Good morning. I’d like to welcome everyone to the Arlington Asset Third Quarter 2015 Earnings Call. Please be aware that each of your lines is on 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 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, 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, 2014, 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. Joining me today are Eric Billings, our Executive Chairman; and Brian Bowers, our Chief Investment Officer. We reported core operating income per diluted share of a $1.35 for the third quarter, an increase from a $1.32 per diluted share in the second quarter of 2015 and a $1.26 per share in the third quarter of 2014. Core operating income for the quarter benefited from increased net interest income from the company’s agency MBS portfolio. We would like to highlight that the amortization net premiums on the company's agency MBS is reflected in the company's GAAP net income and changes in book value through net investment gains and losses rather than through net interest income and core operating income. For the quarter, the amortization of the company's net premium on its agency MBS is based on actual total principal payments worth approximately $0.35 per diluted share. In recent quarters, as the company’s allocation of capital to agency MBS has grown, the higher net interest income associated with that portfolio growth has contributed to an increase in the company's core operating income per share. However, the economic cost of the company’s hedge instruments have generally increased proportionally with the growth in the agency MBS portfolio. Economic costs of the company’s hedge instruments are ultimately reflected through GAAP net income and changes in book value per share rather than core operating income per share. During the third quarter, we witnessed continued interest rate volatility as uncertainty persisted over global growth and the outlook for the timing and magnitude of rate increases by the U.S. Federal Reserve, contributing the spread widening across fixed income securities including agency MBS. Towards the end of the quarter, swap rates move below U.S. Treasury rates, causing interest rate hedges such as our Eurodollar and interest…

Thank you very much. At this time, we will open the floor for questions. [Operator Instructions] Our first question will come from Trevor Cranston, JMP Securities.

Hi guys. Thanks good morning.

Hi Trevor.

Hi Rock. First question on the changes in the hedge book. Can you guys maybe talk a little bit more about what the thinking was behind moving the hedges more into the 10-year part of the curve, and just generally, how you guys are thinking about the interest rate environment right now?

So the thought process behind the shift in the hedge has number of aspects to it, but a key driver is in an environment where we continue to observe moderate expectations for economic growth and ongoing pressures from stronger dollar and other countries’ global growth and what that effect may have on the U.S. We also are mindful of the very limited inflation environment where we’re living in and the absence of major - what appeared to be major catalyst for inflation. And so as a consequence of that, I think what we - we've taken that into consideration and elected to shift the emphasis to some degree of the hedge to make it somewhat less sensitive to movements in the early part of the early years of the forward curve and somewhat more sensitive to what maybe longer term movements in rates that may take a little bit more time to develop, when and if, economic growth picks up and those inflation catalysts arise. I think there are a couple other elements in that as well. The need to maintain a level of extension protection on 30-year fixed-rate assets at these rate levels and these prices suggest that a more balance in the 10-year arena of the curve would provide better risk protection against rising rate movements. And also that by shedding some of the notional amount but maintaining a similar duration profile in the hedge overall, we were able to reduce somewhat the cost of that hedging and one effective - one way to look at that is effectively this, if you're using something approximating how the notional value in the 10-year component to achieve the same duration as you would in a five-year instrument, that 10-year component has - the half of that 10-year component - cost of that component is less than the outstanding one unit of the five-year notional. And so we've been able to reduce an element of cost in that hedge construct and also shift the emphasis to be more sensitive to move into longer term rates than to shorter term rates, which have an expectation for lower trajectory over time.

Got it. Okay. Thanks for those comments. And on the non-agency portfolio, I think the comment that you’re planning to keep the capital invested there relatively flat in the near-term. There is a little bit of a change in term versus the reductions that had been happening. Can you talk about that decision and where you guys are looking at reinvesting pay-downs from the non-agency book currently? Thanks.

Sure. Thanks Trevor. So on the non-agency side, we've seen relative underperformance in that asset in the last 12 months. And so one might ask the question, well, if you’ve seen relative underperformance there then what might be causing you to think that that's where a strong relative exists today? As we look at that asset today, we continue to see the same fundamental value that we have seen over time and feel that there is an opportunity to generate not only the 5% current there, but also the appreciation over time to get you do a 10% total return in that asset on an annual basis. I think that as we sit in this environment today, having that proportion of the capital, 20%, 25% of the capital in a liquid available format for higher non-agency alternatives or agency at points in time, were to buyback the stock, gives us a level of additional incremental flexibility, for which, at this point in time, we’re willing to sacrifice some marginal returns versus the incremental agency dollar to keep access to those positive benefits.

Got it. Okay. Thanks Rock.

Thank you. Our next question will come from Dan Altscher, FBR.

Thanks. Good morning everybody. I wanted to start just with buyback authorization upping to 2 million shares. Can you maybe give us a sense as to what extend you actually plan on executing on that program now that it's much bigger than it was before?

Well, I think, Dan, we’re pleased to have the authorization. I think we have been buyers of this stock in past years at points in time when it traded at levels that were substantially accretive to the company, and I think that we wanted to have the flexibility such that when those moments arise we can act to provide that advantage to the business. At moments in times that can be a very attractive opportunity and we simply - we want to have the ability to take advantage of that. Having said that, there are considerations in that, particularly for somewhat smaller companies that we’re mindful of. And so in order to be a substantial buyer of that, we would - it would need to be meaningfully accretive to the business. We have seen points in time in the past when that had happened and we want to be able to capture that benefit for the shareholder, should it happen again. And we expect to, should we see those opportunities.

Okay. I mean I’m going to press a little bit harder on it. Is this one of those opportunities?

Well, the information doesn't have the - the stock - the market doesn't yet have the information. We’ll see where the stock trades post the quarterly information and we’ll react to that.

Okay. I got it. The developments in direct repo are interesting. Can you talk a little bit about the counterparty, who the cash lender is, or just give us a sense of what that looks like, are you their only counterparty or are they doing this for some other folks?

So a couple of things. One, there are number of parties that we’re in conversation with discussions about this that includes pension funds and the corporate pensions, state pensions, those types of things that are significant cash holders. The one particular while I can't name it, I would say that it’s a large cash holder. I’d say among that universal folks that are also looking at direct repo are the regional FHLBs in addition to the state corporate pension funds. So that’s the universe of people that we’re discussing this opportunity with. And for this first counterparty of ours in the direct repo universe, this is also their first venture into the direct repo environment.

Got it. Can you just give us a sense as to how much may be you've deployed now through that channel?

Well, we’ve started with an amount that is in the range of the average of the other repo providers and I expect that probably will grow somewhat over time. So our average repo provider is probably between the $100 million and $300 million or thereabouts, $100 million to $400 million. And so I’d say they’re in that range, and we would expect that element over time to grow to be consistent with the middle to high-end of those repo providers. And that would be in addition to the advance side, which we would also expect would continue to grow from here to be consistent with the larger of our repo counterparties.

Okay, got it. And maybe just one other question around is also, I guess more from maybe a technology standpoint or from a traditional processing standpoint. What systems are in place to allow this to work? I mean, is there daily mark-to-market, is there hourly mark-to-market, what sort of collateral exchanges are working here on a, I guess, in process or real-time basis that would have traditionally been in place if there is more of a tri-party agreement?

So all the processes that are in place to manage tri-party repo are present in these direct repo arrangements as well. And so all that capability exists - already exist for us and I assume already exists for them as well. They may be doing it in different instruments different form, but the capability exists on both sides of that trade.

Okay, got it. I'll drop off and let others get on. Thanks.

Thank you. Our next question will come from Lucy Webster, Compass Point.

Hi, good morning guys.

Good morning Lucy.

I just want to touch on the agency book, given your interest rate outlook and what you’ve were observed prepays are doing in the market. What's the sort of value proposition you are seeing today of specified pools versus maybe TBAs?

Well, Lucy, look at these levels, we’re pretty selective about the prepays. We are - we've been cautious about some of the higher prepay, the higher pay-up instruments and we've been more focused on the lower pay-up instruments in our new investments either from cash flow or otherwise or repositioning particular bonds. And so we still continue to believe that the pay-up in certain of the spec pool assets provides a superior risk-adjusted return and so we continue to participate there in some segments of that spec pool universe with pay-ups.

Okay, great. And then on the FHLB side, I know that happened during the quarter, but if you could just talk about longer term, what you're thinking there in terms of how much of a contributor to your overall financing you expect it to be going forward?

So I'll sort of step forward a bit on this. I think there are a number of industry parties that are either active in already or in discussion with a number of direct repo counterparties. It's been a topic of discussion in the industry for some time and has not historically really gained a substantial traction. It appears that that may be shifting and are experiencing gaining access to initial direct repo counterparty I think suggest - is consistent with that. Others have had more than one counterparty I believe and are entering into more significant volumes. I think one can envision a time down the row where these businesses potentially have access to something like 20%, 25% of the funding on the FHLB side and maybe 10% to 20% or something like that, may be potentially higher on the direct repo side. Now that's not something that's likely to happen, I don't think in the next 12 months, but that's an opportunity over time for us and for others in the industry. In the near-term, I think it would be, I would characterize it as I did before for Dan, which is that, I would expect the direct repo arena to ultimately end up with a number of counterparties that will be roughly equal in magnitude to the average counterparty on our traditional street repo, and on the advanced side, I think that will probably be among the larger - that would be equivalent to the larger and maybe even above the larger of the individual counterparties on the traditional repo side.

All right, that's helpful. Great. That's it for me. Thanks guys.

Thank you. Our next question will come from Doug Harter, Credit Suisse.

Hi Doug.

Hi Rock. Can you talk about your ability to maintain your asset size, given the declines in book value you’ve had in the last two quarters?

Yes. So the company’s - our approach over time is, you heard us talk about, has been to maintain sufficient liquidity and flexibility in the capital to stay in the opportunity to realize our targeted return over time. And that's how we think about it and we absolutely have flexibility to do that. So we maintain a substantial level of liquidity. We maintain capital flexibility. As you know, part of that has been the non-agency - the flexibility by the non-agency capital over time and while that’s always available to provide for that need, I think we feel like where we sit today, we’re in a comfortable liquidity position to maintain the existing portfolio at its current scale along and generate along the lines of returns that we incorporate in the remarks.

And then just to drill down on your point about your hedge structure and currently you view that as kind of minimizing the cost of the hedge. I guess, just wanted to kind of hear your thoughts as to how you incorporate the book value weakness that you've seen into that conversation and whether that book value weakness volatility would cause you to rethink and have the hedges more spread out across the curve?

Well, it's something we always - we’re obviously always evaluating, Doug. I think historically, if you look at it, the predominant notional amount of our hedge had been in the shorter end of the curve and a proportion of the longer end of the curve. I think that while we maintain an exposure through the Eurodollar futures in the shorter end of the curve, given prices, rates and the outlook, we felt like this shift in the hedge position was appropriate and would result in a better economic outcome over time. That's where we see things today with the economic outlook, the rate outlook, the prices on the agency side and the cost of the longer term 10-year-based hedges versus the relative cost of the shorter term hedges.

All right. Thank you.

Thank you. [Operator Instructions] Our next question will come from David Walrod, Ladenburg.

Hi, good morning guys.

Hi Dave.

Most of my questions have been answered. Just a couple of quick ones. On the comp, it was obviously down. I assume there was some incentive comp baked into the first half. Should we look at the run-rate of comp over the first three quarters is kind of a run-rate going forward for the near-term?

Hi Dave, this is Rich. The one thing that's in the comp numbers year-to-date is some reversal of our stock-based compensation for the executives, really related to prior periods. So there is a catch-up in the current year numbers. So those numbers might be a - year-to-date may reflect a little bit lower of a run-rate because of that. So because with our stock-based compensation plan, you don't meet certain hurdles with returns then we have to reverse some of those expenses that were recognized in prior periods.

Okay. That's helpful. Thanks. And then, Rock, you guys, you touched on the share buyback a little bit. I guess I just wanted to touch on it a little more in regards to how aggressive you would be. You got the deferred tax asset. When you think about the return that will be generated by the share buyback, will you think about that as far as the capital you could deploy, i.e. ex the deferred tax asset or will you think about the fact that the deferred - as you buy back stock, the deferred tax asset will become a larger piece of each individual share that's remaining?

Well, we consider all those components, Dave. It's a good question. We consider each of those components, the existing tax benefits belong to the existing shareholders and they have significant value. I think the other side of that is that the capital that we can invest to generate current return in the portfolio is the investable capital, which doesn't include their BPAs [ph], so we incorporate both into that. I think we place a predominant emphasis on the investable capital of the business that can generate the return on capital - primary return on capital and then we look at a number of other factors in getting to one where we conclude that it has a sufficient level of accretion to us to be a substantial buyer.

Okay. Thanks so much.

Thank you very much. Speakers at this time, we have no further questions in the queue.

Thank you very much. We appreciate your time and look forward to any further questions if you wanted to speak to us directly.

Thank you very much. Ladies and gentlemen, at this time this conference is now concluded. You may disconnect your phone lines and have a great rest of the week. Thank you.