Hatteras Financial Corp Management Discusses Q2 2012 Results - Earnings Call Transcript

Hatteras Financial Corp (HTS)

Q2 2012 Earnings Call

July 25, 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

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

Analysts

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

Joel J. Houck - Wells Fargo Securities, LLC, Research Division

Jason Weaver - Sterne Agee & Leach Inc., Research Division

Arren Cyganovich - Evercore Partners Inc., Research Division

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

Stephen Laws - Deutsche Bank AG, Research Division

Boris E. Pialloux - National Securities Corporation, Research Division

Douglas Harter - Crédit Suisse AG, Research Division

Kenneth Bruce - BofA Merrill Lynch, Research Division

Steven C. Delaney - JMP Securities LLC, Research Division

Richard A. Eckert - B. Riley & Co., LLC, Research Division

Presentation

Operator

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

Mark S. Collinson

Thanks, Laura. Good evening, 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, 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 you that any forward-looking statements made during today's call are subject to risks and uncertainties we've 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, July 25, 2012, and the company undertakes no obligations to make any revisions to the statements or to update these statements to reflect events or circumstances occurring after this conference call. That's it for me. It's Michael Hough.

Michael R. Hough

Good morning. Thanks, everyone, for joining our call today and for your interest in Hatteras. As we typically do, after the prepared remarks, we'll open for Q&A with our entire management team.

I just want to make a couple of quick points here before we get into the nuts and bolts. We generated a solid return for shareholders in the second quarter, with dividends and book value change adding to a total return of about 15% annualized for the quarter. There was some noise around leverage mainly from the capital rates at the end of the first quarter and some isolated bond sales. We'll give more detail on that in a minute.

Now before I turn it over to Ben and Ken for that detail, just a little color on the market environment that we're in today. This March, there's been a straight line drop in rates to once again, all-time lows across the curve, which does make the earnings environment certainly more challenging. A 10-year has dropped almost 100 basis points from the highs in March and the entire curve has adjusted to reflect the current economic and global realities.

However, the earnings opportunities remain robust, especially considering the almost 0 rate world ramp. The mortgage yield curve is still positive and ARMs remain a very attractive security to leverage and effectively hedge.

As it's been for a while, the rates markets have been one directional. The funding call slow and asset values appreciating. It's a great environment for this business model, but as would be expected yields on MBS eventually adjust to the current, which we usually equate to some earnings margin compression in a low-rate situation.

As you see, R&M was 149 basis points last quarter, down from 158 in the first quarter, which kind of reflects what the market has to give us nowadays, meaning we're close to current. Similar spread to where capital can be put the work today.

Also I just want to reiterate that we're not interested in taking on more duration and leveraged risk at this point and we'll not change the way we do things. It's the right strategy for this time and we're happy to be in position to provide investors attractive risk investment returns. And with that, I'll pass this call over to Ken to go over the details of the quarter.

Kenneth A. Steele

Thanks, Michael. Good morning, everyone. Our performance for this quarter was primarily driven by 2 things. First, we were investing the proceeds of our late March offering. The timing of settlements on MBS after an offering will generally mean that the quarter following will not necessarily be representative of a regular run rate. Second, the move lower in rates may continue to spread compression, as well as influence our decision to take some risk off the table. Our net income for the first quarter of 2012 -- excuse me, for the second quarter of 2012 was 89.1 million or $0.91 per weighted average share as compared to 69.3 million or $0.89 per weighted average share for the first quarter of the year.

Although our income was up significantly, our weighted average shares outstanding also grew significantly due to the March offering. Our net interest income was 83 million in the second quarter of 2012 as compared to 72 million in the previous quarter, reflecting a higher earning assets as invested following the offering.

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