Good morning. I'd like to welcome everyone to the Arlington Asset Second Quarter 2014 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Mr. Kurt Harrington. Mr. Harrington, you may begin, sir.

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 Rock Tonkel for his remarks. J. Rock Tonkel: Thank you, Kurt. Good morning, and welcome to the second quarter earnings call for Arlington Asset. I'm Rock Tonkel, Chief Executive Officer, and also joining me on the call today are Eric Billings, our Chairman; and Brian Bowers, our Chief Investment Officer. Yesterday, we reported core operating income per share diluted of $1.22 for the second quarter, which equates to a 21% return on book value available for investment. These results reflect the deployment of most of the proceeds of the March 2014 offering in mid-April with full deployment by mid-May. Results for the quarter also benefited from the redeployment of appreciated private-label capital, the agency MBS opportunities, continued favorable performance from the company's agency and private-label MBS portfolios and increased leverage on core expenses. The ratio of core expenses to capital improved by approximately 50 basis points post the offering. At quarter end, the company had approximately 48% of investable capital directed to the private-label MBS portfolio and 52% allocated to hedged agency MBS. We continue to execute sales of private-label MBS as they reach our appreciation targets. And for the year-to-date through the second quarter, the company realized $37 million of proceeds from sales of private-label MBS, with a current cash yield of approximately 5.5%, which were migrated in the fully hedged agency MBS, with expected current cash yields on the reallocated capital, in the mid-teens. Since June, we have received $15 million of proceeds from additional sales of appreciated private-label MBS. At quarter end, the company's agency MBS portfolio equaled $2.8 billion in market value with corresponding hedges of approximately $895 million of 10-year duration, swap futures and approximately $1.8 billion of Eurodollar futures, which extend through March 2019. Since quarter end, we've added hedges through mid-2019 as well. Given the outlook for the U.S. economy, the Federal Reserve's tapering of QE3 and normalizing interest rates, we continue to maintain an overall hedge position approximately equal to the market value of the company's agency MBS position with a goal of neutral to slightly negative duration on the overall agency portfolio. Our Eurodollar futures run consecutively on a quarterly basis, beginning in March 2015, and as I said, they extend out to March 2019 with a contractual rate on a mark-to-market basis of 193 basis points at June and an equivalent funding cost over the next 5 years of approximately 159 basis points. At quarter end, our 10-year interest rate swap futures had a mark-to-market average cost of 2.66% with an asset yield of 3.4% and a blended hedging cost of approximately 2% at quarter end. We continue to believe this structure will allow us to earn an attractive spread and protect the value of our portfolio, as the economy monitory policy in markets normalize. In the second quarter, our agency MBS portfolio demonstrated a 3-month CPR of 5.7% versus CPRs of 8.2% on Fannie Mae 4s [ph]. Approximately 47% of our agency MBS portfolio was originated under HARP programs with the remainder primarily low loan balance loans. Moving to the private-label MBS portfolio at June, that portfolio had a fair value of 74% of face value, total market value of $314 million and repo of $59 million. OCI on the private-label securities was $58 million as of June. The assumptions used to value that portfolio at that time included, on a weighted average basis, a constant default rate of 3.1%, loss severity on liquidated loans of 42%, a constant prepayment rate of 11.3% and a discount rate of 6.5%. Looking forward to a point 2 years from today, we expect approximately 95% of the re-REMIC portfolio to be variable rate in nature. We continue to observe reductions in serious delinquencies across that portfolio, as they decline from 19% to 15% over the past 12 months. Likewise, loss severities have declined from 46% to 32% over the last 12 months. We expect an overall terminal part of that portfolio substantially above the current price of 74%. And our view is that appreciation will occur within approximately 1.5 years, resulting in total returns on our private-label securities in the teens from their current price levels. We do not expect to realize all of the terminal value on every private-label bond, as the bond price approaches terminal values, naturally the current returns will have declined below our return thresholds. And as we allocate capital -- excuse me, reallocate capital from these assets, we would expect to receive higher risk-adjusted returns on competing investments. We continue to be optimistic about Arlington's opportunities, while Arlington has provided growth in book value, stable dividends and industry-leading returns in recent years, including since the onset of QE3 in the fall of 2012, the company continues to be differentiated by its C-Corp structure, tax benefits, complementary hybrid MBS portfolio, substantial hedge position, liquid balance sheet and declining expense ratio. Looking forward, we expect cash earnings to benefit incrementally from the full effect of our last capital raise, as well as from the ongoing migration of private-label MBS to hedged MBS -- excuse me, hedge agency MBS and a reduced expense to capital ratio. The dynamic of our company and our portfolio have continued to perform within our expectations. And operator, we'd be pleased to take questions now.

[Operator Instructions] Our first question comes from David Walrod with Ladenburg. David M. Walrod: I think you did a pretty thorough job covering the portfolio, I just wanted to talk a little bit about the management changes you announced recently and kind of how your role and Eric's role is going to change. J. Rock Tonkel: Well, as you know, it's been a long time since there's been a different person in this chair. And so, I think it's been a gentle evolution over time. I think we're both very, very comfortable with it. We're working very -- we continue to work closely together, and I think as a matter of investment company dynamic, we're both talking constantly about investment ideas and as a matter of execution to the business, and carry through on those ideas then we're carrying the weight and over time, Eric carries a little less of that weight. So I think we're satisfied with the transition. So far, it's not an unexpected development and I think we're in a good place. Eric F. Billings: I echo those responses. J. Rock Tonkel: And if you didn't hear Eric, he said he echoed those responses. David M. Walrod: And then I just -- I know it's going to be kind of based on market conditions and you're expecting to be kind of fully migrated out of the private-label over 18 months. How was the pace of that? Should we expect, I mean, is it somewhat equal? Or will it ramp up next year? What are your thoughts there? J. Rock Tonkel: You know, Dave, it's opportunistic, right? It's completely driven by the pace with which these individual non-agency bonds rise to their -- to our targets and when they do, we reallocate. You can see the pace that, that's going on at over the course of the first quarter, it was 37%, another half of that so far since June 30. I think that it could be more significant in the back half of this year to the extent that we see ongoing improvement in risk prices, generally, and that's reflected in these bonds, in particular. We have not seen any subsiding of appetite for these assets in the markets. Sort of the opposite. They continue to perform well and there continues to be significant and a growing bid for these assets, so it wouldn't surprise us if that -- those numbers accelerated based on the fact that we do have a substantial bulk of these assets that are not that far from their terminal -- our appreciation targets. So it'll be completely market dependent, but it wouldn't surprise us if there was more significant volume in the second half than in the first.

[Operator Instructions] Our next question comes from Steve Delaney with JMP Securities. Steven C. Delaney: It's really interesting, you had been pretty consistent in your approach on the agency side with the specified pools and just trying to manage prepay risk. I'm just curious, when you guys sit down and think, look at opportunities in the market, a lot of your peers have kind of jumped into the dollar -- the TBA dollar rolls. I mean, could you just explain, like, given that, that does appear in the near term anyway to have sort of a higher ROE profile on your allocated capital, kind of why you guys have chosen to stick with the spec pools? J. Rock Tonkel: Well, I guess, a couple of thoughts there, Steve. We -- I think you know us well enough to know, we're not highly active traders. And I think we're very content -- we have been and we continue to be very content with a scenario where we can establish a structure in the agency portfolio that generates something in the neighborhood of 140 to 150 basis points net with essentially a neutral or slightly negative net duration to it. We think that's a reasonably special thing. And we're pretty content with the protection that we get from that hedge and yet the spread that we're -- that the market is providing to us. So and we look at that over time, not as a trade. Now on an interim basis, naturally, the TBA opportunity has sort of become quite special. And if there are questions about whether that pricing may shift and become less special. And so, I think we're thoughtful about that, we watch it. When we see significant opportunities, we're not afraid to take advantage of them. But we're not in the trading mode and we're not necessarily trying to take advantage of those short -- what maybe shorter-term opportunities that may not have as much duration to them. So you could argue we gave out -- we've given up maybe a little bit of return, but those returns can be volatile and we're concerned -- we're content with the consistency and the stability of what our agency structure has provided to us and what we expect to continue to receive in terms of consistency and low volatility from that portfolio. I think we've seen scenarios here over the last many months and quarters and years, where we've seen some situations with significant volatility, and that's one of the things we're trying to build a structure in order to prevent, as best we can. Steven C. Delaney: No, that makes sense and I appreciate the color, just it does -- it is consistent with the way you guys have approached this thing over the last couple of years. Now Rock, as you transition from the legacy RMBS, the positions into more agency, I assume we're going to see sort of a steady increase in your leverage in your debt-to-equity. I believe it was a 4.0x at June 30. Where -- what's sort of your limit there? Where might we see that trend, if this transition to more of an agency-dominated book continues? J. Rock Tonkel: Well, I think we're completely comfortable with the leverage that we carry on that agency portfolio in the context of the magnitude and nature of the hedge that we have on it. That's a key driver for our comfort level with the leverage on that portfolio, and I think we've seen the results of that in recent periods. So I think we're content with leverage in these ranges on that portfolio. I think as that capital allocation to the agency comes to play a much more dominant -- to be a much more dominant proportion of the overall capital allocation, I think you'd probably see that leverage come down a bit. I think we're comfortable with that leverage today in the context of the circumstance where we have a significant portion of the capital in largely unlevered non-agency securities. And when that's not the case, I think you'll see that agency leverage and [indiscernible] come down a little, even though in the interim, you may see overall leverage increase. What I'm saying is that when you get to the -- down the line to an endpoint there, you'll see lower leverage in that portfolio we expect. Steven C. Delaney: Yes, make sense because you won't have the incremental liquidity, if you will, in the unlevered non-agency portfolio, so I get it. Yes, I was thinking of the blended leverage going up, not so much, but understand that the agency will necessarily, probably come down. And just one last thing, if I might. I'm just curious if you guys are seeing anything as you're kind of moving away from the legacy trade and we saw the Case-Shiller price change this week. It does feel that we're kind of maybe -- after what a great run the last 3 or 4 years in legacy RMBS, it looks like we're losing a little steam there in that market with home prices starting to slow down, at least the rate of increase slow down. I'm just curious if you guys are spending any time looking at sort of new residential credit, given the overall quality, the underwriting that appears to be going on and if there are any opportunities that might develop over the next year in terms of new resi credit. J. Rock Tonkel: Well, Steve, great question. I think you know us -- you know us well enough to know that we look at all these alternatives. And they have done that over the course of the last several years for each of the sort of newer developing segments in the non-agency space and we keep a constant eye on that, as well as other alternatives across the structured finance -- fixed income marketplace. I think we evaluate each of these things, pretty intensively, actually, and we evaluate them not only for the apparent return on its space, but we try to evaluate them having worked our way through some interesting times ourselves. We try to evaluate them in the full context of our understanding of these markets over long periods of time, and in particular, in tougher periods of time. And so we evaluate them for their liquidity risk. We evaluate them for their regulatory risk. We evaluate them for their operational risk. We operate them -- we evaluate them from their fixed G&A risk. So all these things taken together, to date, have caused us to feel that the risk-adjusted returns in those other opportunities have not surpassed or at least sufficiently surpassed the opportunities that we're in today. We continue to believe that the legacy non-agency resi area that we're involved in and other parts of it as well are very interesting and very attractive spaces. It's simply that, as the prices uprise [ph] on those assets and the returns decline naturally, that the agency opportunity, given the market -- given what the market economics is giving us, we feel like that's a more attractive thing. So we will continue to do that. We have noted some over time, including more recently the sort of reperformers, which looked like sort of a potentially interesting trade. But we're not there yet, given all the other risks that we evaluate in that context.

Our next question comes from Jason Stewart with Compass Point.

You mentioned 80% HARP and the remaining low loan balance, was that on the portfolio overall, or on the incremental purchases? J. Rock Tonkel: I think I said 47% HARP and the remainder low loan bal.

Okay, 47%. And is that overall or purchases... J. Rock Tonkel: Yes, that's overall on the agency portfolio, 47% HARP.

Okay. And then on the agency MBS that you purchased in 2Q, any incremental detail that you could give us on what was attractive, maybe I don't want to get down to weighted average loan age, but this was new production, I'm guessing. J. Rock Tonkel: Yes.

Okay. I've been trying to figure out how the CPR -- because your CPR went down. And just from a modeling standpoint, how we should think about CPR going forward in the agency portfolio, given the growth? J. Rock Tonkel: Well, I mean, I think it's a completely a product of the environment with rates and appetites. I think we've seen the durability of the prepaid protections on this spec pool portfolio. And I think we've done a pretty good job from an asset-selection perspective in identifying those that are less likely to pay off. So from an underwriting perspective, I feel like we're mining every minute, every day for those types of opportunities and we've shown a fair consistency in that effort. I'm hopeful that, that will continue and expect it to continue and that we'll seek to perform at the low end of bands for the industry, which is consistent with where we've been in the last few years. In terms of a prediction, it's completely dependent on the environment.

Right, I just -- I recall talking in the last couple of quarters about your prepaid protection and how little credit the market was giving you. And I'm trying to bifurcate that protection versus the new production that you added and get to how the performance of the legacy book is doing. And if it's still in the mid-single digit CPRs, it seems like the math will suggest that it is. J. Rock Tonkel: All right, I would absolutely agree with that.

Okay. And then on the non-agency portfolio. Is this the right pace of sales, given where prices are, if we sort of stabilize in this level, would we -- should we expect that portfolio to be sold at this pace? J. Rock Tonkel: I think it's -- as I said before, I think it's completely opportunistic. And it could be more, it could be less, depending on how quickly these assets hit our target prices. So again it wouldn't surprise us if the volumes were higher in the back half of the year than the first. And we operated at this kind of pace for the remainder of the year. That's completely market dependent. On the other hand, if we get a risk pullback, we may not go that quickly, so it's just completely dependent on risk prices.

At this time, we have no other questions, so we'll turn it back to our speakers for closing comments. J. Rock Tonkel: Great. We appreciate your thoughts and questions and we're available if anybody would like to follow up. Thanks very much. Appreciate it.

Ladies and gentlemen, that concludes today's presentation. You may disconnect your phone lines and thank you for joining us this morning.