Good morning. I’d like to welcome everyone to the Arlington Asset Second Quarter 2018 Earnings Call. [Operator Instructions] I would like to now 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 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 statement. 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 2018 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. Although, lower than the prior quarter, volatility continued to be at heightened levels during the second quarter. The Federal Reserve raised target federal funds rate by 25 basis points in June, while also reaffirming its commitment to its balance sheet normalization policy and further gradual increases in the target federal funds rate. The 10-year U.S. Treasury rose 12 basis points to end the quarter at 2.86%, while the Treasury rate curve continue to flatten as the spread between the two-year and the 10-year U.S. Treasury rate narrowed 14 basis points, with the short and outpacing the long end of the curve. During the second quarter, reduced Federal Reserve’s support for agency MBS and rate volatility led to pricing of agency MBS modestly underperforming interest rate hedges. In general, higher coupon fixed rate agency MBS and related hedges underperformed slightly lower coupon hedged fixed rate agency MBS during the quarter. To start the third quarter, we have seen a modest tightening of mortgage spreads leading to an outperformance of agency MBS relative to interest rate hedges. Turning to our actual results for the quarter, we reported a GAAP net loss of $0.13 per share, which includes $0.23 per share of a deferred tax provision resulting in pre-tax income of $0.10 per share. Non-GAAP core operating income was $0.59 per share, an increase of $0.02 per share from the prior quarter. Core operating income compared to the prior quarter was impacted primarily by favorable…

Thank you. [Operator Instructions] Our first question comes from Christopher Nolan with Ladenburg Thalmann.

Hi, Chris.

Yes. Hey, Rock. Can you give us a G&A run rate going forward quarterly?

So, the variable part of that -- the primary variable part of that would be the stock, the valuation of the incentive stock, which as you know is highly performance driven and is measured quarterly based on performance to-date during the performance period for those units. And so, that’s a variable number that moves around. Other than that, I would think that the general -- overall the fixed expenses of the company including non-comp and comp would run reasonably comparable to where they did during the quarter. And the incentive structure would run about in line with where it is for this quarter. So, those parts should be relatively constant. And the variable part from here would be the quarterly valuation of the restricted stock, which is unknowable because it’s based on the combination of performance factors TSR moving in, economic returns and other factors that get measured along the way. And so, that’s -- we can’t predict that. Other than that, it should be fairly constant.

Great. That’s helpful. And then in your comment, expected economic spreads in excess of a dividend. That implies that you guys will be building up equity capital going forward all things being equal. How do you expect to use this additional equity capital? Do you expect to increase the balance sheet size, do you expect to lower leverage ratios, what’s the thinking there?

Yeah. It depends on what market circumstances are at a given point in time. You’ve heard me say before that people shouldn’t be surprised if over time they see a gentle gradual de-levering of the balance sheet except what I’ve also said is that in periods of widening spreads and particularly attractive opportunities that may not be the case because one would want to take advantage of those. And if you want to delever then delever lower yielding assets rolling off later. So, with that sort of primary exception, one -- I wouldn’t think should be totally surprised to see a gentle de-levering of the balance sheet. We can’t control what happens with mark-to-market movements, but from the things we could -- can control that would be the gentle or general direction that we would be heading in.

Great. Final question. Did I hear you correctly where you mentioned that you expect TBA funding advantages over balance sheet funding to improve going forward or did I mishear you?

No. I’d say the roll was -- the roll over recent periods has sort of declined a little bit in specialness. And so, we while what I was saying in the script was we just rotated a little bit out of the TBAs relative to the scale of the spec bonds. Spec bonds had a bit of a widener in the first quarter and we got the benefit of that by investing fresh capital into them and coming out of some of the TBAs that were not offering as much of a premium. That’s all I was saying. And that’s a month-for-month calculation as you know from our prior conversations and from observing others in the industry. That’s something we assess as the roll moves month-to-month.

Great. Thank you for taking my questions.

Thank you. Our next question comes from Doug Harter with Credit Suisse.

Thanks. Excuse me. Rock, if you could just talk about kind of the factors that went into setting the dividend, where you are today and kind of how you would see kind of your economic earnings power, where that is relative to the dividend and what type of cushion you kind of want to have in that for sustainability?

Sure. So, we look -- when we evaluate the economic earnings of the business and we set the dividend in relationship to that, we are evaluating a number of factors that can’t really very easily or even at all be captured from a GAAP accounting perspective. So, we are looking at core operating income as a starting point and then we’re deducting things like futures expenses, which are a cost of hedging for the TBA portfolio and that isn't something that lends itself to a GAAP recognition. So, we're looking at that, and the number of other factors including amortizing gains and historical gains and losses on assets or swaps, as the case may be and amortizing those over reasonable proxy for the expected life of those instruments. So, those are some of the key factors that were evaluating to arrive at a dividend as well as the expected level of G&A in the business. And when we took a fresh look at the dividend for the first time in a good long while, in the quarter, we looked very closely at that sort of net economic income from the business for the foreseeable future. What we could predict during a reasonable projection period, understanding that the markets may behave differently based on different policy inputs, economic and macroeconomic inputs et cetera, then what is predicted today. And that could change things which might have an impact right now that we can't foresee exactly on the economic income. But knowing the factors that we know today, we assess the economic income of the business, and we set the dividend to be below that, or at worst, sort of at that level. So, our expectation would be -- that we'd be generating a level of economic income above at or above the dividend and we would retain that amount of capital on a quarterly basis that exceeded the dividend amount. It would not be as much as the difference between core and the dividend, because core for the reasons I said before doesn't capture all those elements. But it would be a retention of our income above the dividend going forward during the period in which we remain a C core.

Got it. And then I guess just looking at leverage and book value volatility, is there -- has there been any change in kind of your risk tolerances around sensitivity to book value, if we were to go through another period like the first quarter with spread earning and rates up?

Well, you couldn't see to some degree, Doug, that through the incremental reduction and balance sheet volumes that there's some shift there. But and as you would expect, one is always seeking to maximize the expected spread from the asset return from the asset, while taking the most modest spread and rate risk that you can. And so, I don't know that there is any major move to shift the, shift the composition of the portfolio in such a way that would dramatically shift that. But we're always seeking to address it. And I think you saw, because some degree this quarter, a bit more muted response as a result of that.

Great. Thank you, Rock.

Thank you. Our next question comes from David Walrod with JonesTrading.

Hi. Good morning, everyone.

Good morning, Dave.

You gave us the prepayment rate for July. I guess please give us your outlook for kind of the rest of the third quarter and the rest of the year for prepayment?

I don't know that we would have a view other than a sort of normal seasonal expectation that. The rest of the summer would be somewhat elevated might be a little higher, might be in line. And then through the course of the fall, you've probably expected absent any meaningful rally. We'd expect that sort of trail off into the winter, the lowest speed months are typically during the winter period and the fall will be trailing down into those. You never know whether it's going to be September, October when but we'd expected to be elevated for the rest of the summer and early fall and then begin to drop again probably back towards what we experienced last winter, would be reasonable expectation we would think.

Okay. And then on a big picture standpoint. Can you talk about anything in the non-agency space that you might be finding attractive now or do you still think that agencies is the most attractive asset space to begin?

I don't think, anything is meaningfully shifted there in the investment dynamic, the risk return opportunity in the non-agency that would causes us to undertake shift in footprint towards that asset classes. And again, it's the same as it's been for a long time, we don't necessarily find any cult with the asset that we credit. It's simply the return profile given the amount of leverage on non-agency repel that you would have to put on to get there and makes it more challenging for us.

Okay. Thank you.

Thank you. Our next question comes from Trevor Cranston with JMP Securities.

Hi, thanks. Just wanted a clarification on something you said in the prepared remarks Rock. I think you gave $0.05 as the number that the second quarter results benefited from the spread between LIBOR and repo. So, I just wanted to clarify if that number was right. And also, if the interpretation of that means that if 3-month LIBOR goes all the way back down to equal to repo rates, you would lose $0.05 or if that's not the interpretation.

No, that's fair. That was a five-quarter benefit in the second quarter and if it moved all the way back to repo rate that would be the impact that's not occurred to date. Although, it has receipted from the levels we saw in the second quarter, it's not received at that far. So, there is still a positive benefit in there as things hit today. And as we experienced I know that is presumably experienced in the July role. And we'll see what the August role brings. But as of today, we've seen a pullback from those levels, but still a benefit remaining.

Got you. And then on the portfolio, the move up in coupon obviously shortens the duration a little bit and I see in the deck that you guys are reporting total net duration gap to zero. But can you maybe give us an idea of sort of how you think the portfolio would be impacted if we continue to get a curve flattening with the shorter end of the curve moving higher and the long and fairly stable. Thanks.

It all depends a lot on what volatility is around that. I think it is low revolve move. It might look like parts of 2017 which were pretty reasonable for the space. And I think agency in particular. So, if it's a more muted valve type environment then I guess I wouldn't be surprised to see a performance that might be not terribly underlying with some of the parts of 2017 occurred when volatility was modest. If it's a higher valve type of move, then that would be different, then that's that unpredictable right meaning not clear whether it results in spread widening not clear whether results in changes in rates. You look at the second quarter and we had a 40 basis points travel in the -- and the 5s and only 12, 10-12 basis points at the end. But in the quarter, there was travel, so there was some volatility going on in rates during the quarter which is sort of what I was referring to is the portfolio response was a bit more muted and maybe it might have been given the volatility that we actually did experience through the quarter understanding the rates only moved up 10-12 basis points at the end from the beginning. So, hard to say, it depends on the volatility of that action.

Got it, okay. Thank you.

[Operator Instructions] Our next question comes from Vick Agarwal [ph] with Compass Point.

Hey good morning and thanks for taking my question. I think Rock you said you were looking for leverage to nudge down. And assuming no dislocation is there a level that you'd like to take the portfolio too or rough type of leverage levels that you would like?

We haven't said that --. I think what we have said is what I'll stick to which is the in the absence of meaningful high -- wider that you would view shouldn't be surprised to see as gradually bring the leverage down. We've not set a target to that publicly. And I don't think I'm not suggesting that it would be dramatic. I think it would be gentle and occurring overtime. But relevant and material overtime.

Thanks. And then on – can you give us sense where new investments spreads are running post the quarter?

I would say give or take a 100 basis points on specs and on parts of the world its considerably higher on parts of the world it’s not that much higher, but on parts of the world it’s as high 25 or 30 wider. So, there are parts of the world coupon – parts of coupon spec in the roll that pretty appealing. And specs here offer attractive opportunities still given the risk through return characteristics.

Okay, thanks very much for taking my questions.

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

I want to add one thing to the back end of Trevor’s comment, which is notwithstanding what the mark effect of flattener like that might be and whether its volatile or not volatile, it’s important that and looking at those things we’re seeking to take into consideration in our economic income, forecasting to the extent that we can for the period that we can be doing that and what we think is a reliable period of time that we would expect to company to continue to generate a dividend -- economic earnings reasonably in line with what has been forecasted to support the recent resetting of the dividend. So, notwithstanding that whatever the impact goes to or not at the margin of that flattening or steepening or widening move, the company would continue to be generating a very substantial cash return on invested equity in delivering to the shareholders on a tax advantage basis, which would make it quite attractive relative to other competing opportunities in our view. So, and with that, thanks very much. We appreciate it and we look forward to any follow-up you care to do. Thank you very much.