Good morning. I'd like to welcome everyone to the Arlington Asset Second Quarter 2017 Earnings Call. Please be aware that each of your lines is on 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. 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 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 second quarter of 2017 earnings call for Arlington Asset. Also joining me on the call today are Eric Billings and Brian Bowers. During the second quarter, the bond market signaled tempered expectations for faster economic growth and higher inflation, resulting from potential pro-economic growth policies following the November elections, including potential tax reform, infrastructure spending and deregulation, while the equity markets continue to price in higher optimism for growth and inflation. In response to this backdrop, the 10-year U.S. Treasury rate rallied for most of the quarter, reaching a low of 2.1% in June before ending at 2.31% as of quarter-end, an 8 basis point decline from the March 31 rate. Additionally the Treasury rate curve continue to flatten during the quarter as the spread between the two year and 10-year U.S. Treasury rate narrowed 20 basis points. Although the spread between 10-year U.S. Treasury rates and interest rate swaps tightened modestly during the quarter, two year swap spreads declined significantly by 12 basis points. As widely expected, the Federal Reserve raised its target federal funds rate in June by 25 basis points, the third increase in the six-month period. Market expectations were further rate increases this year have declined from the prior quarter. And based on federal funds futures prices, market participants currently expect that there is less than 50% chance that the Federal Reserve will raise rates again in the fourth end of the calendar year. In its June statement, the Federal Reserve expanded further on its previously announced balance sheet normalization policy by signaling that it began implementing a normalization program later this year by gradually decreasing its monthly reinvestments. In that environment, 30-year Agency MBS underperformed modestly as the market continue to contemplate the impact of the…

At this time, we will open the floor for questions. [Operator Instructions]. Our first question comes from Jessica Levi-Ribner with FBR.

Good morning, guys. Thanks for taking my question.

Good morning, Jessica.

One on the shift from more TBAs versus spec for this quarter. What determines that shift and how do we think about it going through the third quarter?

Well, as I said in the remarks, the driver was simply what we felt was a better risk-adjusted spread opportunity in the TBAs at the time versus specs. And as we've talked about before that's sort of a judgment we make at the margin month-by-month as TBA rolls shift and to the extent that at the given point in time, maybe - they maybe more attractive, say, all things taken together relative to specs. Then we'll allocate more capital to the TBAs and more balance sheet and more capital to the TBAs. And if we find that specs appear relatively expensive at the margin, relative to TBAs at a given point in time, we will adjust that accordingly. So that's sort of a toggle at the margin based on achieving the better risk-adjusted return for the overall portfolio.

Okay. And then just one on your comment about the dividend. How can we think about that going forward and kind of wrapped up in that is, what your expectations for rate hikes and interest rates are going to be and earnings power on the back of that?

Well, as you know, probably the largest drivers beyond simply the scale of the portfolio, and to some degree the mix, but the largest drivers are our going to be prepayments fees and marginal funding rates. So we are quite substantially hedged but there is a unhedged portion of our repo book. And so when we see when the Fed makes its adjustments from a rate perspective, then that flows through to the funding line, I think, the change in the dividend, we've tried to be pretty clear that that was a result primarily of the cumulative effect of the Fed rate increases on the unhedged portion of the book principally over the last six months. And I would say from here, when we look at the dividend change, we took into consideration what we felt was the core and ongoing earnings power of the portfolio in the environment at that time, which to us doesn't seem to have changed materially today versus then. And I think the drivers from there will be are there meaningful additional rate hikes from the Fed and what is the course of prepayment speeds over the remainder of the year etcetera going forward into the future from here. Last year, we saw speeds that were more elevated in the back part of the year based on the spike downward in rates that was extended for a period of time and created a window for accelerated prepayments. We can't say whether that's happened this year or not. We don't have reason to expect it but there is of course political uncertainty that we're all living in that can create unusual scenario. So I would say we wouldn't expect in the normal course. The speed this year would be as accelerated as they were last year because of the rate levels and other factors in the overall mortgage prepayment environment. But that would be a large determinant of the spread earnings, and therefore, the reported core earnings of the company going forward. So I think when we set the dividend, we try to take into consideration what we thought would be reasonable and normal seasonal patterns in prepayment speeds based on the environment we are in, and we feel like we set the dividend in a level that reflected the ability to absorb some changes in speeds over time but if the Fed makes meaningful additional moves and/or speeds are meaningfully higher, then those are things that we can't control and will have their own effects. Outside of that, we feel like we're - the dividend is generally reflective of the earnings power of the portfolio at this scale and mix.

Okay. I appreciate that. Thank you.

And our next question comes from Trevor Cranston of JMP Securities.

Hi, thanks. Good morning. It looks like leverage on the portfolio, if you include the TBA position, increased moderately this quarter. Can you talk about how you're thinking about that currently? And with spreads widening somewhat during the second quarter, if you view agencies as attractive enough to continue growing the portfolio, if you're just comfortable with the size of it as of June 30? Thanks.

Well, I think the growth in the portfolio was driven in large part by the incremental capital. And so we would look at the opportunity today and say yes based on the spreads available today, particularly as they widen a bit over the course of the quarter and represent an attractive opportunity. So to the extent that there is capital from prepayments or otherwise to deploy, then I think we would feel comfortable deploying that into this spread environment in the agency space. So I think we - and whether we do or whether we don't, incrementally will depend on of course, as you know, Trevor, what the pace of runoff is and to the extent they were capital raising opportunities going forward, which would be speculative on my part to guess about.

[Operator Instructions]. And next question comes from Doug Harter of Credit Suisse.

You talk about wanting to deliver the best returns. How are you balancing the leverage which is at the higher end of peers versus a dividend, which is also at the high-end and how are you balancing that versus taking down risk and delivering a lower return but potentially less volatility in book value and/or earnings given where we are?

Well, I think, Doug, that I don't feel like we have really a different answer than we've shared before our approach and our philosophy is to take advantage of those wider spreads and maintain the approximate scale of the portfolio based on our existing invested capital in it, and therefore by maintaining that approximate scale and taking advantage of those higher spread opportunities and the possibility that comes from them to deliver that benefit to the shareholders to maximize their present value of outcome. And so I think there is not really a change there. And what's governing us there is the marginal return attractive relative to other alternatives that are available to us and compelling versus the existing return in the portfolio. And if that's the case, then we would expect in a normal course to continue to reinvest at the margin into a higher spread environment.

Got it. Thank you.

Our next question comes from David Walrod of Jones Trading.

Hi Dave.

Yes, good morning. I just wanted to expand a little bit on a couple of things. First of all, you talked about the Fed and the outlook for rate increases has been a little more tempered. Can you talk about, I guess, any changes you made in the portfolio or in your hedge book in response to these kind of a more nuanced outlook?

Sure. I think we found during the quarter the incremental profitability of not just the TBAs but at the margin forced to be a little bit more favorable than sort of three-and-a-halfs and so we made somewhat of incremental shift there. And I think in the context of that, we - of the context of our view and may be a bit more focused on a front-end that maybe - front-end of the curve which may be continuing to move up as the Fed goes along its work whatever pace they choose to move up funds rates at, we add an incremental hedges in the short-end sort of three year tenor, and at the same time as we incrementally grew the portfolio, we added some long-end protection as well in incremental futures against the TBA portfolio. As the TBA portfolio grew, we incrementally added futures. And as we start to emphasize a little bit more of the front-end sensitivity to future rate hikes, we added some three year swaps. And that let the duration, the overall duration of the hedge, about the same maybe a tiny little bit longer, a little bit higher in repo coverage, a little bit higher hedge coverage with a repo position at 74% versus 72%.

Okay, that's helpful. And then just kind of a basic question. You've obviously got the portfolio and 100% Agency MBS. In your investor presentation you note the possibility of investing opportunistically in other asset classes. Is there anything specifically you're looking at or is that just kind of a generic we look for opportunities?

Well, as you know, we've looked at different alternatives over time and I would say particularly right now with overall investment spreads where they are and available returns as tight as they are, that the Agency opportunity here on a hedge basis with, call it 3.10 or thereabouts yield and about 180 - 175, 180 basis point all-in cost of floating funding and hedge funding, leaves you at neighborhood of 130 points little bit more. To us that seems like an appealing opportunity with the inherent protection to it from the government and from liquidity of that market, against many other alternatives that we are reviewing from time to time. And so there is nothing apparent right at the moment that jumps out at us. We've reviewed different alternatives, and at the moment, we feel like incremental capital to the extent it's available would go to the agency side.

Okay. Thank you.

Mr. Tonkel, there are no further questions at this time.

Okay. Thanks very much folks. If you want to have any further questions or thoughts, just please pick up the phone. Thank you.

Thank you, ladies and gentlemen. At this time, you may now disconnect.