Good morning. I'd like to welcome everyone to the Arlington Asset Fourth Quarter and Full Year 2017 Earnings Call. [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 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, 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 like to now turn the call over to Rock Tonkel for his remarks.

Thank you, Rich. Good morning, and welcome to the fourth quarter of 2017 earnings call for Arlington Asset. Also, joining me on the call today are Eric Billings, our Executive Chairman; and Brian Bowers, our Chief Investment Officer. Before discussing the specifics of Arlington's results for the quarter, I would like to begin by providing some overall market commentary. The successful passage of income tax reform in December coupled with strong employment data has raised economic growth expectations driving interest rates higher during the fourth quarter and in the opening weeks of 2018. At its December meeting, the Federal Reserve raised the target federal funds rate by 25 basis points, its fourth increase in a 12 month period. While the Federal Reserve kept the target, federal funds rate unchanged at its recent January meeting, it did affirm its commitment to its previously announced balance sheet normalization policy and further gradual increases in the target federal funds rate based on federal funds futures prices, the market is currently expecting the Federal Reserve will raise rates 2 to 3 times during 2018. Against this backdrop, a 10 year U.S. Treasury rate rose 8 basis points during the fourth quarter and 2.41%. While the Treasury rate curve flattened as the spread between the two year out of 10 year U.S. Treasury rate narrowed 33 basis points with the shortened outpacing the long end of the curve. Although interest rates rose modestly and the current flattened, low volatility prevailed during the fourth quarter resulting in little change to Agency MBS spreads. However early in 2018, the prevailing sentiment has been at Agency spreads could widen in 2018 due to an expected increase in the net supply of Agency MBS as the Federal Reserve execute its quantitative tightening policy. In fact since the beginning of…

[Operator Instructions] Our first question comes from Jessica Levi-Ribner from B. Riley FBR.

When you're thinking about I guess the allocation between TBAs versus spec pools heading into 2018, how can we think about that? What kind of returns are you seeing and you kept a pretty steady allocation is that how you're thinking about it going forward?

Jessica, that is really a relative return opportunity and the allocation mechanism, so we sort of dialed that up a bit in the back half of the year and for right now anyway I don't think we see any compelling reason to substantially ship that at the moment actually TBA roll opportunities have improved and attractiveness relative to spec bonds since the beginning of the year. Both have improved in return profile but the TBA advantage here is actually a little wider than it was at the end of the fourth quarter. So, I wouldn't necessarily anticipate based on where that market is right now that we would expect to see material shrinkage, but that's a month-to-month evaluation that we do. And that isn't to say that that's by any stretch a permanent judgment, it's a month-to-month assessment that we make in the relative allocation of capital to the TBA dollar role versus the spec pools portfolio, and it's based on relative return, the enhance liquidity that one has in the role and other factors.

In terms of just hedging in the volatility that you're seeing in the market today, can you talk a little bit about how maybe that's impacting your cost and what we can think about that kind of in the first quarter?

Well, I think we pretty well spoke to that in the commentary in the sense that we try to illustrate pretty carefully what the impact of fed increase or short-term rate increases would be to the earnings of the company. And I think our comment was relatively negligible of less than penny per share. Isolating to that effect, there are other facts, other moving parts in the economic equation as you fully understand. But that impact is relatively modest, and the reason is because nearly 100% of our repo balances hedged. So, we get the benefit of that as rates rise on the receive rate, increasing receive rate.

Our next question comes from Doug Harter from Credit Suisse.

Just kind of given the commentary of some spread widening and obviously the interest rate movements we've seen, certainly where you can give us an update as to how book value has fared in the beginning of the quarter.

Well, pretty straightforward, right. There's no real mystery in it. If you have spread widening, typically you'll have some negative mark from a book value perspective and I don't think this episode here is really any different directionally from prior episodes. You've heard others comment that it's in the low single digits. I think some of those comments were made before the last week or at the onset of last week, it was a little more severe. So it might be a bit more than that, but it's providing a very attractive reinvestment opportunities that will be a positive impact for earnings profile going forward.

Can you just talk about your comfort with where your leverage is and your ability to kind of withstand volatility and/or be able to take advantage of the volatility?

Well, I think we have all together as an industry, as individual companies, and as folks who are part of the intellectual property set to follow the space and invest in it. We've all observed a pretty good series of periods over the last five years or so of, at point, significant volatility. And I don't think at any point in that period of time have we ever felt that the portfolio structure was threatened because we have constantly as you well know maintained a very substantial hedge position typically among the highest notionals and duration hedge constructs in the business, and because we concentrate our assets in the deepest liquidity segments of the mortgage market and frankly for that matter of the overall investment market. And so we have the benefit of being relatively modest in size in an enormous market which gives us freedom of movement, flexibility, nimbleness and massive liquidity, essentially virtually unlimited liquidity. And we hedge our portfolio very substantially. So those are the reasons that we have been and continue to be and are comfortable with the leverage levels that we carry. We think that the risk-adjusted return opportunity that we pick up as a result work that incremental leverage amount and beneficial to the shareholders in the end and the present value of delivery to them over time. I said on the last call that it might not surprise people to see us gently, see the leverage come down a touch, and I think this quarter was consistent with that comment last quarter. I don't know that that will be the case in future quarters, but it may be. I think generally that would still hold, but if tremendous opportunities prevail, then we will take advantage of them and with a little bit wider spreads here, there are very appealing opportunities in the agency market for us to take advantage of but we will have very positive effects for earnings going forward.

Our next question comes from Trevor Cranston of JMP Securities.

Rock, I think you made a comment in your opening remarks about some incremental portfolio repositioning that had happened in January. I think you mentioned specifically reducing the 3.5 coupon. So just wanted to clarify if I heard that correctly and if you could sort of elaborate on the changes you guys have made to the book so far this year. Thanks.

The comment specifically, Trevor, was that in total since the end of the third quarter, and we had shifted approximately $1 billion of 3.5 exposure to 4 and 4.5 exposure. And the bulk of that was done in the first half of January prior to January settle. So the initiative for that is pretty straightforward, right? It is to improve your risk and return profile in a potentially rising rate environment, and it's as simple as that. We pick up yield along the way and we improve the disposition to a higher rate complex.

And then just one question on prepay speeds. Obviously, there is a little bit of a dip in the fourth quarter. And I think speeds are generally down in January as well and now with the spike we've had in interest rates, can you guys share your outlook on whether or not you think there's potential for speeds to incrementally decline again in the first quarter versus fourth quarter, or do you think they're going to be more sort of stable from where they were? Thanks.

Well, we've said today in the script that fourth quarter was 9.6 and I think and the January was 8.7 or 8.8, and March estimate just came in last night. So it's an estimate, the March estimate is 8.3. So you can see that now we're two months in and they're meaningfully lower than the fourth quarter. And it wouldn't surprise us to see some seasonal pickup in the second and third quarters. I think at these rates, if these rates hold, it would seem to us that March should probably be reasonably muted also. Hard to predict exactly, but March, whether that's up or down from here, I can't say, but I think it would generally tend to be relatively muted, and then we might see a pick up in the second quarter or the normal seasonal impact. Now, of course, if we see meaningfully higher rates into the second quarter, well, then that would mitigate the impact of the seasonal effect on accelerating speed.

Our next question comes from David Walrod from Jones Trading.

Rock, you mentioned in your prepared remarks about the better investment opportunities you're seeing. Can you quantify that a little bit about the returns you're seeing today relative to your existing portfolio?

Well I guess the comment I'm making here Dave is that because there has been some incremental spread widening than the returns today are incrementally at least more attractive on cash bonds, spec bonds and they're probably more than incrementally attracted - more attractive on TBA role. So the role is widened out relative to specs in appealing way. And so that presents a better profit opportunity this month then it did last month for example.

And then my other question is given where the stock is trading can you talk about your thoughts on share buybacks?

Well naturally it’s the first thing we look at and we’ve got approximately 1.9 million shares so we look at that very closely, we evaluated first every time certainly when we get to market softness like this. And sort of an extreme under value situations as we are in right now in my opinion.

Our next question comes from Fred Small of Compass Point Research and Trading.

This is actually Janet Lee for Fred. I'm just following up on Jessica’s question earlier. I want some clarification on swap expenses. So your swap costs were actually very low this quarter compared to the previous quarters. Can we assume that the swap expense can stay this low going forward or how should we think about that?

Assuming there is no change in our swap book, the fixed rate will stay the same. So certainly we may have to need to add incremental swap or rebalance the swap position to adjust the duration of our swap periodically, and as we go in at the current swap rates but assuming no change in our swap book the fixed pay rate doesn’t change the effect. So it really depends upon any kind of rebalancing that we may do from time-to-time which we may do from time-to-time.

[Operator Instructions] Our next question comes from Christopher Nolan of Ladenburg Thalmann.

Rock given tax law changes, once the NOLs role expire or are exhausted in the second half of 2019, is the thoughts to go back to a restructure or how does the Tax Law change affect your strategy in that regard?

No real change there, Chris I think our default assumption is that when the NOL period is complete and the appropriate economic judgment for us to make is to convert from a C-Corp then we would convert back to a REIT. We would just elect to be traded for tax purposes as a REIT, it’s a simple election we can trigger it when we think it suits the shareholders interest best. And unless something else changes between now and sometime maybe in the back half of 2019 or early 2020, then we would expect to be making that election out somewhere in that timeframe. I would say and I don't think this will be a surprise to most of you. I will say that timeline depends on whether our earnings are higher or lower than sort of reasonable projections. And we have found that over time the NOLs tend to - the NOL timeline is tended to go move outward in time. We've in reality turned out to be a little bit more efficient with NOL usage then we might have expected in earlier periods. I can't say whether that will continue to be true or not, but we have found that that’s been the case in the past that we found ways to be incrementally more efficient and push that time window out in time.

And then the follow-up question is really for Rich. Just looking at the tax provision and I'm looking at the table in the deck generally looking at this, this is really just the percentage change in the corporate tax rates and how it’s effects the DTA, is that a fair way to look at it.

I'm sorry, which slide are you looking at? Are you looking at our presentation or the earnings release?

I'm looking at the presentation.

What you're looking at, particular what page are you looking at?

One second, just lost it

Because you know for example we have a tax slide in the back, yes, I mean there is - we disclosed our NOL carryforwards and NTL carryforwards are you referring to our value of deferred tax asset.

Yes exactly, I was just trying to get an idea as to how you arrived at it and I mean this corporate tax really went from 35 to 21 and given that percentage change?

So the drop in our deferred tax asset quarter-to-quarter Chris, its first driven by the AMT credit that we reclass out of our deferred tax asset into receivable because of the change in the Tax Reform Act that Rock commented in his opening remarks, and also we disclosed in our earnings release provides a disclosure on that. So a significant drop in our deferred tax asset is simply balance sheet reclass. Another small part as you pointed out is a drop in the tax rate. And then lastly it's really largely driven by our unrealized gain that we had during on our swaps during the quarter that just kind of reduced our deferred tax asset. And I kind of provide a little bit more background on it and you can see some disclosure on it in the 10-K when it comes out they'll provide further.

When should we expect the K by the way?

A week or two.

Our final question comes from Laura Engel from Stonegate Capital Partners.

Congrats on finishing up with some strong numbers. Just for modeling purposes looking at G&A levels for the first half, did that fourth quarter have any adjustments or one-time charges or is that a level that we can expect to kind of sustain operations for the upcoming year?

I would look at it - you know they're probably looking at on an annual basis and we’ll take the annual amount just assume that a run rate basis. You might have a little bit fluctuation quarter-to-quarter I think this quarter was a little higher than last quarter because last quarter was a little bit low but I would take the annual amount and use that as a run rate basis.

And then just as far as balance sheet. I know you gave a lot of information obviously on thoughts for that coming here on investment was but any thoughts on returning to any of the private label or the non-agency MBS for the upcoming year or anything that led to entire sheet to increase that balance or allocation I guess?

I don’t mean to be flip but if you back them up 20 points we'll low the boat. I'm being a little flip there, I think we’re comfortable with the present capital allocation. We’re sitting in a posture where we have a very robustly hedge portfolio 100% hedged on our repo balance. Earnings ROEs in the high teens with an asset that is credit risk free reasonably infinitely liquid for a party of our size presents a very attractive economic risk return profile versus other alternatives. And it certainly and particularly at this stage of the cycle is very appealing from my risk-adjusted return perspectives. So we're very comfortable with our present capital allocation. Having said that, we don't see anything fundamentally troubling about the non-agency opportunities that we used to be invested in. Housing industry is in a very constructive place and housing credit is generally in a very constructive place. So we don't see anything necessarily wrong with it, it’s still an appealing credit asset it just doesn't make sense for us relative to our existing portfolio because in order to even remotely match, come close to matching the return that we can generate on our existing portfolio would require very substantial leverage using repo instruments to build that leverage base and that's not something we feel is in the best interest of the company at this stage.

Mr. Tonkel, this time we have no further questions in the queue.

Thank you very much everyone. We're available to answer questions offline if you like.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect.