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Hatteras Financial Corp (NYSE:HTS)

Q4 2012 Earnings Call

February 13, 2013 10:00 am ET

Executives

Mark S. Collinson - Partner

Michael R. Hough - Chairman and Chief Executive Officer

Kenneth A. Steele - Chief Financial Officer, Principal Accounting Officer, Secretary and Treasurer

Benjamin M. Hough - President, Chief Operating Officer and Director

William H. Gibbs - Co-Chief Investment Officer and Executive Vice President

Frederick J. Boos - Co-Chief Investment Officer and Executive Vice President

Analysts

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

Steven C. Delaney - JMP Securities LLC, Research Division

Michael R. Widner - Stifel, Nicolaus & Co., Inc., Research Division

Stephen Laws - Deutsche Bank AG, Research Division

Arren Cyganovich - Evercore Partners Inc., Research Division

Joel Jerome Houck - Wells Fargo Securities, LLC, Research Division

Daniel Furtado - Jefferies & Company, Inc., Research Division

Jackie Earle

Operator

Good morning, and welcome to the Hatteras Fourth Quarter 2012 Earnings Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Mr. Mark Collinson, Partner, CCG Investor Relations. Please go ahead.

Mark S. Collinson

Thanks, Laura. Good morning, everyone. Welcome to the Hatteras Fourth Quarter and Year-end 2012 Earnings Conference Call. With me today, as usual, are the company's Chairman and Chief Executive Officer, Michael Hough; the company's President and Chief Operating Officer, Ben Hough; and the company's Chief Financial Officer, Ken Steele. Also available to answer your questions are the company's Co-Chief Investment Officers Bill Gibbs and Fred Boos.

Before I hand the call over to them, I need to remind all of you that any forward-looking statements made during today's call are subject to risks and uncertainties, which are discussed at length in our annual and quarterly filings with the SEC. Actual events and results can differ materially from these forward-looking statements.

The content of this conference call also contains time-sensitive information that's accurate only as of today, February 13, 2013, and the company undertakes no obligations to make any revisions to these statements or to update these statements to reflect events or circumstances occurring after this conference call.

That's all for me. Here's Michael Hough.

Michael R. Hough

Good morning, and thanks for your interest in Hatteras Financial. We're pleased to host this call reflecting the fourth quarter and full year of 2012. As always, our entire management team is participating and available to answer your questions, following a few minutes of prepared summary remarks.

I'd like to start off and spend a minute to take a big picture look where Hatteras stands today and what we've been thinking about as we plan for the future. We all know we're in a low rate environment, and margins have been compressing. It's tough to have a clear picture of even the near future when markets are so influenced by policy. However, earnings at these more normal levels should be expected given how long rates have been low. I think Hatteras is a pretty good proxy for the market as we cut our dividend twice last year but to a level that is still very attractive relatively and on a risk-adjusted basis.

Hatteras is an interest rate vehicle that we try to operate in a clear and concise way so investors are able to understand and model what they're investing in. We've been using the same strategy since we started in 2007 that we designed from experience. And doing this through past cycles, we learned that, to be a predictable long-term investment, we need to operate solely on the short end of the yield curve. We strongly believe that adjustable rate assets are the best way for a levered mortgage portfolio to protect equity and deliver risk-adjusted returns through market cycles. An ARM portfolio is especially important now that we've had a trough in rates and we're not yet through the cycle.

So we love the ARM portfolio we've accumulated since 2007 that would be impossible to recreate now even if only for its sheer size. I could go on and on highlighting the positive AL attributes to this asset, but it all boils down to mitigating interest rate risk. Because ARMs predictably step-down the duration curve, they tend to follow a similar path as our liabilities. This makes hedging the portfolio more effective and more efficient. Both sides of the balance sheet help offset interest rate risks, so we're not dependent solely on our hedges to do the heavy lifting as we would with the longer fixed-rate portfolio. Right now, we like where the portfolio sits when looking at possible future yield curve scenarios and we really like the mix of assets and the balance in the portfolio.

We say this a lot, but return in this business is a function of risk taken. We've built a pretty efficient company over the years, which is nice because efficiency is risk we don't have to take. This is not the time for us to try to make up for lower yields by reaching.

Before handing this to Ken, I'd like to hit on 2 things in the fourth quarter. As you know, we decided to cut the fourth quarter dividend from $0.80 to $0.70 to carry over some undistributed taxable income. This was very unusual for us because we've never before realized such meaningful gains. We've usually distributed most if not all of our income. It's our recommendation to the board to cut the dividend to this level to reflect the more current spread environment we're in.

As we mentioned on the Third Quarter Call, we were highly sensitive to the potential volatility that could come from the confluence of all the political and market uncertainty at yearend: Tight balance sheets were tight, the fiscal cliff, year-end pressures, et cetera, we just want additional liquidity and flexibility entering 2013.

During the fourth quarter, we sold a chunk of our longest-duration MBS to enhance the risk position of the company. At the time it made sense to be more defensive. In hindsight, we think it was the right call. The potential for near-term disruption seems to have faded a little, and we're adding some new assets into this recent rate back up. Obviously, the political situation is far from solved, so we'll still be cautious. We're not sure where everything may shake out this quarter, but it probably isn't bad to have some UTI carryover in the uncertain environment.

Also I want to comment on stock buybacks. From the beginning, we think we've been pretty thoughtful and restrained around managing our capital base and creating value through accretion. We will always look for opportunities to accretively grow the value of the company either through stock sales or stock repurchases but not at the expense of risk management. We're not in a sprint here, but if the opportunity presents itself to meaningfully add value, then we will seriously consider it. We have to think about it in long-range terms. The philosophy on this remains consistent with what we said on the last earnings call: The company will buy back stock when we determine it is the best long-term use of the company's capital. And also, the longer -- the larger the discount and the longer it stays that way, the more likely we would be to buy back shares. Our Board of Directors share this view and commitment and they are prepared as well to implement a program quickly if this opportunity arises. Because we don't feel like the time is right, we haven't wanted to announce something because, if we're going to implement a share buyback plan, it's because we want to use it in a meaningful way. I hope this provides a little more clarity on this topic.

And with that, I'll pass this off to Ken for detail on the quarter.

Kenneth A. Steele

Thanks, Michael. Good morning, everyone, and thanks for joining us as we wrap up our fifth year as a public company.

The fourth quarter was a somewhat more of the same on a headline level. In addition to some of the things Michael mentioned, we continue to feel the many effects of Dodd-Frank, most notably in the form of recently announced CFTC, the Commodity Futures Trade Commission, actions as they have been busy regulating derivative instruments, as well as the FASB, the PCAOB and the SEC. 2013 will likely continue to be one of new rules which we have worked hard to make sure that we're in good position to implement.

I'm going to just highlight a few of the numbers today and then hand it over to Ben to discuss the portfolio and strategy.

The fourth quarter results as well as those for the year were primarily driven by the results of government stimulus in the form of intervention in the mortgage markets. With short-term rates basically unchanged and even rising some at yearend and falling long rates, we continue to experience compression in the portfolio. Our top line yields compression was also accompanied by further increases in the repo rates, which remained somewhat disconnected from LIBOR. Our net income for the quarter was $101.3 million or $1.02 per weighted average share, as compared to $82 million or $0.83 per weighted average share for the third quarter of the year.

Our net interest income was $74.9 million in the fourth quarter of 2012, as compared to $79.6 million for the previous quarter. We also sold approximately 3 point billion in securities during the fourth quarter, for a gain of $39 million, as we removed risk from the portfolio.

Our MBS had an approximate weighted average coupon of 2.95% for the quarter and a yield of 2.04%, which was a yield decrease of 12 basis points from the third quarter of 2012. Amortization expense rose from the third quarter of 2012, going from $47.2 million to $50.1 million in the fourth quarter of the year, while our weighted average one-month CPR moderated slightly, going from a weight of 20.5% in the third quarter to 19.8% in the fourth quarter.

The cost of funds picked up slightly by 2 basis points to 96 basis points for the quarter, up slightly due to the year-end repo rate pressure. A point on that costs are benefit of repo rates moving independently from LIBOR, and 1 basis point move in repo rates is a little over $0.006 per quarter in earnings. So you can see that rate moves have significant impact on the bottom line. This led to an interest rate spread of 108 basis points for the quarter, a decrease of 14 basis points from the previous quarter. Our operating expenses were $7 million, which is an annualized rate of 89 basis points on average equity for the quarter.

In summary. Our portfolio performed well, and we entered the new year with a balance sheet and liquidity strong. So even though there were some headwinds to face in 2012, overall, the year was still a good one for Hatteras and our shareholders, with a return on average equity of 12.96% and a book value increase of $1.11.

With that, I'll turn the call over to Ben for details regarding the portfolio and our investment.

Benjamin M. Hough

Thanks, Ken.

First of all, I'd like to give some more detail about our leverage over the last quarter and since. As we discussed on our last few calls, we've been comfortable in the 7.5x to 8x range. But during the fourth quarter, given the potential for fallout and volatility over year end, as well as increased prepayment risk on some of our pools, we decided to target a stronger liquidity position, and we sold some of our more vulnerable securities.

At the beginning of the quarter, our leverage on October 1 started out near the low end at 7.3x, and this is for 2 reasons. We have $1.3 billion of full repurchases from our August preferred deal that didn't settle until the fourth quarter. And two, our mark-to-market equity position was higher due to the higher market asset prices on September 30. But by the end of October, our bond position was back up at over $27 billion. So in order to add liquidity, as we approached the year end, we gradually bought down our bond position. The $3.4 billion we sold were generally 15-year fixed paper as well as some ARMs we thought might prepay more quickly given the new lows in rates. Again, some of these sales deficit are until January, so our year-end leverage number have yet to reflect those. Leverage was slightly below 7x at December 31, if you factor in the forward sales.

Main point here is that our quarter-over-quarter leverage and bond position do not paint a clear picture of our average earning assets for the period due to the timing of settlements of our purchases and sales.

So far this quarter, leverage is still in the low- to mid-7x range, while we gauge market risk and keep some dry powder for potential volatility and opportunities. As Michael mentioned, with the nice backup we've seen in rates recently, we've been able to spot some value and selectively add assets.

Prepayments for the quarter were down a little to 19.8% CPR. It's notable that our prepayment rates have been very steady in a tight range around 20% CPR over the last 6 or 7 quarters throughout a steady bull market in rates. This tight range helps us hedge more efficiently and to reinvest runoff. Prepays did not accelerate like we thought they might, so performance has been a little better than our expectations.

Well, looking to the current quarter. Our January CPR print was 20.1%, and February slowed down some and looks to be around 19.5%. If rates stay here or move higher, we expect prepays to decline a little more, depending on other factors such as the level of origination rates, slip of the mortgage curve and the health of the housing market in general.

On the liability side, we had no new swaps in the fourth quarter as the portfolio size declined and the duration shortened. The asset sales, along with a steady seasoning of our ARMs, reduced the need for additional liability extension. Our asset duration at yearend was estimated at about 1 year and our liability duration was about 1.2, resulting in a slightly negative duration gap. That said, we will continue to look for opportunities to forward-start some new hedges against the laddered maturities of our current swaps book. We will also look to hedge any additional purchases. We have $800 million notional in swaps coming due this year that average over 2% fixed rate and about $2.4 billion maturing next year with an average rate of around 1 3/4%, so whatever we replace them with will likely be at significantly lower rates. And we're always looking at other hedge options like [indiscernible] futures and MSRs, among others.

On repo, as we projected on our last earnings call, the supply of cash in the repo market increased significantly after yearend, and there has been about a 15-basis-point drop at wholesale repo rates. Not all of that benefit has been passed on to us by our counterparties so far. We're starting to see more rate relief as time goes on. While repo rates for us were in the mid to high 40s, at the end of the fourth quarter they have gradually declined and we're seeing rates today in the mid to high 30s on average. Going forward, we think that wholesale money market rates may have a little more room to fall and also that, pressure on our counterparties to reduce repo rates, to us, could continue as well, both of which would help to lower our cost of funds.

So overall, the investing environment today is better than it was last quarter, and we remain optimistic but cautious. Prepayment expectations are a little lower. Reinvestment yields are a little higher and repo rates are lower. And while we're still dealing with a lot of dynamic factors, we're off to recent highs in asset prices for now and the repo market is freeing up a bit, helping us out on both sides of the balance sheet. All in, net interest margin opportunities on new capital today are probably in the 115 to 125 basis point range, depending on the asset-hedge mix.

With that, I'll turn it back over to Michael.

Michael R. Hough

Okay, that concludes our opening remarks. And we look forward to any questions you may have. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is from Bose George of KBW.

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

A couple of things. Just first, can we just get an update on asset prices since quarter end?

William H. Gibbs

Sure, Bose. This is Bill. If you take a look at what's going on in the -- I guess you have to look at it in 2 different markets in terms of new-issue, current-coupon bonds, and then more seasoned, higher-couponed paper. In the -- since the end of the quarter, we've seen Z-spreads stay fairly constant on the lower-coupon paper. And it's backed up as a result of the rate moves about 3/8 of a point. If you look at the higher-couponed paper, we've seen some tightening there. People are starting to, I think, have less concern about prepays. We're seeing a little bit of a tightening there, probably 7 to 8 Zs. That paper has backed up about a 1/4 of a point.

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

And in terms of your spreads, just given the asset sales, was the quarter-end spread much different from the average spread?

Benjamin M. Hough

Quarter-end spread of the portfolio?

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

Yes, just on the -- yes.

Benjamin M. Hough

No, it was pretty close. We don't have the exact number, but it didn't impact the...

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

It was similar? Okay, great. And then just lastly, a question on current trends in terms of the supply of the ARM production, where that's been trending and whether there's enough there for you guys to replenish your portfolios.

William H. Gibbs

Sure. It's been fairly constant over the last several months in the $3 billion to $4 billion range. We would expect to see, with the steepening of the curve, that you'll start to see, as you did this morning on the mortgage assets, an increase in ARM production relative to fixed. If the curve stays here or steepens out, we could see a little bit more production in the ARM space. But either way, it's more than adequate to take care of our needs on runoff and any addition we might want to add.

Operator

and the next question comes from Steve Delaney of JMP Securities.

Steven C. Delaney - JMP Securities LLC, Research Division

As usual, guys, your comments were so broad. They covered just about everything I had down. I was going to ask you, Michael, about the stock buyback and the retained earnings at yearend. If I might just make a comment about the buyback: There were a couple days -- I noticed, in the quarter, and these things tend to be quick and you mentioned you'd like to see a consistent level of the stock before you make any type of commitment, but there were 2 days, I think, November 14 and December 28, where the stock was down, around $24.50, which would have put it in the neighborhood, depending on where book was that day, maybe 85% of book or something like that. I guess I just wanted to offer the comment that I think that I, for one, would view an authorization not as any type of commitment to actually go out and deploy it quickly but just to have that in the toolkit. I'm concerned in 2013 that we could have a lot of volatility as the year goes on, based on the Fed adjusting its QE3 policy or at least market concerns about any possible adjustments. So I just wanted to kind of offer that as a comment because they might just be 2 or 3 days but it might be a very attractive trade for you at a point in time.

Michael R. Hough

So, I -- look, it's already in our toolkit, Steve. Just because it's not authorized -- that's a very quick process. Like the 2 on the call, we -- we're on board, it's been discussed, embedded thoroughly at the board level. And we're prepared to implement it when we need it. Pointing back to those couple of days, one, the amount of volume we do is not significant enough for us to be able to buy back stock using the existing rules. And at that time, we saw significant value in the shares and we all personally stepped in and bought the stock. So that is -- at the time, our view was that there was value and it made more sense to do it that way. But yes, I think you're right. And I think we're not looking for quick trades, and it impacts multiple things. When you spend your cash, you just have to look at it from a big picture, long-term standpoint, in our view, anyway.

Steven C. Delaney - JMP Securities LLC, Research Division

And that's understandable especially given the comments that you and Ben made about managing leverage and uncertainty over yearend. And with the government situation and all, I can certainly understand where maintaining good liquidity and low leverage was also a consideration at that time. And just the last thing, I'll make, again, more of a comment rather than a question. I appreciate your -- the way that management and the board handled the dividend. We've seen all kinds of dividend policy strategies play out over the last 60 days. I would characterize yours as extremely transparent. By cutting the dividend to $0.70, you were very straightforward with the Street as to where you saw run rate -- sort of a sustainable run rate, and I think that doing it the way you did and just carrying that -- something over to hopefully be able to maintain a more steady and stable dividend in 2013. I compliment you guys on handling it the way you did.

Operator

And our next question comes from Mike Widner of Stifel, Nicolaus.

Michael R. Widner - Stifel, Nicolaus & Co., Inc., Research Division

So you talked a little bit about book value and sort of the hedging. But obviously, book value was down about 4.5% in the quarter. And everybody's -- most of the agency reads said book value declined. It was a tough quarter. But as we look forward to the prospects of uncertainty about how the yield curve is going to look, just wondering if you could comment on do you see that as -- both in Q4 and going forward, do you see that as effective hedging? And do you think we're in for more book value volatility or stability or again in an environment of potentially a improving economic recovery? I don't want to say a normal economic recovery by any stretch, but if the bias is toward a steepening curve, yes, do you see the hedges being effective? Or should we anticipate, as many people widely do, continued book value declines as the curve steepens up?

Benjamin M. Hough

Yes, look, we've always looked at hedging as -- our primary purpose is to protect equity and maintain our ability to earn through to the cycle. Any given point in time, there's going to be volatility. It's a -- there's a day and time when you see that -- when we see that trend. But going forward, there could be book value volatility either way. We have this portfolio hedged for the long term, the way we feel like it's appropriate, especially considering assets that we have. And we're very comfortable that, that book value has performed and reflected the low duration that we carry so far over the long term. And we do expect that will be the case going forward. However, we are maturing through a cycle. There are things coming, as Steve mentioned, and we are anticipating higher rates at some point. And we will hedge the portfolio as we see appropriate to protect the equity position.

Michael R. Hough

And Mike, I'd like to add, looking back at the quarter-over-quarter book value move, keep in mind that book value for us was up probably more than expected at the end of September, at the end of the third quarter. So some of this is just give-back. And taking 2 points in time over a short window to measure book value doesn't really paint a true picture. And if you look at it year-over-year, over a longer period of time, it performed just like we would have expected to and given our tight duration maps. So I'd just like to add that.

Michael R. Widner - Stifel, Nicolaus & Co., Inc., Research Division

Yes, no, I think that makes sense. And I think that's a good point. And people take for granted that the big book value gains like Q3 are going to be sort of be locked in and permanent, when the reality is that, as basis' adjust, the book value is going to move around. Let me ask you one other one. It's something that's kind of all the rage these days. It's gone from prepay-protected securities to now talking about dollar rolls and forward purchases and all that sort of stuff, which is certainly -- or almost certainly, I would think, a better opportunity, or at least a more evident opportunity in the fixed rate markets and, in particular, the fixed rate part of the curve where the Fed's playing. But is -- that notion of forward purchases and the trickle-through effect, if you will, of distortions created by the Fed, is that an opportunity for you at all? And is there any way you see yourselves being able to capitalize on what's going on there?

Benjamin M. Hough

First of all, the dollar roll market is primarily a 30-year fixed where we don't play. And second of all, we continue to be surprised that we keep getting this question because we've been saying from day 1, and I think everybody always has, whenever there's a steep yield curve, we utilize forward settlements and that all that is, is an exchange or carry between us and the dealer. At the time, the dealer earns the income but we get a cheaper price in the higher long-term yields and book value appreciation. It's something that we were doing in 2002 and '03 and '04 when the curve was steep, and we've been doing it since we started Hatteras. So yes, we do utilize the forward market primarily to buy the dollar price down and to lock in longer and higher yields on the securities.

Kenneth A. Steele

I think the big difference there is how you account for it. And we leave it in the reduction of the basis of the security and not take it as current income.

Michael R. Widner - Stifel, Nicolaus & Co., Inc., Research Division

Just I appreciate that. And yes, I know, Mike, you guys have sort of talked about that for a long time. I guess the more specific question is, what's going on in the 30-year fixed as well as sort of some of the 15-year fixed, low-coupon stuff? It's that discount for forward purchases has expanded quite a bit. And I guess the real question is just, are you seeing some of that trickling through into the 5/1s or the ARM market in general? Or is that dislocation really just a very specific thing that's, again, the abnormal outsized kind of dropped, if you will...

Benjamin M. Hough

I know the forward roll changes always, and the value of the roll is a little better right now. And maybe it was in the fourth quarter. But like you said, for us to take advantage of a little bit of additional roll and to trade in airs up [ph] really -- does not really fit in our strategy. I'll let Bill elaborate a little.

William H. Gibbs

Mike, as far as the ARM market's concerned, on our forward purchases, you're not seeing the kind of distortion that you're seeing in the fixed space, with the Fed playing in there. It's pretty much a math problem there. You take a look at what the coupon is. You look at the funding cost and then take into account an expected CPR, and then you come up with a number. And it's been pretty consistent, with the current coupon paper to be around somewhere between 3 and 4 ticks per month.

Operator

And our next question is from Stephen Laws of Deutsche Bank.

Stephen Laws - Deutsche Bank AG, Research Division

A lot's been covered. And as always, you guys did a great job with your prepared remarks. But wanted to hit on maybe the financing side here. Can you talk about what you're seeing in the repo markets? We typically get the year-end spike. Kind of, how is that unwinding, if at all? And how do you see that trending over the next few months or through the second quarter or into the first half of this year? And then secondly, touch on the swap side, $800 million of swaps maturing, I believe, in the second quarter of this year. Should see some benefit there regardless of whether you simply increase the percentage of repos or add swaps at current rates. And given your view of the curve, is it something where you might replace those swaps before they actually mature? Or maybe talk about how you're viewing your swap book at this point.

Frederick J. Boos

Sure. this is Fred. On the repo question, as Ben mentioned in his prepared remarks, we've migrated from high 40s to high 30s for 30-day repo rolls. Market's come down nicely for us. And why is that? Basically, there's more cash in the cash system right now, in the fed -- system, reserve system. Well, our LIBOR dealer positions have declined. They bump around a lot, especially when they're taking down treasury auctions. The corporations are flushed with cash at the end of Operation Twist. There's a number of reasons why there's more cash in the system, and that's reflected in the lower repo rates. Based on what we see in the broker repo market where we've seen 30-day bids come down to the low 20s, dealers are reluctantly bringing their bids down. That's bids to us since we're not a primary broker-dealer to engage in that market. But the dealer positions are generally slightly wider, but as Ben mentioned, they are coming down. So we're optimistic that they will follow the broker market down and probably likely, hopefully, in the lower 30s by the summer. But again, it's hard to gauge that. Really, the dealers drive those spreads. The other important point to remember is that the Fed, vis-à-vis its liquidity standards, are driving dealer positions out past the overnight position out into the term position, for liquidity purposes. That puts a slight premium into the term bids, but again, we're -- our expectation is that we're going to be in the lower 30s at some point in the near-distant future.

Michael R. Hough

And Stephen, on the swaps questions, the answer is yes, we are looking to replace runoff, maybe a little forward here. We can forward-start positions against these maturities very cheaply right now given the flatness of the yield curve. So it can only cost -- it might only cost us a few basis points to go out 6, 12, 18 months on a forward-starting swap, which we think there's a lot of value there. So yes, we are looking to do that. We've done some of that. We indicated last quarter that we did some of that in the third quarter, and we'll continue to look for those opportunities. But your observation is correct: With the swap rates as high as they are on their existing portfolio, we're going to get some natural recapture of our net interest margin as those mature off and are replaced, whether we replace them with swaps or whatever. So we should get some help from the cost of funds side going out into the next, even, 3 years, depending on what short-term rates do between now and then. So...

Stephen Laws - Deutsche Bank AG, Research Division

Looking at my model, I guess it looks like you guys may have already replaced some for the third quarter with a forward-starting 3-year swap and even a little bit forward-starting on to replace some of the $2.4 billion that mature in '14. Although, it looks like that hasn't been fully replaced. But I guess that's something you guys constantly look at and will -- you'll continue to utilize those forward-starting swaps.

Michael R. Hough

Yes, and you can't talk too many conclusions on exact start date of swaps versus our maturities. Some of those may be applied to some of the new purchases we did in the last quarter. So we see a lot of value in the duration protection we're getting from those swaps, but starting -- the cheapness of starting them forward. We choose to go that route rather than swaptions because it makes a lot more sense for some of the ARM assets we're buying. So it -- when you're looking at the forward starts that we have, it's not necessarily against our maturities. It could be against some of the assets we purchased, but yes, that -- it can be allocated that way too.

Operator

And the next question comes from Arren Cyganovich of Evercore.

Arren Cyganovich - Evercore Partners Inc., Research Division

Just on to the leverage. During the quarter, I think the average looked like it was around 7.5x. And I know you touched on this in your comments, but I just want to understand the recent purchases that you've been making. Do you anticipate that you would get up to that same type of average for the quarter? Or do you anticipate it being, I guess, a little closer to the some 7.3x-ish level?

Benjamin M. Hough

Well, I mean, if you look -- what I've mentioned is that we've -- this quarter so far, we're still at the below 7.5x. And it's yet to be seen, but we're already halfway through the quarter and any purchases we make would -- and you can see, the one issued -- the 1 purchase securities we have on the balance sheet at the end of the fourth quarter and draw some conclusion. But I would guess that our average leverage for this quarter would not be back up in the -- much into the above 7.5x, if that high. But it's still yet to be seen. We still -- there's a lot of volatility and we may find opportunities to get leverage up, so I wouldn't want to draw any conclusions yet.

Arren Cyganovich - Evercore Partners Inc., Research Division

Okay. And then just a quick one on the $800 million of swaps that are maturing in the next 12 months. Are there any maturing in Q1?

Benjamin M. Hough

Well, we have some in each quarter. But we've always laddered our swaps portfolio to match the assets a little better. But we have between $200 million and $300 million each quarter. So, yeah $200 million in the first quarter, $200 million in the second quarter, $300 million in the third quarter and so forth. So they're pretty well spread out.

Arren Cyganovich - Evercore Partners Inc., Research Division

And then I guess, lastly, given the -- and we have seen a kind of leveling-off in the long rates, but given the trend of higher long rates and keeping more of a steep -- steepening yield curve, maybe you can just talk about how your portfolio may be a little bit better situated in that environment versus some of the other folks that have a little bit longer-duration assets.

Michael R. Hough

Well, we're not going to compare our portfolios to others'. But like I was saying early on, we want to operate on the short part of the yield curve and for the very reason that the way that curves steepen then flatten. And the short part of the curve historically, even during inverted yield curve scenarios, the short part of the curve, this will retain some steepness. So we have been very focused there. It's a steeper yield curve is good for us in multiple ways. One, it's good for ARM production. And it's good for prepayments. And we would welcome higher, longer rates if they came to be.

Operator

And our next question is from Joel Houck of Wells Fargo.

Joel Jerome Houck - Wells Fargo Securities, LLC, Research Division

Is there something unusual, can you remind us, at the end of September last year that pushed book value up? And the reason I ask is -- and I know these things can move around from quarter to quarter, but the 4.7% decline in book value was a little more than we expected. I think some of the longer-duration guys were about 4%. And given your shorter duration, it was a little surprising. So I'm wondering if there -- if maybe there was something unusual going on in the fourth quarter in the hybrid market or something unusual going on near the end of the third quarter which pushed that number higher or the value of your assets higher.

Benjamin M. Hough

Yes, Joel, I would have to start by saying I don't think there was anything different in the hybrid ARMs market that was -- that would stand out to draw any conclusions from. But we were up quite a bit in the third quarter. At the end of the third quarter, the bases had tightened significantly and there's been Dewey 3 [ph] volatility. Those are 2 very volatile weeks there in the last year to mark the assets. And so I would just say that it's hard to take those 2 points and draw any conclusions as to the change of book value. So I would like to think that it take a longer-term approach to it. It's not exactly in line with what anybody would expect in -- from a portfolio with the duration of ours.

Michael R. Hough

And Joel, just to add. There's a point we made earlier too, it's that it's a -- we take a long-term look at this, and we -- our goal was to get our assets and liabilities matched as best as possible, through a cycle, walking down the curve together. And any given small window of time, it's not reflective of balance sheet that we've built, so again to reiterate what Ben said, don't draw any conclusions from that.

Joel Jerome Houck - Wells Fargo Securities, LLC, Research Division

Okay. And in terms of new investment opportunity, I think you mentioned 115 to 125 on a hedge basis. How would you handicap the relative attractiveness of a 15-year opportunity you're seeing right now versus the hybrid opportunity? Are they similar? Or are there some variances in those 2?

William H. Gibbs

Joel, I think, if you look at 15 years, they look a heck of a lot more attractive than they did around several weeks ago. We've seen significant back up there in 15 years. And the way we characterize 15 years right now is starting to approach attractive. 7/1s also have backed up. We like 7/1s currently, I think current coupons, 7/1s, are back over a point from where they were trading a couple -- or a few weeks ago -- or I should say, at the end of September, rather. So we like the 7/1s. As well as, taking a look now on 15 years again, 5/1s, from our perspective, the yield is just a little too low for us currently. If they continue to back up, I think that's something we might have a look at as well. But currently, I'd say we're focusing on 7/1s as starting to look at 15 years again.

Frederick J. Boos

I would add that the LIBOR spreads, the LOAS spreads which we look at are still slightly negative for the 15 years sector, at least on the coupons, we're looking at 2.5s, as compared with more positive spread in the 7/1 sector, more in the 15, 20 basis point range. So it's another measure we look at.

Joel Jerome Houck - Wells Fargo Securities, LLC, Research Division

Right. The option is just the spread?

Frederick J. Boos

Yes.

Operator

And next, we have a question from Daniel Furtado of Jefferies.

Daniel Furtado - Jefferies & Company, Inc., Research Division

My question has been asked and answered.

Operator

All right, the next question is from Jason Stewart of Compass Point.

Jackie Earle

This is actually Jackie Earle, on for Jason. I just have one quick question. You guys mentioned investing in excess MSRs. Could you maybe comment on the attractiveness versus IOs and any hurdles to executing that trade?

Michael R. Hough

We're not going to comment really on what we've done with MSRs and our view of that is -- as an investment or a hedge, other than that we are taking a good look at them and evaluating how they may fit in our long-term interest rate risk plan. So that's really all we'll -- all we can say.

Operator

[Operator Instructions] And our next question comes from Adam Patoda [ph] of JPMorgan.

Unknown Analyst

I was wondering if you're seeing much of an impact from the HARP Program on hybrid ARM prepayment speeds.

William H. Gibbs

You definitely have seen impact on the HARP-eligible paper. It's such a small percentage of our overall portfolio. It really hasn't impacted us a great deal. But I think what you'll probably end up seeing is, with this backup in rates we've seen over the last couple of months, as originations start to dry up a little bit, you're going to start to see more focus on the HARP paper. I definitely think, with some of the MSR sales and some of the more aggressive people taking a look at the possibility of refining the HARP paper, you'll probably continue to see a fairly elevated HARP speed.

Operator

And this does conclude our question-and-answer session. I would like to turn the conference back over to Michael Hough for any closing remarks.

Michael R. Hough

I just want to say thanks for your interest in Hatteras and we appreciate you being on the call. And we look forward to our First Quarter Call. Have a nice day.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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