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Hatteras Financial Corp. (NYSE:HTS)

Q2 2009 Earnings Call Transcript

July 29, 2009 10:00 am ET

Executives

Mark Collinson -- CCG

Michael Hough -- Chairman and CEO

Ben Hough -- President and COO

Ken Steele -- CFO, Secretary and Treasurer

Bill Gibbs -- EVP and Co-Chief Investment Officer

Fred Boos -- EVP and Co-Chief Investment Officer

Analysts

Mike Widner -- Stifel Nicolaus

Ken Bruce -- Banc of America

Jason Arnold -- RBC Capital Markets

Brian Roman -- Robeco Investment Management

Bose George -- KBW

Gabe Poggi -- FBR Capital Markets

Kyle Atkin -- Polcott Capital [ph]

James Shanahan -- Wells Fargo

Operator

Hello and welcome to the Hatteras Financial Second Quarter earnings conference call. (Operator instructions).

Now, I would like to turn the conference over to Mark Collinson from CCG. Mr. Collinson, please go ahead.

Mark Collinson

Thanks, Andrea. Good morning, everyone; and welcome to Hatteras’ second quarter 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, 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, 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. And 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 materially vary 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 rate spreads, the yield curve or prepayment rates, changes in economic conditions generally, inflation or deflation, availability of suitable investment opportunities, availability, terms, and deployment of capital, the degree and nature of the company’s competition, general volatility of the capital markets, dependent 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 Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission and subsequent reports, including those on the forms 10-K and 10-Q and 8-K.

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

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

Michael Hough

Okay, good morning. Welcome to our call today and thank you all for your interest in Hatteras. The entire management team is on this call to discuss the results of the quarter and current market conditions and to answer any questions any of you may have.

We are pleased with our second-quarter results, and again, with the performance of the asset liability strategy we have in place. As has been the trend this year, conditions in our markets have continued to get better and the second quarter was again one that was highlighted by improving fundamentals on both sides of our balance sheet.

A quick snapshot of these highlights would be; an increase in our interest spread, as our cost of funding and hedging declined; our assets continue to appreciate; pre-payments increased, but remained within our expected range; and our leverage ratio declined slightly, even though we meaningfully grew the MBS portfolio.

Though we are pleased with all aspects of how our agency-only strategy is performing, and do like the way the fundamentals have been playing out for us. One thing I believe that is especially noteworthy from the quarter is the way the hybrid ARM market has continued to outperform other markets. We expected this when it was lagging and discussed it on our last call, but it holds true even more today. Typical agency ARM investors, as well as investors not usually seen in our market, have flocked to these securities for the relative value they offer over other asset classes. It seems that every time bonds show up for the bid, trade prices come in higher. This has been a good thing for our portfolio, but it does create a more challenging investment environment.

As you may remember from our last earnings call, there are prices that we believe are too high for our target hybrid product and there are times when we will generally opt out. However, it does not mean that there isn't value to be had; it is just that we are being more diligent in our bond selection in order to identify that value. We have been successful in growing the portfolio to our desired mix and what we have been doing is focusing on staying invested ahead of our cash flow, rather than on increasing leverage. Fred and Bill continue to do a great job identifying value in a tough market and not compromising.

Today, we are very comfortable with the leverage position. We see no reason to lower it and we will increase it only when opportunities arise.

As Ben will discuss in a second, we believe new issue mortgages still offer us the most long-term value today, and we are constantly working to access that market as efficiently as possible.

But first, I will hand the call over to Ken to go over our results.

Ken Steele

Thanks, Michael. Good morning, everyone; and thanks again for being on the call today. It is nice to have finished a quarter where a number of significant risks popped up, and previous concerns have waned somewhat. I won't spend too much time reviewing the numbers today, but I will highlight some of the more pertinent figures.

Our net income for the second quarter of 2009 was $43.5 million or $1.20 a share, up from $38.8 million or $1.07 per share for the first quarter of the year. This increase was due to the growth in average earning assets, combined with continued moderation of short-term rates. Our average earning assets grew by $400 million from $5.5 billion for the first quarter to $5.9 billion for the second quarter.

Our yield for the quarter was 4.71%, falling slightly from 4.9% in the first quarter, as prepayments picked up and we purchased some assets at lower coupons. Prepayments for this quarter were 20.93% as the repayment rate versus 12.36% for the first quarter; but if you look at the underlying monthly numbers, it has been a steady climb throughout the whole year, finally leveling off in June.

Our cost of funds fell from 2.09% in the first quarter to 1.74% in the second quarter, a decrease of 35 basis points or around 15%, as the financing markets were relatively consistent throughout all three months. This contributed to a widening of the interest rate spread to 297 basis points, a 16 basis point increase from the first quarter spread of 281 basis points.

As Ben will discuss further in a minute, an important story of the quarter was hybrid ARM prices. Prices moved up notably in the second quarter, and our book value along with it, ending the quarter at $23.90, a $1.70 increase since March 31 and up $3.55 from $20.35 at December 31, 2008, which is a 17.4% increase over the last six months. This increase in equity makes our ratio somewhat difficult to compare at times, as our leverage of 6.4 times equity is a slight drop from the previous quarter, even though we had more assets on the books and we also had more debt. The end result was, we generated a 21% return on equity, an increase when compared to the first quarter of 19.8%.

Not to say that we are without risks out there, but it has been a very good quarter and we are very pleased with the results.

I will now turn the call over to Ben for details regarding the portfolio.

Ben Hough

Thanks, Ken. The second quarter for us was a continuation of the first quarter for the most part.

From a portfolio standpoint, the key takeaways for the quarter were continued (inaudible) hybrid ARMs prices, a steady increase in supply of new ARM productions, slightly higher prepayment rates, and slightly lower funding rates.

The overall ARMs market has become more liquid, as investors across the board continue to seek high-quality, short variation assets and this has helped to steepen the mortgage yield curve for the borrower, which right now, the spread between a five one ARM and a 30-year fixed mortgage is fairly steady at around 100 basis points, compared to an average closer to 50 of 75 basis points last quarter. There is now a lot of economic incentive for a borrower to choose hybrid ARMs, and we have seen a steady increase in supply, and while most of the production has come from a handful of originators, we are seeing more mortgage companies getting back to originating hybrid ARMs.

As in the first quarter, we continue to see value in new production ARMs, and cash flow from the portfolio for the most part was reinvested into the TBA ARM market. With dollar prices on season paper, now mostly with 104 to 105 handles, we prefer the lower-priced paper that gives us more prepayment and duration predictability, allowing us to hedge effectively, while also providing generous net interest spread.

That said, agency ARM purchases that settled in the second quarter totaled 557 million and had a weighted average coupon of 4.27%, an average purchase price of $101.809, at an average months to reset of 61. Those purchases, after prepayments, brought our June 30 total MBS holdings, excluding forward settling purchases to $6.2 billion. The weighted average market price on our total MBS portfolio as of June 30 was $103.60.

Looking ahead into the third quarter, we have another 768 million scheduled to settle, with a weighted average coupon of 4.16%, an average purchase price of $102.081 at an average months to reset of 64. Of these, 402 million are scheduled to settle in July, 269 million in August, and 97 million in September. With the addition of these securities and excluding prepayments, the portfolio will total approximately $6.9 billion and have an average coupon of 5%, a price of $101.489 at an average months to reset of 47.

Prepayments continue their upward trend for the quarter, but stayed well within our expectations. As the mini re-file wave worked its way through the system to our portfolio, we had an annualized average principal prepayment rate of 20.9% for the quarter, with the rate ranging from 20.1% in April to 21.8% in June. With the recent rise in mortgage rates, we expect prepayments to stabilize in this range and then trend lower in the coming months.

On the other side of the balance sheet, we are seeing a steady improvement in the funding markets and the liquidity there. The repo market has remained stable, with a slow but steady decline in rate and very little change in haircuts. While in the first quarter we saw 30-day rates around 50 basis points, we are now seeing quotes in the high-30s to low-40s in basis points. Term repo has also become increasingly available. We have continued to roll our repos short however, and at June 30, including our extended repo, our total repo position had an average rate of 0.69% at an average term of 68 days. Our weighted average share cut remained basically the same at 5.5%.

As for hedging, we continue to opportunistically execute swaps in order to term our borrowing costs. Volatility in the rate markets have allowed us to purchase ARMs into weakness and execute swaps into strength. We added 100 million in swaps in the second quarter and 100 million more since the end of the second quarter, at an average rate of 2.25% and an average term of 47 months. As of today, we have a total of 2.2 billion in swaps, at a weighted average rate of 2.82% at an average term of 29 months.

Combined with our term repo position, our total extended liabilities are 2.7 billion, with a 2.88% average rate, at an average term of 27 months. This represents approximately 40% of our current total repo borrowings. As always, we will continue to evaluate the outlook for interest rates and hedge the portfolio accordingly.

Lastly, since June 30, we have seen spreads continue to tighten with hybrid ARMs prices increasing by about a half a point or so, while swap values have come off only a little.

Michael Hough

Okay, so in conclusion, we believe we are going to see more and more value opportunities going forward, but we believe that now is as much a time to be defensive as was any time last year. Even though the financial system has improved compared to last year, we still have concerns and we're closely evaluating housing and economic trends to develop a clear sense for the direction of interest rates and the shape of the yield curve.

Today, we are constantly looking for new ways to add value and right now, we feel very good about where the company stands. Returns are good, leverage is low, and we are positioned well. We like the outlook.

So with that, we will open it up to questions and answers.

Question-and-Answer Session

Operator

Thank you. (Operator instructions).

Our first question comes from Mike Widner of Stifel Nicolaus. Please go ahead.

Mike Widner -- Stifel Nicolaus

Good morning, guys. I was just wondering if you could comment on -- you mentioned the kind of challenging environment out there for MBS, but I was just wondering if you could talk a little more about what exactly you have bought subsequent to the quarter and what you are seeing out there as far as things that are most attractive. I mean, you are pretty concentrated in interest-only hybrid ARMs right now kind of five-year five ones. Is that the same kind of stuff, are you looking at other things, are you kind of seeking other options?

Bill Gibbs

Hi, Mike, this is Bill.

We are still looking in that five one sector and I -- prices have, when season papers counted out and away from the market in terms of high dollar prices in the $105 to $106 range, so we have been primarily, as Ben mentioned, focusing on the TBA market, and we think there is still a lot of spread.

We are looking right now at current TBAs, getting those yields in the neighborhood about 365. There are a current mix of costs with funds, about 38% hedged out and the balance in 30 days, 60 day repo. That gives us a net interest spread of about 280 basis points. We feel it makes a lot of sense to try to maintain discipline in terms of dollar price. With those kind of net interest spreads, we think they look very attractive.

Mike Widner -- Stifel Nicolaus

And so just to be clear then, you would be buying those kind of lower on the coupon stack, but closer to a $101 kind of handle and that makes more sense?

Bill Gibbs

Correct.

Fred Boos

For reference, this is Fred. And also, the origination volume, as we all know, is concentrated in that five one sector, probably about 70% of the issuance out of Fannie and Freddie is the five one sector.

Mike Widner -- Stifel Nicolaus

Got you. And so it doesn't sound like you are doing much in kind of the other 15 year or -- 15 year fix that is, or any other sort of more niche type markets?

Fred boos

No.

Mike Widner -- Stifel Nicolaus

Okay. And then just one final question. You mentioned adding some swaps. How about the availability of the extended duration repo? Are you guys looking at that at all, and how is the pricing on that front?

Fred Boos

We definitely look at all options. If you take a look at it right now, you are seeing availability for people willing to go out on longer term repo. However, from what we are looking at, it makes more sense economically to do it in the swap market as opposed to the repo market.

Mike Widner -- Stifel Nicolaus

Got you. And so, I mean, specifically you are saying that -- if I understand correctly, the rate that you are getting on swaps is better than what they are proposing on the said three-year repo?

Fred Boos

Correct. That is correct.

Mike Widner -- Stifel Nicolaus

Great. Well, thanks a lot, guys; and good quarter.

Michael Hough

Thanks.

Operator

Thank you. Our next question comes from Ken Bruce of Banc of America. Please go ahead.

Ken Bruce -- Banc of America

Good morning, gentlemen. Michael, would you mind elaborating a bit in terms of your comments on being defensive or why you feel that you should be defensive as much today as maybe last year. I am trying to understand if that is concern around the general state of the U.S. economy or if there is something specific in terms of just the government involvement in the mortgage market and some of the difficulties that that obviously kind of leads to in the future.

Michael Hough

Yes, I think our view really is that while the markets have definitely settled down, the funding market, which is what the big concern was last year is in much better shape this year. I mean, there are still issues out there, we saw it with CIT, and we have concerns about the commercial real estate market and the impact on the banks going forward. We just want to be -- we don't want to be too aggressive right now. I think we need to step back and pay attention. There is rhetoric that is coming out from the fed and others on interest rates and I just think it makes sense for us to operate here defensively and primarily when saying that, I mean, lower leverage in, keeps us in a pretty good position, regardless of what happens.

Ken Bruce -- Banc of America

I guess in many ways you are generating such a wide -- at these spreads, you are generating such good returns and it doesn't really seem to pay to take too much risk.

Michael Hough

That is absolutely right, and the way we look at it, that we have a very -- right now, we are investing cash flow and we are happy to be in this position, but we also view it as -- as we do have draw power, if we see opportunities, and if we see opportunities with spreads widening, back up in the treasury curve or whatever. So, that is kind of the way we are looking at it.

Ken Bruce -- Banc of America

Okay. And just one final question. I'm sorry if I missed this in your prepared remarks, but are you seeing a change in terms of the originations coming out of the large banks, has there been a material shift back into the hybrid ARMs? You know, can you give us any additional color on that, please?

Ben Hough

This is Ben. Hey, Ken. Yes, there has been a fair amount of increase in supply; block size has gotten a little bit bigger at some of the larger originators and we are just generally hearing more and more talk of players coming back into the market, or originators coming back into the market, now that liquidity has gotten better. It is still lower volume than what we have seen historically, but given the spread between the spread to the borrower, there is a lot of incentive there and they are taking advantage of it now. So that increases the supply, it should help increase liquidity, which may again help increase supply and so forth. So we are seeing value there and expect it continue as long as there is some slope in the mortgage yield curve.

Ken Bruce -- Banc of America

And banks are originating in selling these two into Fannie securities or are they retaining more of that on their balance sheet today?

Ben Hough

Well, I think they are probably retaining some, but we are seeing plenty of supply. I mean, I don’t quite know what the numbers are, probably close to 1.5 billion to 2 billion right now in securities and so I feel like that is pretty good flow, but we also have seen some difficulty in the banks, delivering securities on time, as the pull-through rates and some of the other factors have made it a little choppy. But the actual supply that comes to market and what we get is fairly consistent.

Ken Bruce -- Banc of America

Great, thank you.

Michael Hough

Thanks.

Operator

Thank you. Our next question comes from Jason Arnold of RBC Capital Markets. Please go ahead.

Jason Arnold -- RBC Capital Markets

Hi, good morning, guys. Nice job this quarter. I guess just a follow-up to one of the first questions on the focus on the five ones. Is it more because of the supply just being there that you guys tend to focus on those securities -- from your comments earlier, is it the increase or is it the duration exposure, something else that makes it particularly appealing to be in the five ones to you guys right now?

Michael Hough

Jason, this is Michael. Hey, how are you?

Jason Arnold -- RBC Capital Markets

Good, thanks. How are you?

Michael Hough

I am good. I think if you look back to when we started Hatteras, back in November of 2007, we had the opportunity to pick any part of the yield curve we wanted to be on and our history of operating this strategy through interest rate cycles has led us to the five year-ish range and in our view, it is a healthy mix of short duration but also enough duration that we can hedge it effectively for long enough periods of time.

And it was -- over the course of our history, we have invested primarily in five ones, but also in three ones, seven ones, and a couple of ten ones, but the average has been here and it has been -- that has been helped by originations and -- as was the case last year, it is still the case that most of the hybrid ARM productions are going to the five ones and that is very valuable to us as well. So it is something that we chose originally and we have stuck to since we started the company.

Jason Arnold -- RBC Capital Markets

Okay, great. That has certainly been working well for you. Okay.

And then this one other quick one. On your swaps book, would you say that the $1.1 billion in notional value and the 12 to 24 month term category will more or less roll off at an even pace over that 12-month period or is it a little bit more chunky pace?

Michael Hough

It is fairly well spread out. We have been very -- we have layered things in over time, just for that purpose that it wouldn’t be choppy when it comes off. So, I think you will see that be fairly gradual.

Jason Arnold -- RBC Capital Markets

Okay, perfect.

Ben Hough

Hey, Jason, most of lobbed for the ones that we put on early on, back in early 2008 -- early to mid 2008. So those are the ones that are better now -- will be coming due first, obviously.

Jason Arnold -- RBC Capital Markets

Great. That is terrific. All right. Again, nice job, guys. Thanks for the questions.

Michael Hough

Thanks.

Operator

Thank you. Our next question is from Brian Roman of Robeco Investment Management. Please go ahead.

Brian Roman -- Robeco Investment Management

Good morning. I have a bunch of questions.

First of all, you guys speak in different language, mortgage speak. What is it, TDA or TBA, the types of mortgages you are running?

Michael Hough

TBA.

Ben Hough

Well, it is TBA for To Be Announced. They are just being pooled until they can be securitized and get a pool number and be delivered. So that is a promise to deliver a security of a service.

Brian Roman -- Robeco Investment Management

Got it. TBA, I like that. That is tricky.

And again, go through the characteristics of the types of mortgages you are buying, so that you are reducing the premium that you are paying. You said you are through that that $101, $101.5 versus current market rate prices of $104, $105.

Bill Gibbs

Yes, this is Bill. It is primarily new production, and so it will be new mortgages with lower coupons or lower mortgage rates. So we have gone down in coupons to lower the dollar price. So it is brand-new production paper.

Brian Roman -- Robeco Investment Management

That is the TBA?

Bill Gibbs

Correct.

Ben Hough

Correct.

Brian Roman -- Robeco Investment Management

Got it. Okay. So the idea is lower coupon, lower prepayments speed new issuance, lower prepayments speed?

Bill Gibbs

Correct.

Brian Roman -- Robeco Investment Management

Prepayment speeds, which you put in the release -- I think you're sort of 21%-ish, 20%, 21% right now, something like that?

Ben Hough

That was for the second quarter.

Brian Roman -- Robeco Investment Management

Right. If this were a more normal environment, going back three or four years ago, sort of the good old days, what do you think under this sort of interest-rate environment, particularly the change in the last 12 to 15 months do you think prepayment speeds would be?

Michael Hough

Well, if you look back to -- if you say three or four years, we wouldn't consider that normal. The market is -- it probably is slower than you expect with interest rate -- having interest rates dropped as much as they have. The difference is, mortgage rates three and four years ago didn’t go up that much higher. So -- but today, there are constraints, capacity issues, credit standard changes, and so it probably is slower, but it is tough to pinpoint a number, but I would say it is probably -- it would be a little bit higher but not tremendously.

Brian Roman -- Robeco Investment Management

So is that because of the asset class here? I am not even talking three or four years ago, I mean I am just talking about an MSR model, which is more mechanically derived.

Michael Hough

Brian, there are so many variables and what impacts or what drops the prepayment, including the path of interest rates. And the path of interest rates, if you remember when rates went up last time, the yield curve inverted, longer-term mortgage rates didn't go up that much higher, there are lots of other variables that would impact that, but from a pure rate perspective, yes, there are a lot of borrowers in the money that maybe would -- maybe would re-buy if they could. They can’t now, but it is just a different time as every cycle is.

Brian Roman -- Robeco Investment Management

Well, I would assume loan-to-values and tighter underwriting standards are sort of big issues here.

Michael Hough

Sure.

Brian Roman -- Robeco Investment Management

I just have a just a couple of more quick questions here. Leverage. I will get to that question on leverage, which I know was asked earlier before -- but all other things being equal, if rates don’t change, eventually your spread starts to burn out, as things prepay, and your liability costs stop pricing lower. When do you think that inflection point is, if things stay the same, which is never the way things stay?

Michael Hough

Well, I wouldn't say or spread burns out as they prepay, because we can re-invest as we mentioned on the call, today and at least 280 basis points hedged out, and so there is still -- we are still putting very good spread on the books with reinvestment. We don't earn a lot of premium and so the impact on yield, while it is there as prepayments increase, it is not dramatic. So we are -- I wouldn't agree with that statement completely however market conditions are going to change, and we are going to position ourselves to deal with them appropriately.

Brian Roman -- Robeco Investment Management

They will always change. I mean, at some point, the marginal ROE of 20%, 21% has to decline, but how do we get there? That is just a statement.

Last question is the question of leverage. I mean, and I am looking here, you were at almost 9% September 30, 8.7 to 1. I mean, that MFA in the marketplace raising money, I am not exactly sure what they are going to do with it, they may go in the direction of non-agency paper and that wouldn't surprise me, but I don't understand why aren’t -- why don't you take it up at this point? You have got repo, you have got predictable prepayment speeds, you have got high yields, why don't you take it up a notch?

Michael Hough

Well, because -- primarily because we are maintaining discipline and a defensive posture and it gives us drop however to take advantage of opportunities as they arise or in order to deal with changes in market conditions. So it is a very comfortable place to be and today, we don't see any reason to increase that meaningfully.

Brian Roman -- Robeco Investment Management

Just to put that question with the question before, and then I swear, I am done, last question. But if you -- if I were to really read between the lines, then what you are saying is that until that 21% ROE starts to diminish, you don't see a need to take leverage up? Assuming that there is repo funding available.

Michael Hough

I will let you make that assumption. That has not been the driver of our portfolio management strategy.

Brian Roman -- Robeco Investment Management

Okay. All around, great quarter, guys. Thank you.

Michael Hough

Thanks.

Operator

Thank you. Our next question comes from Bose George of KBW. Please go ahead.

Bose George -- KBW

Hey, good morning, guys. Good quarter. First question, it is kind of a follow-up on Brian’s question on leverage. Would you guys think differently about leverage if you are depending on the amount of unrealized gains and hedges you had in your book if you had more -- or fewer unrealized gains and that was the leverage picture, would you think differently about taking leverage up?

Michael Hough

I guess how does that translate into the prices of the assets? I mean, I don't know that -- today, we have made this -- we are making this call on a daily basis, there is nothing that we can say today that would be an absolute reason for us to take up leverage. The fact is that we did increase our (inaudible) portfolio and our leverage came down, primarily for the mark to market. So, leverage could go up if that changed the other way.

Bose George -- KBW

Okay, yes. Then just switching to -- actually wanted to ask about new capital, you know, what you guys think about potentially raising some, you have clearly been very accretive to book value, but is it possible to deploy it in the current market, just given the size of the TBA market, how quickly could deploy capital if you chose to raise some?

Michael Hough

Obviously it depends on how much capital we raise and how quickly we could do it, but the way we are thinking about that, yes, we have always stated that and we have done it three times already, that we would only raise capital when it is accretive and that would be a very important part of the equation. And if we see opportunities, and we want to take advantages of it, we will consider it. At this moment, we are not considering doing a capital raise. That doesn't mean we won't tomorrow, but it is just today that all pieces of the equation are not together.

Bose George -- KBW

Okay, great. Thanks a lot, guys.

Michael Hough

Thanks.

Operator

Thank you. Our next question comes from Matthew Howlett of Fox, Pitt, Kelton. Please go ahead.

Matthew Howlett -- Fox, Pitt, Kelton

Hey, guys. Thanks for taking my question and nice results. It is just, on the government involvement in the agency MBS market, today, that has been almost exclusively fixed-rate. There was talk in the last minutes that they may go into hybrid ARM, but obviously was put on the table. How would that impact the strategy? Today they have been really focused on current coupon fixed-rate buying. Presumably, that would help your book value lower volatility, allowing you to pick up leverage, but would that most definitely reduce -- could that reduce the attractiveness of opportunities, purchase opportunities?

Michael Hough

Sure. Any more demand that comes to the market is going to move the prices of the securities. I would say that we have already had a tremendous move, a lot of it was initially driven by the move down in the 30-year rates that was driven by the purchase programs. If they came in and they were willing to purchase our type of securities at big premiums, I mean, I guess they could run it up. There would definitely be another supply drain, I guess. Other than that, to be honest with you, I would be surprised if they did it as far as the ARMs have already moved.

Matthew Howlett -- Fox, Pitt, Kelton

Right, there is a little surprised as broadly mentioned, just didn't know if you think that is a realistic scenario that they maybe going into. I guess we will just sort of wait and see.

And then the second question is, you guys have managed through a lot of rising rate environments. How do you look at the cap risk with the ARM market? What are the initial rate caps and how do you manage through that, how do you look at that over the next cycle?

Michael Hough

Fred, you want to take that one?

Fred Boos

We generally will manage the duration and on terms of cap risk, the portfolio matures, the five one typically, which is our benchmark, moves down and approaches the tail. It will increase in speeds, but I think the -- addressing the caps, we are very comfortable as these securities move down and approach resets. We feel that that would even present a better barbell picture to us or profile to us and we are averaging 170 basis points, 180 basis points, reliable on resets on the tails. You know, we are very comfortable with that scenario in a rising rate environment, if we were to see that over the near term.

Matthew Howlett -- Fox, Pitt, Kelton

Great. Well, that is it. Thank you.

Michael Hough

Thanks.

Operator

Thank you. Our next question comes from Gabe Poggi of FBR Capital Markets. Please go ahead.

Gabe Poggi -- FBR Capital Markets

Hey, guys. All my questions have been asked and answered. Thanks a lot. Great quarter.

Michael Hough

Thanks.

Operator

Thank you. Our next question comes from Kyle Atkin [ph] of Polcott Capital [ph]. Please go ahead.

Kyle Atkin -- Polcott Capital

Hi. All my questions have been answered too, thanks.

Operator

Thank you. Our next question comes from James Shanahan of Wells Fargo. Please go ahead.

James Shanahan -- Wells Fargo

Thank you. Good morning, everyone. I have a quick one. I was curious if you can tell me what the status was of the provision for claims receivable? This was from a couple of quarters ago, is that basically a reserve that remains on the balance sheet or was there actually a charge off versus that reserve? Just refresh my memory on that, please.

Ken Steele

We did take a reserve against that, Jim. And there has been no real news, the whole thing has been written off and there has been no news coming out of Lehman, basically as we think it is going to take a long time. We may still collect something and it may be significant, but we really don't know. And we are just kind of treating that as a bygone, I guess. So it is still around, it is just reserve, but the claims period ended I think July 1 for filing claims and it is going to I think quite some time before we hear anything out of them.

James Shanahan -- Wells Fargo

Okay, thank you.

Michael Hough

Thanks.

Operator

(Operator instructions).

We are showing no further questions. At this time, I would like to turn the conference back over to Michael Hough for any closing remarks.

Michael Hough

Okay, thank you all for being on the call today and again for your interest in the company and hope you have a great day and we look forward to talking again next quarter.

Operator

Thank you. This concludes today's conference at this time. You may now disconnect.

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Source: Hatteras Financial Corp. Q2 2009 Earnings Call Transcript
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