Hatteras Financial Corp. Announces Fourth Quarter and Full Year 2015 Financial Results

WINSTON-SALEM, N.C.--()--Hatteras Financial Corp. (NYSE: HTS) (“Hatteras” or the “Company”) today announced financial results for the quarter ended December 31, 2015.

Fourth Quarter 2015 Highlights

  • Comprehensive income of $0.08 per weighted-average common share
  • Core earnings of $0.45 per weighted-average common share
  • Dividend of $0.45 per common share
  • Quarter end book value of $19.38 per common share
  • GAAP leverage of 6.3 to 1 at period end
  • Effective leverage of 7.6 to 1 at period end
  • Weighted-average constant prepayment rate (“CPR”) of 17.2 for the quarter
  • Repurchased 1,069,400 common shares at a weighted average price of $13.53 per share

Full Year 2015 Highlights

  • Comprehensive loss of $0.80 per weighted-average common share
  • Core earnings of $1.95 per weighted-average common share
  • Dividend of $1.90 per common share
  • Closed on the Pingora acquisition August 31
  • Executed the Company’s first whole loan securitization
  • Purchased $259 million of mortgage servicing rights (“MSR”)

Fourth Quarter 2015 Results

For the quarter ended December 31, 2015, the Company had comprehensive income (loss) available to common shareholders of $7.4 million, or $0.08 per weighted-average common share, as compared to $(84.9) million, or $(0.88) per weighted-average common share, for the quarter ended September 30, 2015. The change in comprehensive income available to common shareholders was largely due to the volatility in the interest rate markets in the third quarter, when the value of the Company’s hedges changed disproportionately to the increase in the Company’s investments. For the quarter ended December 31, 2015, the Company had core earnings of $0.45 per weighted-average common share, unchanged from $0.45 per weighted-average common share during the quarter ended September 30, 2015. Due to the continued diversification of the Company’s investments, the composition of core earnings reflected a smaller mortgage-backed securities (“MBS”) portfolio and a larger MSR position. The Company purchased $88 million of MSR on conforming loans during the quarter from Pingora’s flow purchase partners.

“While 2015 was a challenging year, the introduction of mortgage servicing rights and mortgage credit to our portfolio will enhance our ability to manage risk more comprehensively and to position the business going forward,” said Michael R. Hough, the Company’s Chairman and Chief Executive Officer. “Combined with share repurchases, we expect these new revenue sources to diversify our portfolio, lessen our exposure to interest rate and basis risk and create long-term shareholder value.”

Net interest margin for the quarter ended December 31, 2015 was $56.1 million, compared to $51.7 million for the quarter ended September 30, 2015. The Company’s net interest spread increased to 1.42% for the fourth quarter of 2015 compared to 1.19% for the third quarter, driven by higher portfolio yield. The yield on the Company’s interest-earning portfolio increased to 1.97% in the fourth quarter compared to 1.77% in the third quarter from owning higher coupon assets combined with a decrease in premium amortization as prepayments slowed. Average interest-earning portfolio yield including to-be-announced (“TBA”) dollar roll income was 2.00% in the current quarter, up from 1.86% in the third quarter. Effective net interest margin, which includes certain adjustments related to derivatives as well as TBA dollar roll income as detailed later in this release, was $49.0 million for the fourth quarter of 2015 as compared to $54.2 million for the third quarter due to a decline in the average size of the Company’s portfolio. Effective interest rate spread was 0.82% for the quarter ended December 31, 2015, up from 0.80% for the previous quarter.

The Company’s average financing rate was 0.47% in the fourth quarter of 2015, compared to 0.43% in the third quarter. The Company’s effective cost of funds, which includes certain adjustments related to derivatives, was 1.18% for the fourth quarter as compared to 1.06% for the third quarter. Total expenses excluding Pingora’s servicing expenses and reduced by expense recoveries from third parties were $14.4 million for the fourth quarter as compared to $10.3 million in the third quarter. This increase was largely due to inclusion of a full quarter of Pingora’s operating expenses as compared to only one month of such expenses in the third quarter, and due to $1.5 million of deal costs related to the non-agency securitization completed in the fourth quarter. The annualized operating expense ratio was 2.60% of average shareholders’ equity for the quarter ended December 31, 2015 as compared to 1.78% for the quarter ended September 30, 2015. The following table breaks out fourth quarter expenses by asset class, on the basis just described:

      Three Months Ended
December 31, 2015   September 30, 2015
Amount   % of Avg

Equity

Amount   % of Avg

Equity

Agency $ 8,232   1.49 % $ 8,181   1.42 %
Non-Agency 2,987 0.54 % 842 0.14 %
MSR   3,187 0.57 %   1,272 0.22 %
Total $ 14,406 2.60 % $ 10,295 1.78 %

Dividend

The Company declared a dividend of $0.45 per common share with respect to the quarter ended December 31, 2015, unchanged from the previous quarter ended September 30, 2015. Based on the closing share price of $13.15 on December 31, 2015, the fourth quarter dividend equates to an annualized yield of 13.7%.

Portfolio

The Company’s weighted-average earning assets, consisting of residential mortgage assets, primarily MBS issued by Fannie Mae and Freddie Mac, were $18.1 billion for the quarter ended December 31, 2015 compared to $19.9 billion for the quarter ended September 30, 2015. The fair values of the Company’s earning assets as of December 31, 2015 and September 30, 2015 are summarized below.

(Dollars in thousands)     December 31, 2015   September 30, 2015

% of

Earning

Assets

  Market

Value

   

Wtd. Avg.

Coupon

% of

Earning

Assets

  Market

Value

   

Wtd. Avg.

Coupon

ARM securities   75.7 % $ 13,414,307   2.67 %   76.7 % $ 14,298,014   2.66 %
Fixed securities 5.6 % 997,310 3.50 % 6.3 % 1,174,566 3.39 %
15-year dollar roll TBA securities 15.3 % 2,704,376 2.74 % 14.7 % 2,735,012 2.74 %
Mortgage loans held for investment   1.9 %   343,765 3.48 %   1.4 %   265,281 3.41 %
Interest-earning portfolio 98.5 % 17,459,758 2.74 % 99.1 % 18,472,873 2.73 %
Mortgage servicing rights   1.5 %   269,926 n/a   0.9 %   170,447 n/a
Earning assets   100.0 % $ 17,729,684   100.0 % $ 18,643,320

During the fourth quarter of 2015, the expense of amortizing the premium on the Company’s securities was $24.9 million, compared to $33.5 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) on the Company’s securities during the fourth quarter of 2015 was 23.4%, compared to 29.0% during the third quarter. The Company’s weighted-average one-month CPR on securities for the quarter ended December 31, 2015 was 17.2, down from 21.1 for the quarter ended September 30, 2015. CPR measures the unscheduled repayment rate as a percentage of principal on an annualized basis.

At December 31, 2015, the Company owned 15-year TBA securities financed in the dollar roll market with a fair value of approximately $2.7 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, 2015, the Company's net TBA securities had a cost basis of approximately $2.7 billion and a net carrying value of $(32.4) million reported in derivative liabilities 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 earned interest of $2.2 million for the quarter ended December 31, 2015 from prime jumbo ARM loans held for investment, on an average unpaid principal balance of $309.1 million. For the third quarter of 2015, the Company earned $1.8 million of interest from prime jumbo ARM loans, on an average unpaid principal balance of $212.8 million. The Company owned $343.8 million of these loans at December 31, 2015, up from $265.3 million owned as of September 30, 2015. The loans had an average size of $762,000, a weighted-average interest rate of 3.42% and a weighted-average loan-to-value of 70% (at origination) as of December 31, 2015.

The Company began investing in MSR through Pingora in July 2015. For the three months ended December 31, 2015, the Company earned gross servicing fee income of $15.5 million on an average MSR balance of $199.6 million as compared to $4.6 million of gross servicing fee income in the third quarter on an average MSR balance of $62.5 million. All of the Company’s MSR investments pertain to agency MBS, spanning all three government owned or sponsored enterprises.

Portfolio Financing and Leverage

At December 31, 2015, the Company financed its portfolio with approximately $13.6 billion of borrowings, primarily under repurchase agreements. The Company’s debt-to-shareholders’ equity ratio at December 31, 2015, was 6.3 to 1 compared to 6.5 to 1 at September 30, 2015. The Company’s effective leverage, which includes the effects of TBA dollar roll financing, was 7.6 to 1 at December 31, 2015, down from 7.8 to 1 as of September 30, 2015. Weighted-average effective leverage in the fourth quarter of 2015 was 7.5 to 1, down from 8.0 to 1 for the third quarter of 2015. At December 31, 2015, the Company’s repurchase agreements had a weighted-average remaining term of approximately 28 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. From time to time, the Company also enters into swaptions (option agreements to enter swaps at future dates) as part of its hedging strategy. See Tables 8 through 10 for detailed information regarding these positions as of December 31, 2015.

Book Value

The Company’s book value (shareholders’ equity less preferred stock liquidation preference) per share on December 31, 2015 was $19.38, decreasing from $19.69 on September 30, 2015 primarily resulting from a modest decrease in asset prices. On a per share basis, book value at December 31, 2015 consisted of $25.36 of common equity, $(7.01) of retained losses, $1.02 of unrealized gains on agency securities including TBA securities, and $0.01 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.

Common Share Repurchases

During the three months ended December 31, 2015, the Company repurchased 1,069,400 shares of its common stock in the open market under its previously-announced Stock Repurchase Program. These shares were purchased at a weighted-average price, after commissions and fees, of $13.53. For the year ended December 31, 2015 the Company repurchased 1,443,283 common shares at a weighted-average price of $14.38 per share after fees and commissions. Subsequent to December 31, 2015, the Company repurchased an additional 1,273,625 common shares at a weighted-average price of $11.60 per share after fees and commissions.

Full Year 2015 Results

The Company had comprehensive loss of $77.4 million or $0.80 per weighted-average common share for the year ended December 31, 2015, compared to a comprehensive income of $248.3 million or $2.57 per weighted-average common share for the year ended December 31, 2014. The decline was primarily driven by the unfavorable swing in fair value adjustments on the Company’s MBS portfolio, which are presented in other comprehensive income. The Company had net income of $29.7 million or $0.31 per weighted-average common share for the year ended December 31, 2015, compared to net $34.4 million or $0.36 per weighted-average common share for the year ended December 31, 2014.

Core earnings were $1.95 for 2015, down from $2.37 for 2014, both on a weighted-average common share basis. The decrease was driven by a lower yields on the Company’s average interest-earning portfolio, which was 1.91% during 2015 as compared to 2.09% during 2014, along with lower earnings from TBA securities financed in the dollar roll markets. The most significant factor to the decline in portfolio yield was higher premium amortization due to higher prepayment levels. The average MBS portfolio repayment rate was 24.98% for the year ended December 31, 2015 as compared to 20.93% for the year ended December 31, 2014.

For the year, the Company distributed $1.90 per common share for 2015. Book value per common share at December 31, 2015 was $19.38 compared to $22.05 at December 31, 2014 a decrease of 12.1%.

Conference Call

The Company will host a conference call at 10:00 a.m. ET on Wednesday, February 17, 2016, to discuss financial results for the quarter ended December 31, 2015. A slide presentation will accompany the call and will be available prior to the call here or by going to the Company’s website at www.hatfin.com and selecting “presentations” from the “news and presentations” tab. Select the Q4 2015 Earnings Presentation link to download and/or print the presentation in advance of the call. 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 17, 2016 at approximately 12:00 noon ET through Thursday, February 25, 2016 at 9:00 a.m. ET. Dial (877) 344-7529 and enter the conference ID number 10080542. 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, along with the Company’s election of the fair value option with respect to accounting for mortgage loans and MSR, 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, amortization on MSR, core earnings, and certain financial metrics derived from non-GAAP information, such as effective cost of funds and effective leverage. Effective interest expense and effective net interest margin each represent their respective GAAP measure adjusted for certain derivatives impacts as well as TBA dollar roll income. Amortization on MSR represents the portion of the change in MSR fair value that is attributable to the realization of cash flows, and is a non-GAAP measure because the Company accounts for MSR under the fair value option. Core earnings is effective net interest margin plus MSR income net of amortization, management fee income and gain from mortgage loans held for sale, less adjusted operating expenses and dividends on preferred stock. For purposes of core earnings, operating expenses are adjusted to exclude transaction expenses, amortization of intangibles stemming from business combinations, and the change in the Company’s representations and warranties reserve. Reconciliations of these non-GAAP measures to their nearest directly comparable measure calculated in accordance with GAAP are included below.

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.

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 economic conditions, interest rates, the Company’s risk strategies and exposures, the Company’s investments in MBS, MSR and prime jumbo ARMs, and share repurchases under the Company’s Stock Repurchase Program. 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, 2015 December 31, 2014
Assets
Mortgage-backed securities, at fair value
(including pledged assets of $13,932,415 and $16,538,214, respectively) $ 14,302,230 $ 17,587,010
Agency CRT securities, at fair value 109,387 -
Mortgage loans held for investment, at fair value
(including pledged assets of $27,835 and $0, respectively) 116,857 31,460
Mortgage loans held for investment in securitization trusts, at fair value 226,908 -
Mortgage loans held for sale, at fair value
(including pledged assets of $9,572 and $0, respectively) 17,542 -
Mortgage servicing rights, at fair value 269,926 -
Cash and cash equivalents (including pledged cash of $493,021 and $323,791, respectively) 816,715 627,595
Unsettled purchased mortgage-backed securities, at fair value 12,582 24,792
Receivable for securities sold - 5,197
Accrued interest receivable 45,008 54,274
Principal payments receivable 108,201 111,439
Other investments 51,930 41,252
Derivative assets, at fair value 2,914 27,151
Other assets   57,326   6,630
Total assets (1) $ 16,137,526 $ 18,516,800
 
Liabilities and shareholders’ equity
Borrowings:
Repurchase agreements $ 13,443,883 $ 15,759,831
Warehouse lines of credit 60,096 -
Federal Home Loan Bank advances 14,132 -
Collateralized borrowings in securitization trusts, at fair value   57,611   -
Total borrowings 13,575,722 15,759,831
Payable for unsettled securities 12,582 24,750
Accrued interest payable 4,938 6,968
Derivative liabilities, at fair value 325,233 244,591
Dividends payable 47,824 53,014
Other liabilities   27,870   6,850
Total liabilities (1)   13,994,169   16,096,004
 
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, 95,773,767 and 96,771,158 shares issued and outstanding, respectively 96 97
Additional paid-in capital 2,438,223 2,454,718
Accumulated deficit (671,872 ) (518,036 )
Accumulated other comprehensive income   98,658   205,765
Total shareholders’ equity   2,143,357   2,420,796
Total liabilities and shareholders’ equity $ 16,137,526 $ 18,516,800

(1) The consolidated balance sheet as of December 31, 2015 includes $227,444 of assets of a consolidated collateralized financing entity (CFE) that can only be used to settle obligations of the CFE as well as liabilities of $58,228 of the CFE for which creditors do not have recourse to Hatteras Financial Corp.

Table 2

Hatteras Financial Corp.

Consolidated Statements of Income

       
(Dollars in thousands, except share related amounts)
 
Three Months Ended December 31 Twelve Months Ended December 31
2015 2014 2015 2014
Interest income:
Securities $ 72,211 $ 87,702 $ 305,717 $ 354,436
Mortgage loans 2,168 35 5,509 35
Mortgage loans in securitization trusts 446 - 446 -
Short-term cash investments   433   324   1,367   1,283
Total interest income   75,258   88,061   313,039   355,754
 
Interest expense:
Repurchase agreements 18,724 26,966 90,744 132,495
Warehouse lines 305 - 597 -
Collateralized borrowings in securitization trusts   97   -   97   -
Total interest expense   19,126   26,966   91,438   132,495
 
Net interest margin   56,132   61,095   221,601   223,259
 
Other income (loss):
Servicing income 15,549 - 20,111 -
Management fee income 1,503 - 2,027 -
Net realized gain on sale of securities 15,371 2,107 32,731 5,196
Net gain (loss) on mortgage loans (1,950 ) 8 (1,034 ) 8
Net gain on mortgage servicing rights 11,250 - 10,711 -
Net gain (loss) on derivative instruments 64,085 (79,988 ) (188,416 ) (141,433 )
Net miscellaneous gains and losses   1,686   -   774   -
Total other income (loss)   107,494   (77,873 )   (123,096 )   (136,229 )
 
Expenses:
Management fee 4,020 4,112 16,235 16,532
Share-based compensation 1,211 1,020 4,256 3,612
Servicing expenses 2,268 - 3,022 -
General and administrative 9,163 3,941 21,899 10,525
Securitization deal costs   1,473   -   1,473   -
Total expenses   18,135   9,073   46,885   30,669
 
Net income (loss) 145,491 (25,851 ) 51,620 56,361
Dividends on preferred stock   5,481   5,481   21,922   21,922
Net income (loss) available to common shareholders $ 140,010 $ (31,332 ) $ 29,698 $ 34,439
 
Earnings (loss) per share - common stock, basic $ 1.45 $ (0.32 ) $ 0.31 $ 0.36
Earnings (loss) per share - common stock, diluted $ 1.45 $ (0.32 ) $ 0.31 $ 0.36
 
Dividends per share of common stock $ 0.45 $ 0.50 $ 1.90 $ 2.00
 
Weighted average common shares outstanding, basic   96,546,219   96,728,821   96,665,489   96,603,634
Weighted average common shares outstanding, diluted   96,546,219   96,728,821   96,665,489   96,603,634

Table 3

Hatteras Financial Corp.

Consolidated Statements of Comprehensive Income

(Unaudited)

     
(Dollars in thousands)
 
Three Months Ended December 31 Twelve Months Ended December 31
2015 2014 2015 2014
 
Net income (loss) $ 145,491 $ (25,851 ) $ 51,620 $ 56,361
 
Other comprehensive income (loss):
 
Net unrealized gains (losses) on securities
available for sale (133,259 ) 39,034 (133,867 ) 122,824
Net unrealized gains on derivative instruments   621   15,967   26,760   90,993
Other comprehensive income (loss)   (132,638 )   55,001   (107,107 )   213,817
 
Comprehensive income (loss) 12,853 29,150 (55,487 ) 270,178
 
Dividends on preferred stock   5,481   5,481   21,922   21,922
 
Comprehensive income (loss) available to
common shareholders $ 7,372 $ 23,669 $ (77,409 ) $ 248,256

Table 4

Key Statistics (1)

(Amounts are unaudited and subject to change)

 
(in thousands, except per share amounts) Three Months Ended
Dec. 31,

2015

  Sept. 30,

2015

  June 30,

2015

  March 31,

2015

  Dec. 31,

2014

Statement of Income Data
Total interest income $ 75,258 $ 72,988 $ 77,676 $ 87,117 $ 88,061
Total interest expense   (19,126 )   (21,248 )   (23,750 )   (27,314 )   (26,966 )
Net interest margin 56,132 51,740 53,926 59,803 61,095
 
Other income (loss):
Servicing income 15,549 4,562 - - -
Management fee income 1,503 524 - - -
Net realized gain (loss) on sale of securities 15,371 1,216 (309 ) 16,453 2,107
Net gain (loss) on mortgage loans, MSRs and other 10,986 (90 ) (689 ) 244 8
Net gain (loss) on derivative instruments   64,085   (130,301 )   (19,415 )   (102,785 )   (79,988 )
Total other income (loss)   107,494   (124,089 )   (20,413 )   (86,088 )   (77,873 )
 
Expenses:
Servicing expenses (2,268 ) (754 ) - - -
Securitization deal costs (1,473 ) - - - -
Operating expenses   (14,394 )   (10,789 )   (8,957 )   (8,250 )   (9,073 )
Total expenses   (18,135 )   (11,543 )   (8,957 )   (8,250 )   (9,073 )
 
Net income (loss) 145,491 (83,892 ) 24,556 (34,535 ) (25,851 )
Dividends on preferred stock   (5,481 )   (5,480 )   (5,480 )   (5,481 )   (5,481 )
Net income (loss) available to common shareholders $ 140,010 $ (89,372 ) $ 19,076 $ (40,016 ) $ (31,332 )
 

Comprehensive income (loss) available to

 common shareholders

$ 7,372 $ (84,885 ) $ (48,593 ) $ 48,697 $ 23,669
 
Earnings (loss) per share, basic and diluted $ 1.45 $ (0.93 ) $ 0.20 $ (0.41 ) $ (0.32 )
 
Comprehensive income (loss) available to common

shareholders per share, basic and diluted

$ 0.08 $ (0.88 ) $ (0.50 ) $ 0.50 $ 0.24
 
Weighted average shares outstanding 96,546 96,546 96,791 96,783 96,729
 
Dividends per common share $ 0.45 $ 0.45 $ 0.50 $ 0.50 $ 0.50
 
Key Statistics (2)
Average interest-earning portfolio $ 15,179,666 $ 16,046,149 $ 16,557,559 $ 17,049,114 $ 16,895,051
Average borrowings $ 13,951,183 $ 14,807,631 $ 15,071,081 $ 15,482,427 $ 15,235,739
Average equity $ 2,216,402 $ 2,308,993 $ 2,429,515 $ 2,442,640 $ 2,442,086
Average interest-earning portfolio yield 1.97 % 1.77 % 1.84 % 2.03 % 2.08 %
Average cost of funds 0.55 % 0.58 % 0.63 % 0.71 % 0.77 %
Interest rate spread 1.42 % 1.19 % 1.21 % 1.32 % 1.31 %
TBA dollar roll income $ 14,829 $ 20,512 $ 24,901 $ 23,155 $ 23,195
Average TBA dollar roll position $ 2,732,180 $ 3,559,674 $ 4,307,588 $ 4,027,774 $ 3,687,748
Average interest-earning yield,

including TBA dollar roll income (3)

2.00 % 1.86 % 1.94 % 2.08 % 2.16 %
Effective interest expense (4) $ 41,040 $ 39,314 $ 40,762 $ 42,792 $ 39,547
Effective cost of funds (4) 1.18 % 1.06 % 1.08 % 1.11 % 1.04 %
Effective net interest margin (5) $ 49,048 $ 54,186 $ 61,815 $ 67,480 $ 71,709
Effective interest rate spread (6) 0.82 % 0.80 % 0.86 % 0.97 % 1.12 %
Core earnings (7) $ 43,216 $ 43,242 $ 48,294 $ 53,749 $ 57,155
Core earnings per share, basic and diluted $ 0.45 $ 0.45 $ 0.50 $ 0.56 $ 0.59
Constant prepayment rate (CPR) on securities 17.2 21.1 19.5 15.4 15.4
Average annual securities portfolio repayment rate 23.4 % 29.0 % 26.6 % 21.0 % 20.63 %
Debt to equity (at period end) 6.3:1 6.5:1 6.4:1 6.2:1 6.5:1
Debt to paid-in-capital (at period end) (8) 5.0:1 5.2:1 5.5:1 5.5:1 5.8:1
Effective debt to equity (at period end) (9) 7.6:1 7.8:1 8.1:1 8.1:1 8.0:1

(1) This table includes non-GAAP financial measures. See the earlier section on non-GAAP Measures for important disclosures, as well as Tables 12 and 13 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 interest-earning portfolio yield, including TBA dollar roll income was calculated the same as average interest-earning portfolio yield other than to include TBA dollar roll income in the numerator and the Company’s average TBA dollar roll position in the denominator.

(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 debt for the period. See Table 12.

(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 13.

(6) Effective interest rate spread is the difference between average interest-earning portfolio yield including TBA dollar roll income and effective cost of funds for the period.

(7) Core earnings consists of effective interest margin plus MSR income net of amortization, management fee income and gain from mortgage loans held for sale, reduced by adjusted operating expenses and dividends on preferred stock for the period. See Table 13.

(8) The debt to paid-in capital ratio was calculated by dividing outstanding borrowings 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) The 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 $2,730,705 as of December 31, 2015.

Table 5

 

Hatteras Financial Corp

(Amounts are unaudited and subject to change)

(Dollars in thousands)

 

Securities Portfolio as of December 31, 2015

               
Amortized Cost Gross Unrealized Loss Gross Unrealized Gain Estimated Fair Value % of Total
Agency MBS  
Fannie Mae Certificates
ARMs $ 7,392,021 $ (14,465 ) $ 102,247 $ 7,479,803 52.3 %
Fixed-Rate   1,005,458   (8,148 )   -   997,310 7.0 %
Total Fannie Mae   8,397,479   (22,613 )   102,247   8,477,113
 
Freddie Mac Certificates
ARMs 5,806,425 (22,551 ) 41,243 5,825,117 40.7 %
Fixed-Rate   -   -   -   - 0.0 %
Total Freddie Mac   5,806,425   (22,551 )   41,243   5,825,117
 
Total Agency MBS $ 14,203,904 $ (45,164 ) $ 143,490 $ 14,302,230 100.0 %
 
Agency CRT Securities $ 111,217 $ (1,830 ) $ - $ 109,387

Table 6

Securities Portfolio—Months to Reset as of December 31, 2015

ARMs

Months to Reset  

% of ARM

Portfolio

 

Current

Face Value

   

Wtd. Avg.

Coupon

 

Wtd. Avg.

Amortized

Purchase

Price

    Amortized

Cost

   

Wtd. Avg.

Market

Price

    Market

Value

0-12   17.7 % $ 2,257,422   2.84 % $ 101.95 $ 2,301,436 $ 105.30 $ 2,377,014
13-24 10.9 % 1,405,584 2.69 % $ 102.75 1,444,298 $ 104.41 1,467,597
25-36 12.6 % 1,626,999 2.87 % $ 102.67 1,670,489 $ 104.03 1,692,591
37-48 35.8 % 4,679,280 2.50 % $ 103.03 4,821,273 $ 102.70 4,805,462
49-60 10.0 % 1,311,237 2.43 % $ 102.47 1,343,689 $ 102.10 1,338,716
61-72 7.6 % 986,205 2.95 % $ 102.39 1,009,803 $ 102.96 1,015,398
73-84 5.1 % 670,062 2.73 % $ 102.28 685,338 $ 102.11 684,191
109-120   0.3 %   32,772 2.85 % $ 101.72   33,337 $ 101.73   33,338
Total ARMS   100.0 % $ 12,969,561 2.67 % $ 102.62 $ 13,309,663 $ 103.43 $ 13,414,307

Fixed

    Current

Face Value

       

Wtd. Avg.

Coupon

     

Wtd. Avg.

Amortized

Purchase

Price

        Amortized

Cost

       

Wtd. Avg.

Market

Price

        Market

Value

Total Fixed-Rate $   965,972     3.50 % $   104.09 $   1,005,458 $   103.24 $   997,310

Table 7

Hatteras Financial Corp

(Amounts are unaudited and subject to change)

(Dollars in thousands)

 

Repo Borrowings as of December 31, 2015

       
Weighted Average
Balance Contractual Rate
Within 30 days $ 12,693,883   0.64 %
30 days to 3 months - 0.00 %
3 months to 36 months   750,000 0.75 %
$ 13,443,883 0.65 %

Table 8

 

Effective Dates of Eurodollar Futures Contracts and Swaps as of December 31, 2015

                 
(Dollars in thousands)

 

 

Effective Dates

Wtd -Avg.

Futures

Contract

Notional

Wtd-Avg

Futures

Contracts

Rate

Wtd.-Avg.

Swap

Notional

Wtd-Avg

Swap Rate

Total Wtd-Avg Rate
1Q 2016   9,689,000   1.41 %   4,400,000   0.92 %   14,089,000   1.26 %
2Q 2016 9,447,000 1.68 % 3,800,000 0.92 % 13,247,000 1.46 %
3Q 2016 8,528,000 1.91 % 3,200,000 0.91 % 11,728,000 1.63 %
4Q 2016 8,390,000 2.15 % 2,600,000 0.90 % 10,990,000 1.86 %
2017 7,613,250 2.73 % 1,125,000 0.90 % 8,738,250 2.49 %
2018 5,903,500 3.27 % 50,000 0.96 % 5,953,500 3.25 %
2019 2,317,250 3.33 % - - 2,317,250 3.33 %
2020 1,257,250 4.02 % - - 1,257,250 4.02 %
2021 292,000 3.98 % - - 292,000 3.98 %

Table 9

Swap Portfolio as of December 31, 2015

           
Wtd. Avg.
Remaining Wtd. Avg.
Notional Term Fixed Interest
Maturity Amount in Months Rate in Contract
 
12 months or less $ 2,400,000 6 0.92%
Over 12 months to 24 months 1,800,000 17 0.89%
Over 24 months to 36 months   400,000 26   0.96%
 
Total $ 4,600,000 12   0.91%
 

Note: The Company has no forward starting swaps as of December 31, 2015.

Table 10

Hatteras Financial Corp

(Amounts are unaudited and subject to change)

(Dollars in thousands)

 

Swaption Position as of December 31, 2015

     
(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 $ 10,813 $ 727   6 $ 3,065,000   3.23 % 3 month LIBOR   6

Table 11

 

Components of Net Gain (Loss) on Derivative Instruments

   
Three Months Ended December 31 Twelve Months Ended December 31
2015   2014 2015   2014

Interest rate swaps – net realized and

 unrealized gains

$ 17,465 $ 11,205 $ 24,851 $ 73,729

Interest rate swaptions – net realized

 and unrealized losses

(1,105 ) (11,537 ) (12,597 ) (15,520 )
Interest rate swaps – monthly net settlements (8,914 ) (25,674 ) (55,064 ) (113,919 )
Futures Contracts – fair value adjustments 108,856 (106,934 ) (82,864 ) (176,916 )
Futures Contracts – losses from maturities (15,564 ) - (48,120 ) -
Futures Contracts – other realized losses (20,442 ) (5,360 ) (45,836 ) (29,423 )

Mortgage loan purchase commitments -

 fair value adjustments

(404 ) (2 ) 11 (2 )
TBA dollar roll income 14,829 23,195 83,397 92,008

TBA dollar rolls – net realized and

 unrealized gains (losses)

  (30,636 )   35,119   (52,194 )   28,610
Net gain (loss) on derivative instruments $ 64,085 $ (79,988 ) $ (188,416 ) $ (141,433 )

Table 12

Hatteras Financial Corp

(Amounts are unaudited and subject to change)

(Dollars in thousands)

 

Reconciliation of GAAP Interest Expense to

Effective Interest Expense and Effective Cost of Funds

 
Three Months Ended
Dec. 31,

2015

  Sept. 30,

2015

  June 30,

2015

  March 31,

2015

  Dec. 31,

2014

Amount % (1) Amount % (1) Amount % (1) Amount % (1) Amount % (1)
         
Interest expense and cost of funds $ 19,126 0.55 % $ 21,248 0.57 % $ 23,750 0.63 % $ 27,314 0.71 % $ 26,966 0.77 %

Reclassification of deferred

 swap losses included in

 interest expense (after hedge

 de-designation)

(2,565 ) -0.08 % (5,433 ) -0.15 % (9,279 ) -0.25 % (13,438 ) -0.35 % (13,719 ) -0.42 %

Interest rate swaps – monthly

 net settlements (after hedge

 de-designation)

8,914 0.26 % 9,510 0.26 % 15,217 0.40 % 21,423 0.56 % 25,674 0.67 %

Losses on maturing Futures

 Contracts

  15,564   0.45 %   13,989   0.38 %   11,074   0.30 %   7,493   0.19 %   626   0.02 %

Effective interest expense and

 effective cost of funds

$ 41,039   1.18 % $ 39,314   1.06 % $ 40,762   1.08 % $ 42,792   1.11 % $ 39,547   1.04 %
 
Average borrowings $ 13,951,183 $ 14,807,631 $ 15,071,081 $ 15,482,427 $ 15,235,739
 
(1) Dollar amount on an annualized basis as a percentage of average borrowings.
  Twelve Months Ended December 31
2015     2014
Amount   % (1) Amount   % (1)
Interest expense and cost of funds $ 91,438   0.62 % $ 132,495   0.87 %
Reclassification of deferred swap losses included in interest expense

(after hedge de-designation)

(30,715 ) -0.20 % (81,132 ) -0.53 %
Interest rate swaps – monthly net settlements (after hedge de-designation) 55,064 0.37 % 113,919 0.74 %
Losses on maturing Futures Contracts   48,120   0.32 %   1,033   0.01 %
Effective interest expense and effective cost of funds $ 163,907   1.11 % $ 166,315   1.09 %
 
Average borrowings $ 14,823,829 $ 15,291,888
 
(1) Dollar amount on an annualized basis as a percentage of average borrowings.

Table 13

Hatteras Financial Corp

(Amounts are unaudited and subject to change)

(Dollars in thousands)

 

Reconciliation of GAAP Net Interest Margin to

Effective Net Interest Margin and Core Earnings

 

 

  Three Months Ended

Dec. 31,

2015

 

Sept. 30,

2015

 

June 30,

2015

 

March 31,

2015

 

Dec. 31,

2014

Net interest margin $ 56,132 $ 51,740 $ 53,926 $ 59,803 $ 61,095

Reclassification of deferred swap losses included in

 interest expense (after hedge de-designation)

2,565 5,433 9,279 13,438 13,719

Interest rate swaps – monthly net settlements (after

 hedge de-designation)

(8,914 ) (9,510 ) (15,217 ) (21,423 ) (25,674 )
Losses on maturing Futures Contracts (15,564 ) (13,989 ) (11,074 ) (7,493 ) (626 )
TBA dollar roll income   14,829   20,512   24,901   23,155   23,195
Effective net interest margin 49,048 54,186 61,815 67,480 71,709
Servicing income, net of amortization (1) 13,182 4,042 - - -
Management fee income 1,503 524 - - -
Net gain on mortgage loans held for sale (2)   323   229   -   -   -
Net operating revenue 64,056 58,981 61,815 67,480 71,709
Total expenses (3) (15,359 ) (10,259 ) (8,041 ) (8,250 ) (9,073 )
Dividends on preferred stock   (5,481 )   (5,480 )   (5,480 )   (5,481 )   (5,481 )
Core earnings $ 43,216 $ 43,242 $ 48,294 $ 53,749 $ 57,155
 
Core earnings per common share, basic and diluted $ 0.45 $ 0.45 $ 0.50 $ 0.56 $ 0.59

(1) Reduced by ($2,367) and ($520) of MSR fair value change that represents estimated amortization of the MSR asset for the three months ended December 31, 2015 and September 30, 2015.

(2) Excludes gain (loss) on mortgage loans held for investment.

(3) Excludes ($1,730) of transaction expenses related to the Company’s acquisition of Pingora and the Company’s whole loan securitization, ($568) of amortization of intangible assets, and ($478) of change in representation and warranty reserve on MSR for the three months ended December 31. Excludes ($805) of transaction expenses related to the Company’s acquisition of Pingora, ($189) of amortization of intangible assets, and ($290) of change in representation and warranty reserve on MSR for the three months ended September 30, 2015. Excludes transaction expenses of ($916) related to the Company’s acquisition of Pingora for the three months ended June 30, 2015.

Table 13

(continued)

Hatteras Financial Corp

(Amounts are unaudited and subject to change)

(Dollars in thousands)

 

Reconciliation of GAAP Net Interest Margin to

Effective Net Interest Margin and Core Earnings

 
Twelve Months Ended December 31
2015   2014
Net interest margin $ 221,601 $ 223,259
Reclassification of deferred swap losses included in interest expense

(after hedge de-designation)

30,715 81,132
Interest rate swaps – monthly net settlements (after hedge de-designation) (55,064 ) (113,919 )
Losses on maturing Futures Contracts (48,120 ) (1,033 )
TBA dollar roll income   83,397   92,008
Effective net interest margin 232,529 281,447
Servicing income, net of amortization (1) 17,224 -
Management fee income 2,027 -
Net gain on mortgage loans held for sale (2)   552   -
Net operating revenue 252,332 281,447
Total expenses (3) (41,909 ) (30,669 )
Dividends on preferred stock   (21,922 )   (21,922 )
Core earnings $ 188,501 $ 228,856
 
Core earnings per common share, basic and diluted $ 1.95 $ 2.37

(1) Reduced by ($2,887) of MSR fair value change that represents estimated amortization of the MSR asset for the twelve months ended December 31, 2015.

(2) Excludes gain (loss) on mortgage loans held for investment.

(3) Excludes ($3,451) of expenses related to the Company’s acquisition of Pingora and the Company’s whole loan securitization, ($757) of amortization of intangible assets, and ($768) of change in representation and warranty reserve on MSR for the twelve months ended December 31, 2015.

Contacts

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

Contacts

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