Hatteras Financial Corp. (NYSE:HTS) started operations in 2007 as a mortgage REIT that seeks to invest in single family mortgage backed securities for which any of the government sponsored Agencies guarantees principal or interest payments. The company invests in both fixed rate and Adjustable rate mortgage backed securities. At the end of the fourth quarter of 2012, the company was managing an investment portfolio of $25.8 billion, compared to $24.4 billion for the linked quarter. Around 94% of the entire portfolio was adjustable rate, while the remaining was 15-year fixed rate agency MBS. The stock is currently offering a 10.31% dividend yield and trading in line with its book value.
4Q 2012 Performance Review
Hatteras Financials reported its fourth quarter performance on Feb. 12, 2013 on solid growth in gain on sales of MBS. During the fourth quarter, Hatteras Financials generated $131.7 million in interest income, down 45 basis points from the interest income of the linked quarter. The decline in interest income was a result of a decline in average portfolio yields during the fourth quarter. Compared to the linked quarter, Hatteras’ interest yielding assets yielded 2.04%, up 12 basis points. The decline in asset yield can be attributed to the QE3 and the Fed’s commitment to keep the short term rates low.
During the most recent quarter, Hatteras experienced $57.01 million in interest experience. The company reported 0.96% in cost of funds, up 2 basis points from the linked quarter. As a result, the company earned interest income of $74.7 million on interest rate spread of 1.08%, down 14 basis points from the linked quarter. Interest income declined 6.5% quarter over quarter. This is compared to a 2 basis points decline in net interest spread for CYS Investments Inc (NYSE:CYS).
Significant gains on sale of mortgage backed securities were recognized during the most recent quarter. The company recognized $39 million on gain on sale of MBS, compared to $10.5 million at the end of the linked quarter. Operating expenses of $7.1 million edged up 17% from the third quarter. As a result, the company reported net income of $106.7 million against $84 million at the end of the linked quarter.
Leverage & Hedges
The company maintained its leverage ratio of 7.4 times during the fourth quarter, compared to 7.3 times at the end of the third quarter of 2012. As of Dec. 31, 2012, the company had entered into interest rate swaps with a notional amount of $10.7 billion, which is 47% of its repurchase agreements. Compared to this, American Capital Agency Corp. (NASDAQ:AGNC) hedged 63%, which is unchanged from last quarter. CYS decreased its hedges from 54% at the end of the linked quarter to 50% at the end of the fourth quarter.
Hatteras Financials reported $50.1 million of amortization expenses during the fourth quarter, compared to $47.3 million during the third quarter. The weighted average conditional prepayment rate for its investment portfolio was 26.6% compared to 27.6% during the third quarter of 2012.