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 preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒

Number of shares outstanding of each of the registrant’s classes of common stock, as of ~~October~~July 29, ~~2021:~~2022:

Note 8. Consolidation of Variable Interest Entities

The vehicles that issue the Company’s investments in securitized mortgage assets are considered VIEs. The Company is required to consolidate any VIE in which it holds a variable interest if it determines that it holds a controlling financial interest in the VIE and is, therefore, determined to be the primary beneficiary of the VIE. The Company is determined to be the primary beneficiary of a VIE in which it holds a variable interest if it both (i) holds the power to direct the activities that most significantly impact the VIE’s economic performance and (ii) has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The economic performance of the trusts that issue the Company’s investments in securitized mortgage assets is most significantly impacted by the performance of the mortgage loans that are held by the trusts. The party that is determined to have the most power to direct the loss mitigation actions that are taken with respect to delinquent or otherwise troubled mortgage loans held by the trust is, therefore, deemed to hold the most power to direct the activities that most significantly impact the trust’s economic performance. As a passive investor, the Company does not have the power to direct the loss mitigation activities of most of the trusts that have issued its securitized mortgage assets.

On September 30, 2020, the Company acquired for ~~$10,693~~$10,693 an investment that represents a majority interest in the first loss position of a securitized pool of business purpose residential mortgage loans. As majority holder of the first loss position, the Company is required to approve any material loss mitigation action proposed by the servicer with respect to a troubled loan. The Company also has the option (but not the obligation) to purchase delinquent loans from the trust. As a result of these contractual rights, the Company determined that it is the party with the most power to direct the loss mitigation activities and, therefore, the economic performance of the trust. As holder of the majority of the first loss position issued by the trust, the Company has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the trust. Accordingly, the Company determined that it is the primary beneficiary of the trust and consolidated the trust’s assets and liabilities owed to third parties onto its consolidated balance sheets.

On February 3, 2022, the Company acquired for $20,585 investments in the first loss position and the excess interest-only strip of a securitized pool of recently originated, performing “non-qualified” residential mortgage loans. The Company’s investment in the excess interest-only strip provides it with the option (but not the obligation) to purchase delinquent loans from the trust. As a result of this contractual right, the Company determined that it has the power to circumvent the loss mitigation activities that would otherwise be performed by the servicer and, therefore, is the party with the most power to impact the economic performance of the trust. As a result of its investments, the Company also has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the trust. Accordingly, the Company determined that it is the primary beneficiary of the trust and consolidated the trust’s assets and liabilities owed to third parties onto its consolidated balance sheets.

The carrying values of the assets and liabilities of the consolidated ~~VIE,~~VIEs, net of elimination entries, are as follows as of the dates indicated:


	June 30, 2022
	VIE of Business Purpose Residential Mortgage Loans			VIE of Residential Mortgage Loans			Total
Cash of consolidated VIEs	$	247		$	—		$	247
Restricted cash of consolidated VIEs (1)		13			4,636			4,649
Mortgage loans of consolidated VIEs, at fair value		4,548			220,456			225,004
Other assets of consolidated VIEs		657			744			1,401
Secured debt of consolidated VIEs, at fair value		(272	)		(205,225	)		(205,497	)
Other liabilities of consolidated VIEs		(1	)		(274	)		(275	)
Net investment in consolidated VIEs	$	5,192		$	20,337		$	25,529

September 30, 2021

December 31, 2020

Restricted cash of consolidated VIE ⁽¹⁾

$
3,267

$
11,169

Mortgage loans of consolidated VIE, at fair value

16,516

93,283

Interest receivable of consolidated VIE

67

545

Secured debt of consolidated VIE, at fair value

(7,350
)

(93,627
)
Interest payable of consolidated VIE

(52
)

(321
)
Investment in consolidated VIE

$
12,448

$
11,049

(1)

Restricted cash represents cash collected by the trust that must be used solely to satisfy the liabilities of the VIE in the month following collection.


	December 31, 2021
	VIE of Business Purpose Residential Mortgage Loans			VIE of Residential Mortgage Loans		Total
Cash of consolidated VIEs	$	2,118		$	—	$	2,118
Restricted cash of consolidated VIEs (1)		111			—		111
Mortgage loans of consolidated VIEs, at fair value		7,442			—		7,442
Other assets of consolidated VIEs		547			—		547
Secured debt of consolidated VIEs, at fair value		(508	)		—		(508	)
Other liabilities of consolidated VIEs		(2	)		—		(2	)
Net investment in consolidated VIEs	$	9,708		$	—	$	9,708

(1)

Restricted cash represents cash collected by the trust that must be used solely to satisfy the liabilities of the VIE in the month following collection.

The debt of the Company’s consolidated VIEs have recourse solely to the assets of the respective VIE; it has no recourse to the general credit of the Company.

Consolidated VIE of Business Purpose Residential Mortgage Loans

⁽¹⁾

~~Restricted cash represents cash collected by the trust that must be used solely to satisfy the liabilities of the VIE in the month following collection~~.

The pool of business purpose residential mortgage loans and the third-party held debt obligations of the consolidated VIE had aggregate unpaid principal balances of ~~$17,108~~$4,835 and ~~$7,367,~~$291, respectively, as of ~~September~~June 30, ~~2021.~~2022. The trust is contractually entitled to receive monthly interest payments on each underlying mortgage loan net of a loan-specific servicing and asset management fee that is not remitted to the trust but is, rather, retained by the servicer. As of ~~September~~June 30, ~~2021,~~2022, the weighted average net note rate to which the VIE was entitled and the weighted average coupon rate of the debt obligations of the consolidated VIE were 6.05% and 4.99%, respectively. The debt of the consolidated VIE has recourse solely to the assets of the VIE; it has no recourse to the general credit of the Company.was 6.01%.

The pool of business purpose residential mortgage loans held by the consolidated VIE consists of fixed-rate, short-term, interest-only mortgage loans (with the full amount of principal due at maturity) made to professional real estate investors and are secured by first lien positions in non-owner occupied residential real estate. The properties that secure these mortgage loans often require construction, repair or rehabilitation. The repayment of the mortgage loans is often largely based on the ability of the borrower to sell the mortgaged property or to convert the property for rental purposes and obtain refinancing in the form of a longer-term loan. Pursuant to the terms of certain of the mortgage loans, the borrower may draw upon a specified amount of additional funds as needed in order to finance construction on, or the repair or rehabilitation of, the mortgaged property (referred to as a “construction draw”). Pursuant to the terms of the securitization transaction, if the monthly principal repayments collected from the mortgage loan pool are insufficient to fund that month’s construction draws, such shortfall is to be funded by the holders of the first loss position on a pro rata basis. Any construction draws funded by holders of the first loss position accrue interest at the net note rate of the mortgage loan. The repayment of any construction draws funded by holders of the first loss position takes priority over the senior debt securities with respect to the cash flows collected from the mortgage loan pool in the following month. As of ~~September~~June 30, ~~2021,~~2022, the aggregate unfunded construction draw balance commitment attributable to the Company’s subordinate debt security investment was ~~$1,306.~~$121.

Consolidated VIE of Residential Mortgage Loans

The pool of mortgage loans and the third-party held debt obligations of the consolidated VIE had aggregate unpaid principal balances of $237,483 and $239,574, respectively, as of June 30, 2022. As of June 30, 2022, the weighted average contractual interest rates of the loans and consolidated debt held by third parties were 4.79% and 1.37%, respectively.

The pool of mortgage loans of the consolidated VIE consists of performing, first lien “non-qualified” residential mortgage loans. “Non-qualified” residential mortgage loans are loans that do not fully comply with the “ability-to-repay” rule and related guidelines of the Truth-in-Lending Act established by the Consumer Finance Protection Bureau pursuant to the authority granted under the Dodd-Frank Act. A “qualified” residential mortgage loan (i.e., a residential mortgage loan that fully complies with the “ability-to-repay” rule of the Truth-in-Lending Act) must meet certain debt-to-income ratio requirements and cannot have certain features, such as an interest-only period, negative amortization, balloon payments or terms longer than 30 years. Qualified mortgage loans have limited upfront fees and points and, generally, cannot have prepayment penalties except for limited circumstances. Lenders of qualified mortgage loans are afforded certain legal protections not available to non-qualified mortgage loan lenders.

Accounting for Consolidated VIEs

The Company has elected to account for the mortgage loans and debt of ~~the~~its consolidated ~~VIE~~VIEs at fair value with changes in fair value that are not attributed to interest income or interest expense, respectively, recognized as a component of “investment and derivative gain (loss), net” in the accompanying consolidated statements of comprehensive ~~income~~income..

As described in further detail in “Note 2. Summary of Significant Accounting Policies,” the Company recognizes interest income for the mortgage loans of ~~the~~its consolidated ~~VIE~~VIEs by applying the “interest method” permitted by GAAP, whereby the premium or discount

recognized at the initial recognition of each loan is amortized or accreted as an adjustment to contractual interest income accrued at the loan’s ~~stated~~contractual interest rate. The Company ceases the accrual of interest income for a mortgage loan (i.e., places the loan in non-accrual status) when it believes collectability of principal and interest in full is not reasonably assured, which generally occurs when a loan is three or more monthly payments past due, unless the loan is well secured and in the process of collection based upon an individual loan assessment. Upon placing a loan in non-accrual status, any previously accrued but uncollected interest is derecognized and a corresponding reduction to current period interest income is recorded.

The following table presents information about the accrual status of the ~~mortgage~~ loans of the Company’s consolidated VIE of business purpose residential mortgage loans as of ~~September~~June 30, ~~2021:~~2022:


	Aggregate Fair Value		Aggregate Unpaid Principal Balance		Difference			Aggregate Fair Value		Aggregate Unpaid Principal Balance		Difference
Less than 90 days past due and in accrual status	$	9,516	$	9,857	$	(341	)	$	151	$	151	$	—
90 days or more past due and in non-accrual status		7,000		7,251		(251	)		4,397		4,684		(287	)
Total mortgage loans of consolidated VIE	$	16,516	$	17,108	$	(592	)	$	4,548	$	4,835	$	(287	)

The following table presents information about the accrual status of the loans of the Company’s consolidated VIE of residential mortgage loans as of June 30, 2022:


	Aggregate Fair Value		Aggregate Unpaid Principal Balance		Difference
Less than 90 days past due and in accrual status	$	219,118	$	236,145	$	(17,027	)
90 days or more past due and in non-accrual status		1,338		1,338		—
Total mortgage loans of consolidated VIE	$	220,456	$	237,483	$	(17,027	)

Note 9. Borrowings

Repurchase Agreements

The Company finances the purchase of mortgage investments through repurchase agreements, which are accounted for as collateralized borrowing arrangements. In a repurchase transaction, the Company sells a mortgage investment to a counterparty under a master repurchase agreement in exchange for cash and concurrently agrees to repurchase the same asset at a future date in an amount equal to the cash initially exchanged plus an agreed-upon amount of interest. Mortgage investments sold under agreements to repurchase remain on the Company’s consolidated balance sheets because the Company maintains effective control over such assets throughout 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 mortgage investment. The difference between the proceeds received by the Company upon the

initial transfer of the mortgage investment and the contractually agreed-upon repurchase price is recognized as interest expense ratably over the term of the repurchase arrangement.

Amounts borrowed pursuant to repurchase agreements are equal in value to a specified percentage of the fair value of the pledged collateral. The Company retains beneficial ownership of the pledged collateral throughout the term of the repurchase agreement. The counterparty to the repurchase agreements may require that the Company pledge additional securities or cash as additional collateral to secure borrowings when the value of the collateral declines.

The Company’s MBS repurchase agreement arrangements generally carry a fixed rate of interest and are short-term in nature with contract durations generally ranging from 30 to 60 days, but may be as short as one day or as long as one year. The Company’s mortgage loan repurchase agreement arrangement has a maturity date of ~~August 25, 2022~~March 17, 2023 and an interest rate that resets monthly at a rate equal to ~~one-month LIBOR~~SOFR plus ~~2.50%~~2.61%. Under the terms of the Company’s mortgage loan repurchase agreement, the Company may request extensions of the maturity date of the agreement for up to 364 days, subject to the lender’s approval.

~~As of September 30, 2021 and December 31, 2020, 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:


	June 30, 2022			December 31, 2021
Agency MBS repurchase financing:
Repurchase agreements outstanding	$	224,566		$	425,836
Agency MBS collateral, at fair value (1)		237,373			447,979
Net amount (2)		12,807			22,143
Weighted-average rate		1.48	%		0.14	%
Weighted-average term to maturity	14.0 days			13.0 days
Non-agency MBS repurchase financing:
Repurchase agreements outstanding	$	84,788		$	—
MBS collateral, at fair value		99,901			—
Net amount (2)		15,113			—
Weighted-average rate		2.81	%
Weighted-average term to maturity	17.0 days
Mortgage loans repurchase financing:
Repurchase agreements outstanding	$	20,640		$	20,788
Mortgage loans collateral, at fair value		29,484			29,697
Net amount (2)		8,844			8,909
Weighted-average rate		3.77	%		2.60	%
Weighted-average term to maturity	260.0 days			319.0 days
Total mortgage investments repurchase financing:
Repurchase agreements outstanding	$	329,994		$	446,624
Mortgage investments collateral, at fair value (1)		366,758			477,676
Net amount (2)		36,764			31,052
Weighted-average rate		1.96	%		0.25	%
Weighted-average term to maturity	30.2 days			27.2 days

September 30, 2021

December 31, 2020

Agency MBS repurchase financing:

Repurchase agreements outstanding

$
533,123

$
623,712

Agency MBS collateral, at fair value

558,543

656,154

Net amount ⁽¹⁾

25,420

32,442

Weighted-average rate

0.12
%

0.21
%
Weighted-average term to maturity

14.0 days

14.0 days

Mortgage loans repurchase financing:

Repurchase agreements outstanding

$
20,860

$
31,500

Mortgage loans collateral, at fair value

29,800

45,000

Net amount ⁽¹⁾

8,940

13,500

Weighted-average rate

2.59
%

3.00
%
Weighted-average term to maturity

329.0 days

315.0 days

Total mortgage investments repurchase financing:

Repurchase agreements outstanding

$
553,983

$
655,212

Mortgage investments collateral, at fair value

588,343

701,154

Net amount ⁽¹⁾

34,360

45,942

Weighted-average rate

0.21
%

0.34
%
Weighted-average term to maturity

25.9 days

28.5 days

(1)

As of December 31, 2021, includes $28,219 at sale price of unsettled agency MBS sale commitments which is included in the line item “sold securities receivable” in the accompanying consolidated balance sheets.

(2)

Net amount represents the value of collateral in excess of corresponding repurchase obligation. The amount of collateral at-risk is limited to the outstanding repurchase obligation and not the entire collateral balance.

⁽¹⁾	Net amount represents the value of collateral in excess of corresponding repurchase obligation. The amount of collateral at-risk is limited to the outstanding repurchase obligation and not the entire collateral balance.

The following table provides information regarding the Company’s outstanding repurchase agreement borrowings during the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020:~~2021:


	September 30, 2021			September 30, 2020			June 30, 2022			June 30, 2021
Weighted-average outstanding balance during the three months ended	$	599,224		$	412,071		$	282,725		$	652,624
Weighted-average rate during the three months ended		0.20	%		0.45	%		1.07	%		0.24	%
Weighted-average outstanding balance during the nine months ended	$	601,897		$	1,378,097
Weighted-average rate during the nine months ended		0.27	%		1.55	%
Weighted-average outstanding balance during the six months ended							$	312,544		$	603,233
Weighted-average rate during the six months ended								0.66	%		0.29	%

As of June 30, 2022, the Company had an amount at risk under repurchase agreements with Credit Suisse Securities (USA) LLC and affiliates that was 11.2% of shareholders' equity that had a weighted average maturity of 65 days. The amount at risk is calculated as the value of the collateral in excess of the corresponding repurchase obligation.

Long-Term Unsecured Debt

As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company had ~~$85,901~~$86,199 and ~~$73,027,~~$85,994, respectively, of outstanding long-term unsecured debentures, net of unamortized debt issuance costs of ~~$1,780~~$1,482 and ~~$732,~~$1,687, respectively. The Company’s long-term unsecured debentures consisted of the following as of the dates indicated:

September 30, 2021

December 31, 2020

Senior
Notes Due 2025

Senior
Notes Due 2026

Trust
Preferred Debt

Senior
Notes Due 2025

Senior
Notes Due 2023

Trust
Preferred Debt

Outstanding Principal

$
34,931

$
37,750

$
15,000

$
34,931

$
23,828

$
15,000

Annual Interest Rate

6.75
%

6.000
%

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
%

6.000
%

2.88
%

6.75
%

6.625
%

2.99
%
Maturity

March 15, 2025

August 1, 2026

2033 - 2035

March 15, 2025

May 1, 2023

2033 - 2035


	June 30, 2022									December 31, 2021
	Senior Notes Due 2025			Senior Notes Due 2026			Trust Preferred Debt			Senior Notes Due 2025			Senior Notes Due 2026			Trust Preferred Debt
Outstanding Principal	$	34,931		$	37,750		$	15,000		$	34,931		$	37,750		$	15,000
Annual Interest Rate		6.75	%		6.000	%	LIBOR+ 2.25 - 3.00 %				6.75	%		6.000	%	LIBOR+ 2.25 - 3.00 %
Interest Payment Frequency	Quarterly			Quarterly			Quarterly			Quarterly			Quarterly			Quarterly
Weighted- Average Interest Rate		6.75	%		6.000	%		3.79	%		6.75	%		6.000	%		2.87	%
Maturity	March 15, 2025			August 1, 2026			2033 - 2035			March 15, 2025			August 1, 2026			2033 - 2035

During the nine months ended September 30, 2021, the Company repurchased $7 in principal balance of Senior Notes due 2023 for a purchase price of $7. There were 0 repurchases of outstanding long-term unsecured debentures during the three months ended September 30, 2021. During the three and nine months ended September 30, 2020, the Company repurchased $820 and $1,066 in principal balance of Senior Notes due 2023 for a purchase price of $782 and $1,012, respectively. During the three and nine months ended September 30, 2020, the Company repurchased $153 and $331 in principal balance of Senior Notes due 2025 for a purchase price of $140 and $296, respectively.

On July 15, 2021, the Company completed a public offering of ~~$37,750~~$37,750 of ~~6.00%~~6.000% Senior Notes due 2026 and received net proceeds of ~~$36,570~~$36,570 after deducting underwriter discounts. On August 6, 2021, the Company redeemed all ~~$23,821~~$23,821 in principal amount of its outstanding Senior Notes due 2023 at a redemption price of ~~100%~~100% of the principal amount plus unpaid interest thereon.

The Senior Notes due 2025 and the Senior Notes due 2026 are publicly traded on the New York Stock Exchange under the ticker symbols “AIC” and “AAIN,” respectively. The Senior Notes due 2025 and Trust Preferred Debt may be redeemed in whole or in part at any time and from time to time at the Company’s option at a redemption price equal to the principal amount plus accrued and unpaid interest. The Senior Notes due 2026 may be redeemed in whole or in part at any time and from time to time at the Company’s option on or after August 1, 2023 at a redemption price equal to the principal amount plus accrued and unpaid interest. The indenture governing the Senior Notes contains certain covenants, including limitations on the Company’s ability to merge or consolidate with other entities or sell or otherwise dispose of all or substantially all of the Company’s assets.

Long-Term Debt Secured ~~Debt~~by Single-family Properties

On September 28, 2021, McLean SFR Investment, LLC (“McLean SFR”), a wholly-owned subsidiary of Arlington Asset, entered into a loan agreement with a third-party lender to fund McLean SFR’s purchases of SFR properties. Under the terms of the loan agreement, loan advances may be drawn up to ~~74%~~74% of the fair value of eligible SFR properties up to a maximum loan amount of ~~$150,000.~~$150,000. Advances under the loan agreement may be drawn during the advance period, which ends on the earlier of the date the outstanding principal balance equals the maximum loan amount or March 28, 2023. The outstanding principal balance is due on October 9, 2026 and advances under the loan agreement bear interest at a fixed rate of ~~2.76%~~2.76%. During the advance period, McLean SFR is subject to a commitment fee on the unfunded commitment if the outstanding loan balance is below certain thresholds. As of ~~September~~June 30, 2022 and December 31, 2021, ~~there were 0 advances~~the outstanding ~~under the loan agreement.~~balance was $122,770 and $39,178, respectively, net of unamortized debt issuance costs of $237 and $264, respectively.

Through September 28, 2024, the outstanding principal balance may be prepaid in an amount equal to the excess of (i) the sum of the present value of all remaining scheduled payments of principal and interest on the principal amount of the loan being prepaid discounted using a U.S. Treasury rate over (ii) the outstanding principal balance of the loan. Subsequent to September 28, 2024, the outstanding principal balance may be prepaid in an amount equal to the outstanding principal balance plus accrued interest. On March 25, 2022, McLean SFR entered into a waiver agreement with the lender that would waive any prepayment fee determined in accordance with the prior sentence on the portion of outstanding loan balance prepaid with the sale proceeds from the potential sale of

376 SFR properties if the sale transaction is consummated by August 22, 2022 in exchange for a one-time waiver fee of 0.80% of the outstanding principal balance prepaid (See Footnote 7 - Investments in SFR Properties).

The loan is secured by a first priority interest in all the assets of McLean SFR and a first priority pledge of the equity interest of McLean SFR. If the outstanding principal balance of the loan is greater than 74% of the fair value of the eligible collateral, McLean SFR is required to either pledge additional collateral or prepay the loan in an amount so that the outstanding principal balance does not exceed 74% of the fair value of the eligible collateral. Under the terms of the loan agreement, if McLean SFR does not maintain a minimum debt service coverage ratio for a specified time period, then all available cash of McLean SFR will be held as additional collateral for the loan amount until the minimum debt service coverage ratio is met. The obligations under the loan agreement may become recourse to Arlington Asset upon the occurrence of certain enumerated acts committed by McLean SFR or Arlington Asset. The loan agreement contains a minimum net worth financial covenant of Arlington Asset.

Note 10. Derivative Instruments

In the normal course of its operations, the Company is a party to financial instruments that are accounted for as derivative instruments. Derivative instruments are recorded at fair value as either ~~“derivative~~“other assets” or ~~“derivative~~“other liabilities” in the consolidated balance sheets, with all periodic changes in fair value reflected as a component of “investment and derivative gain (loss), net” in the consolidated statements of comprehensive income. Cash receipts or payments related to derivative instruments are classified as investing activities within the consolidated statements of cash flows.

Types and Uses of Derivative Instruments

Interest Rate Hedging Instruments

The Company is party to interest rate hedging instruments that are intended to economically hedge changes, attributable to changes in benchmark interest rates, in certain MBS fair values and future interest cash flows on the Company’s short-term financing arrangements. Interest rate hedging instruments may include centrally cleared interest rate swaps, exchange-traded instruments, such as U.S. Treasury note futures, Eurodollar futures, interest rate swap futures and options on futures, and non-exchange-traded

instruments such as options on agency MBS. While the Company uses its interest rate hedging instruments to economically 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 hedging instruments at least on a daily basis based upon daily changes in fair value as measured by the Chicago Mercantile Exchange (“CME”), the central clearinghouse through which those instruments are cleared. In addition, the CME requires market participants to deposit and maintain an “initial margin” amount which is determined by the CME and is generally intended to be set at a level sufficient to protect the CME from the maximum estimated single-day price movement in that market participant’s ~~contracts~~.contracts. However, futures commission merchants may require “initial margin” in excess of the CME’s ~~requirement~~.requirement. Receivables recognized for the right to reclaim cash initial margin posted in respect of interest rate hedging instruments are included in the line item “deposits” in the accompanying consolidated balance sheets.

The daily exchange of variation margin associated with a centrally cleared or exchange-traded hedging instrument is legally characterized as the daily settlement of the instrument itself, as opposed to a pledge of collateral. Accordingly, the Company accounts for the daily receipt or payment of variation margin associated with its interest rate swaps and futures as a direct reduction to the carrying value of the derivative asset or liability, respectively. The carrying amount of interest rate swaps and futures reflected in the Company’s consolidated balance sheets is equal to the unsettled fair value of such instruments; because variation margin is exchanged on a one-day lag, the unsettled fair value of such instruments generally represents the change 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 hedging instruments that are used for interest rate risk management, the Company is a party to derivative instruments that economically serve as investments, such as forward commitments to purchase fixed-rate “pass-through” agency MBS on a non-specified pool basis, which are known as to-be-announced (“TBA”) securities. A TBA security is a forward commitment for the purchase or sale of a fixed-rate agency MBS at a predetermined price, face amount, issuer, coupon, and stated maturity for settlement on an agreed upon future date. The specific agency MBS that will be delivered to satisfy the TBA trade is not known at the inception of the trade. The specific agency MBS to be delivered is determined 48 hours prior to the settlement date. The Company accounts for TBA securities as derivative instruments because the Company cannot assert that it is probable at inception and throughout the term of an individual TBA commitment that its settlement will result in physical delivery of the underlying agency MBS, or the individual TBA commitment will not settle in the shortest time period possible.

The Company’s agency MBS investment portfolio ~~includes~~may include net purchase (or “net long”) positions in TBA securities, which are primarily the result of executing 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 by entering into an offsetting sale with the same counterparty prior to the settlement date, net settling the “paired-off” positions in cash, and contemporaneously entering, with the same counterparty, another forward purchase of a TBA agency MBS of the same characteristics for a later settlement date. TBA securities purchased for a forward settlement month are generally priced 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,” reflects compensation for the net interest income (interest income less financing costs) that is foregone as a result of relinquishing beneficial ownership of the MBS for 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 to create the economic experience of investing in an agency MBS, financed with a repurchase agreement, over a period of time. Forward purchases and sales of TBA securities are accounted for as derivative instruments in the Company’s financial statements. Accordingly, dollar roll income is recognized as a component of “investment and derivative 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 net sale (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’s investments in agency MBS to changes in interest rates.

In addition to TBA transactions, the Company may, from time to time, enter into commitments to purchase or sell specified agency MBS that do not qualify as regular-way security trades. Such commitments are also accounted for as derivative instruments.

Under the terms of commitments to purchase or sell TBAs or specified agency MBS, the daily exchange of variation margin may occur based on changes in the fair value of the underlying agency MBS if a party to the transaction demands it. Receivables recognized for the right to reclaim cash collateral posted by the Company in respect of agency MBS purchase or sale commitments is included in the line item “deposits” in the accompanying consolidated balance sheets. Liabilities recognized for the obligation to

return cash collateral received by the Company in respect of agency MBS purchase or sale commitments is included in the line item “other liabilities” in the accompanying consolidated balance sheets.

Derivative Instrument Population and Fair Value

The following table presents the fair value of the Company’s derivative instruments as of the dates indicated:


	September 30, 2021					December 31, 2020					June 30, 2022					December 31, 2021
	Assets		Liabilities			Assets		Liabilities			Assets		Liabilities			Assets		Liabilities
Interest rate swaps	$	0	$	(135	)	$	0	$	(147	)	$	0	$	(1,008	)	$	0	$	(107	)
10-year U.S. Treasury note futures												0		0			16		0
Options on U.S. Treasury note futures												0		0			4		0
TBA commitments		2,004		(2,885	)		258		(74	)		1,216		(879	)		230		(121	)
Total	$	2,004	$	(3,020	)	$	258	$	(221	)	$	1,216	$	(1,887	)	$	250	$	(228	)

Interest Rate Swaps

The Company’s LIBOR based interest rate swap agreements represent agreements to make semiannual interest payments based upon a fixed interest rate and receive quarterly variable interest payments based upon the prevailing three-month LIBOR as of the preceding reset date. The Company’s Secured Overnight Financing Rate (“SOFR”) based interest rate swap agreements represent

agreements to make annual interest payments based upon a fixed interest rate and receive annual variable interest payments based upon the daily SOFR over the preceding annual period.

~~The~~The following table presents information about the Company’s interest rate swap agreements that were in effect as of ~~September~~June 30, ~~2021:~~2022:


			Weighted-average:
	Notional Amount		Fixed Pay Rate			Variable Receive Rate			Net Receive (Pay) Rate			Remaining Life (Years)		Fair Value
Years to maturity:
Less than 3 years	$	130,000		1.32	%		1.22	%		(0.10	)%		1.5	$	(279	)
3 to less than 10 years		100,000		1.68	%		1.30	%		(0.38	)%		5.4		(729	)
Total / weighted-average	$	230,000		1.48	%		1.25	%		(0.23	)%		3.2	$	(1,008	)

Weighted-average:

Notional Amount

Fixed Pay Rate

Variable Receive Rate

Net Receive (Pay) Rate

Remaining Life (Years)

Fair Value

Years to maturity:

Less than 3 years

$
100,000

0.11
%

0.04
%

(0.07
)%

2.1

$
(21
)
3 to less than 10 years

115,000

1.09
%

0.10
%

(0.99
)%

9.3

(114
)
Total / weighted-average

$
215,000

0.64
%

0.07
%

(0.57
)%

6.0

$
(135
)

The following table presents information about the Company’s interest rate swap agreements that were in effect as of December 31, ~~2020:~~2021:


			Weighted-average:																Weighted-average:
	Notional Amount		Fixed Pay Rate			Variable Receive Rate			Net Receive (Pay) Rate			Remaining Life (Years)		Fair Value			Notional Amount		Fixed Pay Rate			Variable Receive Rate			Net Receive (Pay) Rate			Remaining Life (Years)		Fair Value
Years to maturity:
Less than 3 years	$	200,000		0.10	%		0.06	%		(0.04	)%		2.9	$	(40	)	$	50,000		0.71	%		0.13	%		(0.58	)%		1.8	$	(5	)
3 to less than 10 years		75,000		0.74	%		0.22	%		(0.52	)%		9.5		(107	)		100,000		0.90	%		0.13	%		(0.77	)%		6.6		(102	)
Total / weighted-average	$	275,000		0.28	%		0.10	%		(0.18	)%		4.7	$	(147	)	$	150,000		0.84	%		0.13	%		(0.71	)%		5.0	$	(107	)

U.S. Treasury Note Futures

The Company may purchase (“long”) or sell (“short”) exchange-traded U.S. Treasury note futures with the objective of economically hedging a portion of its interest rate risk. Upon the maturity date of these futures contracts, the Company has the option to either net settle each contract in cash in an amount equal to the difference between the then-current fair value of the underlying U.S. Treasury note and the contractual sale price inherent to the futures contract, or to physically settle the contract by purchasing or delivering the underlying U.S. Treasury ~~note~~note..

As of ~~September~~June 30, ~~2021 and December 31, 2020,~~2022, the Company had 0 outstanding positions of U.S. Treasury note futures. As of December 31, 2021, the Company held long positions of 10-year U.S. Treasury note futures with an aggregate notional amount of $25,000 with a maturity date in March 2022.

Options on U.S. Treasury Note Futures

The Company may purchase or sell exchange-traded options on U.S. Treasury note futures contracts with the objective of economically hedging a portion of the sensitivity of its investments in agency MBS to significant changes in interest rates. The

Company may purchase put or call options which provide the Company with the right to sell to a counterparty or purchase from a counterparty U.S. Treasury note futures, and the Company may also write put or call options that provide a counterparty with the option to sell to the Company or buy from the Company U.S. Treasury note futures. The options may be exercised at any time prior to their expiry, and if exercised, may be net settled in cash or through physical receipt or delivery of the underlying futures contracts.

As of ~~September~~June 30, ~~2021 and December 31, 2020,~~2022, the Company had 0 outstanding options on U.S. Treasury note futures contracts.

Information about the Company’s outstanding options on 10-year U.S. Treasury note futures contracts as of December 31, 2021 is as follows:


	Notional Amount Long/(Short)		Weighted-average Strike Price		Implied Strike Rate (1)			Net Fair Value
Purchased call options:
January 2022 expiration	$	25,000		134.5		1.00	%	$	4

(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. Treasury note futures contract.

TBA Commitments

The following ~~table presents~~tables present information about the Company’s TBA commitments as of the dates indicated:

September 30, 2021

Notional Amount:
Purchase (Sale)
Commitment

Contractual Forward Price

Market Price

Fair Value

1.5% 30-year MBS purchase commitments

$
175,000

$
171,443

$
169,967

$
(1,476
)
1.5% 30-year MBS sale commitments

(175,000
)

(170,865
)

(169,967
)

898

2.0% 30-year MBS purchase commitments

250,000

251,545

250,938

(607
)
2.0% 30-year MBS sale commitments

(125,000
)

(126,086
)

(125,469
)

617

2.5% 30-year MBS sale commitments

(100,000
)

(102,906
)

(103,219
)

(313
)
Total TBA commitments, net

$
25,000

$
23,131

$
22,250

$
(881
)


	June 30, 2022
	Notional Amount: Net Purchase (Sale) Commitment			Contractual Forward Price			Market Price			Fair Value
2.5% 30-year MBS sale commitments	$	(25,000	)	$	(22,649	)	$	(22,472	)	$	177
3.0% 30-year MBS sale commitments		(30,000	)		(27,970	)		(27,932	)		38
3.5% 30-year MBS sale commitments		(100,000	)		(95,486	)		(96,172	)		(686	)
4.5% 30-year MBS purchase commitments		50,000			50,121			50,195			74
4.5% 30-year MBS sale commitments		(50,000	)		(50,929	)		(50,195	)		734
Total TBA commitments, net	$	(155,000	)	$	(146,913	)	$	(146,576	)	$	337


	December 31, 2021
	Notional Amount: Net Purchase (Sale) Commitment			Contractual Forward Price			Market Price			Fair Value
2.5% 30-year MBS purchase commitments	$	225,000		$	229,043		$	229,148		$	105
2.5% 30-year MBS sale commitments		(225,000	)		(229,152	)		(229,148	)		4
Total TBA commitments, net	$	0		$	(109	)	$	0		$	109

December 31, 2020

Notional Amount:
Purchase (Sale)
Commitment

Contractual Forward Price

Market Price

Fair Value

1.5% 30-year MBS purchase commitments

$
50,000

$
50,281

$
50,539

$
258

1.5% 30-year MBS sale commitments

(50,000
)

(50,465
)

(50,539
)

(74
)
Total TBA commitments, net

$
0

$
(184
)

$
0

$
184

Derivative Instrument Gains and Losses

The following tables provide information about the derivative gains and losses recognized within the periods indicated:


	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Interest rate derivatives:
Interest rate swaps:
Net interest expense (1)	$	(282	)	$	(1,187	)	$	(573	)	$	(1,897	)
Unrealized gains (losses), net		3,231			(13,517	)		6,697			7,548
Gains (losses) realized upon early termination, net		288			(1,258	)		3,449			(1,271	)
Total interest rate swap gains (losses), net		3,237			(15,962	)		9,573			4,380
U.S. Treasury note futures, net		0			91			(782	)		2,710
Options on U.S. Treasury note futures, net		0			0			(4	)		(20	)
Total interest rate derivative gains (losses), net		3,237			(15,871	)		8,787			7,070
TBA commitments:
TBA dollar roll income (2)		280			1,778			1,103			2,614
Other losses on TBA commitments, net		(263	)		(890	)		(4,969	)		(10,122	)
Total gains (losses) on TBA commitments, net		17			888			(3,866	)		(7,508	)
Total derivative gains (losses), net	$	3,254		$	(14,983	)	$	4,921		$	(438	)

Three Months Ended September 30,

Nine Months Ended September 30,

2021

2020

2021

2020

Interest rate derivatives:

Interest rate swaps:

Net interest (expense) income ⁽¹⁾
$
(379
)

$
(23
)

$
(2,276
)

$
563

Unrealized (losses) gains, net

(3,951
)

299

3,597

14,611

Gains (losses) realized upon early termination, net

1,149

0

(122
)

(118,893
)
Total interest rate swap (losses) gains, net

(3,181
)

276

1,199

(103,719
)
U.S. Treasury note futures, net

872

0

3,582

(3,071
)
Options on U.S. Treasury note futures, net

0

0

(20
)

0

Total interest rate derivative (losses) gains, net

(2,309
)

276

4,761

(106,790
)
TBA commitments:

TBA dollar roll income ⁽²⁾

1,064

319

3,678

594

Other (losses) gains on TBA commitments, net

(2,082
)

(108
)

(12,204
)

4,726

Total (losses) gains on TBA commitments, net

(1,018
)

211

(8,526
)

5,320

Other derivatives

0

0

0

(1,040
)
Total derivative (losses) gains, net
$
(3,327
)

$
487

$
(3,765
)

$
(102,510
)
(1)

Represents the periodic net interest settlement incurred during the period (often referred to as “net interest carry”). Also includes “price alignment interest” income earned or expense incurred on cumulative variation margin paid or received, respectively, associated with centrally cleared interest rate swap agreements.

(2)

Represents the price discount of forward-settling TBA purchases relative to a contemporaneously executed “spot” TBA sale, which economically equates 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 of the forward-settling purchase.

⁽¹⁾

⁽²⁾

Derivative Instrument Activity

The following tables summarize the volume of activity, in terms of notional amount, related to derivative instruments for the periods indicated:

For the Three Months Ended September 30, 2021

Beginning of
Period

Additions

Scheduled
Settlements

Early
Terminations

End of Period

Interest rate swaps

$
525,000

$
0

$
0

$
(310,000
)

$
215,000

10-year U.S. Treasury note futures

45,000

0

(45,000
)

0

0

TBA purchase (sale) commitments, net

0

1,125,000

(1,100,000
)

0

25,000


	For the Three Months Ended June 30, 2022
	Beginning of Period		Additions		Scheduled Settlements			Early Terminations			End of Period
Interest rate swaps	$	175,000	$	75,000	$	—		$	(20,000	)	$	230,000
TBA commitments, net		—		430,000		(275,000	)		—			155,000


	For the Three Months Ended June 30, 2021
	Beginning of Period		Additions		Scheduled Settlements			Early Terminations			End of Period
Interest rate swaps	$	675,000	$	—	$	—		$	(150,000	)	$	525,000
10-year U.S. Treasury note futures		—		165,000		(120,000	)		—			45,000
Purchased call options on 10-year U.S. Treasury note futures		65,200		—		(65,200	)		—			—
TBA commitments, net		100,000		450,000		(550,000	)		—			—


	For the Six Months Ended June 30, 2022
	Beginning of Period		Additions		Scheduled Settlements			Early Terminations			End of Period
Interest rate swaps	$	150,000	$	145,000	$	—		$	(65,000	)	$	230,000
10-year U.S. Treasury note futures		25,000		50,000		(50,000	)		(25,000	)		—
Purchased call options on 10-year U.S. Treasury note futures		25,000		—		(25,000	)		—			—
TBA commitments, net		—		755,000		(600,000	)		—			155,000


	For the Six Months Ended June 30, 2021
	Beginning of Period		Additions		Scheduled Settlements			Early Terminations			End of Period
Interest rate swaps	$	275,000	$	450,000	$	—		$	(200,000	)	$	525,000
2-year U.S. Treasury note futures		—		50,000		(50,000	)		—			—
10-year U.S. Treasury note futures		—		540,100		(320,000	)		(175,100	)		45,000
Purchased call options on 10-year U.S. Treasury note futures		—		65,200		(65,200	)		—			—
TBA commitments, net		—		1,365,000		(1,365,000	)		—			—

For the Three Months Ended September 30, 2020

Beginning of
Period

Additions

Scheduled Settlements

Early
Terminations

End of Period

Interest rate swaps

$
50,000

$
0

$
0

$
0

$
50,000

TBA purchase (sale) commitments, net

0

200,000

(200,000
)

0

0

For the Nine Months Ended September 30, 2021

Beginning of
Period

Additions

Scheduled
Settlements

Early
Terminations

End of Period

Interest rate swaps

$
275,000

$
450,000

$
0

$
(510,000
)

$
215,000

2-year U.S. Treasury note futures

0

50,000

(50,000
)

0

0

10-year U.S. Treasury note futures

0

540,100

(365,000
)

(175,100
)

0

Purchased call options on 10-year U.S.
Treasury note futures

0

65,200

(65,200
)

0

0

TBA purchase (sale) commitments, net

0

2,490,000

(2,465,000
)

0

25,000

For the Nine Months Ended September 30, 2020

Beginning of
Period

Additions

Scheduled Settlements

Early
Terminations

End of Period

Interest rate swaps

$
2,985,000

$
50,000

$
(100,000
)

$
(2,885,000
)

$
50,000

2-year U.S. Treasury note futures

0

1,150,000

0

(1,150,000
)

0

10-year U.S. Treasury note futures

0

765,000

0

(765,000
)

0

TBA purchase (sale) commitments, net

0

375,000

(375,000
)

0

0

Put options on S&P 500 ETF

0

1,850

(1,850
)

0

0

Cash Collateral Posted and Received for Derivative and Other Financial Instruments

The following table presents information about the cash collateral posted by the Company in respect of its derivative and other financial instruments, which is included in the line item ~~“deposits, net”~~“deposits” in the accompanying consolidated balance sheets, for the dates indicated:


	June 30, 2022		December 31, 2021
Cash collateral posted for:
Interest rate swaps (cash initial margin)	$	4,084	$	4,174
U.S. Treasury note futures (cash initial margin)		0		375
Repurchase agreements		539		0
Total cash collateral posted, net	$	4,623	$	4,549

September 30, 2021

December 31, 2020

Cash collateral posted for:

Interest rate swaps (cash initial margin)

$
5,384

$
6,306

TBA commitments, net

730

0

Total cash collateral posted, net

$
6,114

$
6,306

Note 11. Offsetting of Financial Assets and Liabilities

The agreements that govern certain of the Company’s derivative instruments and collateralized short-term financing arrangements provide for a right of setoff in the event of default or bankruptcy with respect to either party to such transactions. The Company presents derivative assets and liabilities as well as 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 line item “deposits” in the accompanying consolidated balance sheets.

The daily exchange of variation margin associated with a centrally cleared or exchange-traded derivative instrument is legally characterized as the daily settlement of the derivative instrument itself, as opposed to a pledge of collateral. Accordingly, the

Company accounts for the daily receipt or payment of variation margin associated with its interest rate swaps and futures as a direct reduction to the carrying value of derivative asset or liability, respectively. The carrying amount of interest rate swaps and futures reflected in the Company’s consolidated balance sheets is equal to the unsettled fair value of such instruments; because variation margin is exchanged on a one-day lag, the unsettled fair value of such instruments generally represents the change 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 September 30, 2021														As of June 30, 2022
	Gross Amount Recognized		Amount Offset in the Consolidated Balance Sheets		Net Amount Presented in the Consolidated Balance Sheets		Gross Amount Not Offset in the Consolidated Balance Sheets						Net Amount		Gross Amount Recognized		Amount Offset in the Consolidated Balance Sheets		Net Amount Presented in the Consolidated Balance Sheets		Gross Amount Not Offset in the Consolidated Balance Sheets						Net Amount
							Financial Instruments ⁽¹⁾			Cash Collateral ⁽²⁾											Financial Instruments (1)			Cash Collateral (2)
Assets:
Derivative instruments:
TBA commitments	$	2,004	$	0	$	2,004	$	(2,004	)	$	0		$	0	$	1,216	$	0	$	1,216	$	(879	)	$	0		$	337
Total derivative instruments		2,004		0		2,004		(2,004	)		0			0		1,216		0		1,216		(879	)		0			337
Total assets	$	2,004	$	0	$	2,004	$	(2,004	)	$	0		$	0	$	1,216	$	0	$	1,216	$	(879	)	$	0		$	337
Liabilities:
Derivative instruments:
Interest rate swaps	$	135	$	0	$	135	$	0		$	(135	)	$	0	$	1,008	$	0	$	1,008	$	0		$	(1,008	)	$	0
TBA commitments		2,885		0		2,885		(2,004	)		(730	)		151		879		0		879		(879	)		0			0
Total derivative instruments		3,020		0		3,020		(2,004	)		(865	)		151		1,887		0		1,887		(879	)		(1,008	)		0
Repurchase agreements		553,983		0		553,983		(553,983	)		0			0		329,994		0		329,994		(329,994	)		0			0
Total liabilities	$	557,003	$	0	$	557,003	$	(555,987	)	$	(865	)	$	151	$	331,881	$	0	$	331,881	$	(330,873	)	$	(1,008	)	$	0


	As of December 31, 2021
	Gross Amount Recognized		Amount Offset in the Consolidated Balance Sheets		Net Amount Presented in the Consolidated Balance Sheets		Gross Amount Not Offset in the Consolidated Balance Sheets						Net Amount
							Financial Instruments (1)			Cash Collateral (2)
Assets:
Derivative instruments:
TBA commitments	$	230	$	0	$	230	$	(105	)	$	0		$	125
10-year U.S. Treasury note futures		16		0		16		0			0			16
Options on U.S. Treasury note futures		4		0		4		0			0			4
Total derivative instruments		250		0		250		(105	)		0			145
Total assets	$	250	$	0	$	250	$	(105	)	$	0		$	145
Liabilities:
Derivative instruments:
Interest rate swaps	$	107	$	0	$	107	$	0		$	(107	)	$	0
TBA commitments		121		0		121		(105	)		0			16
Total derivative instruments		228		0		228		(105	)		(107	)		16
Repurchase agreements		446,624		0		446,624		(446,624	)		0			0
Total liabilities	$	446,852	$	0	$	446,852	$	(446,729	)	$	(107	)	$	16

As of December 31, 2020

Gross Amount
Recognized

Amount Offset
in the
Consolidated
Balance Sheets

Net Amount
Presented in the
Consolidated
Balance Sheets

Gross Amount Not Offset in the
Consolidated Balance Sheets

Net
Amount

Financial
Instruments ⁽¹⁾

Cash
Collateral ⁽²⁾

Assets:

Derivative instruments:

TBA commitments

$
258

$
0

$
258

$
(74
)

$
0

$
184

Total derivative instruments

258

0

258

(74
)

0

184

Total assets

$
258

$
0

$
258

$
(74
)

$
0

$
184

Liabilities:

Derivative instruments:

Interest rate swaps

$
147

$
0

$
147

$
0

$
(147
)

$
0

TBA commitments

74

0

74

(74
)

0

0

Total derivative instruments

221

0

221

(74
)

(147
)

0

Repurchase agreements

655,212

0

655,212

(655,212
)

0

0

Total liabilities

$
655,433

$
0

$
655,433

$
(655,286
)

$
(147
)

$
0

(1)

Does not include the fair value amount of financial instrument collateral pledged in respect of repurchase agreements that exceeds the associated liability presented in the consolidated balance sheets.

⁽¹⁾	Does not include the fair value amount of financial instrument collateral pledged in respect of repurchase agreements that exceeds the associated liability presented in the consolidated balance sheets.

⁽²⁾

(2)

Does not include the amount of cash collateral pledged in respect of derivative instruments and repurchase agreements that exceeds the associated liability presented in the consolidated balance sheets.

~~Does not include the amount of cash collateral pledged in respect of derivative instruments that exceeds the associated derivative liability presented in the consolidated balance sheets.~~

Note 12. Fair Value Measurements

Fair Value of Financial Instruments

The 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 a liability in an orderly transaction between market participants at the measurement date. Financial Accounting Standards Board Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to 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 the lowest 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 the measurement date;


	Level 2 Inputs -	Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and


	Level 3 Inputs -	Unobservable inputs for the asset or liability, including significant judgments made by the Company about the assumptions that a market participant would use.

The Company measures the fair value of the following assets and liabilities:

Investments in Financial Assets

~~Mortgage investments~~

Agency MBS - The Company’s investments in agency MBS are classified within Level 2 of the fair value hierarchy. Inputs to fair value measurements of the Company’s investments in agency MBS include price estimates obtained from third-party pricing services. In determining fair value, third-party pricing services use a market approach. The inputs used in the fair value measurements performed by the third-party pricing services are based upon readily observable transactions for securities with similar characteristics (such as issuer/guarantor, coupon rate, stated maturity, and collateral pool characteristics) occurring on the measurement date. The Company makes inquiries of the third-party pricing sources and reviews their documented valuation methodologies to understand the significant inputs and assumptions used to determine prices. The Company reviews the various third-party fair value estimates and performs procedures to validate their reasonableness, including comparison to recent trading activity for similar securities and an overall review for consistency with market conditions observed as of the measurement ~~date~~.date.

~~Mortgage credit~~Credit securities – The ~~Company’s~~Company's investments in ~~residential MBS and~~ commercial MBS are classified within Level 2 of the fair value hierarchy. Inputs to fair value measurements of the ~~Company’s~~Company's investments in ~~residential and~~ commercial MBS include quoted prices for similar assets in recent market transactions and estimates obtained from third-party ~~pricing~~ sources including pricing services and dealers. In determining fair value, third-party pricing sources use a market approach. The inputs used in the fair value measurements performed by third-party pricing sources are based upon observable transactions for securities with similar characteristics. The Company reviews the third-party fair value estimates and performs procedures to validate their reasonableness, including comparisons to recent trading activity observed for similar securities as well as an internally derived discounted future cash flow ~~measurement~~.

measurement. The Company’s ~~first loss position~~investments in a ~~securitized~~non-agency MBS collateralized by a pool of ~~business-purpose~~business purpose residential mortgage loans isand ABS collateralized by residential solar panel loans are classified within Level 3 of the fair value hierarchy.

To measure the fair value of ~~this~~the Company’s non-agency MBS investment secured by a pool of business purpose residential mortgage loans, the Company uses an income approach by preparing an estimate of the present value of the amount and timing of the cash flows expected to be collected from the security over its expected remaining ~~life. T~~olife. To prepare the estimate of cash flows expected to be collected, the Company uses significant judgment to develop assumptions about the future performance of the pool of business purpose residential mortgage loans that serve as collateral, including ~~assumptions about the timing and amount of credit losses and prepayments. The significant unobservable inputs to the fair value measurement include the estimated rate~~loan-level probabilities of default and ~~loss-given-default for~~loss-given-default. As of June 30, 2022 and December 31, 2021, the ~~underlying pool~~remaining population of business purpose residential mortgage loans serving as ~~well as~~collateral to the ~~discount rate, which represents~~Company's non-agency MBS investment represented less than 10% of the original collateral pool. Because the repayment of business purpose residential mortgage loans is often largely based on the ability of the borrower to sell the mortgaged property or to convert the property for rental purposes and obtain refinancing in the form of a ~~market participant’s current required rate~~longer-term loan, relatively high delinquency and default rates are common and expected attributes of ~~return for a similar instrument~~this asset class. . The following table presents the weighted-average of the significant ~~unobservable~~ inputs to the fair value measurement of the Company’s non-agency MBS secured by ~~business-purpose~~business purpose residential mortgage loans as of dates indicated:


	June 30, 2022			December 31, 2021
Annualized default rate		81.6	%		77.7	%
Loss-given-default		13.8	%		15.8	%

Inputs to fair value measurements of the ~~periods indicated:~~Company’s investments in ABS collateralized by residential solar panel loans includes quoted prices obtained from dealers and, when available, observable market information for the same or similar securities. In determining fair value, dealers may use a market approach or an income approach, depending upon the type and level of relevant market information available as of the measurement date. The significant inputs used in the fair value measurements performed by dealers are often unobservable as ABS collateralized by residential solar panel loans trade infrequently. The Company reviews the fair value estimates obtained from dealers and performs procedures to validate their reasonableness, including comparisons to an internally derived discounted future cash flow measurement and, when available, recent trading activity observed for similar securities.

September 30, 2021

December 31, 2020

Annualized default rate

35.0
%

12.0
%
Loss-given-default

25.0
%

40.0
%
Discount rate

13.0
%

13.9
%

Loans – The Company’s commercial mortgage loan investment is classified within Level 3 of the fair value hierarchy. To measure the fair value of its mortgage loan investment, the Company uses an income approach by preparing an estimate of the present value of the expected future cash flows of the loan over ~~their~~its expected remaining life, discounted at a current market rate. The significant unobservable inputs to the fair value measurement of the Company’s mortgage loan investment isare the estimated probability of default and the discount rate, which is based on current market yields and interest rate spreads for a similar ~~loan~~.loan. As of ~~September~~June 30, ~~2021, the estimated probability of default and discount rate for the Company’s mortgage loan investment~~ ~~were 0%, and 5.6%, respectively. As of December 31, 2020,~~ 2022, the estimated probability of default and discount rate for the Company’s mortgage loan investment were 0% and 6.6%, respectively. As of December 31, 2021, the estimated probability of default and discount rate for the Company’s mortgage loan investment were 0%0% and ~~6.3%~~5.6%, respectively.

Mortgage loans and secured debt of consolidated ~~VIE~~VIEs – The Company has elected to apply a fair value measurement practical expedient permitted by GAAP to measure the fair value of the mortgage loans and debt obligations of its consolidated ~~VIE.~~VIEs. The fair value measurement practical expedient is permitted to be applied to consolidated “collateralized financing entities,” which are VIEs for which the financial liabilities of the VIE have contractual recourse solely to the financial assets of the VIE. ~~Pursuant~~

As of June 30, 2022 and December 31, 2021, pursuant to the practical expedient, the Company ~~measures~~measured the fair value of both the mortgage loans and the debt obligations of its consolidated VIE of business purpose residential mortgage loans based upon the fair value of the mortgage loans of the VIE. As of December 31, 2021, the senior debt obligations of the consolidated VIE had been fully extinguished and only the subordinate debt obligation of the consolidated VIE remained. The business purpose residential mortgage loans and subordinate debt obligation of the consolidated VIE are classified within Level 3 of the fair value hierarchy. To measure the fair value of the business purpose residential mortgage loans of the consolidated VIE as of June 30, 2022 and December 31, 2021, the Company used significant judgment to develop assumptions about the future performance of each business purpose residential mortgage loan, which included determining loan-level probabilities of default and loss-given-default. As of June 30, 2022 and December 31, 2021, the remaining population of business purpose residential mortgage loans represented less than 10% of the original collateral pool. Because the repayment of business purpose residential mortgage loans is often largely based on the ability of the borrower to sell the mortgaged property or to convert the property for rental purposes and obtain refinancing in the form of a longer-term loan, relatively high delinquency and default rates are common and expected attributes of this asset class. The following table presents the weighted-average of the significant inputs to the fair value measurement of the business purpose residential mortgage loans of the Company’s consolidated VIE as of the periods indicated:


	June 30, 2022			December 31, 2021
Probability of default		85.5	%		66.2	%
Loss-given-default		6.8	%		8.6	%

As of June 30, 2022, the Company measured the fair value of both the residential mortgage loans and the debt obligations of its consolidated VIE of residential mortgage loans based upon the fair value of the debt obligations ~~of the VIE,~~ as the fair value of the debt securities issued by the VIE iswere more observable to the Company than the fair value of the underlying mortgage ~~loans~~.loans.

The senior and mezzanine debt obligations of the consolidated VIE of residential mortgage loans are classified within Level 2 of the fair value hierarchy. Inputs to the fair value measurements of the senior and mezzanine debt obligations of the consolidated VIE include quoted prices for similar assets in recent market transactions and estimates obtained from third-party pricing sources, including pricing services and dealers. In determining fair value, third-party pricing sources use a market approach. The inputs used in the fair value measurements performed by third-party pricing sources ~~are~~were based upon observable transactions for securities with similar characteristics.

The ~~subordinate debt obligation~~residential mortgage loans and the ~~mortgage loans~~subordinate and excess interest-only debt obligations of the consolidated VIE of residential mortgage loans (held by the Company as investments and eliminated against the associated debt of the VIE in consolidation) are classified within Level 3 of the fair value hierarchy. To measure the fair value of the subordinate and excess interest-only debt ~~obligation~~obligations of the consolidated VIE of residential mortgage loans, the Company uses an income approach by preparing an estimate of the present value of the amount and timing of the cash flows expected to be collected from ~~the~~each security over its expected remaining ~~life. T~~olife. To prepare the estimate of cash flows expected to be collected, the Company uses significant judgment to develop assumptions about the future performance of the pool of ~~business-purpose~~ residential mortgage loans that serve as collateral, including assumptions about the timing and amount of credit losses and ~~prepayments~~.prepayments. The significant unobservable inputs to the fair value measurement include the estimated rate of prepayment, rate of default and loss-given-default for the underlying pool of mortgage loans as well as the discount rate, which represents a market participant’s current required rate of return for a similar instrument. The following table presents the weighted-average of the significant ~~unobservable~~ inputs to the fair value measurement of the subordinate and excess interest-only debt ~~obligation~~obligations of its consolidated VIE of residential mortgage loans as of ~~the periods indicated:~~June 30, 2022:

September 30, 2021

December 31, 2020

Annualized default rate

15.0
%

20.0
%
Loss-given-default

25.0
%

40.0
%
Discount rate

12.0
%

13.9
%


	Subordinate Debt Obligation			Excess Interest-Only Debt Obligations
Annualized voluntary prepayment rate		18.5	%		18.5	%
Annualized default rate		0.5	%		0.5	%
Loss-given-default		17.5	%		17.5	%
Discount rate		7.3	%		17.7	%

MSR financing receivables – The Company’s MSR financing receivables are classified within Level 3 of the fair value hierarchy. The Company uses a nationally recognized, independent third-party mortgage analytics and valuation firm to estimate the fair value of the underlying MSRs from which the Company’s MSR financing receivables primarily derive their value. The third-party valuation firm estimates the fair value of the underlying MSRs using a discounted cash flow analysis using their proprietary prepayment models and market analysis. The Company corroborates the third-party valuation firm’s estimate of the fair value of the underlying MSRs and evaluates the estimate for reasonableness. The significant unobservable inputs to the fair value measurement of the underlying MSRs include the following:

•

the discount rate, which represents a market participant’s current required rate of return for similar MSRs;

•

expected rates of prepayment within the serviced pools of mortgage loans; and

•

annual per-loan cost of servicing.

•

~~the discount rate, which represents a market participant’s current required rate of return for similar MSRs;~~

•

~~expected rates of prepayment within the serviced pools of mortgage loans; and~~

•

~~annual per-loan cost of servicing.~~

The following table presents the significant unobservable inputs to the fair value measurement of the MSRs underlying the Company’s MSR financing receivables as of ~~September 30, 2021:~~the periods indicated:

	~~September 30, 2021~~
~~Discount rate~~		~~9.0~~	%
~~Annualized prepayment rate~~		~~10.2~~	%
~~Annual per-loan cost of servicing (current loans)~~	$	~~65.00~~


	June 30, 2022			December 31, 2021
Discount rate		8.0	%		9.0	%
Annualized prepayment rate		7.1	%		10.1	%
Annual per-loan cost of servicing (current loans)	$	65.00		$	65.00

Pursuant to the Company’s MSR financing receivable arrangements, upon the consummation of three-year performance periods ending December 31, 2023 and April 1, 2024, the Company’s mortgage ~~servicer~~servicing counterparty is entitled to an incentive fee payment equal to a percentage of the total return of the underlying MSRs in excess of a hurdle rate of return. Accordingly, the fair value of the Company’s MSR financing receivables reflects the present value of any expected incentive fee payment that would be owed to its ~~counterparty~~counterparty. The present value of the expected incentive fee payment is estimated based upon the timing and amount of capital contributions from (and cash distributions to) the Company to (from) its mortgage servicing counterparty to date as well as the future expected cash flows from the MSR financing receivables over the remaining performance periods, which is derived from the current fair value of the underlying reference MSRs. As of ~~September~~June 30, 2022 and December 31, 2021, the present value of the expected incentive fee payment reflected in fair value of the Company’s MSR financing receivables was ~~$1,413.~~

~~As of December 31, 2020, the fair value of the Company’s MSR financing receivable was its transacted purchase price, which occurred on the measurement date~~$.11,511 and $3,820, respectively.

Derivative instruments

Exchange-traded derivative instruments - Exchange-traded derivative instruments, which include U.S. Treasury note futures, Eurodollar 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 for identical instruments in liquid ~~markets~~.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 cleared interest 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 or SOFR forward rates) from its specific observations of that day’s trading activity. The clearinghouse uses the applicable forward interest rate curve to develop a market-based forecast of future remaining contractually required cash flows for each interest rate swap. Each market-based cash flow forecast is then discounted using the SOFR curve (sourced from the Federal Reserve Bank of New York) to determine a net present value amount which represents the instrument’s fair ~~value~~.value.

Forward-settling purchases and sales of TBA securities – Forward-settling purchases and sales of TBA securities are classified within Level 2 of the fair value hierarchy. The fair value of each forward-settling TBA contract is measured using price estimates obtained from a third-party pricing service, which are based upon readily observable transaction prices occurring on the measurement date for forward-settling contracts to buy or sell TBA securities with the same guarantor, contractual maturity, and coupon rate for delivery on the same forward settlement date as the commitment under ~~measurement~~.measurement.

~~Other~~25

Other

Long-term unsecured debt - As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the carrying value of the Company’s long-term unsecured debt was ~~$85,901~~$86,199 and ~~$73,027,~~$85,994, respectively, net of unamortized debt issuance costs, and consists of Senior Notes and trust preferred debt issued by the Company. The Company’s estimate of the fair value of long-term unsecured debt is ~~$84,795~~$81,350 and $~~69,904~~84,821 as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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 within Level 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.

Long-term debt secured by single-family properties –As of June 30, 2022 and December 31, 2021, the carrying value of the Company’s long-term debt secured by single-family properties was $122,770 and $39,178, respectively, net of unamortized debt issuance costs. As of June 30, 2022 and December 31, 2021, the Company’s estimate of the fair value of its long-term debt secured by single-family properties was $112,019 and $38,562, respectively. The Company’s long-term debt secured by single-family properties is classified within Level 3 of the fair value hierarchy.

Investments in equity securities of publicly-traded companies –As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company had investments in equity securities of publicly-traded companies at fair value of ~~$5,544~~$511 and ~~$10,821,~~$5,267, respectively, which is included in the line item “other assets” in the accompanying consolidated balance sheets. Investments in publicly traded stock are classified within Level 1 of the fair value hierarchy as their fair value is measured based on u~~nadjusted~~unadjusted quoted prices in active exchange markets for identical assets.

Investments in equity securities of non-public companies and investment funds – As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company had investments in equity securities of non-public companies and investment funds measured at fair value of ~~$7,143~~$5,235 and $~~6,869~~7,388, respectively, which are included in the line item “other assets” in the accompanying consolidated balance sheets.

Investments in equity securities of non-public companies and investment funds are classified within Level 3 of the fair value hierarchy. The fair values of the Company’s investments in equity securities of non-public companies and investment funds are not readily determinable. Accordingly, the Company estimates fair value by estimating the enterprise value of the investee which it then allocates to the investee’s securities in the order of their preference relative to one another. To estimate the enterprise value of the investee, the Company uses traditional valuation methodologies based on income and market approaches, including the consideration of recent investments in, or tender offers for, the equity securities of the investee, a discounted cash flow analysis and a comparable guideline public company valuation. The primary unobservable inputs used in estimating the fair value of an equity security of a non-public company include (i) a stock price to net asset multiple for similar public companies that is applied to the entity’s net assets, (ii) a discount factor for lack of marketability and control, and (iii) a cost of equity discount rate, used to discount to present value the equity cash flows available for distribution and the terminal value of the entity. As of ~~September~~June 30, 2022, the stock price to net asset multiple for similar public companies, the discount factor for lack of marketability and control, and the cost of equity discount rate used as inputs were 97 percent, 15 percent, and 16 percent, respectively. As of December 31, 2021, the stock price to net asset multiple for similar public companies, the discount factor for lack of marketability and control, and the cost of equity discount rate used as inputs were 95 percent, 15 percent, and 16 percent, respectively. As of December 31, 2020, the stock price to net asset multiple for similar public companies, the discount factor for lack of marketability and control, and the cost of equity discount rate used as inputs were 95 percent, 10 percent, and 15 percent, respectively. For its investments 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, restricted cash, deposits, receivables, repurchase agreements, payables, and other assets (aside from those previously discussed) and liabilities are generally reflected in the consolidated balance sheets at their cost, which, due to the short-term nature of these instruments and their limited inherent credit risk, approximates fair value.

Fair Value Hierarchy

Financial Instruments Measured at Fair Value on a Recurring Basis

The following tables set forth financial instruments measured at fair value by level within the fair value hierarchy as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020.~~2021. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.


	September 30, 2021								June 30, 2022
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Financial assets:
Agency MBS	$	637,718	$	0	$	637,718	$	0	$	382,357	$	0	$	382,357	$	0
Mortgage credit securities		25,477		0		11,335		14,142
Mortgage loans of consolidated VIE		16,516		0		0		16,516
MSR financing receivables										120,260		0		0		120,260
Loans		29,800		0		0		29,800		29,484		0		0		29,484
MSR financing receivable		112,834		0		0		112,834
Credit securities										113,419		0		99,901		13,518
Mortgage loans of consolidated VIEs										225,004		0		0		225,004
Derivative assets		2,004		0		2,004		0		1,216		0		1,216		0
Other assets		12,687		5,544		0		7,143		5,746		511		0		5,235
Financial liabilities:
Secured debt of consolidated VIE		7,350		0		6,698		652
Secured debt of consolidated VIEs										205,497		0		193,976		11,521
Derivative liabilities		3,020		0		3,020		0		1,887		0		1,887		0


	December 31, 2021
	Total		Level 1		Level 2		Level 3
Financial assets:
Agency MBS	$	483,927	$	0	$	483,927	$	0
MSR financing receivables		125,018		0		0		125,018
Loans		29,697		0		0		29,697
Credit securities		26,222		0		0		26,222
Mortgage loans of consolidated VIE		7,442		0		0		7,442
Derivative assets		250		20		230		0
Other assets		12,655		5,267		0		7,388
Financial liabilities:
Secured debt of consolidated VIE		508		0		0		508
Derivative liabilities		228		0		228		0

December 31, 2020

Total

Level 1

Level 2

Level 3

Financial assets:

Agency MBS

$
970,880

$
0

$
970,880

$
0

Mortgage credit securities

26,660

0

14,730

11,930

Mortgage loans of consolidated VIE

93,283

0

0

93,283

Loans

45,000

0

0

45,000

MSR financing receivable

9,346

0

0

9,346

Derivative assets

258

0

258

0

Other assets

17,690

10,821

0

6,869

Financial liabilities:

Secured debt of consolidated VIE

93,627

0

93,051

576

Derivative liabilities

221

0

221

0

Level 3 Financial Assets and Liabilities

The table below sets forth an attribution of the change in the fair value of the Company’s Level 3 financial assets that are measured at fair value on a recurring basis for the periods indicated:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020			2022			2021			2022			2021
Beginning balance	$	206,729		$	86,701		$	166,428		$	51,398		$	463,318		$	157,714		$	195,767		$	166,428
Net (loss) gain included in "Investment gain (loss), net"		4,504			(21	)		9,639			(1,649	)
Additions from consolidation of VIE		—			124,345			—			124,345
Net (loss) gain included in "Investment and derivative gain (loss), net"														(13,599	)		(1,183	)		1,616			5,135
Additions from consolidation of VIEs														0			0			276,594			0
Transfers to real estate owned by consolidated VIE														(199	)		0			(199	)		0
Purchases		35,601			—			128,614			36,995			18,032			72,669			21,219			93,013
Sales		—			—			(1,662	)		—			(12,406	)		(1,662	)		(12,406	)		(1,662	)
Payments, net		(68,810	)		(180	)		(128,350	)		(705	)		(64,763	)		(22,764	)		(95,381	)		(59,540	)
Accretion of discount		2,411			246			5,766			707
Accretion (amortization) of discount (premium), net														3,118			1,955			6,291			3,355
Ending balance	$	180,435		$	211,091		$	180,435		$	211,091		$	393,501		$	206,729		$	393,501		$	206,729
Net unrealized gains (losses) included in earnings for the period for Level 3 assets still held at the reporting date	$	4,504		$	(21	)	$	9,719		$	(1,649	)
Net unrealized (losses) gains included in earnings for the period for Level 3 assets still held at the reporting date													$	(13,037	)	$	(1,108	)	$	2,647		$	5,215

The table below sets forth an attribution of the change in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis for the periods indicated:

Three Months Ended September 30,

Nine Months Ended September 30,

2021

2020

2021

2020

Beginning balance
$
640

$
—

$
576

$
—

Net gain (loss) included in "Investment gain (loss), net"

9

—

(1
)

—

Additions from consolidation of VIE

—

559

—

559

Payments, net

3

—

3

—

Accretion of discount

—

—

74

—

Ending balance
$
652

$
559

$
652

$
559

Net unrealized gains (losses) included in earnings for the
period for Level 3 liabilities still held at the reporting date
$
9

$
—

$
(1
)

$
—


	Three Months Ended June 30,					Six Months Ended June 30,
	2022			2021		2022			2021
Beginning balance	$	13,615		$	611	$	508		$	576
Net (gain) loss included in "Investment and derivative gain (loss), net"		(1,081	)		29		(1,332	)		(10	)
Additions from consolidation of VIEs		0			0		14,278			0
Payments, net		(936	)		0		(1,796	)		0
(Amortization) accretion of (premium) discount, net		(77	)		0		(137	)		74
Ending balance	$	11,521		$	640	$	11,521		$	640
Net unrealized (gains) losses included in earnings for the period for Level 3 liabilities still held at the reporting date	$	(1,081	)	$	29	$	(1,332	)	$	(10	)

Note 13. Income Taxes

The Company has elected to be taxed as a REIT under the Internal Revenue ~~Code.~~Code commencing upon filing its tax return for its taxable year ended December 31, 2019. As a REIT, the Company is required to distribute annually ~~90%~~90% of its REIT taxable income. So long as the Company continues to qualify as a REIT, it will generally not be subject to U.S. ~~Federal~~federal or state corporate income taxes on its taxable income to the extent that it distributes all of its annual taxable income to its shareholders on a timely basis. At present, it is the Company’s intention to distribute ~~100%~~100% of its taxable income, although the Company will not be required to do so. The Company intends to make distributions of its REIT taxable income within the time limits prescribed by the Internal Revenue Code, which may extend into the subsequent taxable year. Accordingly, the Company does not expect to incur an income tax liability on its REIT taxable income.

As of ~~September~~June 30, ~~2021,~~2022, the Company had estimated federal net operating loss (“NOL”) carryforwards of ~~$150,936~~$167,491 that can be used to offset future taxable ordinary income and reduce its REIT distribution requirements. NOL carryforwards totaling ~~$14,588~~$14,588 expire in 2028 and NOL carryforwards totaling ~~$136,348~~$152,903 have no expiration period. For the NOL carryforwards that have no expiration period, the Company is limited to utilizing NOL carryforwards to 80% of the taxable income in any one year. As of ~~September~~June 30, ~~2021,~~2022, the Company had estimated federal net capital loss (“NCL”) carryforwards of ~~$180,948~~$171,835 that can be used to offset future net capital gains. The scheduled expirations of the Company’s NCL carryforwards are ~~$66,862 in 2021, $3,763~~$3,763 in 2022, $110,323 in 2023, $13,036 in 2026 and ~~$110,323~~$44,713 in ~~2023.~~2027. The Company’s estimated NOL and NCL carryforwards as of June 30, 2022 are subject to potential adjustments up to the time of filing of the Company’s income tax returns.

The Company and certain subsidiaries have made joint elections to treat ~~certain~~such subsidiaries as taxable REIT subsidiaries (“TRSs”). In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate related business. As such, each of these TRSs is taxable as a C corporation and subject to federal, state and local income taxes based upon their taxable income. For the three ~~and nine~~ months ended ~~September~~June 30, 2022 and 2021, the Company recognized a provision (benefit) for income taxes of $802 and $(76), respectively, on the pre-tax net income of its TRSs. For the six months ended June 30, 2022 and 2021, the Company recognized a provision for income taxes of ~~$436~~$3,089 and ~~$758,~~$322, respectively, on the pre-tax ~~net~~ income of its TRSs.

The Company recognizes uncertain tax positions in the financial statements only when it is more-likely-than-not that the position will be sustained upon examination by the relevant taxing authority based on the technical merits of the position. A position

that meets this standard is measured at the largest amount of benefit that will more-likely-than-not be realized upon settlement. A liability is established for differences between positions taken in a tax return and the financial statements. As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company assessed the need for recording a provision for any uncertain tax position and has made the determination that such provision is not necessary. If the Company were to incur income tax related interest and penalties, the Company’s policy is to classify them as a component of provision for income taxes.

The Company is subject to examination by the Internal Revenue Service (“IRS”) and state and local authorities in jurisdictions where the Company has significant business operations. The Company’s federal tax returns for 2018 and forward remain subject to examination by the IRS.

Note 14. Earnings (Loss) Per Share

Basic earnings (loss) per share includes no dilution and is computed by dividing net income or loss applicable to common stock by the weighted-average number of common shares outstanding for the respective period. Diluted earnings per share includes the impact of dilutive securities such as unvested shares of restricted stock, restricted stock units, and performance share units. The following ~~tables present~~table presents the computations of basic and diluted earnings (loss) per share for the periods indicated:


	Three Months Ended June 30,						Six Months Ended June 30,
(Shares in thousands)	2022			2021			2022			2021
Basic weighted-average common shares outstanding		28,766			33,066			29,296			33,123
Performance share units, unvested restricted stock units, and unvested restricted stock		0			0			0			0
Diluted weighted-average common shares outstanding		28,766			33,066			29,296			33,123
Net loss attributable to common stock	$	(400	)	$	(7,782	)	$	(3,843	)	$	(14,545	)
Basic loss per common share	$	(0.01	)	$	(0.24	)	$	(0.13	)	$	(0.44	)
Diluted loss per common share	$	(0.01	)	$	(0.24	)	$	(0.13	)	$	(0.44	)

Three Months Ended September 30,

Nine Months Ended September 30,

(Shares in thousands)
2021

2020

2021

2020

Basic weighted-average common shares outstanding

31,927

34,655

32,720

35,990

Performance share units, unvested restricted stock units,
and unvested restricted stock

—

42

—

—

Diluted weighted-average common shares outstanding

31,927

34,697

32,720

35,990

Net (loss) income (attributable) available to common stock
$
(981
)

$
4,033

$
(15,526
)

$
(81,435
)
Basic (loss) earnings per common share
$
(0.03
)

$
0.12

$
(0.47
)

$
(2.26
)
Diluted (loss) earnings per common share
$
(0.03
)

$
0.12

$
(0.47
)

$
(2.26
)

The diluted loss per share for the three ~~months~~ and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 did not include the antidilutive effect of ~~315,576~~534,170 and ~~312,371~~508,274 shares of unvested shares of restricted stock, restricted stock units, and performance share units, respectively. The diluted loss per share for the ~~nine~~three and six months ended ~~September~~June 30, ~~2020~~2021 did not include the antidilutive effect of ~~65,208~~358,127 and 310,769 shares of unvested shares of restricted stock, restricted stock units, and performance share ~~units.~~units, respectively.

Note 15. Stockholders’ Equity

Common Stock

The Company has authorized common share capital of 450,000,000 shares of Class A common stock, par value ~~$0.01~~$0.01 per share, and 100,000,000 shares of Class B common stock, par value ~~$0.01~~$0.01 per share. Holders of the Class A and Class B common stock are entitled to 1 vote and 3 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 shares of Class B common stock ceases to be employed by the Company. As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, there were 0 outstanding shares of Class B common stock. The Class A common stock is publicly traded on the New York Stock Exchange under the ticker symbol “AAIC.”

~~Common Stock Dividends~~

The Board of Directors evaluates common stock dividends on a quarterly basis and, in its sole discretion, approves the payment of dividends. The Company’s common stock dividend payments, if any, may vary significantly from quarter to quarter. For the nine months ended September 30, 2021 and the year ended December 31, 2020, the Board of Directors determined that the Company would not declare a dividend on its common stock.

Common Equity Distribution Agreements

On August 10, 2018, the Company entered into separate common equity distribution agreements with equity sales agents JMP Securities LLC, B. Riley FBR, Inc., JonesTrading Institutional Services LLC and Ladenburg Thalmann & Co. Inc. pursuant to which the Company may offer and sell, from time to time, up to 12,597,423 shares of the Company’s Class A common stock.

Pursuant to the common equity distribution agreements, shares of the Company’s common stock may be offered and sold through the equity sales agents 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 maker other than on an exchange or, subject to the terms of a written notice from the Company, in privately negotiated transactions.

During the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and the year ended December 31, ~~2020,~~2021, there were 0 issuances of common stock under the common equity distribution agreements.

As of ~~September~~June 30, ~~2021,~~2022, the Company had 11,302,160 shares of Class A common stock available for sale under the common equity distribution agreements.

Common Share Repurchase Program

On ~~October 26, 2015,~~July 31, 2020, the Company announced that its Board of Directors authorized a share repurchase program pursuant to which the Company may repurchase up to ~~2,000,000~~18,000,000 shares of Class A common stock (the ~~“Repurchase Program”~~"Repurchase Program"). On July 31, 2020, the Company announced that its Board of Directors authorized an increase in the Repurchase Program pursuant to which the Company may repurchase up to 18,000,000 shares of Class A common stock, inclusive of 56,090 shares previously available to be repurchased under the prior authorization. Repurchases under the Repurchase Program may be made from time to time on the open market and in private transactions at management’s discretion in accordance with applicable federal securities laws. The timing of repurchases and the exact number of shares of Class A common stock to be repurchased will depend upon market conditions and other factors. The Repurchase Program is funded using the Company’s cash on hand and cash generated from operations. The Repurchase Program has no expiration date and may be suspended or terminated at any time without prior notice.

During the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, the Company repurchased ~~1,059,980~~947,570 and ~~2,053,470~~1,957,136 shares of Class A common stock for a total purchase price of ~~$4,095~~$3,242 and ~~$8,108,~~$6,739, respectively. During the year ended December 31, ~~2020,~~2021, the Company repurchased ~~3,662,566~~3,242,371 shares of Class A common stock for a total purchase price of ~~$10,377.~~$12,475. As of ~~September~~June 30, ~~2021,~~2022, there remain available for repurchase ~~14,179,179~~11,033,142 shares of Class A common stock under the Repurchase Program.

Preferred Stock

The Company has authorized preferred share capital of (i) 100,000 shares designated as Series A Preferred Stock that is unissued; (ii) 2,000,000 shares designated as 7.00% Series B Cumulative Perpetual Redeemable Preferred Stock (the “Series B Preferred Stock”), par value of ~~$0.01~~$0.01 per share; (iii) 2,500,000 shares designated as 8.250% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (the “Series C Preferred Stock”), par value of ~~$0.01~~$0.01 per share; and (iv) 20,400,000 shares of undesignated preferred stock. The Company’s Board of Directors has the authority, without further action by the shareholders, to issue additional preferred stock in one or more series and to fix the terms and rights of the preferred stock. The Company’s preferred stock ranks senior to its common stock with respect to the payment of dividends and the distribution of assets upon a voluntary or involuntary liquidation, dissolution, or winding up of the Company. The Company’s preferred stock ranks on parity with each other. The Series B Preferred Stock and Series C Preferred Stock are publicly traded on the New York Stock Exchange under the ticker symbols “AAIC PrB” and “AAIC PrC,” respectively.

The Series B Preferred Stock has no stated maturity, is not subject to any sinking fund and will remain outstanding indefinitely unless repurchased or redeemed by the Company. Holders of Series B Preferred Stock have 0 voting rights, except under limited conditions, and are entitled to receive a cumulative cash dividend at a rate of ~~7.00%~~7.00% per annum of their ~~$25.00~~$25.00 per share liquidation preference (equivalent to ~~$1.75~~$1.75 per annum per share). Shares of Series B Preferred Stock are redeemable at ~~$25.00~~$25.00 per share, plus accumulated and unpaid dividends (whether or not authorized or declared), exclusively at the Company’s ~~option commencing on May 12, 2022 or earlier upon the occurrence of a change in control.~~ option. Dividends are payable quarterly in arrears on the 30th day of March, June, September and December of each year, when and as declared. The Company has declared and paid all required quarterly dividends on the Company’s Series B Preferred Stock to date in ~~2021.~~2022.

There were 0 shares of Series B Preferred Stock repurchased by the Company during the three and nine months ended September 30, 2021. During the year ended December 31, 2020, the Company repurchased 17,766 shares of Series B Preferred Stock for a total purchase price of $299.

The Series C Preferred Stock has no stated maturity, is not subject to any sinking fund and will remain outstanding indefinitely unless repurchased or redeemed by the Company. Holders of Series C Preferred Stock have 0 voting rights, except under limited conditions, and are entitled to receive a cumulative cash dividend (i) from and including the original issue date to, but excluding, March 30, 2024 at a fixed rate equal to ~~8.250%~~8.250% per annum of the ~~$25.00~~$25.00 per share liquidation preference (equivalent to ~~$2.0625~~$2.0625 per annum per share) and (ii) from and including March 30, 2024, at a floating rate equal to three-month LIBOR plus a spread of ~~5.664%~~5.664% per annum of the ~~$25.00~~$25.00 per share liquidation preference. Shares of Series C Preferred Stock are redeemable at ~~$25.00~~$25.00 per share, plus accumulated and unpaid dividends (whether or not authorized or declared), exclusively at the Company’s option commencing on

March 30, 2024 or earlier upon the occurrence of a change in control or under circumstances where it is necessary to preserve the Company’s qualification as a REIT. Dividends are payable quarterly in arrears on the 30th day of March, June, September and December of each year, when and as declared. The Company has declared and paid all required quarterly dividends on the Company’s Series C Preferred Stock to date in ~~2021.~~2022.

During the three and six months ended June 30, 2022, the Company repurchased 72,363 shares of Series C Preferred Stock for a total purchase price of $1,749. There were 0 shares of Series C Preferred Stock repurchased by the Company during the ~~three and nine months ended September 30, 2021. During the~~ year ended December 31, ~~2020, the Company repurchased 82,966 shares of Series C Preferred Stock for a total purchase price of $1,578.~~2021.

Preferred Equity Distribution Agreements

TheThe Company is party to an amended and restated equity distribution agreement with JonesTrading Institutional Services LLC and Ladenburg Thalmann & Co. Inc., pursuant to which the Company may offer and sell, from time to time, up to 1,647,370 shares of the Company’s Series B Preferred Stock. Pursuant to the Series B preferred equity distribution agreement, shares of the Company’s Series B Preferred stock may be offered and sold through the preferred equity sales agents 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 maker other than on an exchange or, subject to the terms of a written notice from the Company, in privately negotiated transactions.

During the ~~three and nine~~six months ended ~~September~~June 30, 2022, the Company issued 6,058 shares of Series B Preferred Stock at a weighted average public offering price of $24.87 per share for proceeds net of selling commissions and expenses of $149 under the Series B preferred equity distribution agreement. There were no issuances of Series B Preferred Stock during the three months ended June 30, 2022. During the year ended December 31, 2021, the Company issued ~~22,719~~37,337 shares of Series B preferred stock at a weighted average public offering price of ~~$24.99~~$24.99 per share for proceeds net of selling commissions and expenses of ~~$560~~$919 under the Series B preferred equity distribution agreement. ~~During the year ended December 31, 2020, there were 0 issuances~~As of ~~preferred stock under the Series B preferred equity distribution agreement. As of September~~June 30, ~~2021,~~2022, the Company had ~~1,623,242~~1,602,566 shares of Series B Preferred stock available for sale under the preferred equity distribution agreement.

Shareholder Rights Agreement

On June 1, 2009, the Board of Directors approved a shareholder rights agreement (“Rights Plan”) and the Company’s shareholders approved the Rights Plan at its annual meeting of shareholders on June 2, 2010. On April 9, 2018, the Board of Directors approved a first amendment to the Rights Plan (“First Amendment”) to extend the term for an additional three years and the Company’s shareholders approved the First Amendment at its annual meeting of shareholders on June 14, 2018. On April 11, 2022, the Board of Directors approved a second amendment to the Rights Plan (“Second Amendment”) to further extend the term until June 4, 2025 and the Company's shareholders approved the Second Amendment at its annual meeting of shareholders on June 16, 2022. The Second Amendment also decreased the Purchase Price (as defined under the Rights Plan) from $70.00 to $21.30.

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%~~4.9% or more of 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 A and Class B common shareholders will have the right to purchase securities from us at a discount to such securities’ fair market value, thus causing substantial dilution to the Acquiring 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 NOL carryforwards, NCL carryforwards, and built-in losses under Sections 382 and 383 of the Internal Revenue Code. 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 the Internal Revenue Code. 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% by one or more “5% shareholders” during a three-year period. The Rights 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, an Acquiring Person, without the approval of the Board of Directors and triggering an “ownership change” as defined by Section 382.

The Rights Plan, as amended by the Second Amendment, and any outstanding rights will expire at the earliest of (i) June 4, ~~2022,~~2025, (ii) the time at which the rights are redeemed or exchanged pursuant to the Rights Plan, (iii) the repeal of Section 382 and 383 of the Internal Revenue Code or any successor statute if the Board of Directors determines that the Rights Plan is no longer necessary for the preservation of the applicable tax benefits, or (iv) the beginning of a taxable year to which the Board of Directors determines that no applicable tax benefits may be carried forward.

Note 16. Long-Term Incentive Plan

The Company provides its employees and its non-employee directors with long-term incentive compensation in the form of stock-based awards. On April 29, 2021, the Board of Directors adopted the Arlington Asset Investment Corp. 2021 Long-Term Incentive Plan (the “2021 Plan”), which was approved by the Company’s shareholders and became effective on July 15, 2021. The 2021 Plan replaced the Arlington Asset Investment Corp. 2014 Long-Term Incentive Plan (the “2014 Plan”). No additional grants will be made under the 2014 Plan. However, previous grants under the 2014 Plan and any long-term incentive plans prior to the 2014 Plan (collectively, the “Prior Plans”) will remain in effect subject to the terms of the Prior Plans and the applicable award agreement.

Under the 2021 Plan, a maximum number of 5,256,076 shares of Class A common stock of the Company, subject to adjustment as set forth in the 2021 Plan, were authorized for issuance and may be issued to employees, directors, consultants, advisors and independent contractors who provide bona fide services to the Company and its affiliates. If an award under the 2021 Plan or Prior Plans is canceled, terminated, forfeited or otherwise settled without the issuance of shares subject to such award, those shares will be available for future grants under the 2021 Plan. In addition, shares delivered or withheld for tax obligations arising from an award, other than a stock option or stock appreciation right (“SAR”), will be available for future grants under the 2021 Plan. As of June 30, 2022, 4,350,695 shares remained available for issuance under the 2021 Plan; however, the shares remaining available for issuance would be reduced by the potential future issuance of shares of common stock for the settlement of outstanding performance-based stock awards and dividend equivalents for such awards. If these outstanding performance-based stock awards are earned at “target” level performance, an additional 1,939,009 shares would be issued resulting in 2,411,686 shares remaining available for issuance under the 2021 Plan as of June 30, 2022.

Under the 2021 Plan, the Compensation Committee of the Company’s Board of Directors may grant restricted stock, restricted stock units (“RSUs”), stock options, SARs and/or other stock-based awards. Under the 2021 Plan, shares issued upon the exercise of a stock option or SAR or shares subject to a restricted stock award and any shares issued in settlement of restricted stock unit award, reduced by the number of any shares withheld to satisfy withholding taxes, may not be sold or transferred before the earlier of (i) the first anniversary of the exercise of the option or SAR or vesting of the restricted stock award or the settlement of restricted stock unit award, or (ii) the date the participant is no longer employed by or providing services to the Company or an affiliate. Non-employee members of the Board of Directors may not be granted awards under the 2021 Plan during any twelve-month period with respect to the number of shares that have a fair market value on the date of grant that exceeds $160. The 2021 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 appropriate valuation methodologies, as adjusted for estimates of future award forfeitures. Valuation methodologies used and subsequent expense recognition is dependent upon each award’s service and performance conditions.

Performance-based Stock Awards

The Company has granted performance-based RSUs and performance stock units (collectively, “Performance-based Stock Awards”) to employees of the Company that are convertible into shares of Class A common stock following the achievement of performance goals over the applicable performance periods. Compensation costs for Performance-based Stock Awards subject to nonmarket-based performance conditions (i.e., performance not predicated on changes in the Company’s stock price) are measured at the closing stock price on the dates of grant, adjusted for the probability of achieving certain benchmarks included in the performance metrics. These initial cost estimates are recognized as expense over the requisite performance periods, as adjusted for changes in estimated, and ultimately actual, performance and forfeitures. Compensation costs for components of Performance-based Stock Awards subject to market-based performance conditions (i.e., performance predicated on 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 the inherent uncertainty regarding the achievement of the market-based performance metrics. These initial valuation amounts are recognized as expense over the requisite performance periods, subject only to adjustments for changes in estimated, and ultimately actual, forfeitures.

During the six months ended June 30, 2022 and 2021, the Compensation Committee granted Performance-based Stock Awards with performance goals based on (i) the compound annualized total shareholder return (i.e., share price change plus dividends on a reinvested basis) during the applicable performance period (“Absolute TSR Awards”), (ii) the compound annualized total shareholder return relative to a peer index during the applicable performance period (“Relative TSR Awards”), (iii) the compound annualized growth in the Company’s book value per share (i.e., book value change with such adjustments as determined and approved by the Compensation Committee plus dividends on a reinvested basis) during the applicable performance period (“Book Value Awards”), and (iv) the share price of the Company's common stock during the applicable performance period ("Stock Price Awards"). In addition, the Compensation Committee granted Performance-based Stock Awards in prior years with performance goals based on annual return on equity during the applicable performance period ("ROE Awards").

The Compensation Committee of the Board of Directors of the Company approved the following Performance-based Stock Award grants for the periods indicated:


	Six Months Ended June 30,
	2022		2021
Absolute TSR Awards granted		174,581		90,711
Absolute TSR Award grant date fair value per share	$	6.03	$	6.89
Relative TSR Awards granted		87,291		47,710
Relative TSR Award grant date fair value per share	$	5.83	$	6.55
Book Value Awards granted		103,000		—
Book Value Award grant date fair value per share	$	3.37	$	—
Stock Price Awards granted		1,225,490		—
Stock Price Award grant date fair value per share	$	1.72	$	—

For the Company’s Book Value Awards and ROE Awards, the grant date fair value per share is based on the close price on the date of grant. For the Company’s Absolute TSR Awards, Relative TSR Awards and Stock Price Awards, the grant date fair value per share is based on a Monte Carlo simulation model. The following assumptions, determined as of the date of grant, were used in the Monte Carlo simulation model to measure the grant date fair value per share of the Company’s Absolute TSR Awards, Relative TSR Awards and Stock Price Awards for the periods indicated:


	Absolute TSR Awards						Relative TSR Awards						Stock Price Awards
	Six Months Ended June 30,						Six Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021			2022			2021
Closing stock price on date of grant	$	3.58		$	4.08		$	3.58		$	4.08		$	3.06		$	—
Beginning average stock price on date of grant (1)	$	3.60		$	4.07		$	3.60		$	4.07		N/A			$	—
Expected volatility (2)		69.20	%		69.27	%		69.20	%		69.27	%		51.17	%		—
Dividend yield (3)		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		—
Risk-free rate (4)		1.01	%		0.34	%		1.01	%		0.34	%		2.97	%		—
Discount for illiquidity (5)		0.00	%		0.00	%		0.00	%		0.00	%		8.42	%		—

(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 end of the performance period to the extent the underlying Performance-based Stock Award is earned. Applying dividend yield assumption of 0.00% in the Monte Carlo simulation is mathematically 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.

(5)

Based on restriction on ability to sell vested awards for one year after vesting.

The vesting of the Performance-based Stock Awards is subject to both continued employment under the terms of the award agreement and the achievement of the Company performance goals established by the Compensation Committee.

For Absolute TSR Awards and Relative TSR Awards granted during the six months ended June 30, 2022 and 2021, the Compensation Committee established a three-year performance period. The actual number of shares of Class A common stock that will be issued to each participant at the end of the applicable performance period will vary between 0% and 250% of the number of the Absolute TSR Awards and Relative TSR Awards granted, depending on performance results. If the minimum threshold level of performance goals is not achieved, no awards are earned. To the extent the performance results are between the minimum threshold level and maximum level of performance goals, between 50% to 250% of the number of Absolute TSR Awards and Relative TSR Awards are earned. Upon settlement, vested Absolute TSR Awards and Relative TSR Awards are converted into shares of the Company’s Class A common stock on a one-for-one basis.

For Book Value Awards granted during the six months ended June 30, 2022, the Compensation Committee established a one-year performance period. The actual number of shares of Class A common stock that will be issued to each participant at the end of the applicable performance period will vary between 0% and 100% of the number of Book Value Awards granted, depending on performance results. Any Book Value Awards earned at the end of the one-year performance period would be converted into an equal number of shares of restricted stock that will vest on the third anniversary of the original Book Value Award grant date subject to continued employment under the terms of the award agreement. If the threshold level of the annual performance goal is not achieved, no Book Value Awards are earned.

For Stock Price Awards granted during the six months ended June 30, 2022, the Compensation Committee established a three-year performance period. If the market price of the Company's common stock is equal to or greater than a stock price performance goal for 45 consecutive trading days at any time during the performance period, between 75% to 300% of the number of Stock Price Awards are earned and converted into an equal number of shares of restricted stock that will vest ratably over a three-year period beginning on the third anniversary of the date of grant subject to continued employment under the terms of the award of the agreement. If the minimum threshold level of stock price performance goals are never achieved, no awards are earned.

For the ROE Awards granted in prior years, the Compensation Committee established a one-year performance period. Any ROE Awards earned at the end of the one-year performance period would be converted into an equal number of shares of restricted stock that will vest on the third anniversary of the original ROE Award grant date subject to continued employment under the terms of the award agreement. If the threshold level of the annual performance goal is not achieved, no ROE Awards are earned.

Performance-based Stock Awards do not have any voting rights. No dividends are paid on outstanding Performance-based Stock Awards during the applicable performance period. Instead, dividend equivalents are accrued on outstanding Performance-based Stock Awards during the applicable performance period, deemed invested in shares 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 Performance-based Stock Awards vest.

For the six months ended June 30, 2022 and 2021, the Company recognized $565 and $182, respectively, of compensation expense related to Performance-based Stock Awards. As of June 30, 2022, the Company had 1,939,009 Performance-based stock awards outstanding. As disclosed above, the actual number of shares of common stock that could be issued for settlement of the Performance-based shares can be greater or less than the amount of Performance-based shares outstanding depending upon the actual results compared to the performance goals. As of June 30, 2022 and December 31, 2021, the Company had unrecognized compensation expense related to Performance-based Stock Awards of $3,986 and $878, respectively. The unrecognized compensation expense as of June 30, 2022 is expected to be recognized over a weighted average period of 3.61 years. For Absolute TSR Awards, Relative TSR Awards and Book Value Awards that had performance measurement periods ending during the six months ended June 30, 2022 and 2021, none of the performance measures were met and therefore no awards were earned or vested during those periods. For the six months ended June 30, 2022 and 2021, there were 0 and 82,124 ROE Awards, respectively, including dividend

equivalents, that were earned and converted into an equal number of shares of restricted stock that will vest on the third anniversary of the original ROE Award grant date.

Employee Restricted Stock Awards

Compensation costs for restricted stock awards subject only to service conditions are measured at the closing stock price on the dates of grant and are recognized 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 either vest ratably over a three-year period or cliff vest at the end of a three-year period based on continued employment over these specified periods. A summary of these unvested restricted stock awards is presented below:


	Number of Shares			Weighted-average Grant-date Fair Value		Weighted- average Remaining Vested Period
Share Balance as of December 31, 2020		547,688		$	4.89		1.5
Granted		365,592			3.89		—
Conversion of ROE Awards		82,124			5.65		—
Forfeitures		(22,000	)		6.54		—
Vestitures		(214,369	)		5.89		—
Share Balance as of December 31, 2021		759,035			4.16		1.5
Granted		384,291			3.42		—
Forfeitures		(12,167	)		3.57		—
Share Balance as of June 30, 2022		1,131,159		$	3.91		1.3

For the six months ended June 30, 2022 and 2021, the Company recognized $988 and $604, respectively, of compensation expense related to restricted stock awards. As of June 30, 2022 and December 31, 2021, the Company had unrecognized compensation expense related to restricted stock awards of $2,129 and $1,847, respectively. The unrecognized compensation expense as of June 30, 2022 is expected to be recognized over a weighted average period of 1.3 years. For the six months ended June 30, 2022 and 2021, there were no restricted stock awards that vested.

In addition, as part of the Company’s satisfaction of incentive compensation earned for past service under the Company’s variable compensation programs, employees may receive restricted Class A common stock in lieu of cash payments. These restricted Class A common stock shares are issued to an irrevocable trust and are not returnable to the Company. No such shares were issued during the six months ended June 30, 2022 and 2021. As of June 30, 2022 and December 31, 2021, the Company had 9,155 vested shares of the undistributed restricted stock issued to the trust.

Employee Restricted Stock Units

In connection with the announcement in June 2019 that the Company’s Executive Chairman would retire on December 31, 2019 from all positions with the Company, including its Board of Directors, the Company and its Executive Chairman entered into a consulting agreement to provide consulting services through January 1, 2022. Pursuant to the consulting agreement, the Company granted the Executive Chairman 87,847 RSUs with a grant date fair value of $6.83 per share. The grant date fair value of the award was based on the closing price of the Class A common stock on the New York Stock Exchange on the date of grant. The RSUs were scheduled to vest equally on each of January 1, 2020, July 1, 2020, January 1, 2021, July 1, 2021 and January 1, 2022, subject to the individual’s continued employment through December 31, 2019 and providing consulting services through January 1, 2022. Upon vesting, the RSUs were convertible into shares of Class A common stock. The RSUs did not have any voting rights, and no dividends were paid on outstanding RSUs. Instead, dividend equivalents were accrued on outstanding RSUs, deemed invested in shares of Class A common stock and were paid out in shares of Class A common stock on the vesting date.

For the six months ended June 30, 2022 and 2021, the Company recognized $0 and $54, respectively, of compensation expense related to employee restricted stock units. For the six months ended June 30, 2022 and 2021, the intrinsic value of RSUs that were converted into shares of Class A common stock were $73 and $74, respectively. As of June 30, 2022 and December 31, 2021, the Company had 0 and 20,455, respectively, of employee restricted stock units outstanding.

Director Restricted Stock Units

Compensation costs for RSU awards subject only to service conditions are measured at the closing stock price on the dates of grant and are recognized 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. 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 to non-employee directors vest immediately on the award grant date and are convertible into shares of Class A common stock. For RSUs granted under the Company’s 2021 Plan, 2014 Plan, and certain of the Prior Plans, the RSUs are convertible into shares of Class A common stock at the later of the date the non-employee director ceases to be a member of the Company’s Board or the first anniversary of the grant date. For RSUs granted under certain Prior Plans, the RSUs are convertible 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 non-employee director RSUs do not have any voting rights but are entitled to cash dividend equivalent payments. As of June 30, 2022 and December 31, 2021, the Company had 548,272 and 415,822, respectively, of non-employee director RSUs outstanding. A summary of the non-employee director RSUs grants is presented below for the periods indicated:


	Six Months Ended June 30,
	2022		2021
RSUs granted		132,450		98,035
Grant date fair value	$	3.02	$	4.08

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 the six months ended June 30, 2022 and 2021, the Company recognized $200 and $200, respectively, of director fees related to these RSUs. There were no non-employee director RSUs that were converted into shares of Class A common stock for the six months ended June 30, 2022 and 2021.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context otherwise requires or provides, references in this Quarterly Report on Form 10-Q to “we,” “us,” “our” and the “Company” refer to Arlington Asset Investment Corp. (“Arlington Asset”) and its subsidiaries. This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in Item 1 of this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

The discussion of our consolidated financial condition and results of operations below may contain forward-looking statements. These statements, which reflect management’s beliefs and expectations, are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of the risks and uncertainties that may affect our future results, please see “Cautionary Statement About Forward-Looking Information” in Item 3 of Part I of this Quarterly Report on Form 10-Q and the risk factors included in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021 and our subsequent Quarterly Reports on Form 10-Q.

Our Company

We are an investment firm that focuses primarily on investing in mortgage related assets and residential real estate. ~~We may also invest in other asset classes that our management team believes may offer attractive risk adjusted returns outside the real estate or mortgage asset classes.~~ Our investment capital is currently allocated between ~~agency MBS, MSR~~the following asset classes:

•

mortgage servicing right (“MSR”) related assets ~~mortgage~~

•

credit investments

~~and~~ •

single-family residential (“SFR”) properties

•.

agency mortgage-backed securities (“MBS”)

Our ~~agency MBS consist of residential mortgage pass-through certificates~~MSR related assets represent investments for which the ~~principal and interest payments are guaranteed by either~~return is based on the economic performance of a 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”).pool of specific MSRs. Our ~~mortgage~~ credit investments generally include investments in mortgage loans secured by either residential or commercial real property or MBS collateralized by residential or commercial mortgage loans (“non-agency MBS”)~~. The principal and interest of our mortgage credit investments are not guaranteed~~ or asset-backed securities (“ABS”) collateralized by ~~a GSE or a U.S government agency.~~residential solar panel loans. Our ~~MSR related assets represent investments for which the return is based on the economic performance of a pool of specific MSRs. The Company’s~~ SFR investment strategy is to acquire, lease and operate single-family residential homes as rental properties.

~~We believe we leverage prudently our investment portfolio,~~ Our agency MBS consist of residential mortgage pass-through certificates for which the principal and interest payments are guaranteed by a U.S. government sponsored enterprise (“GSE”), such as we seek to increase potential returns to our shareholders. We fund our investments primarily through short-term financing arrangements, principally though repurchase agreements. We enter into various hedging transactions to mitigate the ~~interest rate sensitivity of our cost of borrowing~~Federal National Mortgage Association (“Fannie Mae”) and the ~~value of~~Federal Home Loan Mortgage Corporation (“Freddie Mac”).

We may also invest in other asset classes that our ~~fixed-rate~~management team believes may offer attractive risk adjusted returns outside the real estate or mortgage ~~investment portfolio.~~asset classes.

We are internally managed and do not have an external investment advisor.

Factors that Affect our Results of Operations and Financial Condition

Our business is materially affected by a variety of industry and economic factors, including:

•

conditions in the global financial markets and economic conditions generally;

•

the impacts of the coronavirus (“COVID-19”) pandemic;

•

changes in interest rates and prepayment rates;

•

conditions in the 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.

•

~~conditions in the global financial markets and economic conditions generally;~~

•

~~the impacts of the coronavirus (“COVID-19”) pandemic;~~

•

~~changes in interest rates and prepayment rates;~~

•

~~conditions in the 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

Through most of the third quarter of 2021, equity capital markets continued to strengthen supported by a resilient economic recovery, ongoing accommodative central bank polices and strong corporate earnings results despite headwinds from resurgences in COVID-19 cases in the U.S. However, market volatility began to rise in late September as many of those positive factors supporting capital markets began to fade with the market focusing on the anticipated impact of supply chain constraints, the looming

Congressional fiscal policy battles, a potential financial contagion from an expected default of one of China’s largest property developers and an increased expectation of a near term reversal of the Federal Reserve’s accommodative policies.

At its September 22, 2021 meeting, the Federal Open Market Committee (“FOMC”) stated that it expects to continue to maintain an accommodative monetary policy stance and will keep its target range for the federal funds rate at 0% to 0.25%. In addition, the FOMC reaffirmed that it will continue with its asset purchase program to help foster smooth market functioning and accommodative financial conditions by continuing to increase its holdings of Treasury securities by at least $80 billion per month and agency MBS by at least $40 billion per month until substantial further progress has been made towards its maximum employment and price stability goals. However, the FOMC stated that if progress towards these goals continues as expected, that a moderation in the pace of asset purchases may soon be warranted, commonly referred to as “tapering.” In additional commentary, the FOMC signaled that a gradual tapering process commencing after its scheduled November meeting and concluding around mid-2022 would likely be appropriate assuming the economic recovery remains on track. Based on federal funds futures, the market is now currently expecting one rate hike in the next twelve months.

The 10-year U.S. Treasury rate ~~increased two basis points during the third quarter to 1.49%~~was 3.01% as of ~~September~~June 30, ~~2021.~~2022, a 67 basis point increase from the prior quarter end. The ~~U.S. Treasury~~interest rate curve, ~~remained relatively unchanged during the third quarter with~~measured as the spread between the 2-year and 10-year U.S. Treasury ~~rate~~remained relatively flat at ~~121~~six basis points as of ~~September~~June 30, ~~2021.~~2022. The spread between the current coupon agency MBS and the 10-year swap rate widened ~~by seven~~21 basis points during the ~~third quarter.~~second quarter of 2022. Residential mortgage rates increased significantly evidenced by the Fannie Mae average primary mortgage rate

increasing by 103 basis points during the second quarter to 5.70% as of June 30, 2022. The rate of inflation continued to increase significantly with the Consumer Price Index rising 9.1% for the twelve month period ending June 30, 2022, the largest increase in over 40 years with the indices for energy and food being the largest contributors.

In order to address the significantly rising inflation, the U.S. Federal Reserve has taken actions with the objective of lowering inflation by significantly raising interest rates. At its May 4, 2022 meeting, the Federal Open Market Committee (“FOMC”) decided to raise its target range for the federal funds rate by 50 basis points to a range of 0.75% to 1.00% and also announced that it will begin reducing its holdings of Treasury securities and agency MBS starting June 1, 2022. At its June 15, 2022 meeting, the FOMC decided to raise its target range for the federal funds rate by an additional 75 basis points to a range of 1.50% to 1.75%. At its July 27, 2022 meeting, the FOMC decided to raise its target range for the federal funds rate by an additional 75 basis points to a range of 2.25% to 2.50% and that it anticipates ongoing increases in the target range will be appropriate. Subsequent to the July 27, 2022 FOMC meeting, the market is expecting additional hikes totaling approximately 100 basis points in the next six months followed by rate cuts beginning in 2023 based on federal funds futures.

Prepayment speeds in the ~~conforming~~ fixed-rate residential mortgage market decreased ~~modestly~~ during the ~~third~~second quarter of ~~2021 as compared~~2022 primarily due to the prior quarter but remain at elevated levels due to historically low mortgage rates. Looking forward, market expectations are that historically low interest rates will keep prepayment speeds elevatedrise in the ~~near term.~~primary mortgage rate driven by the increase in the 10-year U.S. Treasury rate. Pay-up premiums on agency MBS, which represent the price premium of agency MBS backed by specified pools over a TBA security, decreased during the second quarter of 2022 as a result of ~~September 30, 2021 did not change significantly compared~~declining prepayment concerns. The spread between the market yield on agency MBS and benchmark interest rates widened during the second quarter of 2022 resulting in agency MBS underperforming relative to interest rate hedges. Conversely, valuation multiples of MSRs increased during the ~~prior quarter-end.~~ second quarter of 2022 driven primarily by declining prepayment speed expectations.

Housing prices ~~have strengthened~~continued to strengthen significantly as evidenced by the Standard & Poor’s CoreLogic Case-Shiller U.S. National Home Price NSA index reporting ana 19.7% annual gain in ~~July 2021,~~May 2022 with price gains the ~~highest recorded~~strongest in ~~over 30 years of~~ the ~~index’s data.~~south and southeast. The strong gains in housing continue to be driven by ~~low mortgage rates and~~favorable supply demand dynamics as the low supply of homes for sale and new housing starts has been insufficient to meet the growing demand for housing driven by overall population growth, low mortgage rates, inflationary pressures as well as the impact of the COVID-19 pandemic increasing the number of potential home buyers moving from urban apartments to suburban homes. However, as the Federal Reserve ratchets up interest rates and housing affordability declines, ongoing support for extraordinary home price appreciation may not continue for much longer.

The following table presents certain key market data as of the dates indicated:


	June 30, 2021			September 30, 2021			December 31, 2021			March 31, 2022			June 30, 2022			Change - Second Quarter 2022

30-Year FNMA Fixed Rate MBS (1)
2.0%	$	100.98		$	100.38		$	99.72		$	92.63		$	86.77		$	(5.86	)
2.5%		103.41			103.22			102.09			95.20			89.89			(5.31	)
3.0%		104.22			104.67			103.64			97.55			93.11			(4.44	)
3.5%		105.27			105.83			105.32			99.75			96.17			(3.58	)
4.0%		106.54			107.17			106.41			101.58			98.62			(2.96	)
4.5%		107.63			108.16			107.22			103.25			100.39			(2.86	)

Investment Spreads
FNMA Current Coupon vs. 10-year Swap Rate	39 bps			46 bps			49 bps			108 bps			129 bps			21 bps

30 Year Fixed Mortgage Rate
Freddie Mac Average Primary Mortgage Rate		2.98	%		3.01	%		3.11	%		4.67	%		5.70	%	103 bps

U.S. Treasury Rates ("UST")
2-year UST		0.25	%		0.28	%		0.73	%		2.33	%		2.95	%	62 bps
5-year UST		0.89	%		0.96	%		1.26	%		2.46	%		3.04	%	58 bps
10-year UST		1.47	%		1.49	%		1.51	%		2.34	%		3.01	%	67 bps
2-year UST to 10-year UST spread	122 bps			121 bps			78 bps			1 bps			6 bps			5 bps

Interest Rate Swap Rates
2-year swap		0.33	%		0.38	%		0.94	%		2.55	%		3.28	%	73 bps
5-year swap		0.96	%		1.05	%		1.37	%		2.52	%		3.08	%	56 bps
10-year swap		1.44	%		1.51	%		1.58	%		2.41	%		3.09	%	68 bps
2-year swap to 2-year UST spread	8 bps			10 bps			21 bps			22 bps			33 bps			11 bps
10-year swap to 10-year UST spread	-3 bps			2 bps			7 bps			7 bps			8 bps			1 bps

London Interbank Offered Rates ("LIBOR") and Secured Overnight Financing Rate ("SOFR")
1-month LIBOR		0.10	%		0.08	%		0.10	%		0.45	%		1.79	%	134 bps
3-month LIBOR		0.15	%		0.13	%		0.21	%		0.96	%		2.29	%	133 bps
SOFR		0.05	%		0.05	%		0.05	%		0.29	%		1.50	%	121 bps

(1)

Generic 30-year FNMA TBA price information, sourced from Bloomberg, is provided for illustrative purposes only and is not meant to be reflective of the fair value of securities held by the Company.

September 30,
2020

December 31,
2020

March 31,
2021

June 30,
2021

September 30,
2021

Change - Third Quarter 2021

30-Year FNMA Fixed Rate MBS ⁽¹⁾

2.0%

$
103.39

$
103.95

$
99.67

$
100.98

$
100.38

$
(0.60
)
2.5%

104.89

105.45

102.51

103.41

103.22

(0.19
)
3.0%

104.77

104.80

104.13

104.22

104.67

0.45

3.5%

105.48

105.73

105.61

105.27

105.83

0.56

4.0%

106.64

106.80

107.32

106.54

107.17

0.63

4.5%

108.17

108.39

108.87

107.63

108.16

0.53

Investment Spreads

FNMA Current Coupon vs.
10-year Swap Rate

69 bps

42 bps

26 bps

39 bps

46 bps

7 bps

CMBS 2.0/3.0 BBB- vs. Swap Curve

500 bps

475 bps

390 bps

345 bps

350 bps

5 bps

U.S. Treasury Rates ("UST")

2-year UST

0.13
%

0.12
%

0.16
%

0.25
%

0.28
%

3 bps

5-year UST

0.28
%

0.36
%

0.94
%

0.89
%

0.96
%

7 bps

10-year UST

0.68
%

0.91
%

1.74
%

1.47
%

1.49
%

2 bps

2-year UST to 10-year UST spread

55 bps

79 bps

158 bps

122 bps

121 bps

-1 bps

Interest Rate Swap Rates

2-year swap

0.22
%

0.20
%

0.29
%

0.33
%

0.38
%

5 bps

5-year swap

0.35
%

0.43
%

1.06
%

0.96
%

1.05
%

9 bps

10-year swap

0.71
%

0.93
%

1.78
%

1.44
%

1.51
%

7 bps

2-year swap to 2-year UST spread

9 bps

8 bps

13 bps

8 bps

10 bps

2 bps

10-year swap to 10-year UST spread

3 bps

2 bps

4 bps

-3 bps

2 bps

5 bps

London Interbank Offered Rates ("LIBOR") and Secured Overnight Financing Rate ("SOFR")

1-month LIBOR

0.15
%

0.14
%

0.11
%

0.10
%

0.08
%

-2 bps

3-month LIBOR

0.23
%

0.24
%

0.19
%

0.15
%

0.13
%

-2 bps

SOFR

0.08
%

0.07
%

0.01
%

0.05
%

0.05
%

0 bps

⁽¹⁾	~~Generic 30-year FNMA TBA price information, sourced from Bloomberg, is provided for illustrative purposes only and is not meant to be reflective of the fair value of securities held by the Company.~~

Recent Regulatory Activity

Elimination of LIBOR ~~Transition~~

The ICE Benchmark Administration Limited (“IBA”) is a benchmark administrator that is authorized and regulated by the U.K. Financial Conduct Authority (“FCA”) to administer the publication of LIBOR. On July 27, 2017, the FCA announced that it intends to stop persuading or compelling banks to submit LIBOR rates after December 31, 2021, which could either cause LIBOR to stop publication immediately or cause LIBOR’s regulator to determine that its quality had degraded to the degree that it is no longer representative of its underlying market. On March 5, 2021, the FCA, which regulates LIBOR, announced that all LIBOR tenors relevant to us will cease to be published or will no longer be representative after June 30, 2023. The FCA's announcement coincides with the March 5, 2021 announcement of LIBOR's administrator, the IBA, indicating that, as a result of not having access to input data necessary to calculate LIBOR tenors relevant to us on a representative basis after June 30, 2023, IBA would have to cease publication of such LIBOR tenors immediately after the last publication on June 30, 2023. These announcements mean that any of our LIBOR-based financial instruments that extend beyond June 30, 2023 will need to be converted to a replacement rate.

The U.S. Federal Reserve and the Federal Reserve Bank of New York jointly convened the ~~Alternative Reference Rates Committee (“ARRC”),~~ARRC, a steering committee comprised of private sector entities, each with an important presence in markets effected by LIBOR, and official-sector entities, including banking and financial sector regulators. The ARCC’s initial objectives were to identify risk-free alternative reference rates for ~~U.S. dollar (“USD”)~~USD LIBOR, identify best practices for contract robustness and create an implementation plan. The ARRC ~~identified~~has recommended SOFR, plus a ~~new index calculated by short-term repurchase agreements backed by U.S. Treasury securities,~~recommended spread adjustment, as the rate that represents the best replacement for USD LIBOR in most USD derivatives and other financial contracts. In April 2018, the Federal Reserve Bank of New York began publishing SOFR rates. The ARRC also published its transition plan with specific steps and timelines designed to encourage the adoption of SOFR.LIBOR's replacement.

On April 6, 2021, the state of New York enacted ~~legislation (the “New~~the New York LIBOR ~~Legislation”)~~Legislation, addressing the phase-out of LIBOR as a benchmark rate in financial instruments governed by New York law. The New York LIBOR Legislation generally tracks the legislation proposed by the ARRC and provides a statutory remedy for contracts that reference USD LIBOR as a benchmark interest rate but do not include effective fallback provisions in the event USD LIBOR is no longer published or is no longer representative. Under the New York LIBOR Legislation, if a contract governed by New York law that references USD LIBOR as a benchmark interest rate either does not contain benchmark fallback provisions or contains benchmark fallback provisions that would cause thebenchmark rate to fall back to a rate that would continue to be based on USD LIBOR, then the fallback rate would be SOFR plus any applicable spread adjustment and any conforming changes selected or recommended by the Federal Reserve Board, the Federal Reserve Bank of New York or by the ARRC. The New York LIBOR Legislation also establishes a safe harbor from liability for the selection and use of the recommended benchmark interest rate.

These announcements mean that any of our LIBOR-based borrowings that extend beyond June 30, 2023 will need to be converted to a replacement rate. The likely market transition away from LIBOR and towards SOFR is expected to be gradual and complicated. There are significant differences between LIBOR and SOFR, such as LIBOR being an unsecured lending rate while SOFR is a secured lending rate, and SOFR is an overnight rate while LIBOR reflects term rates at different ~~maturities while~~maturities. If our LIBOR-based borrowings are converted to SOFR, ~~is an overnight rate. These and other~~the differences ~~create the potential for basis risk between the two rates. The impact of any basis risk~~ between LIBOR and SOFR, ~~may negatively affect our operating results. Any of these alternative methods may~~plus the recommended spread adjustment, could result in interest ~~rates~~costs that are ~~either~~ higher ~~or lower~~ than if LIBOR ~~were~~remained available, ~~in its current form,~~ which could have a material adverse effect on our operating results. Although SOFR is the ARRC's recommended replacement rate, it is also possible that lenders may instead choose alternative replacement rates that may differ from LIBOR in ways similar to SOFR or in other ways that would result in higher interest costs for us. Furthermore, lenders may select alternative rates sooner than June 30, 2023, either in amendments to existing facilities or as we decide to enter into new facilities. It is possible that not all of our assets and liabilities will transition away from LIBOR at the same time, and it is possible that not all of our assets and liabilities will transition to the same alternative reference rate, in each case increasing the difficulty of hedging. We and other market participants have less experience understanding and modeling SOFR-based assets and liabilities than LIBOR-based assets and liabilities, increasing the difficulty of investing, hedging, and risk management. The process of transition involves operational risks. It is not yet possible to predict the magnitude of LIBOR's end on our borrowing costs and other operations given the remaining uncertainty about which rates will replace ~~LIBOR.~~LIBOR and the related timing.

We are party to various financial instruments which include LIBOR as a reference rate that mature or expire after June 30, 2023. As of ~~September~~June 30, ~~2021,~~2022, these financial instruments include interest rate swap agreements and preferred stock and unsecured notes ~~and preferred stock~~ issued by ~~the Company.~~us.

As of ~~September~~June 30, ~~2021,~~2022, we had ~~$115~~$200 million notional amount of interest rate swaps outstanding that expire after June 30, 2023 in which we make semiannual interest payments based upon a fixed interest rate and receive quarterly interest payments based upon the prevailing three-month LIBOR on the date of reset. The interest rate swap agreements are centrally cleared by the Chicago Mercantile Exchange (“CME”) which acts as the calculation agent with the terms and conditions of each interest rates swap agreement defined in the CME Rulebook and supplemented by the rules published by the International Swaps and Derivative Association, Inc. (“ISDA”). The fallback terms of interest rate swap agreements that have LIBOR as a reference rate were not originally designed to cover a permanent discontinuation of LIBOR. On October 23, 2020, ISDA amended its rules to provide LIBOR fallback protocols and provisions for bilateral interest rate swap agreements, including defining the LIBOR cessation triggering events and robust fallback provisions. Under the fallback provisions, the existing contractual rate based on LIBOR rate would fall back to a rate based on SOFR

adjusted for the difference in tenor plus a spread adjustment for the historical differences between the two rates. On January

25, 2021, the CME amended its Rulebook to incorporate ISDA’s LIBOR fallback provisions for both new and legacy centrally cleared interest rate swap agreements.

As of ~~September~~June 30, ~~2021,~~2022, we had $15.0 million of junior subordinated debt outstanding that require quarterly interest payments at three-month LIBOR plus a spread of 2.25% to 3.00% and matures between 2033 and 2035. Under the terms of the indenture agreement for the notes, if the publication of LIBOR is not available, the current fallback is for the independent calculation agent to obtain quotations for what LIBOR should be from major banks in the interbank market. If the calculation agent is unable to obtain such quotations, then the LIBOR in effect for future interest payments would be LIBOR in effect for the immediately preceding interest payment period. The indenture governing the junior subordinated notes are governed by New York law and would likely be subject to the fallback rate provisions of the New York LIBOR Legislation.

As of ~~September~~June 30, ~~2021,~~2022, we had ~~1,117,034~~1,044,671 shares of ~~8.250% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (“~~Series C Preferred ~~Stock”)~~Stock outstanding with a liquidation preference of ~~$27.9~~$26.1 million. The Series C Preferred Stock is entitled to receive a cumulative cash dividend (i) from and including the original issue to, but excluding, March 30, 2024 at a fixed rate of 8.250% per annum of the $25.00 per share liquidation preference, and (ii) from and including March 30, 2024, at a floating rate equal to three-month LIBOR plus a spread of 5.664% per annum of the $25.00 liquidation preference. Under the terms of our Articles of Incorporation, if the publication of LIBOR is not available, the current fallback is for ~~the Company~~us to obtain quotations for what LIBOR should be from major banks in the interbank market. If we are unable to obtain such quotations, we are required to appoint an independent calculation agent, which will determine LIBOR based on sources it deems reasonable in its sole discretion. If the calculation agent is unable or unwilling to determine LIBOR, then the LIBOR in effect for future dividend payments would be LIBOR in effect for the immediately preceding dividend payment period. Notwithstanding the preceding section of this paragraph, if we determine that LIBOR has been discontinued, we will appoint an independent calculation agent to determine whether there is an industry accepted substitute or successor base rate to three-month LIBOR. If the calculation agent determines that there is an industry accepted substitute or successor base rate, the calculation agent shall use such substitute or successor base rate. If the calculation agent determines that there is not an accepted substitute or successor base rate, then the calculation agent will follow the original fallback language.

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 LIBOR that may be implemented in the U.K. or elsewhere. While we expect LIBOR to be available in substantially its current form until the end of ~~2021,~~2022, and likely based on IBA's announced consultation through June 2023, if sufficient banks decline to make submissions to IBA, it is possible that LIBOR will become unavailable prior to that point. Uncertainty as to the nature of such potential changes, alternative reference rates or other reforms may adversely affect the market for, or value of, any securities, loans, derivatives and other financial obligations on which the interest or dividend is determined by reference to LIBOR, which could negatively impact our overall financial condition or results of operations. More generally, any of the above changes or any other consequential changes to LIBOR or any other “benchmark” as a result of international, national or other proposals for reform or other initiatives or investigations, or any further 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 on any securities based on or linked to a “benchmark.”

~~COVID-19 Stimulus~~

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into legislation that authorizes more than $2 trillion in economic relief to individuals, businesses and government organizations due to the economic and health impacts of the COVID-19 pandemic. Among its many provisions, the CARES Act instituted a foreclosure moratorium and borrower right to request forbearance on any federally-backed residential mortgage, including mortgage loans in agency MBS. On July 30, 2021, the Federal Housing Finance Agency (“FHFA”) announced that Fannie Mae and Freddie Mac would not be extending the current foreclosure moratorium date of July 30, 2021; however, the FHFA extended the eviction moratorium until September 30, 2021 on single-family properties that Fannie Mae or Freddie Mac acquired through foreclosure. In addition, under the CARES Act, borrowers of federally-backed residential mortgages may request forbearance if the borrower has experienced financial hardship as a result of the COVID-19 pandemic. If forbearance is requested by the borrower, the loan servicer is required to grant forbearance for up to 180 days that can be extended for an additional 180 days at the borrower’s request. During the forbearance period, the servicer cannot charge or collect any fees, penalties, or interest beyond what could be charged if the borrower made all payments timely. On June 25, 2021, the Federal Housing Authority (“FHA”) further extended the foreclosure moratorium to July 31, 2021 for all federally-backed residential mortgages. The FHA also provided an additional three-month forbearance extension for borrowers who previously received forbearance from their servicer between July 1, 2020 and September 30, 2020, and also extended the time period for borrowers to start new six-month forbearance plans to September 30, 2021. On June 24, 2021, the FHFA further announced that Fannie Mae and Freddie Mac extended their foreclosure moratoriums until July 31, 2021. On July 30, 2021, the FHA once again further extended its foreclosure moratorium to September 30, 2021.

As a response to COVID-19, many state and local jurisdictions have implemented eviction moratoriums with varying expiration periods. On September 4, 2020, the Centers for Disease Control and Prevention (“CDC”) issued a federal eviction moratorium that temporarily halted residential evictions of qualifying tenants for nonpayment of rent during the period from September 4, 2020 to December 31, 2020. On August 3, 2021, the CDC issued an extension of the eviction moratorium through October 3, 2021 in counties experiencing substantial and high levels of community transmission levels of COVID-19; however, on August 26, 2021, the U.S. Supreme Court issued a decision immediately ending the CDC eviction moratorium, immediately allowing for evictions to resume.

We expect vigorous debate and discussion in a number of areas, including residential housing and mortgage reform, fiscal policy, monetary policy 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.

Portfolio Overview

The following table summarizes our ~~mortgage~~asset and capital allocation of our investment ~~portfolio at fair value~~strategies as of ~~September~~June 30, ~~2021~~2022 (dollars in thousands):


	June 30, 2022
	Assets		Invested Capital Allocation (1)		Invested Capital Allocation (%)			Leverage (2)
MSR financing receivables	$	120,260	$	120,260		41	%		0.5
Single-family residential properties		182,783		64,605		22	%		1.9
Credit investments (3)		168,432		63,058		21	%		1.7
Agency MBS (4)		235,781		48,102		16	%		4.0
Total invested capital	$	707,256		296,025		100	%
Cash and other corporate capital				5,486
Total investable capital			$	301,511				1.6

September 30, 2021

Assets

Capital Allocation ⁽¹⁾

Capital Allocation (%)

Leverage ⁽²⁾

Agency MBS and net long TBA commitments

$
659,968

$
134,932

44
%

4.1

MSR financing receivables

112,834

112,834

36
%

0.1

Mortgage credit investments ⁽³⁾

67,725

46,865

15
%

0.4

Single-family residential properties

9,419

15,947

5
%

—

Total mortgage investments

$
849,946

$
310,578

100
%

1.8

(1)

Our investable capital is calculated as the sum of our shareholders’ equity capital plus accumulated depreciation of our single-family residential properties and long-term unsecured debt.

⁽¹⁾

~~Our investable capital is calculated as the sum of our shareholders’ equity capital and long-term unsecured debt.~~

(2)

Our leverage is measured as the ratio of the sum of our repurchase agreement financing, long-term debt secured by single-family properties, net payable or receivable for unsettled securities, net contractual forward purchase or sale price of our TBA commitments and leverage within our MSR financing receivables less our cash and cash equivalents compared to our investable capital.

⁽²⁾

Our leverage is measured as the ratio of the sum of our repurchase agreement financing, net payable or receivable for unsettled securities, net contractual forward purchase price of our TBA commitments and leverage within our MSR financing receivables less our cash and cash equivalents compared to our investable capital.

(3)

Includes our net investment of $25,529 in VIEs with gross assets and liabilities of $231,301 and $205,772, respectively, that is consolidated for GAAP financial reporting purposes.

⁽³⁾

~~Includes our net investment of $12,448 in a VIE with gross assets and liabilities of $19,850 and $7,402, respectively, that is consolidated for GAAP financial reporting purposes.~~

(4)

Agency MBS ~~Investment Portfolio~~

~~Our specified~~assets include the fair value of the agency MBS ~~consisted of~~which underlie the ~~following as of September 30, 2021 (dollars in thousands):~~

Unpaid Principal Balance

Net Unamortized Purchase Premiums

Amortized Cost Basis

Net Unrealized (Loss) Gain

Fair Value

Market Price

Coupon

Weighted
Average
Expected
Remaining
Life

30-year fixed rate:

2.0%

$
456,519

$
12,290

$
468,809

$
(8,634
)

$
460,175

$
100.80

2.00
%

7.3

2.5%

170,776

8,761

179,537

(2,003
)

177,534

103.96

2.50
%

5.3

5.5%

8

—

8

1

9

115.87

5.50
%

4.9

Total/weighted-average

$
627,303

$
21,051

$
648,354

$
(10,636
)

$
637,718

$
101.66

2.14
%

6.7

Unpaid Principal Balance

Net Unamortized Purchase Premiums

Amortized Cost Basis

Net Unrealized (Loss) Gain

Fair Value

Market
Price

Coupon

Weighted
Average
Expected
Remaining
Life

Fannie Mae

$
444,751

$
13,582

$
458,333

$
(6,681
)

$
451,652

$
101.55

2.12
%

6.9

Freddie Mac

182,552

7,469

190,021

(3,955
)

186,066

101.92

2.17
%

6.3

Total/weighted-average

$
627,303

$
21,051

$
648,354

$
(10,636
)

$
637,718

$
101.66

2.14
%

6.7

The annualized prepayment rate for our agency MBS was 8.62% for the three months ended September 30, 2021. As of September 30, 2021, our agency MBS was comprised of securities specifically selected for their relatively lower propensity for

~~prepayment, which includes approximately 60% in specified pools of low balance loans, approximately 24% in specified pools of loans originated in certain geographical areas~~Company's TBA forward purchase and ~~approximately 16% in specified pools of new production serviced by banks.~~ Weighted average pay-up premiums on our agency MBS portfolio, which represent the estimated price premium of agency MBS backed by specified pools over a TBA agency MBS, were approximately one-half of a percentage point as of September 30, 2021.

~~Our agency MBS portfolio also includes net long TBA positions, which are primarily the result of executing sequential series of “dollar roll” transactions that are settled on a net basis.~~sale commitments. In accordance with GAAP, ~~we account for our net long~~the Company's TBA ~~positions~~forward commitments are reflected on the consolidated balance sheets as derivative ~~instruments. Information about our~~assets and liabilities at fair value in the financial statement line items "other assets" and "other liabilities". As of June 30, 2022, the fair value of the underlying agency MBS that underlie the Company's net ~~long~~short position in TBA ~~positions as~~commitments had a fair value of ~~September 30, 2021 is as follows (dollars in thousands):~~

Notional Amount:

Net Long (Short)

Implied

Implied

Net Carrying

Position ⁽¹⁾

Cost Basis ⁽²⁾

Fair Value ⁽³⁾

Amount ⁽⁴⁾

1.5% 30-year MBS purchase commitments

$
175,000

$
171,443

$
169,967

$
(1,476
)
1.5% 30-year MBS sale commitments

(175,000
)

(170,865
)

(169,967
)

898

2.0% 30-year MBS purchase commitments

250,000

251,545

250,938

(607
)
2.0% 30-year MBS sale commitments

(125,000
)

(126,086
)

(125,469
)

617

2.5% 30-year MBS sale commitments

(100,000
)

(102,906
)

(103,219
)

(313
)
Total net long agency TBA dollar roll positions

$
25,000

$
23,131

$
22,250

$
(881
)
$(146,576) with a net carrying value of $337.

⁽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 agency MBS. This amount is reflected on the Company’s consolidated balance sheets as a component of “derivative assets, at fair value” and “derivative liabilities, at fair value.”

MSR Financing Receivables

As of ~~September~~June 30, ~~2021,~~2022, we had ~~$112.8~~$120.3 million of MSR financing receivable investments at fair value. We are party to agreements with a licensed, GSE approved residential mortgage loan servicer that enable us to garner the economic return of an investment in an MSR purchased by the mortgage servicing counterparty. The arrangement allows us to participate in the economic benefits of investing in an MSR without holding the requisite licenses to purchase or hold MSRs directly. The transactions are accounted for as a financing receivable in our consolidated financial statements. The following tables present further information about our MSR financing receivable investments as of ~~September~~June 30, ~~2021~~2022 (dollars in thousands):


Amortized Cost Basis (1)		Unrealized Gain		Fair Value
$	74,866	$	45,394	$	120,260

Amortized Cost Basis ⁽¹⁾

Unrealized Gain

Fair Value

$
104,446

$
8,388

$
112,834

(1)

Represents capital investments plus accretion of interest income net of cash distributions.


MSR Financing Receivable Underlying Reference Amounts:
MSRs		Financing			Advances Receivable		Cash and Other Net Receivables		Counterparty Incentive Fee Accrual			MSR Financing Receivables		Implicit Leverage
$	176,408	$	(60,868	)	$	2,348	$	13,883	$	(11,511	)	$	120,260		0.51


Underlying Reference MSRs:
Holder of Loans	Unpaid Principal Balance		Weighted-Average Note Rate			Weighted-Average Servicing Fee			Weighted-Average Loan Age	Price			Multiple (1)		Fair Value
Fannie Mae	$	12,057,248		3.04	%		0.25	%	18 months		1.35	%		5.38	$	162,449
Freddie Mac		1,015,899		3.66	%		0.25	%	17 months		1.37	%		5.50		13,959
Total/weighted-average	$	13,073,147		3.09	%		0.25	%	18 months		1.35	%		5.39	$	176,408

(1)

Calculated as the underlying MSR price divided by the weighted-average servicing fee.

Credit Investment Portfolio

As of June 30, 2022, our credit investment portfolio was primarily comprised of a $29.5 million commercial mortgage loan secured by a first lien position in healthcare facilities and $138.9 million in non-agency MBS or ABS investments collateralized by commercial mortgage loans, pools of business purpose residential mortgage loans, residential mortgage loans and residential solar panel loans, including a $25.5 million net investment in VIEs consolidated for GAAP financial reporting purposes. The following table presents further information about our credit investments as of June 30, 2022 (dollars in thousands):


	Fair Value (1)		Market Price		Leverage
Commercial MBS	$	99,901	$	99.90		5.6
Commercial mortgage loan		29,484		100.00		2.3
Residential MBS - interest-only (2)		19,255		8.12		—
Residential MBS (2)		1,082		67.11		—
Business purpose residential MBS (3)		15,683		93.51		—
Residential solar panel loan ABS		3,027		59.81		—
Total/weighted-average	$	168,432				1.7

(1)

For credit investments in securities, includes contractual accrued interest receivable.

(2)

Calculated as an annualized internal rate of return based upon our initial investment, cash received from the investment, cash paid for secured financing costs (if any) and assumes liquidation at period-end at an amount equal to estimated fair value plus accrued interest and the payoff of any secured financing and accrued interest thereon (if any).

(3)

Residential MBS – interest-only and residential MBS, in combination, reflect our net investment at fair value of $20,337 in a VIE with gross assets and liabilities of $225,836 and $205,499, respectively, that is consolidated for GAAP financial reporting purposes.

(4)

Includes our net investment of $5,192 in a VIE with gross assets and liabilities of $5,465 and $273, respectively, that is consolidated for GAAP financial reporting purposes.

SFR Rental Properties

The following tables present further information about our SFR rental properties as of June 30, 2022 (dollars in thousands):


Market	Number of Properties		Gross Book Value		Average Gross Book Value		Average Square Feet		Average Year Built
Atlanta, GA		102	$	34,458	$	338		2,209		2008
Dallas, TX		88		30,920		351		1,915		2014
Huntsville, AL		86		28,510		332		2,306		2015
Tulsa, OK		103		27,130		263		1,762		2016
Birmingham, AL		69		18,606		270		1,690		2017
Kansas City, MO		52		15,510		298		1,944		2008
Memphis, TN		49		14,421		294		1,890		2006
Charlotte, NC		37		13,228		358		1,920		2010
Total/weighted average		586	$	182,783	$	312		1,971		2012


Status of Property	Number of Properties		Gross Book Value
In rehabilitation		38	$	12,693
In marketing		97		31,455
Leased not yet occupied		1		247
Leased and occupied		450		138,388
Total		586	$	182,783

As of June 30, 2022, we also had commitments to acquire 25 properties for an aggregate purchase price of $9.0 million.

As of June 30, 2022, we had a commitment pursuant to a purchase and sale agreement to sell 376 of our properties for $131.9 million with an expected closing date of August 19, 2022. As of June 30, 2022, the 376 properties have an investment cost basis of $113.0 million, net of accumulated depreciation of $1.3 million.

Agency MBS Investment Portfolio

Our agency MBS consisted of the following as of June 30, 2022 (dollars in thousands):


	Unpaid Principal Balance		Net Unamortized Purchase Premiums (Discounts)			Amortized Cost Basis		Net Unrealized Gain (Loss)			Fair Value		Market Price		Coupon			Weighted Average Expected Remaining Life
30-year fixed rate:
3.5%	$	68,634	$	(844	)	$	67,790	$	(1,440	)	$	66,350	$	96.67		3.50	%		9.2
4.0%		202,817		1,253			204,070		(3,191	)		200,879		99.04		4.00	%		9.0
4.5%		114,419		(9	)		114,410		710			115,120		100.61		4.50	%		8.1
5.5%		8		—			8		—			8		107.89		5.50	%		5.7
Total/weighted-average	$	385,878	$	400		$	386,278	$	(3,921	)	$	382,357	$	99.09		4.06	%		8.8


	Unpaid Principal Balance		Net Unamortized Purchase Premiums (Discounts)			Amortized Cost Basis		Net Unrealized Gain (Loss)			Fair Value		Market Price		Coupon			Weighted Average Expected Remaining Life
Fannie Mae	$	136,673	$	1,178		$	137,851	$	(2,391	)	$	135,460	$	99.11		4.00	%		8.8
Freddie Mac		249,205		(778	)		248,427		(1,530	)		246,897		99.07		4.09	%		8.8
Total/weighted-average	$	385,878	$	400		$	386,278	$	(3,921	)	$	382,357	$	99.09		4.06	%		8.8

The annualized prepayment rate for our agency MBS was 8.40% for the three months ended June 30, 2022. As of June 30, 2022, our agency MBS was comprised of securities specifically selected for their relatively lower propensity for prepayment, which includes approximately 37% and 29% in specified pools of high loan-to-value and low balance loans, respectively, while the remainder includes specified pools of loans originated in certain geographical areas. Weighted average pay-up premiums on our agency MBS portfolio, which represent the estimated price premium of agency MBS backed by specified pools over a TBA agency MBS, were approximately 0.34 of a percentage point as of June 30, 2022.

Our agency MBS investment portfolio may also include net long TBA positions, which are primarily the result of executing sequential series of “dollar roll” transactions that are settled on a net basis. In addition to transacting in net long positions in TBA securities for investment purposes, we may also, from time to time, transact in net sale (or “net short”) positions in TBA securities for the purpose of economically hedging a portion of the sensitivity of the fair value of our investments in agency MBS to changes in interest rates. In accordance with GAAP, we account for our net long and net short TBA positions as derivative instruments. Information about our net long and net short TBA positions as of as of June 30, 2022 is as follows (dollars in thousands):


	Notional Amount:
	Net Long (Short)			Implied			Implied			Net Carrying
	Position (1)			Cost Basis (2)			Fair Value (3)			Amount (4)
2.5% 30-year MBS sale commitments	$	(25,000	)	$	(22,649	)	$	(22,472	)	$	177
3.0% 30-year MBS sale commitments		(30,000	)		(27,970	)		(27,932	)		38
3.5% 30-year MBS sale commitments		(100,000	)		(95,486	)		(96,172	)		(686	)
4.5% 30-year MBS purchase commitments		50,000			50,121			50,195			74
4.5% 30-year MBS sale commitments		(50,000	)		(50,929	)		(50,195	)		734
Total net long (short) agency TBA positions	$	(155,000	)	$	(146,913	)	$	(146,576	)	$	337

(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 implied fair value of the underlying agency MBS. This amount is reflected on the Company's consolidated balance sheets as a component of "other assets" and "other liabilities".

⁽¹⁾

~~Represents capital investments plus accretion of interest income net of cash distributions.~~

MSR Financing Receivable Underlying Reference Amounts:

MSRs

Financing

Counterparty Incentive Fee Accrual

Cash and Other Net Receivables

MSR Financing Receivables

Implicit Leverage

$
120,589

$
(11,548
)

$
(1,413
)

$
5,206

$
112,834

0.10

Underlying MSRs:

Holder of Loans

Unpaid Principal Balance

Weighted-Average Note Rate

Weighted-Average Servicing Fee

Weighted-Average Loan Age

Price

Multiple ⁽¹⁾

Fair Value

Fannie Mae

$
11,311,790

2.92
%

0.25
%

8 months

1.07
%

4.20

$
120,572

Fannie Mae

1,636

3.22
%

0.25
%

4 months

1.07
%

4.27

17

Total/weighted-average

$
11,313,426

2.92
%

0.25
%

8 months

1.07
%

4.20

$
120,589

⁽¹⁾

~~Calculated as the underlying MSR price divided by the weighted-average servicing fee.~~

Economic Hedging Instruments

We attempt to hedge a portion of our exposure to interest rate fluctuations associated with our agency MBS primarily through the use of interest rate hedging instruments. Specifically, these interest rate hedging instruments are intended to economically hedge changes, attributable to changes in benchmark interest rates, in agency MBS fair values and future interest cash flows on our

short-term financing arrangements. As of ~~September~~June 30, ~~2021,~~2022, the interest rate hedging instruments that we primarily used ~~by us~~ were ~~centrally cleared~~ interest rate swap agreements.

Our LIBOR-based interest rate swap agreements represent agreements to make semiannual interest payments based upon a fixed interest rate and receive quarterly variable interest payments based upon the prevailing three-month LIBOR as of the preceding reset date. Our SOFR-based interest rate swap agreements represent agreements to make annual interest payments based upon a fixed interest rate and receive annual variable interest payments based upon the daily SOFR over the preceding annual ~~period~~.period. Information about our outstanding interest rate swap agreements in effect as of ~~September~~June 30, ~~2021~~2022 is as follows (dollars in thousands):


			Weighted-average:													Weighted-average:
	Notional Amount		Fixed Pay Rate			Variable Receive Rate			Net Receive (Pay) Rate			Remaining Life (Years)		Notional Amount		Fixed Pay Rate			Variable Receive Rate			Net Receive (Pay) Rate			Remaining Life (Years)
Years to maturity:
Less than 3 years	$	100,000		0.11	%		0.04	%		(0.07	)%		2.1	$	130,000		1.32	%		1.22	%		(0.10	)%		1.5
3 to less than 10 years		115,000		1.09	%		0.10	%		(0.99	)%		9.3		100,000		1.68	%		1.30	%		(0.38	)%		5.4
Total / weighted-average	$	215,000		0.64	%		0.07	%		(0.57	)%		6.0	$	230,000		1.48	%		1.25	%		(0.23	)%		3.2

In addition to interest rate swap agreements, we may also use exchange-traded U.S. Treasury note futures ~~that are either long or short positions~~ that mature on a quarterly basis. Upon the maturity date of these futures contracts, we have the option to either net settle each contract in cash in an amount equal to the difference between the current fair value of the underlying U.S. Treasury note and the contractual sale price inherent to the futures contract, or to physically settle the contract by ~~purchasing or~~ delivering the underlying U.S. Treasury ~~note~~.note. As of ~~September~~June 30, ~~2021,~~2022, we had no outstanding U.S. Treasury note futures.

~~Mortgage Credit Investment Portfolio~~

As of September 30, 2021, our mortgage credit investment portfolio was primarily comprised of a $29.8 million commercial mortgage loan secured by a first lien position in healthcare facilities and $37.9 million in non-agency MBS investments collateralized by pools of residential mortgage loans, business purpose residential mortgage loans and small balance commercial mortgage loans, including a $12.4 million net investment in a consolidated variable interest entity (“VIE”). The following table presents further information about our mortgage credit investments as of September 30, 2021 (dollars in thousands):

Unpaid Principal Balance

Net Unamortized Premiums (Discounts)

Amortized Original Cost Basis

Net Unrealized Gain (Loss)

Fair Value ⁽¹⁾

Market Price

Leverage

Total Return on Capital ⁽²⁾

Commercial mortgage loan

$
29,800

$
—

$
29,800

$
—

$
29,800

$
100.00

2.3

9.83
%
Business purpose residential MBS⁽³⁾

24,649

1,805

26,454

(3,289
)

23,165

93.71

—

9.84
%
Residential MBS

6,934

5

6,939

21

6,960

100.04

—

5.29
%
Commercial MBS

6,000

(766
)

5,234

(859
)

4,375

72.38

—

(2.01
%)
Other

5,061

(1,547
)

3,514

(89
)

3,425

67.70

—

0.20
%
Total/weighted-average

$
72,444

$
(503
)

$
71,941

$
(4,216
)

$
67,725

$
93.32

0.4

7.43
%

~~(1)~~

~~For investments in mortgage credit securities, includes contractual accrued interest receivable.~~

~~(2)~~

Calculated as an annualized internal rate of return based upon our initial investment, cash received from the investment, cash paid for secured financing costs (if any) and assumes liquidation at quarter-end at an amount equal to estimated fair value plus accrued interest and the payoff of any secured financing and accrued interest thereon (if any).

~~(3)~~

~~Includes our net investment of $12,448 in a VIE with gross assets and liabilities of $19,850 and $7,402, respectively, that is consolidated for GAAP financial reporting purposes.~~

~~Single-Family Residential Rental Properties~~

~~The following table presents further information about our single-family residential rental properties as of September 30, 2021 (dollars in thousands):~~

Market

Number of
Properties

Gross Book
Value

Average Gross
Book Value

Average
Square Feet

Average
Year Built

Tulsa, OK
��

12

$
3,024

$
252

1,683

2005

Atlanta, GA

5

1,624

325

1,808

2012

Charlotte, NC

5

1,546

309

2,754

2011

Dallas, TX

4

1,269

317

1,968

2008

Kansas City, MO

4

1,088

272

2,384

2004

Memphis, TN

3

868

289

1,875

2004

Total/weighted average

33

$
9,419

$
285

2,001

2007

~~As of September 30, 2021, the Company also had commitments to acquire 75 properties for an aggregate purchase price of $19,949.~~

Results of Operations

Net ~~Interest~~Operating Income

Net ~~interest~~operating income ~~determined in accordance with GAAP~~ primarily represents the interest and other income recognized from our ~~specified agency MBS, mortgage credit~~ investments in financial assets and ~~MSR financing receivables (including the amortization of purchase premiums and accretion of purchase discounts),~~rent revenues recognized from SFR properties net of the interest expense incurred from repurchase agreement financing arrangements or other ~~short-~~short and long-term borrowing ~~transactions.~~ transactions and SFR property operating expenses.

Net ~~interest~~operating income ~~determined in accordance with GAAP~~ does not include TBA agency MBS dollar roll income, which we believe represents the economic equivalent of net interest income generated from our investments in non-specified fixed-rate agency MBS, nor does it include the net interest income or expense of our interest rate swap agreements, which are not designated as hedging instruments for financial reporting purposes. In our consolidated statements of comprehensive income, ~~prepared in accordance with GAAP,~~ TBA agency MBS dollar roll income and the net interest income or expense from our interest rate swap agreements are reported as a component of the overall periodic change in the fair value of derivative instruments within the line item ~~“gain (loss) from~~“investment and derivative ~~instruments, net” of the “investment~~ gain (loss), ~~net” section.~~net.”

Investment and Derivative Gain (Loss), Net

“Investment and derivative gain (loss), net” primarily consists of periodic changes in the fair value (whether realized or unrealized) of ~~the Company’s mortgage~~our investments in financial assets and periodic changes in the fair value (whether realized or unrealized) of derivative instruments.

General and Administrative Expenses

“Compensation and benefits expense” includes base salaries, annual cash incentive compensation, and non-cash stock-based compensation. Annual cash incentive compensation is based on meeting estimated annual performance measures and discretionary components. Non-cash stock-based compensation includes expenses associated with stock-based awards granted to employees, including ~~the Company’s~~our performance share units to named executive 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, proxy solicitation expenses, corporate registration fees, local license taxes, office supplies and other miscellaneous expenses.

•

~~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~~

•

Three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 compared to the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021

The following table presents the ~~net income (loss) available (attributable) to common stock reported~~summary financial information for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively (dollars in thousands, except per share amounts):

Three Months Ended September 30,

Nine Months Ended September 30,

2021

2020

2021

2020

Interest income

$
6,346

$
5,410

$
19,650

$
36,517

Interest expense

1,914

1,632

6,373

19,833

Net interest income

4,432

3,778

13,277

16,684

Single-family property operating expenses

(36
)

—

(36
)

—

Investment (loss) gain, net

(1,313
)

3,952

(17,108
)

(86,319
)
General and administrative expenses

(2,897
)

(2,971
)

(8,724
)

(9,542
)
Income (loss) before income taxes

186

4,759

(12,591
)

(79,177
)
Income tax provision

436

—

758

—

Net (loss) income

(250
)

4,759

(13,349
)

(79,177
)
Dividend on preferred stock

(731
)

(726
)

(2,177
)

(2,258
)
Net (loss) income (attributable) available to common stock

$
(981
)

$
4,033

$
(15,526
)

$
(81,435
)
Diluted (loss) earnings per common share

$
(0.03
)

$
0.12

$
(0.47
)

$
(2.26
)
Weighted-average diluted common shares
outstanding

31,927

34,697

32,720

35,990


	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Interest and other income	$	8,763		$	7,045		$	16,169		$	13,304
Rent revenues from single-family residential properties		2,137			—			3,201			—
Interest expense		(4,459	)		(1,958	)		(7,701	)		(4,459	)
Single-family residential property operating expenses		(1,915	)		—			(3,446	)		—
Net operating income		4,526			5,087			8,223			8,845
Investment and derivative gain (loss), net		370			(9,032	)		(457	)		(15,795	)
General and administrative expenses		(3,787	)		(3,190	)		(7,071	)		(5,827	)
Income (loss) before income taxes		1,109			(7,135	)		695			(12,777	)
Income tax provision (benefit)		802			(76	)		3,089			322
Net income (loss)		307			(7,059	)		(2,394	)		(13,099	)
Dividend on preferred stock		(707	)		(723	)		(1,449	)		(1,446	)
Net loss attributable to common stock	$	(400	)	$	(7,782	)	$	(3,843	)	$	(14,545	)
Diluted loss per common share	$	(0.01	)	$	(0.24	)	$	(0.13	)	$	(0.44	)
Weighted-average diluted common shares outstanding		28,766			33,066			29,296			33,123

~~GAAP~~ The following tables present our net operating income for the periods indicated, disaggregated by our investments in financial assets, investments in SFR properties and corporate and other (dollars in thousands):


	Three Months Ended June 30, 2022
	Investments in Financial Assets			Investments in SFR Properties			Corporate and Other			Total
Interest and other income	$	8,763		$	—		$	—		$	8,763
Rent revenues from single-family properties		—			2,137			—			2,137
Interest expense		(2,341	)		(718	)		(1,400	)		(4,459	)
Single-family property operating expenses		—			(1,915	)		—			(1,915	)
Net operating income (loss)	$	6,422		$	(496	)	$	(1,400	)	$	4,526


	Three Months Ended June 30, 2021
	Investments in Financial Assets			Investments in SFR Properties		Corporate and Other			Total
Interest and other income	$	7,045		$	—	$	—		$	7,045
Rent revenues from single-family properties		—			—		—			—
Interest expense		(808	)		—		(1,150	)		(1,958	)
Single-family property operating expenses		—			—		—			—
Net operating income (loss)	$	6,237		$	—	$	(1,150	)	$	5,087


	Six Months Ended June 30, 2022
	Investments in Financial Assets			Investments in SFR Properties			Corporate and Other			Total
Interest and other income	$	16,169		$	—		$	—		$	16,169
Rent revenues from single-family properties		—			3,201			—			3,201
Interest expense		(3,805	)		(1,126	)		(2,770	)		(7,701	)
Single-family property operating expenses		—			(3,446	)		—			(3,446	)
Net operating income (loss)	$	12,364		$	(1,371	)	$	(2,770	)	$	8,223


	Six Months Ended June 30, 2021
	Investments in Financial Assets			Investments in SFR Properties		Corporate and Other			Total
Interest and other income	$	13,304		$	—	$	—		$	13,304
Rent revenues from single-family properties		—			—		—			—
Interest expense		(2,158	)		—		(2,301	)		(4,459	)
Single-family property operating expenses		—			—		—			—
Net operating income (loss)	$	11,146		$	—	$	(2,301	)	$	8,845

Net ~~Interest~~Operating Income from Investments in Financial Assets

Net ~~interest~~operating income ~~determined~~from our investments in ~~accordance with GAAP (“GAAP net interest income”)~~financial assets increased ~~$0.6~~$0.2 million, or ~~15.8%~~3.2%, from ~~$3.8~~$6.2 million for the three months ended ~~September~~June 30, ~~2020~~2021 to ~~$4.4~~$6.4 million for the three months ended ~~September~~June 30, ~~2021. GAAP net interest~~2022. Net operating income ~~decreased $3.4~~from our investments in financial assets increased $1.3 million, or ~~20.4%~~11.7%, from ~~$16.7~~$11.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 to ~~$13.3~~$12.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. The increase from the comparative periods is primarily the result of a higher average investment balance in higher yielding MSR financing receivables.

The components of ~~GAAP~~ net ~~interest~~operating income from our ~~investment portfolio~~investments in financial assets are summarized in the following ~~table~~tables for the periods indicated (dollars in thousands):


	Three Months Ended June 30,
	2022								2021
	Average		Income			Yield			Average		Income			Yield
	Balance		(Expense)			(Cost)			Balance		(Expense)			(Cost)
Agency MBS	$	280,167	$	2,065			2.95	%	$	735,641	$	2,984			1.62	%
Credit investments		62,869		991			6.31	%		91,858		1,770			7.71	%
Mortgage loans of consolidated VIEs		262,098		1,611			2.46	%		53,534		776			5.80	%
MSR financing receivables		104,244		3,983			15.28	%		52,075		1,390			10.68	%
Other		2,297		113						4,394		125
	$	711,675		8,763			4.93	%	$	937,502		7,045			3.01	%
Repurchase agreements	$	282,725		(763	)		(1.07	)%	$	652,624		(403	)		(0.24	)%
Secured debt of consolidated VIEs		246,642		(1,578	)		(2.56	)%		38,152		(405	)		(4.25	)%
	$	529,367		(2,341	)		(1.76	)%	$	690,776		(808	)		(0.46	)%
Net interest income/spread			$	6,422			3.17	%			$	6,237			2.55	%
Levered net interest return (1)							14.09	%							10.11	%


	Six Months Ended June 30,
	2022								2021
	Average		Income			Yield			Average		Income			Yield
	Balance		(Expense)			(Cost)			Balance		(Expense)			(Cost)
Agency MBS	$	336,192	$	3,557			2.12	%	$	726,365	$	5,768			1.59	%
Credit investments		59,533		1,844			6.19	%		78,199		3,039			7.77	%
Mortgage loans of consolidated VIEs		226,120		2,965			2.62	%		68,398		2,463			7.20	%
MSR financing receivables		106,260		7,365			13.86	%		33,754		1,748			10.36	%
Other		3,545		438						5,318		286
	$	731,650		16,169			4.42	%	$	912,034		13,304			2.92	%
Repurchase agreements	$	312,544		(1,039	)		(0.66	)%	$	603,233		(891	)		(0.29	)%
Secured debt of consolidated VIEs		210,703		(2,766	)		(2.63	)%		53,939		(1,267	)		(4.70	)%
	$	523,247		(3,805	)		(1.45	)%	$	657,172		(2,158	)		(0.65	)%
Net interest income/spread			$	12,364			2.97	%			$	11,146			2.27	%
Levered net interest return (1)							11.87	%							8.75	%

Three Months Ended September 30,

2021

2020

Average

Income

Yield

Average

Income

Yield

Balance

(Expense)

(Cost)

Balance

(Expense)

(Cost)

Agency MBS

$
700,865

$
2,660

1.52
%

$
539,095

$
2,808

2.08
%
Mortgage credit investments

65,419

1,247

7.62
%

130,266

2,217

6.81
%
Mortgage loans of consolidated VIE

29,031

301

4.15
%

—

—

MSR financing receivable

87,933

1,945

8.85
%

—

—

Other

—

193

—

385

$
883,248

6,346

2.87
%

$
669,361

5,410

3.23
%
Repurchase agreements

$
599,224

(306
)

(0.20
)%

$
412,071

(470
)

(0.45
)%
Long-term unsecured debt

93,899

(1,435
)

(6.11
)%

73,173

(1,162
)

(6.35
)%
Secured debt of consolidated VIE

16,452

(173
)

(4.21
)%

—

—

$
709,575

(1,914
)

(1.08
)%

$
485,244

(1,632
)

(1.34
)%
Net interest income/spread ⁽¹⁾

$
4,432

2.56
%

$
3,778

2.78
%
Net interest margin ⁽¹⁾

2.66
%

2.95
%
(1)

Calculated as net interest income divided by the weighted average asset balance net of the weighted average secured financing balance.

Nine Months Ended September 30,

2021

2020

Average

Income

Yield

Average

Income

Yield

Balance

(Expense)

(Cost)

Balance

(Expense)

(Cost)

Agency MBS

$
717,865

$
8,428

1.57
%

$
1,506,029

$
29,713

2.63
%
Mortgage credit investments

73,939

4,286

7.73
%

120,089

5,742

6.38
%
Mortgage loans of consolidated VIE

55,275

2,764

6.67
%

—

—

MSR financing receivables

51,813

3,693

9.50
%

—

—

Other

—

479

—

1,062

$
898,892

19,650

2.91
%

$
1,626,118

36,517

2.99
%
Repurchase agreements

$
601,897

(1,197
)

(0.26
)%

$
1,378,097

(16,216
)

(1.55
)%
Long-term unsecured debt

80,000

(3,736
)

(6.23
)%

73,959

(3,617
)

(6.52
)%
Secured debt of consolidated VIE

41,443

(1,440
)

(4.63
)%

—

—

$
723,340

(6,373
)

(1.17
)%

$
1,452,056

(19,833
)

(1.80
)%
Net interest income/spread ⁽¹⁾

$
13,277

2.37
%

$
16,684

1.45
%
Net interest margin ⁽¹⁾

2.52
%

1.66
%

~~(1)~~

~~Net interest spread and net interest margin rates exclude interest on long-term unsecured debt.~~

The effects of changes in the composition of our investments in financial assets on ~~our GAAP~~ net ~~interest~~operating income ~~from our investment activities~~ are summarized below (dollars in thousands):


	Three Months Ended September 30, 2021									Nine Months Ended September 30, 2021									Three Months Ended June 30, 2022									Six Months Ended June 30, 2022
	vs.									vs.									vs.									vs.
	Three Months Ended September 30, 2020									Nine Months Ended September 30, 2020									Three Months Ended June 30, 2021									Six Months Ended June 30, 2021
	Rate			Volume			Total Change			Rate			Volume			Total Change			Rate			Volume			Total Change			Rate			Volume			Total Change
Agency MBS	$	(997	)	$	849		$	(148	)	$	(5,735	)	$	(15,550	)	$	(21,285	)	$	927		$	(1,846	)	$	(919	)	$	888		$	(3,099	)	$	(2,211	)
Mortgage credit investments		129			(1,099	)		(970	)		937			(2,393	)		(1,456	)
Mortgage loans of consolidated VIE		—			301			301			—			2,764			2,764
Credit investments																				(700	)		(79	)		(779	)		(1,034	)		(161	)		(1,195	)
Mortgage loans of consolidated VIEs																				(2,187	)		3,022			835			(5,199	)		5,701			502
MSR financing receivables		—			1,945			1,945			—			3,693			3,693			1,200			1,393			2,593			1,862			3,755			5,617
Other		—			(192	)		(192	)		—			(583	)		(583	)		48			(60	)		(12	)		179			(27	)		152
Repurchase agreements		378			(214	)		164			5,886			9,133			15,019			(585	)		225			(360	)		(329	)		181			(148	)
Long-term unsecured debt		55			(328	)		(273	)		177			(296	)		(119	)
Secured debt of consolidated VIE		—			(173	)		(173	)		—			(1,440	)		(1,440	)
Secured debt of consolidated VIEs																				1,043			(2,216	)		(1,173	)		814			(2,313	)		(1,499	)
	$	(435	)	$	1,089		$	654		$	1,265		$	(4,672	)	$	(3,407	)	$	(254	)	$	439		$	185		$	(2,819	)	$	4,037		$	1,218

Net Operating Loss from SFR Properties

~~Economic Net Interest Income~~

~~Economic net interest income,~~We began to acquire SFR properties pursuant to our SFR property rental investment strategy in September 2021. The homes we acquire may require minor refurbishment prior to a ~~non-GAAP financial measure, represents~~tenant occupying the ~~interest income earned net~~property. In addition, there is typically a lease marketing period prior to a new tenant occupying the home. We expect the time period between the date of settlement of the home purchase and the date the house is occupied by a tenant to average between 30 to 60 days. The timing of the earnings benefit to us will be dictated by the pace of home purchases, the level of any property level refurbishments and the length of the lease marketing period. During the period prior to a lease commencement date, we incur property costs such as real estate taxes, insurance, homeowner association fees and depreciation. For the three months ended June 30, 2022, we had rental income of $2.1 million, interest expense ~~incurred~~ from ~~all~~long-term debt secured by the properties of ~~our~~$0.7 million and property operating expenses of $1.9 million, including $0.6 million of depreciation expense, for a net operating loss of $0.5 million. For the six months ended June 30, 2022, we had rental income of $3.2 million, interest ~~bearing financial instruments as well as~~expense from long-term debt secured by the ~~agency MBS which underlie,~~properties of $1.1 million and property operating expenses of $3.5 million, including $1.3 million of depreciation expense, for a net operating loss of $1.4 million. The net operating loss for the periods 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 earned or expenseattributable to property costs 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 general and administrative expenses. For a full description of each~~commencement of the ~~three aforementioned components of economic net interest income, see “Non-GAAP Core Operating Income” below~~.leases for the newly acquired homes.

~~Below is a reconciliation of economic net interest income, a non-GAAP financial measure, to net interest income determined in accordance with GAAP (dollars in thousands):~~46

Three Months Ended September 30,

Nine Months Ended September 30,

2021

2020

2021

2020

Economic net interest income

$
5,117

$
4,074

$
14,679

$
17,841

TBA dollar roll income

(1,064
)

(319
)

(3,678
)

(594
)
Interest rate swap net interest expense (income)

379

23

2,276

(563
)
Net interest income determined in accordance with GAAP

$
4,432

$
3,778

$
13,277

$
16,684

~~The components of our economic net interest income are summarized in the following table for the periods indicated (dollars in thousands):~~

Three Months Ended September 30,

2021

2020

Average

Income

Yield

Average

Income

Yield

Balance

(Expense)

(Cost)

Balance

(Expense)

(Cost)

Agency MBS

$
700,865

$
2,660

1.52
%

$
539,095

$
2,808

2.08
%
Mortgage credit investments

65,419

1,247

7.62
%

130,266

2,217

6.81
%
Mortgage loans of consolidated VIE

29,031

301

4.15
%

—

—

MSR financing receivables

87,933

1,945

8.85
%

—

—

TBA dollar rolls ⁽¹⁾

211,070

1,064

2.02
%

48,779

319

2.62
%
Other

—

193

—

385

Repurchase agreements

599,224

(306
)

(0.20
)%

412,071

(470
)

(0.45
)%
Interest rate swaps ⁽²⁾

286,326

(379
)

(0.53
)%

50,000

(23
)

(0.18
)%
Long-term unsecured debt

93,899

(1,435
)

(6.11
)%

73,173

(1,162
)

(6.35
)%
Secured debt of consolidated VIE

16,452

(173
)

(4.21
)%

—

—

Economic net interest income/margin ⁽³⁾

$
5,117

2.39
%

$
4,074

2.92
%

Nine Months Ended September 30,

2021

2020

Average

Income

Yield

Average

Income

Yield

Balance

(Expense)

(Cost)

Balance

(Expense)

(Cost)

Agency MBS

$
717,865

$
8,428

1.57
%

$
1,506,029

$
29,713

2.63
%
Mortgage credit investments

73,939

4,286

7.73
%

120,089

5,742

6.38
%
Mortgage loans of consolidated VIE

55,275

2,764

6.67
%

—

—

MSR financing receivables

51,813

3,693

9.50
%

—

—

TBA dollar rolls ⁽¹⁾

216,322

3,678

2.27
%

47,593

594

1.66
%
Other

—

479

—

1,062

Repurchase agreements

601,897

(1,197
)

(0.26
)%

1,378,097

(16,216
)

(1.55
)%
Interest rate swaps ⁽²⁾

483,671

(2,276
)

(0.63
)%

863,375

563

0.09
%
Long-term unsecured debt

80,000

(3,736
)

(6.23
)%

73,959

(3,617
)

(6.52
)%
Secured debt of consolidated VIE

41,443

(1,440
)

(4.63
)%

—

—

Economic net interest income/margin ⁽³⁾

$
14,679

2.20
%

$
17,841

1.71
%

~~(1)~~

TBA dollar roll average balance (average cost basis) is based upon the contractual price of the initial TBA purchase trade of each 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 receive (pay) rate in effect for the period, adjusted for~~ “~~price alignment~~ ~~interest” income earned or expense incurred on cumulative variation margin paid or received, respectively.~~

~~(3)~~

~~Net interest spread and net interest margin rates exclude 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~~Investment and ~~related funding and hedging activities are summarized below (dollars in thousands):~~

Three Months Ended September 30, 2021

Nine Months Ended September 30, 2021

vs.

vs.

Three Months Ended September 30, 2020

Nine Months Ended September 30, 2020

Rate

Volume

Total Change

Rate

Volume

Total Change

Agency MBS

$
(997
)

$
849

$
(148
)

$
(5,735
)

$
(15,550
)

$
(21,285
)
Mortgage credit investments

129

(1,099
)

(970
)

937

(2,393
)

(1,456
)
Mortgage loans of consolidated VIE

—

301

301

—

2,764

2,764

MSR financing receivables

—

1,945

1,945

—

3,693

3,693

TBA dollar rolls

(314
)

1,059

745

979

2,105

3,084

Other

—

(192
)

(192
)

—

(583
)

(583
)
Repurchase agreements

378

(214
)

164

5,886

9,133

15,019

Interest rate swaps

(247
)

(109
)

(356
)

(2,591
)

(248
)

(2,839
)
Long-term unsecured debt

55

(328
)

(273
)

177

(296
)

(119
)
Secured debt of consolidated VIE

—

(173
)

(173
)

—

(1,440
)

(1,440
)

$
(996
)

$
2,039

$
1,043

$
(347
)

$
(2,815
)

$
(3,162
)

~~Investment~~Derivative Gain (Loss), Net

As prevailing longer-term interest rates increase (decrease), the fair value of our investments in fixed-rate agency MBS and TBA commitments generally decreases (increases). Conversely, the fair value of our interest rate derivative hedging instruments and MSR financing receivables generally increase (decrease) 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 our agency MBS portfolio to fluctuations in interest rates, they are not generally designed to mitigate the sensitivity of our net book value to spread risk, which is 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 rate swaps. Accordingly, irrespective of fluctuations in interest rates, an increase (decrease) in agency MBS spreads will generally result in the underperformance (outperformance) of the values of agency MBS relative to interest rate hedging ~~instruments~~.instruments.

The following table presents information about the gains and losses recognized due to the changes in the fair value of our investments and interest rate hedging instruments for the periods indicated (dollars in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

2021

2020

2021

2020

(Loss) gain on agency MBS investments, net

$
(2,447
)

$
1,858

$
(24,532
)

$
29,784

Gain (loss) on mortgage credit investments, net

546

838

2,364

(16,369
)
Gain on MSR financing receivable

4,452

—

8,388

—

TBA commitments, net:

TBA dollar roll income

1,064

319

3,678

594

Other (loss) gain from TBA commitments, net

(2,082
)

(108
)

(12,204
)

4,726

Total (loss) gain on TBA commitments, net

(1,018
)

211

(8,526
)

5,320

Interest rate derivatives:

Net interest (expense) income on interest rate swaps

(379
)

(23
)

(2,276
)

563

Other (loss) gain from interest rate derivative
instruments, net

(1,930
)

299

7,037

(107,353
)
Total (loss) gain on interest rate derivatives, net

(2,309
)

276

4,761

(106,790
)
Other derivatives, net

—

—

—

(1,040
)
Other investments, net

(537
)

769

437

2,776

Investment (loss) gain, net

$
(1,313
)

$
3,952

$
(17,108
)

$
(86,319
)


	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
(Loss) gain on agency MBS investments, net	$	(10,591	)	$	7,130		$	(36,548	)	$	(22,085	)
(Loss) gain on credit investments, net		(682	)		225			607			1,818
Gain (loss) on MSR financing receivables		8,452			(2,021	)		31,210			3,936
TBA commitments, net:
TBA dollar roll income		280			1,778			1,103			2,614
Other loss from TBA commitments, net		(263	)		(890	)		(4,969	)		(10,122	)
Total gain (loss) on TBA commitments, net		17			888			(3,866	)		(7,508	)
Interest rate derivatives:
Net interest expense on interest rate swaps		(282	)		(1,187	)		(573	)		(1,897	)
Other gain (loss) from interest rate derivative instruments, net		3,519			(14,684	)		9,360			8,967
Total gain (loss) on interest rate derivatives, net		3,237			(15,871	)		8,787			7,070
Other investments, net		(63	)		617			(647	)		974
Investment and derivative gain (loss), net	$	370		$	(9,032	)	$	(457	)	$	(15,795	)

General and Administrative Expenses

General and administrative expenses ~~decreased~~increased by ~~$0.1~~$0.6 million ~~or 3.3%,~~ from ~~$3.0~~$3.2 million for the three months ended ~~September~~June 30, ~~2020~~2021 to ~~$2.9~~$3.8 million for the three months ended ~~September~~June 30, 2021. General and administrative expenses decreased by $0.8 million, or 8.4%, from $9.5 million for the nine months ended September 30, 2020 to $8.7 million for the nine months ended September 30, 2021.2022. The ~~decrease~~increase in general and administrative expenses for the ~~nine~~three months ended ~~September~~June 30, ~~2021~~2022 is primarily due to ~~a decrease~~an increase in compensation and benefits expense primarily as a result of an increase in performance based management incentive compensation. General and ~~professional services expenses.~~

~~Compensation and benefits expense~~administrative expenses increased by ~~$0.1~~$1.3 million ~~or 5.6%,~~ from ~~$1.8~~$5.8 million for the ~~three~~six months ended ~~September~~June 30, ~~2020~~2021 to ~~$1.9~~$7.1 million for the ~~three~~six months ended ~~September~~June 30, 2021. Compensation and benefits expense decreased by $0.4 million, or 7.3%, from $5.5 million for the nine months ended September 30, 2020 to $5.1 million for the nine months ended September 30, 2021. The decrease in compensation and benefits for the nine months ended September 30, 2021 is primarily due to a decrease in management cash incentive compensation.2022.

Other general and administrative expenses decreased by $0.2 million, or 16.7%, from $1.2 million for the three months ended September 30, 2020 to $1.0 million for the three months ended September 30, 2021. Other general and administrative expenses decreased by $0.4 million, or 10.0%, from $4.0 million for the nine months ended September 30, 2020 to $3.6 million for the nine months ended September 30, 2021. The decrease in other general and administrative expenses for the nine months ended September 30, 2021 is primarily due to a decrease in professional services expenses.

Income Tax Provision

Our ~~taxable REIT subsidiaries (“TRSs”)~~TRSs are subject to U.S. federal and state corporate income taxes. As a result, for the three ~~and nine~~ months ended ~~September~~June 30, 2022 and 2021, we recognized a provision (benefit) for income taxes of $0.8 million and $(0.1) million, respectively, on the pre-tax net income of our TRSs. For the six months ended June 30, 2022 and 2021, we recognized a provision for income taxes of ~~$0.4~~$3.1 million and ~~$0.8~~$0.3 million, respectively, on the pre-tax net income of our TRSs. As noted in ~~“Non-GAAP Core Operating Income”~~“Non-GAAP Earnings Available for Distribution” below, our computation of non-GAAP ~~core operating income~~earnings available for distribution includes a provision for income taxes on the ~~core operating income~~earnings available for distribution of our TRSs. TRS ~~core operating income~~earnings available for distribution is comprised of net interest income generated by TRSs net of the TRSs’ general and administrative expenses. In our consolidated financial consolidated statements of comprehensive income prepared in accordance with GAAP, the “income tax provision (benefit)” includes (i) the income tax provision for TRS ~~core operating income~~earnings available for distribution and (ii) an income tax provision for (or benefit from) periodic increases (or decreases) in the fair value of the investments of our TRSs, which are recognized in net income as a component of “investment and derivative gain (loss) net.” Below is a reconciliation of the income tax provision for TRS ~~core operating income,~~earnings available for distribution, a non-GAAP financial measure, to the income tax provision determined in accordance with GAAP for the periods indicated (dollars in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

2021

2020

2021

2020

Income tax provision for TRS core operating income

$
85

$
—

$
157

$
—

Income tax provision for TRS investment gains, net

351

—

601

—

GAAP income tax provision

$
436

$
—

$
758

$
—


	Three Months Ended June 30,					Six Months Ended June 30,
	2022		2021			2022		2021
Income tax provision for TRS earnings available for distribution	$	306	$	61		$	535	$	72
Income tax provision (benefit) for TRS investment gains (losses), net		496		(137	)		2,554		250
GAAP income tax provision (benefit)	$	802	$	(76	)	$	3,089	$	322

Non-GAAP Earnings Available for Distribution

~~Non-GAAP Core Operating Income~~

In addition to the results of operations determined in accordance with GAAP, we also report “non-GAAP core operating income.” We define core operating income as “economic net interest income” and “single-family residential property operating profit” less “core general and administrative expenses,” “income tax provision for TRS core operating income” and preferred stock dividends.

~~Economic Net Interest Income~~

~~Economic net interest income,~~ a non-GAAP financial measure ~~represents the interest~~"earnings available for distribution" (formerly core operating income). We define earnings available for distribution as net income earned net of the interest expense incurred from all of our 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 incomeavailable to common stock determined in accordance with GAAP ~~(ii)~~adjusted for the following items:

•

Plus (less) realized and unrealized losses (gains) on investments and derivatives;

•

Plus (less) income tax provision (benefit) for TRS realized and unrealized gains and losses on investments and derivatives

•

Plus TBA ~~agency MBS “dollar roll”~~dollar roll income

•

Plus (less) interest rate swap net interest income (expense)

•

Plus depreciation of single-family residential properties

•

Plus stock-based compensation

Realized and unrealized gains and losses recognized with respect to our mortgage related investments and economic hedging instruments, which are reported in line item “investment and derivative gain (loss), net” of our consolidated statements of comprehensive income, other than TBA dollar roll income and ~~(iii)~~interest rate swap net interest income or expense, are excluded from the computation of earnings available for distribution as such gains on losses are not reflective of the economic interest income earned or interest expense incurred from our interest-bearing financial assets and liabilities during the indicated reporting period. Because our long-term-focused investment strategy for our mortgage related investment portfolio is to generate a net spread on the leveraged assets while prudently hedging periodic changes in the fair value of those assets attributable to changes in benchmark interest ~~rate swap agreements.~~

~~We believe that economic net interest income assists investors~~rates, we generally expect the fluctuations in ~~understanding and evaluating~~ the ~~financial performance~~fair value of our ~~long-term-focused, net interest spread-based investment strategy, prior~~mortgage related investments and economic hedging instruments to ~~the deduction~~largely offset one another over time. In addition, certain of ~~core general~~our investments are held by our TRS which is subject to U.S. federal and ~~administrative expenses.~~state corporate income taxes. In calculating earnings available for distribution, any income tax provision or benefit associated with gains or losses on our mortgage related investments and economic hedging instruments are also excluded from earnings available for distribution.

•

~~Net interest income determined in accordance with GAAP~~. Net interest income determined in accordance with GAAP primarily represents the interest income recognized from our investments in specified agency MBS, mortgage credit investments and MSR financing receivables (including the amortization of purchase premiums and accretion of purchase discounts), net of the interest expense incurred from repurchase agreement financing arrangements or other short- and long-term borrowing transactions income.

•

TBA ~~agency MBS~~ dollar ~~roll income. Dollar~~ roll income represents the economic equivalent of net interest income (implied interest income net of 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 a result of delaying, or “rolling,” the settlement of a forward-settling purchase of a TBA agency MBS by entering into an offsetting “spot” sale with the same counterparty prior to the settlement date, net settling the “paired-off” positions in cash, and contemporaneously entering another forward-settling purchase with the same counterparty of a TBA agency MBS of the same essential characteristics for a later settlement date at a price discount relative to the spot sale. The price discount of the forward-settling purchase relative to the contemporaneously executed spot sale reflects compensation for the interest income (inclusive of expected prepayments) that, at the time of sale, is expected to be foregone as a result of relinquishing beneficial ownership of the MBS from the settlement date of the spot sale until the settlement date of the forward purchase, net of implied repurchase financing costs. We calculate dollar roll income as the excess of the spot sale price over the forward-settling purchase price, and recognize this amount ratably over the period beginning on the settlement date of the sale and ending on the settlement date of the forward purchase. In our consolidated statements of comprehensive income prepared in accordance with GAAP, TBA agency MBS dollar roll income is reported as a component of the overall periodic 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.

From time to time, we may enter into forward-settling TBA agency MBS sale commitments (known as a “net short” TBA position) as a means of economically hedging a portion of the interest rate sensitivity of our agency MBS investment portfolio. When we delay (or “roll”) the settlement of a net short TBA position, the price discount of the forward-settling sale relative to the contemporaneously executed spot sale reflects compensation for the interest income (inclusive of expected prepayments) that, at the time of sale, is expected to be foregone as a result of relinquishing beneficial ownership of the MBS from the settlement date of the spot sale until the settlement date of the forward purchase, ~~results in an~~net of implied ~~net interest expense (i.e., “dollar roll expense”). In our presentation of non-GAAP core operating income, we present TBA~~repurchase financing costs. We calculate dollar roll income ~~net~~as the excess of ~~any implied net interest expense that resulted from rolling~~the spot sale price over the forward-settling purchase price and recognize this amount ratably over the period beginning on the settlement date of ~~net short~~the sale and ending on the settlement date of the forward purchase. In our consolidated statements of comprehensive income prepared in accordance with GAAP, TBA ~~positions.~~agency MBS dollar roll income is reported as a component of the overall periodic change in the fair value of TBA forward commitments within the line item “investment and derivative gain (loss), net.”

•

~~Net interest income earned or expense incurred from interest rate swap agreements~~. We utilize interest rate swap agreements to economically hedge a portion of our exposure to variability in future interest cash flows, attributable to changes in benchmark interest rates, associated with future roll-overs of our short-term repurchase agreement financing arrangements. Accordingly, the net interest income earned or expense incurred (commonly referred to as “net interest carry”) from our interest rate swap agreements in combination with repurchase agreement interest expense recognized in accordance with GAAP represents our effective “economic interest expense.” In our consolidated statements of comprehensive income prepared in accordance with GAAP, the net interest income earned or expense incurred from interest rate swap agreements is reported as a component of the overall periodic change in the fair value of derivative instruments within the line item “gain (loss) from derivative instruments, net” of the “investment gain (loss), net” section.

~~Single-family Residential Property Profit~~

Single-family residential property profit represents the operating profit of the Company’s single-family residential properties determined in accordance with GAAP plus the depreciation and amortization of the single-family residential properties.

~~Core General and Administrative Expenses~~

Core general and administrative expenses are non-interest expenses reported within the line item “total general and administrative expenses” of the consolidated statements of comprehensive income less stock-based compensation expense.

~~Income Tax Provision for TRS Core Operating Income~~

Our TRSs are subject to U.S. federal and state corporate income taxes. Our computation of core operating income includes a provision for income taxes on the core operating income of our TRSs. The core operating income of our TRSs is comprised of net interest income generated by our TRSs net of our TRSs’ general and administrative expenses. In our consolidated statements of comprehensive income prepared in accordance with GAAP, the ~~“income tax provision (benefit)” includes (i)~~net interest income earned or expense incurred from interest rate swap agreements is reported as a

component of the ~~income tax provision for TRS core operating income and (ii) an income tax provision for (or benefit from)~~overall periodic ~~increases (or decreases)~~change in the fair value of derivative instruments within the ~~investments of our TRSs, which are recognized in net income as a component of~~line item “investment and derivative gain (loss), net.”

~~Non-GAAP Core Operating Income~~

~~The following table presents our computation of non-GAAP core operating income for the three and nine months ended September 30, 2021 and 2020 (amounts in thousands, except per share amounts):~~

Three Months Ended September 30,

Nine Months Ended September 30,

2021

2020

2021

2020

GAAP net interest income
$
4,432

$
3,778

$
13,277

$
16,684

TBA dollar roll income

1,064

319

3,678

594

Interest rate swap net interest (expense) income

(379
)

(23
)

(2,276
)

563

Economic net interest income

5,117

4,074

14,679

17,841

Single-family residential property profit (loss)

(24
)

—

(24
)

—

Core general and administrative expenses

(2,377
)

(2,375
)

(7,164
)

(7,959
)
Preferred stock dividend

(731
)

(726
)

(2,177
)

(2,258
)
Income tax provision for TRS core operating income

(85
)

—

(157
)

—

Non-GAAP core operating income
$
1,900

$
973

$
5,157

$
7,624

Non-GAAP core operating income per diluted
common share
$
0.06

$
0.03

$
0.16

$
0.21

Weighted average diluted common shares
outstanding

32,243

34,697

33,032

36,055

The following table provides a reconciliation of GAAP net income (loss) to non-GAAP ~~core operating income~~earnings available for distribution for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 (amounts in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

2021

2020

2021

2020

GAAP net (loss) income
$
(250
)

$
4,759

$
(13,349
)

$
(79,177
)
Add (less):

Total investment loss (gain), net

1,313

(3,952
)

17,108

86,319

Stock-based compensation expense

520

596

1,560

1,583

Income tax provision for TRS investment gain

351

—

601

—

Depreciation of single-family residential properties

12

—

12

—

Preferred stock dividend

(731
)

(726
)

(2,177
)

(2,258
)
Add back:

TBA dollar roll income

1,064

319

3,678

594

Interest rate swap net interest (expense) income

(379
)

(23
)

(2,276
)

563

Non-GAAP core operating income
$
1,900

$
973

$
5,157

$
7,624


	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Net loss attributable to common stock	$	(400	)	$	(7,782	)	$	(3,843	)	$	(14,545	)
Add (less):
Investment and derivative (gain) loss, net		(370	)		9,032			457			15,795
Income tax provision (benefit) for TRS investment gain (loss)		496			(137	)		2,554			250
Depreciation of single-family residential properties		604			—			1,319			—
Stock-based compensation expense		992			537			1,753			1,040
Add back:
TBA dollar roll income		280			1,778			1,103			2,614
Interest rate swap net interest expense		(282	)		(1,187	)		(573	)		(1,897	)
Non-GAAP earnings available for distribution	$	1,320		$	2,241		$	2,770		$	3,257
Non-GAAP earnings available for distribution per diluted common share	$	0.05		$	0.07		$	0.09		$	0.10
Weighted average diluted common shares outstanding		29,300			33,424			29,804			33,434

~~Non-GAAP core operating income~~Earnings available for distribution is used by management to evaluate the financial performance of our long-term-focused, net interest spread-based investment strategy and core business activities over periods of time as well as assist with the determination of the appropriate level of periodic dividends to common stockholders. In addition, we believe that ~~non-GAAP core operating income~~earnings available for distribution assists investors in understanding and evaluating the financial performance of our long-term-focused, net interest spread-based investment strategy and core business activities over periods of time as well as its earnings capacity.

Periodic fair value gains and losses recognized with respect to our mortgage investments and economic hedging instruments, which are reported in line item “total investment gain (loss), net” of our consolidated statements of comprehensive income, are excluded from the computation of non-GAAP core operating income as such gains on losses are not reflective of the economic interest income earned or interest expense incurred from our interest-bearing financial assets and liabilities during the indicated reporting period. Because our long-term-focused investment strategy for our mortgage investment portfolio is to generate a net interest spread on the leveraged assets while prudently hedging periodic changes in the fair value of those assets attributable to changes in benchmark interest rates, we generally expect the fluctuations in the fair value of our mortgage investments and economic hedging instruments 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”~~all events or transactions in accordance with GAAP does, in fact, reflect the financial results of our business and these effects should not be ignored when evaluating and analyzing our financial results. ~~For example, the economic cost or benefit of hedging instruments other than interest~~

~~rate swap agreements, such as U.S. Treasury note futures or options, do not affect the computation of non-GAAP core operating income.~~ In addition, our calculation of ~~non-GAAP core operating income~~earnings available for distribution may not be comparable to other similarly titled measures of other companies. Therefore, we believe that ~~non-GAAP core operating income~~earnings available for distribution should be considered as a supplement to, and in conjunction with, net income and comprehensive income determined in accordance with GAAP. Furthermore, there may be differences between ~~non-GAAP core operating income~~earnings available for distribution and taxable income determined in accordance with the Internal Revenue Code. As a REIT, we are required to distribute at least 90% of our REIT taxable income (subject to certain adjustments) to qualify as a REIT and all of our taxable income in order to not be subject to any U.S. federal or state corporate income taxes. Accordingly, ~~non-GAAP core operating income~~earnings available for distribution may not equal our distribution requirements as a REIT.

Liquidity and Capital Resources

Liquidity 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 liquidity consist of existing cash balances, short-term borrowings (for example, repurchase agreements), principal and interest payments from our mortgage investments, net rental payments from our SFR properties and proceeds from sales of mortgage investments. Other sources of liquidity include proceeds from the offering of common stock, preferred stock, debt securities, or other securities 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 in transactions with us. Our liquidity could be impaired due to circumstances that we may be unable to control, such as a general market disruption or an operational problem that affects us or third parties. Further, our ability to sell assets may be impaired if other market participants are seeking to sell similar assets at the same time. If we cannot obtain funding from third parties our results of operations could be negatively impacted.

As of ~~September~~June 30, ~~2021,~~2022, our debt-to-equity leverage ratio was ~~2.9~~3.5 to 1 measured as the ratio of the sum of our total debt to our stockholders’ equity as reported on our consolidated balance sheet. In evaluating our liquidity and leverage ratios, we also monitor our “at risk” leverage ratio. Our “at risk” leverage ratio is measured as the ratio of the sum of our repurchase agreement financing, long-term debt secured by single-family properties, net payable or receivable for unsettled securities, net contractual forward price of our TBA purchase and sale commitments, leverage within our MSR financing receivable less our cash and cash equivalents compared to our investable capital. Our investable capital is calculated as the sum of our stockholders’ equity plus our accumulated depreciation of our SFR properties and long-term unsecured debt. As of ~~September~~June 30, ~~2021,~~2022, our “at risk” leverage ratio was ~~1.8~~1.6 to 1.

As of ~~September~~June 30, ~~2021, the Company’s~~2022, our liquid assets totaled ~~$100.3~~$39.5 million consisting of cash and cash equivalents of ~~$21.2~~$9.6 million and settled unencumbered agency MBS of ~~$79.1~~$29.9 million at fair value. ~~Cash equivalents consist primarily of money market funds invested in debt obligations of the U.S. government.~~

Due to the ongoing economic impact of the COVID-19 pandemic on the financial markets, we may experience increased difficulty in our financing operations. During the period immediately after the beginning of the COVID-19 pandemic, mortgage REITs experienced severe disruptions in financing operations (including the cost, attractiveness and availability of financing), in particular the ability to utilize repurchase financing and the margin requirements related to such financing. While funding conditions have improved significantly since mid-2020, if the ongoing economic impact of COVID-19 were to, again, cause severe disruptions in financing operations, we could experience an unwillingness or inability of our potential lenders to provide us with, or renew, financing, increased margin calls, and/or additional capital requirements. These conditions could force us to sell our assets at inopportune times or otherwise cause us to potentially revise our strategic business initiatives, which could adversely affect our business.

We are continuing to monitor the rapid developments around COVID-19 and the related impacts to our business. In response to the economic uncertainty that has unfolded as a result of COVID-19, we took steps to lower our repurchase agreement leverage and maintain what we believe to be a sufficient liquidity position.

Sources of Funding

We believe that our existing cash balances, net investments in mortgage investments, cash flows from operations, borrowing capacity, and other sources of liquidity will 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 private transactions, to provide capital for corporate purposes and/or strategic business opportunities, including possible acquisitions, joint ventures, alliances or other business arrangements which could require substantial capital outlays. Our policy is to evaluate strategic business opportunities, including acquisitions and 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 or equity on acceptable terms, to take advantage of investment opportunities that become available. Should our needs ever exceed these

sources of liquidity, we believe that most of our investments could be sold, in most circumstances, to provide cash. However, we may be required to sell our assets in such instances at depressed prices.

Cash Flows

As of ~~September~~June 30, ~~2021,~~2022, our cash totaled ~~$24.7~~$15.5 million, which included cash and cash equivalents of ~~$21.2~~$9.6 million, restricted cash of ~~$0.2~~$1.3 million, and restricted cash of a consolidated ~~VIE~~VIEs of ~~$3.3~~$4.6 million, representing a net decrease of ~~$15.3~~$6.3 million from ~~$40.0~~$21.8 million as of December 31, ~~2020.~~2021. Cash ~~provided by~~used in operating activities of ~~$4.9~~$2.6 million during the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 was attributable primarily to net interest income less our general and administrative expenses. Cash provided by investing activities of ~~$164.7~~$70.8 million during the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 was primarily generated by sales of agency MBS and ~~mortgage~~ credit securities, distributions received on our MSR financing receivables, receipt of principal payments from agency MBS and credit securities and principal receipts on loans and mortgage loans of a consolidated ~~VIE,~~VIEs, partially offset by purchases of new agency MBS, ~~mortgage~~ credit securities, ~~a mortgage loan,~~ MSR financing receivables and ~~single-family residential real estate as well as net payments for settlements and deposits for margin on our interest rate derivative instruments.~~SFR properties. Cash used in financing activities of ~~$184.9~~$74.5 million during the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 was primarily from repayments of repurchase agreements, net repayments of secured debt of a consolidated ~~VIE, redemption of long-term unsecured debt,~~VIEs, dividend payments to stockholders and from repurchases of our common stock, partially offset by proceeds from ~~issuance of~~ long-term ~~unsecured debt.~~debt secured by single-family properties.

Debt Capital

~~Long-Term Unsecured Debt~~

As of September 30, 2021, we had $85.9 million of total long-term unsecured debt, net of unamortized debt issuance costs of $1.8 million. Our 6.75% Senior Notes due 2025 with a principal amount of $34.9 million outstanding as of September 30, 2021 accrue and require payment of interest quarterly at an annual rate of 6.75% and mature on March 15, 2025. Our 6.00% Senior Notes due 2026 with a principal amount of $37.8 million outstanding as of September 30, 2021 accrue and require payment of interest quarterly at an annual rate of 6.00% and mature on August 1, 2026. Our trust preferred debt with a principal amount of $15.0 million outstanding as of September 30, 2021 accrue and require the payment of interest quarterly at three-month LIBOR plus 2.25% to 3.00% and mature between 2033 and 2035. Our Senior Notes due 2025 and trust preferred debt may be redeemed in whole or part at any time and from time to time at our option at a redemption price equal to the principal amount plus accrued and unpaid interest. Our Senior Notes due 2026 may be redeemed in whole or in part at any time and from time to time at the Company’s option on or after August 1, 2023 at a redemption price equal to the principal amount plus accrued and unpaid interest.

Repurchase Agreements

We have short-term financing facilities that are structured as repurchase agreements with various financial institutions to fund our mortgage investments. 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 financing objectives. Funding for mortgage investments through repurchase agreements continues to be available to us at rates we consider to be attractive from multiple counterparties.

Our repurchase agreements to finance our acquisition of MBS include provisions contained in the standard master repurchase agreement as published by the Securities Industry and Financial Markets Association (“SIFMA”) and may be amended and supplemented in accordance with industry standards for repurchase facilities. Certain of our repurchase agreements include financial covenants, with which the failure to comply would constitute an event of default. Similarly, each repurchase agreement includes events of insolvency and events of default on other indebtedness as similar financial covenants. As provided in the standard master repurchase agreement as typically amended, upon the occurrence of an event of default or termination, the applicable counterparty has the option to terminate all repurchase transactions under such counterparty’s repurchase agreement and to demand immediate payment of any amount due from us.

Our repurchase agreement to finance our acquisition of mortgage loans is subject to a master repurchase agreement between aour wholly-owned subsidiary, ~~of the Company,~~ for which we provide a full guarantee of performance, and a third party lender. The agreement contains financial covenants including our maintenance of a minimum level of net worth, liquidity and profitability, with which the failure to comply would constitute an event of default. Similarly, the agreement includes events of insolvency and events of default on other indebtedness as similar financial covenants. Upon the occurrence of an event of default or termination, the counterparty has the option to terminate all other indebtedness arrangements with us and to demand immediate payment of any amount due from us.

Under our repurchase agreements, we may be required to pledge additional assets to our repurchase agreement counterparties in the event the estimated fair value of the existing pledged collateral under such agreements declines and such lenders demand additional collateral (commonly referred to as a “margin call”), which may take the form of additional securities or cash. Margin calls

on repurchase agreements collateralized by our mortgage investments primarily result from events such as declines in the value of the underlying mortgage collateral caused by factors such as rising interest rates, higher prepayments or higher actual or expected credit losses. Our repurchase agreements generally provide that valuations for mortgage investments securing our repurchase agreements are to be obtained from a generally recognized source agreed to by both parties. However, in certain circumstances and under certain of our repurchase agreements, our lenders have the sole discretion to determine the value of the mortgage investments 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 the event of a margin call, we must provide cash or additional securities on the same business day that the margin call is made if the lender provides us notice prior 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 pledged collateral. However, should we encounter increases in interest rates, prepayments or ~~prepayments,~~expected credit losses, margin calls on our repurchase agreements could result in a material adverse change in our liquidity position.

Our repurchase agreement counterparties apply a “haircut” to the value of the pledged collateral, which means the collateral is valued, for the purposes of the repurchase agreement transaction, at less than fair value. Upon the renewal of a repurchase agreement financing at maturity, a lender could increase the “haircut” percentage applied to the value of the pledged collateral, thus reducing our liquidity.

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 event that market conditions are such that we are unable to continue to obtain repurchase agreement financing for our mortgage investments in amounts and at interest rates consistent with our financing objectives, we may liquidate such investments and may incur significant losses on any such sales of mortgage investments.

The following table provides information regarding our outstanding repurchase agreement borrowings as of the date and period indicated (dollars in thousands):


	June 30, 2022
Agency MBS repurchase financing:
Repurchase agreements outstanding	$	224,566
Agency MBS collateral, at fair value		237,373
Net amount (1)		12,807
Weighted-average rate		1.48	%
Weighted-average term to maturity	14.0 days
Non-agency MBS repurchase financing:
Repurchase agreements outstanding	$	84,788
MBS collateral, at fair value		99,901
Net amount (1)		15,113
Weighted-average rate		2.81	%
Weighted-average term to maturity	17.0 days
Mortgage loans repurchase financing:
Repurchase agreements outstanding	$	20,640
Mortgage loans collateral, at fair value		29,484
Net amount (1)		8,844
Weighted-average rate		3.77	%
Weighted-average term to maturity	260.0 days
Total mortgage investments repurchase financing:
Repurchase agreements outstanding	$	329,994
Mortgage investments collateral, at fair value		366,758
Net amount (1)		36,764
Weighted-average rate		1.96	%
Weighted-average term to maturity	30.2 days
Maximum amount outstanding at any month-end during the period	$	340,286

September 30, 2021

Agency MBS repurchase financing:

Repurchase agreements outstanding

$
533,123

Agency MBS collateral, at fair value

558,543

Net amount ⁽¹⁾

25,420

Weighted-average rate

0.12
%
Weighted-average term to maturity

14.0 days

Mortgage loans repurchase financing:

Repurchase agreements outstanding

$
20,860

Mortgage loans collateral, at fair value

29,800

Net amount ⁽¹⁾

8,940

Weighted-average rate

2.59
%
Weighted-average term to maturity

329.0 days

Total mortgage investments repurchase financing:

Repurchase agreements outstanding

$
553,983

Mortgage investments collateral, at fair value

588,343

Net amount ⁽¹⁾

34,360

Weighted-average rate

0.21
%
Weighted-average term to maturity

25.9 days

Maximum amount outstanding at any month-end during the period

$
694,586

(1)

⁽¹⁾	Net amount represents the value of collateral in excess of corresponding repurchase obligation. The amount of collateral at-risk is limited to the outstanding 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.~~counterparties. As of ~~September~~June 30, ~~2021,~~2022, we had outstanding repurchase agreement balances with ~~eight~~seven counterparties and have master repurchase agreements in place with a total of 1714 counterparties located throughout North America, Europe and Asia. As of ~~September~~June 30, ~~2021,~~2022, no more than ~~4.0%~~11.2% of our stockholders’ equity was at risk with any one counterparty, with the top five counterparties representing approximately ~~12.5%~~16.7% of our stockholders’ equity. ~~The table below includes a summary of our repurchase agreement funding~~

Long-term Debt Secured by ~~number of counterparties and counterparty region as of September 30, 2021:~~SFR Properties

Number of

Percentage of Repurchase

Counterparties

Agreement Funding

North America

5

61.8
%
Europe

1

16.3
%
Asia

2

21.9
%

8

100.0
%

~~Long-term Secured Debt~~

McLean SFR Investment, LLC (“McLean SFR”), a wholly-owned subsidiary of Arlington Asset, is party to a loan agreement with a third-party lender to fund McLean SFR’s purchases of SFR properties. Under the terms of the loan agreement, loan advances may be drawn up to 74% of the fair value of eligible SFR properties up to a maximum loan amount of $150 million. Advances under the loan agreement may be drawn during the advance period, which ends on the earlier of the date the outstanding principal balance equals the maximum loan amount or March 28, 2023. The outstanding principal balance is due on October 9, 2026 and advances under the loan agreement bear interest at a fixed rate of 2.76%. During the advance period, McLean SFR is subject to a commitment fee on the unfunded commitment if the outstanding loan balance is below certain thresholds. As of ~~September~~June 30, ~~2021, there were no advances~~2022, the outstanding ~~under the loan agreement.~~principal balance was $123.0 million.

Long-Term Unsecured Debt

As of June 30, 2022, we had $86.2 million of total long-term unsecured debt, net of unamortized debt issuance costs of $1.5 million. Our 6.75% Senior Notes due 2025 with a principal amount of $34.9 million outstanding as of June 30, 2022 accrue and require payment of interest quarterly at an annual rate of 6.75% and mature on March 15, 2025. Our 6.00% Senior Notes due 2026 with a principal amount of $37.8 million outstanding as of June 30, 2022 accrue and require payment of interest quarterly at an annual rate of 6.00% and mature on August 1, 2026. Our trust preferred debt with a principal amount of $15.0 million outstanding as of June 30, 2022 accrue and require the payment of interest quarterly at three-month LIBOR plus 2.25% to 3.00% and mature between 2033 and 2035. Our Senior Notes due 2025 and trust preferred debt may be redeemed in whole or part at any time and from time to time at our option at a redemption price equal to the principal amount plus accrued and unpaid interest. Our Senior Notes due 2026 may be redeemed in whole or in part at any time and from time to time at our option on or after August 1, 2023 at a redemption price equal to the principal amount plus accrued and unpaid interest.

Derivative Instruments

In 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 hedging instruments such as interest rate swaps, U.S. Treasury note futures, put and call options on U.S. Treasury note futures, Eurodollar futures, interest rate swap futures and options on agency MBS, and (ii) derivative instruments that economically serve as investments such as TBA purchase and sale commitments.

Interest Rate Hedging Instruments

We exchange cash variation margin with the counterparties to our interest rate hedging instruments at least on a daily basis based upon daily changes in fair value as measured by the central clearinghouse through which those derivatives are cleared. In addition, the central clearinghouse requires market participants to deposit and maintain an “initial margin” amount which is determined by the clearinghouse and is generally intended to be set at a level sufficient to protect the clearinghouse from the maximum estimated single-day price movement in that market participant’s contracts. However, the futures commission merchants (“FCMs”) through which we conduct trading of our cleared and exchanged-traded hedging instruments may require incremental initial margin in excess of the clearinghouse’s requirement. The clearing exchanges have the sole discretion to determine the value of our hedging instruments for the purpose of setting initial and variation margin requirements or otherwise. In the 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 our hedging agreements that we were not able to satisfy. However, if we encounter significant decreases in long-term interest rates, margin calls on our hedging agreements could result in a material adverse change in our liquidity position.

As of ~~September~~June 30, ~~2021,~~2022, we had outstanding interest rate swaps with the following aggregate notional amount and corresponding initial margin held in collateral deposit with the ~~custodian~~FCM (dollars in thousands):

September 30, 2021

Notional

Collateral

Amount

Deposit

Interest rate swaps

$
215,000

$
5,384


	June 30, 2022
	Notional		Collateral
	Amount		Deposit
Interest rate swaps	$	230,000	$	4,084

The FCMs through which we conduct trading of our hedging instruments may limit their exposure to us (due to an inherent one business day lag in the variation margin exchange process) by applying a maximum “ceiling” on their level of risk, either overall and/or by instrument type. The FCMs generally use the amount of initial margin that we have posted with them as a measure of their level of risk exposure to us. We currently have FCM relationships with ~~three~~two large financial institutions. To date, among our ~~three~~two FCM arrangements, we have had sufficient excess capacity above and beyond what we believe to be a sufficient and appropriate hedge position. However, if our FCMs substantially lowered their risk exposure thresholds, we could experience a material adverse change in our liquidity position and our ability to hedge appropriately.

TBA Dollar Roll Transactions

TBA 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-off positions 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 to take 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 fund our total purchase commitment with cash or other financing sources and our liquidity position could be negatively impacted.

Margin Requirements for Agency MBS Purchase and Sale Commitments

Our commitments to purchase and sell agency MBS, including TBA commitments, are subject to master securities forward transaction agreements published by SIFMA as well as supplemental terms and conditions with each counterparty. Under the terms of these agreements, we may be required to pledge collateral to our counterparty in the event the fair value of the agency MBS underlying our purchase and sale commitments change and such counterparty demands collateral through a margin call. Margin calls on agency MBS commitments are generally caused by factors such as rising interest rates or prepayments. Our agency MBS commitments provide that valuations for our commitments and any pledged collateral are to be obtained from a generally recognized source agreed to by both parties. However, in certain circumstances, our counterparties have the sole discretion to determine the value of the agency MBS commitment and any pledged collateral. In such instances, our counterparties are required to act in good faith in making determinations of value. In the event of a margin call, we must generally provide additional collateral on the same business ~~day~~. day.

MSR Financing Receivable Commitments

We are party to agreements with a licensed, GSE approved residential mortgage loan servicer that enables us to garner the economic return of an investment in an MSR purchased by the mortgage servicing counterparty through an MSR financing transaction. We have committed to invest a total minimum of $50 million of capital with the counterparty with $25 million of the minimum commitment expiring on December 31, 2023 and $25 million of the minimum commitment expiring on April 1, 2024. As of ~~September~~June 30, ~~2021,~~2022, we have fully funded the total minimum commitment. At any time prior to the minimum commitment expiration dates, we have the option to request the mortgage servicing counterparty to sell the related MSR investments and repay us amounts owed to us under the MSR financing transaction less a minimum fee the mortgage servicing counterparty would have earned ~~on the minimum commitment amounts~~ over the remaining original commitment periods.

At our election, we can request the mortgage servicing counterparty ~~could~~ utilize leverage on the MSRs ~~that are subject~~ to which our MSR financing receivables are referenced to finance the purchase of additional MSRs to increase potential returns to us. ~~The lender providing the leverage to~~As of June 30, 2022, our mortgage servicing counterparty ~~would have~~has a ~~secured interest in the MSRs pledged under a~~$75 million credit facility ~~between~~that is secured by its MSRs including MSRs to which our MSR financing receivables are referenced. As of June 30, 2022, we had the ~~lender and~~ability to utilize approximately 81% of our mortgage servicing ~~counterparty. Draws~~counterparty’s available capacity under ~~the~~its credit ~~facility bear interest at three-month LIBOR plus 2.75% with a LIBOR floor of 1.75% with a maturity date of April 29, 2022 with two one-year borrower extension options.~~facility. In general, our mortgage servicing counterparty can obtain advances of up to 60% of the fair value of the MSR collateral ~~value.~~value pledged. Under our mortgage servicing counterparty’s credit facility, if the fair value of the pledged MSR collateral declines and the lender demands additional collateral from our mortgage servicing counterparty through a margin call, we would be required to provide the mortgage servicing counterparty with additional funds to meet such margin call. If we were unable to satisfy such margin call, the lender could liquidate the MSR collateral position ~~that are referenced~~ to which our MSR financing receivables are referenced to satisfy the loan obligation, ~~and~~ thereby reducing the value of our MSR financing receivables. AsDraws under the facility bear interest at term SOFR plus 2.90% with a SOFR floor of ~~September 30, 2021, our mortgage servicing counterparty has drawn $11.5 million~~1.60% and a maturity date of ~~financing under its credit facility collateralized by $120.6 million of MSRs referenced to our MSR financing receivable.~~April 28, 2023 with a one-year borrower extension option.

Our mortgage servicing counterparty may also pledge MSRs subject to other similar MSR financing receivable relationships with other third parties as collateral under the same credit facility that have a pledge of the MSRs ~~referenced~~ to which our MSR financing ~~receivable.~~receivables are referenced. If such third party to another MSR financing receivable were unable to satisfy a margin call on its referenced pool of MSRs and the value of such MSRs were insufficient to satisfy the corresponding debt obligation to the lender, the lender would have recourse to the MSRs ~~referenced~~ to which our MSR financing ~~receivables.~~receivables are referenced. In such case, if the mortgage servicing counterparty to our MSR

financing receivables fails to satisfy such third party’s shortfall, the lender could liquidate the MSRs to which our MSR financing receivables are referenced if we did not fund such remaining margin deficiency. As a result of this cross collateralization of our mortgage servicing counterparty’s credit facility, the value of our MSR financing receivables may be adversely impacted by the inability of our mortgage servicing counterparty’s other contracted parties to meet their margin calls.

Under the arrangement, we are obligated to provide funds to the mortgage servicing counterparty to fund its advances of ~~delinquent~~ payments on the serviced pool of mortgage loans within the referenced ~~MSR with the~~MSR. The mortgage servicing counterparty is required to return to us any subsequent servicing advances ~~collected.~~collected or reimbursed by the GSEs. At our option, we could ~~instruct~~request the mortgage servicing counterparty to fund any servicing advances with draws under its credit facility, subject to available borrowing capacity, while we would be required to fund such financing costs.

As of June 30, 2022, our mortgage servicing counterparty has drawn $73.6 million of financing under its credit facility, including $60.9 million attributable to us, collateralized by an estimated $131.2 million of MSRs, including $108.4 million attributable to us, and $1.3 million of servicer advances, including $1.1 million attributable to us.

Investment Commitments

WeWe are party to an investment management agreement with a third party to invest up to ~~$50~~a minimum $65 million of capital in SFR properties. Our commitment to fund up to $65 million of capital may be reduced to $55 million to the extent we utilize debt financing to fund certain acquisitions of SFR properties. As of June 30, 2022, we have fully funded the $65 million of the capital commitment. Under the terms of the investment management agreement, if we were to terminate the commitment, we would have to pay a termination fee equal to a fixed amount less ~~fees paid~~ inception to ~~date.~~date fees paid.

As of ~~September~~June 30, ~~2021,~~2022, we had commitments to acquire 25 SFR properties for an aggregate purchase price of $9.0 million.

As of June 30, 2022, we are a party to a participation agreement pursuant to which we have committed to fund up to $30 million of a $130 million revolving credit facility that matures on July 7, 2024. Under the terms of the participation agreement, we are obligated to fund the last $30 million of advances under the revolving credit facility. As of ~~September~~June 30, ~~2021,~~2022, our unfunded commitment was ~~$30~~$29.7 million.

Equity Capital

Common Equity Distribution Agreements

We are party to separate common equity distribution agreements with equity sales agents JMP Securities LLC, B. Riley FBR, Inc., JonesTrading Institutional Services LLC and Ladenburg Thalmann & Co. Inc. pursuant to which we may offer and sell, from

time to time, shares of our ~~Class A~~ common stock. Pursuant to the common equity distribution agreements, shares of our common stock may be offered and sold through the equity sales agents 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 maker other than on an exchange or, subject to the terms of a written notice from us, in privately negotiated transactions. ~~During the three and nine months ended September 30, 2021, there were no issuances of common stock under the common equity distribution agreements.~~ As of ~~September~~June 30, ~~2021,~~2022, we had 11,302,160 shares of Class A common stock available for sale under the common equity distribution agreements.

~~Common Share Repurchase Program~~Preferred Stock

~~Our Board of Directors has authorized a share repurchase program pursuant to which we may repurchase shares of Class A common stock (the “Repurchase Program”).~~ During the three and nine months ended September 30, 2021, we repurchased 1,059,980 and 2,053,470 shares of our Class A common stock for a total purchase price of $4.1 million and $8.1 million, respectively. As of ~~September~~June 30, ~~2021,~~2022, we had ~~remaining availability of 14,179,179 shares of Class A common stock under the Repurchase Program.~~

~~Preferred Stock~~

~~As of September 30, 2021, we had~~ Series B Preferred Stock outstanding with a liquidation preference of ~~$9.0~~$9.5 million. The Series B Preferred Stock is publicly traded on the New York Stock Exchange under the ticker symbol “AAIC PrB.” The Series B Preferred Stock has no stated maturity, is not subject to any sinking fund and will remain outstanding indefinitely unless repurchased or redeemed by us. Holders of Series B Preferred Stock have no voting rights, except under limited conditions and are entitled to receive a cumulative cash dividend at a rate of 7.00% per annum of their $25.00 per share liquidation preference (equivalent to $1.75 per annum per share). Shares of Series B Preferred Stock are redeemable at $25.00 per share, plus accumulated and unpaid dividends (whether or not authorized or declared) exclusively at our ~~option commencing on May 12, 2022 or earlier upon the occurrence of a change in control.~~option. Dividends are payable quarterly in arrears on the 30th day of each December, March, June and September, when and as ~~declared~~.declared. We have declared and paid all required quarterly dividends on our Series B Preferred Stock to date.

As of ~~September~~June 30, ~~2021,~~2022, we had Series C Preferred Stock outstanding with a liquidation preference of ~~$27.9~~$26.1 million. The Series C Preferred Stock is publicly traded on the New York Stock Exchange under the ticker symbol “AAIC PrC.” TheThe Series C Preferred Stock has no stated maturity, is not subject to any sinking fund and will remain outstanding indefinitely unless repurchased or redeemed by us. Holders of Series C Preferred Stock have no voting rights except under limited conditions and will be entitled to receive cumulative cash dividends (i) from and including the original issue date to, but excluding, March 30, 2024 at a fixed rate equal to 8.250% per annum of the $25.00 per share liquidation preference (equivalent to $2.0625 per annum per share) and (ii) from and including March 30, 2024, at a floating rate equal to three-month LIBOR plus a spread of 5.664% per annum. Shares of Series C

Preferred Stock are redeemable at $25.00 per share, plus accumulated and unpaid dividends (whether or not authorized or declared) exclusively at our option commencing on March 30, 2024 or earlier upon the occurrence of a change in control or under circumstances where it is necessary to preserve our qualification as a REIT. Under certain circumstances upon a change of control, the Series C Preferred Stock is convertible into shares of our common stock. Dividends ~~will be~~are payable quarterly in arrears on the 30th day of March, June, September and December of each year, when and as declared. We have declared and paid all required quarterly dividends on our Series C Preferred Stock to date.

Preferred Equity Distribution Agreement

We are party to an amended and restated equity distribution agreement with JonesTrading Institutional Services LLC and Ladenburg Thalmann & Co. Inc., pursuant to which we may offer and sell, from time to time, shares of our Series B Preferred Stock. Pursuant to the Series B preferred equity distribution agreement, shares of our Series B Preferred ~~stock~~Stock may be offered and sold through the preferred equity sales agents 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 maker other than on an exchange or, subject to the terms of a written notice from us, in privately negotiated transactions.

During the ~~three and nine~~six months ended ~~September~~June 30, ~~2021,~~2022, we issued ~~22,719~~6,058 shares of ~~our~~ Series B preferred stock ~~at a weighted average public offering price of $24.99 per share~~ for proceeds net of selling commissions and expenses of ~~$0.6~~$0.1 million under the Series B preferred equity distribution agreement. As of ~~September~~June 30, ~~2021,~~2022, we had ~~1,623,242~~1,602,566 shares of Series B Preferred stock available for sale under the Series B preferred equity distribution agreement.

REIT Distribution Requirements

We have elected to be taxed as a REIT under the Internal Revenue Code. As a REIT, we are required to distribute annually 90% of our REIT taxable income (subject to certain adjustments) to our shareholders. So long as we continue to qualify as a REIT, we will generally not be subject to U.S. federal or state corporate income taxes on our taxable income that we distribute to our shareholders on a timely basis. At present, it is our intention to distribute 100% of our taxable income, although we will not be required to do so. We intend to make distributions of our taxable income within the time limits prescribed by the Internal Revenue Code, which may extend into the subsequent taxable ~~year~~.year.

As of June 30, 2022, we had estimated NOL carryforwards of $167.5 million that can be used to offset future taxable ordinary income and reduce our future distribution requirements. As of June 30, 2022, we also had estimated NCL carryforwards of $171.8 million that can be used to offset future net capital gains.

Off-Balance Sheet Arrangements and Other Commitments

As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, or special purpose entities or VIEs, established for the purpose of

facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Our economic interests held in unconsolidated VIEs are generally limited in nature to those of a passive holder of beneficial interests in securitized financial assets. As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, we had consolidated for financial reporting purposes two and one, respectively, securitization ~~trust~~trusts for which we determined that our ~~investment~~investments provided us with both (i) the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) thethe obligation to absorb losses or the right to receive benefits that could potentially be significant to the ~~VIE~~.VIE. We were not required to consolidate for financial reporting purposes any other VIEs as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, as we did not have the power to direct the activities that most significantly impact the economic performance of such entities.

As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, we had not guaranteed any obligations of unconsolidated entities. As of ~~September~~June 30, 2022 and December 31, 2021, we had not entered into any commitment or intent to provide funding to unconsolidated entities other than the aforementioned asset-backed revolving credit facility funding commitment. ~~As of~~

Critical Accounting Estimates

Refer to the heading titled “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, ~~2020, we had not entered into any commitment or intent to provide funding to unconsolidated entities.~~2021 for a discussion of our critical accounting estimates.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market 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, credit risk, liquidity risk and regulatory risk. See “Item 1 — Business” in our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 for discussion of our risk management strategies related to these market risks. The following is additional information regarding certain of these market risks.

Interest Rate Risk

We are exposed to interest rate risk in our agency MBS, ~~portfolio.~~MSR related asset and SFR investments. Our investments in ~~agency MBS~~mortgage investments are also financed with short-term borrowing facilities, such as repurchase agreements, which are interest rate sensitive financial instruments. Our exposure to interest rate risk fluctuates based upon changes in the level and volatility of interest rates, mortgage prepayments, and in the shape and slope

of the yield curve, among other factors. Through the use of interest rate hedging instruments, we attempt to economically hedge a portion of our exposure to changes, attributable to changes in benchmark interest rates, in agency MBS fair values and future interest cash flows on our short-term financing arrangements. Our primary interest rate hedging instruments 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 interest rate swap futures.~~

Changes in both short- and long-term interest rates affect us in several ways, including our financial position. As interest rates ~~increase,~~rise, the ~~fair~~ value of fixed-rate agency MBS may be expected to decline, prepayment rates may be expected to decrease and duration may be expected to extend. However, an increase in interest rates results in an increase in the fair value of our interest rate hedging instruments. Conversely, if interest rates decline, the fair value of fixed-rate agency MBS is generally expected to increaseextend, while the ~~fair value~~values of our interest rate hedging instruments ~~is expected to decline. We also manage our interest rate risk through investment allocation between our agency MBS~~ and ~~MSR related assets. As interest rates rise, the value of our~~ MSR financing receivables isare generally expected to increase due to lower expectations of prepayments in the referenced pools of mortgage loans. ~~Conversely, as~~Increases in interest rates ~~fall,~~may also have an adverse impact on our SFR investments if we are unable to increase rents or acquire SFR homes with rates high enough to offset the increase in interest rates on our borrowings. In addition, an increase in interest rates could also negatively impact the value of ~~MSR financing receivables~~our SFR investments as the affordability to individual home buyers would likely decrease. Conversely, if interest rates decline, the value of fixed-rate agency MBS is generally expected to ~~decline due to higher expectations of prepayments in the referenced pools of mortgage loans. Accordingly, our MSR financing receivables that derive value from~~increase while the value of aour interest rate hedging instruments and MSR related assets are expected to decline. In addition, decreases in interest rates may lead to additional competition for the acquisition of SFR homes, which may lead to future acquisitions being more costly and resulting in lower yields. Also, our ability to obtain favorable interest rates on our financing structures may affect our SFR investment strategy. We manage our interest rate risk through investment allocation between our agency MBS and MSR ~~can be a fair value hedge~~related assets and the utilization of ~~our fixed-rate agency MBS.~~interest rate hedging instruments.

The tables that follow illustrate the estimated change in fair value for our current investments in agency MBS, MSR financing receivable and derivative instruments under several hypothetical scenarios of interest rate movements. For the purposes of this illustration, interest rates are defined by the U.S. Treasury yield curve. Changes in fair value are measured as percentage changes from their respective fair values presented in the column labeled “Value.” Our estimate of the change in the fair value 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 our agency MBS and TBA commitments is derived from The Yield Book, a third-party model. The interest rate sensitivity of our MSR financing receivable is derived from an internal model. Actual results could differ significantly from these estimates. The effective 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 the investments, including assumptions regarding prepayments based, in part, on age and interest rate of the mortgages underlying

the agency MBS, prior exposure to refinancing 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:

•

The 50 and 100 basis point upward and downward shocks to interest rates that are applied in the analyses represent parallel shocks to the forward yield 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 on the value of our MBS investments or our LIBOR- or SOFR-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 manage interest rate risk in response to significant changes in interest rates or other market conditions.

•

The yield curve that results from applying an instantaneous parallel decrease in interest rates reflects an interest rate of less than 0% in certain points of the curve. The results of the analyses included in the tables below reflect the effect of these negative interest rates.

•

The yield curve that results from applying an instantaneous parallel decrease in interest rates may reflect an interest rate of less than 0% in certain points of the curve. The results of the analyses included in the tables below reflect the effect of these negative interest rates.

•

~~The analyses do not reflect any estimated changes in our income tax provision.~~

•

The analyses do not reflect an estimated changes in our income tax provision.

•

~~The analyses do not reflect any estimated changes in the fair value of our mortgage credit investments or single-family residential~~•

The analyses do not reflect any estimated changes in the fair value of our credit investments or SFR properties.

These analyses are not intended to provide a precise forecast. Actual results could differ materially from these estimates (dollars in thousands, except per share amounts):


	June 30, 2022
				Value			Value
				with 50			with 50
				Basis Point			Basis Point
				Increase in			Decrease in
	Value			Interest Rates			Interest Rates
Agency MBS	$	382,357		$	373,539		$	389,927
TBA commitments		337			4,690			(3,660	)
MSR financing receivables		120,260			122,446			116,918
Interest rate swaps		(1,008	)		2,298			(4,314	)
Equity available to common stock (1)		179,704			180,732			176,629
Equity available to common stock percent change					0.57	%		(1.71	)%


	June 30, 2022
				Value			Value
				with 100			with 100
				Basis Point			Basis Point
				Increase in			Decrease in
	Value			Interest Rates			Interest Rates
Agency MBS	$	382,357		$	363,653		$	396,100
TBA commitments		337			9,388			(7,055	)
MSR financing receivables		120,260			124,971			113,021
Interest rate swaps		(1,008	)		5,603			(7,619	)
Equity available to common stock (1)		179,704			181,373			172,204
Equity available to common stock percent change					0.93	%		(4.17	)%

September 30, 2021

Value

Value

with 50

with 50

Basis Point

Basis Point

Increase in

Decrease in

Value

Interest Rates

Interest Rates

Agency MBS

$
637,718

$
619,913

$
651,593

TBA commitments

(881
)

(2,128
)

285

MSR financing receivables

112,834

118,885

100,735

Interest rate swaps

(135
)

5,831

(6,101
)
Equity available to common stock

187,776

180,742

184,752

Book value per common share

$
5.97

$
5.74

$
5.87

Book value per common share percent change

(3.75
)%

(1.61
)%
(1)

Equity available to common stock is calculated as total equity plus accumulated depreciation of single-family residential real estate less the preferred stock liquidation preference.

September 30, 2021

Value

Value

with 100

with 100

Basis Point

Basis Point

Increase in

Decrease in

Value

Interest Rates

Interest Rates

Agency MBS

$
637,718

$
599,570

$
660,833

TBA commitments

(881
)

(3,394
)

1,078

MSR financing receivables

112,834

121,187

71,919

Interest rate swaps

(135
)

11,798

(12,068
)
Equity available to common stock

187,776

167,400

160,003

Book value per common share

$
5.97

$
5.32

$
5.09

Book value per common share percentage change

(10.85
)%

(14.79
)%

Spread Risk

Our mortgage investments expose us to “spread risk.” Spread risk, also known as “basis risk,” is the risk of an increase in the spread between market participants’ required rate of return (or “market yield”) on our mortgage investments and prevailing benchmark interest rates, such as the U.S. Treasury or interest rate swap rates.

The spread risk inherent to our investments in agency MBS and the resulting fluctuations in fair value of these securities can occur independent of changes in prevailing benchmark interest rates and may relate to other factors impacting the mortgage and fixed income markets, such as actual or anticipated monetary policy actions by the U. S. Federal Reserve, liquidity, or changes in market participants’ required rates of return on different assets. While we use interest rate hedging instruments to attempt to mitigate the sensitivity of our net book value to changes in prevailing benchmark interest rates, such instruments 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 several hypothetical scenarios of agency MBS spread movements. Changes in fair value are measured as percentage changes from their respective fair values presented in the column labeled “Value.” The sensitivity of our agency MBS and TBA commitments to changes in MBS spreads 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 of ~~6.3~~4.9 years, which is a model-based assumption that is dependent upon the size and composition of our investment portfolio as well as economic conditions present as of ~~September~~June 30, ~~2021.~~2022.

These analyses are not intended to provide a precise forecast. Actual results could differ materially from these estimates (dollars in thousands, except per share amounts):


	June 30, 2022
			Value with			Value with
			10 Basis Point			10 Basis Point
			Increase in			Decrease In
			Agency MBS			Agency MBS
	Value		Spreads			Spreads
Agency MBS	$	382,357	$	380,184		$	384,530
TBA commitments		337		1,365			(690	)
Equity available to common stock (1)		179,704		178,558			180,850
Equity available to common stock percent change				(0.64	)%		0.64	%


	June 30, 2022
			Value with			Value with
			25 Basis Point			25 Basis Point
			Increase in			Decrease In
			Agency MBS			Agency MBS
	Value		Spreads			Spreads
Agency MBS	$	382,357	$	376,923		$	387,791
TBA commitments		337		2,906			(2,231	)
Equity available to common stock (1)		179,704		176,839			182,569
Equity available to common stock percent change				(1.59	)%		1.59	%

(1)

Equity available to common stock is calculated as total equity plus accumulated depreciation of single-family residential real estate less the preferred stock liquidation preference.

September 30, 2021

Value with

Value with

10 Basis Point

10 Basis Point

Increase in

Decrease In

Agency MBS

Agency MBS

Value

Spreads

Spreads

Agency MBS

$
637,718

$
633,717

$
641,719

TBA

(881
)

(1,099
)

(663
)
Equity available to common stock

187,776

183,557

191,995

Book value per common share

$
5.97

$
5.83

$
6.10

Book value per common share percent change

(2.25
)%

2.25
%

September 30, 2021

Value with

Value with

25 Basis Point

25 Basis Point

Increase in

Decrease In

Agency MBS

Agency MBS

Value

Spreads

Spreads

Agency MBS

$
637,718

$
627,715

$
647,721

TBA commitments

(881
)

(1,426
)

(336
)
Equity available to common stock

187,776

177,228

198,324

Book value per common share

$
5.97

$
5.63

$
6.30

Book value per common share percent change

(5.62
)%

5.62
%

Credit Risk

Unlike our agency MBS investments, our ~~mortgage~~ credit investments do not carry a credit guarantee from a GSE or government agency. Accordingly, our ~~mortgage~~ credit investments expose us to credit risk. Credit risk, sometimes referred to as non-performance or non-payment risk, is the risk that we will not receive, in full, the contractually required principal or interest cash flows stemming from our investments due to an underlying borrower’s or issuer’s default on their obligation. Upon a mortgage loan borrower’s default, a foreclosure sale or other liquidation of the underlying mortgaged property will result in a credit loss if the liquidation proceeds fall short of the mortgage loan’s unpaid principal balance and unpaid accrued interest.

Some of our ~~mortgage~~ credit investments have credit enhancements that mitigate our exposure to the credit risk of the underlying mortgage loans. Credit losses incurred on the underlying mortgage loans collateralizing our investments in non-agency MBS are allocated on a “reverse sequential” basis. Accordingly, any credit losses realized on the underlying mortgage loans are first absorbed by the beneficial interests subordinate to our non-agency MBS, if any, to the extent of their respective principal balance, prior to being allocated to our investments.

Other of our non-agency MBS investments represent “first loss” ~~positions~~.positions. Accordingly, for such investments, credit losses realized on the underlying pool of mortgage loans are first allocated to ~~the Company’s~~our security, to the extent of its principal balance, prior to being allocated to the respective securitization’s more senior credit positions.

We accept exposure to credit risk at levels we deem prudent within our overall investment strategy and our evaluation of the potential risk-adjusted returns. We attempt to manage our exposure to credit risk through prudent asset selection resulting from pre-acquisition due diligence, ~~ongoing~~on-going performance monitoring subsequent to acquisition, and the disposition of assets for which we identify negative credit trends.

There is no guarantee that our attempts to manage our credit risk will be successful. We could experience substantial losses if the credit performance of the mortgage loans to which we are exposed falls short of our expectations.

~~Inflation~~

Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more than inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our financial statements are prepared in accordance with GAAP and our distributions are determined by our Board of Directors in its sole discretion pursuant to our variable dividend policy; in each case, our activities and balance sheet are measured with reference to fair value without considering inflation.

Cautionary Statement About Forward-Looking Information

When used in this Quarterly Report on Form 10-Q, in future filings with the SEC or in press releases or other written or oral communications, statements which are not historical in nature, including those containing words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions, are intended to identify “forward-looking statements” within the meaning of Section 27A of the Securities Act 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 this Quarterly Report on Form 10-Q 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 on acquiring either (i) residential MBS that are either issued by U.S. government agencies or guaranteed as to principal and interest by U.S. government agencies or U.S. government sponsored agencies (“agency MBS”), or (ii) mortgage servicing right (“MSR”) related assets, (iii) credit investments that generally consist of mortgage loans secured by either residential or commercial real property or MBS collateralized by such mortgage loans, or (iv) SFR homes as rental properties;

•

the uncertainty and economic impact of the ongoing COVID-19 pandemic and the measures taken by the government to address it, including the impact on our business, financial condition, liquidity and results of operations due to a significant decrease in economic activity and disruptions in our financing operations, among other factors;

•

our ability to qualify and maintain our qualification as a REIT;

•

our ability to forecast our tax attributes, which are based upon various facts and assumptions, and our ability to protect and use our net operating losses (“NOLs”) and net capital losses (“NCLs”) to offset future taxable income, including whether our shareholder rights plan, as amended (“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, or changes in, these strategies;

•

credit risks underlying our assets, including changes in the default rates and management’s assumptions regarding default rates on the mortgage loans securing our non-agency MBS;

•

the effect of changes in prepayment rates, interest rates and default rates on our portfolio;

•

our evaluation of SFR homes and the costs to operate SFR homes;

•

the effect of governmental regulation and actions on our business, including, without limitation, changes to monetary and fiscal policy and tax laws;

•

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 mortgage investments or pursuing business activities other than investing in mortgage investments;

•

our ability to successfully operate our business as a REIT;

•

our ability to maintain our exclusion from the definition of “investment company” under the Investment Company Act of 1940, as amended; and

•

the effect of general economic conditions on our business.

•

the availability and terms of, and our ability to deploy, capital and our ability to grow our business through our current strategy focused on acquiring either (i) agency MBS or (ii) mortgage credit investments that generally consist of mortgage loans secured by either residential or commercial real property or MBS collateralized by such mortgage loans, and debt securities secured by MSRs;

•

~~our ability to qualify and maintain our qualification as a REIT;~~

•

~~our business, acquisition, leverage, asset allocation, operational, investment, hedging and financing strategies and the success of, or changes in, these strategies;~~

•

~~credit risks underlying our assets, including changes in the default rates and management’s assumptions regarding default rates on the mortgage loans securing our non-agency MBS;~~

•

~~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 tax laws;~~

•

~~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 mortgage investments or pursuing business activities other than investing in mortgage investments;~~

•

~~our ability to successfully operate our business as a REIT;~~

•

~~our ability to maintain our exclusion from the definition of “investment company” under the Investment Company Act of 1940, as amended; 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 information currently in our possession. These beliefs, assumptions and expectations may change as a result of many possible events or factors, not all of which are known to us or are within our control. If a change occurs, the performance of our portfolio and our business, financial condition, liquidity and results of operations may vary materially from those expressed, anticipated or contemplated in our forward-looking statements. You should carefully consider these risks, along with 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 the timing of changes in the Federal Funds rate by the U.S. Federal Reserve;

•

the effect of any changes to the London Interbank Offered Rate (“LIBOR”) and the Secured Overnight Financing Rate (“SOFR”) and establishment of alternative reference rates;

•

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;

•

the sale of our SFR properties;

•

competition for investment opportunities;

•

U.S. Federal Reserve monetary policy;

•

the federal conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and the federal government;

•

mortgage loan prepayment activity, modification programs and future legislative action;

•

changes in, and success of, our acquisition, hedging and leverage strategies, changes in our asset allocation and changes in our operational policies, all of which may be changed by us without shareholder approval;

•

failure of sovereign or municipal entities to meet their debt obligations;

•

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 qualify and maintain our qualification as a REIT for federal income tax purposes;

•

our ability to successfully expand our business into areas other than investing in MBS and our expectations of the returns of expanding into any such areas; and

•

the other important factors identified in our Quarterly Reports on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2021 under the caption “Item 1A — Risk Factors.”

•

~~the effect of any changes to LIBOR and SOFR and establishment of alternative reference rates;~~

•

~~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;~~

•

~~U.S. Federal Reserve monetary policy;~~

•

~~mortgage loan prepayment activity, modification programs and future legislative action;~~

•

~~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 qualify and maintain our qualification as a REIT for federal income tax purposes;~~

•

~~our ability to successfully expand our business into areas other than investing in MBS and our expectations of the returns of expanding into any such areas; and~~

•

the other important factors identified in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2020 under the caption “Item 1A — Risk Factors.”

These and other risks, uncertainties and factors, including those described elsewhere in this Quarterly Report on Form 10-Q, could cause our actual results to differ materially from those projected in any forward-looking statements we make. All forward-looking statements speak only as of the date on which they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect us. Except as required by law, 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 or otherwise.

Item 4. Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, our management, with the participation of our Chief Executive Officer, J. Rock Tonkel, Jr., and our Chief Financial Officer, Richard E. Konzmann, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) pursuant to Rule 13a-15(b) of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the quarter ended ~~September~~June 30, ~~2021~~2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

We are from time to time involved in civil lawsuits, legal proceedings and arbitration matters that we consider to be in the ordinary course of our business. There can be no assurance that these matters individually or in the aggregate will not have a material adverse effect on our financial condition or results 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 actively defend such litigation, significant legal expenses could be incurred. An adverse resolution of any future litigation against us could materially affect our financial condition, results of operations and liquidity. Furthermore, we operate in highly-regulated markets that currently are under intense regulatory scrutiny, 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 with the former securitization business conducted by a subsidiary. We believe that the continued scrutiny of MBS, structured finance, and derivative market participants increases the risk of additional inquiries and requests from regulatory or enforcement agencies and other parties. We cannot provide any assurance that these inquiries and requests will not result in further investigation of or the initiation of a proceeding against us or that, if any such investigation or proceeding were to arise, it would not materially adversely affect our Company.

Item 1A. Risk Factors

~~For information regarding factors that could affect our results~~

Other than the following risk factor relating to the announced sale of ~~operations, financial condition and liquidity, see~~up to 376 SFR properties, there have been no material changes to the risk factors ~~discussed~~disclosed in ~~Part I,~~ Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021. The materialization of any risks and uncertainties identified in our Cautionary Statement About Forward-Looking Information contained in this report together with those previously disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~

~~The following risk factor should be read~~2021 or those that are presently unforeseen could result in ~~conjunction with the risk factors contained~~significant adverse effects on our financial condition, results of operations and cash flows. See “Cautionary Statement About Forward-Looking Information” in Part I, Item 3 of this report or our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

We may not consummate the announced sale of up to 376 SFR properties on a timely basis, on its current terms or at all, and even if consummated, we may not fully realize the anticipated benefits of the sale.

As disclosed in our Notes to Consolidated Financial Statements, we have entered into a definitive agreement to sell 376 SFR properties. While the sale is expected to be completed in August 2022, there can be no assurance that the sale will be completed in a timely manner, on its current terms or at all, as the completion of the sale is dependent on a number of factors, including customary closing conditions. If we are ~~exposed~~unable to ~~certain risks related~~consummate the sale, then we will not derive the expected benefits to our ~~investments in SFR homes.~~

~~Our investments in SFR homes expose us to certain risks (including risks that differ from~~business. Further, even if we do consummate the ~~risks associated with~~sale, we nonetheless may not fully realize the ~~other assets included in our investment portfolio), including among others:~~

•anticipated benefits of the transaction.

~~Ability to identify attractive tenants. Our success depends, in large part, upon our ability to attract and retain qualified tenants. This will depend, in turn, upon our ability, through a~~ ~~third-party investment firm,~~to screen applicants, identify good residents, avoid tenants who may default, and the willingness of our tenants to renew their leases. When properties are vacant, we are not earning rental income and incur maintenance costs as well as turnover costs associated with re-leasing the properties, such as marketing and leasing commissions. Additionally, if we have to evict tenants, we will incur legal costs and may have renovation costs if the tenants don’t properly maintain the properties or cause damage to the properties.

•

~~Assumptions regarding, and conditions in, our targeted markets~~. The success of our SFR strategy will depend upon many factors including, but not limited to: the availability of properties that meet our investment criteria and our ability to acquire such properties at favorable prices; our ability to avoid overpaying for properties and avoid impairment charges on such assets; real estate appreciation or depreciation in our target markets; the condition of our properties; our ability to contain renovation, maintenance, marketing and other operating costs for our properties; our ability to maintain high occupancy rates and target rent levels; general economic conditions in our target markets, such as changes in employment and household earnings and expenses; the effects of rent controls, stabilization laws and other laws or regulations regarding rental rates and tenant rights; and changes in, and changes in enforcement of, laws, regulations and government policies including health, safety, environmental, property, zoning and tax laws.

•

~~Significant competition~~. There is significant competition for SFR homes. Within the past several years, several entities have entered the SFR market and attempted to acquire and operate SFR properties on a large-scale basis and to achieve attractive yields employing technology through a disciplined approach to acquisitions and leasing, marketing and management. Many of our competitors may be larger and have greater financial, technical, leasing, marketing and other resources than we do, which may affect our ability to acquire our target properties at attractive prices and attract quality tenants.

~~These conditions and risks, if experienced by us, could have a material adverse impact on our ability to successfully execute our SFR investment strategy.~~

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer

On July 31, 2020, we announced that our Board of Directors authorized an increase to our share repurchase program (the “Repurchase Program”) pursuant to which we may purchase up to 18,000,000 shares of ~~Class A~~our common ~~stock~~.stock. As of ~~September~~June 30, ~~2021,~~2022, we had repurchased ~~3,820,821~~6,966,858 shares of ~~Class A~~our common stock and there remain available for repurchase ~~14,179,179~~11,033,142 shares of ~~Class A~~our common stock under the Repurchase ~~Program~~Program..

The following table presents information with respect to our purchases of our ~~Class A~~ common stock during the three months ended ~~September~~June 30, ~~2021,~~2022 by ~~the Company~~us or any “affiliated purchaser” ~~of the Company,~~affiliated with us, as defined in Rule 10b-18(a)(3) under the Exchange Act:

Settlement Date

Total Number of Shares Purchased

Average Net Price Paid Per Share

Total Number of Shares Repurchased as Part of Repurchase Program

Maximum Number of Shares that May Yet be Purchased Under the Repurchase Program

July 1, 2021 - July 31, 2021

368,564

$
3.96

368,564

14,870,595

August 1, 2021 - August 31, 2021

402,857

3.80

402,857

14,467,738

September 1, 2021 - September 30, 2021

288,559

3.76

288,559

14,179,179

Total

1,059,980

$
3.84

1,059,980

14,179,179


Settlement Date	Total Number of Shares Purchased		Average Net Price Paid Per Share		Total Number of Shares Repurchased as Part of Repurchase Program		Maximum Number of Shares that May Yet be Purchased Under the Repurchase Program
April 1, 2022 - April 30, 2022		397,432	$	3.52		397,432		11,583,280
May 1, 2022 - May 31, 2022		370,152		3.24		370,152		11,213,128
June 1, 2022 - June 30, 2022		179,986		3.46		179,986		11,033,142
Total		947,570	$	3.40		947,570		11,033,142

On March 20, 2020, our Board of Directors authorized us to repurchase up to $25 million in the aggregate of our Series B Preferred Stock, Series C Preferred Stock, Senior Notes due 2023 and Senior Notes due 2025. As of June 30, 2022, we had repurchased an aggregate of $5.9 million of Preferred Stock and Senior Notes and had remaining authorization to repurchase up to $19.1 million of such securities.

The following table presents information with respect to our purchases of our Series C Preferred Stock during the three months ended June 30, 2022 by us or any “affiliated purchaser” affiliated with us, as defined in Rule 10b-18(a)(3) under the Exchange Act:


Settlement Date	Total Number of Shares Purchased		Average Net Price Paid Per Share		Total Number of Shares Repurchased as Part of Repurchase Program		Maximum Number of Shares that May Yet be Purchased Under the Repurchase Program
April 1, 2022 - April 30, 2022		23,003	$	24.57		23,003	N/A
May 1, 2022 - May 31, 2022		34,809		24.38		34,809	N/A
June 1, 2022 - June 30, 2022		14,551		23.03		14,551	N/A
Total		72,363	$	24.17		72,363	N/A

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits


Exhibit Number		Exhibit Title

3.01		Amended and Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 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 Perpetual Redeemable Preferred Stock, $0.01 par value per share (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form 8-A filed on May 9, 2017).


3.03		Articles of Amendment to the Amended and Restated Articles of Incorporation of Arlington Asset Investment Corp. designating the Company’s 8.250% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $0.01 per share (incorporated by reference to Exhibit 3.3 to the Company’s Registration Statement on Form 8-A filed on March 11, 2019).

3.04		Articles of Amendment to the Amended and Restated Articles of Incorporation of Arlington Asset Investment Corp. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on June 25, 2019).

3.05		Amended and Restated Bylaws, as amended (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on July 28, 2011).

Exhibit Number		~~Exhibit Title~~
3.06		Amendment No. 1 to the Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on February 4, 2015).

3.07		Amendment No. 2 to the Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 26, 2016).

3.08		Amendment No. 3 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 January 17, 2019).

3.09		Amendment No. 4 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 December 13, 2019).

4.01		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. 333-235885) filed on January 10, 2020).

4.02		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. 333-235885) filed on January 10, 2020).

4.03		Indenture dated as of May 1, 2013 between the Company and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K 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 4.6 to the Company’s Registration Statement on Form S-3 (File No. 333-235885) filed on January 10, 2020).

4.06		Form of Subordinated Note. (incorporated by reference to Exhibit 4.7 to the Company’s Registration Statement on Form S-3 (File No. 333-235885) filed on January 10, 2020).

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 on May 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 SEC on 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 the SEC on June 5, 2009).

4.10		First Amendment to Shareholder Rights Agreement, dated as of April 13, 2018 (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on April 13, 2018).

4.11		Second Supplemental Indenture, dated as of March 18, 2015, between the Company, Wells Fargo Bank, National Association, as Trustee and The 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).

4.12		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 on March 17, 2015).

4.13		Form of specimen certificate representing the shares of 7.00% Series B Perpetual Redeemable Preferred Stock (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 8-A filed on May 9, 2017).


4.14		Form of specimen certificate representing the shares of 8.250% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 8-A filed on March 11, 2019).

4.15		First Supplemental Indenture dated as of July 15, 2021 between the Company and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.5 to the Company’s Registration Statement on Form 8-A filed on July 15, 2021).

4.16		Form of 6.000% Senior Notes Due 2026 (incorporated by reference to Exhibit 4.6 to the Company’s Registration Statement on Form 8-A filed on July 15, 2021).

Exhibit Number		~~Exhibit Title~~
4.17		Second Amendment to Shareholder Rights Agreement, dated as of April 11, 2022 (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K filed on April 12, 2022).
~~31.01~~
10.01		Purchase and Sale Agreement dated as of May 10, 2022, by and between McLean SFR Investment, LLC and HomeSource Acquisitions, LLC (incorporated by reference to Exhibit 10.01 to the Registrant's Quarterly Report on Form 10-Q filed on May 16, 2022).

10.02		Amendment No. 1 to Purchase and Sale Agreement dated as of May 27, 2022, by and between McLean SFR I nvestment, LLC and HomeSource Acquisitions, LLC.*

10.03		Amendment No. 2 to Purchase and Sale Agreement dated as of June 20, 2022, by and between McLean SFR Investment, LLC and HomeSource Acquisitions, LLC. (incorporated by reference to Exhibit 10.01 to the Registrant’s Current Report on Form 8-K filed on June 21, 2022).

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 of 2002.*

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 of 2002.*

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 of 2002.**

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 of 2002.**

101.INS		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.***

101.SCH		Inline XBRL Taxonomy Extension Schema Document***

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document***

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document***

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document***

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document***

104		The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2021,~~2022, has been formatted in Inline XBRL.

* Filed herewith.

** Furnished herewith.

*** Submitted electronically herewith. Attached as Exhibit 101 are the following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at June 30, 2022 and December 31, 2021; (ii) Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2022 and 2021; (iii) Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2022 and 2021 and for the Three Months Ended June 30, 2022 and 2021; and (iv) Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021.

*	~~Filed herewith.~~

**	~~Furnished herewith.~~

~~***~~

Submitted electronically herewith. Attached as Exhibit 101 are the following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at September 30, 2021 and December 31, 2020; (ii) Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2021 and 2020; (iii) Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2021 and 2020 and for the Three Months Ended June 30, 2021 and 2020 and for the Three Months Ended September 30, 2021 and 2020; and (iv) Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020.

SIGNATURES

Pursuant 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 on its behalf by the undersigned, thereunto duly authorized.


	ARLINGTON ASSET INVESTMENT CORP.
	By:	/s/ RICHARD E. KONZMANN
		Richard E. Konzmann
		Executive Vice President, Chief Financial Officer and Treasurer
		(Principal Financial Officer)
Date: ~~November 9, 2021~~August 15, 2022

6267


	Six Months Ended June 30,
	2022			2021
Cash flows from operating activities:
Net loss	$	(2,394	)	$	(13,099	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities
Investment and derivative loss, net		457			15,795
Net (discount) premium (accretion) amortization		(3,694	)		(1,297	)
Other		3,316			1,131
Changes in operating assets
Interest receivable		67			312
Other assets		(2,743	)		(537	)
Changes in operating liabilities
Interest payable and other liabilities		3,693			1,087
Accrued compensation and benefits		(1,337	)		(1,223	)
Net cash (used in) provided by operating activities		(2,635	)		2,169
Cash flows from investing activities:
Purchases of agency mortgage-backed securities		(400,331	)		(607,659	)
Purchases of credit securities		(120,335	)		(28,356	)
Purchases of MSR financing receivables		(21,220	)		(60,556	)
Purchases of single-family residential real estate		(121,919	)		—
Purchases of loans		—			(29,967	)
Proceeds from sales of agency mortgage-backed securities		586,693			625,812
Proceeds from sales of credit securities		10,395			13,640
Proceeds from sales of single-family residential real estate		351			—
Receipt of principal payments on agency mortgage-backed securities		20,463			29,735
Receipt of principal payments on credit securities		862			—
Receipt of principal payments on loans		212			282
Receipt of principal payments on mortgage loans of consolidated VIE		29,278			58,948
Receipt of distributions on MSR financing receivables		64,552			—
Restricted cash balance of VIE upon consolidation		9,637			—
Proceeds from (payments for) derivatives and deposits, net		5,979			(9,349	)
Other		6,231			3,583
Net cash provided by (used in) investing activities		70,848			(3,887	)
Cash flows from financing activities:
(Repayments of) proceeds from repurchase agreements, net		(116,630	)		39,374
Repayments of secured debt of consolidated VIE		(31,652	)		(65,350	)
Repurchase of common stock		(6,739	)		(4,013	)
Repurchase of preferred stock		(1,749	)		—
Proceeds from issuance of preferred stock		149			—
Proceeds from long-term debt secured by single-family properties		83,565			—
Repurchase of long-term unsecured debt		—			(7	)
Dividends paid		(1,449	)		(1,446	)
Net cash used in financing activities		(74,505	)		(31,442	)
Net decrease in cash, cash equivalents and restricted cash		(6,292	)		(33,160	)
Cash, cash equivalents and restricted cash, beginning of period		21,786			39,965
Cash, cash equivalents and restricted cash, end of period	$	15,494		$	6,805
Supplemental cash flow information:
Cash payments for interest	$	6,625		$	4,468
Cash payments for taxes	$	753		$	—
Non-cash investing activity:
Assets of VIE upon consolidation	$	287,282		$	—
Non-cash financing activity:
Liabilities of VIE upon consolidation	$	266,697		$	—

	Nine Months Ended September 30,
	2021			2020
Cash flows from operating activities:
Net loss	$	(13,349	)	$	(79,177	)
Adjustments to reconcile net loss to net cash provided by operating activities
Total investment loss, net		17,108			86,319
Net (discount) premium (accretion) amortization		(2,742	)		6,568
Other		1,700			1,805
Changes in operating assets
Interest receivable		892			9,074
Other assets		(339	)		4,148
Changes in operating liabilities
Interest payable and other liabilities		2,178			(4,075	)
Accrued compensation and benefits		(509	)		(1,582	)
Net cash provided by operating activities		4,939			23,080
Cash flows from investing activities:
Purchases of agency mortgage-backed securities		(607,659	)		(649,274	)
Purchases of mortgage credit securities		(28,356	)		(163,529	)
Purchases of loans		(29,967	)		(25,000	)
Purchases of MSR financing receivables		(96,157	)		—
Purchases of single-family residential real estate		(9,419	)		—
Proceeds from sales of agency mortgage-backed securities		724,611			3,654,467
Proceeds from sales of mortgage credit securities		31,702			122,100
Receipt of principal payments on agency mortgage-backed securities		49,938			196,199
Receipt of principal payments on mortgage credit securities		70			2,163
Receipt of principal payments on loans		45,167			—
Receipt of principal payments on mortgage loans of consolidated VIE		78,861			—
Receipt of distributions on MSR financing receivables		3,816			—
Restricted cash balance of consolidated VIE upon consolidation		—			8,658
Payments for derivatives and deposits, net		(2,481	)		(65,211	)
Other		4,555			(10,776	)
Net cash provided by investing activities		164,681			3,069,797
Cash flows from financing activities:
Repayments of repurchase agreements, net		(101,229	)		(3,072,498	)
Repayments of secured debt of consolidated VIE, net		(86,467	)		—
Repurchase of common stock		(8,109	)		(8,911	)
Repurchase of preferred stock		—			(1,603	)
Proceeds from issuance of preferred stock		559			—
Issuance of long-term unsecured debt		36,316			—
Redemption of long-term unsecured debt		(23,821	)		—
Repurchase of long-term unsecured debt		(7	)		(1,308	)
Dividends paid		(2,177	)		(10,592	)
Other		—			(66	)
Net cash used in financing activities		(184,935	)		(3,094,978	)
Net decrease in cash, cash equivalents and restricted cash		(15,315	)		(2,101	)
Cash, cash equivalents and restricted cash, beginning of period		39,965			19,636
Cash, cash equivalents and restricted cash, end of period	$	24,650		$	17,535
Supplemental cash flow information:
Cash payments for interest	$	6,111		$	23,728
Cash payments for taxes	$	—		$	—
Cash receipt for refund of prior alternative minimum tax payments	$	—		$	4,566


Scenario:			Effect on Interest Income ~~Recognition for Investments~~ ~~in Mortgage Credit Securities and MSR Financing Receivables:~~Recognition:
Scenario:
A positive change in cash flows occurs. Actual cash flows exceed prior estimates and/or a positive change occurs in the estimate of expected remaining cash flows.			A revised effective interest rate is calculated and applied prospectively such that the positive change in cash flows ~~will be~~is recognized as incremental interest income over the remaining life of the investment.
			The amount of periodic interest income recognized over the remaining life of the investment will be reduced accordingly. Generally, the investment’s effective interest rate is reduced accordingly and applied on a prospective basis. However, if the revised effective interest rate is negative, the investment’s existing effective interest rate is retained while the reference amount to which the existing effective interest rate will be prospectively applied is reduced to the present value of cash flows expected to be collected, discounted at the investment’s existing effective interest rate.
An adverse change in cash flows occurs. Actual cash flows fall short of prior estimates and/or an adverse change occurs in the estimate of expected remaining cash flows.


Investments in agency MBS, subsequent measurement	Note 3
Investments in ~~mortgage~~ credit securities, subsequent measurement Loans held for investment, subsequent measurement Investments in MSR financing receivables, subsequent measurement Investments in ~~single-family residential~~SFR properties	Note 4 Note 5 Note 6 Note 7
Consolidation of variable interest entities Borrowings	Note 8 Note 9
To-be-announced agency MBS transactions, including “dollar rolls”	Note 10
Derivative instruments	Note 10
Balance sheet offsetting	Note 11
Fair value measurements Income taxes	Note 12 Note 13
Stock-based compensation	Note 16


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock	AAIC	NYSE
7.00% Series B Cumulative Perpetual Redeemable Preferred Stock	AAIC PrB	NYSE
8.250% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock	AAIC PrC	NYSE
6.000% Senior Notes due 2026	AAIN	NYSE
6.75% Senior Notes due 2025	AIC	NYSE


Title		Outstanding
Class A Common Stock		~~31,479,419~~28,890,953 shares


			Page
PART I — FINANCIAL INFORMATION
	Item 1.	Consolidated Financial Statements and Notes — (unaudited)	1
		Consolidated Balance Sheets	1
		Consolidated Statements of Comprehensive Income	2
		Consolidated Statements of Changes in Equity	3
		Consolidated Statements of Cash Flows	54
		Notes to Consolidated Financial Statements	65
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2936
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	5157
	Item 4.	Controls and Procedures	5762
PART II — OTHER INFORMATION
	Item 1.	Legal Proceedings	5863
	Item 1A.	Risk Factors	5863
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5963
	Item 3.	Defaults Upon Senior Securities	5964
	Item 4.	Mine Safety Disclosures	5964
	Item 5.	Other Information	5964
	Item 6.	Exhibits	5964
		Signatures	6267

	Series B Preferred Stock (#)			Series B Preferred Amount ($)			Series C Preferred Stock (#)			Series C Preferred Amount ($)			Class A Common Stock (#)			Class A Amount ($)			Additional Paid-In Capital			Accumulated Deficit			Total
Balances, December 31, 2019		354,039		$	8,270			1,200,000		$	28,944			36,755,387		$	368		$	2,049,292		$	(1,759,626	)	$	327,248
Net loss		—			—			—			—			—			—			—			(94,170	)		(94,170	)
Issuance of Class A common stock under stock-based compensation plans		—			—			—			—			60,374			—			62			—			62
Stock-based compensation		—			—			—			—			—			—			393			—			393
Other		—			(6	)		—			(10	)		—			—			(6	)		—			(22	)
Dividends declared		—			—			—			—			—			—			—			(702	)		(702	)
Balances, March 31, 2020		354,039		$	8,264			1,200,000		$	28,934			36,815,761		$	368		$	2,049,741		$	(1,854,498	)	$	232,809
Net income		—			—			—			—			—			—			—			10,234			10,234
Repurchase of Class A common stock		—			—			—			—			(1,069,340	)		(11	)		(3,036	)		—			(3,047	)
Repurchase of preferred stock		(10,200	)		(173	)		(33,100	)		(627	)		—			—			—			—			(800	)
Stock-based compensation		—			—			—			—			—			—			594			—			594
Other		—			(13	)		—			—			—			—			(13	)		—			(26	)
Dividends declared		—			—			—			—			—			—			—			(779	)		(779	)
Balances, June 30, 2020		343,839		$	8,078			1,166,900		$	28,307			35,746,421		$	357		$	2,047,286		$	(1,845,043	)	$	238,985
Net income		—			—			—			—			—			—			—			4,759			4,759
Repurchase of Class A common stock		—			—			—			—			(2,079,074	)		(21	)		(5,843	)		—			(5,864	)
Repurchase of preferred stock		(7,566	)		(126	)		(35,252	)		(677	)		—			—			—			—			(803	)
Issuance of Class A common stock under stock-based compensation plans		—			—			—			—			95,846			1			47			—			48
Repurchase of Class A common stock under stock-based compensation plans		—			—			—			—			(32,023	)		—			(91	)		—			(91	)
Stock-based compensation		—			—			—			—			—			—			596			—			596
Other		—			(9	)		—			—			—			—			(9	)		—			(18	)
Dividends declared		—			—			—			—			—			—			—			(726	)		(726	)
Balances, September 30, 2020		336,273		$	7,943			1,131,648		$	27,630			33,731,170		$	337		$	2,041,986		$	(1,841,010	)	$	236,886


Standard	Description	Date of Adoption	Effect on the Consolidated Financial Statements
Recently Issued Accounting Guidance Not Yet Adopted
ASU Nos. 2020-04 and 2021-01, Reference Rate Reform (Topic 848)	The amendments in these updates provide optional practical expedients and exceptions for applying GAAP to the modification of receivables, debt or lease contracts as well as cash flow and fair value hedge accounting relationships that reference a rate, such as the London Interbank Offered Rate (“LIBOR”), that is expected to be discontinued because of reference rate reform. The practical expedients and exceptions provided by these updates are effective from March 12, 2020 through December 31, 2022.	Not yet adopted.	To date, ~~the Company has not made~~ any modifications ~~to contracts~~ due to reference rate ~~reform.~~reform have not had a material impact to the Company. The Company has not elected to apply hedge accounting for financial reporting purposes. The Company does not currently expect the adoption of ASU Nos. 2020-04 and 2021-01 to have ana material effect on its consolidated financial statements.

	Three Months Ended September 30, 2021			Nine Months Ended September 30, 2021
Balance at period beginning	$	74,652		$	9,346
Capital investments		35,601			95,223
Capital distributions		(3,816	)		(3,816	)
Accretion of interest income		1,945			3,693
Changes in valuation inputs and assumptions		4,452			8,388
Balance at period end	$	112,834		$	112,834


	Single-family Residential Real Estate			Single-family Residential Real Estate Held-for-Sale			Total
Land	$	11,423		$	18,913		$	30,336
Buildings and improvements		57,093			95,354			152,447
Investments in single-family residential real estate, at cost		68,516			114,267			182,783
Less: accumulated depreciation		(326	)		(1,288	)		(1,614	)
Investments in single-family residential real estate, net	$	68,190		$	112,979		$	181,169

	September 30, 2021			December 31, 2020
Restricted cash of consolidated VIE ⁽¹⁾	$	3,267		$	11,169
Mortgage loans of consolidated VIE, at fair value		16,516			93,283
Interest receivable of consolidated VIE		67			545
Secured debt of consolidated VIE, at fair value		(7,350	)		(93,627	)
Interest payable of consolidated VIE		(52	)		(321	)
Investment in consolidated VIE	$	12,448		$	11,049

	September 30, 2021
	Notional Amount: Purchase (Sale) Commitment			Contractual Forward Price			Market Price			Fair Value
1.5% 30-year MBS purchase commitments	$	175,000		$	171,443		$	169,967		$	(1,476	)
1.5% 30-year MBS sale commitments		(175,000	)		(170,865	)		(169,967	)		898
2.0% 30-year MBS purchase commitments		250,000			251,545			250,938			(607	)
2.0% 30-year MBS sale commitments		(125,000	)		(126,086	)		(125,469	)		617
2.5% 30-year MBS sale commitments		(100,000	)		(102,906	)		(103,219	)		(313	)
Total TBA commitments, net	$	25,000		$	23,131		$	22,250		$	(881	)

	As of December 31, 2020
	Gross Amount Recognized		Amount Offset in the Consolidated Balance Sheets		Net Amount Presented in the Consolidated Balance Sheets		Gross Amount Not Offset in the Consolidated Balance Sheets						Net Amount
							Financial Instruments ⁽¹⁾			Cash Collateral ⁽²⁾
Assets:
Derivative instruments:
TBA commitments	$	258	$	0	$	258	$	(74	)	$	0		$	184
Total derivative instruments		258		0		258		(74	)		0			184
Total assets	$	258	$	0	$	258	$	(74	)	$	0		$	184
Liabilities:
Derivative instruments:
Interest rate swaps	$	147	$	0	$	147	$	0		$	(147	)	$	0
TBA commitments		74		0		74		(74	)		0			0
Total derivative instruments		221		0		221		(74	)		(147	)		0
Repurchase agreements		655,212		0		655,212		(655,212	)		0			0
Total liabilities	$	655,433	$	0	$	655,433	$	(655,286	)	$	(147	)	$	0

	September 30, 2020			December 31, 2020			March 31, 2021			June 30, 2021			September 30, 2021			Change - Third Quarter 2021

30-Year FNMA Fixed Rate MBS ⁽¹⁾
2.0%	$	103.39		$	103.95		$	99.67		$	100.98		$	100.38		$	(0.60	)
2.5%		104.89			105.45			102.51			103.41			103.22			(0.19	)
3.0%		104.77			104.80			104.13			104.22			104.67			0.45
3.5%		105.48			105.73			105.61			105.27			105.83			0.56
4.0%		106.64			106.80			107.32			106.54			107.17			0.63
4.5%		108.17			108.39			108.87			107.63			108.16			0.53

Investment Spreads
FNMA Current Coupon vs. 10-year Swap Rate	69 bps			42 bps			26 bps			39 bps			46 bps			7 bps
CMBS 2.0/3.0 BBB- vs. Swap Curve	500 bps			475 bps			390 bps			345 bps			350 bps			5 bps

U.S. Treasury Rates ("UST")
2-year UST		0.13	%		0.12	%		0.16	%		0.25	%		0.28	%	3 bps
5-year UST		0.28	%		0.36	%		0.94	%		0.89	%		0.96	%	7 bps
10-year UST		0.68	%		0.91	%		1.74	%		1.47	%		1.49	%	2 bps
2-year UST to 10-year UST spread	55 bps			79 bps			158 bps			122 bps			121 bps			-1 bps

Interest Rate Swap Rates
2-year swap		0.22	%		0.20	%		0.29	%		0.33	%		0.38	%	5 bps
5-year swap		0.35	%		0.43	%		1.06	%		0.96	%		1.05	%	9 bps
10-year swap		0.71	%		0.93	%		1.78	%		1.44	%		1.51	%	7 bps
2-year swap to 2-year UST spread	9 bps			8 bps			13 bps			8 bps			10 bps			2 bps
10-year swap to 10-year UST spread	3 bps			2 bps			4 bps			-3 bps			2 bps			5 bps

London Interbank Offered Rates ("LIBOR") and Secured Overnight Financing Rate ("SOFR")
1-month LIBOR		0.15	%		0.14	%		0.11	%		0.10	%		0.08	%	-2 bps
3-month LIBOR		0.23	%		0.24	%		0.19	%		0.15	%		0.13	%	-2 bps
SOFR		0.08	%		0.07	%		0.01	%		0.05	%		0.05	%	0 bps

	September 30, 2021
	Assets		Capital Allocation ⁽¹⁾		Capital Allocation (%)			Leverage ⁽²⁾
Agency MBS and net long TBA commitments	$	659,968	$	134,932		44	%		4.1
MSR financing receivables		112,834		112,834		36	%		0.1
Mortgage credit investments ⁽³⁾		67,725		46,865		15	%		0.4
Single-family residential properties		9,419		15,947		5	%		—
Total mortgage investments	$	849,946	$	310,578		100	%		1.8

	Unpaid Principal Balance		Net Unamortized Purchase Premiums		Amortized Cost Basis		Net Unrealized (Loss) Gain			Fair Value		Market Price		Coupon			Weighted Average Expected Remaining Life
30-year fixed rate:
2.0%	$	456,519	$	12,290	$	468,809	$	(8,634	)	$	460,175	$	100.80		2.00	%		7.3
2.5%		170,776		8,761		179,537		(2,003	)		177,534		103.96		2.50	%		5.3
5.5%		8		—		8		1			9		115.87		5.50	%		4.9
Total/weighted-average	$	627,303	$	21,051	$	648,354	$	(10,636	)	$	637,718	$	101.66		2.14	%		6.7

Amortized Cost Basis ⁽¹⁾				Unrealized Gain				Fair Value
$	104,446			$	8,388			$	112,834

Underlying MSRs:
Holder of Loans	Unpaid Principal Balance		Weighted-Average Note Rate			Weighted-Average Servicing Fee			Weighted-Average Loan Age	Price			Multiple ⁽¹⁾		Fair Value
Fannie Mae	$	11,311,790		2.92	%		0.25	%	8 months		1.07	%		4.20	$	120,572
Fannie Mae		1,636		3.22	%		0.25	%	4 months		1.07	%		4.27		17
Total/weighted-average	$	11,313,426		2.92	%		0.25	%	8 months		1.07	%		4.20	$	120,589

	Unpaid Principal Balance		Net Unamortized Premiums (Discounts)			Amortized Original Cost Basis		Net Unrealized Gain (Loss)			Fair Value ⁽¹⁾		Market Price		Leverage		Total Return on Capital ⁽²⁾
Commercial mortgage loan	$	29,800	$	—		$	29,800	$	—		$	29,800	$	100.00		2.3		9.83	%
Business purpose residential MBS⁽³⁾		24,649		1,805			26,454		(3,289	)		23,165		93.71		—		9.84	%
Residential MBS		6,934		5			6,939		21			6,960		100.04		—		5.29	%
Commercial MBS		6,000		(766	)		5,234		(859	)		4,375		72.38		—		(2.01	%)
Other		5,061		(1,547	)		3,514		(89	)		3,425		67.70		—		0.20	%
Total/weighted-average	$	72,444	$	(503	)	$	71,941	$	(4,216	)	$	67,725	$	93.32		0.4		7.43	%

	Number of		Percentage of Repurchase
	Counterparties		Agreement Funding
North America		5		61.8	%
Europe		1		16.3	%
Asia		2		21.9	%
		8		100.0	%

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Emerging growth company