Hatteras Financial Issues Financial Results

Sat. May 09, 2009; Posted: 11:55 PM

In a release dated April 28, the company stated:

- During the first quarter of 2009, Hatteras earned $1.07 per diluted share on net income of $38.8 million, compared to $0.73 per diluted share on net income of $20.7 million during the fourth quarter of 2008. Expenses for the fourth quarter, however, reflected a one-time expense associated with a repurchase agreement default by Lehman Brothers for $6.1 million. Excluding this expense, the company would have earned $26.7 million, or $0.94 per diluted share, for that quarter. The quarter-over-quarter increase in net income was generally the result of having a higher interest rate spread and more earning assets for the first quarter of 2009 as compared to the fourth quarter of 2008.

- Net interest income for the quarter ended March 31, was $41.8 million, compared to $29.4 million for the quarter ended December 31, 2008. The company's average earning assets increased to $5.5 billion from $5.0 billion in the previous quarter, and the net interest margin increased to 2.81 percent for the first quarter of 2009 from 2.05 percent in the fourth quarter of 2008, largely due to a drop in short-term funding costs. Repurchase agreement (repo) rates declined during the first quarter as global credit issues eased, causing LIBOR and other lending rates to decrease. The company incurred $3.0 million of operating expenses in the first quarter, compared to $2.6 million during the fourth quarter. This increase was largely due to an increase in the management fee resulting from a larger equity base.

- The company's portfolio, consisting of Fannie Mae and Freddie Mac guaranteed mortgage securities (agency securities), increased to $5.9 billion at March 31, compared to $5.2 billion at the end of the previous quarter. The portfolio's weighted average coupon was 5.18 percent for the first quarter of 2009, compared to 5.28 percent for the fourth quarter of 2008. The annualized yield on average assets was 4.90 percent for the first quarter, compared to 5.05 percent for the fourth quarter, and the annualized cost of funds on the average liabilities (including hedges) was 2.09 percent, compared to 3.00 percent in the fourth quarter. This resulted in an average interest rate spread of 2.81 percent for the quarter ended March 31, an increase of 76 basis points from the quarter ended December 31, 2008. The higher interest rate spread, despite the lower asset yield, was primarily the result of lower financing costs.

Michael Hough, the company's Chief Executive Officer, said, "We continued to grow our balance sheet throughout the first quarter, maintaining the very selective stance we adopted earlier this year when we saw MBS prices were being pushed higher by low funding costs and government actions. Given the market dynamics, we are very pleased with our performance and the execution of our focused asset/liability strategy. Some mortgage rates recently have fallen to much lower levels than have been previously available. Although the pace of refinancing and prepayments remained low during the quarter, we expect it to increase somewhat in the near future, the impediments to refinancing for some notwithstanding. For the first time in a while, the mortgage yield curve is positively sloped, as hybrid ARM rates have declined more than fixed rates. We believe this should drive an increase in hybrid ARM originations going forward.

"While yields have fallen in the agency securities market, so too has the cost of financing, with short-term repo rates and term swap rates reaching all-time low levels during the quarter and fostering especially generous net interest margin opportunities. We will continue to strategically invest in agency securities and finance and hedge in a way designed to both enhance return on equity and protect book value. We are focused on providing an attractive, non-correlated income stream for our shareholders in this very unusual economic environment."

Hatteras Financial is a real estate investment trust formed in 2007 to invest in adjustable-rate and hybrid adjustable-rate 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.

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