Hatteras Financial Corp (HTS)

HTS 
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Hatteras Financial Corp (HTS)

Q2 2013 Earnings Call

July 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

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

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

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

Arren Cyganovich - Evercore Partners Inc., Research Division

Tapfuma Chibaya

Daniel Furtado - Jefferies LLC, Research Division

Jason Arnold - RBC Capital Markets, LLC, Research Division

Kenneth Bruce - BofA Merrill Lynch, Research Division

Presentation

Operator

Good morning, and welcome to the Hatteras Financial Corporation Quarter 2 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mark Collinson, from Compass Investor Relations. Please go ahead.

Mark S. Collinson

Thank you, Catherine. Good morning, everyone. Welcome to the 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, Ken Steele. Also available to answer your questions are the company's Co-Chief Investment Officers, Bill Gibbs and Fred Boos.

Two things for me before I hand over to them. In addition to our press release this quarter, we've also furnished unaudited supplemental financial information on our website. Management will refer to this information in their remarks this morning and those of you who have not yet done so may wish to have this information available during the call. Please go to www.hatfin.com, click on the Investor Relations tab, and then on the words Q2 Earnings Supplementary Financial Information. A short PDF document will then download for you.

Second, 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 call also contains time-sensitive information that is accurate only as of today, July 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. So here's CEO Michael Hough.

Michael R. Hough

Good morning. Welcome to our second quarter call. As always, all of us are here to answer any questions you may have following our prepared remarks. With this call, we'll do something a little different than usual. We thought it would be helpful to include a short supplement to the earnings release of additional information regarding the company and the volatile market in the second quarter. We'll refer to it throughout this call and hope it will provide some useful information and enhance the typical disclosure we provide.

There's just a few comments before getting into the supplement. The second quarter was certainly eventful for us and for the market as a whole, as it began with tight margins, high prepays and uncertain durations that I blame on the open-endedness and aggressiveness of QE3. Early on in the quarter we were staying invested to our targets -- target leverage and liquidity number, just as we have been on the first quarter. Not an easy task with the type of parameters we put on the securities that we purchase. As you know, the quarter ended with a snapping of the rubber band and the wind back to a more natural yield curve. Our book value declined in the second quarter by about 21%, which is a sizable move for a balance sheet such as ours, and the reality is, most of it happened in no more than a 2-week time frame. But it should be noted that this is our year-to-date move as well. Recognizing the disappointing OCI hit our portfolio took, we'll discuss what we saw in the ARMs market especially over quarter end and how it impacted us specifically.

I think an important part of our story is that we entered the second quarter in a relatively defensive position, which helped us weather the gin [ph] volatility. Leverage was 7.4x and liquidity 7.7% of assets in March 31. That coupled with the shorter ARMs portfolio enabled us to control our processes and not be forced to sell in to the distress. We've seen imbalanced markets more than once since we started Hatteras. I can't say it enough. We always want to put ourselves in position to make business decisions and not have them made for us. That's why you see that we were not uncomfortable having to manage the quarter end with leverage at 0.93% and 5.4% of our assets and liquidity given the rate and spread spikes that had already happened, and as some of the near-term risks may have somewhat diminished. We have maintained the flexibility to evaluate and thoughtfully decide what moves will be best for the long-term benefit of the company. Ultimately, we almost certainly will move towards more liquidity and a lower-leverage target, which we will get through to through possible appreciation, portfolio runoff and/or portfolio sales, which could include taking gains, losses or a combination of. We will also continue to add hedges to reduce our exposure to higher interest rates from here.

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