Good morning. I would like to welcome everyone to the Arlington Asset First Quarter Earnings Call. [Operator Instructions] I would now like to turn the conference over to Kurt Harrington. Mr. Harrington, you may begin.

Thank you very much. Good morning. This is Kurt Harrington, 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 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 Eric Billings for his remarks.

Thank you very much. Good morning, and welcome to the first quarter earnings call for Arlington Asset. I am Eric Billings, Chief Executive Officer of Arlington Asset, and joining on the call today are Rock Tonkel, President, Chief Operating Officer; and Brian Bowers, our Chief Investment Officer. Yesterday, we reported core operating income per share diluted of $1.18 for the first quarter, which equates to a 20% return on book value available for investment. First quarter performance was driven by continued improvement in private-label MBS credit performance and prices complemented by low CPRs and attractive cash spreads in our agency MBS portfolio. In March, Arlington raised $82 million in common equity, which was accretive to investable book value, and will positively impact future cash earnings while further reducing the company's expense-to-capital ratio, boosting return on equity and efficiently utilizing tax benefits. We expect the March offering to be accretive following full deployment of the capital, but it had no effect on core operating EPS in the first quarter. We expect all of the proceeds from the March offering will be allocated to the company's agency MBS portfolio. Including purchases and pending settlements in mid-May, the company's agency MBS portfolio now equals approximately $2.6 billion in market value, with corresponding hedges of approximately $815 million in 10-year duration swap futures and approximately $1.5 billion of Eurodollar futures, which extend through March 2019. Agency MBS balances may increase during the second quarter, with full deployment of the recent offering. Following recent purchases, the company has approximately 51% of investable capital directed to the private-label MBS portfolio, and 49% allocated to its hedged agency MBS portfolio. Given current market conditions, as our private-label MBS reach our appreciation targets and we execute sales of private-label MBS, our allocation process will naturally migrate capital to…

[Operator Instructions] Our first question comes from Trevor Cranston from JMP Securities.

On the agency portfolio, you guys have traditionally been pretty focused on the 30-year specified pool sector. I was wondering if you could just share your general thoughts on kind of where you think -- what's your outlook for spread bids over the balance of the year, as Fed continues to wind down taper? And also just share your general thoughts on the other sectors of the agency market, if you're looking at those and finding any attractive opportunities in sectors like 15-years or hybrid ARMs.

Well, just generally, we try to be somewhat agnostic on our view of interest rates, as you can see, in our structure, our hedge structure. It seems fairly obvious, having said that the economy is normalizing, and then over the long term course of events, zero Fed funds rate obviously still reflects a crisis circumstance, which is quite clearly past. So it is inevitable that, that part of the rate structure will start to move it up at some time in the future, and probably, the rest of the curve will follow at some level. For us, the key is to enjoy the character of the spread and the yield curve as we are structured today, and to have the portfolio be in a place where, when and if or as the day comes that the yield curve eventually flattens and even potentially inverts, which is a normal course of cyclical events, which at some day in the future will occur, we have the flexibility on the portfolio to adjust accordingly, and to maintain our structure without significant damage or damage to the capital of the company. And that is the nature of how we run the business. So it leaves us in a position, where we don't have to be guessing rates based all on spread. We feel it's the most attractive for sure [indiscernible].

I think we -- the key for us, as Eric said, is that we're going to structure and have an overall financial position that allows us to sustain that structure through movements in the market. And so to the extent we see movements in basis or otherwise, then if they're negative, we'll get the benefit of that in the future. And if they're positive, it means that the margin lower of returns -- new returns maybe lower, and we'll react to that with the appropriate adjustment. So I feel like as long as we can -- as long as we're able to maintain that structure, then we'll generate the economic benefit from that portfolio that we see -- that we expect. Looking across the spectrum, I think we've seen points over the last quarter, where the 15s, and those in particular, started to look pretty interesting. They got a little cheaper, and then they got a little more expensive, and so we feel like we're in the right place in the 30-year asset, and that's how we look at it. Brain, do you have anything you want to add?

No, the only thing I'd add is, yes, we continue to look at all the various sectors and all the opportunities, which includes 15-year, 20-year or hybrid. But we're continuing to find the most attractive area to be the 30-year product, in particular, where we can. Types of product there we like is the prepayment protection, in particular, to keep CPRs relatively low. So we find that -- we continue to find that sector to be the most attractive to hedge and the most attractive to maintain a constant spread or NIM on a relative basis, on a go forward basis there.

Our next question comes from Jason Stewart from Compass Point.

Have you just seen any material change in pay-ups on specified pools year-to-date?

No.

Not really material, maybe a bit of a pickup there, but not a huge change, Jason.

And I guess, given your rate outlook, that might not be surprising. But it does seem like there's free optionality in those bonds, and I'm just -- I'm wondering if it surprises you that there's nobody paying attention to that sector.

Jason, yes, we would agree with your comment about the free optionality. And look, right now, the market participants haven't been recognizing that particular benefit. Maybe if rates continue to go lower or they perceive that rates will stay lower, that the pay-ups will then begin to adjust on a relative basis. So at this point, we would agree with you, we like the attractiveness of that sector and we like the attractiveness of the fact that the pay-ups are still relatively cheap on an overall basis.

One comment there, Jason. You can sort of observe from what you've heard in the script here that we've shifted a little bit from the HARP to the other types of spec pools. And there may be -- that could be more of the case going forward is the -- to the extent that supply shifts on the HARP side. So these are things that we're mindful of. We're flexible. We can adapt to it very easily. But that -- depending on the flow of HARP product, we may see that number shift around a little bit. It doesn't really affect anything much. We still get the -- we're seeing the prepaid benefit pretty much across the board. So whether it's a HARP or low loan balance or otherwise, we'll pick our spots and be satisfied with that.

Yes, it just seems -- I mean, when you go back and look at our data at least, pay-ups with some points were over 100 ticks, and the rate view may not be lower from a consensus standpoint, but there seems to be some embedded value or optionality there that's not being reflected with pay-ups flat. So I was just -- I appreciate your comments on that, and that's perfect. And then on the non-agency portfolio, the decline in CPR, was that mostly voluntary or involuntary?

I think it's more of the credit side of it, Jason. It's -- we just continue to see improvement in tier rates and relative to new delinquencies. So I just think it's -- improvement there is false [ph]. I don't think they're changed a lot.

No, really haven't.

Okay. So no real impact from the change in debt forgiveness on short sales? I mean that wasn't a big driver of activity in the quarter?

I don't have it at that level of detail off the top of my head, Jason. I just think the dynamic is there, and that's a good thing, right, because as the -- to our surprise, to some degree, to our surprise, we still have enhancement left in some of these bonds that we wouldn't have otherwise expected to be here at this late date. So to the extent that you still have a little enhancement, then you're still getting -- and you're still getting voluntaries at really high levels. That's a real positive to the bond. When your invols are going down, you're simply pushing off into the future potential bond loss, and at the same time, collecting that difference between your basis and par. So it's a pretty positive dynamic across the board.

All right. One last one, and I'll jump out. The $16 million of non-agency sold, I didn't catch if that was a face number or market value, and is that the case we should expect going forward? Or is that just going to vary depending on price and opportunity to redeploy the capital?

Completely dependent on price and opportunity on both sides, right, whether it's on the sell side, if it hits our price targets and falls below our threshold returns; and on the other hand, if the agency opportunity is -- provides a higher risk-adjusted return, then the capital moves. So it's completely a product of market conditions at a given point in time. That $16 million was the proceeds.

But, I mean, obviously, Jason, it's just going to be market-dependent, and the analogies we've used in the past, which are, to the degree we own these bonds, at a blended base of 72, obviously, is a lot of bonds. So it's an average, and we think the average might be, for instance, 90 or something in that vicinity. So if it's going to take 2 years, well, you can -- let's give or take something in the vicinity of 23%, 24% move plus the coupon, well, if it's 2 years, that's going to get us something in the vicinity of mid-teens, high-to-mid-teens ROE. To the degree that we can come out of those bonds, for instance, in the high 70 to 80, 81 -- one, as they evolve, then that's not all one package, then that changes that dynamic dramatically, and we can redeploy that into the agency spread and it's -- that's how we do it. So the -- you saw $16 million in the last quarter. As we go forward, it's probably entirely reasonable to assume that these -- the pricing is going to continue to move up, continue to appreciate, because that's what it's been doing now very consistently for a long time, and so I don't know that we think it will accelerate, but it's certainly reasonable at some level to expect at least a continuation of that trend. And then obviously, eventually, you'll get -- probably get some kind of a hockey stick move on it. But we'll just wait, let the market give us the opportunity, and take it when we can.

Our next question comes from David Walrod from Ladenburg.

Just a couple of things, not too much more. It sounds like you're close to being fully deployed in the new capital raise. Do you anticipate wrapping it up in the next week or so?

Give or take, yes, I mean, by May, settle -- certainly, by regular May, settle.

Okay. And now that you're kind of reallocating your focus, any change to your thoughts on leverage in either of the 2 portfolios?

Not really. The non-agencies are sitting just, I think, a shade below 0.2, which as you know, sort of been our level there for a long time. And I think the agency -- the new agency capital will go to work at about 8. I think the overall blended on the agency will be a little higher than that because the preexisting portfolio is probably a little bit more highly leveraged than that, but we're totally comfortable with those metrics.

Great. I think Eric said that, post April, the capital allocation was 51% in the private label and 49% into the MBS. Where do you envision that settling in?

Well, I mean, it depends on, David, on your timeframe. Eventually, obviously, I think we expect that the non-agencies will trend to 0. If those assets continue to appreciate in price, then by definition, as they get to what we think is their equivalent par value, and would be something that's going to be around maybe a 90 price, then of course, we would only be achieving a coupon, as most of those are adjustable rate, that would be something in the vicinity of 2.5% coupon. With the little bit of leverage we have on it, it's closer to 3%. But obviously, well before then, we will have exited that portfolio and moved into the agency structure, where we're achieving mid-teens, and sometimes a little higher than that return. So you can see that matrix, if that occurs, that those prices continue to appreciate in time, as we said in the script, we would anticipate at this point, within 1.5 years, we would probably have moved out substantially all of those assets and moved them to the agency's portfolio. And it's hard to say, but it's a guesstimate at a 1.5 years, and obviously something that could happen considerably quicker than that if pricing continues to gain momentum, but that's our ballpark estimate right now.

Okay, that's helpful. And then, please, just a quick question on the tax charge. What do you think -- what was that about?

Tax charge, sorry, you mean the tax provision?

Yes, the tax provision.

For the tax provision, it was at a normalized rate of around 38%. We know most of that is deferred taxes, and the cash taxes were 277 -- $300,000, roughly 2% of the non-capital gain income.

That's pretty consistent with historical.

And at this time, our next question comes from Douglas Harter from Crédit Suisse.

[Audio Gap] ...on some alternative investment opportunities you're seeing, and if anything, is interesting or close to coming to fruition?

I would say that we continue to look at a number of different types of opportunities. I don't think anything is what we would describe as close at all right now. And we are just trying to be very opportunistic about it, and move with a lot of thoughtfulness to the process. And if we see something that on a risk-adjusted basis we felt could exceed the returns we're achieving in either of our portfolios, then again, we would be -- are willing to move some level of capital into that kind of an area. Having said that, in this environment, it is very difficult for other asset types to compete with these returns. So it makes it very difficult to -- for that to happen. But again, we look at everything, and we have many, many years of experience in the financial -- specialty finance world, and so if that comes to pass, it's certainly not something we're unwilling to do.

Thank you. Mr. Harrington, there are no further questions at this time.

Okay, thank you, everyone.

Thanks, everybody.

Take care.

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