Hatteras Financial Corp. (
Q3 2010 Earnings Conference Call
October 27, 2010 10 AM ET
Mark Collinson – Partner. CCG Investor Relations
Michael Hough – CEO
Kenneth Steele – CFO, Treasurer and Secretary
Ben Hough – President and COO
Mike Widner – Stifel Nicolaus
Bose George – KBW
Jason Arnold – RBC Capital Markets
Daniel Furtado – Jefferies & Co.
Steve Delaney – JMP Securities
Jim Ballan – Lazard Capital Markets
Henry Coffey – Sterne, Agee
Michael Taiano – Sandler O’Neill
Matthew Howlett – Macquarie
Kenneth Bruce – Bank of America Merrill Lynch
Previous Statements by HTS
» Hatteras Financial Corp. Q2 2010 Earnings Call Transcript
» Hatteras Financial Corp. Q1 2010 Earnings Call Transcript
» Hatteras Financial Corp. Q4 2009 Earnings Call Transcript
» Hatteras Financial Corp. Q3 2009 Earnings Call Transcript
Good morning and welcome to the Hatteras Financial Corporation Q3 Earnings Conference Call and Webcast. (Operator Instructions). Please note this event is being recorded.
I now would like to turn the conference over to Mark Collinson. Mr. Collinson, please go ahead.
Thanks, Annie. Good morning, everyone. Welcome to the Hatteras third quarter earnings conference call. With me today as usual are the company’s Chairman, Chief Executive Officer, Michael Hough; the company’s President and Chief Operating Officer, Ben Hough; and the company’s Chief Financial Officer, Kenneth Steele. Also available to answer your questions are the company’s Co-Chief Investment Officers, Bill Gibbs and Fred Boos.
Before I hand the call over to them I need to remind all of you that any forward-looking statements made during today’s call are subject to risk and uncertainties, which are discussed at length in our annual and quarterly SEC filings. Actual events and results can differ materially from these forward-looking statements.
Also the content of this conference call also contains time-sensitive information that’s accurate only as of today, Wednesday, October the 27th, 2010 and the company undertakes no obligations to make any revisions to these statements or update these statements to reflect events or circumstances occurring after this conference call. That’s all from me. Here is Michael Hough.
Hey, good morning and thank you all for participating in our third quarter earnings call. As usual, we have the entire Hatteras management team on the call to answer any and all questions you may have. But first, we’d like to a few minutes of prepared remarks that will highlight the operations of the quarter.
There are a lot of things we can talk about this morning, but I really want to focus on what has transpired in the market and what it means for Hatteras and how we are positioning things.
The completion of the GSE buyback program, the coming of investment, the continued shift lower of the yield curve and the uncertainty of economic and policy direction are all drivers of performance. All these taken together have served to tight margins on existing asset liability models, but at the same time, this created an opportunity that we are trying to exploit.
Recently, we have gradually positioned the company more defensively as the cycle has matured and will continue to do so. However, we feel like we’re getting such a good opportunity today to lock in spread that we always need to step back and remain cautious about all possible outcomes. But we are comfortable for now with our leverage and our portfolio mix.
As you know, we recently completed our first capital raise since December 2008. Hatteras realized net proceeds of 206 million on September 21
that was accretive to book value, aid [ph] in capital per share and ROE and permanent lowers our expense ratio.
Most importantly, in our view, that any assets and liabilities we’ve acquired with this capital will serve to extend the strong earnings environment we enjoy now. This along with the growth of Hatteras’ book value and asset pricing, we saw with an opportunity that would improve the long-term performance of our company. All without a material change to the existing asset liability mix and our risk posture.
The assets we bought with the proceeds will most likely be the most stable and predictable bonds we’ve ever bought and that allows us to hedge those funds more aggressively and for a longer period of time than in the past. We expect recently issued via one arm paper to behave more like a bullet with longer durations than existing paper and we think our prepayment assumptions should be more accurate.
Since we like the hedge longer, we can therefore match cash flows for a more true and predictable hedge. The capital was received at the end of September and for the most part, we have the securities trades done. Much of the paper has involved early on and an attractive pricing relative to today’s market.
Even though we have the bonds purchased, it is important to note that they will settle throughout the fourth quarter with the majority of the bonds settling in December. Leverage is September 30
, was 5.6 and we expect it to be around seven by year end. The timing of this will likely drag earnings for the fourth quarter to the degree that the cash is not yet earning.
However, when the yield curve is steep like it is now, to benefit its settlement will be attractive pricing on bonds that come on the books at a gain. To make long-term economic and defensive decision when adding securities and hedges, a lot of can be short-term calls to trade off as long-term value.
But, now, I’ll hand the call over to Ken for a rundown in the third quarter.
Thanks, Michael. Good morning, everyone and thanks again for joining us on the call today. This was a busy quarter operationally with several moving parts, which I will try to shed some lights on.