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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

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

Analysts

Jason Weaver - Sterne Agee & Leach Inc., Research Division

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

Unknown Analyst

Steven C. Delaney - JMP Securities LLC, Research Division

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

Arren Cyganovich - Evercore Partners Inc., Research Division

Kenneth Bruce - BofA Merrill Lynch, Research Division

Boris E. Pialloux - National Securities Corporation, Research Division

Hatteras Financial Corp (HTS) Q1 2012 Earnings Call April 25, 2012 10:00 AM ET

Operator

Good day and welcome to the Hatteras Financial Q1 Earnings Conference Call and Webcast. [Operator Instructions] Please also note that today's conference is being recorded. I would now like to turn the conference call over to Mr. Mark Collinson, CCG. Mr. Collinson, please go ahead.

Mark S. Collinson

Thank you, Johnny. Good morning, everyone, and welcome to Hatteras' first quarter 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.

Briefly, before I hand over the call 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, April 25, 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.

So that's all for me. Here's CEO, Michael Hough.

Michael R. Hough

Okay, good morning. Thank you all for joining us today and for your interest in Hatteras. I'll give a quick overview before turning over to Ben and Ken to give more detail on the quarter and our recent capital raise. As always, our entire team is here and available to discuss the quarter and any other questions you have. First, I'd like to introduce a new member of our management team. As we've grown in size, we've continued to deepen our bench and our expertise and the core skill sets required to be successful in this business.

In the first quarter, we were lucky enough to add Jim Sutton to our team. Jim has spent his career advising clients on their interest rate hedging needs, most recently with Bank of America Merrill Lynch. He'll be responsible for all aspects of our interest rate hedging and will deepen our day-to-day knowledge of the various markets for interest rate risk-related products. We're very excited to have him on board and think his addition will add a lot of value to our company.

We had a solid first quarter, having declared a $0.90 dividend with $0.89 in earnings per average share, about a 13% return on average equity and almost 1% increase in book value. We feel good that these results came without exposing our investors to undue and additional risks. We were also fortunate enough to have been able to raise almost $540 million in a follow-on common equity offering on March 26, in a deal that turned out very positive for the company and for all of our shareholders.

I think we've been pretty consistent in our views on this business and on capital raising. In late March, there was a short window of opportunity for us to buy securities, when the 10-year treasury hit its highest levels in about a year and where net interest margin opportunities were very attractive.

I'll let Ben get into more detail, but this deal has been very positive in a lot of ways. It was accretive to current book value at the time of the deal, and a chunk of the book value increase at quarter end came directly from the new bonds purchased, then with the new capital. We bought new assets at obviously attractive prices, especially compared to today's market, and we were able to put them on our books at attractive net interest spreads, most likely higher than the 158 basis points we earned in the first quarter.

We took advantage of the timing and got invested pretty quickly this time, probably the quickest we've invested a follow-on deal to date. We're also able to extend the duration of our swaps book, which was the primary intention, while maintaining the desired risk position of the balance sheet. And we brought down the company's overall cost of funds, which obviously should help earnings going forward.

Also we further reduced our expense ratio, expanding our cost advantage over others. All in, we couldn't be happier with how the deal went, and accessing the capital markets opportunistically is a great feature of this business. We thank you all -- we thank all of you who had the confidence in us to participate.

So anyone who has followed us for a while knows we believe the #1 risk for agency mortgage REITs will always be a rising interest rate market. So as we've said many times, we will always be focused on managing our portfolio against this eventuality, no matter how far away it may be. In many ways, we have slowly been positioning ourselves for a turn of the cycle since our IPO. Because of the ideal timing of our formation and early capitalization, we have a fantastic portfolio that was acquired at relatively low prices. This gave us the flexibility to manage through a number of different events while still delivering good returns to our shareholders. Our strategy has remained intact, and the portfolio is much better off having stayed the course rather than straying and altering the risk to the company.

A point I like to make is that it's much pretty much impossible to replicate our balance sheet in today's market, a fact which we think is real long term inherent value. To be clear, this means that we have over $20 billion of staggered reset Fannie and Freddie MBS that would be very difficult to find today, period. We owned them at a low cost basis because we had the discipline to stay focused on current production. You'd have to go out and pay over $105 for this portfolio today.

In the short run, this may not seem to matter, but the flexibility of having significant positive OCI is critical. Having unrealized gains will allow us to manage our exposures much more comfortably going forward.

Another point we tend to make is that we're pretty efficient. As result of our growth, combined with a logical fee structure, our all-in expenses are expected to run well less than 1% of average equity, depending on the variability of the equity number within a quarter. Since a mortgage REIT regenerates its return for taking risk, from a competitive standpoint we look at this lowest of the group numbers, allowing us to take less risks. Over a long period of time, the additional risk needed by others to offset this advantage adds up.

So we're comfortable that we've put the company in a very advantageous position for the market we're in. Our objective going forward will be to protect and take advantage of what we've built. We'll be selective when it comes to capital raising. I guess at a minimum, we should use this last deal as a bar we'd like to exceed. We'll be prepared for a turn in the cycle regardless of when that may be, continuing our focus on a laddered, short-duration portfolio, hedging it thoughtfully against duration mismatch and extension risks. We'll be proactive if we need to, whether this means increasing hedges, harvesting some of the portfolio, reducing leverage or most likely some combination of all of these. And we will work to ensure we get the best possible agency hybrid production and the best possible prices and optimize our funding to repo swaps, et cetera. So with that, I'll turn the call over to Ben -- I mean to Ken, I'm sorry.

Kenneth A. Steele

Thanks, Michael. Good morning, everyone, and thanks again for joining us today on the call. I will quickly summarize our operating results for the first quarter of the year, which was a good one for Hatteras. Our net income for the first quarter 2012 was $69.3 million, or $0.89 per weighted average share as compared to $70.6 million, or $0.92 per weighted average share for the fourth quarter of last year. Our net interest income was $72 million for the first quarter of 2012 as compared to $72.5 million in the previous quarter, reflecting our slightly less earning assets.

Our average MBS for the quarter was $17.3 billion, down from $17.6 billion in the previous quarter, and we ended the quarter at $18.3 billion. We sold approximately $620 million worth of securities during the quarter for a gain of $2.5 million.

At March 31, 2012, we earned $17.1 billion of ARMs with a weighted average cost basis of $102.49, the estimated weighted average coupon of 3.37%, a 12 basis point coupon decrease from December 31 portfolio coupon rate of 3.49%. We also earned $372 million of 15-year fixed-rate securities with a weighted average coupon of 3% and a cost basis of $103.37. On the average coupon our portfolio fell, reflecting the current low-rate environment. Amortization expense for the quarter -- first quarter of 2012 also fell, going to $29.5 million down from $32.6 million in the fourth quarter of last year. This was reflected in our CPR, as it dropped from 10.6% [ph] on an annualized basis for the fourth quarter to 19.6% for the first quarter. Yield on our portfolio for the first quarter of 2012 was 2.61%, which was 1 basis point more than the previous quarter rate. Our cost of funds ticked down a bit, 1 basis point, it was 1.03% for the quarter. Repo rates eased a bit as year-end pressures diminished at the rolls. This led to an interest rate spread of 158 basis points for the first quarter of 2012, an increase of 2 basis points from the previous quarter.

Our operating expenses were $5.2 million, with an annualized rate of 98 basis points on average equity for the quarter. The quarter ending leverage was 6.2:1, which was largely a reflection of the proceeds from our equity offering. The book value is $27.30 per share at March 31, 2012, up $0.22 from the year-end and up $1.19 or 4.6% from a year ago. Despite market pressures, our performance on a financial basis was strong as we generated annualized return average equity of 13.1%, and a $0.90 dividend.

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

Benjamin M. Hough

Thanks, Ken. From a portfolio standpoint, the main discussion points are the pace of investing proceeds of the stock offering, the asset mix and the hedging activity. For January and February, we concentrated on reinvesting cash flow and culling the portfolio of a few positions that we expected to underperform. With the curve steepening in March and given the capital raise, we quickly went to work getting invested. We were able to get about $5.4 billion in purchases executed before the end of the quarter, with about $1.1 billion of those settling the last week of March, and the rest settling forward in April and May.

At quarter end in April, we've added another approximately $1 billion settling in April and May. So we were happy with the pace of acquiring assets, and that for a majority of the purchases, we were ahead of the rate rally that has ensued over the last few weeks. All in, the timing of the settlements of these purchases was about $1.1 billion in March, $3.9 billion in April and $1.4 billion in May. The asset mix was mostly in current coupon 5/1s and 7/1s, with a modest allocation to 15-year fixed.

Given the steeper curve and where we saw value, we weighted the ARMs portion about 3:1 towards 7/1s over 5/1s. As we've already noted, one of our goals with this raise was to lengthen the maturity of the swaps book and bring down the average rate. In the middle of March and prior to the equity raise, our swaps book was about 45% of our repo position and had an average rate of 178 and 31 months until maturity. We added a few swaps prior to quarter end that show up in the release, but with rates moving sharply lower, we were patient getting the assets hedged, gradually getting more swaps on the books over the first 2 weeks in April.

But since the stock offering and up to today, we have added $1.8 billion in swaps, with an average tenure of a little over 4 years. This brings our total swaps position today to $9.1 billion, with an average rate of 1.61 and 36 months until maturity. Most of the new swaps have forward-starting dates spread over the next 3 to 6 months.

So up to now, the offering has allowed us to extend the term of our swaps book by 5 months and decreased the average rate by 17 basis points. Once our forward purchased assets have settled and been financed, our current swaps book will put that percentage back to around 45%. We're still looking for entry points to add more hedges as well as probably execute some forward-starting swaps to replace our shorter swap maturities, both of which will extend the book longer and bring the average rate lower from here.

So as a whole, we invested the asset side quickly while rates were higher, and hedged them out gradually as rates rallied lower, thus a nice uptick in book value since the offering. All in, this is consistent with our philosophy and strategy of maintaining a portfolio that limits volatility and where assets and liabilities shorten together relatively quickly. This dynamic gives us flexibility to adjust and manage interest rate risk as conditions change.

As for prepayments, they have remained right in line with our expectations. The average CPR for the quarter was a little lower than in Q4 at 19.6 and ranged from 18 to 20.5 over January, February and March. April came in at 21 CPR. We expect to get slightly lower prepayments in May, reflecting the uptick in interest rates in March, then probably back into the 18 to 22 range in June. After that, prepaid -- prepayments will be rate dependent.

However, even if rates stay this low for an extended period, prepayments will eventually drift lower as the portfolio becomes more current with new investments and as cash flow is reinvested.

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

Michael R. Hough

Okay, that's all for our prepared remarks. And we're still free to ask a question. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jason Weaver from Sterne Agee.

Jason Weaver - Sterne Agee & Leach Inc., Research Division

First of all -- and you -- Ben, you probably just gave us all the puzzle pieces to make this come out right now, but I'm just looking for confirmation. If I'm looking at the correct numbers, your average leverage during the quarter was about flat with what you reported at 12/31. Can you tell me how that compares currently as you move closer to full investment and the rest of those securities settle?

Benjamin M. Hough

I think it'll be real similar. I mean, it's -- a lot depends on where prepayments come in over the next 2 months, as far as average leverage is concerned. But we're still in that 7.5 to 8 range, and it could be slightly at lower end or slightly at the higher end of that range depending on how things play out.

Jason Weaver - Sterne Agee & Leach Inc., Research Division

Fair enough. And just one more thing regarding a comment in your press release that the net price for the secondary to you is $26.81, and that being done at a premium to book value. Can you give us some more info there because I don't know what your average book value in the quarter was, but $27.08 and $27.30, $26.81, how is it temporarily lower there?

Benjamin M. Hough

Yes. Well that was -- I mean, book value has been down a little during the quarter and especially late February and early March. And obviously, there's been a big rate rally since the end of the quarter and even since quarter end. So when the deal was executed, the pricing we did internally, it was and this is what -- this is how we quoted it, that it was marginally accretive to book value at that date. But that quickly changed, and I've made the comment in the introduction that a significant amount of the move since the deal has been from the securities we bought because of the deal, so that had a whole lot to do with the run-off.

Operator

Our next question comes from Bose George from KBW.

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

First question was just on the spread where you put the new money to work from the capital raise. I think you guys were targeting something like 175. Was it somewhat in that range?

Benjamin M. Hough

Yes, Bose. I think you could be very comfortable using around 175 for the bonds we've put on the books already.

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

Okay, great. And then just in terms of your repo funding costs, I noticed the 30-day and the 90-day were the same at 35 basis points. I mean, could you end up doing more 90-day repo with that? Or is the 30-day repo cost coming down since then?

Benjamin M. Hough

We haven't really been -- I mean, as you know, we've been 30 days for the most part for a very good while is one of the ways we can manage counter-party risk ourselves by staying short. But yes, sure we could use 30, 60, 90, even longer repo and it's something that we're looking at.

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

And just a follow-up on that. Is the pricing on longer repo looking attractive? Is there -- do you see stuff 6 months, a year, stuff like that?

Benjamin M. Hough

6 months is available. If you go out 6 months, you're probably looking somewhere in the mid-40s range. But where we are right now, to answer your question, I guess your earlier question, we have seen a little bit of a pull down in rate on repo, 1 basis point or 2. We would expect that to probably continue into next month. So we've been primarily looking in the 30- and 60-day range at this time.

Michael R. Hough

Swap out 6 months, 6 month repo, though. So you have to keep that in mind as you term out a little bit, swap versus a repo.

Operator

Our next question comes from Vic Agarwal [ph] from Wells Fargo.

Unknown Analyst

A quick question. In regard to prepayments, have you seen any pull-through in the quarter from HARP? Or do you envision any of that accelerating over the next couple of months?

Michael R. Hough

I'm sorry, Vic, will you ask that again, please.

Unknown Analyst

I wanted to see if you had any pull-through from HARP in the quarter? Or do you envision any of that coming through over the next couple of months?

Frederick J. Boos

We've seen -- if we look at our HARP eligible paper, which is after this capital raise it's going to be less than 10% of our overall portfolio, we've seen paper there, it's been coming in and CPR is probably the mid-20s. That hasn't been a big pickup at all. I think if you look at it, a lot of it seems to be a little more servicer-specific. I mean we had seen some pickup in, for example, Bank of America service paper, but it's not a large percentage of our portfolio and it has a minimal effect.

Unknown Analyst

Okay. And when you said that the average swap was -- was that 1.61 for the new swap or was that the overall portfolio?

Michael R. Hough

That's the overall portfolio, the full $9.1 billion. I think most everything we've got and executed on average is going to be between 90 and 100 basis points on all the new stuff.

Operator

Our next question comes from Steve Delaney from JMP Securities.

Steven C. Delaney - JMP Securities LLC, Research Division

Michael, in your comments you mentioned the expense ratio, and it is obviously the lowest in the peer group, below 1%. But it did look like it ticked up a little bit quarter-to-quarter to -- from 93 basis points to 98. And the G&A piece of $900,000 is a couple hundred thousand higher than the $700,000 we've been running. Is there any -- I guess my question for Ken, is there any onetime item there? Or do you think something in the ballpark of $900,000 a quarter? Does that look like a new -- a good run rate for us?

Kenneth A. Steele

Yes, Steve. I think that's a pretty good run rate. I mean G&A is up slightly and that probably should be your expectation. As we've been growing, we have deepened our bench and we're putting some pressure on expenses there from that standpoint. But I think overall, we do think it'll remain that -- kind of the same basis point percentage, in the 80s or 90s, depending on where equity is. But that $900 million-ish for the moment is probably more where things will be. There were no unusual onetime hits in there.

Steven C. Delaney - JMP Securities LLC, Research Division

Okay, great. And of course you will get a little help on the ratio from your denominator growing here in the second quarter with the rate.

Kenneth A. Steele

Absolutely.

Steven C. Delaney - JMP Securities LLC, Research Division

You guys, touched on repo with Bose, but one thing that's kind of puzzled me -- I track rates pretty closely day-to-day, and 1 month LIBOR has actually come in 6 basis points year-to-date, and were about 24, and Fed funds running about 14. It kind of -- I wasn't at all surprised at the year-end spike in repo to the high 30s or 40, but it seems like it's been persistently hanging up. For 30-day quotes, we're hearing mid-30s, and I would have expected to see maybe back down to 30 or slightly below. It seems like there's plenty money available, but is it just that the lenders want to make a little more spread on it going forward? Any color on sort of current 30-day quotes and whether you expect them -- whether there's any potential for them to move lower over the next few months?

Frederick J. Boos

Hi, Steve, Fred. We're seeing 30-day rates in the mid-30s but slowly, gradually moving down a little bit, perhaps following LIBOR. But really -- I mean, collateral availability, collateral supply really drives the overnight collateral funding rates. We've seen those spike up recently with some of the larger auctions, the Street has taken those down. Thus, we're seeing a little bit stickiness on the part of the dealers to want to bring down repo rates. We think they'll drift a little lower in the, say in the next month, maybe not as bad a quarter end as say year-end and first quarter. Now there are a few headwinds out there that we think are unlikely to take place, but certainly the dealers are worried about money market reform, possibly QE sterilization, things like that are probably not likely but still on the radar screen. So to answer your question, we think rates will move down a bit, but we don't see them drifting down rapidly.

Kenneth A. Steele

And although that's not -- it's not overly significant. Any time they disconnect, widening like that, Steve, that hurts us. Our swaps are paying off that LIBOR rate, so...

Steven C. Delaney - JMP Securities LLC, Research Division

Exactly, so you get -- instead of -- you get a negative arbitrage on that because you might be paying out 7 or 8 more basis points than you're receiving.

Kenneth A. Steele

Exactly.

Operator

Our next question comes from Mike Widner from Stifel, Nicolaus.

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

Just wanted to follow up a little bit on kind of the portfolio and the money being put to work. If I do my math -- if I'm doing my math right, then adding up kind of all the stuff you talked about buying and when you expect it to settle, it looks to me like you'd still be a bit lower than the 7.5x leverage, 7.5 to 8 that you guys indicated, so it's -- by roughly $1 billion, at least by my quick math. So are you guys sort of -- well first off, I guess the question is my math right there? And then assuming I'm not doing something stupid, are you guys expecting to maybe buy more assets and get the leverage a little higher, or -- I don't know, if you could comment on that a little bit.

Michael R. Hough

Okay. Yes, sure absolutely. I think your number is maybe off a little bit. I think that the purchases we have done to date pretty much put us into the range that we're comfortable at, where we've been over the last few quarters. So I think that there may be a little bit of noise between when things settled and when they're purchased, and we may have gotten a little bit extra in March coming into the deal. I was trying to outline how things had played out since the deal. So all in, I think -- based on what we've -- the numbers I've given you and what we've already purchased, we are probably in the middle of that 7.5x to 8x range depending on where equity is.

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

Because I was just adding up what's on the balance sheet, at least what's showing up as of March 31. And between the MBS and the unsettled, you get to about $20 billion and you mentioned an additional $1 billion since the quarter end. I mean, that just puts you a little bit light of 7.5x if that's the total. So it sounds like you're saying there might be something else.

Kenneth A. Steele

And that is because the TBAs just show up on -- as a derivative and are netted there. So we have some unsettled ones coming on that'll -- you'll see once the Q gets out, it gets disclosed in the footnotes.

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

Okay. Great. Got you. All right. And then just running -- I mean, another one where I sort of scratch my head at some of the line items here. As I look at your effective cost of swaps, your total cost of swaps during the quarter -- and it looks like you might have added some earlier in the quarter than just at the time of the capital raise. And I'm wondering if something is off on my calculation there, if you guys did enter into some of those longer 5/1s kind of back earlier in the quarter, if it was all really done right at the end of the quarter?

Michael R. Hough

They were all done at the end of the quarter. We went into January 1 with $7.3 billion and we added $600 million after March 26 and -- before the end of the quarter, and that put us at $7.9 billion, so we did not add anything in between there. So I'm not sure how you're backing into your rate, but there was everything -- there was no hedge activity between January 1 and March 26.

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

And then I guess just one final one, if you could talk about sort of where you see spreads today -- really, I guess, where you see yields today on new investments as you think about redeploying capital versus where effective yields were for the stuff you were buying early April, as well as kind of end of March.

Frederick J. Boos

Yes, Mike. We're looking at -- if you want to look at the yield side, depending on the blend we use for assets, it's going to be somewhere between like a 210 to a 225 yield. And how we -- hedging it out appropriately, we're looking somewhere in the neighborhood of probably 160 to 165 in terms of net interest spread.

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

And that's what you're seeing today? Or that's...

Frederick J. Boos

That's today.

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

Okay, versus you've mentioned earlier I guess about 175.

Frederick J. Boos

On the money we deployed right at the deal time. That's correct.

Operator

Our next question comes from Arren Cyganovich from Evercore.

Arren Cyganovich - Evercore Partners Inc., Research Division

In your commentary about not being able to replicate the portfolio at today's prices, I was wondering if you'd just talk a little bit about -- you get about roughly a fourth of the portfolio prepaid each year, repaid each year. Is that going to be a longer term strain on the spreads of the portfolio after everything is invested? Or do you feel that it's enough to just keep things relatively steady going forward?

Michael R. Hough

Yes, I think -- obviously, prepayments are, in today's world, are reinvested at lower rates. But they're coming at a pace that we can easily -- that we can easily invest. The point that I was making there was that this is a very large ARM portfolio in a market that's very difficult to get ARMs at times, and we are -- which is why we've been opportunistic when we raise capital and why we -- we're looking at -- you're right, 25 basis point -- I mean, 25% a year if the CPRs remain consistent, which is an easily manageable number. So that is part of this, but we are -- we're in position relative to what the market has to offer in a very positive way.

Arren Cyganovich - Evercore Partners Inc., Research Division

Okay. And then you also look like you pared back your small position in 15-year fixed assets. What was the reasoning behind that?

Michael R. Hough

We did that earlier in the first quarter. Just -- we're always looking for paper that we think might underperform. Since then, we have rebuilt the 15-year position and it's back to something similar to where it's been. So we've -- that was the reason that we pared back. I think Ken or maybe Ben mentioned it in the call, that you've seen slightly lower average leverage in the first quarter and that was why. But that is -- we feel like that's an important part of this portfolio in today's market. And I think we're going to keep it small but maybe consistent allocation that way.

Operator

And our next question comes from Ken Bruce from Bank of America Merrill Lynch.

Kenneth Bruce - BofA Merrill Lynch, Research Division

Just looking at spreads here, in the quarter 158 basis points, 166 on new money, 175 basis points on the last capital rates. Can you give us some context as to what the average spread is in this particular part of the mortgage market? They're easy to track on fixed rate, generally speaking. Obviously, there's a few moving pieces in there that matter, but hybrids are a little bit different, and they've come down from 215. Could you just give us some context as where they normally have been, maybe what the trough levels have been, and any context around that, please?

Michael R. Hough

Well, I guess the question is how long back do you want to look. It's -- when we were 200-plus basis points that was above average -- above average margin for this type of paper on this part of the yield curve, obviously very attractive in our business. And I think what you see is as the yield curve has sat in one place for the most part for a pretty good while, spreads are coming back to what we would think would be more average, and what historically we've seen over the long term. 158 basis points, that you can kind of shock that either way, look at prepayments, look at the shape of the yield curve, it can widen from there, maybe it could contract a little from there. But I think what you see is the portfolio that we had, that we've been able to expand the net interest margin just by putting new capital to work. And -- but I think as always, whatever part of interest rate cycle that you're in, you're going to get a migration to the norm, and I think we've seen that. And we've been here a pretty good while, so we would have to say this is pretty close to what we think average would be. That make sense?

Kenneth Bruce - BofA Merrill Lynch, Research Division

It does. I guess this part at least I would characterize the last few years even though they've -- the interest rate environment is settled down -- is mortgage assets are traded in an abnormal way or valued in an abnormal way? Can you contextualize that with the current environment to maybe the pre-2007 era as to where hybrid spreads were?

Michael R. Hough

I'll just make a point there. Pre-2007, the mortgage market was a completely different animal than it is today. And hybrid ARMs were a small part of the overall ARMs market in that period of time. And so to do an apples-to-apples, when we were seeing products in the ARMs market, that -- from let's just say 2000 to 2007, it's hard to do a comparison there. But we've seen spreads on these type of products just on the Treasury curve as tight as 45 basis points to Treasury, and we've seen them as wide as 300 to Treasury, looking back to 2008. But I think when we -- prior 2007 spreads, the treasuries averaged in the 60 to 70 basis points range. And we're maybe slightly higher than that right now, but depending on coupon, not meaningfully so.

Kenneth Bruce - BofA Merrill Lynch, Research Division

Thanks. And my last question is, I always find that changes to a management team to be revealing. And I guess in the context of your latest addition -- and this is not a critique, I guess this is more just a question. They can -- management changes can reveal what may be perceived as a weakness or a potential growth opportunity. And I guess I would like to get your perspective on that.

Michael R. Hough

Yes. I think we have, from asset liability management's standpoint, our original team has deep expertise on both sides of our balance sheet. What we've seen is that with growth of the company, the need to segregate some of the responsibilities is very important. And that -- we're able to bring some of the services that we contracted out in-house, and we have someone who can focus now 100% on this one part of the balance sheet. And it's more of an enhancement than our view of perceived weakness, but it does free up a bigger picture focus from the CIO side and from the management side. It enables us to execute much more effectively. That's why we did it and that's why we'll continue to look for other opportunities to do the same thing in other parts of our company.

Operator

[Operator Instructions] Our next question comes from Boris Pialloux from National Securities.

Boris E. Pialloux - National Securities Corporation, Research Division

I just want to know what was your factor of [ph] duration of your ARMs hybrid portfolio in Q1 2012?

Michael R. Hough

The duration on the asset side alone, depending on what point of Q1 you wanted to look at it because...

Boris E. Pialloux - National Securities Corporation, Research Division

Yes, probably at the end, I think, march maybe.

Michael R. Hough

Yes. At the end of the quarter, we're probably on the asset side close to between 1 and 1.5, probably right in the middle there somewhere, depending on who you look at, depending on which assumptions you use. But it was definitely on the short end.

Operator

[Operator Instructions] And at this time, I'm showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

Michael R. Hough

We just want to say thank you all for your interest and your questions, and we look forward to next quarter. Have a great day.

Operator

Ladies and gentlemen, that concludes today's conference call. We thank you for attending. You may now disconnect your telephone lines.

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