Hatteras Financial Corp's CEO Discusses Q4 2011 Results - Earnings Call Transcript

Hatteras Financial Corp (HTS)

Q4 2011 Earnings Call

February 15, 2012 10:00 am ET

Executives

Mark S. Collinson - Partner

Michael R. Hough - Chairman and Chief Executive Officer

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

Benjamin M. Hough - President, Chief Operating Officer and Director

William H. Gibbs - Co-Chief Investment Officer and Executive Vice President

Analysts

Michael R. Widner - Stifel, Nicolaus & Co., Inc., Research Division

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

Arren Cyganovich - Evercore Partners Inc., Research Division

Boris E. Pialloux - National Securities Corporation, Research Division

Joel Houck - Wells Fargo Securities, LLC, Research Division

Jason Arnold - RBC Capital Markets, LLC, Research Division

Presentation

Operator

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Good morning, and welcome to the Hatteras Financial Fourth Quarter and Fiscal Year End Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mark Collinson of CCG Investor Relations. Please go ahead.

Mark S. Collinson

Thanks, Laura. Good morning, everyone, and welcome to Hatteras' Fourth Quarter and Fiscal Year End 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.

Before I hand the call over to them, I need to remind you all 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, February 15, 2012, 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.

That's all for me. Now here's our CEO, Michael Hough.

Michael R. Hough

Okay. Thank you all for joining us today. We will be brief with our prepared remarks before opening to questions. As Mark said, as in the past, we're all here to discuss the quarter and the market following the introduction.

So before hitting the numbers, I'd like to quickly touch on a few points that I think are worthwhile today, mostly regarding the strength of the returns we're providing, especially considering the low risk approach we use. 2011 was another strong year for us, 15% ROE and 9% book value growth. We achieved this by staying focused and without adding more risk to the portfolio. It was a year full of headlines and issues to deal with, and I'm very pleased with how our team navigated because it easily strayed from the strategy but we didn't. And results are at least in line with our expectations given the way the markets have moved. The portfolio started this year invested in hedge, and we're looking forward to a strong 2012.

Fourth quarter by itself was another good one, with an ROE of almost 14% and 3% book value growth, this at an unprecedented time with historic low mortgage rates and active government involvement in the mortgage market. During the quarter, we maintained our bond position and the only adjustments we made were to net duration, not like we needed to be neutral at work to much slightly negative given how far rates have moved. We paid a $0.90 dividend in the fourth quarter. This obviously reflected our earnings but maybe somewhat indicative of the potential of the portfolio we have in place. We are earning a margin that is becoming more current with the market, so the impact to net interest margin from changing conditions could be less meaningful. Return is a function of risk-taking in this business, and everyone has the same investing options but how we appropriate that risk is what is going to drive return.

So we have the portfolio we want today that is earning a very attractive net interest margin, especially at this point in the cycle with this trough and rates commence less interest rate exposure than in any other time. We spent 4 years building this laddered ARM portfolio and wouldn't trade it for anything, can't be replicated today and highly valuable to any experienced asset liability manager. $17 billion of staggered reset Fannie and Freddie ARMs, all under manageable premiums, and duration matched with a latter book of plain vanilla interest rate swaps is a portfolio to protect, one that is profitably positioned for where the world is today.

We gained confidence in how this balance sheet is driven almost solely by the direction of interest rates and not by outside forces. This is what we strive for because that gives us and you a portfolio where performance can accurately be modeled with most any interest rate assumption. We think that is hugely important to our business and to our shareholders.

When I say well positioned, I mean a balance sheet that is flexible and durable and will naturally adjust with the market over time. We like the 2-to-4 duration of the ARMs because it gives us the opportunity for at least equal duration of the liabilities. That matches what we want. We also earned approximately $5 of unrealized gains on the MBS side. These gains are great to have because they give us flexibility to easily reposition or manage leverage if necessary. We see these gains as an important asset that we want to protect for as long as we can.

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