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» Hatteras Financial Corp. Q1 2010 Earnings Call Transcript
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The content of this conference call also contains time-sensitive information that’s accurate only as of today July 28, 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. And that’s all from me. Here is Michael Hough.Michael Hough Hi, good morning and welcome to our second quarter earnings call. The entire Hatteras management team is here with me on the call and following a few short prepared remarks we will all be available to answer each and any of your questions. The second quarter was a different one for us as pre-payments for the first time were the predominant factor in our quarterly performance. It’s not something I want to harp on because for the most part, the GSE buyback program has now been completed, but Fannie Mae did the bulk of their loan purchases as it relates to our portfolio in April, May and June. Non-buyback prepayments also increased somewhat as mortgage rates keep hitting new lows and mortgages written in late 2009 and early 2010 are now on the money to re-finance. We would expect this prepayment trend to continue across the entire spectrum of agency MBS, but we believe they will come in within a manageable range. Ben and Ken will discuss the numbers in detail, but I would like to mention that the primary issue for us in the quarter was the timing of getting the cash from prepayments reinvested at levels that made sense to us. As most of you know MBS premiums are high in both seasoned and new issue paper and balancing our long-term management philosophy of mitigating risk where we can made it tough to get new paper with low premiums on the books quickly. As we have done since we since we started in this business years, we chose to manage prepayment risk the best way we can and the most effective way is by keep our cost basis and premium reasonably low. In a market like we are in now, we opt to sacrifice immediate return for longer settle dates with lower premiums and more future repayment protection. We also view that there is one time prepayment spike is really more of catch up from last year’s amazingly low prepayment rate in light of the low interest rate, steep U-curve environment that we’ve had.
It’s for this reason that it made perfect sense to us to distribute some of the excess earnings we retained last year and offset some of earnings shortfall we had this quarter from the catch up. The $1.10 dividend is the number that feels good to us and somewhat reflects current market conditions.Going forward we and as much as the market now see many uncertainties as to the direction of interest rates, monetary and regulatory policy and the health of the global credit markets. Even though our thoughts tilt toward a low rates steep U-curve for a longer period of time than most expect, we must not maneuver our strategy to the latest whim or current expectations. We don’t think directional bets are the way to go with this type of strategy and we want to mitigate risks where we can and when we can. Even though we see low short funding rates continuing for the foreseeable future, we continue to protect against a possibility of higher rates coming sooner than we think. There are credible opportunities available to us in interest rates swaps for example and we have selectively taken advantage of them by slightly increasing our notional as well as the term as long-term protection against higher rates. We continue to purchase assets that we view is the most manageable and can most easily hedge in up and down rate times. We are buying securities we think fit into our long-term portfolio goals and expect to hold and hedge them unless we see their value proposition to the portfolio change. We are in the market today when we see value and are attempting to maintain consistency in our bond position going forward. There is still great spread in earnings opportunities available out there especially when you considered the long-term spread you can get investing against the swaps curve. As of today, swap rates are very attractive, all the way out five plus years especially we are considering the relative opportunities available to us in MBS. Read the rest of this transcript for free on seekingalpha.com