0000930661-95-000268.txt : 19950815 0000930661-95-000268.hdr.sgml : 19950815 ACCESSION NUMBER: 0000930661-95-000268 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPSTEAD MORTGAGE CORP CENTRAL INDEX KEY: 0000766701 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 752027937 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08896 FILM NUMBER: 95562347 BUSINESS ADDRESS: STREET 1: 2711 NORTH HASKELL AVE STREET 2: STE 900 CITY: DALLAS STATE: TX ZIP: 75204 BUSINESS PHONE: 2148742323 MAIL ADDRESS: STREET 1: 2001 BRYAN TOWER STREET 2: STE 3300 CITY: DALLAS STATE: TX ZIP: 75201 FORMER COMPANY: FORMER CONFORMED NAME: LOMAS MORTGAGE CORP DATE OF NAME CHANGE: 19891105 10-Q 1 FORM 10-Q (QE 6-30-95) ============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ----- EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 1995 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ----- EXCHANGE ACT OF 1934 For the transition period from to ------------ ------------ Commission File Number: 1-8996 CAPSTEAD MORTGAGE CORPORATION (Exact name of Registrant as specified in its Charter) Maryland 75-2027937 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2001 Bryan Tower, Dallas, Texas 75201 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (214) 999-2323 The Registrant meets the conditions set forth in General Instruction H(1)(a) and (b) for Form 10-Q and is therefore filing this Form under the reduced disclosure format. Indicate by check mark whether the Registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- ------ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date. Common Stock ($0.01 par value) 15,380,363 as of August 8, 1995 CAPSTEAD MORTGAGE CORPORATION FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1995 INDEX PART I. -- FINANCIAL INFORMATION
Page ---- ITEM 1. Financial Statements Consolidated Balance Sheet -- June 30, 1995 and December 31, 1994.. 3 Consolidated Statement of Income -- Quarter and Six Months Ended June 30, 1995 and 1994........................................... 4 Consolidated Statement of Cash Flows -- Six Months Ended June 30, 1995 and 1994........................................... 5 Notes to Consolidated Financial Statements........................ 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 11 PART II. -- OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K........................... 18 SIGNATURES......................................................... 19
-2- PART I. -- FINANCIAL INFORMATION CAPSTEAD MORTGAGE CORPORATION CONSOLIDATED BALANCE SHEET (In thousands) ITEM 1. FINANCIAL STATEMENTS
June 30, 1995 December 31, 1994 -------------- ------------------ (Unaudited) Assets Mortgage securities collateral $5,091,361 $5,270,103 Mortgage investments 3,502,956 3,305,984 ---------- ---------- 8,594,317 8,576,087 Less allowance for possible losses (5,900) (7,354) ---------- ---------- 8,588,417 8,568,733 Cash and cash equivalents 29,889 21,741 Prepaids, receivables and other 77,114 70,415 Mortgage servicing rights 339,504 282,969 ---------- ---------- $9,034,924 $8,943,858 ========== ========== Liabilities Collateralized mortgage securities $4,828,950 $5,102,145 Short-term borrowings 3,506,836 3,190,582 Accounts payable and accrued expenses 16,132 11,568 Mortgage servicing rights acquisitions payable 40,177 75,888 ---------- ---------- 8,392,095 8,380,183 ---------- ---------- Stockholders' Equity Preferred stock - $0.10 par value; 100,000 shares authorized: $1.60 Cumulative Preferred Stock, Series A, 519 and 623 shares issued and outstanding ($8,512 aggregate liquidation preference) 8,326 8,720 $1.26 Cumulative Convertible Preferred Stock, Series B, 30,459 and 30,277 shares issued and outstanding ($346,623 aggregate liquidation preference) 327,276 324,779 Common stock - $0.01 par value; 100,000 shares authorized; 15,334 and 15,304 shares issued and outstanding 153 153 Paid-in capital 311,269 310,766 Undistributed income (deficit) (2,227) (2,228) Unrealized loss on debt and equity securities (1,968) (78,515) ---------- ---------- 642,829 563,675 ---------- ---------- $9,034,924 $8,943,858 ========== ==========
See accompanying notes to consolidated financial statements. -3- CAPSTEAD MORTGAGE CORPORATION CONSOLIDATED STATEMENT OF INCOME (Unaudited) (In thousands, except per share amounts)
Quarter Ended Six Months Ended June 30 June 30 ------------------------- ----------------------- 1995 1994 1995 1994 --------- --------- --------- -------- Interest income: Mortgage securities collateral $ 97,054 $ 90,667 $195,406 $172,136 Mortgage investments 55,926 45,152 109,673 89,421 -------- -------- -------- -------- Total interest income 152,980 135,819 305,079 261,557 -------- -------- -------- -------- Interest and related expenses: Collateralized mortgage securities 91,608 85,941 185,793 163,019 Short-term borrowings 50,541 28,494 98,755 49,628 Mortgage insurance and other 2,943 3,292 5,871 7,249 Provision for possible losses 600 500 1,200 1,000 -------- -------- -------- -------- Total interest and related expenses 145,692 118,227 291,619 220,896 -------- -------- -------- -------- Net margin on mortgage assets 7,288 17,592 13,460 40,661 -------- -------- -------- -------- Mortgage servicing revenues: Servicing fees 16,147 5,333 30,563 7,669 Other 4,691 423 7,465 544 -------- -------- -------- -------- Total mortgage servicing revenues 20,838 5,756 38,028 8,213 -------- -------- -------- -------- Mortgage servicing expenses: Salaries and related costs 1,333 664 2,609 955 General, administrative and other 3,466 354 5,658 602 Amortization of mortgage servicing rights 5,934 423 10,185 1,159 -------- -------- -------- -------- Total mortgage servicing expenses 10,733 1,441 18,452 2,716 -------- -------- -------- -------- Net margin on mortgage servicing operations 10,105 4,315 19,576 5,497 -------- -------- -------- -------- Other revenues: Gain on sales 1,832 160 3,132 2,157 CMO administration 861 1,193 1,844 2,027 Other 755 371 1,073 600 -------- -------- -------- -------- Total other revenues 3,448 1,724 6,049 4,784 -------- -------- -------- -------- Other expenses: Salaries and related costs 1,718 1,954 3,280 4,374 General and administrative 1,384 1,647 2,700 3,069 -------- -------- -------- -------- Total other expenses 3,102 3,601 5,980 7,443 -------- -------- -------- -------- Net income $ 17,739 $ 20,030 $ 33,105 $ 43,499 ======== ======== ======== ======== Net income $ 17,739 $ 20,030 $ 33,105 $ 43,499 Less cash dividends on preferred stock (9,823) (9,706) (19,621) (19,386) -------- -------- -------- -------- Net income available to common stockholders $ 7,916 $ 10,324 $ 13,484 $ 24,113 ======== ======== ======== ======== Net income per share: Primary $0.52 $0.68 $0.88 $1.58 Fully diluted 0.51 0.67 0.88 1.55 Cash dividends paid per share: Common $0.52 $0.83 $0.88 $1.66 Series A preferred 0.40 0.40 0.80 0.80 Series B preferred 0.31 0.31 0.63 0.63
See accompanying notes to consolidated financial statements. -4- CAPSTEAD MORTGAGE CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (In thousands)
Six Months Ended June 30 ---------------------------- 1995 1994 --------- ----------- Operating activities: Net income $ 33,105 $ 43,499 Noncash items Amortization of discount and premium 6,521 2,503 Amortization of mortgage servicing rights 10,185 1,159 Depreciation and other amortization 1,292 803 Provision for possible losses 1,200 1,000 Net change in prepaids, receivables, other assets, accounts payable and accrued expenses 2,390 (22,582) Net gain from investing activities (3,132) (2,157) --------- ----------- Net cash provided by operating activities 51,561 24,225 --------- ----------- Investing activities: Mortgage securities collateral: Principal collections on collateral 211,396 859,829 Decrease (increase) in accrued interest receivable 2,060 (3,934) Decrease in short-term investments 11,212 145,653 Purchases of mortgage loans (61,270) (1,623,486) Purchases of agency securities (479,059) (1,197,053) Purchases of equity securities - (17,808) Purchases of other mortgage securities (91,634) - Purchases of mortgage servicing rights (78,838) (104,927) Principal collections on mortgage investments 157,487 161,962 Purchases of hedge instruments (13,492) - Proceeds from sales of hedge instruments 24,012 - Proceeds from sales of mortgage assets 301,541 22,808 --------- ----------- Net cash used by investing activities (16,585) (1,756,956) --------- ----------- Financing activities: Collateralized mortgage securities: Issuance of securities - 1,846,957 Principal payments on securities (278,268) (1,019,831) Increase in accrued interest payable 1,395 1,351 Capital stock transactions 2,606 3,341 Dividends paid (33,104) (44,678) (Decrease) increase in mortgage servicing acquisitions payable (35,711) 36,394 Increase in short-term borrowings 316,254 840,761 --------- ----------- Net cash provided by financing activities (26,828) 1,664,295 --------- ----------- Net increase (decrease) in cash and cash equivalents 8,148 (68,436) Cash and cash equivalents at beginning of period 21,741 87,760 --------- ----------- Cash and cash equivalents at end of period $ 29,889 $ 19,324 ========= =========== Noncash investing and financing activities: Charges to allowance for possible losses $ 2,654 $ 1,095 Transfers from mortgage investments to mortgage securities collateral $- $ 1,898,253
See accompanying notes to consolidated financial statements. -5- CAPSTEAD MORTGAGE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1995 (Unaudited) NOTE A -- BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and six months ended June 30, 1995 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 1995. For further information refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1994. Certain amounts for prior periods have been reclassified to conform to the 1995 presentation. NOTE B -- MORTGAGE INVESTMENTS Mortgage investments and the related average effective interest rates (calculated excluding unrealized gains and losses) during the periods indicated were as follows (dollars in thousands):
Quarter Six Months Ended Ended As of June 30 June 30 June 30 ---------------------- -------------- -------------- 1995 1994 1995 1994 1995 1994 ---------- ---------- ----- ----- ----- ----- Mortgage loans held for sale $ 5,288 $ - 7.59% -% 8.01% -% Mortgage loan portfolio: Fixed-rate mortgage loans 4,295 396,311 9.13 6.86 8.00 6.78 Medium-term mortgage loans 264 8,127 6.05 6.62 7.90 6.55 Adjustable-rate mortgage loans 2,039 142,864 6.08 4.57 6.11 4.53 AAA-rated private mortgage pass-through securities portfolio: Fixed-rate mortgage securities 1,931 308,683 8.77 6.77 8.71 6.77 Medium-term mortgage securities 456,092 477,203 6.99 6.86 6.98 6.87 Adjustable-rate mortgage securities 860,800 677,834 6.80 5.08 6.65 5.13 Agency securities portfolio: Fixed-rate mortgage securities 500,642 504,650 6.32 6.44 6.34 6.45 Adjustable-rate mortgage securities 1,337,863 1,064,127 6.11 4.55 5.90 4.55 Notes 333,742 - 6.95 - 6.93 - ---------- ---------- $3,502,956 $3,579,799 ========== ==========
-6- The Company classifies its mortgage investments by term and interest rate characteristics of the underlying mortgage loans. Fixed-rate mortgage investments (i) have fixed rates of interest for their entire terms, or (ii) have an initial fixed rate period of ten years after origination and then adjust annually based on a specified margin over 1-year United States Treasury Securities ("1-year Treasuries"). Medium-term mortgage investments (i) have an initial fixed-rate period of three or five years after origination and then adjust annually based on a specified margin over 1-year Treasuries or (ii) have initial interest rates that adjust one time, approximately five years following origination of the mortgage loan, based on a specified margin over the Federal National Mortgage Association ("FNMA") yields for 30-year fixed-rate commitments at the time of adjustment. Adjustable-rate mortgage investments either (i) adjust semiannually based on a specified margin over the 6-month London Interbank Offered Rate ("LIBOR"), or (ii) adjust annually based on a specified margin over 1-year Treasuries. Fixed-rate and adjustable-rate mortgage agency securities consist of mortgage-backed securities issued by government-sponsored entities, either the Federal Home Loan Mortgage Corporation ("FHLMC"), FNMA or the Government National Mortgage Association ("GNMA"). Agency notes are unsecured, fixed-rate notes issued by FNMA, FHLMC, or the Federal Home Loan Bank Board ("FHLBB") and mature in 1997. Some agency notes may be redeemed earlier by FNMA, FHLMC or FHLBB. At June 30, 1995 the AAA-rated private mortgage pass-through securities ("Mortgage Pass-Throughs") and the agency securities were pledged to secure short-term borrowings. NOTE C -- NET INTEREST INCOME ANALYSIS The following tables summarize interest income and interest expense and average effective interest rates for the periods indicated (dollars in thousands):
Quarter Ended June 30 -------------------------------------- 1995 1994 ------------------ ------------------ Average Average Amount Rate Amount Rate -------- -------- -------- -------- Interest income: Mortgage securities collateral $ 97,054 7.61% $ 90,667 7.57% Mortgage investments 55,926 6.54 45,152 5.93 -------- -------- Total interest income 152,980 135,819 -------- -------- Interest expense: Collateralized mortgage securities 91,608 7.59 85,941 7.31 Short-term borrowings 50,541 5.89 28,494 4.26 -------- -------- Total interest expense 142,149 114,435 -------- -------- Net interest $ 10,831 $ 21,384 ======== ======== Six Months Ended June 30 ------------------------------------- 1995 1994 ------------------- ---------------- Average Average Amount Rate Amount Rate -------- -------- -------- -------- Interest income: Mortgage securities collateral $195,406 7.59% $172,136 7.71% Mortgage investments 109,673 6.43 89,421 6.14 -------- -------- Total interest income 305,079 261,557 -------- -------- Interest expense: Collateralized mortgage securities 185,793 7.58 163,019 7.08 Short-term borrowings 98,755 5.92 49,628 3.96 -------- -------- Total interest expense 284,548 212,647 -------- -------- Net interest $ 20,531 $ 48,910 ======== ========
-7- The following tables summarize the amount of change in interest income and interest expense due to changes in interest rates versus changes in volume for the quarter and six months ended June 30, 1995 compared to the same periods in 1994 (in thousands):
Quarter Ended June 30, 1995 -------------------------------- Rate* Volume* Total ---------- -------- ---------- Interest income: Mortgage securities collateral $ 481 $ 5,906 $ 6,387 Mortgage investments 4,908 5,866 10,774 -------- ------- -------- Total interest income 5,389 11,772 17,161 -------- ------- -------- Interest expense: Collateralized mortgage securities 3,319 2,348 5,667 Short-term borrowings 12,760 9,287 22,047 -------- ------- -------- Total interest expense 16,079 11,635 27,714 -------- ------- -------- Net interest $(10,690) $ 137 $(10,553) ======== ======= ======== Six Months Ended June 30, 1995 ------------------------------- Rate* Volume* Total -------- ------- --------- Interest income: Mortgage securities collateral $ (2,762) $26,032 $ 23,270 Mortgage investments 4,476 15,776 20,252 -------- ------- -------- Total interest income 1,714 41,808 43,522 -------- ------- -------- Interest expense: Collateralized mortgage securities 11,752 11,022 22,774 Short-term borrowings 29,547 19,580 49,127 -------- ------- -------- Total interest expense 41,299 30,602 71,901 -------- ------- -------- Net interest $(39,585) $11,206 $(28,379) ======== ======= ========
* The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. NOTE D -- DISCLOSURES REGARDING FAIR VALUES OF DEBT AND EQUITY SECURITIES The estimated fair values of debt and equity securities have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop these estimates. In addition, fair values fluctuate on a daily basis. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair values. -8- The following tables summarize available-for-sale and held-to-maturity debt and equity securities as of June 30, 1995 and December 31, 1994 (in thousands):
June 30, 1995: Available-for-Sale Securities ---------------------------------------------- Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- Mortgage Pass-Throughs: Fixed-rate mortgage securities $ 1,889 $ 42 $ - $ 1,931 Medium-term mortgage securities* 29,398 111 8,625 20,884 Adjustable-rate mortgage securities 858,658 2,179 37 860,800 Adjustable-rate mortgage agency securities 1,333,387 5,518 1,042 1,337,863 Other mortgage securities 93,771 1,171 1,285 93,657 ---------- ------- ------- ---------- $2,317,103 $ 9,021 $10,989 $2,315,135 ========== ======= ======= ========== Held-to-Maturity Securities ---------------------------------------------- Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- Medium-term Mortgage Pass- Throughs* $ 435,208 $ 7,591 $ - $ 442,799 Agency securities: Fixed-rate mortgage securities 500,642 - 21,106 479,536 Notes 333,742 947 - 334,689 Mortgage securities collateral 4,997,704 4,042 58,609 4,943,137 ---------- ------- ------- ---------- $6,267,296 $12,580 $79,715 $6,200,161 ========== ======= ======= ========== December 31, 1994: Available-for-Sale Securities --------------------------------------------- Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- Debt securities: Mortgage Pass-Throughs: Fixed-rate mortgage securities $ 427 $ - $ 18 $ 409 Medium-term mortgage securities* 9,054 - 9,054 - Adjustable-rate mortgage securities 780,224 - 24,601 755,623 Adjustable-rate mortgage agency securities 1,088,252 - 45,391 1,042,861 Other mortgage securities 10,369 1,734 810 11,293 ---------- ------- ------- ---------- Total debt securities 1,888,326 1,734 79,874 1,810,186 Equity securities 1,113 - 375 738 ---------- ------- ------- ---------- $1,889,439 $ 1,734 $80,249 $1,810,924 ========== ======= ======= ==========
-9-
Held-to-Maturity Securities -------------------------------------------- Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- -------- ---------- Medium-term Mortgage Pass-Throughs* $ 459,874 $ - $ 12,342 $ 447,532 Agency securities: Fixed-rate mortgage securities 504,023 - 62,586 441,437 Notes 333,687 - 9,690 323,997 Mortgage securities collateral 5,258,810 7,159 61,700 5,204,269 ---------- ---------- -------- ---------- $6,556,394 $7,159 $146,318 $6,417,235 ========== ========== ======== ==========
* Medium-term Mortgage Pass-Throughs held-to-maturity were held available-for- sale until the third quarter of 1994. An unrealized loss at the transfer date remains a component of the recorded mark to market for available-for-sale securities and is being amortized over the remaining life of these investments. At June 30, 1995 the unamortized balance of this unrealized loss was $8.6 million. The fair value of debt and equity securities was estimated using either (i) quoted market prices when available, including quotes made by lenders in connection with designating collateral for repurchase arrangements, (ii) offer prices by the Company for similar mortgage assets, or (iii) expected securitization results. Mortgage securities collateral has been permanently financed through the issuance of collateralized mortgage securities and, as a result, the exposure to changes in the fair value of the underlying assets (and liabilities) is limited. For this reason, the table above presents the fair value of the net projected cash flows of the mortgage securities collateral after payments on the related collateralized mortgage securities using market discount rates and prepayment assumptions. The maturity of the Company's mortgage assets is directly affected by the rate of principal prepayments by mortgagors and redemptions by issuers, including the Company, of remaining debt securities outstanding (referred to as "clean-up calls"). As a result, the actual maturity of the Company's mortgage assets usually occurs well in advance of stated maturities. The Company anticipates that through prepayments and exercising clean-up calls, a significant portion of its higher cost collateralized mortgage securities will be retired within the next several years and a residual amount of high coupon mortgage securities collateral will be released and can be sold or continued to be held as investments. Included in mortgage securities collateral is $28.7 million and $4.6 million of collateral released from the related indentures at June 30, 1995 and December 31, 1994, respectively. During the first quarter of 1995, $35.9 million of mortgage securities collateral previously released from the related indentures pursuant to clean-up calls was sold at gross realized gains of $966,000. No such sales occurred in the quarter ended June 30, 1995. Similar sales aggregating $20.7 million, which resulted in gross realized gains of $2,159,000, occurred during the six months ended June 30, 1994. During the quarter ended June 30, 1995, debt and equity securities held available for sale aggregating $171.3 million were sold for gains of $1,688,000. No such sales of available-for-sale securities occurred during the first quarter of 1995 or the six months ended June 30, 1994. The net unrealized losses on available-for-sale securities included as a separate component of stockholders' equity declined by $24.8 million and $76.5 million during the three and six months ended June 30, 1995, respectively. -10- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition ------------------- Purchase and commitment volumes have fallen significantly from previous year levels due to the increase in mortgage interest rates in 1994 and corresponding declines in mortgage loan originations. Although mortgage interest rates have declined considerably since early February 1995, origination levels have not increased appreciably. During the quarter ended June 30, 1995, the Company purchased 93 mortgage loans totaling $25 million. During the six months ended June 30, 1995, 226 mortgage loans were purchased totaling $60 million. This compares to purchases of 2,008 mortgage loans totaling $554 million, and 5,640 mortgage loans totaling $1.6 billion during the same periods in 1994. To meet the challenges of a smaller mortgage loan origination market in 1995, the Company has implemented a strategy of selling individual mortgage loans to private investors shortly after the commitment to purchase, instead of accumulating $100 million or more of similar mortgage loans for an efficient securitization (typically a publicly offered collateralized mortgage obligation or "CMO"). This strategy allows the Company to offer more competitive pricing and significantly reduces market risk associated with accumulating and securitizing jumbo mortgage loans. During the quarter and six months ended June 30, 1995, $28 million and $93 million of mortgage loans were sold, respectively. These sales, low purchase volume, and the first quarter 1995 formation of $160 million of AAA-rated private mortgage pass-through securities ("Mortgage Pass- Throughs") has substantially reduced holdings of mortgage loans. Of the $160 million of Mortgage Pass-Throughs formed during the first quarter of 1995, $137 million were backed by adjustable-rate mortgage ("ARM") loans. No additional Mortgage Pass-Throughs were formed during the second quarter. In addition to reducing exposure to fraud and credit risk, a primary benefit of pooling mortgage loans into Mortgage Pass-Throughs is the improved liquidity of AAA-rated securities over that of individual loans. As a result, when securing short-term borrowings, the Company is able to negotiate more favorable terms. The Company plans to continue to retain a large portfolio of primarily ARM Mortgage Pass-Throughs. During the quarter and six months ended June 30, 1995, the Company acquired $244 million and $344 million of ARM agency securities. These acquisitions replace closed and pending asset sales and run-off of existing portfolio. Sales during the second quarter included $38 million of ARM agency securities and another $203 million were committed for sale in July. After considering these acquisitions and sales, the Company's position in ARM investments has remained largely unchanged from the $2 billion level held at the beginning of the second quarter. The Company also added $100 million and $132 million of fixed-rate unsecured agency notes to its available for sale portfolio during the quarter and six months ended June 30, 1995, all of which were sold prior to quarter-end. A strong bond market rally in May and June made these sales advantageous. During the quarter and six months ended June 30, 1995, the Company did not issue any CMOs; however, the Company did acquire $16 million and $91 million of FNMA trust interest-only securities, respectively, thus increasing the CMO investment portfolio to $262 million at June 30, 1995, compared to a portfolio of $168 million at December 31, 1994 and $147 million at June 30, 1994. -11- Derivative financial instruments, specifically 10-year U.S. Treasury interest rate floors, were acquired as a partial hedge against prepayment exposure (see "Effects of Interest Rate Changes"). These hedge positions were closed out in June at gains aggregating $4,958,000 which were deferred. The mortgage servicing portfolio (excluding pending transfers) increased during the quarter to $20.6 billion with a weighted average interest rate of 7.30% and earning an average annual service fee excluding ancillary revenue and earnings on escrows (the "Average Service Fee") of 30.70 basis points. The June 30, 1995 balance of mortgage servicing rights related to this portfolio was $290.8 million (140.91 basis points, or a 4.59 multiple of the Average Service Fee). Derivative financial instruments, specifically 10-year U.S. Treasury interest rate floors and 3-month London Interbank Offered Rate ("LIBOR") interest rate floors, were acquired as a partial hedge against prepayment exposure (see "Effects of Interest Rate Changes"). Certain of these hedge positions were closed out in June at gains aggregating $12,118,000, which were deferred. Open hedge positions at June 30, 1995 consist of $700 million notional amount of LIBOR floors which carried a $4.1 million unrealized gain at quarter-end. Annualized portfolio run-off, consisting of prepayments and scheduled payments on mortgage loans serviced, was 8.35% for the quarter, up from 6.15% in the first quarter and is expected to be higher in the third quarter due to lower prevailing interest rates and seasonal factors. Pending transfers as of quarter- end totaled another $3.3 billion of mortgage servicing with a weighted average interest rate of 7.48% and earning an Average Service Fee of 27.48 basis points. At an average cost of 152.51 basis points, these servicing assets are being acquired at a 5.55 multiple of the Average Service Fee. By early October, the mortgage servicing portfolio is expected to be over $23.0 billion. The Company currently plans to grow the mortgage servicing portfolio to more than $25 billion by the end of 1995. The following table summarizes the Company's utilization of capital as of June 30, 1995 (in thousands):
Capital Assets Borrowings Employed ---------- -------------- --------- Mortgage loans held for sale and in portfolio $ 11,886 $ - $ 11,886 Mortgage Pass-Through portfolio: Fixed-rate mortgage securities 1,931 1,858 73 Medium-term mortgage securities 456,092 444,725 11,367 Adjustable-rate mortgage securities 860,800 832,125 28,675 Agency securities portfolio: Fixed-rate mortgage securities 500,642 478,166 22,476 Adjustable-rate mortgage securities 1,337,863 1,299,891 37,972 Notes 333,742 339,501 (5,759) CMO investment portfolio 5,091,361 4,929,520(a) 161,841 Mortgage servicing rights 339,504 50,177(b) 289,327 ---------- ---------- -------- $8,933,821 $8,375,963 557,858 ========== ========== Other assets, net of other liabilities 84,971 -------- Total stockholders' equity $642,829 ========
(a) Includes approximately $100.6 million of related short-term borrowings. (b) Represents amounts owed under contracts for bulk purchases of mortgage servicing rights and $10 million drawn on a $200 million line of credit secured by existing mortgage servicing rights. -12- A significant impact of the rise in mortgage interest rates in 1994 was a corresponding decline in value of most of the Company's mortgage assets (excluding servicing rights). The decline in intermediate- and long-term interest rates since early February 1995 has restored much of the value to these assets. The effect is most apparent on the $2.3 billion of mortgage assets and equity securities held-available-for-sale at June 30, 1995 where the unrealized loss declined to only $2.0 million compared to $78.5 million at December 31, 1994. Changes in value and ongoing market value risk associated with remaining mortgage securities will not have a direct impact on the earnings of the Company as these assets are classified as held-to-maturity and can only be sold under very limited circumstances. Results of Operations --------------------- Comparative net operating results (interest income or fee revenues, net of related interest expense or direct operating costs), by source, were as follows (in thousands, except percentages and per share amounts):
Quarter Ended Six Months Ended June 30 June 30 ------------------ ------------------ 1995 1994 1995 1994 -------- -------- -------- -------- Mortgage loans $ 176 $ 6,904 $ 891 $20,474 Mortgage Pass-Throughs 1,487 4,270 3,012 9,048 Agency securities 2,571 4,440 5,496 8,329 CMO investments 3,654 2,478 5,261 3,810 Mortgage servicing 10,105 4,315 19,575 5,497 Gain on sales 1,832 160 3,132 2,157 CMO administration 861 1,193 1,844 2,027 Other income 755 371 1,074 600 ------- ------- ------- ------- Contribution to income 21,441 24,131 40,285 51,942 General and administrative expenses (3,102) (3,601) (5,980) (7,443) Provision for possible losses (600) (500) (1,200) (1,000) ------- ------- ------- ------- Net income $17,739 $20,030 $33,105 $43,499 ======= ======= ======= ======= Net income per share: Primary $ 0.52 $ 0.68 $ 0.88 $ 1.58 Fully diluted 0.51 0.67 0.88 1.55 Return on average stockholders' equity 10.98% 12.45% 10.26% 13.51%
Operating results for the quarter and six months ended June 30, 1995 declined 11.4% and 23.9% from those achieved in the same periods of 1994. Results were significantly affected by a series of moves by the Federal Reserve beginning in February 1994 raising short-term interest rates 3 percentage points. These increases resulted in corresponding increases in the Company's borrowing costs which had the effect of substantially reducing net interest spreads on mortgage investments. However, second quarter results improved considerably from the net income of 36 cents per common share in the first quarter of 1995 as for the first time in more than a year the Federal Reserve did not increase short-term rates in a three-month period. Since February 1995, intermediate- and long-term interest rates have declined considerably in response to a spate of economic indicators suggesting a slowing of the U.S. economy. While this significant decrease in rates had little effect on borrowing costs in the second quarter, the Federal Reserve did reduce short- term interest rates 0.25 of 1 percent in early July. This reduction will reduce borrowing costs in the third quarter although the -13- benefit may be partially offset by increased amortization of mortgage servicing rights prompted by higher prepayments of mortgage loans. Any further short-term interest rate cuts by the Federal Reserve will serve to improve already widening net interest spreads on mortgage investments. The net interest spread earned from mortgage loans contributed significantly less to net operating results than in 1994 due primarily to significantly lower average holdings of mortgage loans during 1995. Average holdings for the quarter and six months ended June 30, 1995 were $11 million and $83 million, respectively, compared to the $820 million and $1.1 billion held during the same periods in 1994. Lower mortgage loan purchase volume, particularly in the latter part of 1994 and in 1995, along with 1994 CMO issuances, the formation of Mortgage Pass-Throughs and $93 million of sales in 1995 have substantially reduced holdings of mortgage loans. This reflects the Company's current position of significantly reducing market risk associated with aggregating and securitizing jumbo mortgage loans (see the discussion above under "Financial Condition"). Mortgage Pass-Throughs contributed less to net operating results compared to the same periods in 1994 primarily due to higher borrowing costs offset somewhat by higher yields and higher average portfolios outstanding. Borrowing costs for this portfolio averaged 6.25% and 6.23% for the quarter and six months ended June 30, 1995, respectively, compared to 4.33% and 3.98% for the same periods in 1994. Mortgage Pass-Through yields were higher at 6.87% and 6.77% for the quarter and six months ended June 30, 1995, respectively, compared to 5.94% and 5.97% for the same periods in 1994, due primarily to the rise in ARM Mortgage Pass-Through yields as the underlying ARM loans reset periodically (see "Effects of Interest Rate Changes"). The average portfolio outstanding was $1.3 billion for both the quarter and six months ended June 30, 1995, compared to $1.1 billion and $1.0 billion for the same periods in 1994. The increases are the result of the formation of nearly $1 billion of Mortgage Pass-Throughs since April 1, 1994, offset by portfolio run-off and a $350 million CMO issuance late in 1994 that was secured largely by fixed-rate Mortgage Pass-Throughs. Agency securities contributed less to net operating results compared to the same periods in 1994 because of substantially higher borrowing costs and despite sizable increases in average portfolio outstanding and higher agency security yields. Borrowing costs were 5.95% and 5.88% in the quarter and six months ended June 30, 1995 compared to 3.98% and 3.68% in the same periods in 1994. The average agency securities portfolio outstanding was over $2.0 billion for the quarter and six months ended June 30, 1995, compared to $1.1 billion and $775 million for the same periods in 1994. Agency security yields were 6.32% and 6.20% in the quarter and six months ended June 30, 1995 compared to 5.42% and 5.73% in the same periods in 1994. The increase in average portfolio outstanding was the result of the acquisition of $1.4 billion of ARM securities and $466 million of fixed-rate unsecured agency notes since April 1, 1994. Higher yields reflect investments made mid-1994 in newly issued ARM securities that had not yet reset to a fully-indexed rate (either the 1-year treasury rate or 6-month LIBOR, i.e. "teaser-rate ARM securities"). These teaser-rate ARM securities produced an average yield of 5.95% during the quarter, 10 basis points less than related borrowing costs. This negative spread reflects the rapid rise in short-term interest rates late in 1994 and early 1995, well in excess of upward adjustments in the interest rates on ARM securities. Yields on these securities improved 49 basis points during the current quarter and 99 basis points year-to-date and are expected to continue to improve in future quarters (see "Effects of Interest Rate Changes"). -14- CMO investments contributed more to net operating results during the quarter and six months ended June 30, 1995, than in the same periods in 1994 primarily due to the additional investment in FNMA trust interest-only securities during 1995. Additionally, prepayments on mortgage securities collateral were still relatively high in the first quarter of 1994 due to refinancing activity. During the quarter and six months ended June 30, 1995, the Company received principal collections on mortgage securities collateral totaling $128.4 million and $211.4 million, respectively, compared to $282.1 million and $859.8 million of run-off in the same periods in 1994. Lower levels of prepayments have the effect of lowering amortization of bond discounts and improving operating results. Improved mortgage servicing results reflect growth in this operation. The first quarter of 1994 was the first profitable quarter for mortgage servicing since commencing operations in March 1993. Revenues have increased to $20.8 million and $38.0 million for the quarter and six months ended June 30, 1995, respectively, compared to approximately $5.8 million and $8.2 million during the same periods in 1994. Direct operating costs have also increased, but not to the same extent as revenues, which is reflective of efficiencies being gained in the servicing process as the servicing portfolio continues to grow. Amortization of servicing assets amounted to $5.9 million during the current quarter. During the quarter and six months ended June 30, 1995, the Company sold $198.8 million and $298.4 million, respectively, of mortgage assets consisting of agency securities, mortgage loans and mortgage securities collateral previously released from CMOs pursuant to "clean-up calls." General and administrative expenses were lower for the second quarter of 1995 compared to the same period in 1994 primarily due to lower bonus and incentive compensation accruals and additional allocations of costs to the mortgage servicing operation. Liquidity and Capital Resources ------------------------------- The Company's primary sources of funds include monthly principal and interest payments on mortgage loans and mortgage securities, short-term borrowings, excess cash flows on CMO investments, proceeds from securitizations and sales of mortgage assets, servicing fees and other revenue from its mortgage servicing portfolio, and equity offerings when available. The Company currently believes that these funds are sufficient for the acquisition of additional mortgage loans and other mortgage assets, repayments on short-term borrowings, growth of the mortgage servicing portfolio and the payment of cash dividends as required for Capstead's continued qualification as a Real Estate Investment Trust ("REIT"). It is the Company's policy to remain strongly capitalized and conservatively leveraged. During the first quarter, the Company began selling its mortgage loan acquisitions directly to private investors in increments of up to $10 million rather than accumulating the $100 million or more in mortgage loans necessary to efficiently issue CMOs. Additionally, the Company may, from time to time, sell a portion of its investments in other mortgage assets classified as available- for-sale. Such sales may be accomplished by issuing publicly-offered, multi- class Mortgage Pass-Through certificates ("MPCs"). This sale activity may increase quarterly income volatility because of the recognition of transactional gains or losses. Sales in 1995 were related to reducing holdings of mortgage loans and collateral released from CMOs pursuant to clean-up calls and the sale of certain agency securities. -15- Short-term borrowings are primarily made under repurchase arrangements. The Company has uncommitted repurchase facilities with investment banking firms to finance mortgage loan holdings and the Mortgage Pass-Through portfolio, subject to certain conditions. Interest rates on borrowings under these facilities are based on overnight to 30-day LIBOR rates. The Company also enters into repurchase and dollar repurchase arrangements with investment banking firms to whom the Company pledges agency securities and other mortgage assets as collateral. The terms and conditions of these arrangements, including interest rates, are negotiated on a transaction-by-transaction basis. Other short-term financing arrangements that the Company may use include entering into repurchase transactions prior to the issuance of CMOs or MPCs whereby the Company may pledge the mortgage assets that are expected to secure an issuance as collateral for a repurchase transaction with the managing underwriter of the related issuance. At June 30, 1995 the Company had available a $200 million line of credit with an investment banking firm to be secured by servicing assets, $120 million of which is committed. Advances have separate maturities and rates of interest with interest due monthly. Interest rates on advances under this facility are based on LIBOR rates related to the term of the advance. EFFECTS OF INTEREST RATE CHANGES Changes in interest rates may impact the Company's earnings in various ways. The Company's earnings depend, in part, on the difference between the interest received on mortgage investments and the interest paid on related short-term borrowings (primarily repurchase arrangements). The resulting spread may be reduced in a rising interest rate environment. For ARM loans the risk of rising short-term interest rates is offset to some extent by increases in the rates of interest earned on these loans. Since ARM loans generally limit the amount of such increase during any single interest rate adjustment period and over the life of the loan, the interest rates on the repurchase arrangements can rise to levels that may exceed the interest rates on the underlying ARM loans resulting in a negative interest spread. This occurred in late 1994 on many of the Company's ARM investments. Now that interest rates have stabilized, these spreads have begun to recover. With the 0.25 of 1 percent reduction in short- term interest rates by the Federal Reserve in early July 1995, further improvement in spreads is expected. Rising interest rates may not only reduce interest spreads, but also the volume of mortgage loan purchases as mortgage loan origination activity slows, which may result in lower average mortgage loan holdings during these periods. In addition, earnings are impacted if long-term interest rates change during the period after the Company has committed to purchase fixed-rate mortgage loans but before these loans have been pledged to secure CMOs and MPCs or otherwise committed for sale. If long-term interest rates increase during this period, the interest payable on the CMOs issued will increase while the yield on the underlying mortgage loans pledged to collateralize the CMOs will not change; as a consequence, the interest spread on the CMO will be lower. Conversely, if long-term interest rates decrease during this period, the interest payable on the CMO issued will decrease, while the yield on the underlying mortgage loans pledged to collateralize the CMO will not change; as a consequence, the interest spread on the CMO will be higher. Similarly, proceeds received on the issuance of MPCs and other sales, and related gains or losses, will be negatively impacted by an increase in long-term interest rates during this period due to the resulting decline in market value of the related collateral. Conversely, these transactional gains or losses will be favorably impacted by a decrease in long-term interest rates during this period. -16- The Company historically has attempted to manage its exposure to long-term interest rate changes in part by pricing CMO and MPC issuances prior to the purchase of, but subsequent to the commitment to purchase, all of the mortgage loans that will collateralize the issuances or from time to time, entering into forward sale agreements for hedging purposes. Beginning in 1995 the Company shortened the holding period for mortgage loan acquisitions to usually about a week, in an effort to eliminate the market risk associated with aggregating and securitizing mortgage loans. Changes in interest rates also impact earnings recognized from CMO investments, which consist of fixed-rate CMO residuals and interest-only and principal-only securities. The amount of income that may be generated from the typical CMO residual is dependent upon the rate of principal prepayments on the underlying mortgage collateral. If mortgage interest rates fall significantly below the interest rate on the collateral, principal prepayments will increase, reducing or even eliminating the overall return on the investment in the CMO residual. This is due primarily to the acceleration of the amortization of bond discounts, a noncash item, as bond classes are repaid more rapidly than originally anticipated. Conversely, if mortgage interest rates rise significantly above the interest rate on the collateral, principal prepayments will typically diminish, resulting in a greater overall return on the investment in the fixed- rate CMO residual because of an increase in the period of time over which the Company receives the larger positive interest spread. During periods of increasing interest rates, the Company's volume of mortgage loan acquisitions generally will diminish due, among other things, to decreased refinancing activity. Similarly, in a falling interest rate environment, prepayments on the mortgage collateral underlying investments in interest-only securities generally will be high and the Company could incur losses on these securities. Conversely, in periods of rising interest rates, interest-only securities will tend to perform favorably because the underlying mortgage collateral will generally prepay at slower rates. Principal-only securities react differently to changes in interest rates. Lower interest rates result in the recovery of these investments more rapidly thus increasing yields. During periods of rising rates, it takes longer for the Company to recover its investments thus lowering yields. Principal-only securities retained by the Company generally represent a much smaller investment than interest-only investments. Another effect of changes in interest rates is that when interest rates decrease, the rate of prepayment of mortgage loans generally increases. To the extent the proceeds of prepayments on the mortgage investment portfolios cannot be reinvested at a rate of interest at least equal to the rate previously earned on such investments, earnings may be adversely affected. In addition, the rates of interest earned on ARM loans generally will decline during periods of falling interest rates. The above discussion regarding how changes in interest rates impact investments in mortgage assets also applies to the Company's growing investment in mortgage servicing rights. When interest rates rise, mortgage servicing rights become more valuable since the average lives of the related mortgage loans tend to be longer and earnings from large, temporarily held cash balances will be greater. Conversely, lower interest rates will spur prepayments thus reducing the period of time the Company can service the related loans. Because the Company began mortgage servicing in 1993 and has acquired relatively low interest rate servicing, exposure to lower interest rates is less than for other servicers that acquired servicing portfolios in previous years when interest rates were substantially higher. -17- The Company's business plan is to build a mortgage banking operation with investments in mortgage securities and mortgage servicing that should produce reasonably balanced results in a rising or falling interest rate environment. Hedging interest rate risk is imprecise and costly. To fully protect income from every interest rate scenario would be cost prohibitive. The Company expects to supplement its business plan with interest rate hedges from time to time. PART II. - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: (a) Exhibits: The following Exhibit is presented herewith: -------- Exhibit 11 - Computation of Earnings Per Share for the quarter and six months ended June 30, 1995 and 1994. Exhibit 27 - Financial Data Schedule (electronic filing only). (b) Reports on Form 8-K: None. ------------------- -18- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CAPSTEAD MORTGAGE CORPORATION Date: August 7, 1995 By /s/ RONN K. LYTLE ------------------------------------ Ronn K. Lytle Chairman and Chief Executive Officer Date: August 7, 1995 By /s/ ANDREW F. JACOBS ------------------------------------ Andrew F. Jacobs Senior Vice President - Control and Treasurer -19- EX-11 2 COMP. OF INCOME PER SHARE EXHIBIT 11 CAPSTEAD MORTGAGE CORPORATION COMPUTATION OF NET INCOME PER SHARE (in thousands, except per share amounts)
Quarter Ended Six Months Ended -------------------- -------------------- 1995 1994 1995 1994 --------- --------- --------- --------- Primary: Average number of common shares outstanding 15,322 15,238 15,313 15,220 Incremental shares calculated using the Treasury Stock method 4 9 4 46 ------- ------- -------- -------- 15,326 15,247 15,317 15,266 ------- ------- -------- -------- Net income $17,739 $20,030 $ 33,105 $ 43,499 Less cash dividends paid on convertible preferred stock: Series A ($0.40 per share) (239) (266) (487) (538) Series B ($0.315 per share) (9,584) (9,440) (19,134) (18,848) ------- ------- -------- -------- Net income available to common stockholders $ 7,916 $10,324 $ 13,484 $ 24,113 ======= ======= ======== ======== Primary net income per share $0.52 $0.68 $0.88 $1.58 Fully diluted: Average number of common shares outstanding 15,322 15,238 15,313 15,220 Assumed conversion of convertible preferred stock: Series A 548 606 554 619 Series B * * * * Incremental shares calculated using the Treasury Stock method 5 9 4 45 ------- ------- -------- -------- 15,875 15,853 15,871 15,884 ======= ======= ======== ======== Net income $17,739 $20,030 $ 33,105 $ 43,499 Less cash dividends paid on the Series B Preferred Stock (9,584) (9,440) (19,134) (18,848) ------- ------- -------- -------- Net income $ 8,155 $10,590 $ 13,971 $ 24,651 ======= ======= ======== ======== Fully diluted net income per share $0.51 $0.67 $0.88 $1.55
* The Series B Preferred Stock is not considered convertible for purposes of calculating fully diluted net income per share as it is currently antidilutive. EX-27 3 FDS, ARTICLE 5
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CAPSTEAD MORTGAGE CORPORATION'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLAR 6-MOS DEC-31-1995 JAN-01-1995 JUN-30-1995 1 29,889 0 0 0 0 0 0 0 9,034,924 3,563,145 4,828,950 153 0 337,276 315,400 9,034,924 0 349,156 0 0 30,303 1,200 284,548 33,105 0 33,105 0 0 0 33,105 0.88 0.88