Good morning. I'd like to welcome everyone to the Arlington Asset Fourth Quarter and Full Year 2014 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Kurt Harrington. Mr. Harrington, you may now begin. Kurt Harrington Thank you very much. Good morning. Before we begin this morning's call, I would like to remind everyone that statements concerning future financial or business performance, market conditions, business strategies or expectations, and any other guidance on present or future periods constitute forward-looking statements that are subject to a number of factors, risks and uncertainties that might cause actual results to differ materially from stated expectations or current circumstances. These forward-looking statements are based on management's beliefs, assumptions and expectations, which are subject to change, risk and uncertainty as a result of possible events or factors. These and other material risks are described in the company's Annual Report on Form 10-K for the year ended December 31, 2013, and other documents filed by the company with the SEC from time to time, which are available from the company and from the SEC, and you should read and understand these risks when evaluating any forward-looking statement. I would now like to turn the call over to Rock Tonkel for his remarks. Rock Tonkel Thank you, Kurt. Good morning, and welcome to the 2014 fourth quarter earnings call for Arlington Asset. I'm Rock Tonkel, Chief Executive Officer; and joining me today in the call are Eric Billings, our Executive Chairman; and Brian Bowers, our CIO. Overall, 2014 was a positive year for Arlington. We reported core operating income per share diluted of $1.40 for the fourth quarter, and $5.19 per share for the full year ended 2014, which equates an annual return on book value available for investment of approximately 22%.…

Okay. At this time we will open the floor for questions. [Operator Instructions] Our first question comes from Douglas Harder from Credit Suisse.

I was hoping you could help me understand kind of the decline in book value, excluding the deferred tax asset. That piece of it I understand, but the magnitude of the decline [indiscernible] was greater than I was looking for. Just hoping you could give a little bit more clarity, and the decline seems to be more so than some of the other names we have seen that have reported so far.

Well, I think that's largely a consequence, Doug, of the fact that we maintain a very substantially hedged portfolio that we've all discussed previously on many occasions. We maintain the hedge that was approximately equal to the repo or the market value of the portfolio at various times over the last several years. That's worked quite well for us through various periods. That's illustrated by the economic returns of the company over time. And when markets go through these periods of volatility with the risk appetite and the rally to treasuries and the consequent decline in rates, that's pretty rapid, then we have two things going on there at least, right; multiple things with two at a minimum, one of which is you have spread widening just based on risk appetite reduction, and then the other thing is as you decline below certain levels, there is a heightened sensitivity to prepay, and you begin to get the effects of [indiscernible] asset and that's what we experience some of -- we experience certainly during this period. And I think that's not unusual. That's something we've observed before and we've seen it ameliorate itself over time in prior occasions. So that's what's given us the ability to generate consistent returns over time.

So I guess thinking about those risks, where we sit today, I mean, so you said you've reduced a little bit of your ten-year treasury position but I guess, how do you try to think and get comfortable with the risk that we take another leg down in yields versus obviously you're well-positioned from a hedged, if rates were to go back-up, I guess how do you think about balancing those risks?

Well, I think what I'm trying to address here is that the company has demonstrated significant flexibility as a consequence of its construct. We've described that in the script. So I think the flexibility that the structure provides with low leverage and great deal of liquidity allows us to flex with various environments and to the extent we see these mark-to-market differences, then we get the benefit of a wider spread opportunity over time. To the extent, we see rates move lower as we have here, we have the flexibility to adjust the hedge that could mean further reduction in the ten-year. We felt that was appropriate. It could mean shifting some of the hedge from the longer end of the curve to the shorter end of the curve. These are things we look at consistently. And it also could mean shifts in the asset side of the equation, although we think that this particular structure has benefited us a great deal over many years, the pay-ups in particular, the pay-up protected -- excuse me, prepaid protected portfolio have demonstrated their value over a long period of low rates prior to mid or late 2013.

Great. Thank you, Rock.

Our next question comes from Richard Eckert from MLV & Company.

A couple of questions here; I just wanted to get the figures on the net deferred tax allowance. You said that you made an allowance of approximately 134, 113 of which is recoverable. Is that correct?

Yes, that's correct.

Okay. Next question is, you ended up with substantially lower balances of agency securities and lower leverage. Is your capital fully deployed or fully allocated now?

Where are you seeing? Rich, where are you seeing? I'm not following you there? Where are you seeing the lower balances?

No, it's lower versus my expectation.

Oh, I understand what you're saying. So, a couple of things; one, I think we're -- look, in this particular environment we've adopted a little bit more cautious stance from a growth perspective. So, in order to maintain that flexibility and maximize your available liquidity in volatile market conditions, that may mean if the margin that we've grown a little less than maybe you may have anticipated, I don't think there's anything meaningfully outside the realm of our expectations, but at the margin there may be some modest difference there from a growth and agency portfolio balance perspective. And that's just holding more -- holding maybe a little more of our liquidity.

So do you anticipate maintaining the liquidity level going forward into the next quarter or two?

Well, it depends on what circumstances we encounter, right; to the extent that as we've seen in the past, we experienced a flex back in rates, then that would obviously generate substantial additional liquidity, and that would give us the flexibility to adjust the portfolio accordingly. And meanwhile, if the rates are inclined to move lower, then we have generated excess liquidity ahead of time to adapt to that circumstance and maintain full flexibility through those moves.

Okay. So I interpret that to mean that I shouldn't expect to see large increases in that agency portfolio in the near future?

Look, I think Rich, for right now we feel like we're in a comfortable position, where the company continues to generate very, very strong spread income as it has in the past and that is grown over the course of the last couple of years. There's no change in portfolio structure that would give rise to us to suggest otherwise. We're just being responsive to a -- and maintaining full flexibility through a more volatile period. And I think you've seen our behavior in less volatile period, so including parts of '13 and '14 when volatility was a little lower. So we're not afraid or unwilling to continue to build the business just the opposite. It's just that we're maintaining high level of flexibility here in these conditions.

Okay, thank you.

I'd say also that because of the lower hedge cost and widening of spreads, then you'd expect to continue to see that spread income increase with that condition present.

Our next question comes from Dan Alter from FBR Capital Markets.

Thanks. Good morning. Appreciate you taking the call today. I just wanted to actually touch a little bit on the private-label book. I think if I heard correctly there were $24 million of proceeds, or I guess that were sold or obtained through the sale, but kind of a sense of what the ending mark-to-market was on those sales. In other words, were we selling at 85% of face value, 90% of face value?

I'd say, well, the executions were mostly right on the heels of the prior mark. So I don't think you expect to see them widely outside the prior marks either. So I think they would be consistent with those prior marks.

Okay. I think I got you there. And I think the point you hit on being largely pre-pay protected is clearly an important facet in where we sit right now but, given that I guess spreads have widened a little bit more into the first quarter into January, do you have a sense of maybe what the mark-to-market is on the book through January, I'll say with hedges and some spread widening?

Day-to-day, markets are moving around pretty significantly. I mean we've seen almost a 20 basis point pullback in swaps in the curve over the last couple of days. I think what we've seen is some diminishing in book value from the change in the mark during January, and that's been mitigated as I said earlier by the earnings and the portfolio, which continue to be very strong and consistent with our historical experience, and by the market moves in response we've mitigated that meaningfully off the loss. So I'd say there's definitely some downward movement in book value from the end of the quarter -- end of last quarter, but it's been meaningfully mitigated by some of these other factors.

Right. And one of the things to consider is the fact that pay-ups have also increased in the latter half of January. So that's also mitigated the reduction and mitigated some of the book value reduction at this point in time.

Right. Yes, I totally got you there. And just kind of just again related to the pre-payment protected asset portfolio I guess we're through January. I guess from the realm, have you seen any kind of tick-up in CPRs yet or is it still kind of just holding steady here thanks to the enhanced prepay?

No, I think December might have been up a touch very modestly over November, and we haven't seen January up. So I think the applications and numbers that you've all seen for growth in that origination for January probably a little bit lower than folks expected, which we can all draw our own conclusions from what that might mean for CPRs. We certainly wonder about the prepayment assumptions embedded in the trading durations on fixed rate mortgages. They received a suggest prepaid speeds that are so high to be sort of difficult to envision, given the structural impediments to prepayments and mortgage volume that exist in the mortgage infrastructure out there. But we'll see how that plays out. I would say that Brian makes a very good point that the shift in pay-ups on prepay protective securities has been meaningful in the last weeks or two weeks of January -- in last two weeks it's been quite meaningful actually. That's an important mitigant on mark-to-market shifts.

Great, thanks. That's all, much appreciated.

[Operator Instructions] And our next question comes from Trevor Cranston from JMP Securities.

Hi. Thanks. One more follow-up on the pay-ups on the spec pool portfolio; if we see the pay-ups kind of continue to increase here and if rates kind of stay or continue to drop, can you talk about how you would evaluate kind of continuing to hold those at very high pay up levels versus maybe doing some other things to mitigate re-fi and extension risk like going down in coupon or moving into 15 years.

So, good question, Trevor, we fund up [ph] with these things constantly. We've looked at some of the hybrid securities. We've looked at the 15s. We feel like for now that the pay-up position we're in on the 30s is a good place to be for now. And I think if we see -- as we see shifts in market conditions, we may adapt to that with an adjustment on the asset of the hedge side. These are decisions that we take all the way along the way, and we've had very good experience and generated, we think meaningful excess returns from the prepay protected 30-year portfolio over a long period of time. But we're not reluctant to alter that structure if pay-ups get to a level where we think it's not a good risk award.

Got it. Then one more follow-up on the book value question; just to help us for modeling purposes, can you kind of give us the approximate timing of when in January you took off some of the 10 year portion of the hedge?

It wasn't right at the beginning. It was probably in the first half, but not right at the very beginning of January.

Okay. It's close enough. Thanks a lot.

Our next question comes from Mark DeVries from Barclays.

Yes. Thanks. Sorry if I missed this in your comments, Rock, but could you give is a sense of what your rate outlook is here? With the consensus seeming to be moving towards the view that rates will remain range bound and for [indiscernible] long. Are you inclined at all to kind of reduce some of your hedges? Yes, thanks. Sorry if I missed this in your comments Rock. Can you give just a sense of what your rate outlook is here and you know what the consensus you know the rates being moving towards you rates won't (inaudible) and local are you inclined at all they kind of reduce some from your hedges?

Again, [technical difficulty] Mark, we look at it all the time; it's a great question and we're not necessarily -- we're not pretending to have a metal crystal ball than others are on where rates are headed from here. There are certainly a lot of influences that would suggest that they could go lower from global yield. There are other influences. But look, the underlying forces in the U.S. economy appeared was to be quite constructive, that's true, and we're thinking housing we think that's generally true across the U.S. economy. And so, we're cautious about the notion of being a lot more exposed to a higher rate move. And so we're cautious about the idea of pulling back a lot of that hedge. You can see it in the behavior we have demonstrated so far that certainly as we get down here into these price levels on bonds that we want to make sure that we protect ourselves against that potential diminishing of bond value as rates rise, and so that's where we stand.

Yes, fair enough. And contrary to the consensus view on rates, rates have obviously been pretty volatile recently and I think creating greater challenges for agency MBS investing now that you've got those expansion and pre-pay risks in play. Would you talk about, will that backdrop [indiscernible] about the relative appeal of maybe shifting more capital back towards non-agency…

Look, the irony there is I guess a couple of things. One as the spreads have widened naturally the spread opportunity in the agency business has become significantly wider and the returns have actually increased to a not immaterial way. We tried to illustrate that in the discussion here in which we said, spreads in -- essentially spreads had increased to the point where they were looking more like sort of a 175 basis points from something that was probably -- different people maybe look at it different ways, but maybe 20, maybe 30 basis points lower prior to the onset of the need of this move in late December, so -- mid-December. So I feel like as agency spreads have widened, the opportunities become more attractive, not less attractive, provided that one is protected against the prepay, potential increase in prepayments and that's why we have the 100% prepay protected portfolio. On the other hand, look the non-agency portfolio continues to demonstrate very solid performance from the credit perspective and from a return perspective. At this time, it's probably not quite as high as the agency side but that can change very quickly too and if it does then we can adjust capital back there as we have demonstrated in the past many times in toggling capital back and forth between the agency and the non-agency. So we are in no way reluctant at all to move capital back to the non-agency side provided the returns are sufficiently competitive with the agency side. And right at this moment after the spread move, the agency spread is such that the returns are higher here; and adjusted for the cost of the pay-ups and the cost of the hedge.

Okay. And if that 175 bips of spread, just remind us what lever to ROE that will translate into with the leverage you're comfortable taking?

Oh, I think you're talking about you know pick your leverage metric that you're probably talking about high teens.

Okay, thanks.

And Mr. Tonkel, there are no more questions at this time. Rock Tonkel Okay. Thanks, everybody. We appreciate your time, and if you have follow-on questions we'll be available to address them. Thanks very much.