Hatteras Financial Corp (HTS)

Q3 2011 Earnings Call

October 26, 2011 11:00 am ET

Executives

Michael R. Hough - Chairman and Chief Executive Officer

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

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

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

Mark S. Collinson - Partner

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

Analysts

Steven C. Delaney - JMP Securities LLC, Research Division

Michael Taiano - Sandler O’Neill & Partners

Stephen Laws - Deutsche Bank AG, Research Division

Daniel Furtado - Jefferies & Company, Inc., Research Division

Joel Houck - Wells Fargo Securities, LLC, Research Division

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

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

Unknown Analyst -

Matthew Howlett - Macquarie Research

Jason Arnold - RBC Capital Markets, LLC, Research Division

Presentation

Operator

Good morning, and welcome to the Hatteras Financial Q3 2011 Earnings Conference Call. [Operator Instructions] Please also note, this event is being recorded. I would now like to turn the conference over to Mark Collinson. Please go ahead, sir.

Mark S. Collinson

Thank you, Morgan [ph]. Good morning everyone, and welcome to Hatteras' Third 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.

Before I hand the call over to them, I need to briefly 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 those forward-looking statements. The content of this conference call also contains time-sensitive information that is accurate only as of today, October 26, 2011, and the company undertakes no obligations to make any revisions to these statements or to update these statements to reflect events and circumstances occurring after this conference call.

So that's all for me. Thank you very much. And now here is Michael Hough.

Michael R. Hough

Good morning, and welcome to our third quarter call. As always, we have the entire management team here to answer any and all questions you may have following some brief prepared remarks. But first, I'd like to introduce a new member of our team, John Dalena. We're excited to have John on board as Chief Strategist and his experience are going to be instrumental in the growth of the development of our company long-term.

So what I'd like to do today is quickly address a few of the headlines of what was a pretty volatile quarter and how we view them in relation to Hatteras. Where we typically say in one or two good market movers a quarter over the past couple of years, we were graced with a multiple about this time. So just to take a look at a few of them.

The first one was the turmoil around the U.S. debt back in early -- late July and early August. Through August, given the issues surrounding the debt ceiling cogs and the debt downgrade, we saw an opportunity to increase liquidity as a defensive measure by paring out of some prepay exposed paper and delaying the reinvesting until conditions somewhat stabilize. While this reduced our earnings power for the quarter a good bit, we felt an increased level of liquidity was prudent in preparation for the unknown. It was also a positive for the MBS portfolio.

Back end was an accelerated Fed accommodation. The Fed's announcement of its intention to keep interest rates at 0 until 2013 and Operation Twist certainly impacted our portfolio this quarter as the shift in the rate curve caused a moderate prepayment increase with lower yields on reinvestment. While trending higher in Q2, the experience with prepayments was consistent with our expectations that we have predicted over the past year. We do expect the fourth quarter is likely to be similar to the third this way because of the record low rates in August and September that will pass through to the MBS this quarter. We do expect them to slow after that as the recent backup into 10-year should reverse this trend, but it'll still be dependent on the direction of rates from here. Either way, the portfolio is well positioned for this quarter and for 2012.

Third being the euro crisis. As the crisis in Europe expanded this quarter, we were precautionary and managed our exposure to the EU banks back to just 7% of the overall portfolio. We continued to diversify our funding sources as well. We haven't really seen any issues in the repo market today even at the EU banks, with stable haircuts and consistent pricing being the norm. In sum though, we remain comfortable but weary as we head into year end. Since quarter end, we've been extending some of the repo book to January.

The fourth being the SEC's concept release regarding mortgage rates. There is a continuation of the ongoing Request for Information. We are working with Council, NAREIT and other trade groups on developing the proper response for us and others on the November 7 due date. This obviously has been something that investors have been concerned with and we understand.

While we're confident that Congress intended to exempt companies like Hatteras from the 1940 Act, we take their request very seriously and we'll do our best to help the SEC however possible. Companies like Hatteras are a valuable source of capital for the mortgage market and a good result will recognize this.

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