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Edited Transcript of AI earnings conference call or presentation 26-Apr-17 1:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Arlington Asset Investment Corp Earnings Call

Arlington Apr 28, 2017 (Thomson StreetEvents) -- Edited Transcript of Arlington Asset Investment Corp earnings conference call or presentation Wednesday, April 26, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* J. Rock Tonkel

Arlington Asset Investment Corp. - CEO, President and Director

* Richard E. Konzmann

Arlington Asset Investment Corp. - CFO, EVP and Treasurer

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Conference Call Participants

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* David Matthew Walrod

JonesTrading Institutional Services, LLC - MD and Head of Financial Services Research for New York Office

* Douglas Michael Harter

Crédit Suisse AG, Research Division - Director

* Jessica Sara Levi-Ribner

FBR Capital Markets & Co., Research Division - Research Analyst

* Merrill H. Ross

Wunderlich Securities Inc., Research Division - Senior Analyst

* Mickey Max Schleien

Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research and Supervisory Analyst

* Trevor John Cranston

JMP Securities LLC, Research Division - Director and Senior Research Analyst

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Presentation

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Operator [1]

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Good morning. I'd like to welcome everyone to the Arlington Asset First Quarter 2017 Earnings Call. (Operator Instructions)

I would now like to turn the conference over to Rich Konzmann. Mr. Konzmann, you may begin.

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Richard E. Konzmann, Arlington Asset Investment Corp. - CFO, EVP and Treasurer [2]

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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 another material risks are described in the company's annual report on Form 10-K, 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.

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J. Rock Tonkel, Arlington Asset Investment Corp. - CEO, President and Director [3]

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Thank you, Rich. Good morning, and welcome to the First Quarter 2017 Earnings Call for Arlington Asset. Joining me today on the call are Eric Billings, our Executive Chairman; and Brian Bowers, our Chief Investment Officer.

Following the significant interest rate volatility and agency MBS spread widening that prevailed during the latter half of the fourth quarter, the market conditions during the first quarter were relatively calm. Although markets continue to expect the new administration's proposed co-economic growth policies will result in faster economic growth and higher inflation, those expectations became more tempered as the pathways for the administration to implement its policies have proved to be more challenging than expected.

For the quarter, while there was some inter-quarter interest rate volatility, the 10-year U.S. Treasury rate decreased 5 basis points to end at 2.4% as of March 31. However, swap spreads widened approximately 10 basis points during the quarter, with the 10-year swap rate ending at 2.38%, as of quarter end. With the lower overall interest rate volatility, agency investment spreads remained relatively unchanged during the first quarter. As expected, the Federal Reserve raised its target federal funds rate in March by 25 basis points, the second increase in the 3-month period. The majority of market participants expect the Federal Reserve will further raise its target federal funds rate up to 2 more times by the end of this year, highlighting the importance of hedge funding costs on fixed rate portfolios. In its deliberations at the March meeting, the Federal Reserve signaled further its intentions of normalizing monetary policy, by likely beginning to reduce its portfolio of U.S. Treasury bonds and agency MBS, later this year, with the path for shrinking the balance sheet -- it's balance sheet expected to come from reducing or ceasing the reinvestment of its monthly pay downs.

Repo funding capacity remained stronger in the quarter with financing rates on agency MBS continuing to be competitive as demand for short-term repo backed by agency MBS remain strong. In general, net funding cost for short-term repo financing hedged with interest rate swaps continue to be favorable, as the spread between repo financing rates and LIBOR improved during the quarter.

In the residential loan market, prepayment speeds meaningfully declined during the quarter, beginning in February, due to both seasonal factors and the sharp increase in long-term rates, post the U.S. presidential election. Looking forward, near-term prepayment speeds are expected to remain moderate, subject to normal seasonal variations. However, continued wage growth, home price appreciation and a recent downward movement in long-term rates in April, could accelerate prepayment speed from the current levels. Against the backdrop of this investment climate, we continue to believe agency MBS portfolios, like Arlington's, offer attractive long-term hedge spread and dividend return opportunity for shareholders as they benefit from historically low funding rates, favorable hedging costs for extended periods and attractive investment spreads relative to other alternatives.

Turning to the actual results for the quarter. We reported GAAP net income of $0.22 per share and non-GAAP core operating income of $0.60 per share for the quarter. Although core operating income for the first quarter benefited from lower prepayment speeds, and the resulting higher agency MBS yields, the benefit was more than offset by the lower investment volumes early in the quarter, higher average cost of funding driven primarily by the Fed's December rate hike and market expectations for the March hike, an increase in our average interest rate swap position and moderately higher G&A expenses as compared with the prior quarter, partly due to seasonal first quarter factors.

As previously mentioned, first quarter earnings benefited from lower agency MBS prepayment speeds, but weighted average CPR for our agency MBS during the first quarter was 8.17%, a significant decrease from 12.9% in the prior quarter, as prepayments benefited from both normal seasonal factors and the sharp increase in the 10-year U.S. Treasury rate following the presidential election. Due to the significantly lower prepayment speeds, the weighted average affected asset yields on our agency MBS, increased to 2.85% for the first quarter compared to 2.55% during the prior quarter. Looking forward to the second quarter, prepayment speeds were relatively benign to start the quarter, with the weighted average CPR for April at 8.61% for our portfolio, a modest increase from February and March speeds.

For the first quarter, our average investment balances were lower than the prior quarter, which contributed to a decline in core operating income of approximately $0.06 per share compared to the prior quarter for that reason. As we stated in our fourth quarter earnings call, we reduced our TBA position, and therefore our overall agency portfolio balance starting at the end of the year and into the beginning of the quarter, given the extended period of elevated prepayment speeds and lower expected TBA returns available at that time. Stabilization in interest rates and the sharp decline in prepayment speeds, starting really in February, supported an improvement in the attractiveness of the TBA dollar roll returns and enabling us to increase our overall agency portfolio balance at quarter end back to prior levels.

All-in funding costs increased modestly from the prior quarter, also contributing to a decline in core operating income. The weighted average funding rate on our repo financing during the quarter increased 10 basis points from the prior quarter to 90 basis points, driven primarily by the higher benchmark interest rate due to the Fed's rate hike, in both December and in March. However, the impact on core operating income of the rise in LIBOR, from the Fed rate hikes, was mitigated by a narrowing of the spread between LIBOR and repo financing rates, as conditions in the agency repo market and pricing continue to be favorable. For the quarter, the spread between average 1-month LIBOR and our average repo financing rates narrowed over 10 basis points compared to the prior quarter. As of March 31, the weighted average funding cost of our repo financing was 103 basis points, while 1-month LIBOR stood at 98 basis points.

As we stated in our fourth quarter earnings call, the company increased the notional amount of its interest rate swap position toward the end of the fourth quarter, while also increasing the duration of its swap portfolio through the beginning of the first quarter, in response to higher expected duration of its agency MBS portfolio associated with the rise in rates postelection. The weighted average notional amount of our interest rate swaps as a percentage of our repo financing and CBA position, was 72% for the first quarter compared to 59% in the prior quarter. This larger interest rate swap position contributed moderately to the decline in core operating income from the prior quarter. Comparisons of our first quarter core operating income to the prior quarter were also impacted by higher G&A costs, primarily due to lower annual and cash incentive compensation in the prior quarter, due to company performance, as well as higher employee benefit cost normally experienced in the first quarter of each fiscal year.

As of quarter-end, our book value was $15.83 per share. Our tangible book value, defined as GAAP equity less our deferred tax asset, was $13.08 per share as of March 31, relatively unchanged from the prior quarter tangible book value of $13.11 per share. It was as a result of low -- overall lower volatility in rates and investment spreads remaining relatively unchanged from last quarter. At quarter-end, the company's agency MBS portfolio totaled $4.9 billion, consisting of $4.4 billion of specified agency MBS and $473 million of net long TBA agency securities. During the first quarter, the company sold its position of lower coupon, 3% agencies and decreased its holding of 3.5 coupon agency securities, while increasing the allocation to 4% agency MBS, primarily to take advantage of higher expected return opportunities. In addition, the company increased its allocation of specified agency MBS based on relative returns, while lowering its position of agency TBAs. As of quarter-end, the agency TBA position represented 10% of the company's overall agency portfolio, compared to 16% as of year-end. However, since the end of the first quarter, relative returns for TBAs have improved, compared to specified total returns. The company maintains a substantial hedge position with the intent to protect the company's capital and earnings potential against rising interest rates over the long term. Our hedging strategy enables the company to maintain an attractive return on its agency MBS portfolio, in order to produce resilient and predictable core operating income that supports attractive dividends to our shareholders. The company continues to use interest rate swaps supplemented with options on 10-year U.S. Treasury note futures to hedge its interest rate risk. In the first quarter, the company modestly increased the duration of the swap portfolio in response to the higher expected duration of the agency MBS portfolio associated with the rising rates post the election.

As of March 31, the company had current interest rate swap agreements totaling $3.2 billion in notional amounts, comprised of $1.1 billion of short-term interest rate swaps, with the remaining weighted average maturity of 2 years, and a weighted average fixed pay rate of 124 basis points, $125 million of medium-term interest rate swaps, with the remaining average maturity of 4.8 years, and a weighted average fixed pay rate of 2.09%, and $2 billion of long-term interest rate swaps, with the remaining weighted average maturity of 9.1 years and a weighted average fixed pay rate of 2.01%.

In addition to interest rate swaps, the company also had a series of put options and call options on 10-year U.S. Treasury note futures to mitigate the interest rate sensitivity of the value of its fixed-rate agency MBS portfolio. As of quarter-end, the company was long $700 million in put options at a weighted average strike price that equates to a 2.63% 10-year U.S. Treasury note and was short $350 million in call options at a weighted average strike price, that equated to a 2.35% 10-year U.S. Treasury rate compared to a 10-year -- a quarter-end 10-year U.S. Treasure rate of 2.4%. To limit its exposure to the short call options in a significantly falling rate environment, the company also was long $350 million in long -- in call options at weighted average strike price that equated to a 10-year U.S. Treasury rate of 2.10%.

Company continues to utilize its tax benefits afforded to it as a C-Corporation that allow it to shield substantially all of its income from taxes. As of quarter-end, the company had an estimated net operating loss carryforwards of $85 million and net capital loss carryforwards totaling $320 million. Based on its current investment and hedge portfolio, the company expects it will utilize its NOLs in 2 to 3 years, although changes to the portfolio on actual higher or lower than expected future income could change that estimate. From a book accounting perspective, the company had a deferred tax asset of $65 million or $2.75 per share. The company continues to record a substantial valuation allowance against a portion of its deferred tax asset, attributable to net loss carryforwards for which the company's uncertainty will be able to utilize prior to their expiration.

During the first quarter, the company recorded an increase of $3.1 million or $0.13 per diluted share to its valuation allowance against its deferred tax asset.

Overall, hedge agency returns continue to remain attractive, while dampened somewhat from recent levels by Fed policy-driven increases in short-term funding costs. The focus of Arlington's agency investment and hedging strategy continues to be to maintain the approximate scale and attractive return characteristics of our portfolio in order to generate a resilient and consistent spread income stream to support attractive dividends over time and deliver the highest present value opportunity for shareholders. Having delivered $21.90 per share of dividends to shareholders over the last 29 quarters, the company remains committed to the interests of its shareholders and to delivering dividends which continue to support attractive long-term returns on an after-tax adjusted basis.

And with that, we are happy to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Mickey Schleien, Ladenburg.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research and Supervisory Analyst [2]

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Couple of questions. First, pretty straightforward. What are the main metrics that drive your compensation expense accrual that led to the increase from the fourth quarter?

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Richard E. Konzmann, Arlington Asset Investment Corp. - CFO, EVP and Treasurer [3]

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Mickey, it's Rich. So the reason -- it's in the fourth quarter, the incentive accrual for the executive was lowered based on company performance, so quarter-over-quarter, with an increase in incentive compensation accruals, through the year, we -- assuming that the comp committee and the board consider it warranted, will accrue a maximum. But then if there is a reduction in the incentive accrual, as usual, it will happen at the end of the year. That's the reason for the explanation for -- part of the reason for an increase in the G&A cost quarter-over-quarter from the fourth quarter.

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J. Rock Tonkel, Arlington Asset Investment Corp. - CEO, President and Director [4]

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Mickey, as for the metrics, you can probably see from the proxy, the hurdle rates for executive comp are quite high. And in addition to the quantitative metrics, the -- there are about a dozen qualitative metrics that were evaluated on and that was the basis for the change.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research and Supervisory Analyst [5]

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Okay. I appreciate that. I will take a look at the proxy. My other question relates to leverage. I see that on an average basis, during the quarter, was around 10x. And you ended the quarter about 11. How does that relate to your target leverage? And do you expect to further expand the balance sheet, given all the uncertainty we have for the balance of the year?

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J. Rock Tonkel, Arlington Asset Investment Corp. - CEO, President and Director [6]

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Well, our -- we've spoken before about this. Our approach is to maintain -- it's the structure of the portfolio when we make our initial investments in agency, in order to protect the portfolio through different movements in rates and market conditions over time. And we feel if we've done that appropriately then we should be able to sustain the investment made at the beginning of that process in order to deliver it reasonably close to the originally bargained for return as we can and deliver that return to the shareholders. And if we're moving the portfolio around constantly then we are -- we would view ourselves as haircutting the expected return that we initially bargained for when we put the structure in place in the -- initially. And so what we're not thinking to do is, necessarily move the portfolio up and down in scale and maintaining tons of leverage in the portfolio. I think we're within our, sort of, broad range of leverage characteristics for the portfolio, given the liquidity and hedge characteristics that we have built into it to protect the asset structure from being forced to make actions that we don't seek to make. And so I think the governing principle there is make sure that we're structured well upfront. If we are then we'll seek to maintain the structure in roughly its approximate scale in order to deliver the return that we initially set out to do -- to make. And as we sit here today, I think we feel like we're living within that construct and delivering returns that are reasonably consistent with what our expectation was at the beginning. I think the scale of those returns are quite attractive.

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Operator [7]

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Our next question will come from Trevor Cranston, JMP Securities.

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Trevor John Cranston, JMP Securities LLC, Research Division - Director and Senior Research Analyst [8]

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Question on the funding side, just looking at the spread on your repo rates versus LIBOR on Page 7. Obviously, that's been a meaningful benefit for the last year or so. Can you say, looking forward, how you expect that relationship to evolve? And if eventually you think LIBOR sets the floor for where repo rates can go, or do you think there's room for that spread to continue compressing and repo to potentially even move lower than where LIBOR rates are?

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J. Rock Tonkel, Arlington Asset Investment Corp. - CEO, President and Director [9]

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Thank you, Trevor. Hard to say. I mean, to us it seems that the money market reforms from the fall are somewhere in there clearly playing a role, but I think there are also relevant factors related to U.S. Treasury operations and other things that from time to time can create shortages or extra supply and feed demand to this market. I think we happen to be in one of those windows in the first quarter. So could there be room for further compression? Possibly. I wouldn't necessarily predict that. And -- which is not to say that we would expect it to reverse itself immediately, but that's a possibility. I think there's some, what we would think to be relatively durable positive impact on that spread from the money market reforms last fall. What is less clear is what the treasury market operations from time to time may create in terms of demand pressure, supply pressure in this market, and therefore what the marginal effect will be. So hard to predict, but I think there is some long-term benefit that we'll continue to accrue at a level from the money market reforms, and maybe to help resist pressure for those to widen back out as much as -- as far as they were.

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Trevor John Cranston, JMP Securities LLC, Research Division - Director and Senior Research Analyst [10]

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Got it. Okay, that's helpful. And then looking at the repo book at March 31, the average days to maturity is fairly short at 12. Have you guys looked at extending the maturity of some of your repos, 3 or 6 or more months? And can you comment on if that would make sense for the portfolio in conjunction with the swap book? And also if you are seeing much availability in those longer tenders?

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J. Rock Tonkel, Arlington Asset Investment Corp. - CEO, President and Director [11]

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Interesting question, Trevor. I think, not surprisingly, and I think you hinted it at it. We look at the funding side in connection naturally with the swap book, and historically, we've chosen to sort of express the hedging function for the repo through the swap -- primarily through the swap function, and kept the funding relatively short to capture that short cost advantage in shorter-term repo. To be honest, I can't say we've spent a huge amount of time looking at extended time lines for repo finance cost, meaning going out 90 or 180 or something like that. We've done it from time to time when markets we thought might be a little tight, around quarter-ends and year-ends, and those sorts of things. But in the normal course, we really haven't extended out those repo maturities. We've expressed our repo hedging views through the swap construct primarily.

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Operator [12]

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Our next question will come from David Walrod, Jones Trading.

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David Matthew Walrod, JonesTrading Institutional Services, LLC - MD and Head of Financial Services Research for New York Office [13]

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You sold all your 3% and you -- so you lowered your exposure to 3.5%. Where are you putting money to work these days?

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J. Rock Tonkel, Arlington Asset Investment Corp. - CEO, President and Director [14]

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Marginal capital today probably, Dave, would be reasonably proportioned between a 3.5% and the 4s, probably with a bit of a slant to the 4s. And probably with a bit more emphasis on the TBA today than the spec pools at the margin, because the dynamics that prevailed in the early part of the first quarter and the middle of the first quarter were spec pools were really at the margin more attractive than TBAs, that sort of reversed itself. And so at the margin here today, TBAs probably would make up a little bit greater composition of a fresh dollar of capital going in. Probably with something like a 20 basis point or maybe even as much as 30 or 40 basis point marginal pickup. Now of course, that return resets, you're looking at that every month, so it's not quite as durable an expected return as the spec pool asset, but it does from time to time offer a particularly opportunistic circumstance and that seems to be the case a bit today.

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David Matthew Walrod, JonesTrading Institutional Services, LLC - MD and Head of Financial Services Research for New York Office [15]

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Okay, great. And you discussed lots of variables that are taking place right now in regards to Fed activity and prepays, et cetera. How should we think about just the overall spread going forward for the year?

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J. Rock Tonkel, Arlington Asset Investment Corp. - CEO, President and Director [16]

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Well, I guess I would say this, Dave. If you look at the first quarter, what you can see from what we've said is that the lower balances accounted for about $0.06 of reduced earnings power. And that led us to the core return for the quarter. And I think that if you adjust for the fully phased in effect of the March hike without necessarily assuming some forward -- some -- making some assumption about forward rate hikes, but if you sort of look at the fully phased in effect of the March rate hike, and you cost that and you -- each of us would make our own assumption for speeds but sort of running at those speeds, then you -- I think, it's fair to say that the first quarter is probably broadly reflective of the economic earnings power of the portfolio based on current conditions, but the variables going forward are speeds. What does the Fed do? Those are the big features. I think there are a number of structural elements of sort of flexibility in the structure of these businesses that maybe people don't fully keep in mind all the time. But if you think about it, give or take 5%, 10% of the portfolio is running off on annual basis, probably something closer to 10% than 5%, and that is happening every month. So you're resetting those assets every month in a -- if you're presuming a rising rate environment higher coupons. Likewise, speeds -- and if you have a rising rate environment, speeds should be -- depending on -- separate from seasonal factors, speeds can be helping -- a mitigating factor there. And then I think you also have, in our case, a substantial block of hedges through the swap portfolio. And in addition to that, you have the TBA portfolio that resets every month. TBAs for us have been generally between 10% and 20%, maybe a little bit more than that at times of our total portfolio construct, and those reset every month. So that -- each of those create elements of structural flexibility to adapt to circumstances as you go along in different rate environments. And I think it's important to keep those things in mind as people think about what the future may hold from a rate or speed or otherwise perspective.

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Operator [17]

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Our next question will come from Doug Harter, Crédit Suisse.

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Douglas Michael Harter, Crédit Suisse AG, Research Division - Director [18]

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Just wanted to follow up on the leverage comments. And if you could just share your thoughts on how do you think you could handle another bout of volatility and be able to maintain the portfolio size given that leverage has been moving higher?

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J. Rock Tonkel, Arlington Asset Investment Corp. - CEO, President and Director [19]

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Well, as I've said, I feel like, Doug, the portfolio leverage, I think it's consistent with our approach to portfolio structure. That's been true for a while, it continues to be true today. I mean, obviously, at some point there are limits to that. But I think as we sit here today, given the hedge construct, given the funding environment, and given our -- some of the elements that I just spoke to about portfolio flexibility as one goes along and faces points in time of volatility or relative tranquility, we view in totality, the portfolio structure to be in a place right now where we're comfortable with it from a leverage perspective.

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Operator [20]

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Our next question will come from Jessica Levi-Ribner, FBR.

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Jessica Sara Levi-Ribner, FBR Capital Markets & Co., Research Division - Research Analyst [21]

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Most have been asked and answered. But just looking at the swaps to repo and TBA ratio, it's pretty -- it jumped a lot from the fourth quarter to this quarter. Can you talk about how you see that going forward? Do you think you're going to maintain the 70-plus percent rate or back down to the mid- to high-50s?

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J. Rock Tonkel, Arlington Asset Investment Corp. - CEO, President and Director [22]

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Well, there's a number of factors that one is always evaluating as it relates to the swap construct in relation to the overall repo and portfolio balance. There's a lot of -- a number of moving parts there. We're constantly looking at it, and we're adjusting for changes in asset mix, speed expectations, rate expectations and a variety of other factors. So it's hard to say exactly where we go in the future versus now. We're also looking at -- well, what is our view of the overall economic picture, both domestically and globally? What is our -- therefore, our view on policy, from both a balance sheet and a rate hike perspective, and therefore, what are we locking in versus our -- what we expect the short-term funding cost to be for spread purposes. So we're trying to address duration on the one hand -- duration risk on the one hand, which is shifting as portfolio mix shifts, and rates environments' shift, the curve changes, and we're also trying to focus -- make sure we focus on the spread, the economic impact of that in the spread. I would say, in the environment that we envision that we feel we're in, and that we envision, given the circumstances we can see today, I wouldn't expect that to move around a lot in the near term. It's possible that it may increase at the margin, it may decrease at the margin. I don't expect it to move around a lot in the near term based on variables that we see today. But again, our job is to be managing that on a day-to-day basis, and if we see a change in circumstances that calls for a more meaningful increase or a more meaningful decrease, then we would do that. I don't see that based on where we stand today. I think any modifications there, probably, would be more on the marginal side.

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Richard E. Konzmann, Arlington Asset Investment Corp. - CFO, EVP and Treasurer [23]

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Jessica, this is Rich. Just to add on to Rock's comments. Looking at the notional as a percent of our repo, and financing is only looking at our hedge, but we also look at the duration. If you have a longer duration swaps on, then you may have a lower percentage of your notional, but maybe have more coverage, if you will, under your swaps in that kind of scenario. Just kind of have to look at it 2 different ways.

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Operator [24]

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Our next question will come from Merrill Ross, Wunderlich.

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Merrill H. Ross, Wunderlich Securities Inc., Research Division - Senior Analyst [25]

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Given that you are somewhat underinvested since the beginning of the first quarter, but now you're more fully invested here at the end, what's your confidence about covering the second quarter dividend with the core earnings?

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J. Rock Tonkel, Arlington Asset Investment Corp. - CEO, President and Director [26]

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Well, look, I think, Merrill, we're right around that. That's a key question for all of us. I think it's early. I think we talked about the factors that it's dependent on, speeds, et cetera. I think there's about a $0.10 of earnings in the first quarter that were sort of not reflected because of the slightly elevated G&A and the $0.06 from the portfolio volume being a little underinvested. So there's -- there was pretty significant room, if you look it at from first quarter perspective. But on the other hand, that didn't fully reflect the fully phased in effect of the March increase and whatever the market may place upon our expectations for forward rates and the impact that has on repo costs over the rest of the quarter. And then, look, the other variable that we all know is a major factor for every company in this space facing the market is speeds. Where does speeds go over the rest of the quarter? April, as we said, was pretty muted, up a little bit from February and March, which were quite low. We view April as very much sort of in line with -- very reasonably in line with expectations. Seasonal factors may cause that to go up over the rest of the quarter. All these things will play out as they do over the next couple of months. And we'll see what that brings us. I think my comment earlier was, given the $0.10 of sort of cushion, for lack of a better term, cushion in the first quarter earnings were thereabout offset by the funding cost increases. Without making a prediction about exact speeds for the quarter, I feel like the first quarter number probably is reasonably reflected and we'll see economics earning power of the portfolio is based on current conditions.

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Merrill H. Ross, Wunderlich Securities Inc., Research Division - Senior Analyst [27]

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Right. Second question. Have you made use of the ATMs?

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J. Rock Tonkel, Arlington Asset Investment Corp. - CEO, President and Director [28]

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Say that again?

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Merrill H. Ross, Wunderlich Securities Inc., Research Division - Senior Analyst [29]

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Have you made use of the At the Market Program to issue shares?

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J. Rock Tonkel, Arlington Asset Investment Corp. - CEO, President and Director [30]

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Yes. I think we disclosed in the K that we'd made use of that program over the course of -- part of '16 and early '17.

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Merrill H. Ross, Wunderlich Securities Inc., Research Division - Senior Analyst [31]

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And do you intend to continue, I mean given the share price and federal (inaudible)?

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J. Rock Tonkel, Arlington Asset Investment Corp. - CEO, President and Director [32]

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We think that, we'll look at -- for us, as we've talked about many times, it's a -- it's an evaluation we look at constantly. We've been pretty disciplined, as I'm sure people know, in the past about executing on equity on all capital forms, but in particular on equity. We've been quite disciplined, I think from a accretion, dilution perspective. We continue to be of that mindset, but clearly the ATM offers a pretty compelling economic opportunity from a cost perspective, it's sure a lot cheaper to execute through the ATM than it is through any other means. And so it certainly has -- is an appealing construct and we look at it constantly. It totally depends on conditions at the time, but there's no -- we have no reservations about using it at the appropriate price.

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Merrill H. Ross, Wunderlich Securities Inc., Research Division - Senior Analyst [33]

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Okay. Last question. Just interested in your opinion, obviously no one can know for sure, but what do you think the impact will be on the TBA dollar roll market once the Fed starts to reduce its reinvestment of principal paydowns?

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J. Rock Tonkel, Arlington Asset Investment Corp. - CEO, President and Director [34]

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Well, there's a lot wrapped up in that question, Merrill. There are many different perspectives on what the balance sheet approach will be exactly. There are folks who feel like -- that the balance sheet approach will be quite aggressive. And there are other folks who feel like there may be very little movement at all in the balance sheet. And so, to me, it's very hard to say what that looks like. I suspect some of it is in the market already. We have -- I think we would say we feel like some portion of the effect of the policy discussion is in the market, which presumably is what the Fed wants. And so how much of that discussion and impact is not in the market is hard to say. We could see that compress -- that special is compressed a bit over time, and we're prepared for that if that occurs. You've seen us be 100% invested in spec pools, and without speaking to the separate effect on spec pools of a policy normalization from the balance sheet, we have the flexibility to be back in that direction if that's really the -- considerably stronger risk adjusted return alternative. So we have great flexibility to move from one to the other. And we would be adjusting all the time to those circumstances, how it plays out. How it plays out, I'm not going to venture a guess exactly on how much balance sheet and when exactly are they going to remove from the market. I would make one observation. They spent an enormous amount of time, and an enormous amount of effort and enormous amount of money to softer reflation in equity -- in all risk markets, and in particular, in the housing market. And so I would think that having, at least the appearance, if not the outright statement that they're keeping a real close eye on housing, not only from the standpoint of its effect on confident spending, et cetera, and well-being, but also from a standpoint of its contribution to GDP. I suspect they're going to be very cognizant, they would be very conscious about what the impact is on housing finance and other rate structures. And the negative impact that could come from a material shift in the balance sheet that would cause a significant shift higher in long-term rates.

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Merrill H. Ross, Wunderlich Securities Inc., Research Division - Senior Analyst [35]

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They've already stated in a number of different places that they're not going to auction mortgage backs, which is helpful. But I think your point that you've maintained flexibility in investment strategy is probably the only answer to have, I think the only correct answer.

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J. Rock Tonkel, Arlington Asset Investment Corp. - CEO, President and Director [36]

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That's how we think about it.

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Operator [37]

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

At this time, ladies and gentlemen, thank you for joining us today. Please disconnect from your phone lines, and have a great rest of the week. Thank you.