily on investing in mortgage-related assets, with capital allocated between agency MBS, mortgage credit investments, and MSR-related assets[157]. - The company believes it prudently leverages its investment portfolio to increase potential returns, primarily funding investments through short-term financing arrangements[159]. - The company is internally managed and does not have an external investment advisor, which allows for direct control over investment strategies[159]. - The company anticipates potential adverse effects on its financial condition due to uncertainties surrounding LIBOR reforms and alternative reference rates[176]. - The company expects ongoing discussions regarding residential housing and mortgage reform, which may affect future operations and strategies[182]. - The company intends to distribute 100% of its taxable income as a REIT, which requires an annual distribution of at least 90% of its REIT taxable income[277]. - The company expresses its intention to expand its business into areas beyond investing in MBS, with expectations of returns from such expansions[302]. Financial Performance - The impacts of the COVID-19 pandemic and changes in interest rates are significant factors affecting the company's results of operations and financial condition[160]. - GAAP net interest income increased by $1.3 million, or 34.2%, from $3.8 million in Q2 2020 to $5.1 million in Q2 2021[204]. - Net interest income for the six months ended June 30, 2021, decreased by $4.1 million, or 31.8%, to $8.8 million from $12.9 million in the same period of 2020[204]. - The company reported a net loss of $7,059,000 for Q2 2021, compared to a net income of $10,234,000 in Q2 2020[235]. - The company recognized a net investment loss of $9,032 thousand for the three months ended June 30, 2021, compared to a gain of $9,797 thousand for the same period in 2020[218]. - Economic net interest income for Q2 2021 was $5.68 million, compared to $3.93 million in Q2 2020[211]. - The company reported a provision for income taxes of $(0.1) million for the three months ended June 30, 2021, and $0.3 million for the six months ended June 30, 2021[220]. Interest Rates and Market Conditions - The 10-year U.S. Treasury rate decreased by 27 basis points to 1.47% as of June 30, 2021, while the spread between the 2-year and 10-year U.S. Treasury rate narrowed by 36 basis points to 122 basis points[162]. - The Federal Open Market Committee plans to maintain an accommodative monetary policy stance, keeping the federal funds rate target range at 0% to 0.25% and continuing asset purchases of at least $80 billion in Treasury securities and $40 billion in agency MBS per month[163]. - The transition from LIBOR to SOFR is expected to be gradual and complicated, with potential basis risk affecting operating results[169]. - The company highlights potential risks related to changes in interest rates, including the Federal Funds rate by the U.S. Federal Reserve[302]. - The financial performance is significantly influenced by interest rates rather than inflation, as most assets and liabilities are interest rate sensitive[298]. Mortgage Investments - The total mortgage investments amounted to $930.1 million as of June 30, 2021, with a capital allocation of $301.9 million[184]. - The company's mortgage credit investments totaled $129.8 million, with commercial mortgage loans at $74.7 million and residential MBS at $25.0 million[184]. - The agency MBS portfolio had an annualized prepayment rate of 6.34% for the three months ended June 30, 2021, with approximately 58% in specified pools of low balance loans[186]. - The mortgage credit investment portfolio included $74.7 million in commercial mortgage loans and $55.1 million in non-agency MBS investments as of June 30, 2021[189]. - The company had two mortgage loan investments with an aggregate principal balance of $74.7 million, with one loan fully repaid for $44.8 million, leaving a remaining balance of $29.9 million[173]. Debt and Financing - As of June 30, 2021, the company had $15.0 million of junior subordinated debt outstanding, requiring quarterly interest payments at three-month LIBOR plus a spread of 2.25% to 3.00%[174]. - The company had $73.1 million in total long-term unsecured debt as of June 30, 2021, with interest rates ranging from 6.625% to 6.75%[245][246]. - A public offering on July 15, 2021 raised $37.8 million in 6.00% Senior Notes due 2026, with net proceeds of $36.6 million[247]. - Outstanding repurchase agreements for Agency MBS financing totaled $673.7 million as of June 30, 2021, with a weighted-average rate of 0.09%[255]. - The company diversified its repurchase agreement funding across 8 counterparties, with no more than 3.9% of stockholders' equity at risk with any one counterparty[256]. Risk Management - The company has credit risk exposure due to mortgage credit investments that do not carry a credit guarantee from a GSE or government agency[295]. - Credit losses on non-agency MBS are allocated on a "reverse sequential" basis, absorbing losses first through subordinate interests[296]. - The company attempts to manage credit risk through prudent asset selection and ongoing performance monitoring[297]. - The company recognizes the risks associated with its mortgage-related portfolios, including changes in fair value[302]. - The company mentions the potential impact of fluctuations in the value of hedge instruments on its financial results[302]. Shareholder Information - As of June 30, 2021, the company had 11,302,160 shares of Class A common stock available for sale under common equity distribution agreements[272]. - The company has a share repurchase program authorized for up to 18,000,000 shares of Class A common stock, with 15,239,159 shares remaining available for repurchase as of June 30, 2021[273]. - The Series B Preferred Stock has a liquidation preference of $8.4 million and pays a cumulative cash dividend of 7.00% per annum[274]. - The Series C Preferred Stock has a liquidation preference of $27.9 million and pays a cumulative cash dividend of 8.250% per annum until March 30, 2024[274]. Economic Conditions - The CARES Act authorized over $2 trillion in economic relief, impacting the company's mortgage loan portfolio and borrower forbearance options[177]. - The company acknowledges the impact of general economic conditions on its business performance[302]. - Forward-looking statements include uncertainties regarding capital deployment, economic impacts from COVID-19, and the ability to maintain REIT qualification[299]. - The company indicates that changes in laws and regulations may adversely affect its business operations[302].

Investment Strategy - Arlington Asset Investment Corp. focuses primarily on investing in mortgage-related assets, with capital allocated between agency MBS, mortgage credit investments, and MSR-related assets[164]. - The company is internally managed and does not have an external investment advisor, allowing for direct control over investment strategies[165]. - Arlington Asset's investment strategy includes hedging transactions to mitigate interest rate sensitivity of borrowing costs and the value of fixed-rate mortgage investments[165]. - The company anticipates potential investment opportunities arising from the current economic environment due to increased liquidity[183]. - The company has committed to invest a minimum of $25 million in MSR financing transactions, fully funded as of March 31, 2021[262]. Economic Environment - Housing prices reported an 11.2% annual gain in January 2021, the highest recorded in nearly 15 years, driven by low mortgage rates and low supply of homes[169]. - The impacts of the COVID-19 pandemic and changes in interest rates are significant factors affecting the company's financial condition and results of operations[166]. - The Federal Open Market Committee plans to maintain a target range for the federal funds rate at 0% to 0.25% and continue asset purchases of at least $80 billion per month in Treasury securities and $40 billion in agency MBS[168]. - The transition from LIBOR to SOFR is expected to be gradual and complicated, with significant differences between the two rates potentially affecting borrowing costs[171]. Financial Performance - GAAP net interest income decreased by $5.3 million, or 58.2%, from $9.1 million for the three months ended March 31, 2020, to $3.8 million for the three months ended March 31, 2021[206]. - Net loss attributable to common stock was $6.763 million, compared to a net loss of $94.944 million in the previous year[205]. - Diluted loss per common share was $(0.20), a significant improvement from $(2.59) in the prior year[205]. - Economic net interest income for the three months ended March 31, 2021, was $3.884 million, down from $9.838 million in the same period last year[212]. - The company reported a GAAP net loss of $6.040 million for Q1 2021, a significant improvement compared to a net loss of $94.170 million in Q1 2020[232]. Asset Management - Liquid assets totaled $181.6 million as of March 31, 2021, consisting of cash and cash equivalents of $48.2 million and unencumbered agency MBS of $133.4 million at fair value[183]. - The total mortgage investment portfolio at fair value as of March 31, 2021, was $724.1 million, with a capital allocation of $312.6 million[184]. - The company has a mortgage loan investment with a principal balance of $44.9 million, bearing interest at one-month LIBOR plus a spread of 4.25% and a LIBOR floor of 2.00%[174]. - The company had $36 million of MSR financing receivable investments at fair value[194]. - The company reported net interest income primarily from agency MBS, mortgage credit investments, and MSR financing receivables, net of interest expenses[199]. Debt and Leverage - As of March 31, 2021, the company's debt-to-equity leverage ratio was 2.7 to 1, indicating a significant reliance on debt financing[237]. - The company reduced its "at risk" leverage ratio to 1.4 to 1 as of March 31, 2021, by selling mortgage investments and reducing repo borrowings[183]. - The company had $73.1 million of total long-term unsecured debt as of March 31, 2021, with senior notes accruing interest at rates of 6.625% and 6.75%[244]. - As of March 31, 2021, outstanding repurchase agreements totaled $505.6 million, with a weighted-average rate of 0.33% and a weighted-average term to maturity of 27.1 days[252]. Risk Management - The company is exposed to interest rate risk, particularly in its agency MBS portfolio, which is financed with short-term borrowing facilities[277]. - The company utilizes interest rate hedging instruments to manage its exposure to changes in benchmark interest rates[278]. - Credit risk is present in mortgage credit investments, which do not carry a credit guarantee, exposing the company to potential credit losses[287]. - The company manages credit risk through prudent asset selection and ongoing performance monitoring, but there are no guarantees of success[291]. Shareholder Returns - The company intends to distribute 100% of its taxable income to shareholders, complying with REIT distribution requirements[274]. - The company did not declare a dividend on common stock during the first quarter of 2021 to preserve liquidity[183]. - The Series C Preferred Stock has a liquidation preference of $27.9 million and pays a fixed dividend of 8.250% per annum until March 30, 2024[269]. - The Series B Preferred Stock has a liquidation preference of $8.4 million and pays a cumulative cash dividend of 7.00% per annum[269].

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2020 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to | --- | --- | --- | |----------------------------------------------------------------------------|----------------------------------------|------------ ...

PART I — FINANCIAL INFORMATION [Item 1. Consolidated Financial Statements and Notes](index=3&type=section&id=Item%201.%20Consolidated%20Financial%20Statements%20and%20Notes) The company's financial statements reflect a significant strategic shift in H1 2020, with reduced assets and liabilities, and a net income of $10.2 million in Q2 2020, driven by investment gains [Consolidated Financial Statements](index=3&type=section&id=Consolidated%20Financial%20Statements) Consolidated financial statements for June 30, 2020, show significant deleveraging with an 80% asset decrease, a $10.2 million net income in Q2 2020, but an $83.9 million net loss for the six-month period Consolidated Balance Sheets (in thousands) | | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | **Total Assets** | $785,800 | $4,000,114 | | Agency mortgage-backed securities | $501,582 | $3,768,496 | | **Total Liabilities** | $546,815 | $3,672,866 | | Repurchase agreements | $426,877 | $3,581,237 | | **Total Stockholders' Equity** | $238,985 | $327,248 | Consolidated Statements of Operations (in thousands) | | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :--- | :--- | :--- | | **Net Interest Income** | $3,765 | $6,582 | | **Total Investment Gain (Loss), Net** | $9,797 | $(26,683) | | **Net Income (Loss)** | $10,234 | $(23,525) | | **Diluted Earnings (Loss) Per Share** | $0.26 | $(0.67) | Consolidated Statements of Cash Flows (in thousands) | | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | **Net Cash Provided by Operating Activities** | $15,978 | $18,704 | | **Net Cash Provided by Investing Activities** | $3,146,981 | $127,917 | | **Net Cash Used in Financing Activities** | $(3,168,499) | $(138,650) | | **Net (Decrease) Increase in Cash** | $(5,540) | $7,971 | [Notes to Consolidated Financial Statements](index=7&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Notes detail accounting policies, the company's focus on a levered mortgage investment portfolio, REIT election intent, reduced investment securities, derivative use, and the suspension of common stock dividends in Q1 and Q2 2020 - The company focuses on acquiring and holding a levered portfolio of mortgage investments, primarily agency MBS and mortgage credit investments, and intends to elect to be taxed as a REIT for the taxable year ended December 31, 2019[15](index=15&type=chunk) Investment Securities (in thousands) | Category | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | **Agency MBS** | $501,582 | $3,768,496 | | **Mortgage Credit Securities** | $79,871 | $33,501 | | **Loans** | $69,575 | $45,000 | Financing (in thousands) | Financing Type | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | **Repurchase Agreements** | $426,877 | $3,581,237 | | Weighted-Average Rate | 0.43% | 2.11% | | **Long-Term Unsecured Debt** | $74,022 | $74,328 | - For the quarters ended March 31, 2020, and June 30, 2020, the Board of Directors determined that the Company would not declare a dividend on its common stock[106](index=106&type=chunk) - During the three and six months ended June 30, 2020, the Company repurchased **1,069,340 shares** of Class A common stock for a total purchase price of **$3,047 thousand**[112](index=112&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=27&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the strategic response to COVID-19, including reduced leverage and increased liquidity, resulting in a smaller portfolio, lower net interest income, and significant Q2 2020 investment gains [Overview and Market Conditions](index=27&type=section&id=Overview%20and%20Market%20Conditions) The company, an investment firm, navigated extreme H1 2020 market volatility due to COVID-19, with Federal Reserve actions stabilizing markets and the CARES Act impacting mortgages, while managing the LIBOR transition - The global economic impact of the COVID-19 pandemic led to substantial liquidity strains and extreme market volatility, with Federal Reserve actions improving market functioning and tightening agency mortgage spreads during Q2 2020[135](index=135&type=chunk)[136](index=136&type=chunk) - In response to the pandemic, the FOMC lowered its target federal funds rate by a total of **150 basis points** to a range of **0% to 0.25%** and announced large-scale asset purchases to support smooth market functioning[137](index=137&type=chunk)[138](index=138&type=chunk) - The CARES Act instituted a foreclosure moratorium and a borrower's right to request forbearance on any federally-backed residential mortgage, including those in agency MBS[145](index=145&type=chunk) [Portfolio Overview and Results of Operations](index=31&type=section&id=Portfolio%20Overview%20and%20Results%20of%20Operations) In H1 2020, the company reduced risk and leverage, shrinking its portfolio to $651 million, resulting in lower net interest income but a $9.8 million net investment gain in Q2 2020 - The company reduced its 'at risk' short term secured financing to investable capital ratio to **1.2 to 1** as of June 30, 2020, compared to **8.7 to 1** as of December 31, 2019, by selling mortgage investments and reducing repo borrowings[160](index=160&type=chunk) Total Mortgage Investments (in thousands) | Investment Type | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | **Total Agency MBS** | $501,582 | $3,768,496 | | **Total Mortgage Credit Investments** | $149,446 | $78,501 | | **Total Mortgage Investments** | $651,028 | $3,846,997 | GAAP and Non-GAAP Income Metrics (in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :--- | :--- | :--- | | **GAAP Net Income (Loss) Attributable to Common Stock** | $9,476 | $(24,299) | | **Non-GAAP Core Operating Income** | $437 | $8,365 | | **Non-GAAP Core Operating Income per Diluted Share** | $0.01 | $0.23 | [Liquidity and Capital Resources](index=41&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity strategy resulted in $100.2 million in liquid assets as of June 30, 2020, with significantly reduced repurchase agreements and ongoing access to capital markets - As of June 30, 2020, the company's liquid assets totaled **$100.2 million**, consisting of **$14.1 million** in cash and cash equivalents and **$86.1 million** in unencumbered agency MBS[208](index=208&type=chunk) - The 'at risk' short-term financing to investable capital ratio was **1.2 to 1** as of June 30, 2020[207](index=207&type=chunk) Repurchase Agreements Outstanding (in thousands) | Financing | June 30, 2020 | | :--- | :--- | | **Repurchase Agreements Outstanding** | $426,877 | | Weighted-Average Rate | 0.43% | | Weighted-Average Term to Maturity | 36.3 days | - As of June 30, 2020, the company had **11,302,160 shares** of Class A common stock available for sale under its common equity distribution agreements and **881,965 shares** available for repurchase under its repurchase program[234](index=234&type=chunk)[238](index=238&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=46&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company faces interest rate, prepayment, spread, and credit risks, with sensitivity analysis showing a 100 basis point rate increase decreases book value by 5.26% and a 25 basis point spread widening decreases it by 2.77% Estimated Change in Book Value Per Common Share Due to Interest Rate Changes | Interest Rate Change | Estimated Change in Book Value Per Common Share | | :--- | :--- | | +100 basis points | -5.26% | | +50 basis points | -1.75% | | -50 basis points | +0.53% | | -100 basis points | +0.37% | Estimated Change in Book Value Per Common Share Due to Agency MBS Spread Changes | Agency MBS Spread Change | Estimated Change in Book Value Per Common Share | | :--- | :--- | | +25 basis points | -2.77% | | +10 basis points | -1.11% | | -10 basis points | +1.11% | | -25 basis points | +2.77% | - The company's mortgage credit investments expose it to credit risk, as they are not guaranteed by a GSE or government agency, representing the risk of not receiving full principal or interest payments due to borrower default[254](index=254&type=chunk) [Item 4. Controls and Procedures](index=51&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures are **effective** as of the end of the period covered by the report[266](index=266&type=chunk) - There were no **material changes** in internal control over financial reporting during the quarter ended June 30, 2020[267](index=267&type=chunk) PART II — OTHER INFORMATION [Item 1. Legal Proceedings](index=52&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in ordinary course legal proceedings but reports no specific material cases expected to adversely affect its financial condition - The company is involved in civil lawsuits, legal proceedings, and arbitration matters considered to be in the ordinary course of business, with no assurance that they will not have a material adverse effect in the future[269](index=269&type=chunk) [Item 1A. Risk Factors](index=52&type=section&id=Item%201A.%20Risk%20Factors) A new risk factor addresses severe COVID-19 disruptions, potentially impacting investment values, prepayment rates, financing, personnel, and future dividend payments - A new risk factor has been added to address the severe disruptions caused by the COVID-19 pandemic, which may have a material adverse impact on the business[271](index=271&type=chunk) - Specific COVID-19 related risks include adverse effects on the value of investments, increased refinancing and prepayment activity, disruptions in financing operations such as increased margin calls, and potential unavailability of key personnel[272](index=272&type=chunk)[273](index=273&type=chunk)[274](index=274&type=chunk) - The Board of Directors did not declare a common stock dividend for the first and second quarters of 2020 to enhance liquidity, and future dividends are subject to uncertainty[276](index=276&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=53&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company repurchased 1,069,340 shares of Class A common stock, along with Series B and Series C Preferred Stock, during Q2 2020 Common Stock Repurchases | Period | Total Shares Purchased (Class A Common) | Average Price Paid Per Share | | :--- | :--- | :--- | | April 2020 | — | $— | | May 2020 | 22,249 | $2.46 | | June 2020 | 1,047,091 | $2.86 | | **Total Q2 2020** | **1,069,340** | **$2.85** | - In June 2020, the company repurchased **10,200 shares** of its Series B Preferred Stock at an average price of **$16.98 per share**[280](index=280&type=chunk) - In June 2020, the company repurchased **33,100 shares** of its Series C Preferred Stock at an average price of **$18.95 per share**[281](index=281&type=chunk) [Other Items (Defaults, Mine Safety, Other Info, Exhibits)](index=54&type=section&id=Other%20Items%20(Defaults%2C%20Mine%20Safety%2C%20Other%20Info%2C%20Exhibits)) The company reports no defaults on senior securities, mine safety is not applicable, and Item 6 lists exhibits including officer certifications - Item 3: No defaults upon senior securities were reported[281](index=281&type=chunk) - Item 6: A comprehensive list of exhibits filed with the report is provided, including certifications by the CEO and CFO[284](index=284&type=chunk)[286](index=286&type=chunk)[287](index=287&type=chunk)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2020 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to | --- | --- | |---------------------------------------------------------------------------------------|---------------------------------------------------- ...