Good morning. I’d like to welcome everyone to the Arlington Asset Second Quarter 2016 Earnings Call. Please be aware that each of your lines is in a listen-only mode. After the Company’s remarks, we will open the floor for questions. [Operator Instructions] I would now like to turn the conference over to Rich Konzmann. Mr. Konzmann, you may begin.

Thank you very much and good morning. This is Rich Konzmann, Chief Financial Officer of Arlington Asset. Before we begin this morning’s call, I’d 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, risk 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, 2015, 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 comments.

Thank you, Rich. Good morning and welcome to the second quarter 2016 earnings call for Arlington Asset. Also with me today are Eric Billings, our Executive Chairman; and Brian Bowers, our Chief Investment Officer. Before discussing Arlington’s results for the quarter, I would like to begin by providing a bit of commentary on the overall market, uncertainty around the global economic impact of the United Kingdom’s referendum vote, supporting its exit from the European Union in late June, created pressure on risk asset prices and a flight to the safety of U.S. Treasury’s driving the 10-year U.S. Treasury rate to historic laws with a low of 136 in the first week of July after reaching 193 basis points early in the first quarter -- excuse me, second quarter. As confidence returned, market conditions stabilized and equity markets rallied with the Dow Jones’ industrial leverage reaching its historic high. In July, as recent economic data suggests, the U.S. economy may be more steady than previously expected, creating an environment where long-term interest rates are near historic lows while available investment spreads remain compressed across all fixed income alternatives. Market participants’ expectations for increases in the federal funds rate during 2016 have diminished materially as compared to early this year with the yield curve flattening during the quarter as the short-end of the curve has remained relatively unchanged and the long end has declined. In the residential MBS market, the significant decline in mortgage rates in 2016 combined with typical seasonal factors resulted in elevated prepayments fees during the quarter and market expectations of somewhat high -- continued high prepayments fees in near future, compressing asset yields. Despite these lower yields, at current spreads and current hedging costs, new dollars invested into the hedged MBS portfolio are generating attractive returns. Against the…

At this time, we will open the floor for questions. [Operator Instruction] And the first question will come from Douglas Harter with Credit Suisse. Please go ahead.

Rock, you mentioned a little bit about some of the hedging changes you made. Would you attribute that to the significantly smaller change in book value this quarter compared to the first quarter?

Yes. I think the inclusion of options and in replacement of a portion of the 10-year futures or swaps position of the hedges has given the Company, as we have talked about before, more flexibility to respond to a rate rally and yet retain the protection against the meaningful rise in rates on the upside. So, I would say, yes. In fact, that’s a major contributor to the lower sensitivity to rates during the quarter, which effectively in agency portfolio was about 1%, 1.5% real economic change during the quarter in the agency portfolio, from a book value perspective.

Great and then, kind of as you look out at the landscape, is there anything else from an investments standpoint that you guys are looking at in addition to agencies, or should we expect sort of all incremental capital to go to agencies at this point?

Well, as we stated and I think as we all observe that investments spreads generally particularly in liquid fixed income classes are generally pretty tight, particularly those that we observe most closely in the residential space. I think, we view the non-agency portfolio -- non-agency opportunities like the ones we own and some of the others within the residential non-agency class to be attractive. It’s not that they are not attractive, it is that they can’t compete with the alternative returns available on agency without levering them more meaningfully than we are comfortable doing, I don’t think we have talked about that before, and exposing the Company potentially to the mark-to-market risk therein, against the financing on those assets. And so, the available relative return on the agency side, given that you can hedge that position today with the combination of elements that allows you to fund it somewhere around 1% between your repo cash cost of funding and your longer term hedge instruments against an asset that’s yielding closer to 3%. And that offers a pretty compelling alternative that when one applies the leverage levels that we’re comfortable with and I think consistent with what we talked about over time that that produces a high-teens, at least the high-teens return on that agency investment alternative that surpasses the other residential non-agency alternatives that we think are appealing, but can’t quite compete on a return basis.

Thank you for your questions. The next question will come from Jessica Ribner with FBR & Co. Please go ahead.

I’ve got a couple of questions for you. The first is just as it relates to the buyback, what are you thinking about that in the next couple of quarters?

Well, I think we think about it looking forward as we’ve talked about it a little bit in the past, which is that we view it opportunistically. We have been buyers of the stock when it is a sufficiently compelling and accretive exercise for the Company, which in those environments is certainly the first thing we look to. But, I think in this environment at these prices that capital is better utilized on behalf of the shareholders over for the long-term return to be retained in the business at this point. I think we’re always open to it. We always look at it constantly. As we’ve said and as you’ve observed in the past, we have bought stock at really highly accretive levels, and we’ll continue to do that in the future. We have the authorization. It’s an exercise we go -- we are constantly evaluating. And so that’s how we think about it.

And then, just in terms of the cost of finance, there’s been a lot of talk around repo obviously, given all the capital, standards, the things you’re facing. And I noticed that your cost of funds ticked up quarter-over-quarter. How can we think about that over the next two to three quarters? Do you expect cost of finance moderately rising [multiple speakers].

First issue is what does the Fed do, right, because the short-term Fed funds rate will drive -- will certainly have an impact on what the repo financing is, and presumably out the curve as well, as expectations shift, if the Fed were to move. So, setting that aside, which is obviously the -- by far the most significant factor. But setting that aside, the other factors are really more nuances and probably mostly reflect moderate changes in funding markets, but also for us specifically simply reflect the adjustments from the FHLB. For a short period of time, we had a block of financing that was financed at lower rates than market rates with the FHLB. And when the captive insurance entities were excluded from access to the FHLB advance window, then those balances rolled off. And at the margin, you’ve seen some modest increase in incremental funding cost from there. I wouldn’t call it really meaningful. Any other changes would simply be movements in month-to-month or quarter-to-quarter changes in market funding rates, which haven’t moved that much but have recently tended to be between below 60 basis points and below 70s.

Thank you for your question. The next question will come from Trevor Cranston with JMP Securities.

First question, in the prepared comments, you talked a little bit about the higher CPR levels for the second quarter and the impact on earnings. Can you talk about your outlook for the third quarter on CPRs and whether or not that would impact how you’re potentially thinking about the dividend going forward?

Good question, Trevor. I think part of it depends on rates; we’ve had a rate volatility over the course of the last year or two and specifically the last years. So that obviously has a meaningful factor, which is unpredictable. I think in the normal seasonal effect, we might tend to see it start to tail off, either now or sort of as the summer ends, we start to see those tail off a bit, turn back toward levels that we may have seen late last year, early this year, which would have been more like in the high single digits. So, if seasonal factors follow historical patterns over the last couple of years, that’s what we would expect to see but that’s all provided, rates don’t really move much or don’t move down much. Obviously, if they move up, then you’d expect to see those speeds flow, and get the benefit of that. Our expectation probably going forward at the margin is that we would expect to see them shallow out a little bit in the next quarter and maybe a little bit more after that, but that is dependent on no incremental drop in rates. And so, if you think about the earnings rate that we demonstrated -- that the Company demonstrated in the second quarter, what are the factors that might affect that in the third quarter, certainly one would be if the Fed does anything; number two -- from a funding cost perspective naturally and otherwise; number two would be the question you are getting at which is the speed differential if there is any stable -- any reduction in speed or whether they sit here or move up, that would have an impact on us. And I think at the margin, the other thing that might have an impact on portfolio would be that the redeployment of the incremental proceeds from the sales of non-agencies that have occurred thus far in the third quarter that we alluded to and potentially if risk markets permit additional sales in the third quarter, then you might see some additional redeployment of that to incremental balances of agencies, which could provide a boost to the margin, to earning assets and therefore spread earnings.

And on leverage, obviously the leverage number went up quarter-over-quarter on tangible capital. Can you talk about generally, how much room you think to continue increasing leverage as you redeploy capital into the agency strategy?

Well, the leverage is a product of really principally a couple of things. It’s a function of what proceeds we may redeploy from non-agency, which generally are going to be levered at 0.3 or 0.4, something like that; how much of those proceeds in a given period of time are reallocated over to the agency side, which generally when we are investing in that we are going in it somewhere in the neighborhood of 8 times, which I think is a number you have heard from us before on the entry leverage point somewhere in approximately 8 times new capital investment into the agency side, and the second factor obviously is what the temporary movements maybe in book value, whether that’s down from a rate rally scenario or up from a rate movement and spread compression scenario. And that will be the other factor affecting leverage. I think as I just alluded to, I think you will see some incremental movement of capital to the agency side from the non-agency side, so at margin -- that will be a marginal contributor to a modest increase in leverage and how markets treat spreads out. What rates do and what’s spreads do in the quarter, we will see, and that will have some impact on leverage at the margin as well.

Thank you for your questions. The next question will come from David Walrod with Ladenburg. Please go ahead.

First, I wanted to talk about on the repo side, anything you’re seeing in regards to availability of repo, just from your providers, given all that’s going on kind of around the world?

We haven’t really seen anything significant new to report there, Dave. I think on prior calls, we have noted that initially a couple of years ago, few years back, the European banks started to back out -- back away a bit from the repo funding market; that’s been two years on the rear view mirror probably. The U.S. banks another middle market participants and some of the other international banks took those positions up easily, I think for us and for others. In the market, I think that’s still generally true. One or two of the U.S. banks over the last year, and I think we have talked about this, maybe slowed their growth in that market a little bit. But generally, I don’t think we have anything relevant to report from what we are seeing in incremental developments on the funding side over the last several months.

Dave, this is Brian. I would tend to agree with Rock. Actually the landscape is quite competitive and we are seeing quite a good availability across all the different counterparties. So, they have appetite and they are looking to grow would be the thing to say here

Okay, great. That’s good to hear. In regards to your core economic earnings, is there any residual impact, when you look to $0.67 for many of the futures positions or can we think of $0.67 as a good core run rate?

I think that’s a good question, Dave. I think there is probably a little bit more pick up there to go, but it’s very minor, maybe a penny or a couple of penny, something like that.

Okay, great. And then, my last question, Rock, is you talked a little bit about the NOL in the end of your prepared remarks. Can you just expand on that a little bit as far as when those expire, and just kind of give us little more detail on that?

Sure Dave, this is Rich. The NOLs have quite a long time for to expire; I forget the exact…

27…

Yes, 27. So, we have plenty of time to utilize our NOLs before they expire. Right now, as we reported, we have about $99 million at the end of June 30th in NOL carryforwards and really at our run rate right now. We’re pretty comfortable that we could have, in addition to this year, up to maybe two more years at the C-corp, really at the end of 2018 will kind of be the inflection point to see when we kind of break out -- when we hit those. And I would say, if we use them earlier than expected, that’s a good thing anyway, because we were generating more income, a good problem to have. But that’s kind of really right now where we think the inflection point is.

I think the combination, Dave, of the recognition of the swap expense is -- that’s extending the life of the NOLs at the margin. I also think that we have been working hard to identify ways to be tax efficient; incrementally, we’re always doing that. And I think there has been some improvement there as well beyond just the improvement in our NOL position, our longer term NOL sustainability from the use of the swaps. And so, I think the news there is that at the margin, the window for ongoing usage of the NOLs, availability of the NOLs and therefore the C-corp construct is extending in time and we’ve probably already seen it extend by a year. And there may be more available to us in that way going forward.

Thank you for your question. [Operator Instructions]. The next question will come from Merrill Ross with Wunderlich. Please go ahead.

I am wondering especially about the two-year swaps, the 750 notional amount, whether there is any room to terminate those swaps in light of the outlook. I mean, John Williams [ph] specifically said that the fed would be able to raise rates one more time and then not again until 2019. So, two-year swap seem to be a little outside the envelope of that. If you believe what he says, so, I am just wondering if there is any room to maybe hedge little more efficiently and call back a little margin.

It’s a great question, Merrill. I think it’s -- as you would expect, it’s a question that we wrestle with all the time. And I think it does provide -- there is a potential opportunity there. I mean, you know our focus on making sure that we are well-hedged and substantially hedged against the up-rate and up-funding cost environment that could ensue as the economy -- if and as the economy continues to strengthen and that’s just policy position. So, we think about that a lot. But there is an opportunity at the margin for some incremental swap cost savings there. Those swaps cost us about 100 basis points or so gross, 100 basis points and 110 basis points gross. And repo today is about 65ish. So, there is some room there for potential pick up, if we were to view those as no longer necessary useful. But, I wouldn’t say we’re there yet. We’re not there right now. It’s something we evaluate and it’s definitely a possibility for improvement down the road.

Thank you for your question. There are no further questions at this time. Mr. Tonkel, I’ll turn it back to you.

Great. We appreciate your time. And if you have any further questions or observations, please you know where to reach us. Thank you very much.

Thank you, ladies and gentlemen. This concludes today’s teleconference. You may now disconnect your lines.