Hatteras Financial Corp (HTS)

HTS 
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Hatteras Financial Corp (HTS)

Q1 2013 Earnings Call

April 24, 2013 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, Treasurer and Secretary

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

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

Analysts

Steven C. Delaney - JMP Securities LLC, Research Division

Michael R. Widner - Keefe, Bruyette, & Woods, Inc., Research Division

Stephen Laws - Deutsche Bank AG, Research Division

Arren Cyganovich - Evercore Partners Inc., Research Division

Joel Jerome Houck - Wells Fargo Securities, LLC, Research Division

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

Michael P. Taiano - Telsey Advisory Group LLC

Jason Arnold - RBC Capital Markets, LLC, Research Division

Douglas Harter - Crédit Suisse AG, Research Division

Presentation

Operator

Good morning, and welcome to the Hatteras Financial First Quarter 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.

Mark S. Collinson

Thank you, Joseph. Good morning, everyone, and welcome to the Hatteras First Quarter Earnings Conference Call. With me today, as usual, are the company's Chairman and CEO Michael Hough; COO, Ben Hough; and CFO, Ken Steele. Also available to answer your question are the company's co-Chief Investment Officers, Bill Gibbs and Fred Boos.

Briefly from me before I hand 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's accurate only as of today, April 24, 2013, 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. Here's Michael Hough.

Michael R. Hough

Okay. Thanks, Mark. Good morning. We will be brief with our remarks today. The entire team is here and happy to discuss anything surrounding the Hatteras business during Q&A.

This week we'll celebrate our fifth year as a public company. While at times there have been bumps, it's clearly been a great opportunity to provide some really nice value to our shareholders. That is what we're trying to do, of course. But if you think about it, 5 good years in the falling rate market does not equate to a complete success. We are now charged with providing value for the next 5 years, which we'll have to do by both sticking to what we know is right and by being flexible and adaptive.

Surely mortgage finance is going to be different 5 years from now, and we'll have had to adapt to staying focused on immediate and potential risks will be the most important driver for future success. So I'm bullish on how well we're positioned for the next 5 years, and on our ability to create shareholder value and provide capital for home ownership.

Our success will ultimately be dependent on risk management and doing what's in the best long-term interest of the company and the shareholders. Looking back 5 years from now, I expect I'll again say it was bumpy. But we're confident in our ability to manage Hatteras appropriately, and continue to be a valuable long-term investment partner.

And with that, I'll hand this to Ken to summarize the financials.

Kenneth A. Steele

Thanks, Michael. Good morning, everyone. In general, our results on a core basis were pretty stable quarter-over-quarter, which was the theme for the overall markets as well. Investors keep looking for chinks in the armor of QE3, but not really finding yet has kept volatility down.

Our net income for the quarter was $61.8 million, or $0.62 per weighted average share as compared to $101.3 million or $1.02 per weighted average share for the fourth quarter of 2012. Major difference was the decrease in gains on sales of assets, which dropped from $39 million in the prior quarter to $2.5 million in this quarter.

Our net interest income was $71.4 million in the first quarter of 2013 as compared to $74.7 million in the previous quarter. This was largely a function of a smaller average portfolio, as average earning assets went from $25.8 billion in the fourth quarter of 2012 to $24.1 billion for the first quarter of 2013.

In general, all of our earnings metrics improved slightly, as our yield went from 2.04% to 2.06%, which was an increase of 2 basis points. Our cost of funds fell 1 basis point to 95 basis points, and our spread, therefore, increased to 111 basis points. Amortization expense decreased, going from $50.1 million in the fourth quarter of 2012 to $43.2 million in the first quarter of 2013. This was due both to a smaller portfolio and a slowing of repayments.

Our weighted average one-month CPR dropped from a rate of 19.8 in the last quarter of 2012 to 19 in the first quarter of this year. Our total operating expenses were $6.7 million, which is an annualized rate of 88 basis points on average equity for the quarter.

Book value was essentially unchanged at $28.18, which contains $0.30 of undistributed earnings. Our liquidity position was strong, with $2 billion of cash and securities unencumbered at quarter end.

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