I'd like to welcome everyone to the Arlington Asset Fourth Quarter and Full-Year 2016 Earnings Call. Please be aware that each of your lines is in a listen-only mode. [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, 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 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.

Good morning. Fourth quarter began with a relatively benign start. However, that quickly changed with the surprising Presidential election results triggering a major repricing of financial assets. The new administration's pro-growth policies have raised market expectations for faster economic growth and higher inflation. In turn, this has led to increased demand for equity assets and the sell-off in U.S. Treasuries, driving the 10-year Treasury to up approximately 100 basis points during the quarter. In the agency MBS market, the dramatic increase in rates and volatility led to widening in agency MBS spreads relative to swap and U.S. Treasury rates which in turn led to underperformance of agency MBS relative to interest rate hedges. These wider agency MBS spreads have led to more attractive investment opportunities for new agency investments. As widely expected, the Federal Reserve rate has raised its target federal funds rate in December by 25 basis points, the first increase in a year. The majority of market participants today expect that Federal Reserve will raise its target federal funds rate two times or three more times by the end of this year, highlighting the importance of hedge funding costs for fixed rate portfolios. Repo funding capacity remained strong during the quarter with financing rates on agency MBS continuing to be competitive. Market reform that went effective on October drove withdrawals out of prime funds and into government funds increasing the demand for short term repo backed by agency MBS, resulting in favorable financing rates. In general, this has led to improved net funding cost for short term repo financing hedged with interest rate swaps as the spread between repo financing rates and LIBOR has contracted favorably. In the residential loan market, prepayment speeds remained elevated during the fourth quarter as a result of historically low interest rates, steady…

[Operator Instructions]. Our first question comes from Jessica Levi-Ribnerm from FBR & Company.

Just looking at the interest rate sensitivity disclosures between last quarter and this quarter, it looks like last quarter book value rose almost 3% under a 50 basis point increasing rate. And this quarter, it looks like it will fall 5.7%. What's driving that difference?

Well, I think you've got over time, Jessica. You've got -- naturally you have incremental shifts in hedge position that can occur over time. I'm not sure -- I don't have the table in front of me that you're looking at or referring to, but in there, you also have to take into account shifts in the curve and spread changes in the assets. So you have a combination of factors that are shipping at any one time, composition of the portfolio, the mix of assets, the duration risk associated with each of those elements of the portfolio, whether it's 3.0% or 3.5% or 4.0% cash bonds or TBAs; you have the combination of the hedges that -- the swaps, short term and longer term swaps that may be moving components. And then you have the options rolling in the natural course of business. They're going to roll every month-to-month, three months depending on where they are placed and whether expertise -- overlapping expertise might be.

Our next question comes from Trevor Cranston from JMP Securities.

One more question on the portfolio sensitivity tables actually. Looking at the spread sensitivities, obviously those numbers are fairly high if you were to get something on the magnitude of 25 basis points change in MBS spreads. Can you guys talk about sort of how you're thinking about managing that type of risk with the backdrop of the Fed potentially starting to shrink its MBS portfolio and just generally, what you think the impact on the MBS market could potentially be from that shift in Fed policy?

Well, that's a big question Trevor. The entire market is wrestling to some degree, yes. It's an ongoing topic, it's one we think about a lot. I think we've just seen a bit of, I think certainly -- since year-end and maybe even in the fourth quarter, some degree of that, although that was more rate focused since year-end. We've certainly seen more focus on that issue and to some degree, it may have played into the markets to some degree already. But I think that that's an issue that we will be observing, assessing very carefully and very closely over time as the Fed enumerates, its views on the economy, on the magnitude of quantitative easing, magnitude of stimulus, that it wants to maintain and watching very closely what that pathway is likely to be anticipating that when it comes, it may in fact, create an increase in spreads. As you know, as we've discussed before, we seek to build into the portfolio level of protection at the point of investment that permits a wide variance in market conditions and the ability to absorb significant volatility. I think the last couple of years have demonstrated the ability of the portfolio to absorb a quite significant volatility and I think the fourth quarter is another example of that and continue to generate very attractive resilient and consistent spread earnings. To the extent that we view a potential spread widening from a change in the Fed policy as impacting that, we will then make adjustments in the portfolio, whether that's from a mix, whether that's meaning coupon mix, fixed versus variable or scale to the extent we view that as elevating risk to a level that threatens the ability to generate the consistent spread that we seek to generate, the highest present value of earnings over time that we view as driving inherently the intrinsic value of the Company and the portfolio to its shareholders and try to continue to deliver that consistency to them on a tax-advantage basis for the duration of the remaining tax assets. Again, I can't be more specific than to say that if we get to a point where we see that Fed policy shift and the resulting impact in the market causing a threat to that, a suggestion that we should evolve the portfolio in a different direction, we'll do that. At this stage, we don't see that as the case at this point.

[Operator Instructions]. Our next question comes from David Walrod from Jones Trading.

I just want to talk a little bit about the leverage. Obviously, it's steadily increasing as you shifted the portfolio into all agencies and also due to the decline in book value, but can you talk about your comfort level at these levels? Should we expect it to continue to pick up or would you like to see it come down just -- I guess, kind of walk me through your thoughts there?

Well, we've tried to be pretty clear that our intent from a portfolio structure standpoint is that we've made an investment in the structure with the invested capital placed in the agency portfolio structured with the hedge package that we have in place and that that's expected to deliver a spread return over time, consistent spread return over time, as we've said. Our goal is to reasonably, approximately sustain an appropriate scale of the portfolio to continue to deliver that spread, so that we can generate a return that's in line with what we targeted when we made the investment. And again, we've tried to structure the portfolio, so that it can absorb these variances and continue to drive that consistent spread over time. I think the record would demonstrate that the portfolio has, in fact, generated consistent and resilient spread earnings and consistent dividends over a long period for time, notwithstanding the volatility in the market. That continues to be the view and so our view is that the leverage will move up and down from time-to-time, it moved down a little bit in the third quarter and moved up again in the fourth quarter. Some of that is a product of the incremental shift in capital from the non-agencies which are operated on a lower no leverage basis to agencies which are naturally operated on a more levered basis. So some of that is a product of mix, but a good amount of the change in leverage is also a product of the mark-to-market differences moving up or down and in the fourth quarter naturally that was down. And so, as a consequence, the leverage increased. That's a natural process that will occur over time. Our goal is to invest at those periods of time to take advantage of those wider spreads, capture the benefit of that for shareholders and realize it over time in an increased earnings opportunity over the life of the portfolio. Our math says that if we're investing in that fashion and spreads are widening and we're remaining in that portfolio, then the end present value return will be higher in the end. And so, we'll get those shareholders, we'll get that return back over time in the form of more consistent and higher spread earnings than we otherwise would have.

Our next question comes from Fred Small from Compass Point.

On the specialness, I think you said had an increase since year-end, how much has that increased either -- I don't know how you talk about it or if you can talk about it on an implied spread basis like you reported?

Well, I would say the increase in available yields, whether expressed as a spec bond, cash bond or a TBA have increased materially. As a consequence, first of the widening that occurred in the fourth quarter and then incrementally as well from the lower expected speeds and actually realized speeds is, I'm sure you all know, the speed dropped in February, was sort of expected to be meaningful and it turned out to be exactly that quite sharp. So, as a consequence of that and some of the other factors we described, the specialness of the TBA roll has increased the effective realizable yield by 20 basis points to 40 basis points. So it's relevant. I'd say also something similar is true over the course of the quarter, certainly compared to last quarter, early part of last quarter, this similar trend is true in the cash bonds. So both elements of the 30-year fixed universe continue to be attractive and are more attractive now than they have been in a good while. So scoping that for you Fred, if specialness declined to an effective equivalent yield, net yield of something in the low 200%s, it's now solidly in the mid-200%s, in terms of yield. So it's been a material pick up in the course of -- in the current market. Now that can change, that will change from month-to-month in the TBA market and so that may evolve back downward and may evolve upward from here, we'll see.

Then other one, just on the net duration gap change quarter-over quarter, is that something that you're sort of managing to or how should we think about that moving forward?

Well historically, the Company -- you would have observed the Company being more in a position to or closer to neutral from a net duration perspective. And I think what you've observed in part is the extension and increase in duration given the rate environment, given a number of factors, but the rate environment in particular. And so, with that shift, we have been and are addressing that shift. We would expect it to over time, be more in line with our more -- our historical pattern to be closer to a neutral position and it's lower now than it was at year-end, based on the shift in the portfolio mix and the increases that I alluded to in the script about the modest increases in the hedge position.

Thank you, Mr.Tonkel. At this time, I am showing no more questions.

Okay, well thank you very much. If anybody has further questions, we will be available to and happy to talk to you on the phone. Thank you very much.

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.