Good morning. I'd like to welcome everyone to the Arlington Asset First Quarter 2015 Earnings Call. Please be aware that your lines are in 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 Richard Konzmann. Mr. Konzmann, you may now begin.

Thank you very much and good morning. This is Richard Konzmann, Chief Financial Officer of Arlington Asset. Before we begin this morning's call, I'd 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.

Thank you, Rich. Good morning, and welcome to the first quarter 2014 earnings call for Arlington Asset. I'm Rock Tonkel, CEO, and also joining me on the call today are Eric Billings, our Executive Chairman; and Brian Bowers, our Chief Investment Officer. First, I'd like to welcome Rick Konzmann to our team as Arlington's Chief Financial Officer. Rich brings substantial depth and breadth of experience with him across finance industry sectors and we are very pleased to have him on board. I also want to offer our gratitude to Kurt Harrington as he prepares to retire next week after 18 outstanding years with Arlington. Kurt has helped guide the company through multiple stages as Chief Financial Officer and we wish him only the best as he moves on to new pursuits with his wife Carol. We reported core operating income per share diluted of $1.50 for the first quarter, an increase from $1.35 per diluted share in the fourth quarter of 2014 and $1.02 per diluted share in the first quarter of 2014. Core operating income for the quarter benefited from increased net interest income from the company's agent CMBS portfolio and cash gains on our private label CMBS portfolio. The company declared a dividend of $0.875 for the quarter represents an annualized deal of 15%. During the quarter the company also raised $35 million of capital through the issuance of six and three quarters senior notes due in 2025. During the quarter lower interest rates along with tightened volatility prevailed as market concerns remain over U.S. and global growth as well as the outlook for U.S. Federal Reserve monetary policy among other factors. Lower forward interest rate expectations and increased market sensitivity to potential prepay speed increases gave rise to shortened market durations and further spread widening between the yields on our agency MBS and the cost of our related hedges during the quarter which resulted in elevated net unrealized and realized losses on our hedged agency MBS portfolio. The company recorded a net loss on agency MBS portfolio of $62.8 million during the first quarter comprised of $76.1 million of net losses on the hedge portfolio partially offset by net gains on the agency MBS portfolio bonds of 13.3 million which were the primary drivers to the reduction in book value per share to $24.83 at quarter end. We view the agency MBS strategy over investment cycle that spreads widened and tightened and as the curve made steep and then flatten we seek to invest available capital opportunistically while maintaining sufficient liquidity to stay in the investments over an extended period. We expect this to allow us to earn our target investment spread that can result in changes in our book value over certain market periods. Our complementary MBS portfolio is characterized by a fluid allocation process and substantial liquidity in the private label MBS portfolio which together provide the company with flexibility to adjust to market conditions. While mark-to-market gains or losses can occur overtime to the extent mark-to-market hedge values are lower than hedge funding costs on agency MBS will be lower for a longer period. With the current asset yield approximately 3.05% and the blended hedge funding cost of approximately 163 basis points, we continue to believe this structure allows us to earn an attractive spread at agency MBS to a variety of market conditions as has been our experience overtime. In this current favorable environment, the company deployed investment capital during the quarter into new agency backed MBS that should benefit future core operating income. While mortgage repayment speeds have increased in recent months in response to lower rates and appreciating housing prices among other factors, the company continues to maintain an agency MBS portfolio that would specifically select for prepay protection. As of quarter-end, the company’s agency MBS portfolio was entirely invest in the 30 year fixed rate securities including approximately 49% of specified tools of low balance loans approximately 34%, of specified tools of loans issued on to the heart program, although remainder include speck tools of loans with low FICA scores or other characteristics selected for prepayment protection. Payoffs on these securities were approximately three quarters of a point at the end of the quarter. Our agency MBS portfolio demonstrated three months CPR of 8.18% in the quarter versus CPRs of 16.98% on the Fannie Mae 4% coupon universe, while our agency MBS portfolio continues to demonstrate favorable prepayment characteristics compared to the Fannie Mae 4% coupon universe we have observed increased prepayment speeds in March and April. We reduced our long term hedges to 20% of our total hedged portfolio as of quarter end compared to approximately 35% as of year-end. With the U.S. Federal Reserve policymakers continuing to focus commentary on our 2015 lift off on interest rates Arlington has maintained hedges equal to approximately 94% of the outstanding repurchase agreement financing on its agency MBS as of March 31, 2015 with an average duration of approximately six years to protect the portfolio of rates rise. To the extent rates declined or curve flattens further we have the flexibility to make other adjustments to the hedge structure. Our Euro, Dollar futures [ph] consecutively on a quarterly basis until December of 2019 with a contractual rate on a mark-to-mark basis of 1.58% at March 31, 2015. Complementing this hedge, our 10 year interest rate swap futures had a mark-to-market average cost of 2.02%. At quarter end, the company had approximately 68% of investable capital directly to the hedged agency MBS portfolio and 32% allocated to its private-label MBS portfolio compared to an allocation of approximately 61% to agency MBS and 39% to private label MBS at year end. Performance in the private label MBS was unchanged and we continue to selectively execute sales of private-label MBS as they reach our appreciation targets. The company realized $21 million of proceeds from the sale of private label MBS in the first quarter and realize an additional $20 million of proceeds since quarter end. These proceeds coupled with the net proceeds from our $35 million 10 year and senior note issuance at the end of the quarter have been deployed into new agency MBS at attractive spreads. Our private label MBS portfolio at March 31, 2015 had a fair value of 75% of face value, total market value of $241 million and repo of $62.9 million. Net unrealized gains within accumulative other comprehensive income related to the private label securities was $36.6 million as of March 31, 2015. The assumptions used to value the portfolio at that time included on a weighted average basis are constant default rate of 3.1% loss severity on liquidated loans of 42.1%, constant prepayment rate of 11% and a discount rate of 5.5%. Looking forward to this year-end, we expect approximately 87% of our re-REMIC portfolio to be variable rate in nature at that time. Included in the first quarter 2015 results is a deferred tax provision of $1.10 per share on increase to the valuation allowance against our deferred tax assets related to the net capital loss carry-forwards, primarily resulting from the changes during the quarter in the value the company's interest rate hedges. Due to decreases in interest rate, the hedges have produced capital losses much of which may be recovered interest rates increased in the future, but the timing or certainty of which cannot be predicted with sufficient certainty to preclude the valuation allowance. As of quarter end, the deferred tax asset was $113 million, or $4.93 per share comprised mostly of net operating loss carry-forwards and net capital loss carry-forwards. Market conditions have continued to be challenging. However, our company has produced attractive returns over an extended time. Our balance sheet is flexible and composed of liquid securities, our complementary MBS portfolio includes private label MBS that comprises approximately 32% of our capital which offered substantial untapped liquidity. Our portfolio continues to produce consistent spread income and that earnings power combined with our tax benefits provide additional flexibility to our business. Although we experienced a demolition of book value during the quarter primarily as a results of mark-to-market adjustments it has created new investment opportunities going forward that we expect will benefit future earnings. Thank you very much and I'd open the call to questions.

At this time we will open the floor for questions. [Operator Instructions] Our first quarter comes from Dan Alter with FBR.

Thanks. Good morning everybody. Appreciate for taking my question. I was wondering if you can give a little bit of a book value walkthrough so, I know $1.10 the valuation allowance was mentioned but if you kind of just maybe walkthrough the other components of the change in the value of MBS versus maybe some of the hedges that maybe experienced incremental spread wining on the performance of MBS versus hedges kind of slow - the components there?

Sure. So, as I mentioned before doing the call and a lot of times, as you can see in the earnings release we had about $3.31 decrease in book value associated with the hedges and about a $0.58 increase related to the gains on the agency MBS. Those are the two biggest primary drivers. As we think about the deferred tax asset of a $1.10 per share and the valuation allowance, the way I look at the deferred tax asset if you will is the we didn't really get a corresponding tax benefit coming through our income statement associated with those with the losses on the agency MBS, on the gains, the net gains and losses on the agency MBS and the hedges. So again the two biggest drivers will be the net $63 million number I think it is on the hedged agency MBS portfolio.

Okay. I know that's helpful. Appreciate that. Similar to last quarter where we had a little bit of a DTA move. Some I think a loss was maybe crystallized or probably wasn't going to be reversed, is there any of that in this quarter is all the potential for all that capital loss carry-forward to have potentially come back if rates start moving the other way.

Yeah there is an - if rates increases there is a potential for a significant increase in reversal of that valuation allowance. A significant portion of our capital losses relates to the mark-to-market adjustment in our hedge portfolio. So to the extent that rates increase in the valuations because a different direction our hedge portfolio, the deferred tax asset would increase correspondingly.

Okay. And since we did have I guess some pretty significant spread widening in the quarter. Can you kind of like maybe like an updated sensitivity for every 10 bps or 20 bps or 25 bps from spread widening kind of what the magnitude is change in book value.

Well Dave it's been reduced to some extent by virtue of a couple things. First of all, the shift we made in the long-term hedge, we were adjusted down the long-term hedge function from approximately a third of the hedge function that are 27%. That shortens the duration of the hedge to some degree and in addition to that with the growth in the portfolio there was not a corresponding commensurate growth in the magnitude of the hedge. So that brought down the magnitude of the hedge to some degree and giving us a little less sensitivity to a downward moving rates.

Okay. And then just one other quick one if I may. I think when we saw the bond offering come out last month. I think maybe there is some potential thought of putting some of the proceeds and so maybe some other re-REMICs that are available now. Has that was that opportunity kinds of see now not there or as pricing not there or is that potentially thought at this point?

There have been some new re-REMIC structures created. We have not found as we've looked more closely at them, we've not found them to be more compelling than the other alternatives. We are looking at those. We continue to look at those as well as other of the non-agency structures. But so far we haven't found them compelling versus the other return opportunities.

Got it. Okay, thanks. It's helpful. Appreciate the questions.

Our next question comes from Doug Harder with Credit Suisse.

Thanks. I was hoping you could elaborate sort of when in the quarter did you terminate some of the longer dated hedges. Just to help understand whether that helps to understand the magnitude of the book value decline.

So the change, the adjustment that we made in the 10 year hedge was gone early in the quarter, I would say and in the neighborhood of mid-January or so Doug. And essentially what we accomplished there was we shorten the duration of hedge by offsetting the decline from the 10 year hedge with a partial shorter duration addition of a five year Euro-Dollar futures and then on top of that we grew the portfolio over the course of the quarter at various points taking advantage of those widened spreads that occurred just at various points through the course of the quarter.

And acknowledging that sort of given future direction of rates or spreads some of this book value decline could come back but how do you think about what your tolerances, your risk tolerances are to accept kind of this level volatility going forward and should we expect any changes to try to tighten those bands?

So what we’re seeking to do as we said in the past is what we’re seeking to do is to invest through a cycle of opportunistic points I think we viewed these while we understand and accept that there is volatility and capital from time to time associated with changes in market conditions particularly during more volatile periods, what we find is that provides us with an opportunity on the other hand so opportunistically take advantage of those and that’s what we start to do in the first quarter. And so that’s part of the approach that we take that’s our approach to the business is that we are intending the structure so that we can stay in it overtime that includes being protected against times of rising rates and especially with the policymakers focused on our lift off in a not too distant future we want to make sure that we’re protected against that difficult quantify impact of an upward rise in rates. And so that’s our approach, that’s our strategy and what we’re trying to do is to take advantage of those moments and time when we do find wider spread opportunities and do that in a way that preserves and protect enhances the forward earnings capability of the company by reducing the long-term hedge cost associated with the agency portfolio.

And remember when you have these environments we all know if that book value doesn’t return that it means pretty exclusively that the interest stays at these peak levels are going to steeper they stay there as perpetuity in any case however you look at it in these environments and the net present value of our business in the future cash loans are virtual in any circumstances almost certainly to be higher and considerably higher so actually ironically the net present value of our business is going up and it’s actually not going down. It’s actually in those environments when the book value might appear to be growing, the incur - converting in actually net present value of the businesses is probably is shrinking. So as long as we’re protected in a hedged structure, the ability to earn these returns are probably sustainable for a considerably longer periods of time and that's the margin in the already even greater spreads and greater returns as we reallocate capital and as hedges roll off - they are coming on it margin wider spreads and returns that actually increasing yields and spread in the business.

But over the past two quarters, the yield curve is generally flatter so you’ve had a flatter yield curve to go along with the book rather declined in the past two quarters so I guess that would be the environment that would concern me.

But the key for us right now is optimizing any spreads, any assets that we’ve done today are wider than they were a month ago, three months ago and earnings that we generate are higher so the nature of this structure that we’re in is one that over the course of time if the yield curve stays in this environment in the circumstance then we will earn the spreads for a longer period of time.

Okay. Thank you.

Our next question comes from Trevor Cranston with JMP Securities.

Hi thanks. One more question just with respect to your kind of sensitivity rates you mentioned that the duration of the MBS portfolio shortened as rates drops and that I guess the duration of the hedge book is about six years currently can you give us an estimate of where you think the duration of the assets are today to sort of a sense of about what the gap is like?

Yeah I'll tell you it’s in the range of 4 to 5 at this point Trevor.

Okay got it. And then Rock I think you mentioned in your prepared remarks that your prepay speeds took up in March and April can you give us a sense of what the numbers for those two months converse of the eight for the quarter and what's your outlook is in terms of how high it might get during the second quarter?

Well I think the universe saw a meaningful pickup in speeds and as I said in the text while our assets have continued to significantly outperformed the universe. We even spec tools like ours are not immune to higher levels of speeds at certain points in time and we observed on increase in March and then another modest increase from that in April to probably near the highs we've witnessed in the low double-digits. And so that's while that's still probably about half of the speed of the gaining for universe that somewhat accelerated and I think we all probably have pretty well similarly for what's driving that. Our expectation is that as the rates sort of normalize and stabilize and that those numbers will return towards historical levels whether they return to the sixes and sevens and eights we'll see overtime we would expect that to occur overtime as the environment shifts we would expect to see them mitigate back toward more normalized levels or more those closer to more historical norms.

Yeah that makes sense. Okay, thank you.

Our next question comes from Richard Eckert with MLV & Company.

Good morning and thank you for taking my call. I had a couple of quarters, the first was on the leverage. Now actually that to the debt-to-equity ratio was actually up to nearly six turns of capital. I was wondering if you intend to keep it there or to gradually nudge your back down towards five turns of capital.

Well two things whereas one, the reasons for that a pretty straight one. We did incrementally add to the agency portfolio which does as you know carry with it a higher leverage amount and so that's part of the effect is just that shift in the mix of the investable capital and the other side is the mark-to-market adjustments from a capital side. So we have that capital invested in the portfolio that's the intent we retain the portfolio structure as we have said we maintained that integrity and so that will be determined by the market movements and to the extent that rates move up and mark-to-markets adjustments move back into the direction and that would accrete capital and lower that rate that leverage level and likewise to the extent that we invest additional assets, a capital into the agency strategy then you would see that in an normalized fashion shifts with the mix in capital. The agency strategy as we've said for the long time going in is approximately eight times levered as in entering leverage point and the non-agency leverage is very modest as you know. So it's a question of the shift in the mix and then the effect on book value as it goes up obviously are spread opportunity on the agency side narrow some but the leverage will go down and likewise when the mark-to-market adjustments come through the book value comes down a bit, the spread widens the earnings opportunity improves, but the leverage increases at the March and at that point the key for us is to maintain a structure that allows us to stay in the investment opportunity over the cycle and that's what we're sneaking to do.

So you're not uncomfortable with where it is today

No. Second question I guess it's directed more at reach. The net deferred tax assets declined by approximately $9 million quarter-over-quarter. Now if you added $25 million to the evaluation allowance I mean expect they were $16 million in positive adjustments to that net deferred tax asset. Is that to see estimated tax benefit of the net capital loss carry forward.

Not necessarily if you look at it this way. If you could just take our pretax income and multiply by our effective tax rate of about 39% that would assume that you had about a $12 million benefit for the quarter. And that because we're not in a tax spend situation you would add that to our deferred tax asset balance however, fortunate that amount coming through the P&L relates to the changes in value and that in the hedges in the MBS portfolio which are capital in nature which is where the valuation allowance is going against it. So, which you don’t get that corresponding tax benefit so it's a part of that when you roll for deferred tax asset from 122 million at the year-end or $113 million at the end of the quarter this comprised really of the tax benefit generated during the quarter of about $12 million offset by the $25 million hit the valuation allowance related to the fortunate net income that's capital in nature.

Okay. Thank you.

Our next question comes from Jason Stewart with Compass Point.

Thanks and good morning. I wanted to just say welcome Rich and Kurt good luck and whatever is next. Most of my questions have been answered but I wanted to ask one on the follow-up on the DTA in 2Q. Two parts actually one, if I get the numbers right Rock I think you said you're going to sell or have sold 20 million bonds in 2Q in the non-agency portfolio?

Yes.

Should we expect a similar gain that we saw percentage wise in the first quarter from that sale?

I don’t have the gain in front of my for the specific bonds that were sold but in general but all of our bonds in an unrealized gains addition it should be a realized gain coming through the P&L. I can’t tell you that's going to be corresponding $3 million number but it should be a positive number.

Okay, I just recall there not being a whole lot of variance in the cost basis for that portfolio but I want to tell…

I think the total amount is $36 million of total unrealized gains on our entire non-agency portfolio at the end of the quarter.

Okay. And would there be any impact to the valuation allowance some of you take from bad sale.

Not necessarily because the way we evaluate the valuation allowance we take in consideration of that build in growth gain in our MBS portfolio sort of the expenses that we actually sell in investment that already had a build in gain if you will it doesn't necessarily impact our valuation allowance.

Okay. Got it.

That really impacted more than mark-to-market adjustment not the realization of the sales security.

Okay. And then on the non-agency portfolio CPR is going to be pretty constant for quite some time and I am just wondering if you are seeing anything excluding what's being sold to change our outlook for prepays and have lower rates and cumulative HPA and these segments borrowers into a positive equity position where you are starting to see a pick-up in prepayments anywhere in that portfolio?

I think it is standard not surprisingly Jason that would be centered in the higher coupon instruments we don’t have great feel coupons above 4% but to the extent that we do then those will have a little bit higher speeds I think among the four portfolio you know which is the bulk of the portfolio that would be somewhat of a seasoning effect and as you would normally observe and expect us to do we are finding that and incurring that portfolio for potential accelerated prepayment effects from seasoning so that is an ongoing process and you seem to address that. In addition to which as HPAs have continued to evaluate in LPVs and some of these loans have continue to come down then we are also looking closely at that as a barometer for potential prepayment speed increases and moving those out. So I think those are probably the key contributors is just a simple seasoning effect to some degree and the HPA increases and we're pruning the portfolio accordingly. We would expect that these assets overtime would return you know toward more normalized levels as the impetus, the immediate impetus of the lagged driving rate declines subsides.

And Jason this is Rich again it's kind of follow-up on the question that I asked on the changes in valuation allowance going forward related to activity in the NBS portfolio. The best way to kind think about it is during the quarter we had about $63 million net loss on our hedge agency MBS portfolio and take a tax effect of that that could pretty close to the valuation allowance we had for the quarter and again because we don’t get a corresponding tax benefit running through the P&L. So to think about it going forward to the extent that we have a positive or negative changes in our hedge agency MBS portfolio you could kind of think about it you could have a corresponding up or down hit in the change in the valuation allowance at our effective rate on that amount.

Okay. That's good color and makes sense and thanks for taking the questions.

[Operator Instructions]. Our next question comes from David Walrus with Ladenburg.

Good morning everyone. My questions have already been answered. I guess the only thing I really had was you talked about how you issued some debt early in March. How long will it take you to deploy that?

I'd say it was deployed mostly within the month. There maybe some of the funds would have settled in April. So I think Dave what I've said was up predominant to that capital would have been invested during the course of March or early April such that the bonds that were purchased would have settled in the ordinary April settled.

Okay. And you've talked a few times looking at the period comments and your commentary today about good return opportunities. Would you feel these opportunities are sufficient that you would look to issue more debt to raise capital in a different way or you feel like you're okay sitting tight at these levels?

Well as you know the - our view on that is that we're opportunistic and so if there were very attractive opportunistic capital available than we would look at that. And if we have the use of proceeds at appropriate returns to put that to work sufficiently accretively than we would consider which today we would. So if there were an opportunity on the capital side, we would be open to that idea if it was sufficiently accretive to us.

Okay. Thank you very much.

At this time Mr. Tonkel there are no other questions in queue.

Thank you very much everyone. We appreciate your time and questions.

This now concludes our conference. All parties may disconnect now.