Form 8-K Hatteras Financial Corp For: Apr 21

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 8-K

 

CURRENT REPORT

 

Pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

 

Date of report (Date of earliest event reported):   April 21, 2015

_________________________________

HATTERAS FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

__________________________________

 

 

751 West Fourth Street
Suite 400
Winston Salem, North Carolina 27101

(Address of principal executive offices)

 

Registrant's telephone number, including area code:   (336) 760-9331

Not Applicable
(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

* Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
* Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
* Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
* Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

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ITEM 2.02.  RESULTS OF OPERATIONS AND FINANCIAL CONDITION

On April 21, 2015, Hatteras Financial Corp. (the “Company”) issued a press release announcing its financial position as of March 31, 2015, and its results of operations for the three months ended March 31, 2015, and other related information. A copy of such press release is furnished as Exhibit 99.1 to this report.

As previously announced and as further detailed in the press release furnished with this report, the Company will conduct a conference call at 10:00 a.m. eastern time on Wednesday, April 22, 2015, to discuss its financial results for the quarter ended March 31, 2015.

The information in Item 2.02 of this report, including the information in the press release attached as Exhibit 99.1 to this report, is furnished pursuant to Item 2.02 of Form 8-K and shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section. Furthermore, the information in Item 2.02 of this report, including the information in the press release attached as Exhibit 99.1 to this report, shall not be deemed to be incorporated by reference in the filings of the registrant under the Securities Act of 1933, as amended.

 

ITEM 9.01.  FINANCIAL STATEMENTS AND EXHIBITS

(d) Exhibits.

 

The information contained in the press release attached as Exhibit 99.1 to this report shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section. Furthermore, the information contained in the press release attached as Exhibit 99.1 to this report shall not be deemed to be incorporated by reference in the filings of the registrant under the Securities Act of 1933.

 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

 

 

 

 

EXHIBIT INDEX

 

 

 

Exhibit 99.1

Hatteras Financial Corp. Announces First Quarter 2015 Financial Results

Comprehensive Income of $0.50 per Common Share

WINSTON-SALEM, N.C.—(BUSINESS WIRE)—April 21, 2015--Hatteras Financial Corp. (NYSE: HTS) (“Hatteras” or the “Company”) today announced financial results for the quarter ended March 31, 2015.

First Quarter 2015 Highlights

First Quarter 2015 Results

For the quarter ended March 31, 2015, the Company had comprehensive income available to common shareholders of $48.7 million, or $0.50 per weighted-average common share, as compared to $23.7 million, or $0.24 per weighted-average common share, for the quarter ended December 31, 2014.  The increase in comprehensive income available to common shareholders was largely due to a tighter correlation between the changes in the fair values of the Company’s investments and hedging instruments as compared to the fourth quarter.  For the quarter ended March 31, 2015, the Company had core earnings of $0.56 per weighted-average common share compared to $0.59 per weighted-average common share during the quarter ended December 31, 2014.  The decrease was driven primarily by a slight decrease in the yield of our investments and a slight increase in hedge costs included in core earnings, partially offset by lower operating expenses.  “Core earnings” represents a non-GAAP measure and is calculated as net interest margin, as adjusted for certain derivative impacts, less 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.

“First quarter results were on target and favorable with little in the way of surprises”, said Michael R. Hough, the Company’s Chairman and Chief Executive Officer.  “The consistency of our results quarter-over-quarter reflects the modest risk position on our balance sheet.  Our duration, leverage and liquidity targets remain steady for now until clarity on FED monetary policy and the path of interest rates unfolds.  Our interest rate outlook has not materially changed since year end, and rates still seem bound in a relatively narrow trading range.  While we are partial to the near-term predictability of the current rate environment, we remain wary of market complacency and the potential for a changing yield curve and increased volatility.”

Net interest margin for the quarter ended March 31, 2015 was $59.8 million, compared to $61.1 million for the quarter ended December 31, 2014.  The Company’s net interest spread increased to 1.32% for the first quarter of 2015 compared to 1.31% for the fourth quarter of 2014, driven by lower average cost of funds.  The yield on the Company’s mortgage-backed securities (“MBS”) decreased to 2.03% in the first quarter compared to 2.08% in the fourth quarter due to a slight decrease in average gross coupon and an increase in prepayments resulting in higher premium amortization expense.  Effective net interest margin, which includes certain adjustments related to derivatives as well as TBA dollar roll income, was $67.5 million for the first quarter of 2015 as compared to $71.7 million for the fourth quarter of 2014.  Average portfolio yield including TBA dollar roll income was 2.08% in the current quarter, down from 2.16% in the fourth quarter of 2014.

The Company’s cost of funds decreased from 0.77% to 0.71% for the quarter ended March 31, 2015 compared to the previous quarter, driven by non-cash impacts from amortization of the Company’s deferred swap loss.  The Company’s average short-term financing rate was 0.36% in the first quarter of 2015, compared to 0.35% in the fourth quarter of 2014.  The Company’s effective cost of funds, which includes certain adjustments related to derivatives, was 1.11% for the first quarter as compared to 1.04% for the fourth quarter, driven by losses on maturing Eurodollar futures contracts.  Operating expenses, including those of the Company’s subsidiaries, were $8.3 million for the first quarter as compared to $9.1 million in the fourth quarter, reflecting lower personnel costs in the current quarter.  The total annualized expense ratio was 1.35% of average shareholders’ equity for the quarter ended March 31, 2015 as compared to 1.49% for the quarter ended December 31, 2014.  

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Dividend

The Company declared a dividend of $0.50 per common share with respect to the quarter ended March 31, 2015, consistent with the quarter ended December 31, 2014.  Based on the closing share price of $18.16 on March 31, 2015, the first quarter dividend equates to an annualized yield of 11.0%.

Portfolio

The Company’s weighted-average earning assets, consisting of residential mortgage assets, primarily MBS issued by Fannie Mae and Freddie Mac, were $21.1 billion for the quarter ended March 31, 2015 compared to $20.6 billion for the quarter ended December 31, 2014.  The fair values of the Company’s earning assets as of March 31, 2015 and December 31, 2014 are summarized below.

The annualized yield on the Company’s average ARMs and 15-year fixed securities was 2.03% for the first quarter of 2015, compared to 2.08% for the fourth quarter.  The decrease in yield was due to a lower average gross coupon and higher prepayments.

During the first quarter of 2015, the expense of amortizing the premium on the Company’s securities was $27.1 million, compared to $25.6 million during the fourth 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 first quarter of 2015 was 21.0%, compared to 20.6% during the fourth quarter.  The Company’s weighted-average one-month CPR for the quarter ended March 31, 2015 was 15.4, consistent with the quarter ended December 31, 2014.  CPR measures the unscheduled repayment rate as a percentage of principal on an annualized basis.

At March 31, 2015, the Company owned 15-year TBA securities financed in the dollar roll market with a fair value of approximately $4.5 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 March 31, 2015, the Company's net TBA securities had a cost basis of approximately $4.4 billion and a net carrying value of $26.3 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 $467,000 from prime jumbo ARM loans, on an average unpaid principal balance of $55.9 million.  The Company owned $123.3 million of these loans at March 31, 2015, up from $31.5 million owned as of December 31, 2014.  The loans had an average size of $777,000, a weighted-average interest rate of 3.41% and a weighted-average loan-to-value of 68% at March 31, 2015.

Portfolio Financing and Leverage

At March 31, 2015, the Company financed its portfolio with approximately $15.1 billion of borrowings under repurchase agreements.  The Company’s debt-to-shareholders’ equity ratio at March 31, 2015, was 6.2 to 1 compared to 6.5 to 1 at December 31, 2014.  The Company’s effective leverage, which includes the effects of TBA dollar roll financing, was 8.1 to 1 at March 31, 2015 compared with 8.0 to 1 at December 31, 2014.  Weighted-average effective leverage in the first quarter of 2015 was 8.0 to 1, up from 7.7 to 1 in the fourth quarter.  At March 31, 2015, the Company’s repurchase agreements had a weighted-average remaining term of approximately 35 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 March 31, 2015.

Book Value

The Company’s book value (shareholders’ equity less preferred stock liquidation preference) per share on March 31, 2015 was $22.05, unchanged from December 31, 2014.  On a per share basis, the book value at March 31, 2015 consisted of $25.28 of common

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equity, $(6.27) of retained losses, $3.21 of unrealized gains on agency securities including TBA securities, and $(0.17) 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.

Conference Call

The Company will host a conference call at 10:00 a.m. ET on Wednesday, April 22, 2015, to discuss financial results for the quarter ended March 31, 2015.  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, April 22, 2015 at approximately 12:00 noon ET through Wednesday, April 29, 2015 at 9:00 a.m. ET. Dial (877) 344-7529 and enter the conference ID number 10064274.  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 portfolio, the domestic and global economies and financial markets, interest rates, changes in the yield curve, 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.

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Table 1

Hatteras Financial Corp.

Consolidated Balance Sheets

 

 

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Table 2

 

Hatteras Financial Corp.

Consolidated Statements of Income

(Unaudited)

 

 

 

 

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Table 3

 

Hatteras Financial Corp.

Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

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Table 4

 

Key Statistics ⁽¹⁾

(Amounts are unaudited and subject to change)

 

 

 

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Hatteras Financial Corp

(Amounts are unaudited and subject to change)

(Dollars in thousands)

 

Table 5

 

 

Mortgage-Backed Securities Portfolio as of March 31, 2015

 

 

 

 

Table 6

 

Mortgage-Backed Securities—Months to Reset as of March 31, 2015

 

ARMs

Fixed

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Hatteras Financial Corp

(Amounts are unaudited and subject to change)

(Dollars in thousands)

 

Table 7

Repo Borrowings as of March 31, 2015

 

 

Table 8

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

 

 

 

Table 9

Swap Portfolio as of March 31, 2015

 

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

 

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Hatteras Financial Corp

(Amounts are unaudited and subject to change)

(Dollars in thousands)

 

Table 10

 

Swaption Position as of March 31, 2015

 

 

 

 

Table 11

 

Components of Gain (Loss) on Derivative Instruments, Net

 

 

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Hatteras Financial Corp

(Amounts are unaudited and subject to change)

(Dollars in thousands)

 

 

Table 12

 

Reconciliation of GAAP Interest Expense to

Effective Interest Expense and Effective Cost of Funds

 

 

 

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Hatteras Financial Corp

(Amounts are unaudited and subject to change)

(Dollars in thousands)

 

Table 13

 

Reconciliation of GAAP Net Interest Margin to

Effective Net Interest Margin and Core Earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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