Exhibit 99.1
Hatteras Financial Corp. Announces Fourth Quarter 2014 Financial Results
Comprehensive Income of $0.24 per Common Share
WINSTON-SALEM, N.C.--(BUSINESS WIRE)—February 17, 2015--Hatteras Financial Corp. (NYSE: HTS) (“Hatteras” or the “Company”) today announced financial results for the quarter ended December 31, 2014.
Fourth Quarter 2014 Highlights
· | Comprehensive income of $0.24 per weighted-average common share |
· | Core earnings of $0.59 per weighted-average common share |
· | Dividend of $0.50 per common share |
· | Quarter end book value of $22.05 per common share |
· | GAAP leverage of 6.5 to 1 at period end |
· | Effective leverage of 8.0 to 1 at period end |
· | Weighted-average effective leverage of 7.7 to 1 for the quarter |
· | Weighted-average constant prepayment rate (“CPR”) of 15 for the quarter |
Full Year 2014 Highlights
· | Comprehensive income of $2.57 per weighted-average common share |
· | Core earnings of $2.37 per weighted-average common share |
· | Dividends of $2.00 per common share |
· | Economic return of 11.9% |
Fourth Quarter 2014 Results
For the quarter ended December 31, 2014, the Company had comprehensive income available to common shareholders of $23.7 million, or $0.24 per weighted-average common share, as compared to $59.0 million, or $0.61 per weighted-average common share, for the quarter ended September 30, 2014. The decrease in comprehensive income available to common shareholders was largely due to decreases in the fair values of the Company’s hedging instruments in excess of fair value increases on the Company’s assets. For the quarter ended December 31, 2014, the Company had core earnings of $0.59 per weighted-average common share compared to $0.51 per weighted-average common share during the quarter ended September 30, 2014. The increase was driven primarily by higher average earning assets from higher leverage and lower effective interest expense, caused by the maturity of higher cost interest rate swaps in the third quarter. Also, the yield on the Company’s MBS increased as a result of lower prepayment rates. “Core earnings” represents a non-GAAP measure and is calculated as net interest margin, as adjusted for certain derivative impacts, and after deducting operating expenses and dividends on preferred stock. Management believes core earnings is additional useful information regarding the Company’s performance and an enhancement to the Company’s reporting. Management uses core earnings as a measure of the earnings power of the portfolio and uses it as an additional gauge for determining appropriate distributable income, among other things.
“The results of both the 4th quarter and all of 2014 continue to reflect how we create value for our investors”, said Michael R. Hough, the Company’s Chairman and Chief Executive Officer. “We generated a total economic return of 11.9% for 2014 as our hybrid ARM investments continue to provide attractive risk-adjusted returns while maintaining an asset/liability mix with a neutral exposure to interest rate changes. Even though the global financial environment has pressured long rates lower, rates on the short end of the yield curve where our assets and liabilities are concentrated, increased during 2014. Despite these higher short-term rates, our book value increased 2.6% during the year. While we continue to manage our portfolio towards the risk of higher interest rates, we are moving forward with other initiatives that we expect will generate investments that enhance our long-term risk return profile.” Economic return for any period is defined as dividends per common share and the change in net book value per common share over the beginning of period net book value per common share.
Net interest margin for the quarter ended December 31, 2014 was $61.1 million, compared to $49.3 million for the quarter ended September 30, 2014. The Company’s net interest spread increased to 1.31% for the fourth quarter of 2014 compared to 1.10% for the third quarter of 2014. The increase in net interest spread was a result of the yield on the Company’s mortgage-backed securities
(“MBS”) increasing to 2.08% in the fourth quarter compared to 1.96% in the third quarter and due to lower cost of funds. The increase in MBS yield was driven by a decline in prepayments resulting in lower premium amortization expense.
The Company’s cost of funds decreased from 0.86% to 0.77% for the quarter ended December 31, 2014 compared to the previous quarter. The Company’s average short-term financing rate was 0.35% in the fourth quarter of 2014, up slightly from 0.33% in the third quarter of 2014. The Company’s effective cost of funds, which includes certain interest rate swap adjustments, was 1.04% for the fourth quarter as compared to 1.12% for the third quarter, reflecting the lower interest rate swap costs mentioned above. Operating expenses, including those of Company’s subsidiaries, were $9.1 million for the fourth quarter as compared to $7.1 million in the third quarter, reflecting the higher personnel and overhead costs along with various year end expenses. The total annualized expense ratio was 1.49% of average shareholders’ equity for the quarter ended December 31, 2014 as compared to 1.16% for the quarter ended September 30, 2014.
Dividend
The Company declared a dividend of $0.50 per common share with respect to the quarter ended December 31, 2014, consistent with the quarter ended September 30, 2014. Based on the closing share price of $18.43 on December 31, 2014, the fourth quarter dividend equates to an annualized yield of 10.9%.
Portfolio
The Company’s weighted-average earning assets, consisting of residential mortgage assets, primarily MBS issued by Fannie Mae and Freddie Mac, were $20.6 billion for the quarter ended December 31, 2014 compared to $19.7 billion for the quarter ended September 30, 2014. The fair value of the Company’s MBS and to-be-announced (“TBA”) securities as of December 31, 2014 and September 30, 2014 is summarized below.
(Dollars in thousands) | December 31, 2014 | | | September 30, 2014 | |
| % of Earning Assets | | | Market Value | | | Wtd. Avg. Coupon | | | % of Earning Assets | | | Market Value | | | Wtd. Avg. Coupon | |
ARM securities | | 77.3 | % | | $ | 16,310,376 | | | | 2.75 | % | | | 78.4 | % | | $ | 16,151,701 | | | | 2.77 | % |
15-year fixed securities | | 6.0 | % | | | 1,276,634 | | | | 3.47 | % | | | 3.6 | % | | | 738,723 | | | | 3.50 | % |
15-year dollar roll TBA securities | | 16.7 | % | | | 3,521,816 | | | | 2.93 | % | | | 18.0 | % | | | 3,703,228 | | | | 3.00 | % |
| | 100.0 | % | | $ | 21,108,826 | | | | 2.82 | % | | | 100.0 | % | | $ | 20,593,652 | | | | 2.84 | % |
The annualized yield on the Company’s average ARMs and 15-year fixed securities was 2.08% for the fourth quarter of 2014, compared to 1.96% for the third quarter. The increase in yield was primarily due to the decrease in premium amortization as the principal repayment rate on the portfolio decreased.
During the fourth quarter of 2014, the expense of amortizing the premium on the Company’s securities was $25.6 million, compared to $29.4 million during the third quarter. 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 2014 was 20.6%, compared to 25.3% during the third quarter. The Company’s weighted-average one-month CPR for the quarter ended December 31, 2014 was 15.4, as compared to 19.0 for the quarter ended September 30, 2014. CPR measures unscheduled repayment rate as a percentage of principal on an annualized basis.
At December 31, 2014, the Company owned 15-year TBA securities financed in the dollar roll market with a fair value of approximately $3.5 billion, as shown in the table above. The Company accounts for TBA securities as derivative instruments and recognizes dollar roll gains and losses in other income (loss) in the Company's financial statements. As of December 31, 2014, the Company's net TBA securities had a cost basis of approximately $3.5 billion and a net carrying value of $11.9 million reported in derivative assets at fair value on the Company's balance sheet. The Company uses dollar rolls as alternative financing for its 15-year fixed-rate positions.
The Company also earned interest of $35,000 from prime jumbo ARM loans purchased and closed on in the fourth quarter of 2014. The Company owned $31.5 million of these loans at December 31, 2014 with an average loan size of $790,000. The loans had a weighted-average interest rate of 3.43% and weighted-average loan-to-value of 65% at December 31, 2014.
Portfolio Financing and Leverage
At December 31, 2014, the Company financed its portfolio with approximately $15.8 billion of borrowings under repurchase agreements. The Company’s debt-to-shareholders’ equity ratio at December 31, 2014, was 6.5 to 1 compared to 6.1 to 1 at September 30, 2014. The Company’s effective leverage, which includes the effects of TBA dollar roll financing, was 8.0 to 1 at December 31, 2014 compared with 7.6 to 1 at September 30, 2014. Weighted-average effective leverage in the fourth quarter was 7.7
to 1, up from 7.4 to 1 in the third quarter. At December 31, 2014, the Company’s repurchase agreements had a weighted-average remaining term of approximately 29 days.
The Company uses interest rate swap agreements and Eurodollar futures contracts 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, 2014, the Company had entered into interest rate swaps and Eurodollar futures contracts with effective notional amounts and rates as shown in the following table.
(Dollars in thousands) | Wtd -Avg. Futures Contract Notional | | | Wtd-Avg Futures Contracts Rate | | | Wtd.-Avg. Swap Notional | | | Wtd-Avg Swap Rate | | | Total | | | Wtd. Avg. Rate | |
Effective 2015 | | 8,143,000 | | | | 0.95 | % | | | 6,408,333 | | | | 1.11 | % | | | 14,551,333 | | | | 1.02 | % |
Effective 2016 | | 7,538,500 | | | | 1.97 | % | | | 3,500,000 | | | | 0.91 | % | | | 11,038,500 | | | | 1.64 | % |
Effective 2017 | | 6,801,750 | | | | 2.94 | % | | | 1,125,000 | | | | 0.92 | % | | | 7,926,750 | | | | 2.66 | % |
Effective 2018 | | 4,945,500 | | | | 3.52 | % | | | 50,000 | | | | 0.95 | % | | | 4,995,500 | | | | 3.49 | % |
Effective 2019 | | 1,496,000 | | | | 3.89 | % | | | - | | | | - | | | | 1,496,000 | | | | 3.89 | % |
Effective 2020 | | 1,483,750 | | | | 4.04 | % | | | - | | | | - | | | | 1,483,750 | | | | 4.04 | % |
Effective 2021 | | 701,000 | | | | 4.03 | % | | | - | | | | - | | | | 701,000 | | | | 4.03 | % |
The Company also enters into swaptions (option agreements to enter swaps at future dates) as part of its hedging strategy. At December 31, 2014, the Company had swaptions with the following terms:
(Dollars in thousands) | | Options | | | Underlying Swaps | |
Swaptions | | Original Cost | | | Fair Value | | | Wtd. Avg. Months to Expiration | | | Notional | | | Wtd. Avg. Fixed Pay Rate | | | Receive Rate | | Wtd. Avg. Term (Years) | |
Fixed payer | | $ | 20,080 | | | $ | 4,561 | | | | 6 | | | $ | 992,300 | | | | 2.74% | | | 3 month LIBOR | | | 7 | |
Book Value
The Company’s book value (shareholders’ equity less preferred stock liquidation preference) per share on December 31, 2014 was $22.05, down 1.1% from the per share book value of $22.30 on September 30, 2014. On a per share basis, the book value at December 31, 2014 consisted of $25.27 of common equity, $(5.35) of retained losses, $2.44 of unrealized gains on agency securities including TBA securities, and $(0.31) of unrealized losses on interest rate swaps. This last item relates to the unamortized balance of the Company’s interest rate swaps remaining from when the Company accounted for these derivatives as cash flow hedges and does not include changes related to other derivatives, which flow through earnings.
Full Year 2014 Results
The Company had comprehensive income of $248.3 million or $2.57 per weighted-average common share for the year ended December 31, 2014, compared to a comprehensive loss of ($427.0) million or ($4.34) per weighted-average common share for the year ended December 31, 2013. The improvement was primarily driven by the favorable swing in fair value adjustments on the Company’s MBS portfolio, which are presented in other comprehensive income. The Company had net income of $34.4 million or $0.36 per weighted-average common share for the year ended December 31, 2014, compared to a net loss of ($156.1) million or ($1.59) per weighted-average common share for the year ended December 31, 2013. Net income improved primarily due to realized losses on sale of MBS securities in 2013, when the Company repositioned its portfolio and lowered its leverage to reduce its exposure to rate moves and market volatility.
Core earnings were $2.37 for 2014, up from $2.07 for 2013, both on a weighted-average common share basis. The increase was driven by a higher yield on the Company’s average ARMs and 15-year fixed securities, which was 2.09% during 2014 as compared to 1.96% during 2013, along with incremental earnings from TBA securities financed in the dollar roll markets. The most significant factor to the increase in portfolio yield was lower premium amortization due to lower prepayment levels.
For the year, the Company distributed $2.00 per common share for 2014. Book value per common share at December 31, 2014 was $22.05 compared to $21.50 at December 31, 2013 an increase of 2.6%.
Conference Call
The Company will host a conference call at 10:00 a.m. ET on Wednesday, February 18, 2015, to discuss financial results for the quarter ended December 31, 2014. To participate in the event by telephone, please dial (877) 507-4471 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) 317-6040. Canada callers should dial (855) 669-9657. A digital replay of the call will be available on Wednesday, February 18, 2015 at approximately 12:00 noon ET through Thursday, February 26, 2015 at 9:00 a.m. ET. Dial (877) 344-7529 and enter the conference ID number 10059934. International callers should dial (412) 317-0088 and enter the same conference ID number. Canada callers should dial (855) 669-9658. 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 residential mortgage real estate assets. 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 3000® indexes.
Non-GAAP Measures
In addition to the Company’s results presented in accordance with GAAP, this press release includes certain non-GAAP financial information. Management’s decision to present these supplemental non-GAAP measures arose largely from three developments during 2013: 1) the Company’s cessation of hedge accounting for its interest rates swaps effective September 30, 2013, 2) increased use of Eurodollar futures contracts as interest rate hedges, and 3) the Company’s use of TBA dollar rolls, which generate non-traditional investment income and embody off-balance sheet financing. These changes result in the recognition of material fair value adjustments in net income, as well as line item classifications that make it difficult to clearly explain the economics of the Company’s results and strategies without supplemental disclosures. The non-GAAP measures the Company employs include effective interest expense, effective net interest margin, core earnings, and certain financial metrics derived from non-GAAP information, such as effective cost of funds and effective leverage. The Company uses these measures internally to assess its results and financial condition. Therefore, the Company believes that providing these measures gives users of financial information additional clarity regarding its performance and financial condition, and better enables them to see “through the eyes of management.”
These measures involve differences from results computed in accordance with GAAP, and should be considered supplementary to, and not as a substitute for, the Company’s results computed in accordance with GAAP. Further, the Company’s definition of these non-GAAP measures may not be comparable to other similarly-titled measures of other companies. Reconciliations of each non-GAAP measure to its nearest directly comparable measure calculated in accordance with GAAP are included below.
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 future earnings potential of the Company’s MBS portfolio and its other initiatives, the domestic and global economies and financial markets, interest rates, prepayment rates, the mortgage market and actions by the Federal Reserve. 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.
Consolidated Balance Sheets
(Dollars in thousands, except share related amounts) | | | | | | | |
| | | | | | | |
| December 31, 2014 | | | December 31, 2013 | |
Assets | | | | | | | |
Mortgage-backed securities, at fair value | | | | | | | |
(including pledged assets of $16,538,214 and $17,049,670, respectively) | $ | 17,587,010 | | | $ | 17,642,532 | |
Mortgage loans held for investment, at fair value | | 31,460 | | | | - | |
Cash and cash equivalents (including pledged cash of $323,791 and $225,379, respectively) | | 627,595 | | | | 988,705 | |
Unsettled purchased mortgage-backed securities, at fair value | | 24,792 | | | | - | |
Receivable for securities sold | | 5,197 | | | | 231,214 | |
Accrued interest receivable | | 54,274 | | | | 55,156 | |
Principal payments receivable | | 111,439 | | | | 95,021 | |
Other investments | | 41,252 | | | | 34,910 | |
Derivative assets, at fair value | | 27,151 | | | | 26,989 | |
Other assets | | 6,630 | | | | 2,833 | |
Total assets | $ | 18,516,800 | | | $ | 19,077,360 | |
| | | | | | | |
Liabilities and shareholders’ equity | | | | | | | |
Repurchase agreements | $ | 15,759,831 | | | $ | 16,129,683 | |
Dollar roll liability | | - | | | | 351,826 | |
Payable for unsettled securities | | 24,750 | | | | - | |
Accrued interest payable | | 6,968 | | | | 8,279 | |
Derivative liabilities, at fair value | | 244,591 | | | | 167,607 | |
Dividends payable | | 53,014 | | | | 52,929 | |
Accounts payable and other liabilities | | 6,850 | | | | 2,935 | |
Total liabilities | | 16,096,004 | | | | 16,713,259 | |
| | | | | | | |
Shareholders’ equity: | | | | | | | |
7.625% Series A Cumulative Redeemable Preferred stock, $.001 par value, 25,000,000 shares authorized, 11,500,000 shares issued and outstanding, respectively ($287,500 aggregate liquidation preference) | | 278,252 | | | | 278,252 | |
Common stock, $.001 par value, 200,000,000 shares authorized, 96,771,158 and 96,601,523 shares issued and outstanding, respectively | | 97 | | | | 97 | |
Additional paid-in capital | | 2,454,718 | | | | 2,453,018 | |
Accumulated deficit | | (518,036 | ) | | | (359,214 | ) |
Accumulated other comprehensive income (loss) | | 205,765 | | | | (8,052 | ) |
Total shareholders’ equity | | 2,420,796 | | | | 2,364,101 | |
Total liabilities and shareholders’ equity | $ | 18,516,800 | | | $ | 19,077,360 | |
Table 2
Hatteras Financial Corp.
Consolidated Statements of Income
(Unaudited)
(Dollars in thousands, except share related amounts) | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Three Months Ended December 31 | | | Twelve Months Ended December 31 | | |
| 2014 | | | 2013 | | | 2014 | | | 2013 | | |
| | | | | | | | | | | | | | | | |
Interest income: | | | | | | | | | | | | | | | | |
Mortgage-backed securities | $ | 87,702 | | | $ | 104,312 | | | $ | 354,436 | | | $ | 450,708 | | |
Mortgage loans held for investment | | 35 | | | | - | | | | 35 | | | | - | | |
Short-term cash investments | | 324 | | | | 456 | | | | 1,283 | | | | 1,560 | | |
Total interest income | | 88,061 | | | | 104,768 | | | | 355,754 | | | | 452,268 | | |
| | | | | | | | | | | | | | | | |
Interest expense | | 26,966 | | | | 40,754 | | | | 132,495 | | | | 197,709 | | |
| | | | | | | | | | | | | | | | |
Net interest margin | | 61,095 | | | | 64,014 | | | | 223,259 | | | | 254,559 | | |
| | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | |
Management fee | | 4,112 | | | | 4,224 | | | | 16,532 | | | | 18,180 | | |
Share-based compensation | | 1,020 | | | | 701 | | | | 3,612 | | | | 2,594 | | |
General and administrative | | 3,941 | | | | 2,583 | | | | 10,525 | | | | 7,092 | | |
Total operating expenses | | 9,073 | | | | 7,508 | | | | 30,669 | | | | 27,866 | | |
| | | | | | | | | | | | | | | | |
Other income (loss): | | | | | | | | | | | | | | | | |
Net realized gain (loss) on sale of mortgage-backed securities | | 2,107 | | | | (68,679 | ) | | | 5,196 | | | | (283,012 | ) | |
Impairment of mortgage-backed securities | | - | | | | - | | | | - | | | | (8,102 | ) | |
Gain on mortgage loans held for investment | | 8 | | | | - | | | | 8 | | | | - | | |
Gain (loss) on derivative instruments, net | | (79,988 | ) | | | 2,205 | | | | (141,433 | ) | | | (69,715 | ) | |
Total other income (loss) | | (77,873 | ) | | | (66,474 | ) | | | (136,229 | ) | | | (360,829 | ) | |
| | | | | | | | | | | | | | | | |
Net income (loss) | | (25,851 | ) | | | (9,968 | ) | | | 56,361 | | | | (134,136 | ) | |
Dividends on preferred stock | | 5,481 | | | | 5,481 | | | | 21,922 | | | | 21,922 | | |
Net income (loss) available to common shareholders | $ | (31,332 | ) | | $ | (15,449 | ) | | $ | 34,439 | | | $ | (156,058 | ) | |
| | | | | | | | | | | | | | | | |
Earnings (loss) per share - common stock, basic | $ | (0.32 | ) | | $ | (0.16 | ) | | $ | 0.36 | | | $ | (1.59 | ) | |
| | | | | | | | | | | | | | | | |
Earnings (loss) per share - common stock, diluted | $ | (0.32 | ) | | $ | (0.16 | ) | | $ | 0.36 | | | $ | (1.59 | ) | |
| | | | | | | | | | | | | | | | |
Dividends per share of common stock | $ | 0.50 | | | $ | 0.50 | | | $ | 2.00 | | | $ | 2.45 | | |
| | | | | | | | | | | | | | | | |
Weighted average common shares outstanding, basic | | 96,728,821 | | | | 97,389,614 | | | | 96,603,634 | | | | 98,337,362 | | |
| | | | | | | | | | | | | | | | |
Weighted average common shares outstanding, diluted | | 96,728,821 | | | | 97,389,614 | | | | 96,603,634 | | | | 98,337,362 | | |
Table 3
Hatteras Financial Corp.
Consolidated Statements of Comprehensive Income
(Unaudited)
(Dollars in thousands) | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended December 31 | | | Twelve Months Ended December 31 | |
| 2014 | | | 2013 | | | 2014 | | | 2013 | |
| | | | | | | | | | | | | | | |
Net income (loss) | $ | (25,851 | ) | | $ | (9,968 | ) | | $ | 56,361 | | | $ | (134,136 | ) |
| | | | | | | | | | | | | | | |
Other comprehensive income: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Net unrealized gains (losses) on securities | | | | | | | | | | | | | | | |
available for sale | | 39,034 | | | | 63,595 | | | | 122,824 | | | | (391,590 | ) |
Net unrealized gains on derivative instruments | | 15,967 | | | | 12,732 | | | | 90,993 | | | | 120,684 | |
Other comprehensive income (loss) | | 55,001 | | | | 76,327 | | | | 213,817 | | | | (270,906 | ) |
| | | | | | | | | | | | | | | |
Comprehensive income (loss) | | 29,150 | | | | 66,359 | | | | 270,178 | | | | (405,042 | ) |
| | | | | | | | | | | | | | | |
Dividends on preferred stock | | 5,481 | | | | 5,481 | | | | 21,922 | | | | 21,922 | |
| | | | | | | | | | | | | | | |
Comprehensive income (loss) available to | | | | | | | | | | | | | | | |
common shareholders | $ | 23,669 | | | $ | 60,878 | | | $ | 248,256 | | | $ | (426,964 | ) |
| | | | | | | | | | | | | | | |
Comprehensive income (loss) per share - | | | | | | | | | | | | | | | |
common stock basic and diluted | $ | 0.24 | | | $ | 0.63 | | | $ | 2.57 | | | $ | (4.34 | ) |
Table 4
Key Statistics (1)
(Amounts are unaudited and subject to change)
(in thousands, except per share amounts) | Three Months Ended | |
| Dec. 31, 2014 | | | Sept. 30, 2014 | | | June 30, 2014 | | | March 31, 2014 | | | Dec. 31, 2013 | |
Statement of Income Data | | | | | | | | | | | | | | | | | | | |
Interest income | $ | 88,061 | | | $ | 81,299 | | | $ | 89,805 | | | $ | 96,589 | | | $ | 104,768 | |
Interest expense | | (26,966 | ) | | | (31,950 | ) | | | (35,128 | ) | | | (38,451 | ) | | | (40,754 | ) |
Net interest margin | | 61,095 | | | | 49,349 | | | | 54,677 | | | | 58,138 | | | | 64,014 | |
| | | | | | | | | | | | | | | | | | | |
Operating expenses | | (9,073 | ) | | | (7,125 | ) | | | (7,310 | ) | | | (7,161 | ) | | | (7,508 | ) |
| | | | | | | | | | | | | | | | | | | |
Other income (loss): | | | | | | | | | | | | | | | | | | | |
Net realized gain (loss) on sale of MBS | | 2,107 | | | | 237 | | | | (4,584 | ) | | | 7,436 | | | | (68,679 | ) |
Impairment of MBS | | - | | | | - | | | | - | | | | - | | | | - | |
Gain on mortgage loans held for investment | | 8 | | | | - | | | | - | | | | - | | | | - | |
Gain (loss) on derivative instruments, net | | (79,988 | ) | | | 35,430 | | | | (55,260 | ) | | | (41,615 | ) | | | 2,205 | |
Total other income (loss) | | (77,873 | ) | | | 35,667 | | | | (59,844 | ) | | | (34,179 | ) | | | (66,474 | ) |
| | | | | | | | | | | | | | | | | | | |
Net income (loss) | | (25,851 | ) | | | 77,891 | | | | (12,477 | ) | | | 16,798 | | | | (9,968 | ) |
Dividends on preferred stock | | (5,481 | ) | | | (5,480 | ) | | | (5,481 | ) | | | (5,480 | ) | | | (5,481 | ) |
Net income (loss) available to common shareholders | $ | (31,332 | ) | | $ | 72,411 | | | $ | (17,958 | ) | | $ | 11,318 | | | $ | (15,449 | ) |
| | | | | | | | | | | | | | | | | | | |
Comprehensive income (loss) available to common shareholders | $ | 23,669 | | | $ | 58,952 | | | $ | 87,712 | | | $ | 77,923 | | | $ | 60,878 | |
| | | | | | | | | | | | | | | | | | | |
Earnings (loss) per share, basic and diluted | $ | (0.32 | ) | | $ | 0.75 | | | $ | (0.19 | ) | | $ | 0.12 | | | $ | (0.16 | ) |
| | | | | | | | | | | | | | | | | | | |
Comprehensive income (loss) available to common shareholders, basic and diluted | $ | 0.24 | | | $ | 0.61 | | | $ | 0.91 | | | $ | 0.81 | | | $ | 0.63 | |
| | | | | | | | | | | | | | | | | | | |
Weighted average shares outstanding | | 96,729 | | | | 96,563 | | | | 96,516 | | | | 96,606 | | | | 97,390 | |
| | | | | | | | | | | | | | | | | | | |
Distributions per common share | $ | 0.50 | | | $ | 0.50 | | | $ | 0.50 | | | $ | 0.50 | | | $ | 0.50 | |
| | | | | | | | | | | | | | | | | | | |
Key Statistics (2) | | | | | | | | | | | | | | | | | | | |
Average MBS | $ | 16,895,051 | | | $ | 16,484,392 | | | $ | 17,019,973 | | | $ | 17,485,685 | | | $ | 19,309,176 | |
Average debt (3) | $ | 15,235,739 | | | $ | 14,806,602 | | | $ | 15,349,322 | | | $ | 15,787,282 | | | $ | 18,013,431 | |
Average equity | $ | 2,442,086 | | | $ | 2,453,988 | | | $ | 2,429,640 | | | $ | 2,405,938 | | | $ | 2,405,778 | |
Average portfolio yield | | 2.08 | % | | | 1.96 | % | | | 2.10 | % | | | 2.20 | % | | | 2.16 | % |
Average cost of funds | | 0.77 | % | | | 0.86 | % | | | 0.92 | % | | | 0.97 | % | | | 0.90 | % |
Interest rate spread | | 1.31 | % | | | 1.10 | % | | | 1.18 | % | | | 1.23 | % | | | 1.26 | % |
TBA dollar roll income | $ | 23,195 | | | $ | 22,370 | | | $ | 25,622 | | | $ | 20,821 | | | $ | 5,605 | |
Average TBA dollar roll position | $ | 3,687,748 | | | $ | 3,257,935 | | | $ | 3,393,046 | | | $ | 2,935,689 | | | $ | 803,746 | |
Average portfolio yield, including TBA dollar roll income | | 2.16 | % | | | 2.09 | % | | | 2.26 | % | | | 2.29 | % | | | 2.19 | % |
Effective interest expense (4) | $ | 39,547 | | | $ | 41,630 | | | $ | 41,959 | | | $ | 43,179 | | | $ | 47,411 | |
Effective cost of funds (4) | | 1.04 | % | | | 1.12 | % | | | 1.09 | % | | | 1.09 | % | | | 1.05 | % |
Effective net interest margin (5) | $ | 71,709 | | | $ | 62,039 | | | $ | 73,468 | | | $ | 74,231 | | | $ | 62,962 | |
Effective interest rate spread (6) | | 1.12 | % | | | 0.97 | % | | | 1.17 | % | | | 1.20 | % | | | 1.14 | % |
Core earnings (7) | $ | 57,155 | | | $ | 49,434 | | | $ | 60,677 | | | $ | 61,590 | | | $ | 49,973 | |
Core earnings per share, basic and diluted | $ | 0.59 | | | $ | 0.51 | | | $ | 0.63 | | | $ | 0.64 | | | $ | 0.51 | |
Constant prepayment rate (CPR) | | 15.4 | | | | 19.0 | | | | 15.4 | | | | 13.0 | | | | 14.2 | |
Average annual portfolio repayment rate | | 20.63 | % | | | 25.31 | % | | | 20.36 | % | | | 17.66 | % | | | 19.55 | % |
Debt to equity (at period end) | 6.5:1 | | | 6.1:1 | | | 6.2:1 | | | 6.3:1 | | | 7.0:1 | |
Debt to paid-in-capital (at period end) (8) | 5.8:1 | | | 5.5:1 | | | 5.5:1 | | | 5.6:1 | | | 6.1:1 | |
Effective debt to equity (at period end) (9) | 8.0:1 | | | 7.6:1 | | | 7.4:1 | | | 7.7:1 | | | 7.3:1 | |
(1) | This table includes non-GAAP financial measures. See the earlier section on non-GAAP Measures for important disclosures, as well as Tables 10 and 11 which contain reconciliations to the most comparable U.S. GAAP measures. |
(2) | The averages presented herein are computed from the Company’s books and records, using daily weighted values. Percentages are annualized, as appropriate. |
(3) | Average debt includes borrowings under repurchase agreements and dollar roll liability as presented on the balance sheet. It does not include off-balance sheet financing related to the Company’s TBA dollar roll position. |
(4) | Effective interest expense includes certain interest rate swap adjustments and gains/losses on maturities of Eurodollar futures. Effective cost of funds is effective interest expense for the period on an annualized basis divided by average repurchase agreements and dollar roll liability for the period. See Table 10. |
(5) | Effective net interest margin includes certain interest rate swap adjustments, gains/losses on maturities of Eurodollar futures and TBA dollar roll income. See Table 11. |
(6) | Effective interest rate spread is the difference between average portfolio yield including TBA dollar roll income and effective cost of funds for the period. |
(7) | Core earnings consists of effective interest margin reduced by operating expenses and dividends on preferred stock for the period. See Table 11. |
(8) | Debt to paid-in capital ratio was calculated by dividing the amount outstanding under repurchase agreements at period end by the sum of the par value of the Company’s common stock and additional paid-in capital at period end. |
(9) | Effective debt to equity ratio was calculated the same as the debt to equity ratio other than to include the Company’s off-balance sheet TBA dollar roll liability at period end in the numerator. The Company’s off-balance sheet TBA dollar roll liability was $3,518,289 as of December 31, 2014. |
Hatteras Financial Corp
(Amounts are unaudited and subject to change)
(Dollars in thousands)
Table 5
Mortgage-Backed Securities Portfolio as of December 31, 2014
| Amortized Cost | | | Gross Unrealized Loss | | | Gross Unrealized Gain | | | Estimated Fair Value | | | % of Total | |
Agency Securities | | | | | | | | | | | | | | | | | | | |
Fannie Mae Certificates | | | | | | | | | | | | | | | | | | | |
ARMs | $ | 9,203,741 | | | $ | (13,737 | ) | | $ | 183,889 | | | $ | 9,373,893 | | | | 53.3 | % |
Fixed-Rate | | 1,111,288 | | | | - | | | | 5,177 | | | | 1,116,465 | | | | 6.4 | % |
Total Fannie Mae | | 10,315,029 | | | | (13,737 | ) | | | 189,066 | | | | 10,490,358 | | | | | |
| | | | | | | | | | | | | | | | | | | |
Freddie Mac Certificates | | | | | | | | | | | | | | | | | | | |
ARMs | | 6,805,885 | | | | (21,794 | ) | | | 76,790 | | | | 6,860,881 | | | | 39.0 | % |
Fixed-Rate | | 158,402 | | | | - | | | | 1,767 | | | | 160,169 | | | | 0.9 | % |
Total Freddie Mac | | 6,964,287 | | | | (21,794 | ) | | | 78,557 | | | | 7,021,050 | | | | | |
| | | | | | | | | | | | | | | | | | | |
Total Agency Securities | | 17,279,316 | | | | (35,531 | ) | | | 267,623 | | | | 17,511,408 | | | | 99.6 | % |
| | | | | | | | | | | | | | | | | | | |
Total Non-Agency ARMs | | 75,454 | | | | - | | | | 148 | | | | 75,602 | | | | 0.4 | % |
| | | | | | | | | | | | | | | | | | | |
Total MBS | $ | 17,354,770 | | | $ | (35,531 | ) | | $ | 267,771 | | | $ | 17,587,010 | | | | 100.0 | % |
Table 6
Mortgage-Backed Securities—Months to Reset as of December 31, 2014
ARMs
Months to Reset | % of ARM Portfolio | | | Current Face Value (1) | | | Weighted Avg. Coupon (2) | | | Wtd. Avg. Amortized Purchase Price (3) | | | Amortized Cost (4) | | | Weighted Avg. Market Price (5) | | | Market Value (6) | |
0-12 | | 14.0 | % | | $ | 2,128,967 | | | | 3.02 | % | | $ | 102.24 | | | $ | 2,176,760 | | | $ | 106.76 | | | $ | 2,272,988 | |
13-24 | | 11.0 | % | | | 1,696,057 | | | | 2.97 | % | | $ | 102.44 | | | | 1,737,488 | | | $ | 106.09 | | | | 1,799,368 | |
25-36 | | 12.4 | % | | | 1,934,060 | | | | 2.73 | % | | $ | 102.78 | | | | 1,987,805 | | | $ | 104.77 | | | | 2,026,261 | |
37-48 | | 13.9 | % | | | 2,178,095 | | | | 2.89 | % | | $ | 102.69 | | | | 2,236,582 | | | $ | 104.16 | | | | 2,268,665 | |
49-60 | | 35.9 | % | | | 5,694,326 | | | | 2.52 | % | | $ | 103.06 | | | | 5,868,751 | | | $ | 102.83 | | | | 5,855,524 | |
61-72 | | 5.4 | % | | | 861,146 | | | | 2.52 | % | | $ | 102.65 | | | | 883,954 | | | $ | 102.19 | | | | 880,039 | |
73-84 | | 7.4 | % | | | 1,165,719 | | | | 2.98 | % | | $ | 102.40 | | | | 1,193,740 | | | $ | 103.59 | | | | 1,207,531 | |
Total ARMS | | 100.0 | % | | $ | 15,658,370 | | | | 2.75 | % | | $ | 102.73 | | | $ | 16,085,080 | | | $ | 104.16 | | | $ | 16,310,376 | |
Fixed
| | Current Face Value | | | Wtd. Avg. Coupon | | | Wtd. Avg. Amortized Purchase Price | | | Amortized Cost | | | Wtd. Avg. Market Price | | | Market Value | |
Total Fixed-Rate | | $ | 1,206,213 | | | | 3.47 | % | | $ | 105.26 | | | $ | 1,269,690 | | | $ | 105.84 | | | $ | 1,276,634 | |
Hatteras Financial Corp
(Amounts are unaudited and subject to change)
(Dollars in thousands)
Table 7
Repo Borrowings as of December 31, 2014
| | | | | Weighted Average | |
| Balance | | | Contractual Rate | |
Within 30 days | $ | 13,770,099 | | | | 0.35 | % |
30 days to 3 months | | 1,489,732 | | | | 0.36 | % |
3 months to 36 months | | 500,000 | | | | 0.53 | % |
| $ | 15,759,831 | | | | 0.36 | % |
Table 8
Swap Portfolio as of December 31, 2014
| | | | | | Wtd. Avg. | | | | | |
| | | | | | Remaining | | | Weighted Average | |
| | Notional | | | Term | | | Fixed Interest | |
Maturity | | Amount | | | in Months | | | Rate in Contract | |
| | | | | | | | | | | | |
12 months or less | | $ | 3,700,000 | | | | 6 | | | | 1.73% | |
Over 12 months to 24 months | | | 2,400,000 | | | | 18 | | | | 0.92% | |
Over 24 months to 36 months | | | 1,800,000 | | | | 29 | | | | 0.89% | |
Over 36 months to 48 months | | | 400,000 | | | | 38 | | | | 0.96% | |
| | | | | | | | | | | | |
Total | | $ | 8,300,000 | | | | 16 | | | | 1.28% | |
Note: The Company has no forward starting swaps as of December 31, 2014.
Table 9
Components of Gain (Loss) on Derivative Instruments, Net
| Three Months Ended Dec. 31 | | | Twelve Months Ended Dec. 31 | |
| 2014 | | | 2013 | | | 2014 | | | 2013 | |
Interest rate swaps – fair value adjustments | $ | 11,205 | | | $ | 25,036 | | | $ | 73,729 | | | $ | 25,036 | |
Interest rate swaptions – fair value adjustments | | (11,537 | ) | | | - | | | | (15,520 | ) | | | - | |
Interest rate swaps – monthly net settlements | | (25,674 | ) | | | (30,985 | ) | | | (113,919 | ) | | | (30,985 | ) |
Futures Contracts – fair value adjustments | | (106,934 | ) | | | 19,008 | | | | (176,916 | ) | | | (25,585 | ) |
Futures Contracts – realized gains (losses) | | (5,360 | ) | | | (5,971 | ) | | | (29,423 | ) | | | (33,298 | ) |
Mortgage loan purchase commitments - fair value adjustments | | (2 | ) | | | - | | | | (2 | ) | | | - | |
TBA dollar roll income | | 23,195 | | | | 5,605 | | | | 92,008 | | | | 5,605 | |
Net realized and unrealized gains (losses) on TBA dollar rolls | | 35,119 | | | | (10,488 | ) | | | 28,610 | | | | (10,488 | ) |
Gain (loss) on derivative instruments, net | $ | (79,988 | ) | | $ | 2,205 | | | $ | (141,433 | ) | | $ | (69,715 | ) |
Hatteras Financial Corp
(Amounts are unaudited and subject to change)
(Dollars in thousands)
Table 10
Reconciliation of GAAP Interest Expense to
Effective Interest Expense and Effective Cost of Funds
| Three Months Ended | |
| Dec. 31, 2014 | | | Sept. 30, 2014 | | | June 30, 2014 | | | March 31, 2014 | | | Dec. 31, 2013 | |
| Amount | | % (1) | | | Amount | | % (1) | | | Amount | | % (1) | | | Amount | | % (1) | | | Amount | | % (1) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense and cost of funds | $ | 26,966 | | | 0.77 | % | | $ | 31,950 | | | 0.86 | % | | $ | 35,128 | | | 0.92 | % | | $ | 38,451 | | | 0.97 | % | | $ | 40,754 | | | 0.90 | % |
Less: reclassification of deferred swap losses included in interest expense (after hedge de-designation) | | (13,719 | ) | | -0.42 | % | | | (19,806 | ) | | -0.54 | % | | | (22,923 | ) | | -0.60 | % | | | (24,684 | ) | | -0.63 | % | | | (24,328 | ) | | -0.54 | % |
Interest rate swaps – monthly net settlements (after hedge de-designation) | | 25,674 | | | 0.67 | % | | | 29,079 | | | 0.79 | % | | | 29,754 | | | 0.77 | % | | | 29,412 | | | 0.75 | % | | | 30,985 | | | 0.69 | % |
Losses on maturing Futures Contracts | | 626 | | | 0.02 | % | | | 407 | | | 0.01 | % | | | - | | | - | | | | - | | | - | | | | - | | | - | |
Effective interest expense and effective cost of funds | $ | 39,547 | | | 1.04 | % | | $ | 41,630 | | | 1.12 | % | | $ | 41,959 | | | 1.09 | % | | $ | 43,179 | | | 1.09 | % | | $ | 47,411 | | | 1.05 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Average debt | $ | 15,235,739 | | | | | | $ | 14,806,602 | | | | | | $ | 15,349,322 | | | | | | $ | 15,787,282 | | | | | | $ | 18,013,431 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) Dollar amount on an annualized basis as a percentage of average repurchase agreements and dollar roll liability | |
| Twelve Months Ended December 31 | |
| 2014 | | | 2013 | |
| Amount | | % (1) | | | Amount | | % (1) | |
Interest expense and cost of funds | $ | 132,495 | | | 0.87 | % | | $ | 197,709 | | | 0.93 | % |
Less: reclassification of deferred swap losses included in interest expense (after hedge de-designation) | | (81,132 | ) | | -0.53 | % | | | (24,328 | ) | | -0.12 | % |
Interest rate swaps – monthly net settlements (after hedge de-designation) | | 113,919 | | | 0.74 | % | | | 30,985 | | | 0.15 | % |
Losses on maturing Futures Contracts | | 1,033 | | | 0.02 | % | | | - | | | 0.00 | % |
Effective interest expense and effective cost of funds | $ | 166,315 | | | 1.09 | % | | $ | 204,366 | | | 0.96 | % |
| | | | | | | | | | | | | |
Average debt | $ | 15,291,888 | | | | | | $ | 21,249,868 | | | | |
| | | | | | | | | | | | | |
(1) Dollar amount on an annualized basis as a percentage of average repurchase agreements and dollar roll liability | |
Hatteras Financial Corp
(Amounts are unaudited and subject to change)
(Dollars in thousands)
Table 11
Reconciliation of GAAP Net Interest Margin to
Effective Net Interest Margin and Core Earnings
| Three Months Ended | |
| Dec. 31, 2014 | | | Sept. 30, 2014 | | | June 30, 2014 | | | March 31, 2014 | | | Dec. 31, 2013 | |
Net interest margin | $ | 61,095 | | | $ | 49,349 | | | $ | 54,677 | | | $ | 58,138 | | | $ | 64,014 | |
Less: reclassification of deferred swap losses included in interest expense (after hedge de-designation) | | 13,719 | | | | 19,806 | | | | 22,923 | | | | 24,684 | | | | 24,328 | |
Interest rate swaps – monthly net settlements (after hedge de-designation) | | (25,674 | ) | | | (29,079 | ) | | | (29,754 | ) | | | (29,412 | ) | | | (30,985 | ) |
Losses on maturing Futures Contracts | | (626 | ) | | | (407 | ) | | | - | | | | - | | | | - | |
TBA dollar roll income | | 23,195 | | | | 22,370 | | | | 25,622 | | | | 20,821 | | | | 5,605 | |
Effective net interest margin | | 71,709 | | | | 62,039 | | | | 73,468 | | | | 74,231 | | | | 62,962 | |
Total operating expenses | | (9,073 | ) | | | (7,125 | ) | | | (7,310 | ) | | | (7,161 | ) | | | (7,508 | ) |
Dividends on preferred stock | | (5,481 | ) | | | (5,480 | ) | | | (5,481 | ) | | | (5,480 | ) | | | (5,481 | ) |
Core earnings | $ | 57,155 | | | $ | 49,434 | | | $ | 60,677 | | | $ | 61,590 | | | $ | 49,973 | |
| | | | | | | | | | | | | | | | | | | |
Core earnings per common share, basic and diluted | $ | 0.59 | | | $ | 0.51 | | | $ | 0.63 | | | $ | 0.64 | | | $ | 0.51 | |
| Twelve Months Ended December 31 | |
| 2014 | | | 2013 | |
Net interest margin | $ | 223,259 | | | $ | 254,559 | |
Less: reclassification of deferred swap losses included in interest expense (after hedge de-designation) | | 81,132 | | | | 24,328 | |
Interest rate swaps – monthly net settlements (after hedge de-designation) | | (113,919 | ) | | | (30,985 | ) |
Losses on maturing Futures Contracts | | (1,033 | ) | | | - | |
TBA dollar roll income | | 92,008 | | | | 5,605 | |
Effective net interest margin | | 281,447 | | | | 253,507 | |
Total operating expenses | | (30,669 | ) | | | (27,866 | ) |
Dividends on preferred stock | | (21,922 | ) | | | (21,922 | ) |
Core earnings | $ | 228,856 | | | $ | 203,719 | |
| | | | | | | |
Core earnings per common share, basic and diluted | $ | 2.37 | | | $ | 2.07 | |
CONTACT:
Hatteras Financial Corp.
Kenneth A. Steele, 336-760-9331
Chief Financial Officer
or
Compass Investor Relations
Mark Collinson, Partner, 714-222-5161
www.compass-ir.com
