Hatteras Financial Corp. (NYSE: HTS) (“Hatteras” or the
“Company”) today announced financial results for the quarter ended
September 30, 2011.
Third Quarter 2011 Highlights
- Net income of $1.04 per weighted
average share
- Declared a $1.00 per share
dividend
- Quarter end book value of $26.32 per
share
- Net return on average equity of
15.5%
- Average net interest spread of
1.64%
- Annualized total expense ratio of 0.90%
of average shareholders’ equity
Third Quarter 2011 Results
During the quarter ended September 30, 2011, the Company earned
net income of $79.0 million, or $1.04 per diluted common share,
compared to net income of $77.5 million, or $1.04 per diluted
common share during the quarter ended June 30, 2011. The Company
earned $140.2 million of gross interest income and had amortized
premium expense of $30.1 million for interest income of $110.1
million. Net interest income for the quarter ended September 30,
2011 was $70.2 million, compared to $77.6 million for the quarter
ended June 30, 2011. The Company’s average earning assets increased
to $16.2 billion for the third quarter of 2011 from $15.0 billion
in the second quarter of 2011. The Company’s net interest margin
decreased to 1.64% for the third quarter of 2011 from 1.97% in the
second quarter of 2011 as portfolio yield dropped and the Company’s
cost of funds (including hedges) increased 0.02% to 1.08%. The
Company’s average repurchase agreement (repo) rate increased to
0.29% in the third quarter of 2011, from 0.24% in the second
quarter of 2011, on all outstanding short-term (less than 30 days)
repo positions. The Company realized gain on sale of
mortgage-backed securities (MBS) of $13.3 million during the
quarter compared to $4.4 million for the previous quarter.
Operating expenses were $4.6 million for the third quarter of 2011
versus $4.5 million for the second quarter of 2011, and the
annualized expense ratio was 0.90% of shareholders’ equity based on
average equity for the quarter ended September 30, 2011 verses
0.88% for the prior quarter.
“Our flexible portfolio enabled us to effectively manage
through a volatile quarter, producing strong returns for our
shareholders while protecting book value”, said Michael R. Hough,
the Company’s Chief Executive Officer. “We reduced exposure early
in the quarter and slowly repositioned into better performing
assets as market conditions stabilized and clarity emerged
regarding the near term direction of interest rates. As we
anticipated, prepayments increased moderately and within our
estimates and we ended the quarter with a portfolio that is well
positioned for the current environment.”
Dividend
The Company declared dividends of $1.00 per share of common
stock with respect to the quarter ended September 30, 2011, which
equaled the $1.00 per share dividend for the quarter ended June 30,
2011. Based on the closing share price of $25.16 on September 30,
2011, the third quarter dividend equates to an annualized yield of
15.9%.
Portfolio
The Company’s portfolio, consisting of Fannie Mae and Freddie
Mac guaranteed mortgage securities (agency securities), increased
to $17.6 billion at September 30, 2011, compared to $16.4 billion
at the end of the previous quarter. The portfolio’s weighted
average coupon was 3.54% for the third quarter of 2011, compared to
3.61% for the second quarter of 2011. The annualized yield on
average assets declined to 2.72% for the third quarter of 2011,
compared to 3.03% for the second quarter of 2011 as a result of the
lower average coupon and increased premium amortization. The
annualized cost of funds on average liabilities (including hedges)
was essentially unchanged from the prior quarter at 1.08% in the
third quarter of 2011, compared to 1.06% in the second quarter of
2011.
At September 30, 2011 the Company’s portfolio of agency
securities consisted of 93.6% of adjustable-rate MBS and 6.4% of
15-year fixed-rate MBS. At September 30, 2011 the Company owned
$16.5 billion of adjustable-rate MBS with a weighted average coupon
of 3.56% and a weighted average cost basis of $102.39, and $1.1
billion of 15-year fixed-rate securities with a weighted average
coupon of 3.13% and a weighted average cost basis of 103.56. The
Company’s adjustable rate MBS portfolio at September 30, 2011 is
summarized below.
Weighted Avg. (dollars in
thousands) Current Weighted Avg. Amortized Weighted Avg. Months to
Reset Face value Coupon Purchase Price Amortized Cost Market Price
Market Value 0-18 $ 1,091,863 4.76 % $ 101.35 $ 1,106,555 $ 106.07
$ 1,158,144 19-36 $ 907,792 4.47 % $ 101.41 $ 920,568 $ 106.05 $
962,674 37-60 $ 8,299,571 3.41 % $ 102.45 $ 8,502,916 $ 104.42 $
8,666,670 61-84 $ 5,167,829 3.40 % $ 102.65 $ 5,304,845 $ 104.28 $
5,389,188 85-120 $ 293,712 3.62 % $ 103.19 $ 303,091 $ 104.55 $
307,070 $ 15,760,768 3.56 % $ 102.39 $ 16,137,975 $ 104.59 $
16,483,747
During the third quarter of 2011, the expense of amortizing the
premium on the Company’s securities was $30.1 million, compared to
$17.8 million during the second quarter of 2011. The increase was
the result of a larger portfolio of agency securities and faster
prepayment speeds. The weighted-average principal repayment rate
(scheduled and unscheduled principal payments as a percentage of
the weighted-average portfolio, on an annual basis) during the
third quarter of 2011 was 28.6%, compared to 18.5% during the
second quarter of 2011. The Company’s weighted-average one-month
constant prepayment rate (CPR) for the quarter ended September 30,
2011 was 21.7, as compared to 14.9 for the quarter ended June 30,
2011. CPR measures unscheduled repayment rate as a percentage of
principle on an annualized basis.
Portfolio Financing and Leverage
At September 30, 2011, the Company financed its portfolio with
approximately $15.9 billion of borrowings under repurchase
agreements bearing fixed interest rates until maturity with 23
different counterparties. The Company’s repo debt-to-shareholders’
equity ratio at September 30, 2011, was 7.9 to 1, increasing from
7.4 to 1 from June 30, 2011, and averaged 7.3 to 1 during the
quarter ended September 30, 2011. The Company’s repurchase
agreements had a weighted-average term of approximately 24 days.
The Company also uses interest rate swap agreements to
synthetically extend the fixed interest period of these liabilities
and hedge against the interest rate risk associated with financing
the Company’s portfolio. As of September 30, 2011, the Company had
in place, with 13 different counterparties, interest rate swaps
with a notional amount of $7.5 billion. The swap agreements, which
are indexed to 30-day LIBOR, have a weighted average remaining term
of 36 months at a weighted average fixed rate of 1.82%.
Book Value
The Company’s book value (shareholders’ equity) per share on
September 30, 2011 was $26.32, down $0.40, from the per share book
value of $26.72 on June 30, 2011. On a per share basis, the book
value at September 30, 2011 consisted of $24.79 of common equity,
$0.01 of retained earnings, $4.56 of unrealized gains on agency
securities, and ($3.04) of unrealized losses on interest rate
swaps.
HARP Expansion
On October 24, 2011, the Federal Housing Finance Agency (FHFA)
announced that it is revamping and expanding the rules regarding
the Home Affordable Refinance Program (HARP) with intent of
increasing significantly the number of homeowners eligible to
refinance their mortgage under this program. While final guidance
is not due until November 15, 2011, the FHFA announced the
relaxation of underwriting guidelines, such as loan-to-value,
appraisals, and certain fees, among other things, subject to a
variety of qualifications. It does not change the time period which
these loans were originated, maintaining the requirement that the
loans must have been guaranteed by Fannie Mae or Freddie Mac prior
to June 2009. The Company does not expect this announcement to have
a significant impact on its results of operations. The following
table shows the Company’s loan portfolio which could be impacted by
this program.
Gross Weighted Weighted Weighted-Average Outstanding
Percentage of Average Average
Coupon
Current
Face
Total
Portfolio(1)
Cost
Basis
Months to
Reset
4.51 - 5.00 $ 117,990,687 0.69% $101.41 28 5.01 - 5.50 852,990,780
5.02% 101.44 24 5.51 - 6.00 744,995,096 4.38% 101.34 25 6.01 - 6.50
501,562,760 2.95% 101.11 19 6.51 - 7.00 61,282,239 0.36% 101.07 15
Total $ 2,278,821,562 13.41% (1) Paper issued on or before
June '09 as % of Total MBS Portfolio.
Conference Call
The Company will host a conference call at 10:00 a.m. EDT on
Wednesday October 26, 2011, to discuss financial results for the
third quarter ended September 30, 2011. To participate in the event
by telephone, please dial (877) 317-6789 five to 10 minutes prior
to the start time (to allow time for registration) and ask to join
the “Hatteras Financial” conference call. International callers
should dial (412) 317-6789. Canada callers should dial (866)
605-3852. A digital replay of the call will be available on
Wednesday, October 26, 2011 at approximately 12:00 noon ET through
Thursday, November 3, 2011 at 9:00 a.m. ET. Dial (877) 344-7529 and
enter the conference ID number 10005636. International callers
should dial (412) 317-0088 and enter the same conference ID number.
The conference call will also be webcast live over the Internet and
can be accessed at Hatteras' web site at www.hatfin.com. To monitor
the live webcast, please visit the web site at least 15 minutes
prior to the start of the call to register, download, and install
any necessary audio software. An audio replay of the event will be
archived on Hatteras' web site.
About Hatteras Financial Corp.
Hatteras Financial is a real estate investment trust formed in
2007 to invest in single-family residential mortgage pass-through
securities guaranteed or issued by U.S. Government agencies or U.S.
Government-sponsored entities, such as Fannie Mae, Freddie Mac or
Ginnie Mae. Based in Winston-Salem, N.C., Hatteras is managed and
advised by Atlantic Capital Advisors LLC. Hatteras is a component
of the Russell 2000® and the Russell 3000® indices.
Forward-Looking Statements
This press release, together with other statements and
information publicly disseminated by the Company, contains certain
forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. The Company
intends such forward-looking statements to be covered by the safe
harbor provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995 and includes this
statement for purposes of complying with these safe harbor
provisions. Forward-looking statements, which are based on certain
assumptions and describe the Company's future plans, strategies and
expectations, are generally identifiable by use of the words
"believe," ”will,” "expect," "intend," "anticipate," "estimate,"
”should,” "project" or similar expressions. You should not rely on
forward-looking statements since they involve known and unknown
risks, uncertainties and other factors that are, in some cases,
beyond the Company's control and which could materially affect
actual results, performances or achievements. Forward-looking
statements in this press release include, among others, statements
about the Company’s MBS portfolio, the Company’s long-term return
profile, and the impact of the HARP expansion on the Company’s
portfolio. Factors that may cause actual results to differ
materially from current expectations include the risk factors
discussed in the Company’s most recent Annual Report on Form 10-K
and Quarterly Reports on Form 10-Q. Accordingly, there is no
assurance that the Company's expectations will be realized. Except
as otherwise required by the federal securities laws, the Company
disclaims any obligation or undertaking to publicly release any
updates or revisions to any forward-looking statement contained
herein (or elsewhere) to reflect any change in the Company’s
expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is
based.
Table 1
Hatteras Financial Corp. Balance Sheets (In
thousands, except per share amounts) (Unaudited)
September 30,
2011
December 31,
2010
Assets
Mortgage-backed securities, at fair
value
(including pledged assets of $16,638,918 and $9,089,095 at
September 30, 2011 $ 17,614,374 $ 9,587,216 and December 31, 2010,
respectively) Cash and cash equivalents 88,338 112,626 Restricted
cash 279,536 75,422 Unsettled purchased mortgage-backed securities,
at fair value 143,410 49,710 Accrued interest receivable 63,873
37,973 Principal payments receivable 126,811 84,151 Debt security,
held to maturity, at cost 15,000 15,000 Interest rate hedge asset -
23,944 Other assets 26,860 20,937 Total assets
$ 18,358,202 $ 10,006,979
Liabilities and shareholders’ equity Repurchase agreements $
15,886,231 $ 8,681,060 Payable for unsettled securities 143,393
49,774 Accrued interest payable 2,328 3,177 Interest rate hedge
liability 233,392 71,681 Dividend payable 76,547 46,116 Accounts
payable and other liabilities 1,308 9,687
Total liabilities 16,343,199 8,861,495
Shareholders’ equity: Preferred stock, $.001 par value, 10,000,000
shares authorized, none outstanding at September 30, 2011 and
December 31, 2010 – – Common stock, $.001 par value, 100,000,000
shares authorized, 76,546,720 and 46,115,990 shares issued and
outstanding at June 30, 2011 and December 31, 2010, respectively 77
46 Additional paid-in capital 1,897,172 1,043,027 Retained earnings
559 (3,480 ) Accumulated other comprehensive income 117,195
105,891 Total shareholders’ equity 2,015,003
1,145,484 Total liabilities and shareholders’ equity
$ 18,358,202 $ 10,006,979
Table 2
Hatteras Financial Corp. Statements of Income (Unaudited)
(In thousands, except per share
amounts) Three months Three months Nine months Nine months Ended
Ended Ended Ended September 30, 2011 September 30,
2010 September 30, 2011 September 30,
2010 Interest income: Interest income on mortgage-backed
securities $ 110,125 $ 63,701 $ 310,248 $ 196,083 Interest income
on short-term cash investments 380 323 1,051
898 Interest income 110,505 64,024 311,299 196,981
Interest expense 40,259 24,066 102,363
71,183
Net interest income 70,246
39,958 208,936 125,798 Other income: Gain on
sale of mortgage-backed securities 13,330 6,723 17,735 7,767
Operating expenses: Management fee 3,572 2,321 10,195 6,700 Share
based compensation 334 463 735 1,153 General and administrative
688 665 1,992 1,934 Total operating
expenses 4,594 3,449 12,922 9,787
Net income $ 78,982 $ 43,232 $ 213,749 $
123,778 Earnings per share - common stock, basic $
1.04 $ 1.12 $ 3.05 $ 3.33 Earnings per share - common stock,
diluted $ 1.04 $ 1.11 $ 3.05 $ 3.32 Dividends per share $
1.00 $ 1.10 $ 3.00 $ 3.40 Weighted average shares
outstanding 75,743,002 38,765,078 70,057,263
37,214,640
Table 3
Key Statistics
(Amounts are unaudited and subject to
change)
Three months ended (unaudited)
September 30,
2011
June 30,
2011
March 31,
2011
December 31,
2010
September 30,
2010
Statement of Income Data Interest income $ 110,505 $ 113,519
$ 87,275 $ 67,952 $ 64,024 Interest Expense (40,259 )
(35,910 ) (26,194 ) (24,740 ) (24,066 )
Net
Interest Income 70,246 77,609 61,081 43,212 39,958 Gain
on sale of mortgage-backed securities 13,330 4,405 – 5,783 6,723
Operating Expenses (4,594 ) (4,471 ) (3,858 ) (3,356
) (3,449 )
Net Income $
78,982 $ 77,543 $ 57,223 $ 45,639 $
43,232 Earnings per share - common stock, basic $
1.04 $ 1.04 $ 0.96 $ 0.99 $ 1.12 Earnings per share - common
stock, diluted $ 1.04 $ 1.04 $ 0.96 $ 0.99 $ 1.11 Weighted
average shares outstanding 75,743 74,807 59,442 46,100 38,765
Distributions per common share $ 1.00 $ 1.00 $ 1.00 $ 1.00 $
1.10 Key Portfolio Statistics Average MBS $ 16,192,903 $
14,956,852 $ 10,883,248 $ 7,990,536 $ 6,881,681 Average Repurchase
Agreements $ 14,884,196 $ 13,540,291 $ 9,983,197 $ 7,326,776 $
6,302,601 Average Equity $ 2,035,296 $ 2,016,013 $ 1,497,223 $
1,188,389 $ 1,001,956 Average Portfolio Yield 2.72 % 3.03 % 3.20 %
3.39 % 3.70 % Average Cost of Funds 1.08 % 1.06 % 1.05 % 1.35 %
1.53 % Interest Rate Spread 1.64 % 1.97 % 2.15 % 2.04 % 2.17 %
Return on Average Equity 15.52 % 15.39 % 15.29 % 15.39 % 17.26 %
Average Annual Portfolio Repayment Rate 28.55 % 18.54 % 22.44 %
31.26 % 33.91 % Debt to Equity (at period end) 7.9:1 7.4:1 6.1:1
7.6:1 5.6:1 Debt to Additional Paid in Capital at period end) 8.4:1
8.0:1 6.4:1 8.3:1 6.4:1
Note: The average data presented above
are computed from the Company’s books and records, using daily
weighted values. All percentages are annualized.
Table 4
Mortgage-backed Securities Portfolio as
of September 30, 2011
(Amounts are unaudited and subject to
change)
MBS Gross Gross Amortized
Unrealized Unrealized Estimated Cost Loss Gain Fair Value % of
Total Agency MBS Fannie Mae Certificates ARMS $ 11,427,141 $ (172)
$ 255,762 $ 11,682,731 66.3% Fixed Rate 705,818 (1,044)
599 705,373 4.0% Total Fannie Mae 12,132,959
(1,216) 256,361 12,388,104 Freddie Mac
Certificates ARMS 4,710,834 (83) 90,263 4,801,014 27.3% Fixed Rate
425,428 (768) 596 425,256 2.4% Total Freddie
Mae 5,136,262 (851) 90,859 5,226,270
Total Agency MBS $ 17,269,221 $ (2,067)
$ 347,220 $ 17,614,374
Table 5
Repo Borrowings September 30,
2011
(Amounts are unaudited and subject to
change)
Weighted Average Balance Contractual Rate
Within 30 days $ 15,886,231 0.29% 30 days to 3 months - - 3 months
to 36 months - - $ 15,886,231 0.29%
Table 6
Hatteras Swap Portfolio as of September
30, 2011
(Amounts are unaudited and subject to
change)
Remaining Weighted Average
Notional Term Fixed Interest Maturity
Amount in Months Rate in
Contract 12 months or less $ 400,000 6 2.64 % Over 12
months to 24 months 900,000 19 2.00 % Over 24 months to 36 months
1,600,000 32 1.92 % Over 36 months to 48 months 4,000,000 43 1.70 %
Over 48 months to 60 months 600,000 50 1.56 % Total
$ 7,500,000 36
1.82
%
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