Hatteras Financial Corp (HTS)

Q2 2011 Earnings Call

July 27, 2011 10:00 am ET


Frederick Boos - Co-Chief Investment Officer and Executive Vice President

Kenneth Steele - Chief Financial Officer, Principal Accounting Officer, Secretary and Treasurer

Benjamin Hough - President, Chief Operating Officer and Director

Mark Collinson - Partner

Michael Hough - Chairman and Chief Executive Officer


Bose George - Keefe, Bruyette, & Woods, Inc.

Steven Delaney - JMP Securities LLC

Joel Houck

Jason Arnold - RBC Capital Markets, LLC

Michael Widner - Stifel, Nicolaus & Co., Inc.



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Good morning, and welcome to the Hatteras Financial Q2 Earnings Conference Call and Webcast. [Operator Instructions] Please note that this event is being recorded. I now would like to turn the conference over to Mark Collinson, Partner, CCG Investor Relations Strategic Communications. Mr. Collinson, please go ahead.

Mark Collinson

Thank you, Pete. Good morning, everyone, and welcome to Hatteras second quarter earnings conference call. With me today as usual are the company's Chairman and Chief Executive Officer, Michael Hough; the company's President and Chief Operating Officer, Ben Hough; and the company's Chief Financial Officer, Ken Steele. Also available to answer your questions are the company's Co-Chief Investment Officers, Bill Gibbs and Fred Boos.

Briefly 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 risks 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. The content of this conference call also contains time-sensitive information that is accurate only as of today, July 27, 2011, and the company undertakes no obligations to make any revisions to these statements or to update these statements to reflect events or circumstances occurring after this conference call. Thank you, and now over to Michael Hough.

Michael Hough

Good morning. Thank you all for being part of our call. As usual, we have the entire management team on the call to answer any and all questions you may have regarding our second quarter. We are very pleased with the second quarter results. We distributed another strong dividend and had a nice book value appreciation, and all with a stronger and more defensive balance sheet. I'd like to quickly discuss what we're thinking as far as how we're positioning the company going forward. First is our continued push to match asset and liability estimated cash flows. As is obvious, we have continued with the use of 5/1 and 7/1 hybrid ARMs, later on that we can effectively hedge extended durations with interest rates swaps. We can model and predict the mismatch pretty well given different scenarios. I'm not willing to sit here and make an interest rate debt much about the next 6 months, so we're taking the tack as we always have and try to have a balance sheet that shortens its way into a rising rate environment.

Now that possibility seems to keep it and pushed out further to that and some duration on our assets with new purchases and new liabilities against them but not at the expense of net balance sheet exposure. In fact, we continued to gradually tighten that exposure. So hybrid service wellness pursuit but as always, we look at the other options that can serve the same function we are looking for. Lesser hedged short reset paper for example in the year end, longer hedged 15-year paper also were options that we constantly evaluate and may utilize at some point.

There's a lot of value in the portfolio we built today though and one that many financial institutions would love to have at this point in the REIT cycle. Hatteras is the largest ARM portfolio of any REIT and larger than any other banks of a similar or larger size. While this value may not immediately be measurable, we have something that interest rate risk managers need and would have a tough time replicating. But to address the current shares alone in Washington, the debt talks are obviously creating a lot of uncertainty in the right markets, and we don't yet have a real sense of what the impact on treasury rates and credit spread would be in the unlikely event if nothing gets resolved. If it happens though, we're happy to be on the short end of the yield curve and happy to be in the highly liquid position as a defense measure. With our counterparties are assuring us that they will be there for this time and we are seeing very little, if any, change in terms to indicate anything different.

As far as raising additional capital, it just hasn't made as much sense as it did earlier this year because of less attractive investment opportunities. Our timing early in the year was very good and has served to really improve the overall nature of our balance sheet. But of course, we're always looking for ways to improve the portfolio and if the opportunity presents itself, we'll have to consider it. But since the rally in the treasury market yields and premiums and ARMs, and other options don't make as much sense as they did earlier in the year. Lower treasury yields have been the biggest driver of performance, but the fundamentals on agency ARMs continue to be very strong. The plan has been increasing on a relative basis to fixed rate paper because of the steepness of the mortgage curve, but demand primarily from Bank AL managers looks to remain strong especially as the cycle progresses. As possible, we may see a backup in ARM rate as an opportunity to put more money to work. So with that, I'll hand the call over to Ken to quickly go over the numbers from the second quarter, followed by our portfolio and market update from Ben.

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