Hatteras Financial Corp. Announces Fourth Quarter 2012 Financial Results

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Hatteras Financial Corp. Announces Fourth Quarter 2012 Financial Results

WINSTON-SALEM, N.C.--(BUSINESS WIRE)-- Hatteras Financial Corp. (NYSE: HTS) ("Hatteras" or the "Company") today announced financial results for the quarter ended December 31, 2012.

Fourth Quarter 2012 Highlights

  • Net income of $1.02 per weighted average share
  • Declared a $0.70 per share common dividend
  • Book value $28.19 per share at year end
  • Net return on average common equity of 14.07%
  • Average net interest spread of 1.08%
  • Annualized total expense ratio of 0.89% of average shareholders' equity

Full Year 2012 Highlights

  • Net income of $3.67 per weighted average share
  • Declared $3.30 per share common dividends
  • Book value increased $1.11 per share
  • Net return on average common equity of 12.96%
  • Undistributed taxable income of $0.45 per share at year end

Fourth Quarter 2012 Results

During the quarter ended December 31, 2012, the Company earned net income available to common shareholders of $101.3 million, or $1.02 per diluted common share, compared to net income of $82.0 million, or $0.83 per diluted common share during the quarter ended September 30, 2012. Net interest income for the quarter ended December 31, 2012 was $74.7 million, compared to $79.6 million for the quarter ended September 30, 2012. The Company's net interest margin decreased to 1.08% for the fourth quarter of 2012 from 1.22% in the third quarter of 2012 due to a portfolio yield drop that was not offset by a corresponding decrease in the Company's cost of funds. The Company's cost funds (including hedges) increased 0.02% to 0.96% for the quarter ended December 31, 2012. The Company's average repurchase agreement (repo) rate increased to 0.44% in the fourth quarter of 2012, from 0.41% in the third quarter of 2012, on all outstanding short-term repo positions. The Company realized gain on sale of mortgage-backed securities (MBS) of $39.1 million during the quarter compared to $10.5 million for the previous quarter. The annualized expense ratio for the quarter was 0.89% of average shareholders' equity for the quarter ended December 31, 2012 as compared to 0.84% for the prior quarter.

"We achieved solid returns for our investors in 2012 despite uncertain market conditions that impacted the interest rate and mortgage markets," said Michael R. Hough the Company's Chief Executive Officer. "Our take away from last year is that our clear long-term strategy enables us to continue to generate solid risk-adjusted returns while best positioning Hatteras for future volatility."

Mr. Hough added "We believe the ARM based, short-duration balance sheet we have carefully built over the past five years properly reflects where we should be positioned today in light of domestic and global economic uncertainty. We need to remain diligent in continuing to assess the risks in our portfolio and maintaining the appropriate balance of assets and liabilities that is imperative at this point of the economic cycle."

Dividend

The Company declared a dividend of $0.70 per share of common stock with respect to the quarter ended December 31, 2012, which was a decrease from the $0.80 per share dividend for the quarter ended September 30, 2012. Based on the closing share price of $24.81 on December 31, 2012, the fourth quarter dividend equates to an annualized yield of 11.3%. The Company also declared a dividend of $0.4765625 per share of the Company's 7.625% Series A Cumulative Redeemable Preferred Stock with respect to the quarter ended December 31, 2012.

Portfolio

The Company's weighted average earning assets, consisting of residential mortgage securities issued by Fannie Mae and Freddie Mac ("agency securities"), was $25.8 billion for the quarter ended December 31, 2012, compared to $24.4 billion for the previous quarter. The portfolio's weighted average coupon was 2.93% for the fourth quarter of 2012, compared to 2.99% for the third quarter of 2012, reflecting lower rates on new security purchases. The annualized yield on average assets was 2.04% for the fourth quarter of 2012, compared to 2.16% for the third quarter of 2012.

At December 31, 2012, the Company's portfolio of agency securities consisted of 93.7% of adjustable-rate agency securities and 6.3% of 15-year fixed-rate agency securities. At December 31, 2012, the Company owned $22.4 billion of adjustable-rate agency securities with a weighted average coupon of 2.95% and a weighted average cost basis of $102.79, and $1.5 billion of 15-year fixed-rate agency securities with a weighted average coupon of 2.62%, and a weighted average cost basis of $103.64. The Company's adjustable-rate agency securities portfolio at December 31, 2012 is summarized below.

Hatteras Financial Corp ARM Portfolio
   Weighted Avg.   
(dollars in thousands)CurrentWeighted Avg.Amortized

Weighted
Avg.

Months to ResetFace valueCouponPurchase PriceAmortized CostMarket PriceMarket Value
0-12$856,6984.03%$101.24$867,348$106.79$914,832
13-24911,4123.88%$102.28932,202$106.08966,854
25-362,155,2063.60%$102.272,204,154$105.552,274,763
37-483,059,1303.06%$102.383,132,043$104.843,207,245
49-603,450,9592.76%$102.823,548,369$104.813,616,891
61-722,868,3373.26%$102.552,941,356$105.543,027,295
73-847,276,8542.44%$103.377,522,264$104.547,607,359
85-96126,9243.08%$103.47131,327$105.17133,487
97-108--$--$--
109-120610,5092.81%$103.53632,087$105.00641,013
121-140 19,9952.69%$103.72 20,739$104.65 20,923
Total ARMS$21,336,0242.95%$102.79$21,931,889$105.04$22,410,662
 

During the fourth quarter of 2012, the expense of amortizing the premium on the Company's securities was $50.1 million, compared to $47.3 million during the third quarter of 2012. The weighted-average principal repayment rate (scheduled and unscheduled principal payments as a percentage of the weighted-average portfolio, on an annualized basis) during the fourth quarter of 2012 was 26.6%, compared to 27.6% during the third quarter of 2012. The Company's weighted-average one-month constant prepayment rate (CPR) for the quarter ended December 31, 2012 was 19.8, as compared to 20.5 for the quarter ended September 30, 2012. CPR measures unscheduled repayment rate as a percentage of principal on an annualized basis.

Portfolio Financing and Leverage

At December 31, 2012, the Company financed its portfolio with approximately $22.9 billion of borrowings under repurchase agreements. The Company's repo debt-to-shareholders' equity ratio at December 31, 2012, was 7.4 to 1. The Company 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 December 31, 2012, the Company had entered into interest rate swaps with a notional amount of $10.7 billion. The swap agreements, which are indexed to 30-day LIBOR, have a weighted average remaining term of 31 months at a weighted average fixed rate of 1.47%.

Book Value

The Company's book value (shareholders' equity) per share on December 31, 2012 was $28.19, down $1.41 or 4.76%, from the per share book value of $29.60 on September 30, 2012. On a per share basis, the book value at December 31, 2012 consisted of $25.15 of common equity, $0.38 of retained earnings, $5.12 of unrealized gains on agency securities, and ($2.46) of unrealized losses on interest rate swaps.

Full Year 2012 Results

Although the Company experienced spread compression over the course of the year as long-term interest rates declined with little change in short-term rates, 2012 still offered a favorable earning environment. The Company generated net income of $341.7 million, for the 12 months ended December 31, 2012, which equaled $3.67 per weighted average share of common stock. Return on weighted average equity for the year was 12.96%. Book value per share increased $1.11, or 4.1%, from $27.08 on December 31, 2011 to $28.19 on December 31, 2012.

For the 12 months ended December 31, 2012, the annualized yield on weighted average assets during the period was 2.28%, and the annualized cost of funds on the weighted average repurchase balance was 0.96%. This resulted in a weighted average interest rate spread of 1.32% for the year.

Conference Call

The Company will host a conference call at 10:00 a.m. ET on Wednesday February 13, 2013, to discuss financial results for the fourth quarter ended December 31, 2012. To participate in the event by telephone, please dial (888) 317-6016 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) 317-6016. Canada callers should dial (855) 669-9657. A digital replay of the call will be available on Wednesday, February 13, 2013 at approximately 12:00 noon ET through Thursday, February 21, 2013 at 9:00 a.m. ET. Dial (877) 344-7529 and enter the conference ID number 10025029. 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 1000® index.

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 and repurchase agreements, future volatility in the domestic and global economies, risks in the portfolio and the Company's return profile.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.

 
Hatteras Financial Corp.
Balance Sheets
 
(Dollars in thousands, except share amounts)    
December 31, 2012December 31, 2011
Assets
 
Mortgage-backed securities, at fair value
(including pledged assets of $22,591,973 and $17,012,472 at December 31, 2012$23,919,251$17,741,873
and December 31, 2011, respectively)
Cash and cash equivalents168,424347,045
Restricted cash281,021237,014
Unsettled purchased mortgage-backed securities, at fair value138,33849,630
Receivable for securities sold1,587,535-
Accrued interest receivable77,11363,025
Principal payments receivable190,832105,333
Debt security, held to maturity, at cost15,00015,000
Other assets 26,604 27,799
Total assets$26,404,118$18,586,719
 
 
 
Liabilities and shareholders' equity
Repurchase agreements$22,866,429$16,162,375
Payable for unsettled securities137,12148,999
Accrued interest payable7,5924,596
Interest rate hedge liability243,945219,167
Dividend payable73,80469,141
Accounts payable and other liabilities 2,363 2,253
Total liabilities$23,331,254$16,506,531
 
Shareholders' equity:
7.625% Series A Cumulative Redeemable Preferred stock, $.001 par value, 25,000,000
shares authorized, 11,500,000 and 0 shares issued and outstanding at December 31, 2012
and 2011, respectively ($287,500 aggregate liquidation preference)278,252-
Common stock, $.001 par value, 200,000,000 shares authorized,
98,822,654 and 76,823,220 shares issued and outstanding at December 31, 2012 and
2011, respectively9977
Additional paid-in capital2,494,3031,904,748
Retained earnings37,3562,041
Accumulated other comprehensive income 262,854 173,322
Total shareholders' equity 3,072,864 2,080,188
Total liabilities and shareholders' equity$26,404,118$18,586,719

 
Hatteras Financial Corp.
Statements of Income
For the years ended December 31, 2012, 2011 and 2010
     
(Dollars in thousands, except share amounts)
 
 
2012  2011  2010
 
Interest income:
Interest income on mortgage-backed securities$504,800$424,713$263,751
Interest income on short-term cash investments 1,508   1,407   1,265
Interest income506,308426,120265,016
 

Interest expense

 197,064   144,662   95,923
 

Net interest income

 309,244   281,458   169,093
 
Operating expenses:
Management fee17,42013,7879,205
Share based compensation1,9201,1501,432
General and administrative 5,006   2,724   2,507
Total operating expenses 24,346   17,661   13,144
 
Other income/(expense):
Net gain on sale of mortgage-backed securities64,34720,57613,551
 
Net income349,245284,373169,500
Dividends on preferred stock 7,551   0   0
Net income available to common shareholders$341,694  $284,373  $169,500
 
Earnings per share - common stock, basic$3.67  $3.97  $4.30
 
Earnings per share - common stock, diluted$3.67  $3.97  $4.30
 
Weighted average common shares outstanding, basic 93,185,520   71,708,058   39,454,362
 
Weighted average common shares outstanding, diluted 93,185,520   71,708,058   39,454,362

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Hatteras Financial Corp.
Statements of Comprehensive Income
For the years ended December 31, 2012, 2011 and 2010
     
(Dollars in thousands)
 
 
 
2012