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Hatteras Financial Corp (NYSE:HTS)

Q1 2009 Earnings Call

April 29, 2009 10:00 AM ET

Executives

Mark Collinson - Partner, CCG Investor Relations

Michael R. Hough - Chief Executive Officer

Kenneth A. Steele - Chief Financial Officer, Secretary & Treasurer

Benjamin M. Hough - President and Chief Operating Officer

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

Analysts

Bose George - Keefe Bruyette & Woods Inc.

Michael Widner - Stifel Nicolaus

Steven DeLaney - JMP Securities

Jason Arnold - RBC Capital Markets

Brian Roman - Robeco Investment Management

Operator

Good morning and welcome to the Hatteras Financial Corp. First Quarter 2009 Earnings Conference Call. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions). Please note this conference is being recorded.

Now, I would like to turn the conference over to Mr. Mark Collinson.

Mark Collinson

Thanks, Ron. Good morning everyone. Welcome to Hatteras' first quarter fiscal 2009 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, Kenneth 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, please note that on this call certain information presented contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements are based on management's current expectations and are subject to risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, expected, estimated or projected.

The following factors, among others, could cause actual results to differ materially from those described in the forward-looking statements.

The company's limited operating history; changes in its business and investment strategy, changes in interest rates, interest rates spreads, the yield curve or prepayment rates; changes in economic conditions generally, inflation or deflation, availability of suitable investment opportunities; availability terms in deployment of capital; the degree and nature of the company's competition, general volatility of the capital markets, dependence on the company's manager and the company's ability to find a suitable replacement if the manager were to terminate its management relationship; and other factors that are set forth in the company's most resent annual report on Form 10-K filed with the Securities and Exchange Commission and any subsequent reports on Forms 10-Q and 8-K.

The content of this conference call does contain time-sensitive information that is accurate only as of today, April 29, 2009. And the company undertakes no obligation to make any revision to the statements contained in these remarks or to update them to reflect the events or circumstances occurring after this conference call.

So with that, it's my pleasure to turn the call over to Michael Hough.

Michael R. Hough

Thank you, Mark. And good morning and welcome to our first quarter earnings call. Thank you all for your interest in Hatteras and for taking the time today to be on this call and we welcome this opportunity to discuss our first quarter and recent developments in the hybrid ARM markets.

Again, we have our entire senior management team on this call and each of us are available to answer any and all questions you may have following first a brief report on the quarter.

We are very pleased with the continued growth of our balance sheet and the net income we earned during the quarter and like the flexibility, we now have during these unusual times especially from our long-term strategy perspective.

We discussed on our fourth quarter call in February, the selective process we were using to invest and it was around then when we decided to take a more cautious approach to investing because of the unknown ramifications to the mortgage market that might come with government actions.

We seem to have a little more clarity into that now and we have seen mortgage rates come down and prices on agency securities go up significantly, driven primarily by the treasury committing 1.25 trillion dollars directly into the purchase of agency MBS.

Now we continue to employ that same cautious approach, but for a somewhat different reason, because it seems like their goal of driving conforming rates lower to put prime borrowers in the money to refinance has been mostly achieved, at least from a pure rate perspective. As you know issues still remain for many borrowers that could deter there ability to refinance.

It's interesting how quickly the markets have moved though, but we were readily seeing cheap agency hybrids on the daily basis. We are now seeing prices on many of those same securities that we think are unsustainable and frankly are -- at levels we will not pay.

As we've said many times, we are in this to generate income but we have to first protect the value of your investment to be able to do so. So, we are not going to overpay for our securities.

From our experience in this business, we know what happens when you put too much premium on the books. Therefore, we are being very selective in each asset we purchase. The percentage of securities, we buy relative to the flow we see on a daily basis is small, but Fred and Bill continue to be very successful in appropriately building our portfolio.

We are very pleased with the earnings we are generating in this high interest spread environment and we are comfortable with the flexible position we have in the portfolio, and in our ability to continue to find value out there and invest in hedge to our strategy goals.

While we see no reason to maximize leverage right now, we do have room to grow what we choose and I think we are well setup for this current market.

So before we open up to your questions, we'd like to spend a couple of minutes reporting on the financials and on the portfolio. Thanks again for your time today and I'll hand this call over to Ken to give you our quarter's financial report.

Kenneth A. Steele

Thanks Michael. Good morning everyone and thanks again for being here. Once again we were faced with a new set of uncertainties as we navigated the quarter.

Although the market still exhibited a fair bit of unpredictability and as Michael said, we were cautious, most of these concerns have not yet come to pass, could say we were alert but not alarmed. There's been a busy spring and I am quite satisfied with this quarter's results.

Our net income for the quarter was 38.8 million or $1.07 per share, up from 20.7 million or $0.73 per share for the fourth quarter of 2008. This increase was mainly comprised of three items: one, a larger portfolio; two, a higher net interest margin and three no impact from Lehman Brothers.

First to the portfolio; we continue to invest the proceeds from our December offering throughout the quarter. And as a result, our average earning assets grew from around 5 to 5.5 billion. We ended the quarter with 5.9 of agency MBS up from 5.2 billion at December 31st.

Next, our net interest margin grew significantly, growing from 2.05% in the fourth quarter of 2008 to 2.81% for the first quarter of 2009. Most of this increase came from a drop in our cost of funds which went from 3% in the last quarter of '08 to 2.09% for the first quarter of 2009.

Lastly, many of you may be familiar with the reserve we recorded last quarter regarding the Lehman Brothers default on a repurchase agreement we had with them. We reserved all of our exposure related to that event in the last quarter of 2008 for a total expense of 6.1 million.

If you exclude the effect of that expense, we would have made 26.7 million or $0.94 a share for the last quarter of '09, I mean of '08. The yield on our MBS portfolio did drop some from the previous quarter going from 5.05% to 4.9%.

This was a combination of adding securities with lower yields and an increase in premium amortization on our portfolio. Our amortization expense was 3 million for the first quarter of 2009, up from 1.7 million in the fourth quarter of 2008.

Our principal repayment rate while still fairly tame did increase from 7.8% on an annual basis to 12.4% on an annual basis in the first quarter. The repo side of our balance sheet grew in proportion to our asset side going from 4.5 billion at December 31st, to 5.2 billion at March 31st.

Rates continued to pull towards LIBOR as the funding markets continued stabilizing after year-end. Although haircuts remained basically unchanged, financing remained plentiful and interest rates fell.

Our quarter ending debt-to-equity was 6.521 up from 6.121 at December 31st. Although we added assets throughout the quarter, some of that leverage increase was offset by higher overall unrealized gains included in our equity.

We also added to our swap position during the quarter, ending the quarter with around 2 billion in notional amount in place, with an average rate of 2.87% and an average term of 31 months. At December 31st, we had 1.7 billion of swaps in place, also with the weighted average term of 31 months and average fixed rate of 3.05%.

Our book value moved up nicely during the quarter and we ended March with the book value of 2,220, up 9% from 2,035 at December 31, 2008.

All of this increase came basically from the increase in the value of our agency securities as swap values remain fairly level throughout the quarter.

In summary, we had a strong quarter producing an ROE of 19.8% while increasing book value and maintaining a conservative stand. We increased our dividend to $1.05 per share from a $1. Our liquidity is strong and our balance sheet is well positioned for the coming months.

With that, I'll hand the call over to Ben, to discuss some of the portfolio specifics.

Benjamin M. Hough

Thanks Ken. As Michel mentioned, we continue to take a gradual approach to investing due to the uncertainty of prepayments and the high premiums of available bonds.

With many hybrids ARMs moving up in price by as much as four points over the last four months, premiums on much of the available supply have drifted higher than our comfort level and new production has been slow to get to market.

In this environment bond selection is key. So we have been analyzing each security as to geography, FICO, loan-to-value and interest only versus amortizing and have consistently, but patiently bought those securities where we feel there is value and that have long -- solid long-term performance traits for both income and book value.

In the quarter, we selectively added mostly shorter duration ARMs where we found the best balance between premium paid and prepayment risk.

Over the last six weeks or so however, as demand for ARMs has increased, the mortgage curve has steepened at some originators to as high as 95 basis points between hybrids and 30 year fixed and borrowers are starting to take advantage of it.

The result is that we have started to see a little more new production and have been able to get some new five ones along with some 102 to $102.5 price seasoned IOs.

The total added since March 31 is 745 million with 151 million settling in April, 193 million settling in May, 259 in June and 142 in July. Those bonds have a weighted coupon of 421 with a 1/1 842 dollar price and average 61 months to reset.

As a point of reference, since the capital raise in December, we have purchased a total of 1.77 billion in ARMs with an approximate average coupon of 4.56%, a dollar price of 1/1 889 and 41 months to reset.

So understand right now, once it all settles, the portfolio will be approximately 6.6 billion with a weighted average coupon of 5.08% at a 1/1 396 dollar price and 48 months to reset, again excluding prepayments or additional purchases.

Our principal repayment rate rose modestly in the first quarter, but was still relatively low, while the average annualized rate as Ken said was 12.36%. It ranged from about 8% in January up to about 17% in March.

This is a more typical level and we fully expected it given the big drop in rates in December and January along with government refinance systems. (ph). But all in all even with purchasing lower yielding securities, our focused on limiting premium kept the affect on yield to about 15 basis points and 505 last quarter to 4.9% in Q1. We can keep yield volatility at a tighter range by keeping our overall premium in check.

In April, the principal repayment rate on annualized basis was about 20%. So prepayments have been trimming higher as expected, but it's important note though that certain securities are prepaying slower than other and many of our securities have some insulation from prepayments.

Bill and Fred can give you more details on the specifics there. We don't really expect a steady climb in prepays, but more of a choppy fluctuation month over month. As far as portfolio financing goes, conditions have improved from a rate and a counterparty standpoint.

The move down in swap rates and spreads gave us some great hedging opportunities early in the quarter that helped to offset some of the lower yields. We settled a total of 600 million swaps, averaging 1.85% with 50 months to expiration that brought us to the total of 2 billion to where we are now.

We you add in our term repo, we have a total of extended liabilities of 2.5 billion at 2.93% and 29 months until expiration. That represents about 43% of the current expected repo book once all forward purchases have settled, again excluding prepayments or any additional purchases.

We will continue to hedge as we see fit (ph). Repo rates have also recently moved lower as credit conditions have improved. A spread between LIBOR and repo has contracted to a level closer to its historical norm of 5 to 10 basis points. Currently, we're seeing repo rates for ARMs in a range between 40 and 60 basis points with an average somewhere in the middle of that.

We also have been offered more 60 and 90-day term repo which we haven't seen much up for a while. So while haircuts are still sticky and haven't improved like we would expect, overall repo conditions are as good as they have been since March of last year. We expect that as liquidity in the ARMs market remain solid, the funding environment should be good.

Now I'll turn it back over to Michael.

Michael R. Hough

Okay. Thanks Ben. Before closing, just a quick look at the hybrid ARM market. This is our primary target market and it had recently become a fairly dynamic one.

During most of 2008, the mortgage market as a whole had of relatively flat yield curve, where rates were similar for almost every option available to the creditworthy borrower, ARMs as well as fix, same holds true for the investor.

Throughout '08 we drove the value of hybrids and this was particularly the case late in the year, when that yield curve became inverted at the same time the U.S. Treasury interest rate curve was positively slowed.

Hatteras then began directly purchasing fixed rate mortgage-backed securities, pushing those rates down well below those of ARMs. I think this did back the question to some, if ARMs are going to continue to be an alternative mortgage product? Of course with ARM rates higher than fixed there is no incentive for a borrower to deploy the mortgage.

However, our stand then was that there was a whole lot of value available for investors like us. And we actively accumulated as many of these mortgages as we could while the yields were so much higher than other options. Because without changing our credit risk profile, we could buy more yield, shorten our duration and add predictability to our asset liability model, a great value proposition for us.

Recently though, over the last two months especially, it seems the universe of short duration investors had called on banks, money managers et cetera. What has happened is that spreads have come in dramatically driven by all this new demand, none of this is government by the way. And there is now a positive slope in the mortgage yield curve and we are again seeing meaningful originations in hybrids.

The difference between a 30-year fixed rate mortgage and a 5/1 hybrid mortgage rate at a couple of a larger originator has been set, it's now more than 75 basis points, while earlier this year it was zero or negative.

This is meaningful positive slope in the mortgage yield curve. Rates are very low now for the mortgagee and he has a real incentive to choose the lower rate and therefore a lower payment. Because of this, we expect demand will increase for hybrid mortgages as well as hybrid securities, maintaining the positive slope in the mortgage curve.

And with an expected increase in refinancing, hybrid ARM origination volume should keep increasing. The shape of the curve will drive ARM production and borrowers will always be given options if originators want to be profitable.

Though we are bullish on the long-term outlook for hybrids, but again, keep in mind, we will invest when we see securities that are valued profitably and not invest for the sake of leverage.

We are in the market, now looking for those short duration investments that we can best count on for predictability and return.

So with that operator, I'll open the team up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Bose George of KBW.

Bose George - Keefe Bruyette & Woods Inc.

Good morning, guys.

Unidentified Company Speaker

Good morning, Bose.

Bose George - Keefe Bruyette & Woods Inc.

Nice quarter. I just -- I wanted to start with a discussion on your prepayment rates which are impressively low. I was wondering if you can give us the percentage of interest only mortgages versus fully amortizing mortgages in your portfolio, and the differences in prepayment rates between those two cohorts?

William Gibbs

Sure. Good morning, Bose. It's Bill.

Bose George - Keefe Bruyette & Woods Inc.

Hello.

William Gibbs

We have approximately 80% of our portfolio invested in interest only mortgages at this time. And from what we've been seeing the prepayment rates on amortizing mortgages are coming in about double what the interest only mortgages are paid. So that's a big part of the reason why we've seen such same prepays. If you take a look at all the government programs that have been introduced, they require investors or borrowers to go into amortizing loans.

And since most of the production we've seen over the last probably six months has been in 15 and 30 year fixed, all of that is in essentially amortizing loans as well. We think going forward that's going to give us some protection in terms of prepays.

Bose George - Keefe Bruyette & Woods Inc.

Great, thanks and then just in terms of the incremental rate incentive that and interest only borrower would need versus to switch into a fully amortizing mortgage. What does that work out to?

Michael Hough

Sure, based on our calculations, we see it being about a 170 basis points to maintain the same monthly mortgage payment. So it takes a good deal of lower rate in order for the borrower to continue to pay the same mortgage and have that benefit.

Bose George - Keefe Bruyette & Woods Inc.

Great. Well thanks very much guys. Good quarter.

Michael Hough

Thank you.

Operator

Our next question comes from Mike Widner of Stifel Nicolaus.

Michael Widner - Stifel Nicolaus

Hey good morning guys. Thanks for taking the call and a solid quarter. I am not sure if you guys are going to provide much color on this, but with the -- as you indicated with the returns in the pricing on securities right now not being terribly attractive.

How would you think about what to do with cash that you get from prepayments, if you're not seeing to me attractive opportunities there. I mean I guess the options are to sit on cash versus some type of return of capital to investors whether through share repurchase or special dividends or anything along those lines?

Unidentified Company Speaker

Yeah, that's a good question. While, we are seeing a lot of securities and a lot of coupons in hybrids that are -- the prices are prohibited for us. We are still finding value in some securities and whether its new production or specific assets that we like, we are very comfortable in maintaining our ability to invest cash flows. And with prepayments where we are and where we're projecting them to be, we are projecting the ability to be able to keep invested.

Right now prepayments are anywhere from a $100 million to $125 million per month, which we've easily been able to re-invest. And so going forward, we're not terribly concerned at our ability to invest. So, I guess that's the way we would that we're viewing a pickup in prepayments and the options that are out there for us.

Michael Widner - Stifel Nicolaus

Okay, well thanks for that. I guess just sort of building on that a little bit. If the yields and the prices are sort of marginally less appealing on the new investments and you want to keep your ROEs up. Obviously leverages, a lever that you have a lot of ability to pull.

So I guess the question on leverage is, what might cause you to take it upward, if things go the other way to take it down. And again if... its hard to predict what the government is going do next, but if the 1.2 trillion purchase goes up to 2 trillion and we start letting IO borrower, we create hybrid IOs again and the rates are down. I mean the one thing we've learned from the government as its hard to know what they're going to do next, other than the fact they're going to try and allow more borrowers to re-price.

So I guess if you could just talk about how you think of leverage in that context? And again going back to the prior question, is there some set of circumstances that might lead you to potentially return capital or is that kind of off the table and you'd rather sit on cash?

Michael Hough

We're not thinking about returning capital right now, because we're making a lot of money.

Michael Widner - Stifel Nicolaus

Now and clearly now, you wouldn't. I am just thinking about it more in a hypothetical sense as we think about what are the worst case scenario I guess for investors. Right now everything looks great and you guys are generating fantastic ROEs and running a very conservative business model. So, everything works great, but as we think about what might come next? Is there a circumstance under which you might choose to do something?

Michael Hough

Hey now that Mike is that, we are monitoring what the government's doing, and what the government may be thinking. There is no way we can project or run our business against the unknown there. Because it's such an unknown like we mentioned earlier we are very comfortable with position we're in right now. We have a lot of flexibility. We have the ability to increase leverage if we want to or we have the ability to bring leverage down a little bit and still make a lot of money.

So, I think all options are on the table right there. Our view is that when we see value in the market we're going to take advantage of it and when we don't see value we're not. So, right now that's kind of where we are. And we continue to find value out there, but it's not as readily available as may be it was last year. So, that's a business we're in and we're in the business to generate income as much as we can, but all is in the confines of our risk model and protecting our shareholders' investment.

Michael Widner - Stifel Nicolaus

Great, well thank you. I appreciate the color and I mean certainly great results and so far, even given the less attractive investment opportunities clearly the ROE opportunities are still certainly extremely attractive relative to long-term norms in the business. Thanks guys.

Michael Hough

Okay. Thanks.

Unidentified Company Speaker

Thanks Mike.

Operator

Our next question comes from Steve DeLaney of JMP Securities.

Steven DeLaney - JMP Securities

Good morning guys. Thanks for taking the question and nice job putting the money to work at really reasonable dollar prices in a tough environment. I wanted to ask -- my question was really about leverage and Ben's color was very helpful and I just had a couple of follow-up questions on that. First Ben, I heard you say that the purchases subsequent to March 31st were $745 million.

Benjamin Hough

Right.

Steven DeLaney - JMP Securities

And could you repeat those, the settlements by month please. I think it was 151 in April could you just give us that just again please?

Benjamin Hough

Sure, I'll be happy to. That was $151 million in April, $193 million in May, $259 in June, and $142 out in July.

Steven DeLaney - JMP Securities

Okay. So that clearly indicates that's the new forward hybrid production that your future delivery that you're committing to right?

Benjamin Hough

Exactly.

Steven DeLaney - JMP Securities

Okay, great. Now, that I assume that $745 million doesn't include the $384 million of unsettled trades on the balance sheet?

Kenneth Steele

It does include that Steve.

Steven DeLaney - JMP Securities

It does, is this Ken?

Kenneth Steele

Yes.

Steven DeLaney - JMP Securities

Okay. Great, okay. So that was, so basically that 784, if we included that and I am trying to get to kind of where you might be going in leverage. If we included that 784 pro forma as settled, it looks to me it would have taken the leverage from 6.5 to about 7.0 at Mach 31st had those repos been actually closed at that point.

So, but and then again that 384 isn't been 745 Ben. I guess where I'm going... is it reasonable to think that you sort of settled in understanding that it takes a while to build up to cope with fully invested might mean given your selectivity in bonds? But it looks like you might be headed to a range of somewhere between may be 7.2, 7.5 in leverage, is that a reasonable assumption on that part?

Benjamin Hough

Well, I don't think that we're heading into that necessarily as a range. With these bonds, once they're settled and once they're repo down I think you've got to take out any prepayments between now and then.

Steven DeLaney - JMP Securities

Good point.

Benjamin Hough

And that's a wildcard at this rate that's going to bring that number down. And again we're not targeting as a leverage going forward. But you can do the math and figure out that where we would likely be. Again depending on prepayments and equity in the mark-to-market in the portfolio, so with those two wildcards it could be anywhere in a pretty broad range. So, but obviously it's with those four purchases it's going to be a little higher than where it was at the end of the quarter.

Steven DeLaney - JMP Securities

Okay.

Kenneth Steele

Hey Steve.

Steven DeLaney - JMP Securities

Yes.

Kenneth Steele

As much we'd like to give you a pretty defined target range. Last year we were really maxing out what we're comfortable with from a liquidity perspective because we were -- because we were acquiring assets because we like them so much. And now I just don't, I don't think we're going to have a range. I think that all things are on the table right now because, if we find value, we won't take advantage of it. And...

Steven DeLaney - JMP Securities

Yeah. It seems like you got a lot of flexibility, I mean you certainly had some dry powder and it really comes down to what bonds are available for you to buy?

Kenneth Steele

Yeah. That we want to buy.

Steven DeLaney - JMP Securities

Right. I mean funding doesn't seem to be a constraint at this point?

Kenneth Steele

Correct.

Steven DeLaney - JMP Securities

Okay. That is helpful. I mean that gives me what I need and from a modeling standpoint and I'm just -- I think the most encouraging thing you guys have had to share with us is the signs of early increase and some new production hybrids, I just wanted to -- we know for sure is that (ph) you're not going to be chasing those one-four handle bonds. You've made that clear?

Unidentified Company Speaker

Yes.

Steven DeLaney - JMP Securities

Listen, thanks a lot and good luck for the second quarter.

Unidentified Company Speaker

Thanks, Steve.

Unidentified Company Speaker

Thank you.

Operator

Our next question comes from Jason Arnold of RBC Capital Markets.

Jason Arnold - RBC Capital Markets

Guys, exceptionally good results this quarter and as usual thank you for all the very useful information. Most of my questions have been answered. But I was just curious on prepayment speeds going forward, specifically, curious about your thoughts on with where we've seen speeds going in the recent months, do you expect, to have (ph) some stable position here given that there is still some pretty meaningful challenges in the housing market and obstacles to refinancing and some refinancing burnout perhaps as well?

Unidentified Company Speaker

Hello Jason. Good morning. As Ben said in April the -- our percentage increased from the first quarter -- from March really to about 20. And I think really the only way that we can really look at this and then to give you any good color on, it would be how we would purchase a security in the market and maybe the assumptions we would use and if we try to -- for example, if we try to replicate our portfolio in a five and an eight coupon, 5/1 or something like that, we probably have assign (ph) a 25 to 30 CPR on it.

And where -- from a coupon perspective or a mortgage rate perspective, all of our amortizing loans are in the money. On the IO side, that's still more of a challenge purely from an economic perspective, not even including all of the other potential barriers out there. So I think its going to be muted up. It's hard to perceive all the dynamics coming together, but I think we're comfortable doing our analysis on paper in that 25 to 30 CPR range.

Jason Arnold - RBC Capital Markets

Okay. And do you think that would be something that would persist for the rest of this year, like your kind of view there, I mean, and may be mid year it kind of slows down a little bit?

Unidentified Company Speaker

I think that would be more of a -- that would be more than full year look. We believe its going to be pretty volatile from a pure number perspective, depending on the time to pull through mortgages and to pull through refinancings, its going to be very volatile.

Jason Arnold - RBC Capital Markets

Currently a lot of moving parts there for sure.

Unidentified Company Speaker

Yeah.

Unidentified Company Speaker

There are so many constraints while there is a lot of economic benefit for some. There are still a lot of constraints in a lot of different areas -- pointed out. So --

Jason Arnold - RBC Capital Markets

Okay. Thank you very much.

Unidentified Company Speaker

Okay. Thanks.

Operator

Our next question comes from Brian Roman of Robeco Investment Management.

Brian Roman - Robeco Investment Management

My questions have been answered. Thank you.

Operator

Our next question comes from John Flight (ph) of Sterne Agee.

Unidentified Analyst

I'm sorry it's Henry Colthy (ph). In terms of your growth in book value which was up about 9% and we're seeing MBS, I know obviously it's a real problem in terms of where you put new money, but the existing portfolio is appreciating nicely.

What is with governor on that, what do you do to keep from getting too much premium into your book value?

Unidentified Company Speaker

I'm not sure what you mean. Our book value is --

Unidentified Analyst

While the share value keeps growing and growing over principal value is there a point where you start using -- you adjust your prepayment assumptions to kind of overlook the 1/3 and 1/4 kind of quotes we're seeing out there or it is -- do all those gains work their way into book value.

Unidentified Company Speaker

Well, they work their way into book value but they aren't going to stay in there. I mean, what comes -- get it from the basis of our permanent book. And some of those gains will amortize away overtime. I'm not sure if this is exactly your question -- to sell these to start book value but we're not going to also speed up. We go with amortizations as they are estimated just to protect -- just to protect our portfolio.

Unidentified Analyst

So as mortgage values continue to grow, we should start to -- we should see continued appreciation in your book value over the next quarter or so?

Unidentified Company Speaker

If they continue to grow from here, yes. I mean and certainly our swap book is -- I don't think -- it's hard to say but I don't know that it's going to drop a whole lot more. And some of those are shortening up some that we originally put on at higher rates. That's probably going to be in more of a range than our MBS prices will be.

Unidentified Analyst

But you'll get some benefit from the swap maturation?

Unidentified Company Speaker

Either that or we wont see a lot -- we won't see much more detriment -- probably in a range there.

Unidentified Analyst

Well, thank you very much.

Unidentified Company Speaker

Thanks.

Unidentified Analyst

Well, thanks, Henry.

Operator

(Operator Instructions). We're showing no further questions. At this time, I would like to turn the call back over to Mr. Michael Hough for any closing remarks.

Michael Hough

Okay. Thank you. We appreciate you guys joining us on this call and we look forward to talking again next quarter. Have a great day.

Operator

That does conclude today's teleconference. Thank you for participating. You may now disconnect.

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