Good morning, I'd like to welcome everyone to the Arlington Asset First Quarter 2017 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 Assets. 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 statements. I would now like to turn the call over to Rock Tonkel for his remarks.

Thank you Rich. Good morning and welcome to the first quarter of 2017 earnings call for Arlington Asset. Joining me today on the call are Eric Billings, Executive Chairman and Brian Bowers, our Chief Investment Officer. Following the significant interest rate volatility and the Agency MBS spread widening that prevailed during the latter half of the fourth quarter, market conditions during the first quarter were relatively calm. Although markets continue to expect the new administration's proposed co-economic growth policies will result in faster economic growth and higher inflation, those expectations became more tempered as the pathways for the administration to implement its policies has proved to be more challenging than expected. For the quarter, while there were some inter-quarter interest rate volatility, the 10 year U.S. treasury rate decreased 5 basis points to end at 2.4% as of March 31st. However, swaps spreads widened approximately 10 basis points during the quarter with the 10 year swap rate ending at 2.38% as of quarter end. With the lower overall interest rate volatility Agency investment spreads remained relatively unchanged during the first quarter. As expected the Federal Reserves raised its target Federal funds rate in market by 25 basis points, the second increase in the three months period. A majority of market participants expect the Federal Reserve will further raise its target Federal Funds rate up to two more times by the end of this year, highlighting the importance of hedge funding costs on fix rate portfolios. And its deliberation at the March's meeting, the Federal Reserve signaled further it's intentions of normalizing monetary policy by likely beginning to reduce its portfolio of U.S. treasury bonds and Agency MBS later this year with a path for shrinking the balance sheet, it's balance sheet expected to come from reducing or seizing the reinvestment…

[Operator Instructions] Our first question will come from Mickey Schleien, Ladenburg.

Couple of questions. First pretty straightforward, what are the main metrics that drive your compensation expenses accrual that led to the increase from the fourth quarter?

Hey Mickey its Rich, the reason -- in the fourth quarter the percentage of accruals for the executives was lowered based on company's performance, so quarter-over-quarter it was an increase in incentive compensation accruals. Through the year we -- assuming that the comp committee and the Board consider it -- warrant it, we'll accrue at maximum benefits [ph], a reduction in incentive accrual, as usual it happened at the end of the year. So that’s the reason for the explanation for part of reason for an increase in the G&A cost quarter-over-quarter from the fourth quarter.

Mickey as to the metrics, you can probably see from the proxy the hurdle rates for executive comp are quite high and in addition to the quantitative metrics there are about a dozen qualitative metrics that were evaluated on and that was the basis for the change.

Okay, I appreciate that and I will take a look at the proxy. My other question relates to leverage, I see that on an average basis during the quarter it was around 10 times and you ended the quarter about 11, how does that relate to your target leverage? And do you expect to further expand the balance sheet given all the uncertainty we have for the balance of the year?

Well, we have spoken before about this, our approach is to maintain the structure the portfolio when we make our initial investments in Agency, in order to protect the portfolio through different movements in rates and market conditions overtime. And we feel that if we've done that appropriately than we should be able to sustain the investment made at the beginning of that process in order to deliver as reasonably close to the originally bargained for return as we can and deliver that return to the shareholders, and if we are moving the portfolio around constantly then we are -- we would view ourselves as head [ph] cutting expected return that we initial bargained for when we put the structure in place initially. And so, what we are not thinking to do is necessarily move the portfolio up and down in scale and maintain a constant leverage in the portfolio and I think we're within our sort of broad range of leverage characteristics for the portfolio given the liquidity and hedge characteristics that we have built into it to protect the assets structure from being forced to make actions that we don’t seek to make. And so I think the governing principle there is, make sure that we're structured well up front, if we are then we'll seek to maintain the structure at roughly it's approximate scale in order to deliver the return that we initially set out to do, to make and as we sit here today, I think we feel like we're living within that construct and delivering returns that are reasonably consistent with what our expectation was at the beginning and I think the scale of those returns are quite attractive.

That’s very helpful, those are all my questions, I very much appreciate your time this morning.

Thank you very much. Our next question will come from Trevor Cranston, JMP Securities.

Question on the funding side, here just looking at the spread on your repo rates versus LIBOR on Page 7. Obviously, that’s been a meaningful benefit for the last year or so, can you say looking forward how you expect that relationship to evolve and if you know -- eventually thing LIBOR sets a floor for where repo rates can go or do you think there is room for that spread to continue crossing in repo to potentially even move lower than our LIBOR rates are? Thanks.

It's hard to say, I mean, two of the things that the money market reforms from the fall or somewhere in there clearly playing a role, but I think there are also relevant factors related to U.S. Treasury operations and other things that from time-to-time concluded. Shortages or extra supply and see demand for this market. I think we happen to be in one of those windows in the first quarter. So could there be room for further compression? Possibly, I wouldn’t necessarily predict that and which is not to say that we would expect it to revert itself immediately. But that’s a possibility. I think there is some, what we will think to be relatively durable positive impact on that spreads from the money market reforms last fall, what is less clear is what the treasury market operations from time to time may create in terms of demand pressure or supply pressure in this market and therefore what the marginal effect will be. So hard to predict, but I think there is some long-term benefit that we'll continue to accrue at a level from the money market funds and maybe help resist pressure for those that wide and back out as much as far as they were.

And then looking at the repo bucket, March 31, the average days to maturity is fairly short at 12, have you guys looked at extending the maturity of some of your repos three or six or more months and can you comment on if that would make sense for the portfolio in conjunction with the swap book, and also if you are seeing much availability in those longer tenders?

Interesting question, Trevor I think not surprisingly, and I think you hinted at it, we look at the funding side in connection naturally with the swap book and historically we've chosen to sort of express the hedging function for the repo through the swap, through the -- primarily through the swap function, and kept the funding relatively short to capture that short -- the cost advantage in shorter term repo. To be honest I can't say we spent a huge amount of time looking at expanded timeline for repo finance cost, maybe going out 90, 180 or something like that. We've done it from time-to-time when markets we thought might be a little tight around quarter ends and year ends those sorts of things. But in the normal course we really haven’t extended out those repo maturities, we've expressed our repo hedging view thorough the swap construct primarily.

Thank you. Our next question will come from David Walrod, Jones Trading.

You sold all of your 3% and you said you lowered your exposure to 3.5, so where are you putting the money to work these days?

Marginal capital today probably, Dave, would be reasonably proportioned between the 3.5 and 4, it probably would have been [indiscernible] and probably with a bit more emphasis on the TBA today than respectful, the upper margin because the dynamic that prevailed in the early part of the first quarter and the middle of the first quarter where spec pools were really if the margin were more attractive than TBA, this sort of reverse itself. And so at the margin here today, TBA probably would make up with little bit greater composition of a fresh dollar of capital going in, probably with something like that 20 basis points or maybe even as much as 30 or 40 basis points marginal pick up. Now of course that return resets, you are looking at that every month. So it's not quite as durable when expected return as respectful asset, but it does from time-to-time offer or particularly opportunistic circumstance and that seems to be the case a bit today.

It's okay great. And you discussed loss variables that are taking place right now in regards to Fed activity and prepays et cetera, how should we think about just the overall spread going forward for the year?

Well, I guess I would say that, if you look at the first quarter, what you can see from what we have said, is that the lower balances accounted for about $0.06 of reduced earnings power. And that led us to the core return for the quarter, and I think that if you adjust forward the fully phased in effect to the March hike without necessarily assuming some forward -- making some assumption about forward rate hikes. But if you sort of look at the fully phased in effect to the market rate hike and you cross that and you -- each of us would make our own assumptions for speeds, for sort of running at those speeds, then I think it's fair to say that the first quarter is probably broadly reflect to the economic earnings power of the portfolio based on current conditions. But the variable is going forward are speeds, what does the fed do, those are big features. I think there are a number of structural elements of sort of flexibility and the structure of these businesses that maybe people don’t fully keep in mind all the time, but if you think about it, give or take 5% to 10% of the portfolio is running off on annual basis, probably something both [indiscernible] and that is happening every month. So you are resetting those assets every month as in a -- as you are presuming rising rate environment of higher coupons. Likewise, speeds, if you have a rising rate environment, speeds should be depending on and separate from seasonal factors speeds can be a helping, a mitigating factor there and then I think you also have in our case a substantial block of hedges through the swap portfolio. And in addition to that you have the TBA portfolio that resets every month, TBA for us has been generally between 10% and 20% maybe a little bit more than that at time of our total portfolio construct and those reset every month. So that -- each of those create elements are structural flexibility to adapt the circumstances as you go along in different rate environments. And I think it's important to those things in mind as people think about what the future may hold from a rate or speed or other wide perspective.

Okay great thanks a lot.

Thank you very much. Our next question will come from Dough Harter, Credit Suisse.

Just want to follow up on the leverage comments and to just get your thoughts on how you think you could handle another bought of volatility and be able to maintain the portfolio size given the leverage has been moving higher?

Well, as I said, I feel like, Dough the portfolio leverage, I think it's consistent with our approach -- our approach to portfolio structure, that's been true for a while. It continues to be true today. I mean obviously at some points there are limits to that, but I think as we sit here today given the hedge construct, given the funding environment and given our -- some of the elements that I just spoke to about portfolio flexibility as one goes along and faces points in time of volatility or relative tranquility. We view as in totality the portfolio structure to be in place right now, we're comfortable with it from a leverage perspective.

Thank you. Our next question will come from Jessica Levi-Ribnerm, FBR.

Most have been asked and answered, but just looking at the swap to repo and TBA ratio, it's pretty -- it jumped a lot from the fourth quarter to this quarter. Can you talk about how you see that going forward? Do you think you are going to maintain this 70 plus percent radar or back down to the mid to high 50s?

Well there is a number of factors that one is always evaluating as it relates to the swap construct in relation to the overall repo and portfolio balance. There are a number of moving parts there, we are constantly looking at it and we are adjusting for changes in asset mix, speed expectations, rate expectations and a variety of other factors. So it's hard to say exactly where we go in the future versus now. We are also looking at, well what is our view of the overall economic picture both domestically and globally, what is our -- therefore our view on policy from both a balance sheet and a rate hike perspective and therefore what are we locking in versus our -- what we expect the short-term funding cost to be for spread purposes. So we are trying to address duration on the one hand, duration risk on the one hand which is shifting as portfolio mix shifts, and rates environment shifts, the curve changes and we are also trying to focus -- make sure we focused on the spread of the economic impact of that in the spread. I would say in the environment that we envision, that we feel that we are in, and that we envision given the circumstances we can see today, I wouldn’t expect that to move around a lot in the near term. It's possibly that it may increase at the margins it may decrease at the margin I don’t expect it to move around a lot in the near-term base on variables that we see today. But again our job is to be managing that on a day-to-day basis and if we see change in circumstance that calls for a more meaningful increase or a more decrease then we would do that. I don’t see that based on where we stand today. I think increment any modification there probably would be more on the marginal side.

Jessica, this is Rich, just to add on to Rock's comments, looking at the notional, the percent of our repo, and financing is one way of looking at our hedge, being able to look at duration, longer duration swaps on may have a little lower percentage of your notional, but maybe have more coverage, if you will, under your swap and that kind of scenario. Just kind of have to look at two different ways.

Okay great thank you so much.

Thank you very much. [Operator Instruction] Our next question will come from Merrill Ross, Wunderlich.

Given that you are somewhat under invested since the beginning of the first quarter, but now you are more fully invested here at the end, what is your confidence about covering the second quarter dividend with the core earnings?

Well, look I think, Merrill we are right around that, that’s a key question for all of us. I think it's early, I think we talked about the factors that it's dependent on speeds, et cetera. I think there is about $0.10 of earnings in the first quarter that were sort of not reflected because of the slightly elevated G&A and the fix sense from the portfolio volume being a little under invested. So there was pretty significant room if you look at it from first quarter perspective, but on the other hand that didn’t fully reflect the fully phases in effect of the March increase and whatever the market may place upon expectations for forward rates and the impact that has on repo costs over the rest of the quarter. And then, look, the variable that we all know is a major factor for every company in this space facing the market, it's speeds, where the speeds go over the rest of the quarter. April, as we said we are pretty muted, up a little bit from February and March which were quite low, we view April as very much sort of in line with -- very reasonable and in line with expectations, seasonal factors may cost that to grow up over the rest of the quarter. All this thing will try out as they do over the next couple of months and we'll see what that brings us. I think my comment earlier was, given the $0.10 sort of cushion, for a lack of a better term, cushion, in the first quarter earnings were there about offset by the funding cost increases without making a prediction about exact speeds for the quarter. I feel like the first quarter number probably as recently reflectable with the economic earnings power to portfolio is based on current conditions.

Okay. Second question, you may use of the ATM?

Say that again.

Have you made use of the, at-the-market programs to issue shares?

Yes, I think we disclosed in the K that we've made use of that program over the course of part of '16 and early '17.

And do you tend to continue, I mean given the share price? [Multiple Speakers].

It's for us as we talked about many times, it's an evaluation we look at constantly. We've been pretty disciplined as I'm sure people know in the past about executing on equity on all capital forms, but in particular on equity we've been quite disciplined, I think from an accretion dilution perspective. We continue to be of that mind set, but clearly the ATM offers pretty compelling economic opportunities from a cost perspective, it's sure a lot cheaper to executed through ATM than it is through any other means. And so it's certainly has -- it is an appealing construct and we look at it constantly. It's totally depends on conditions as a time, but there is no -- we have no reservation about using it at the appropriate price.

Okay. Last question, does this in your opinion, obviously you know for sure, but what do you think the impact will be on the TBA dollar roll market, once the Fed start to reduce its reinvestment of principal paydowns?

There is a lot wrapped up in that question Merrill. There are many different perspectives on what the balance sheet approach will be exactly. There are folks who feel like that the balance sheet approach will be quite aggressive and there are other folks who feel like there may be very little movement at all in the balance sheet. And so to me, it's very hard to say what that looks like. I suspect some of it is in the market already. We have -- I think we would say we feel like some portion of the effect of the policy discussion is in the market which presumably is what the Fed wants, and so how much of that discussed and impacted is not in the market is hard to say. We could see that compress, that [indiscernible] compress a bit overtime and we are prepared to that. If that occurs, you've seen us to be 100% invested in spec pools and without speaking to the separate effect on spec pools of the policy normalization from the balance sheet, we have the flexibility to be back in that direction if that’s really the considerably stronger risk invested return alternative. So we have great flexibility to move from one to the other and we would be adjusting all the time for those circumstances. How it plays out, I am not going to venture to guess exactly on how much balance sheet and when exactly are they going to remove from the market. I would make one observation, they've spent an enormous amount of time and an enormous amount of the effort and an enormous amount of money to foster repletion [ph] and equity in all risk markets and in particular in the housing markets. And so I would think that having at least the appearance, if not the outright statement, that they are keeping a real close eye on housing not only from the standpoint of its effect that I'm confidence spending, et cetera and wellbeing, but also from the standpoint of its contribution to GDP. I suspect they are going to be very -- I would think they would be very conscious about what the impact is on housing finance and other rate structures and the negative impact that could come from material shift in the balance sheet that would cause a significant shift higher in long term rates.

They've already stated in a number of different place that they're not going to auctions mortgage back suites [ph] is helpful, but I think a point that you maintained flexibility in your investment strategies is probably the only answer to have they can only answer [ph].

That's how we think about it.

Thank you very much. Speakers at this time we have no further questions in the queue. At this time ladies and gentlemen thank you for joining us today. Please disconnect from your phone line and have a great rest the week. Thank you.