Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

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

Analysts

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

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

Arren Cyganovich - Evercore Partners Inc., Research Division

Boris E. Pialloux - National Securities Corporation, Research Division

Joel Houck - Wells Fargo Securities, LLC, Research Division

Jason Arnold - RBC Capital Markets, LLC, Research Division

Hatteras Financial Corp (HTS) Q4 2011 Earnings Call February 15, 2012 10:00 AM ET

Operator

Good morning, and welcome to the Hatteras Financial Fourth Quarter and Fiscal Year End Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mark Collinson of CCG Investor Relations. Please go ahead.

Mark S. Collinson

Thanks, Laura. Good morning, everyone, and welcome to Hatteras' Fourth Quarter and Fiscal Year End 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 you all 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 SEC filings. Actual events and results can differ materially from these forward-looking statements.

The content of this conference call also contains time-sensitive information that is accurate only as of today, February 15, 2012, 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. Now here's our CEO, Michael Hough.

Michael R. Hough

Okay. Thank you all for joining us today. We will be brief with our prepared remarks before opening to questions. As Mark said, as in the past, we're all here to discuss the quarter and the market following the introduction.

So before hitting the numbers, I'd like to quickly touch on a few points that I think are worthwhile today, mostly regarding the strength of the returns we're providing, especially considering the low risk approach we use. 2011 was another strong year for us, 15% ROE and 9% book value growth. We achieved this by staying focused and without adding more risk to the portfolio. It was a year full of headlines and issues to deal with, and I'm very pleased with how our team navigated because it easily strayed from the strategy but we didn't. And results are at least in line with our expectations given the way the markets have moved. The portfolio started this year invested in hedge, and we're looking forward to a strong 2012.

Fourth quarter by itself was another good one, with an ROE of almost 14% and 3% book value growth, this at an unprecedented time with historic low mortgage rates and active government involvement in the mortgage market. During the quarter, we maintained our bond position and the only adjustments we made were to net duration, not like we needed to be neutral at work to much slightly negative given how far rates have moved. We paid a $0.90 dividend in the fourth quarter. This obviously reflected our earnings but maybe somewhat indicative of the potential of the portfolio we have in place. We are earning a margin that is becoming more current with the market, so the impact to net interest margin from changing conditions could be less meaningful. Return is a function of risk-taking in this business, and everyone has the same investing options but how we appropriate that risk is what is going to drive return.

So we have the portfolio we want today that is earning a very attractive net interest margin, especially at this point in the cycle with this trough in rates commands less interest rate exposure than in any other time. We spent 4 years building this laddered ARM portfolio and wouldn't trade it for anything, can't be replicated today and highly valuable to any experienced asset liability manager. $17 billion of staggered reset Fannie and Freddie ARMs, all under manageable premiums, and duration matched with a latter book of plain vanilla interest rate swaps is a portfolio to protect, one that is profitably positioned for where the world is today.

We gained confidence in how this balance sheet is driven almost solely by the direction of interest rates and not by outside forces. This is what we strive for because that gives us and you a portfolio where performance can accurately be modeled with most any interest rate assumption. We think that is hugely important to our business and to our shareholders.

When I say well positioned, I mean a balance sheet that is flexible and durable and will naturally adjust with the market over time. We like the 2-to-4 duration of the ARMs because it gives us the opportunity for at least equal duration of the liabilities. That matches what we want. We also earned approximately $5 of unrealized gains on the MBS side. These gains are great to have because they give us flexibility to easily reposition or manage leverage if necessary. We see these gains as an important asset that we want to protect for as long as we can.

We're operating today at what we see as optimal leverage. We were 7.8x at year end. This number is based on the liquidity cushion we want considering the short duration of portfolio we have. Between the volatility and the MBS and treasury market and with prepays where they're trending, we will probably remain there for a while in the 7.5 to 8x range. If we own longer paper, we need more liquidity and therefore less leverage. So at this time, this is the right range for this portfolio, but we do have the flexibility to easily revise it if we see the need.

We continue to be convinced that the ARMs market is the place to be with taking on levered rate risk. Production in ARMs has consistently been 5% to 8% of the origination market, which has been sufficient for us in our growth and cash flow management. Historically, prepayments trend is slightly higher in ARMs and we know it, but our view is that's the small price to pay for the added interest rate risk protection they provide. The character of a hybrid ARM fits best with the swaps we use. We know this market very well from 15 years of direct involvement and by levering them through multiple interest rate cycles.

The swaps book we have in place more than matches the asset durations and currently extends out to the end of 2015. One of our key objectives in 2012 will be to extend the swaps book out through 2016 and maybe even '17 while interest rate expectations remain low. We don't necessarily take the Fed at its word, but we don't want to fight them either. It's imperative that we remain focused here and keep pushing the maturities out further because the reality is, we don't have certainty on what will actually transpire. The trap for financial institutions has historically been to reach for return by adding risk at times when rates bottom out and which usually hasn't worked out too well. We're very aware of that trap, and there's no reason for us to alter the plan.

You all know we're efficient managers of Hatteras. Our expenses, as a percentage of equity, are significantly lower than the rest of the mortgage REIT industry. This is obviously a scalable business. We had 0s in line items which, of course, require additional staff, but it will never be proportionate to growth. We continue to add experience and expertise to our team as needed, but our structure will continue to logically reflect the nature of our business. The math works fine.

So we believe the markets will again be conducive to strong returns this year, and we feel very comfortable in how we're prepared. That keeps talking rates lower for longer which net-net should be a good thing for relative return. But we really can't assume any outcome from this and we need to maintain the stance we've taken, in the case the conditions force rates higher unexpectedly.

We want to protect book value and deliver a corresponding competitive dividend. We do that, we will view the year as a good one and see the strategy as successful. We expect us to continue with the same approach we've used to date.

One last thing regarding our ATM. We finished the continuous equity offering program for 5 million shares in this first quarter. And as a reminder, we put this in place in May of 2009, so we weren't that aggressive with it. We are putting in place a new plan for 10 million shares that reflects the larger size [indiscernible] of Hatteras. Now expect we use that in a similar way this time.

So with that, I'd like to hand this over to Ken to go over the numbers of the quarter.

Kenneth A. Steele

Thanks, Michael. Good morning, everyone, and thanks again for joining us on the call today. As Michael mentioned, we are pleased to report another good year and quarter for Hatteras.

Turning to our quarterly results first, our net income for the fourth quarter of 2011 was $70 million or $0.92 per weighted average share compared to $79 million or $1.04 per weighted average share for the third quarter of the year. Our net interest income was $72.5 million, up slightly in the fourth quarter as compared to $70.2 million in the third quarter. Our average MBS for the quarter was $17.6 billion, up from $16.2 billion in the third quarter, ending the year at $17.7 billion. We also sold approximately $646 million of securities during the quarter for a gain of $2.8 million.

At December 31, 2011, our portfolio of MBS had a weighted average cost basis of $102.47 and an estimated weighted average coupon of 3.46%, an 8 basis point coupon decrease from the September 30, 2011 portfolio and coupon rate of 3.54%. The yield on the portfolio for the fourth quarter of 2011 was 2.6%, which was 12 basis points less than the third quarter rate of 2.17%. Along with the average coupon on our portfolio falling slightly, amortization expense added to the decrease in yield, with the fourth quarter 2011 expense rising to $32.6 million, up from $30.1 million in the third quarter of the year. This was also reflected in our cost and prepayment rate as 1-month CPRs remained elevated at 20.8 for the first fourth quarter.

Our cost of funds were down slightly at 1.04%. While repo rates drifted higher later in the quarter, we had some higher rate swaps mature during the period which offset this. This led to an interest rate spread of 156 basis points for the fourth quarter of 2011, an 8-basis-point decrease from the third quarter year rate of 1.64%.

Our G&A expenses were fairly constant at $4.7 billion, which is an annualized rate of 93 basis points on average equity for the quarter. At December 31, 2011, our debt-to-equity was 7.8:1. Our book value was $27.08 per share at December 31, 2011, up $0.76 per share or 2.8% than September 30, and up $2.24 or 9% from December 31, 2010. For the full year, our spread was 178 basis points, and our average leverage was approximately 7.2:1. As a result, Hatteras had net income of $284 million, 68% increase over 2010. This equated to earnings of $3.97 per share, with a return on equity of 15% and $3.90 of dividend.

In summary, despite the many storms that brewed throughout the year, we are pleased with our financial results, and our balance sheet and liquidity remains strong, with year-end liquidity position of $1.2 billion in cash and securities.

With that, I will now turn the call over to Ben for details regarding the portfolio in our investing.

Benjamin M. Hough

Thanks, Ken. Overall, it was a very steady and solid quarter. Like Michael and Ken said, we have and still have a lot to keep our eye on in this environment. Our bond position and leverage remained fairly steady throughout the quarter in the 7.5 to 8x range, which we feel is appropriate given the environment and the assets that we have.

For the most part, we saw more value in 7/1s with some 5/1s mixed in and invested cash flow there, mostly all of it lower premium newer production that should yield us around 2.4%. And like over the previous few quarters with rates gradually declining and prepayment risk profiles changing, we identified about $625 million within the portfolio that would likely begin to prepay faster than other similar pools, so we sold those resulting in the gain.

Over the course of the quarter, lower coupons significantly outperformed higher coupons, mostly due to concerns of government-induced refi initiatives, and since we are focused on lower premium paper for that reason, we saw appreciation in our MBS as a whole. These spreads on coupons less than 4% tightened about 25 basis points in addition to the lower treasury yields.

Just to give you an idea of where we are today, these spreads have tightened a little more in 2012 and we can get new production 5/1s with current yields in the 2 to 2.25 range and 7/1s in the 2.25 to 2.5 range.

Now for prepayments they were fairly steady throughout the quarter at around 21 CPR and right in line with our expectations. So far this quarter, we had a CPR in January of 21, dropping off to 18 in February. We expect CPRs to stay in the similar range in the near term and then be rate dependent from there. That said, we do not want to underestimate the government's resolve in looking to the mortgage market as a source for economic stimulus. Washington is clearly on a refi friendly path here, and the only question is to what degree they are able to influence the MBS market. We have always approached this issue cautiously. We can understand what drives a borrower to prepay his mortgage when it is a function of interest rate risk in actual dollars and therefore can manage that risk, but we can only make an educated guess what the government may do next. So for now, we will continue to focus on current production where we better understand the borrower and can keep premium down.

We always have the option to pay off the paper that prepays slower, but the premium on that paper, coupled with the uncertainty and risk that currently come with that, does not work well when combined with the leverage in our view. And to that point, we would like to reiterate what we noted on our last conference call that we had little exposure to the HARP Program. Almost 90% of our portfolio is not impacted by current HARP parameters and the remaining 10% we own at low premiums.

On duration, we are still operating at a 0 to slightly negative base duration gap, which is right where we want to be at this point in the cycle. We had a couple of expensive swaps mature in Q4 and have a few more later this year which we will look to replace. We will continue to manage to a tight gap as our ARMs portfolio walks down the curve and shortens every day.

Lastly, a quick note on the repo market. We did see some pressure higher in repo rates over year end as we expected, but it came back quickly in the first week of January. Overall, it is a liquid market and repo remains readily available. Rates today are still in the high 20s to low 30s in basis points.

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

Michael R. Hough

Okay. So that concludes the remarks, and now we'd like to open this up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is from Mike Widner of Stifel, Nicolaus.

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

Just wondering if you could -- you mentioned the yields you're seeing on current investments. Wondering if you could talk a little bit about the spreads and sort of how you're hedging and then what you see overall spreads looking like for incremental dollars right now.

Michael R. Hough

Before -- just before the current market, I mean, spreads on the portfolio obviously are what you see. And as we invest cash flow and incremental capital is just dependent on how it fits in the portfolio. But I'll hand this over to Bill just to go over them.

William H. Gibbs

Yes, Mike, as Ben mentioned earlier, we're finding more value in the 7/1s than we are in the 5/1s right now. We would more than likely weight our purchases more in that category. And if you take a look at that, we're looking at yields somewhere in the neighborhood of around 230 to 235. As we hedge it out, we're looking at pretty much around a 45-basis-point cost of funds on a blended basis to appropriately hedge that, which will still give us like 185 to 190 spread.

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

Great. And 1 clarifying question. I mean, Mike -- Michael said during the call that Ben keeps seeing rates staying lower for longer or something to that effect. And just he talking about Ben Hough or Ben Bernanke and which of the 2 does he think has a better grasp on economics.

Michael R. Hough

Actually, both.

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

Just one final one, I guess. If you could talk a little bit about leverage and are you guys comfortable here and you see any reason to think about it moving one way or the other?

Michael R. Hough

Yes, well, I mean, just like I was saying, this is a liquidity target for us. And all the analysis that we do on what could impact liquidity, it kind of leads us to this number. I mean, this has come up, has increased over the last -- really, the last 18 months to a level where we feel very comfortable, one, because the portfolio has matured a lot, and two, just by the -- all the indications that we see in the market. So, I mean, I think if we needed to adjust leverage, we obviously have the flexibility to do that, but we can easily turn leverage down as quickly as we can turn it up. So that is -- that was the point I wanted to make there. So I think you have to work off the assumption that we're going to kind of target the 7.5 to 8x range, and it's going to be dependent on cash flow management and everything else.

Operator

Our next question is from Bose George of KBW.

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

I had a couple of questions. One, just -- you guys just noted new spreads are sort of 185 to 190. Your portfolio spread was 156. So I just wanted to refer back to your earlier comment about the $0.90 dividend reflecting kind of an earnings outlook. And I would think that as prepayments slow, your portfolio spread should head towards kind of the market spread, and presumably, that would take the earnings up potentially quite meaningfully next year. Any comment on that?

Michael R. Hough

I think that's absolutely right. I mean, it's something we love more than to see a 2.5% 10-year right now, but that's -- I mean, any steepening of the curve will probably result in a positive move and net interest margin as prepayments slow. So see, I think that's the case. And as you see right now, we have -- our net interest margin has come in the last 2 quarters and has primarily been because we've been operating in a 20-ish CPR range.

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

But even if the curve doesn't steepen in prepays, just -- it looks like the February number was 18. And if things don't change and prepays kind of stay in that run rate, even that should start taking your spread up just as it's -- the prepays are lower than what they were last quarter.

Michael R. Hough

Yes, absolutely. Any slowing of prepays will definitely increase the yield on the portfolio.

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

Okay, great. And then specifically, just on the prepays, you guys noted February number is 18, so your average for January and February now is sub-20. So the March number is something in that range. Again, it looks like prepays will be lower for the first quarter than they were running in the fourth quarter, right?

Michael R. Hough

Yes. But it depends a little bit. I mean, February has some seasonal factors in it to bring it down a little bit. So, I mean, I think when we say a range that we expect, I mean, we've been talking about a 20 to 24, 25 kind of range for a long time. We're a little bit below that now. Rates have come down a lot since year end. So I think we're going to see -- I still think that 21 range is a pretty good target, give or take, moves in or out of that. But after that, it's rate dependent. So I wouldn't look at the 18 number as a go-forward number. I'd look more in that 20 -- 20 to 22 range probably.

Operator

And the next question is from Arren Cyganovich of Evercore.

Arren Cyganovich - Evercore Partners Inc., Research Division

Your swap book has been flowing as a percentage of the repo book. Just wondering -- I know you talked about your duration coming down a bit. I was just wondering if you expect that trend to continue, if you expect to bring the swap book back up a little bit over time.

Michael R. Hough

Well, I mean, the swap book is really a function of the duration of the portfolio. And just like Ben said, swaps have grown off in 2011, and we have a few more in 2012. We've been in a following duration market here in the last 6 months or so and the risk on both sides of the balance sheet. So what we've done is let the swaps book organically mature into the duration of the asset portfolio. So what we say is that we are running approximately neutral duration, if not slightly negative, and which is why we let the swaps come down some.

Arren Cyganovich - Evercore Partners Inc., Research Division

Okay. And then also kind of back to Bose's question. If you can put new money to work at 180-, 190-type spreads and the portfolio is at 156, would it make more sense to increase your -- or maybe not increase leverage but maybe raise capital and invest to bring up the portfolio? Or are you concerned about increasing the duration of the portfolio too much?

Michael R. Hough

Well, I mean, I think we could obviously put money to work with whatever net duration that we choose. We've been very disciplined about raising capital in the past. Really, our first capital raise is the timing was very good. We've had many opportunities to raise capital that we passed on. We really expect 2009 and '10 but the shareholders enjoyed that. And about the past year, we doubled the size of the company, and that was to really adjust the portfolio to a longer interest rate cycle expectation. So like we said, we'd love to move the swaps book out longer in this, and then we can -- we'll have to make a decision if we want to do it organically or through raising capital. But that is how we're going to look at it.

Arren Cyganovich - Evercore Partners Inc., Research Division

And you didn't mention that you've fulfilled your current ATM in this current first quarter?

Michael R. Hough

Correct.

Operator

And the next question is from Boris Pialloux of National Securities.

Boris E. Pialloux - National Securities Corporation, Research Division

Just to make sure, for the -- if I look at your press release, you have for the 19 to 36 months reset, the weighted average price is coming down. I guess is that part of the portfolio that you sold during the quarter to be focused more on securities with lower premiums?

Michael R. Hough

I think the weighted average costs coming down in that bucket would probably be just the amortization of the premium. We are not aggressively adding paper into that bucket, so those are just the natural progression of the securities in that category, if I understand your question. And I would say that, yes, some of that paper, too, we bought a while back at lower premiums as well, but the paper reflects that.

Kenneth A. Steele

Let me add to that real quick if you're still listening. You've got to remember, as time passes, these securities will move from 1 bucket to the next. So it may be that it's not that it's the same bucket with the value blocking.

Operator

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

Joel Houck - Wells Fargo Securities, LLC, Research Division

Wondering, are you guys doing anything to hedge the embedded gains in your portfolio? I mean, obviously, the shareholders benefit the longer you go without obviously having to distribute it. But is there risk or concern that the embedded value could diminish if, for example, rates went up so fast that people moved out of hybrids into 15, 30, you're feeling that perhaps a -- might miss a rate uptick?

Michael R. Hough

I mean, we're going to protect the portfolio through matching liabilities just like we say. I mean, we're not looking at a like from ARMs to another part of the market as being a risk. But obviously, if interest rates go up, values on financial institution -- I mean, financial instruments comes down, and that is something we try to hedge with interest rate swaps. And just keep in mind, in mortgage-backed securities, too, they, at some point, eventually will move to par as they -- through attrition. So there's nothing that we can do to lock that in, but we are protecting the interest rate risk of the portfolio. We like having gains, and really, the point is, we don't see the reason to harvest those gains for dividend's sake because it's basically selling the flexibility in our portfolio to be defensive if we need to be. And in a rising rate market, believe me, it's a whole lot easier to take leverage down if you sell securities with gains in it than it is if you don't have those gains to do. And that's just definitely the way we look at risk management here and an area we should mention.

Joel Houck - Wells Fargo Securities, LLC, Research Division

All right, understood. And then if I heard you right correctly early in the call, Michael, I think you were talking about putting more -- longer days swaps on given where rates are. Did I hear that correctly? And that would add some of these more expensive swaps roll off in the near term. Is it -- are you just going to -- is your strategy simply to let kind of the margin of the portfolio expand? Or is there -- I think earlier person asked, is there a real opportunity here to raise capital and we should be very accretive at the kind of 185, 190 marginal spread?

Michael R. Hough

It's always nice for high-cost swaps to roll off and replace them with longer-term swaps at a lower rate. That is -- that's definitely nice. But we -- when you're looking forward at the environment that we're in right now and who knows what the Fed's going to do, who knows how the yield curve's going to react, we have to keep and anyone in this business has to keep pushing out the liability side in the eventuality that maybe rates do actually go up one day. So that is something we will always do, and we're going to do that through the attrition of the swaps book and replacing swaps. We're going to look at other options and ways to get longer swaps, because when 2014 and 2015, when those times come around, we're going to make sure we're in position then, too, just like we're in position now. And I think that's the most important way to look at this.

Kenneth A. Steele

And one thing we always say is, just we talk about this as a process and not just a single point in time look. And so we are always trying to maintain a certain position with that swap book, but it's nothing we do boom here or boom there.

Joel Houck - Wells Fargo Securities, LLC, Research Division

Well, okay, let me ask a slightly different manner then. So when you -- on your asset selection side, excuse me, did you look at relative value of what you can buy today or do you take into account the net spread? Obviously, financing costs are really low, as you pointed out. So is it one or the other, a combination of both or how do you think about marginal returns as opposed -- with respect to deploying new capital, I guess, is what I'm asking.

Michael R. Hough

Well, the first that we look at is the interest rate risk that we're taking on. And at that point, I mean, from an asset selection basis, there are definitely things that we look at that we focus on to try to maximize that within the risk parameters that we have. But this is an asset liability business, not -- it's not an MBS business. So it has to all be related, it has to be intertwined for this portfolio to perform well now, next year and the years following that.

Kenneth A. Steele

Our bread and butter is 5/1s and 7/1s on a hybrid area. As Michael said, there's a lot of qualities and attributes that go into the pool that we buy, the quantity and availability of the coupons, the richness or cheapness versus alternatives, the coupons, the price of these spreads OESs, the originators, third-party percentages, gross and net lacks. I mean, they marry the things that go into our typical buy decisions, along with the net spread on a hedge basis.

Operator

[Operator Instructions] Our next question comes from Jason Arnold of RBC Capital Markets.

Jason Arnold - RBC Capital Markets, LLC, Research Division

To the previous question, would you entertain utilizing swaptions to extend the swap book out? Or are there any reasons why that would be more attractive or less attractive relative to the plain vanillas?

Michael R. Hough

Well, I mean, it's something that has to be part of the arsenal. And today, volatility is very low, swaps is probably as cheap as they've been on a relative basis as our interest rate caps. So we do look at it. And to date, we are focused on plain vanilla swaps. We're not saying that we'll rule out anything. But our focus is going to be on hedging the cash flows of the assets, which is what we need to do to be comfortable and to be able to model what our portfolio is going to do when interest rates change.

Jason Arnold - RBC Capital Markets, LLC, Research Division

Great. And then just one other quick one. It sounds like you are comfortable with kind of neutral to more or less negative duration on the book at present. Maybe you can just talk about what sort of rate environment would need to kind of come up to maybe take that a little bit more positive. Would it be the comment earlier about having the 10-year north of 2.5% or just kind of on a case-by-case basis. Maybe any thoughts there would be great.

Michael R. Hough

I mean, that's -- for us to say today what it would take is very difficult. That's something we evaluate -- we evaluate that every day. I mean, like we said, the trap in financial institutions cycle after cycle we're falling into is when -- it's just when rates come low, the market perception is that the rates are going to stay low for a longer period of time. And sometimes, people have forgotten how to manage or what they should do. Our view is when rates get this low, we got to become more defensive against that, and that's why we want neutral duration and maybe even slightly negative today. As we go through this part of the cycle, we're going to evaluate everyday to see if there -- if we need to be positioned differently. But right now, the net interest margin is strong, we can put money to work. Accretively, it all makes sense for us to be at this place.

Benjamin M. Hough

And Jason, just one more point. When we say tight to slightly negative duration gap, I mean, that's a base case duration. If interest rates do move up like you say, then we will be positive at that point. So things -- the prepayments will slow, the duration on the assets will shift out, but the liabilities will stay the same. So it's sort of a function of where rates have gone, not necessarily of where we think rates will go. So it will be positive. It was not that much big of an interest rates from here.

Michael R. Hough

Yes. So ideally, we probably -- if we have a view that there is a risk to rising rates, we probably like our operate durations to be neutral, not necessarily our base rate duration to be neutral. That's how we look at it.

Kenneth A. Steele

One more point, kind of -- because it touches on a few of these previous questions. When people talk about, it's easy to say a spread now, a new spread will be 180 or 170 or 190, whatever, but that's just a number and it doesn't reflect the risk that goes with that, the number to point in time. So when we talk about how we work with the portfolio, it's a long-term decision and not just what is it today.

Jason Arnold - RBC Capital Markets, LLC, Research Division

Okay, great color. And I agree, I mean, defending a booking capital is the right way to go, so keep up the good work.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Michael Hough for any closing remarks.

Michael R. Hough

That's all. Thank you all for your interest in Hatteras, and we look forward to doing this again next quarter. Have a great day.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Hatteras Financial Corp's CEO Discusses Q4 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts