Exhibit 99.1
Hatteras Financial Corp. Announces Third Quarter 2011 Financial Results
WINSTON-SALEM, N.C.--(BUSINESS WIRE)--October 25, 2011--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 | % |
CONTACT:
Contacts
Hatteras Financial Corp.
Kenneth A. Steele, 336-760-9331
Chief Financial Officer
or
CCG Investor Relations
Mark Collinson, 310-954-1343
Partner
www.ccgir.com
