Dynex Capital Inc (DX) 2014 Q2 法說會逐字稿

Good morning, and welcome to the Dynex Capital Second Quarter 2014 Earnings Conference Call. (Operator Instructions). Please note, this event is being recorded. I would now like to turn the conference over to Allison Griffin, Vice President of Investor Relations. Please go ahead.

Thank you, Denise. Good morning the press release associated with today's call was issued and filed with the SEC today, July 30, 2014. You may view the press release on the Company's website at www.dynexcapital.com under Investor Relations and on SEC's website at www.sec.gov.

We would like to remind you that this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words believe, expect, forecast, anticipate, estimate, project, plan, and similar expressions, identify forward-looking statements that are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. The Company's actual results and timing of certain events could differ considerably from those projected in or contemplated by the forward- looking statements as a result of unforeseen external factors or risks.

For additional information on these factors or risks please refer you to the Annual Report on Form 10-K for the period ended December 31, 2013, as filed with the SEC. The document may be found on the Company's website under Investor Relations as well as on the SEC's website.

This call is being broadcast live over the Internet with a streaming slide presentation and can be found through a webcast link on the Investor Relations page under IR Highlights. It may also be referenced by clicking on the Dynex Capital's second quarter 2014 earnings conference call link on the IR Highlights page of the webcast.

I would now like to turn the call over to Byron Boston, CEO.

Good morning, and thank you for joining us today. With me today again is Tom Akin, our Executive Chairman; Steve Benedetti, our CFO and Smriti Popenoe, our Chief Investment Officer.

We are happy with our second quarter results as we were able to take advantage of a great environment for generating solid net interest income. As we mentioned in our prior call that even though the market environment is very complex, there is a great business opportunity to earn net interest income as the yield curve remains steep, rates range bound and volatility very low, nonetheless we remain on heightened alert given that risk premiums in most asset classes globally have materially declined over the past three years.

Much of what you'll hear today will sound familiar. Our goal is to remind you that we continue to manage our portfolios in a very disciplined manner, and we have not been forced to make major changes to our strategy. One year ago, we told you that we expected slower prepayment speeds, tighter spreads and rolling down the curve to be significant factors in our future performance. That is what has happened over the past 12 months. Six years ago, we told you that we were constructing our portfolio to perform in multiple market environments and that we expect the shape of the yield curve and the level of rates to be supportive of our investment strategy. That is also what has happened to date.

We have continued to pay an attractive quarterly dividend of $0.25 and our book value has increased 5% this year. Our larger portfolio thesis continues to hold.

Hybrid ARMs have become more attractive as more investors have sought to shorten the duration of their asset portfolios. The multifamily sector continues to perform as the home ownership rate has declined, and the commercial mortgage sector has proven to be an excellent anchor at the core of our investment strategy. The current global economic financial and regulatory environment is highly complex, and we believe that we have an excellent strategy for producing solid net interest income without taking excessive risk.

With that, I'll turn the call over to Steve Benedetti, our CFO.

Thanks, Byron. I'm on slide five for those that are following the presentation. My comments are going to be referencing a number of non-GAAP financial measures as disclosed in the earnings release and which are also reconciled on slide 36 and 37 in the appendix to the conference call slide deck.

As in prior quarters, we present these measures as a result of the discontinuance of cash flow hedge accounting under Generally Accepted Accounting Principles during 2013.

For the second quarter, we reported a GAAP net loss per common share of $0.15, which reflects the mark-to-market loss on our hedging instruments for the quarter. As a reminder, our GAAP results include market value adjustments from our interest rate hedges while corresponding changes in our asset guides are reflected only in shareholders' equity and book value per common share.

As a result, we present core net operating income which excludes the market value losses on our hedges and which was $0.26 per common share for the quarter compared to $0.25 per common share last quarter. This represents an 11.3% return on our average common equity for the quarter.

During the quarter, we declared a dividend of $0.25 per common share, in line with core earnings and which represents a current yield of 11.8% based on last night's closing stock price. Adjusted net interest income, another non-GAAP measure was $20.1 million flat to the first quarter. Adjusted net interest income benefited from an increase in the adjusted net interest spread of four basis points to 192 basis points which helped to offset the smaller interest earning asset portfolio

Our leverage declined by 0.2 turns to 5.7 time shareholders' equity, as a result of the deleveraging of our investment capital coupled with an increase in shareholders' equity of $13 million during the quarter. With respect to prepayments, we saw a modest increase this quarter in our agency RMBS but this increase had only a nominal impact on our reported results and our longer term prepayment expectations remain unchanged.

On slide six, we present key trends -- key financial metric trends for the Company. Net interest spread has increased four consecutive quarters as we have shifted our asset mix more towards CMBS investments and we have benefited from declining borrowing cost from the repositioning of hedges in the fourth quarter of 2013 and also as repo costs have declined. We continue to maintain the majority of our interest rate exposure on the zero to four year part of the curve.

For the quarter, book value per common share increased $0.25 or 3% and for the year book value has increased $0.43 or 5% as investment values have benefited over the last several quarters from the lower volatility tighter spread environment. The increases in value are spread across the entire portfolio with the biggest increases from a dollar point of view on our hybrid ARMs and our non-agency CMBS.

I'll now turn the call over to Smriti who will talk about our investment portfolio outlook and strategy.

Thanks, Steve. I am on page eight for those following along on the investor presentation. I am going to start to with a quick update on the markets that we are active in and as you know we think about those in terms of fundamentals, technicals and psychology.

The multifamily sector where we have most of our capital invested continues to evolve. The current fundamentals -- property prices, vacancies, rent, growth and prospects for these fundamentals in this market remains strong. We're seeing certain markets peak in terms of property price appreciation. This is mostly where there has been some overbuilding but we still believe demographics will support rent growth and vacancy trends in this sector.

In the non-agency CMBS sector, we continue to see competition and loosening of underwriting standards particularly on the collateral front where this is showing up in the form of higher LTDs in deals that we're looking at. We're also seeing an increase in the number of mezzanine loans against properties. As you know, we invest in the AAA part of the capital structure here and underwriting is not at a troubling level yet, but we do see this type of activity as a sign of cash chasing yield.

The fundamentals on the residential sector are starting to show some weakness with 30-year rates declining from 4.4% to 4.1% roughly over the quarter. We did see a seasonal pick up in prepayment speeds but the big story in residential has really been the slowdown in activity on the home sales front. Existing home sales, new home sales and pending home sales have all come out with weak numbers recently.

The other point to note is that the year-over-year increase in home prices as measured by Case-Shiller Index is finally starting to slow. These factors could cause the next supply of MBS to be lower than most people expect.

On the funding side, we continue to have access and availability to liquidity at attractive levels. This is being driven by excess balance sheet capacity and a lack of high quality collateral.

And finally, the nature and timing of GSE reform is still uncertain with no private standalone solutions yet in place to replace the GSEs.

From a technical standpoint over this quarter, things really weren't much different versus last quarter. Continued government involvement, abundance of cash and search for yield resulted in lower risk premiums across the globe, which meant tighter spreads.

We also saw this in the long end of the Treasury Yield Curve. China purchasing a record amount of Treasury bonds over the quarter.

We believe the key technical factor over the next quarter is the Fed's exit, particularly for MBS and net supply this month which was reported actually this morning is meaningfully positive and has begun to impact spreads. In fact in the month of July, we've seen a modest amount of spread widening in both RMBS and CMBS. 30-year and 15-year RMBS are about 10 basis points wider, CMBS about 5 basis points to 10 basis points wider across the capital stack.

The good news is spreads on short hybrid ARMs have been fairly stable. Keep in mind though, even though we're talking about some spread widening, we're still near the tightest spread level since 2011 in most sectors. Our book value has been stable since quarter end.

So what does this all mean for Dynex, turning to page nine. Last quarter, we communicated our view, and our view was this is not the environment in which to make big bets one way or the other. We think that still holds. We're continuing our disciplined investment approach to seek and find value to add on the margin. We think we can do that both on the investing side and the funding side.

Our focus is to generate earnings by keeping the investments in our current portfolio, but being very conscious and mindful about the risk in the environment, being ready to take action if necessary and appropriate. We are managing our liquidity and our leverage with that in mind. I will say we do have the capital and liquidity to withstand a spike in volatility and we would that actually view that as an opportunity to invest. We are also focused on creating value and diversifying our financing portfolio.

Turning to page ten, to describe our interest rate risk position. Our interest rate risk position saw a very little change over the quarter. And just to remind you this page shows you both the changes in our fair value of our assets, net of hedges for parallel and non-parallel interest rate shocks. And as I have made the point in previous calls, the market rarely moves in parallel fashion, and this is really where you get to see the difference between the impacts on fair value for parallel and non-parallel interest rate shock. So not much change in our interest rate sensitivity over the quarter.

Page 11 just goes through our portfolio allocation. Again here not much change between last quarter versus this quarter.

Page 12, we have our CMBS portfolio of credit quality. Again majority of that capital is invested in AAA assets.

Page 13, not much change in our RMBS portfolio either.

And then just turning to page 14, a few comments on our financing portfolio. As I mentioned earlier we are actively managing our financing portfolio to generate value and reduce risk. We did continue to see a decline in financing costs this quarter, our average repo cost for the quarter went down from 61 basis points to 57 basis points. And really this is being driven by demand for high quality collateral.

As you also know, we have a committed facility to finance our CMBS portfolio. We use this primarily to fund CMBS IOs. And the funding cost on that facility also declined over the quarter contributing positively to net interest margin.

And finally a couple of market developments, we've been keeping a close eye on from a financing perspective which we expect to impact funding cost in the near future. The first is the money market fund rules that the SEC came out with this week. We believe this is a net positive for agency repo as it shifts capital from non-government funds to government funds, increasing the amount of funding available for high quality agency collateral.

The second is the supplemental leverage ratio. This is something that's been around for a few months now. We've actually seen interestingly this benefit our non-agency repo financing cost. The demand for non-agency repo financing from financing counterparties who are subject to this supplemental ratio has been very robust, we expect that to continue.

And finally, the reverse repo facility at the Fed, we continue to monitor the activity and the levels in this experiment that the Fed is conducting. We believe this will be a major part of Fed policy in draining liquidity from the system.

In terms of just what we expect our future funding cost to be. Right now the GCF futures market is pricing in about a 2 basis points to 3 basis point increase in repo cost over next quarter. So we may see slight pressure on margins later this quarter and into the fourth quarter.

Before I turn it over to Byron, I would like to leave you with the following thoughts. The first is we're focused on generating earnings by keeping our investments in the current portfolio. We're very mindful and conscious about the risk in the current environment. We're managing our liquidity and our leverage with that in mind. We're comfortable with our ability to withstand a spike in volatility and we would view that as an opportunity to invest. And we're focused on creating value and diversifying our financing portfolio.

With that, I'll turn it over to Byron.

Thanks, Smriti. Let's move to slide 16, and let me remind you that an above average dividend compounded over several years is a significant source of long-term returns. We've included here a chart showing total returns of various stocks and indexes over a 10-year horizon.

One of the interesting facts about the past 10 years is that we have seen multiple market cycles during which the dividends have gone up and dividends have gone down. Book values have gone up and book values have gone down. For example, over the past decade the Federal Reserve Bank tightened credit and raised interest rates over 400 basis points between 2004 and 2007. The U.S. housing market collapsed and the global financial system nearly failed. The mortgage REIT strategies with the liquid balance sheets and disciplined risk management have proven to be the winners. When we run this chart over a longer horizon, the numbers are even more compelling as compounding dividends offset a variety of negative market disruptions.

We believe that maintaining a liquid balance sheet, having a portfolio that can perform in multiple market environments and disciplined risk management are powerful strategies for generating attractive long-term returns. As we have always said, you can continue to trust that we will manage our capital for the long-term, and we will remain very disciplined as we navigate the current complex global environment.

Operator, we're now ready to answer questions.

Thank you. (Operator Instructions). Our first question will come from Douglas Harter of Credit Suisse. Please go ahead.

Thanks. Byron or Smriti, can you talk about how much capital you feel like you need to reinvest each quarter from pay downs and whether that's changed in recent quarters?

Hi, Doug. This is Smriti. So, basically, let me explain to you what our strategy has been for reinvesting. When we saw yields at the levels that they were at in the first quarter and spreads at the levels they were at in the first quarter, we felt like it was okay to reinvest a 100% of our run off in that quarter. We thought the risk return opportunities were good and it made sense for us to do that.

In the second quarter, we've actually taken that number down to about 75% I would say, because we felt like that risk return really wasn't compelling enough to put all the capital back in. And I think we're looking at the environment right now and it really depends on what spreads do here. So, we don't feel compelled at this point to have to put a 100% of our capital back in, if that's --

Yes, and, Doug, with our increasing equity allocation to the CMBS sector, that has reduced a need. So the overall amount of dollars that are coming back just have not been an excessive amount. One of the big stories in the marketplace over the last month or so has been a slight increase in prepayment speeds more than some people anticipated. That was not an issue here at Dynex.

And so as long as we've got the CMBS product, again it's been a great anchor for this portfolio having a focus on commercials.

And I guess just to follow-up on your comments there, Smriti.

Would the backup in spreads we've seen so far quarter to date, is that enough for you to want to put some of that excess capital you held back to work yet or would you look for more volatility or more widening before you got more constructive?

Yes. We're still very close to the absolute tights, Doug. And I think the real key here for the first time you've actually seen some meaningful net supply come into the market in the month of June and the month of July. It's been a net positive of 5 billion to 7 billion. The Fed's probably going to announce another reduction in their purchase program today. We think there is room for some of this, for mortgages to widen some more. So not yet there in terms of where we think there is meaningful risk reward to put capital to work at.

Great. Thank you, guys.

And the next question will come from Trevor Cranston of JMP Securities. Please go ahead.

Hi, thanks. You guys mentioned several times throughout the presentation that risk premiums have continued to decline and spreads remain at close to the absolute tight levels. Is there any point at which you guys would think about adding some hedges either in the CMBS space or the agency space to protect yourself against spread widening, or is your approach to kind of be just a little more cautious on what you purchase and maintain your liquidity so you could take advantage in that way?

So, Trevor, the answer to that is yes, yes to both. So, there is two ways you can manage spread risk, one is delevering and not participating in the market at some point and then the other is actually hedging. We look at this all the time and it's part of our risk return trade off. So absolutely we look at it as a way to protect ourselves.

And, Trevor, let me just -- I am glad you asked this question, because I want to clarify something. I want to make sure everybody understands this. When we say we are disciplined investors, it doesn't mean that we are not investing, doesn't mean that we are not looking for great opportunities. And so the answer is yes, as a disciplined investor, we are always thinking about when to add that additional hedge. And let me just explain some other behaviors that go on here at Dynex.

We spend an enormous amount of time running future scenarios and future risk shocks. We develop strategies that we can potentially deploy if we either sense that the profitability of that scenario is increasing or if we find ourselves in that type of situation. So that's what's meant in terms of disciplined risk management. You have to first recognize that -- if you want to compare us to 2011, right? Let's compare to 2011. That was a great year. There was an enormous amount of risk in the system, S&P downgraded the U.S. and enormous amount of investors moved to the sideline. Dynex Capital aggressively put capital into the marketplace. Why, because spreads were at all time wides at that point.

So a disciplined investor wants to put more capital in the market with spreads are really wide, when they recognize that spreads are get closer to the tighter levels, we want to be a little slower, a little more disciplined, a little more careful and be prepared to understand what type of hedges we may need to put on if we sense that again spreads may wide or rates may do some type of things, or curve may adjust in some other types of fashion.

So, I appreciate your question. I want to make sure you and everyone else understand what's meant by disciplined investor. Someone asked me in the last quarter, hey, are you guys are really, really cautious. Cautious isn't the word, disciplined is the better word to describe what we do at Dynex.

Got it. I appreciate those comments. Thanks a lot.

(Operator Instructions). The next question will come from Jason Stewart of Compass Point. Please go ahead.

Hi, good morning. Thanks. Could you talk about the growth in the CMBS IO portfolio, it looks like -- maybe give us some color on the pace of growth during the quarter, and where your thoughts on that stand today with spreads were they are?

Sure. So versus the first quarter, our growth was actually slower. I can dig through the numbers in a few minutes here and maybe get back to you offline. We saw spreads tighten this quarter, basically all through the quarter, even though a lot of deals got done in the month of June. Probably, I would say a good 15 basis points to 20 basis points over the quarter in CMBS IO portfolio.

They got to the levels Jason, if I could describe to you sort of our behavior last quarter versus this quarter. Last quarter, we were comfortable, and I'm just using an example here, putting in for $10 million of a deal at call it 155 to 165 over swaps. And we put in for $10 million, we'd get $2 million or $3 million.

That kind of continued over this quarter as spreads tightened in. And as spreads tightened in earlier in the quarter, we felt like we the risk return was still good. But towards the end of quarter, we actually started dropping from deals. So people would ask us if we were interested in remaining in the deal at tighter spreads, and we actually exercised some discipline there.

So what you should see basically is at these tighter spread levels we are being a lot more choosy about which deals we want to invest in and quite frankly we've turned down deals at some of these tighter levels.

Would you -- it looks like both Fannie and Freddie's multifamily volume accelerated throughout the quarter as the scorecard was finalized. Would you expect spreads to widen as their volume picks up throughout the year, or do you feel like the supply demand equation is fairly balanced?

The Fannie-Freddie deals are interesting because the P&I bonds for these deals actually got included, especially the Freddie bonds got included in the mortgage index, so you've seen a lot of out performance of those deals relative to non-agency deals this year because they are now in the index. So they are actually an interesting opportunity I think, but I think also that they tightened in a little too much relative to everything else.

I would expect though, again given the amount of cash in the system, I am hard pressed to see spreads widening too much from here. I think investors are finally starting to see that some of these levels are reaching nose bleed levels and we need to start to back off a little bit.

And as I mentioned in my previous comments, any type of widening like this we view as an opportunity to jump in.

Okay, that's helpful. Thank you. And then if we can just pull back for a second, it seems I think in the first quarter you touched on potential opportunities that may be more medium or long-term as Freddie and Fannie exit the residential mortgage system. Any thoughts on -- any further thoughts on how that's progressing in the Dynex strategy or thought process?

Yes, Jason, this is Byron. It's uncertain how that ultimately will -- in terms of the actual legislation around reform of -- housing finance reform will take place. However, here is what we do know for a fact, is that when the Treasury -- I'm sorry. When the Federal Reserve Bank seizes purchasing their monthly mortgages or large scale asset purchases and we still have a wind down of the Freddie and Fannie portfolio, in my 30-year career it will be the first time that a government agency has not dominated the trading of agency mortgage-backed securities.

So that means those assets as they are created over the next year, two, three, four, five will have to be housed on someone else's balance sheet and in our opinion it means that those assets will have to be priced to where private capital can earn a sufficient return to take that risk. So we view that long-term as one of the most simplistic business opportunities on the horizon. And so we do look forward to being able to take advantage of that as the world evolves in front of us. We -- trying to predict legislation around this is very difficult. Your firm may have more insight on that than we actually do.

If we have a wish list it would be that the FHFA would put more pressure on Fannie and Freddie to dispose of the risks that's on their balance sheet both interest rate risk and credit risk. I believe the capital markets are ready to be able to take more of that risk on in the private space.

So, from our perspective we look at the future in a positive sense. We don't get -- and one of the reasons we put those long-term charts in our presentation we're not getting gloomy just because there is conversation around maybe the Fed will reduce some of the liquidity that they've been providing to the system. We still believe that in the future, there are some great business opportunities both on the residential side of the book and on the commercial side of the book.

Thanks. Appreciate you taking the questions.

And our next question will come from Mike Widner of KBW. Please go ahead.

Yes, good morning, guys.

Good morning, Mike.

So I think you answered a lot of questions. Let me just -- one of the characterizations you made I think was that you're not necessarily cautious about the market or the asset opportunities but you're more diligent in your process.

But I certainly hear in your tone and this was true last quarter and I'm just still hearing it today is that your less than enthused I think about investment opportunities then you were when say spreads were at much wider levels; is that accurate? And are there places where you're still more enthused than others, and as you look forward to the market evolving places where you think there might be greater opportunities that may not be there today, but certainly look more promising?

So, Mike, I want to be real specific, I'm going to tie in what I said a second ago. Because 2011 was a year when a lot of people were cautious, spreads were really wide and we were really excited and we tried to back the truck up and put capital into the marketplace. So that was a risk environment and this is a risk environment today. So that's why I want to point out in terms of how we're very disciplined in this process.

Obviously when spreads are really, really wide, you'd love to really expand your balance sheet and when spreads are really, really tight, this is more in a theoretical sense, you'd like to reduce the balance sheet or slow down the process. One of the complicating factors is really all these issues that are at play globally and could change on us at any point in time.

Nonetheless, and as we have explained, we say the global environment is complex but there is also a great business opportunity. With this type low vol environment heavily being influenced by the central banks globally it is a great opportunity to generate net interest income and we don't want to miss that opportunity. What we don't want to do is make a foolish decision about the type of risk we take or taking too much risk at these type tight global risk premiums.

Does that give you a better impression of it?

Well, I think it does except you use the term "back up the truck." What I am hearing from you is yes, we love the net spread environment but it's certainly not a back up the truck kind of moment.

Exactly, exactly.

Yes, that's exactly correct, I love 2011. There was a point spreads were -- IOs were over 500 basis points and little Dynex Capital in Richmond, Virginia was cleaning up CMBS deals because most other investors had run to the sidelines. I would love for every other investor to run to the sidelines and allow us to do that again. That would be a dream scenario, right?

But here we are in 2014 spreads are at the opposite end of the spectrum, and yes, our antennas are higher, we can see lenders. With this amount of cash in the system it's a borrowers' market right now if you look at how loans are being made, and so lenders are loosening credit standards.

We want to keep our eyes on what lenders are doing to ensure that we are not the investor that is left holding the bag with a bad deal. So we look, we take a closer look at deals that are coming to the marketplace.

Yes, I see some deals that we have passed on when it looks, it's a little shaky in terms of the structures that are being brought to the market. So when spreads are this tight, our antennas are higher, we are more alert to looking for any type of anomalies that could create some problems over a long-term basis.

Yes. I guess another way of sort of thinking about it, is if we go back to 2006 or early 2007, it seemed at least to me at the time or us at the time that investors were willing to overlook a lot of risk or at least chronically underestimated risk and asset prices were relatively high as a result. And as you said 2009, 2011 is the opposite, everyone was running scared and everyone was sort of overestimating the risk or at least pricing implied that.

I mean today, it feels to me a lot more like 2007 than 2009, and I guess -- or 2006 than 2009. And spread opportunities were I suppose -- spread

opportunities are always good for a leverage lender to be honest with you. It's just a matter of how you feel about the risk profile and your view of risk relative to the market. And I still get the sense that you guys feel like the market is in many ways and in many places underestimating the risks relative to how you see them. And so you used all your words to describe that, but you don't want to go so far as sort of saying that it feels more like 2006 than 2009. But I guess is that right?

So, I would say yes, Mike. I think the biggest difference between 2006 and 2009 is that I think investors in 2006 were underestimating the risk and they got a lot of it massively wrong. The difference is you now have coordinated global central banking actions that are basically acting to squeeze volatility out of the system, which means that you have to question -- yes, things are tight, things look expensive, but these global banks have basically made it so that the amount of volatility in the system is now substantially lower and could potentially be low for a long time. That's what gives us pause, right. So I would love to sit here and say, guys, this really looks overpriced and we should be short the market. But I have -- I cannot do anything but respect the power of central banks.

And that's really what we think about and returns are still attractive on a relative basis, you can't ignore that either. There are pockets of value here that we're able to find either on the resi side and on the CMBS side where you say, okay, I am all right taking this risk return.

And, Mike, I am glad you brought this up because we put the 10-year chart in our presentation, so we're willing to talk about the last 10 years. So let's identify Dynex Capital or Smriti and I in that time period versus now, what makes a difference.

You could see the risk. You could see the risk in what was happening. And in the -- let's call between the 2002 through 2007 time period, and reason I go back 2002 is because I am on record as identified that subprime sector would go through a major correction as early as 2002, 2003. And unfortunately had I expressed an opinion at that time in the form of let's say shorting those sectors it would have been very painful for several years. If you read the book "The Big Short," you will see somebody in there who obviously shorted the sector very early on and it was very painful at certain points in time.

So there is an abnormality here which Smriti pointed which is the central bank activity. That is an extreme abnormality. It makes it very difficult to predict the future. So again let's compare back. If you go back to Dynex Capital 2006, 2007, Dynex was selling assets. If you now compare to -- and it was easier to predict where the markets were headed at that point in time. We can't predict the future, but we can run scenarios. And so the probability distribution on multiple scenarios, there are multiple options here in terms of how the markets may evolve over the next several years, and as such, that's why we're approaching and we used the word such as discipline.

So we agree with you that the risk is heightened at these type of risk premiums. But our behavior reflects our knowledge of the past and our experience in the past and trying to ensure that if this type of low vol environment is going to go on for the next two years, we want to be able to take advantage of it and generate solid net interest income for our shareholders. We however don't want to take excessive risk in this type of environment. And as such you can see that our balance sheet is lower today than a year ago, but we're still pretty aggressive about looking for pockets of opportunity to take advantage of the environment.

That certainly makes sense to me. I appreciate the color. And I guess my last thought on it is no one has been in this environment before with the central banks basically --

No, never.

-- trying to crush vol, but we don't have to look very far back, sometime spring of last year when all of a sudden we were not in the very low vol environment despite. So obviously I think you would agree and most people would agree it's a dangerous game when the Fed is manipulating everything. And so yes, it looks like vol will be low for a long time, but we might wake up on Monday and all of a sudden vol is back. That's the risk.

Yes, that's correct. And we expect, so we expect spikes in volatility and as such we built up the liquidity on the balance sheet and we're still paying a solid $0.25 dividend and that's where our mind is focused and we pay a solid dividend. We have built up liquidity over the last year, so we believe we can withstand spikes in volatility.

And then in the back of our mind we understand that with these type of abnormalities with the interconnectedness of the global financial system, we must be prepared for the unforeseen event and the uncertain event to evolve in front of us and then we must be very disciplined about our decisions in that process. And we want to make sure that our shareholders understand and feel very comfortable, look back over the history of the past financial collapses and understand, one, we are really, really experienced, skilled risk managers. And we are taking our time and we are being very diligent about how we make decisions in this environment.

As always, appreciate the comments, guys.

Thanks, Mike.

(Operator Instructions). And at this time in showing no questions in the queue, I would like to conclude the question-and-answer session and turn the conference over to Byron Boston for any closing remarks.

Once again, we want to thank you very much for joining us today. And we look forward to you joining us for our third quarter conference call in about three months or so. Thank you again.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.