-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KB4JxcrlG2240WFJ9eydZNJ6+9/AzrRaqZ+jkuU8FFs/sjwjnqd6rIyTCXu3+0xV 9NLo+BUEk8SRHg6m+0jcWA== 0000930661-96-000185.txt : 19960326 0000930661-96-000185.hdr.sgml : 19960326 ACCESSION NUMBER: 0000930661-96-000185 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960325 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08896 FILM NUMBER: 96538249 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: 2711 NORTH HASKELL AVENUE STREET 2: STE 900 CITY: DALLAS STATE: TX ZIP: 75204 FORMER COMPANY: FORMER CONFORMED NAME: LOMAS MORTGAGE CORP DATE OF NAME CHANGE: 19891105 10-K 1 FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 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: 1-8896 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.) 2711 NORTH HASKELL, DALLAS, TEXAS 75204 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (214) 874-2323 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED ------------------- ------------------------------------ Common Stock ($0.01 par value) New York Stock Exchange $1.60 Cumulative Preferred Stock, Series A ($0.10 par value) New York Stock Exchange $1.26 Cumulative Convertible Preferred Stock, Series B ($0.10 par value) New York Stock Exchange 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [_] AT FEBRUARY 22, 1996 THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES WAS $544,736,000. NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT FEBRUARY 22, 1996: 23,818,162 DOCUMENTS INCORPORATED BY REFERENCE: (1) PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1995 ARE INCORPORATED BY REFERENCE INTO PARTS II AND IV. (2) PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT DATED MARCH 7, 1996, ISSUED IN CONNECTION WITH THE ANNUAL MEETING OF STOCKHOLDERS OF THE REGISTRANT, ARE INCORPORATED BY REFERENCE INTO PART III. ================================================================================ CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES 1995 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PAGE ---- PART I
ITEM 1. BUSINESS........................................... 1 ITEM 2. PROPERTIES......................................... 7 ITEM 3. LEGAL PROCEEDINGS.................................. 7 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................... 8 ITEM 6. SELECTED FINANCIAL DATA............................ 8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............... 8 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........ 8 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............... 8 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. 8 ITEM 11. EXECUTIVE COMPENSATION............................. 8 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................. 9 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..... 9 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K............................... 10
PART I ITEM 1. BUSINESS. ORGANIZATION Capstead Mortgage Corporation ("CMC" or the "Company") was incorporated on April 15, 1985 in the state of Maryland and commenced operations in September 1985. The Company is a national mortgage banking firm, earning income from servicing mortgage loans, investing in mortgage-backed securities and other investment strategies. The Company's business plan is to build its mortgage servicing and mortgage securities portfolios with the goal of producing reasonably balanced operating results in a rising or falling interest rate environment. The mortgage servicing operation has grown rapidly since its inception in 1993 primarily through bulk acquisitions of mortgage servicing rights to become one of the 25th largest mortgage servicers in the country. Until late in 1995, the Company operated a mortgage conduit that purchased and securitized various types of single-family residential mortgage loans. This strategy for accumulating mortgage assets has been successfully replaced by the acquisition of mortgage- backed securities issued by government-sponsored entities. CMC, and its qualified real estate investment trust ("REIT") subsidiaries, have elected to be taxed as a REIT and intend to continue to do so. As a result of this election, CMC is not taxed at the corporate level on taxable income distributed to stockholders, provided that certain REIT qualification tests are met. All taxable income of certain other subsidiaries, including the mortgage servicing operation, is subject to federal and state income taxes, where applicable. MORTGAGE CONDUIT Through November 1995, the Company purchased non-conforming or jumbo mortgage loans from mortgage banking companies, savings banks, commercial banks, credit unions, mortgage brokers and other financial intermediaries ("Correspondents") throughout the United States. The jumbo mortgage loan market changed dramatically over the last several years. Mortgage loan originations reached all time highs in 1992 and 1993 due to steadily declining mortgage interest rates that made refinancing increasingly attractive to mortgagors. Mortgage interest rates reached 20-year lows by the fall of 1993; however, by early 1994 rates began a steady rise. As rising rates choked off the 1992/1993 refinancing boom, competition to acquire remaining originations intensified. At this same time, the cost of mortgage pool insurance rose in response to mounting credit losses being incurred by these insurers, most of whom ultimately withdrew from this business entirely. In order to compete with other buyers of non-conforming loans as a long-term investor, the Company had to be willing to once again accept credit risk on these mortgage assets or find buyers for subordinate classes of its securitizations willing to do so at a fair price. Beginning in January 1995, the Company implemented a strategy of selling individual mortgage loans purchased through its mortgage conduit to private investors shortly after the commitment to purchase, instead of accumulating $100 million or more of similar mortgage loans for an efficient securitization. This strategy allowed the Company to reduce the risks associated with accumulating and securitizing jumbo mortgage loans but was not intended to be a long-term solution. However, in November 1995 the Company exited the mortgage conduit business after concluding that as a long-term 1 investor in mortgage assets, accepting the associated credit risk was not in the best interest of the stockholders. While this decision represents a change in strategy for accumulating mortgage assets, it has been successfully replaced by the acquisition of mortgage-backed securities issued by government-sponsored entities. MORTGAGE LOAN HOLDINGS Prior to exiting the mortgage conduit business, the Company purchased mortgage loans from Correspondents on a daily basis. These loans purchased were warehoused until a long-term investment strategy was implemented. Periodically, mortgage loans were pledged to secure collateralized mortgage obligations ("CMOs"), publicly-offered, multi-class mortgage pass-through certificates ("MPCs"), or AAA-rated private mortgage pass-through securities ("Mortgage Pass- Throughs") issued by the Company's special-purpose finance subsidiaries. The Company currently has limited holdings of unsecuritized mortgage loans, most of which arise from limited origination activities conducted by the Company's new telemarketing origination group - "The Home Loan Center" (as discussed below). MORTGAGE PASS-THROUGH PORTFOLIO The Company maintains a sizable investment in Mortgage Pass-Throughs backed by adjustable-rate and medium-term non-conforming mortgage loans that were acquired through the mortgage conduit. Medium-term mortgage loans have (i) an initial fixed-rate period of 3 or 5 years after origination and then adjust annually based on a specified margin over 1-year U.S. Treasury Securities ("1-year Treasuries") or (ii) initial interest rates that adjust one time, approximately 5 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 loans either adjust (i) semi-annually based on a specified margin over the 6- month London Interbank Offered Rate ("LIBOR") or (ii) annually based on a specified margin over 1-year Treasuries. This investment strategy primarily features adjustable-rate mortgage loans that, because of their adjustable interest rates, are more likely to retain value. Mortgage Pass-Throughs are insured against mortgagor defaults by a mortgage pool insurer. The level of coverage under any mortgage pool insurance policy is determined by one or more of the national statistical rating agencies ("Rating Agencies"), and is at a level necessary to allow the insured pool of mortgage loans, or the securities such pools are pledged to secure, to be AAA-rated. At such time, the Company also insures or reserves against bankruptcy and special hazard risks. Special hazards are risks that are not covered by standard hazard insurance policies (e.g., earthquakes). The Company also has exposure to fraud or misrepresentation in the origination of the mortgage loan. Defaults on mortgage loans, if linked to fraud or misrepresentation, may be mitigated by the Correspondent's obligation to repurchase such mortgage loan. However, to the extent the Correspondent does not perform on its repurchase obligation, the Company may incur a loss. The Company utilizes repurchase agreements to finance the Mortgage Pass-Through portfolio. A repurchase agreement is a form of short-term financing pursuant to which mortgage loans or mortgage-backed securities are pledged as collateral for funds borrowed at short-term interest rates, typically 30 to 60 days. The formation of Mortgage Pass-Throughs enhances the marketability of the underlying mortgage loans, thus enabling the Company to reduce its borrowing costs below the level paid on non-rated loans. 2 AGENCY SECURITIES PORTFOLIO With the decline of the mortgage conduit business, the Company increased acquisitions of agency securities that consist primarily of adjustable-rate mortgage-backed securities guaranteed by government sponsored entities such as FNMA, Government National Mortgage Association ("GNMA") or Federal Home Loan Mortgage Corporation ("FHLMC"). The agency securities portfolio also includes investments in fixed-rate agency securities and callable agency notes. Callable agency notes currently held by the Company are unsecured, 3-year fixed-rate notes issued by FHLMC, FNMA, or the Federal Home Loan Bank Board ("FHLBB") and mature in 1997, unless redeemed earlier. The Company primarily utilizes repurchase agreements to finance the agency securities portfolio. Because of the quality of agency securities, the Company is able to borrow at its lowest cost, thereby achieving more attractive interest rate spreads on the financing of these assets. CMO INVESTMENT PORTFOLIO AND RELATED SECURITIZATION ACTIVITY In past years, the Company has been an active issuer of CMOs and other securities generally backed by fixed-rate, non-conforming mortgage loans acquired through the mortgage conduit. The Company generally retained residual interests in CMOs issued consisting primarily of interest-only and principal- only strips. Interest-only securities represent ownership in an undivided interest in interest payments on the underlying collateral. Principal-only securities represent ownership in an undivided interest in principal payments on the underlying collateral. Most of the CMOs were structured as financings in which the Company recognizes economic gains or losses over the term of the collateral. During 1995 no CMOs were issued; however, the Company did acquire agency-issued, interest-only securities, which increased the CMO investment portfolio substantially. Each series of CMOs consists of multiple classes of bonds, each having its own maturity. The segmentation of CMOs into classes of bonds with varying maturities, along with mortgage pool insurance or other credit enhancements provided to make all or most of the CMO bonds AAA-rated, enabled the Company to issue CMO classes with shorter scheduled maturities and lower interest rates than those on the underlying mortgage loans. Each of these factors contributed to a positive difference between the payments received on the mortgage loans pledged to secure such CMOs and the payments made on the CMOs issued (the "Excess Cash Flow"). Because the shorter-term classes of CMO bonds typically bear lower rates of interest than longer-term classes, the Excess Cash Flow on a CMO is typically greatest in the early years of the CMO. As the mortgage loans are repaid and the shorter-term classes of CMO bonds are retired, the average interest cost of the CMOs outstanding increases. Thus, the Excess Cash Flow will decline over time. The right to receive the Excess Cash Flow, along with the noncash amortization of collateral and bond premiums and discounts is referred to as the "CMO Residual." CMO structures have evolved in recent years such that the Excess Cash Flow portion of a CMO Residual has been virtually eliminated by the formation of additional CMO securities including various forms of interest-only and/or principal-only securities. Since the fall of 1992 the Company typically sold much of the noncash portion of its CMO Residuals and retained for its CMO investment portfolio certain of the interest-only and/or principal-only securities formed in connection with CMO issuances and other securitizations. 3 In late 1993 the Company began issuing CMOs in a senior/subordinate structure (in lieu of purchasing mortgage pool insurance and special hazard insurance) where the investor in the subordinate classes assumes credit and special hazard risks. The Company has retained an aggregate of approximately $2 million of credit and special hazard risk on certain of these issuances. Actual losses to the Company due to these risks are dependent upon the timing and magnitude of related collateral defaults. SERVICING OPERATIONS Mortgage servicing includes collecting and accounting for payments of principal and interest from borrowers, remitting such payments to investors, holding escrow funds for payment of mortgage-related expenses such as taxes and insurance, making advances to cover delinquent payments, inspecting the mortgage premises as required, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults, and generally administering the loans. Fees are received for servicing residential mortgage loans ranging generally from 0.25 to 0.38 percent per annum on the declining principal balances of the loans and are collected out of monthly mortgage payments. The Company formed its mortgage servicing unit early in 1993. Initially, growth was accomplished primarily by retaining mortgage servicing rights on mortgage loans purchased through the mortgage conduit. Beginning in late 1993 the Company began committing to bulk acquisitions of mortgage servicing rights for primarily conforming mortgage loan portfolios. Capstead Inc., the Company's mortgage servicing subsidiary, has grown dramatically to become one of the top 25 mortgage servicers in the country. Capstead Inc. is also an industry leader in efficiency in part due to efforts to service only conventional mortgage loans, excluding FHA and VA loans, and a minimum number of adjustable-rate mortgage loans. In addition, Capstead Inc. services for only 3 investors: FNMA, FHLMC and itself. During 1995, 143,000 mortgage loans with an aggregate principal balance of $13.1 billion were added to the portfolio. At year-end the mortgage servicing portfolio totaled 247,000 loans with a balance of $25.6 billion, had a weighted average interest rate of 7.37 percent, and delinquencies of 30 days and over of only 1.83 percent. The prepayment rate on mortgage loans held in the mortgage servicing portfolio was 9.44 percent during 1995. Another $3.1 billion of servicing had been acquired as of December 31, 1995 that was pending transfer into the portfolio and was being subserviced by the sellers. Additional mortgage servicing has been acquired subsequent to year-end. Including January 1996 acquisitions, pending transfers of mortgage servicing totaled $8.1 billion with a weighted average interest rate of 7.39 percent. By May 1996 the mortgage servicing portfolio is expected to exceed $32 billion. In an effort to capture as much run-off of the servicing portfolio as possible, in 1995 the Company formed the "Home Loan Center," a centralized mortgage origination unit that offers a variety of loan programs including first mortgage loans and home equity loans. The Home Loan Center relies heavily on outsourcing labor intensive aspects of the loan origination process in an effort to remain as efficient as possible. Loans originated by the Home Loan Center generally are sold to FNMA or FHLMC shortly after the commitment to purchase. 4 EFFECTS OF INTEREST RATE CHANGES Changes in interest rates may impact earnings in various says. The Company's business plan is to build its mortgage servicing and mortgage securities portfolios with the goal of producing reasonably balanced operating results in a rising or falling interest rate environment. The Company has acquired derivative financial instruments, specifically interest rate floors, as hedges against increased prepayments on investments in mortgage servicing rights and interest-only securities. Interest rate floors partially protect the value of the assets hedged from the impact of increased prepayments by increasing in value when interest rates decline. Realized gains from effective hedge transactions reduce the carrying amount of the assets hedged. The Company has acquired other derivative financial instruments, specifically interest rate caps, as a hedge against rising interest rates on a portion of its short-term borrowings. The Company may receive cash payments from the counterparties to these instruments should certain specified interest rates fall (floors) or rise (caps). For further discussion of effects of interest rate changes on the Company's mortgage securities and mortgage servicing portfolios, see the Registrant's Annual Report to Stockholders for the year ended December 31, 1995 on pages 46 and 47 under the caption "Management's Discussion and Analysis - Effects of Interest Rate Changes." OTHER INVESTMENT STRATEGIES The Company may enter into other short- or long-term investment strategies as the opportunities arise. COMPETITION In purchasing mortgage securities, the Company competes with savings banks, commercial banks, mortgage and investment bankers, conduits, insurance companies, other lenders, and mutual funds, many of whom may have greater financial resources than the Company. The competition for the acquisition of mortgage servicing rights is primarily with mortgage bankers, commercial banks and savings banks. Additionally, the Company must compete with many of these same entities for refinancings of mortgage loans in the Company's existing servicing portfolio in order to help mitigate the effects of run-off. REGULATION AND RELATED MATTERS The Company's mortgage servicing unit is subject to the rules and regulations of FNMA and FHLMC with respect to servicing mortgage loans. In addition, there are other federal and state statutes and regulations affecting such activities. Moreover, the Company is required annually to submit audited financial statements to FNMA and FHLMC, and each regulatory entity has its own financial requirements. The Company's affairs are also subject to examination by FNMA and FHLMC at all times to assure compliance with applicable regulations, policies and procedures. Many of the aforementioned regulatory requirements are designed to protect the interests of consumers, while others protect the owners or insurers of mortgage loans. Failure to comply with these requirements can lead to loss of approved status, termination of servicing contracts without compensation to the servicer, demands for indemnification or loan repurchases, class action lawsuits and administrative enforcement actions. EMPLOYEES As of December 31, 1995, the Company had 172 full-time employees. 5 TAX STATUS As used herein, "Capstead REIT" refers to CMC and the entities that are consolidated with CMC for federal income tax purposes. Capstead REIT has elected to be taxed as a REIT for federal income tax purposes and intends to continue to do so. As a result of this election, Capstead REIT will not be taxed at the corporate level on taxable income distributed to stockholders, provided that certain requirements concerning the nature and composition of its income and assets are met and that at least 95 percent of its REIT taxable income is distributed. If Capstead REIT fails to qualify as a REIT in any taxable year, it would be subject to federal income tax at regular corporate rates and would not receive a deduction for dividends paid to stockholders. If this were the case, the amount of after-tax earnings available for distribution to stockholders would decrease substantially. So long as Capstead REIT qualifies as a REIT, it will generally be taxable only on its undistributed taxable income. Distributions out of current or accumulated earnings and profits will be taxed to stockholders as ordinary income or capital gain, as the case may be. Distributions in excess of the Company's accumulated and current earnings and profits will constitute a non- taxable return of capital to the stockholders (except insofar as such distributions exceed the cost basis of the shares of stock) resulting in a corresponding reduction in the cost basis of the shares of stock. The Company notifies its stockholders of the proportion of distributions made during the taxable year that constitutes ordinary income, capital gain or a return of capital. During 1993, 20 percent of distributions made were characterized as long-term capital gains. Other distributions during the last 3 years were characterized as ordinary income. Distributions by the Company will not normally be eligible for the dividends received deduction for corporations. Should the Company incur losses, stockholders will not be entitled to include such losses in their individual income tax returns. All taxable income of certain other subsidiaries, including Capstead Inc., that conduct mortgage servicing and formerly conducted securitization operations, is subject to federal and state income taxes, where applicable. Capstead REIT's taxable income will include earnings of these subsidiaries only upon payment to Capstead REIT by dividend of such earnings. The foregoing is general in character. Reference should be made to pertinent Internal Revenue Code sections and the Regulations issued thereunder for a comprehensive statement of applicable federal income tax consequences. ITEM 2. PROPERTIES. The Company's operations are conducted primarily in Dallas, Texas on properties leased by the Company. ITEM 3. LEGAL PROCEEDINGS. At December 31, 1995 there were no material pending legal proceedings, outside the normal course of business, to which the Company or its subsidiaries were a party or of which any of their property was the subject. ITEM 4. RESULTS OF SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 6 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information required by this item is included in the Registrant's Annual Report to Stockholders for the year ended December 31, 1995 on page 38 under the caption "Note 16 - Market and Dividend Information," and is incorporated herein by reference, pursuant to General Instruction G(2). ITEM 6. SELECTED FINANCIAL DATA. The information required by this item is included in the Registrant's Annual Report to Stockholders for the year ended December 31, 1995 on page 39 under the caption "Selected Financial Data," and is incorporated herein by reference, pursuant to General Instruction G(2). ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by this item is included in the Registrant's Annual Report to Stockholders for the year ended December 31, 1995 on pages 40 through 47 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," and is incorporated herein by reference, pursuant to General Instruction G(2). ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by this item is included in the Registrant's Annual Report to Stockholders for the year ended December 31, 1995 on pages 19 through 38, and is incorporated herein by reference, pursuant to General Instruction G(2). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this item is included in the Registrant's definitive Proxy Statement dated March 7, 1996 on pages 3 through 6 under the captions "Election of Directors," "Board of Directors" and "Executive Officers," which is incorporated herein by reference pursuant to General Instruction G(3). ITEM 11. EXECUTIVE COMPENSATION. The information required by this item is included in the Registrant's definitive Proxy Statement dated March 7, 1996 on pages 7 through 13 under the captions "Executive Compensation," "Compensation Committee Report on Executive Compensation," and "Performance Graph," which is incorporated herein by reference pursuant to General Instruction G(3). 7 ITEM 12. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS. The information required by this item is included in the Registrant's definitive Proxy Statement dated March 7, 1996 on pages 14 and 15 under the caption "Security Ownership of Management and Certain Beneficial Owners," which is incorporated herein by reference pursuant to General Instruction G(3). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item is included in the Registrant's Annual Report to Stockholders for the year ended December 31, 1995 on page 36 under the caption "Notes to Consolidated Financial Statements - Note 13 - Management and Non-Competition Agreements", which is incorporated herein by reference pursuant to General Instruction G(2). 8 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Documents filed as part of this report: 1. The following financial statements of the Company, included in the 1994 Annual Report to Stockholders, are incorporated herein by reference: PAGE ---- Consolidated Statement of Income - Years Ended December 31, 1995, 1994 and 1993............ * Consolidated Balance Sheet - December 31, 1995 and 1994........................ * Consolidated Statement of Stockholders' Equity - Three Years Ended December 31, 1995............... * Consolidated Statement of Cash Flows - Years Ended December 31, 1995, 1994 and 1993............ * Notes to Consolidated Financial Statements - December 31, 1995................................. * 2. Financial statement schedules: Schedule II - Valuation and Qualifying Accounts.... 14 Schedule IV - Mortgage Loans on Real Estate........ 15 NOTE: All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. * Incorporated herein by reference from the Company's Annual Report to Stockholders for the year ended December 31, 1995. 3. Exhibits: EXHIBIT NUMBER ------- 3.1(a) Charter of the Company, which includes Articles of Incorporation, Articles Supplementary for each outstanding Series of Preferred Stock and all other amendments to such Articles of Incorporation(5) 3.1(b) Articles Supplementary ($1.26 Cumulative Convertible Preferred Stock, Series B)(4) 3.2 Bylaws of the Company, as amended(5) 10.17 Amendment to Management Agreement dated March 31, 1993, between the Registrant and Capstead Advisers, Inc.(5) 10.18 Second Amendment to Management Agreement dated September 3, 1993, between the Registrant and Capstead Advisers, Inc.(6) 10.19 Stock Option Agreement, dated June 16, 1992, between the Company and Lomas Financial Corporation(5) 10.20 Form of Loan Sale Agreement(3) 10.21 1990 Employee Stock Option Plan(1) 10.22 1990 Directors' Stock Option Plan(2) 10.23 Employment Agreement dated August 1, 1992 between Capstead Mortgage Corporation and Ronn K. Lytle(4) 9 CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES PART IV ITEM 14. - CONTINUED EXHIBIT NUMBER ------- 10.24 Restricted Stock Grant Agreement dated August 1, 1992 between Capstead Mortgage Corporation and Ronn K. Lytle(4) 10.25 1994 Flexible Long Term Incentive Plan(7) 10.26 1994 Capstead Inc. Restricted Stock Plan(7) 10.27 Capstead Mortgage Corporation Deferred Compensation Plan(7) 10.28 Summary of Employment Agreement dated December 9, 1993 between Capstead Mortgage Corporation and Christopher T. Gilson(7) 11 Computation of per share earnings* 12 Computation of ratio of earnings to combined fixed charges and preferred stock dividends* 13 Portions of the Annual Report to Stockholders of the Company for the year ended December 31, 1995* 21 List of subsidiaries of the Company* 23 Consent of Ernst & Young LLP, Independent Auditors* 27 Financial Data Schedule (electronic filing only)* (1) Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 33-40016) dated April 29, 1991 (2) Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 33-40017) dated April 29, 1991 (3) Incorporated by reference to Amendment No. 1 on Form 8 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991 (4) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 (5) Incorporated by reference to the Company's Registration Statement on Form S-3 (No. 33-62212) dated May 6, 1993 (6) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 (7) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 * Filed herewith (b) Reports on Form 8-K: None. (c) Exhibits - The response to this section of ITEM 14 is submitted as a separate section of this report. (d) Financial Statement Schedules - The response to this section of ITEM 14 is submitted as a separate section of this report. 10 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CAPSTEAD MORTGAGE CORPORATION REGISTRANT Date: March 12, 1996 By: /s/ ANDREW F. JACOBS ------------------------------ Andrew F. Jacobs Senior Vice President-Control, Treasurer and Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated below and on the dates indicated.
/s/ RONN K. LYTLE Chairman, Chief March 15, 1996 - ------------------------------- Executive Officer (Ronn K. Lytle) and Director /s/ ANDREW F. JACOBS Senior Vice President- March 12, 1996 - ------------------------------- Control, Treasurer (Andrew F. Jacobs) and Secretary /s/ BEVIS LONGSTRETH Director March 18, 1996 - ------------------------------- (Bevis Longstreth) /s/ PAUL M. LOW Director March 18, 1996 - ------------------------------- (Paul M. Low) /s/ HARRIET E. MIERS Director March 21, 1996 - ------------------------------- (Harriet E. Miers) /s/ WILLIAM R. SMITH Director March 18, 1996 - ------------------------------- (William R. Smith) /s/ JOHN C. TOLLESON Director March 21, 1996 - ------------------------------- (John C. Tolleson)
11 PORTIONS OF THE ANNUAL REPORT ON FORM 10-K ITEMS 14(A)(1), (2) AND (3) FINANCIAL STATEMENT SCHEDULES AND EXHIBITS YEAR ENDED DECEMBER 31, 1995 CAPSTEAD MORTGAGE CORPORATION DALLAS, TEXAS 12 CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ---------------------------------- ---------- ----------------------- ----------- -------------- ADDITIONS ----------------------- CHARGED TO BALANCE AT CHARGED TO OTHER BEGINNING COSTS ACCOUNTS- DEDUCTIONS- BALANCE AT END DESCRIPTION OF PERIOD AND EXPENSES DESCRIBE DESCRIBE * OF PERIOD - ---------------------------------- ---------- ------------ ---------- ----------- -------------- Reserves and Allowances Deducted From Mortgage Investments: Year ended December 31, 1995 Allowance for losses........... $7,354,000 $2,200,000 - $3,635,000 $5,919,000 Year ended December 31, 1994 Allowance for losses........... $6,927,000 $3,500,000 - $3,073,000 $7,354,000 Year ended December 31, 1993 Allowance for losses........... $8,228,000 $2,800,000 - $4,101,000 $6,927,000
* Charge-offs due to mortgagor default, fraud or misrepresentation, or special hazard losses, and charge-offs of other mortgage securities. 13 CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE DECEMBER 31, 1995
PART 1 - MORTGAGE LOANS ON REAL ESTATE AT CLOSE OF PERIOD - --------------------------------------------------------------------------------------------------------------------------------- COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - --------------------------- -------- ------------------ ---------------------------------- ---------------------- AMOUNT OF PRINCIPAL UNPAID AT CLOSE OF PERIOD ---------------------------------- AMOUNT OF SUBJECT TO MORTGAGE PRIOR CARRYING AMOUNT DELINQUENT BEING DESCRIPTION LIENS OF MORTGAGES(2) TOTAL INTEREST(3) FORECLOSED(3) - --------------------------- ------------------ ------------------ ------------ ---------------- ---------------------- $ -0- - $ 49,999 None $ 190,000 $ 190,000 $ 68,000 $ - ( 7).................. $ 50,000 - $ 99,999 None 2,533,000 2,533,000 198,000 63,000 ( 32).................. $100,000 - $ 149,999 None 15,809,000 15,809,000 1,019,000 397,000 ( 122).................. $150,000 - $ 199,999 None 40,820,000 40,820,000 1,455,000 907,000 ( 228).................. $200,000 - $ 249,999 None 293,351,000 293,351,000 17,089,000 5,726,000 (1,328).................. $250,000 - $ 299,999 None 202,653,000 202,653,000 12,331,000 4,663,000 ( 741).................. $300,000 - $ 349,999 None 138,622,000 138,622,000 8,051,000 1,623,000 ( 429).................. $350,000 - $ 399,999 None 89,510,000 89,510,000 4,519,000 1,485,000 ( 240).................. $400,000 - $ 449,999 None 51,346,000 51,346,000 2,141,000 842,000 ( 121).................. $450,000 - $ 499,999 None 39,441,000 39,441,000 2,370,000 1,409,000 ( 83).................. $500,000 - $1,500,000 None 111,303,000 111,303,000 5,141,000 2,293,000 ( 190).................. ------------ ------------ ----------- ------------ 985,578,000 $985,578,000 $54,382,000 $ 19,408,000 ============ =========== ============ Plus premium 3,417,000 Plus unrealized gain on mortgage loans included in debt securities 10,727,000 ------------ $999,722,000 ============
PART 2 - INTEREST EARNED ON MORTGAGES - --------------------------- --------------------------- COLUMN A COLUMN F AND AND COLUMN G(4) - --------------------------- ---------------------------- WEIGHTED AVERAGE DESCRIPTION INTEREST RATE - --------------------------- ---------------- $ -0- - $ 49,999 9.56% ( 7).................. $ 50,000 - $ 99,999 8.16% ( 32).................. $100,000 - $ 149,999 7.91% ( 122).................. $150,000 - $ 199,999 7.88% ( 228).................. $200,000 - $ 249,999 7.64% (1,328).................. $250,000 - $ 299,999 7.57% ( 741).................. $300,000 - $ 349,999 7.63% ( 429).................. $350,000 - $ 399,999 7.60% ( 240).................. $400,000 - $ 449,999 7.61% ( 121).................. $450,000 - $ 499,999 7.60% ( 83).................. $500,000 - $1,500,000 7.64% ( 190)..................
See accompanying notes to Schedule IV. 14 CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES NOTES TO SCHEDULE IV (1) Mortgage loans at December 31, 1995 consisted of single-family, conventional, first mortgage loans. The Company classifies its mortgage loans by term and interest rate characteristics. Fixed-rate mortgage loans have (i) fixed rates of interest for their entire terms or (ii) an initial fixed-rate period of 10 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 loans have (i) an initial fixed-rate period of 3 or 5 years after origination and then adjust annually based on a specified margin over 1-year Treasuries or (ii) initial interest rates then adjust one time, approximately 5 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 loans either adjust (i) semi-annually based on a specified margin over the 6-month London Interbank Offered Rate ("LIBOR") or (ii) annually based on a specified margin over 1- year Treasuries. Principal amount of mortgage loans in the portfolio totaling $8,930,000, or 0.9 percent, were fixed-rate loans; $566,899,000, or 56.3 percent, were medium-term loans; and $423,166,000, or 42.8 percent, were adjustable-rate loans. (2) Reconciliation of mortgage loans:
Balance at December 31, 1994.......... $1,425,413,000 Additions: Purchases and originations of mortgage loans..................... 126,786,000 Unrealized gains on mortgage loans included in debt securities........ 44,400,000 171,186,000 -------------- -------------- 1,596,599,000 Deductions: Principal collections............... 257,239,000 Amortization of discount............ 447,000 Sales............................... 339,191,000 596,877,000 ----------- -------------- Balance at December 31, 1995.......... $ 999,722,000 ==============
(3) Consists of all mortgage loans delinquent 90 days or more. Note that of the amount of principal unpaid at the close of the period that is subject to delinquent principal, $52.8 million is covered by mortgage pool insurance that effectively limits the Company's loss. Similarly, $18.5 million of the amount of mortgages being foreclosed is covered by pool insurance. For a discussion of the Company's exposure to possible loan losses, see the Registrant's Annual Report to Stockholders for the year ended December 31, 1995 on page 33 under the caption "Note 9 - Allowance for Possible Losses". (4) Interest due and accrued at the end of the period and interest income earned applicable to the period for each of the categories presented above is not available without unreasonable effort or expense and therefore has been omitted in accordance with Rule 12-23 of Regulation S-X. Total accrued interest for the above listed mortgage loans totaled $6,415,000 at December 31, 1995. 15 CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES NOTES TO SCHEDULE IV - CONTINUED (5) The geographic distribution of the Company's portfolio at December 31, 1995 was as follows:
NUMBER PRINCIPAL STATE OF LOANS AMOUNT ----- -------- ------------ Alabama................................. 7 $ 1,477,000 Arizona................................. 19 5,037,000 Arkansas................................ 1 245,000 California.............................. 2,523 701,556,000 Colorado................................ 30 8,048,000 Connecticut............................. 15 4,434,000 Delaware................................ 3 1,107,000 District of Columbia.................... 24 7,469,000 Florida................................. 103 31,961,000 Georgia................................. 107 30,675,000 Hawaii.................................. 6 2,324,000 Idaho................................... 1 218,000 Illinois................................ 31 8,690,000 Indiana................................. 4 434,000 Kentucky................................ 1 364,000 Louisiana............................... 12 3,409,000 Maryland................................ 81 23,827,000 Massachusetts........................... 12 3,073,000 Michigan................................ 36 10,349,000 Minnesota............................... 1 219,000 Missouri................................ 6 2,112,000 Nebraska................................ 1 209,000 Nevada.................................. 11 2,408,000 New Hampshire........................... 1 218,000 New Jersey.............................. 71 20,204,000 New Mexico.............................. 34 9,987,000 New York................................ 36 11,598,000 North Carolina.......................... 4 1,103,000 Ohio.................................... 7 1,750,000 Oklahoma................................ 13 3,532,000 Oregon.................................. 2 317,000 Pennsylvania............................ 32 9,401,000 South Carolina.......................... 1 255,000 Tennessee............................... 1 229,000 Texas................................... 112 28,874,000 Utah.................................... 12 2,204,000 Vermont................................. 3 976,000 Virginia................................ 116 35,150,000 Washington.............................. 39 9,472,000 Wisconsin............................... 2 663,000 ---------- ------------ 985,578,000 Plus premium............................ 3,417,000 Plus unrealized gain on mortgage loans included in debt securities............ 10,727,000 ------------ Total.......................... 3,521 $999,722,000 ========== ============
16 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER PAGE - ------- ------------ 3.1(a) Charter of the Company, which includes Articles of Incorporation, Articles Supplementary for each outstanding Series of Preferred Stock and all other amendments to such Articles of Incorporation(5) 3.1(b) Articles Supplementary ($1.26 Cumulative Convertible Preferred Stock, Series B)(4) 3.2 Bylaws of the Company, as amended(5) 10.17 Amendment to Management Agreement dated March 31, 1993, between the Registrant and Capstead Advisers, Inc.(5) 10.18 Second Amendment to Management Agreement dated September 3, 1993, between the Registrant and Capstead Advisers, Inc.(6) 10.19 Stock Option Agreement, dated June 16, 1992, between the Company and Lomas Financial Corporation(5) 10.20 Form of Loan Sale Agreement(3) 10.21 1990 Employee Stock Option Plan(1) 10.22 1990 Directors' Stock Option Plan(2) 10.23 Employment Agreement dated August 1, 1992 between Capstead Mortgage Corporation and Ronn K. Lytle(4) 10.24 Restricted Stock Grant Agreement dated August 1, 1992 between Capstead Mortgage Corporation and Ronn K. Lytle(4) 10.25 1994 Flexible Long Term Incentive Plan(7) 10.26 1994 Capstead Inc. Restricted Stock Plan(7) 10.27 Capstead Mortgage Corporation Deferred Compensation Plan(7) 10.28 Summary of Employment Agreement dated December 9, 1993 between Capstead Mortgage Corporation and Christopher T. Gilson(7) 11 Computation of per share earnings* 12 Computation of ratio of earnings to combined fixed charges and preferred stock dividends* 13 Portions of the Annual Report to Stockholders of the Company for the year ended December 31, 1995* 21 List of subsidiaries of the Company* 23 Consent of Ernst & Young LLP, Independent Auditors* 27 Financial Data Schedule (electronic filing only)*
(1) Incorporated by reference to the Company's Registration Statement on Form S- 8 (No. 33-40016) dated April 29, 1991 (2) Incorporated by reference to the Company's Registration Statement on Form S- 8 (No. 33-40017) dated April 29, 1991 (3) Incorporated by reference to Amendment No. 1 on Form 8 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991 (4) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 (5) Incorporated by reference to the Company's Registration Statement on Form S- 3 (No. 33-62212) dated May 6, 1993 (6) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 (7) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 * Filed herewith EX-11 2 COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS
1995 1994 1993 ------------- ------------- ------------- PRIMARY:* Average number of common shares outstanding 23,087,000 22,877,000 22,580,000 Incremental shares calculated using the Treasury Stock method 32,000 40,000 139,000 ------------ ------------ ------------ 23,119,000 22,917,000 22,719,000 ============ ============ ============ Net income $ 77,359,000 $ 85,579,000 $ 94,256,000 Less cash dividends paid on convertible preferred stock: Series A ($1.60 paid per share) (939,000) (1,042,000) (1,274,000) Series B ($1.26 paid per share) (38,395,000) (37,834,000) (37,318,000) ------------ ------------ ------------ Net income available to common stockholders $ 38,025,000 $ 46,703,000 $ 55,664,000 ============ ============ ============ Primary net income per share $1.64 $2.04 $2.45 FULLY DILUTED:* Average number of common shares outstanding 23,087,000 22,877,000 22,580,000 Assumed conversion of convertible preferred stock: Series A 803,000 896,000 1,111,000 Series B ** ** ** Incremental shares calculated using the Treasury Stock method 263,000 40,000 204,000 ------------ ------------ ------------ 24,153,000 23,813,000 23,895,000 ============ ============ ============ Net income $ 77,359,000 $ 85,579,000 $ 94,256,000 Less cash dividends paid on Series B Preferred Stock (38,395,000) (37,834,000) (37,318,000) ------------ ------------ ------------ Net income $ 38,964,000 $ 47,745,000 $ 56,938,000 ============ ============ ============ Fully diluted net income per share $1.61 $2.01 $2.38
* Adjusted for the 3-for-2 common stock split effective October 30, 1995. ** 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-12 3 COMPUTATION OF RATIO EXHIBIT 12 CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (IN THOUSANDS, EXCEPT RATIOS) (UNAUDITED) (a) Computation of ratio of earnings to combined fixed charges and preferred stock dividends (including CMO debt):
YEAR ENDED DECEMBER 31 ------------------------------------------------ 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- Fixed charges $577,036 $474,748 $491,076 $415,433 $189,840 Preferred stock dividends 39,334 38,876 38,592 4,707 7,499 -------- -------- -------- -------- -------- Combined fixed charges and preferred stock dividends 616,370 513,624 529,668 420,140 197,339 Net income 77,359 85,579 94,256 53,191 33,717 -------- -------- -------- -------- -------- Total $693,729 $599,203 $623,924 $473,331 $231,056 ======== ======== ======== ======== ======== Ratio of earnings to combined fixed charges and preferred stock dividends 1.13:1 1.17:1 1.18:1 1.13:1 1.17:1 ======== ======== ======== ======== ========
(b) Computation of ratio of earnings to combined fixed charges and preferred stock dividends (excluding CMO debt):
YEAR ENDED DECEMBER 31 ------------------------------------------------ 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- Fixed charges $216,650 $139,092 $ 80,923 $ 62,077 $31,474 Preferred stock dividends 39,334 38,876 38,592 4,707 7,499 -------- -------- -------- -------- ------- Combined fixed charges and preferred stock dividends 255,984 177,968 119,515 66,784 38,973 Net income 77,359 85,579 94,256 53,191 33,717 -------- -------- -------- -------- ------- Total $333,343 $263,547 $213,771 $119,975 $72,690 ======== ======== ======== ======== ======= Ratio of earnings to combined fixed charges and preferred stock dividends 1.30:1 1.48:1 1.79:1 1.80:1 1.87:1 ======== ======== ======== ======== =======
EX-13 4 ANNUAL REPORT EXHIBIT 13 Capstead Mortgage Corporation REPORT OF INDEPENDENT AUDITORS Stockholders and Board of Directors Capstead Mortgage Corporation We have audited the accompanying consolidated balance sheet of Capstead Mortgage Corporation and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Capstead Mortgage Corporation and subsidiaries at December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. [SIGNATURE OF ERNST & YOUNG LLP GOES HERE] Dallas, Texas January 29, 1996 1 Capstead Mortgage Corporation and Subsidiaries CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts) Year Ended December 31 - ------------------------------------------------------------------------------------------------------- 1995 1994 1993 -------- -------- --------- Interest income: Mortgage securities collateral $382,425 $354,603 $390,690 Mortgage investments 240,735 202,398 184,136 -------- -------- --------- Total interest income 623,160 557,001 574,826 -------- -------- --------- Interest and related expenses: Collateralized mortgage securities 360,386 335,656 410,153 Short-term borrowings 216,650 139,092 80,923 Mortgage insurance and other 11,385 13,476 20,084 Provision for possible losses 2,200 3,500 2,800 -------- -------- --------- Total interest and related expenses 590,621 491,724 513,960 -------- -------- --------- Net margin on mortgage assets 32,539 65,277 60,866 -------- -------- --------- Mortgage servicing revenues: Servicing fees 68,510 28,973 1,539 Other 19,662 3,913 (132) -------- -------- --------- Total mortgage servicing revenues 88,172 32,886 1,407 -------- -------- --------- Mortgage servicing expenses: Salaries and related costs 6,079 2,867 648 General, administrative and other 14,264 3,002 492 Amortization of mortgage servicing rights 26,576 5,998 1,323 -------- -------- --------- Total mortgage servicing expenses 46,919 11,867 2,463 -------- -------- --------- Net margin on mortgage servicing operations 41,253 21,019 (1,056) -------- -------- --------- Other revenues: Gain on sales 11,144 9,161 61,216 CMO administration 3,645 4,067 1,482 Other 1,679 950 1,875 -------- -------- --------- Total other revenues 16,468 14,178 64,573 -------- -------- --------- Other expenses: Salaries and related costs 6,477 8,263 7,456 General and administrative 6,424 6,632 6,505 Management fees and termination costs -- -- 16,166 -------- -------- --------- Total other expenses 12,901 14,895 30,127 -------- -------- --------- Net income $ 77,359 $ 85,579 $ 94,256 ======== ======== ========= Net income $ 77,359 $ 85,579 $ 94,256 Less cash dividends on preferred stock (39,334) (38,876) (38,592) -------- -------- --------- Net income available to common stockholders $ 38,025 $ 46,703 $ 55,664 ======== ======== ========= Net income per share: Primary $ 1.64 $ 2.04 $ 2.45 Fully diluted 1.61 2.01 2.38 Average number of shares outstanding: Primary 23,119 22,917 22,719 Fully diluted 24,153 23,813 23,895
See accompanying notes to consolidated financial statements. 2 Capstead Mortgage Corporation and Subsidiaries CONSOLIDATED BALANCE SHEET
(In thousands, except per share amounts) December 31 - ---------------------------------------------------------------------------- 1995 1994 ---------- ---------- Assets Mortgage securities collateral $4,830,020 $5,270,103 Mortgage investments 4,522,954 3,305,984 ---------- ---------- 9,352,974 8,576,087 Less allowance for possible losses (5,919) (7,354) ---------- ---------- 9,347,055 8,568,733 Cash and cash equivalents 18,702 21,741 Prepaids, receivables and other 114,489 70,415 Mortgage servicing rights 423,360 282,969 ---------- ---------- $9,903,606 $8,943,858 ========== ========== Liabilities Collateralized mortgage securities $4,538,863 $5,102,145 Short-term borrowings 4,628,782 3,190,582 Accounts payable and accrued expenses 23,339 11,568 Mortgage servicing rights acquisitions payable 47,898 75,888 ---------- ---------- 9,238,882 8,380,183 ---------- ---------- Stockholders' Equity Preferred stock - $0.10 par value; 100,000 shares authorized: $1.60 Cumulative Preferred Stock, Series A, 550 and 623 shares issued and outstanding ($9,020 aggregate liquidation preference) 7,685 8,720 $1.26 Cumulative Convertible Preferred Stock, Series B, 30,686 and 30,277 shares issued and outstanding ($349,207 aggregate liquidation preference) 330,065 324,779 Common stock - $0.01 par value; 100,000 shares authorized; 23,521 and 22,956 shares issued and outstanding 235 229 Paid-in capital 321,207 310,764 Undistributed income (accumulated deficit) (2,370) (2,302) Unrealized gain (loss) on debt and equity securities 7,902 (78,515) ---------- ---------- 664,724 563,675 ---------- ---------- $9,903,606 $8,943,858 ========== ==========
See accompanying notes to consolidated financial statements. 3 Capstead Mortgage Corporation and Subsidiaries CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except per share amounts) Three Years Ended December 31, 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Unrealized Undistributed Gain (Loss) Preferred Stock Income on Debt ------------------------- Common Paid-in (Accumulated and Equity Series A Series B Stock Capital Deficit) Securities Total ---------- --------- -------- --------- --------------- -------------- ---------- Balance at January 1, 1993 $13,205 $315,025 $223 $303,503 $ (457) $ -- $631,499 Net income -- -- -- -- 94,256 -- 94,256 Cash dividends: Common ($2.44 per share) -- -- -- -- (55,221) -- (55,221) Preferred: Series A ($1.60 per share) -- -- -- -- (1,274) -- (1,274) Series B ($1.26 per share) -- -- -- -- (37,318) -- (37,318) Conversion of preferred stock (2,910) (144) 3 3,051 -- -- -- Other -- 4,662 1 1,585 -- -- 6,248 -------- --------- ------ -------- ----------- ------------ --------- Balance at December 31, 1993 10,295 319,543 227 308,139 (14) -- 638,190 Adjustment for change in accounting method -- -- -- -- -- 7,512 7,512 Net income -- -- -- -- 85,579 -- 85,579 Cash dividends: Common ($2.14 per share) -- -- -- -- (48,991) -- (48,991) Preferred: Series A ($1.60 per share) -- -- -- -- (1,042) -- (1,042) Series B ($1.26 per share) -- -- -- -- (37,834) -- (37,834) Conversion of preferred stock (1,575) (18) 2 1,591 -- -- -- Other -- 5,254 -- 1,034 -- -- 6,288 Change in unrealized gain (loss) on debt and equity securities -- -- -- -- -- (86,027) (86,027) -------- --------- ------ -------- ----------- ------------ --------- Balance at December 31, 1994 8,720 324,779 229 310,764 (2,302) (78,515) 563,675 Net income -- -- -- -- 77,359 -- 77,359 Cash dividends: Common ($1.64 per share) -- -- -- -- (38,093) -- (38,093) Preferred: Series A ($1.60 per share) -- -- -- -- (939) -- (939) Series B ($1.26 per share) -- -- -- -- (38,395) -- (38,395) Conversion of preferred stock (1,035) (26) 1 1,060 -- -- -- Other -- 5,312 5 9,383 -- -- 14,700 Change in unrealized gain (loss) on debt and equity securities -- -- -- -- -- 86,417 86,417 -------- --------- ------ -------- ----------- ------------ --------- Balance at December 31, 1995 $ 7,685 $330,065 $235 $321,207 (2,370) $ 7,902 $664,724 ======== ========= ====== ======== =========== ============ =========
See accompanying notes to consolidated financial statements. 4 Capstead Mortgage Corporation and Subsidiaries CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands) Year Ended December 31 - -------------------------------------------------------------------------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Operating activities: Net income $ 77,359 $ 85,579 $ 94,256 Noncash items: Amortization of discount and premium 25,829 6,265 47,988 Amortization of mortgage servicing rights 26,576 5,998 1,323 Depreciation and other amortization 3,260 1,932 819 Provision for possible losses 2,200 3,500 2,800 Net change in prepaids, receivables, other assets, accounts payable and accrued expenses (19,330) (46,330) (2,273) Net gain from investing activities (11,144) (9,161) (61,216) ----------- ----------- ----------- Net cash provided by operating activities 104,750 47,783 83,697 ----------- ----------- ----------- Investing activities: Mortgage securities collateral: Principal collections on collateral 501,110 1,157,248 2,437,768 Decrease in accrued interest receivable 4,092 9,065 11,302 Decrease (increase) in short-term investments 4,603 166,150 (25,361) Purchases and originations of mortgage loans (126,786) (1,935,136) (4,410,950) Purchases of agency securities (2,787,988) (1,631,294) (1,747,931) Purchases of equity securities -- (17,808) -- Purchases of other mortgage securities (131,531) -- -- Purchases of mortgage servicing rights (184,082) (263,821) (26,469) Principal collections on mortgage investments 549,458 349,806 266,347 Proceeds from sales and redemptions of mortgage assets 1,281,057 105,288 3,859,993 Purchases of hedge instruments (27,381) -- -- Proceeds from sales of hedge instruments 32,480 -- -- ----------- ----------- ----------- Net cash provided (used) by investing activities (884,968) (2,060,502) 364,699 ----------- ----------- ----------- Financing activities: Collateralized mortgage securities: Issuance of securities -- 2,565,540 1,185,482 Principal payments on securities (572,191) (1,352,288) (2,469,026) Increase (decrease) in accrued interest payable 1,887 (7,636) (14,427) Capital stock transactions 14,774 6,288 6,248 Dividends paid (77,501) (87,867) (93,813) Increase (decrease) in mortgage servicing acquisitions payable (27,990) 75,888 -- Increase in short-term borrowings 1,438,200 746,775 994,598 ----------- ----------- ----------- Net cash provided (used) by financing activities 777,179 1,946,700 (390,938) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents (3,039) (66,019) 57,458 Cash and cash equivalents at beginning of year 21,741 87,760 30,302 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 18,702 $ 21,741 $ 87,760 =========== =========== ===========
See accompanying notes to consolidated financial statements. 5 Capstead Mortgage Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995 1 Business Capstead Mortgage Corporation, a national mortgage banking firm, earns income from servicing mortgage loans, investing in mortgage-backed securities and other investment strategies. The Company's business plan is to build its mortgage servicing and mortgage securities portfolios with the goal of producing reasonably balanced operating results in a rising or falling interest rate environment. 2 Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Capstead Mortgage Corporation ("Capstead"), its mortgage servicing subsidiary ("Capstead Inc."), its special-purpose finance subsidiaries and certain other entities (collectively, the "Company"). Intercompany balances and transactions have been eliminated. Substantially all of the assets of the special-purpose finance subsidiaries are pledged to secure collateralized mortgage securities and are not available for the satisfaction of general claims of Capstead. Capstead has no obligation for the collateralized mortgage securities beyond the assets pledged as collateral. Use of Estimates The use of estimates is inherent in the preparation of financial statements in conformity with generally accepted accounting principles. The amortization of premiums and discounts on mortgage assets and collateralized mortgage securities and the amortization of mortgage servicing rights is based on expectations of future movements in interest rates and how resulting rates will impact prepayments on underlying mortgage loans. It is possible that prepayments could rise to levels that would adversely affect profitability if such levels are sustained for more than a brief period of time. The Company attempts to mitigate this risk by achieving a balance of investments that perform well in a rising interest rate environment, such as mortgage servicing rights and interest-only securities, and in a falling interest rate environment, such as mortgage investments, as supplemented from time to time by hedging activities. Mortgage Assets Mortgage investments and mortgage securities collateral held in the form of mortgage-backed securities are debt securities. Management determines the appropriate classification of debt securities at the time of purchase or securitization and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Marketable equity securities and debt securities not classified as held-to-maturity are classified as available-for- sale. Available-for-sale securities are stated at fair value with unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. Mortgage investments held in the form of mortgage loans are carried at their unpaid principal balance, net of unamortized discount or premium. The Company may, from time to time, hold mortgage loans for sale. Such loans are carried at the lower 6 Capstead Mortgage Corporation of cost or market on an aggregate basis. Transfers from loans held for sale to loans held for investment are recorded at the lower of cost or market. Interest income, net of servicing fees, is recorded as income when earned. Any discount or premium is recognized as an adjustment to interest income by the interest method over the life of the related mortgage asset. Interest and dividends are included in interest income and other revenues, respectively. Realized gains and losses are included in other revenues. The cost of assets sold is based on the specific identification method. Allowance For Possible Losses The Company provides for possible losses due to mortgagor default on mortgage loans not covered by mortgage pool insurance, fraud in the origination of mortgage loans and special hazards on mortgage loans not covered by special hazard insurance. The Company also provides for possible losses related to the Company's limited exposure to credit and special hazard risks in certain securitizations utilizing a senior/subordinate structure. Cash and Cash Equivalents Cash and cash equivalents include cash on hand and highly liquid investments with original maturities of 3 months or less. Mortgage Servicing Rights The cost of acquiring mortgage servicing rights is capitalized and then amortized in proportion to and over the period of estimated net servicing income. Estimated net servicing income is evaluated periodically and adjustments are made to the rate of amortization. Hedging Activities The Company has acquired derivative financial instruments, specifically interest rate floors, as hedges against increased prepayments on investments in mortgage servicing rights and interest-only securities. Interest rate floors partially protect the value of the assets hedged from the impact of increased prepayments by increasing in value when interest rates decline. Realized gains from effective hedge transactions reduce the carrying amount of the assets hedged. Ongoing correlation and effectiveness of the hedges is measured by comparing the change in value of the floors with the change in value of the assets hedged. Should a hedge prove ineffective, results in excess of a corresponding change in value of the assets hedged would be taken to income and hedge accounting would cease. The Company has acquired other derivative financial instruments, specifically interest rate caps, as a hedge against rising interest rates on a portion of its short-term borrowings. The Company may receive cash payments from the counterparties to these instruments should certain specified interest rates fall (floors) or rise (caps). Any such payments will be accrued and taken to income as a component of interest income on interest-only securities, amortization expense of mortgage servicing rights or interest expense on short-term borrowings, as applicable. The cost of acquiring floors and caps is taken to income as a component of the applicable hedged item over the contractual lives of the instruments. The Company has credit risk with regard to the counterparties to derivative financial instruments. The Company manages credit risk by dealing only with large, financially-sound investment banking firms. The unamortized balance of the instruments is included in prepaids, receivables and other on the balance sheet. Borrowings Collateralized mortgage securities and short-term borrowings are carried at their unpaid principal balances, net of unamortized discount or premium. Any discount or premium is recognized as an adjustment to interest expense by the interest method over the expected term of the related borrowings. 7 Capstead Mortgage Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Mortgage Servicing Revenues Mortgage servicing revenues represent fees received for servicing mortgage loans. Servicing fees are calculated based on a contractual percentage of the outstanding monthly principal balance of mortgage loans serviced and are recognized as income when collected. Income Taxes Capstead and its qualified real estate investment trust ("REIT") subsidiaries ("qualified REIT subsidiaries") have elected to be taxed as a REIT and intend to continue to do so. As a result of this election, Capstead is not taxed on taxable income distributed to stockholders, provided that certain REIT qualification tests are met. Currently, it is Capstead's policy to distribute 100 percent of taxable income of the REIT within the time limits prescribed by the Internal Revenue Code (the "Code"), which may extend into the subsequent taxable year. Accordingly, no provision has been made for income taxes for Capstead and its qualified REIT subsidiaries. Capstead's non-REIT subsidiaries, principally Capstead Inc., file a separate federal income tax return. Stock Option Plans Employee and director stock options are accounted for under the provisions of Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") and Related Interpretations. Under APB 25, a fair value methodology is not utilized in determining expense recognition for stock option awards to employees and directors. Net Income Per Share Primary net income per share is computed by dividing net income, after deduction of preferred stock dividends, by the weighted average number of common shares and common stock equivalents outstanding, after retroactively giving effect to stock splits. Fully diluted net income per share is computed by dividing net income, after deducting dividends on the $1.26 Cumulative Convertible Preferred Stock, Series B ("Series B Preferred Stock"), by the weighted average number of common shares and common stock equivalents outstanding, after retroactively giving effect to stock splits, and assuming conversion of the $1.60 Cumulative Preferred Stock, Series A ("Series A Preferred Stock"). The Series B Preferred Stock is not considered convertible for purposes of calculating fully diluted net income per share as it is currently antidilutive. Reclassification and Stock Split Certain amounts for prior years have been reclassified to conform to the 1995 presentation. On October 30, 1995 a 3-for-2 split of the Company's $0.01 par value common stock was accomplished. All references to the number of common shares and share amounts in the accompanying consolidated financial statements and related notes have been restated to reflect the stock split. Recent Accounting Pronouncements In May 1995 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 122 "Accounting for Mortgage Servicing Rights" ("SFAS 122"). SFAS 122 sets forth new accounting principles for capitalizing originated mortgage servicing rights and recording impairment of existing mortgage servicing rights. The Company will adopt SFAS 122 on a prospective basis effective January 1, 1996 as required. This adoption is not expected to have a material impact on the results of operations or financial position of the Company. 8 Capstead Mortgage Corporation 3 Mortgage Investments Mortgage investments and the related average effective interest rates (calculated excluding unrealized gains and losses) were as follows (dollars in thousands):
Year Ended As of December 31 December 31 - ---------------------------------------------------------------------------- 1995 1994 1995 1994 ---------- ---------- ------ ------ Mortgage loans held for sale $ 5,155 $ -- 7.76% --% Mortgage loans 5,264 209,507 7.07 6.68 AAA-rated mortgage pass-through securities: Fixed-rate 1,771 409 8.76 6.69 Medium-term 424,329 459,874 6.96 6.92 Adjustable-rate 563,203 755,623 6.90 5.48 Agency securities: Fixed-rate 489,689 504,023 6.32 6.44 Adjustable-rate 2,984,451 1,042,861 6.13 4.74 Callable notes 49,092 333,687 6.98 6.96 ---------- ---------- $4,522,954 $3,305,984 ========== ==========
The Company classifies its mortgage investments by term and interest rate characteristics of the underlying mortgage loans. Fixed-rate mortgage investments have (i) fixed rates of interest for their entire terms or (ii) an initial fixed-rate period of 10 years after origination and then adjust annually based on a specified margin over 1-year U.S. Treasury Securities ("1-year Treasuries"). Medium-term mortgage investments have (i) an initial fixed-rate period of 3 or 5 years after origination and then adjust annually based on a specified margin over 1-year Treasuries or (ii) initial interest rates that adjust one time, approximately 5 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 adjust (i) semi-annually based on a specified margin over the 6-month London Interbank Offered Rate ("LIBOR") or (ii) annually based on a specified margin over 1-year Treasuries. Fixed- 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"). Callable agency notes are unsecured, 3-year, fixed-rate notes issued by FHLMC, FNMA or the Federal Home Loan Bank Board ("FHLBB") and mature in 1997, unless redeemed earlier. Collectively, mortgage-backed securities and callable notes issued by government-sponsored entities are referred to as "Agency Securities." At December 31, 1995 the AAA-rated private mortgage pass-through securities ("Mortgage Pass-Throughs") and the Agency Securities were pledged to secure short-term borrowings. Transfers from mortgage investments to mortgage securities collateral totaled $2,688,361,000 and $1,197,947,000 in 1994 and 1993, respectively. 9 Capstead Mortgage Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 4 Mortgage Securities Collateral Mortgage securities collateral consists primarily of collateral pledged to secure borrowings through collateralized mortgage securities. All principal and interest on the collateral is remitted directly to a collection account maintained by a trustee. The trustee is responsible for reinvesting those funds in short-term investments. All collections on the collateral and the reinvestment income earned thereon are available for the payment of principal and interest on the collateralized mortgage securities. The components of mortgage securities collateral are summarized as follows (in thousands):
December 31 - ------------------------------------------------------------------------------- 1995 1994 ---------- ---------- Mortgage collateral $4,660,504 $5,201,886 Short-term investments 24,705 29,308 Accrued interest receivable 29,130 33,221 ---------- ---------- Total collateral 4,714,339 5,264,415 Unamortized discount (7,147) (7,962) ---------- ---------- Net collateral 4,707,192 5,256,453 Other mortgage securities 122,828 13,650 ---------- ---------- $4,830,020 $5,270,103 ========== ==========
Mortgage collateral consists of fixed-rate, medium-term and adjustable-rate mortgage securities and fixed-rate Agency Securities. The weighted average effective interest rate for mortgage collateral was 7.55 percent and 7.63 percent during 1995 and 1994, respectively. Other mortgage securities at December 31, 1995 consist primarily of agency-issued, interest-only securities yielding 10.11 percent with a related notional amount of $800 million. 5 Mortgage Servicing The following table provides information regarding the mortgage servicing portfolio and the related investment in mortgage servicing rights (dollars in thousands):
Unpaid Mortgage Principal Number Servicing Balance of Loans Rights - ------------------------------------------------------------------------------- Loans serviced at January 1, 1994 $ 2,393,267 7,746 $ 25,146 Additions 12,524,522 110,078 170,268 Run-off/amortization (525,607) (2,215) (5,998) ----------- ------- -------- Loans serviced at December 31, 1994 14,392,182 115,609 189,416 Additions 13,090,200 143,153 224,505 Run-off/amortization (1,924,753) (11,877) (26,576) Results of hedging activity - - (17,745) ----------- ------- -------- Loans serviced at December 31, 1995 25,557,629 246,885 369,600 Purchases pending transfer 3,064,000 30,600 53,760 ----------- ------- -------- Total portfolio at December 31, 1995 $28,621,629 277,485 $423,360 =========== ======= ========
10 Capstead Mortgage Corporation The Company services mortgage loans in all 50 states and the District of Columbia. As of December 31, 1995, 16 percent of loans serviced and loans pending transfer were located in California (based on unpaid principal balances). In connection with mortgage servicing activities, the Company maintains segregated escrow deposits that are held in bank trust accounts. At December 31, 1995 and 1994, escrow and fiduciary funds for loans being serviced approximated $316 million and $163 million, respectively, and are excluded from the accompanying balance sheet. 6 Collateralized Mortgage Securities Each series of collateralized mortgage securities issued consists of various classes of bonds, most of which have fixed rates of interest. Interest is payable monthly or quarterly at specified rates for all classes. Typically, principal payments on each series are made to each class in the order of their stated maturities so that no payment of principal will be made on any class of bonds until all classes having an earlier stated maturity have been paid in full. The components of collateralized mortgage securities along with selected other information are summarized as follows (dollars in thousands):
December 31 - ------------------------------------------------------------------------------ 1995 1994 ---------- ---------- Collateralized mortgage securities $4,606,668 $5,177,445 Accrued interest payable 53,164 51,277 ---------- ---------- Total obligation 4,659,832 5,228,722 Less unamortized discount (120,969) (126,577) ---------- ---------- Net obligation $4,538,863 $5,102,145 ========== ========== Range of average interest rates 5.80% to 9.70% 5.87% to 10.00% Range of stated maturities 2007 to 2025 2007 to 2025 Number of series 41 45
The maturity of each series of securities is directly affected by the rate of principal prepayments on the related mortgage securities collateral. Each series of securities is also subject to redemption at the Company's option provided that certain requirements specified in the related indenture have been met (referred to as "clean-up calls"). As a result, the actual maturity of any series of securities is likely to occur earlier than its stated maturity. The average effective interest rate for all collateralized mortgage securities was 7.57 percent and 7.49 percent during 1995 and 1994, respectively. Interest paid on collateralized mortgage securities totaled $351,477,000, $324,229,000 and $375,948,000 during 1995, 1994 and 1993, respectively. 7 Short-Term Borrowings Short-term borrowings are primarily made under repurchase arrangements with investment banking firms pursuant to which 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. Repurchase arrangements, 11 Capstead Mortgage Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) all of which had maturities of less than 31 days, and the related average effective interest rates are classified by type of collateral as follows (dollars in thousands):
December 31, 1995 December 31, 1994 - ------------------------------------------------ ------------------------ Weighted Weighted Borrowings Average Borrowings Average Outstanding Rate Outstanding Rate ----------- -------- ----------- -------- Mortgage loans $ _ _% $ 190,060 6.45% Mortgage Pass-Throughs 962,455 5.99 1,161,894 6.24 Agency Securities 3,454,802 5.75 1,783,996 5.67 Other mortgage assets 168,025 6.10 44,632 6.47 ---------- ---------- $4,585,282 $3,180,582 ========== ==========
In October 1995 Capstead Inc. extended a $300 million revolving line of credit agreement with an investment banking firm for an additional year. The new maturity date of this agreement is October 1997. A fee was paid on the $120 million committed portion of this facility. The line will be used primarily to finance future acquisitions of mortgage servicing rights and will be collateralized by those rights, as well as certain existing servicing rights. The agreement requires, among other things, that Capstead Inc. maintain certain financial ratios and specified levels of unencumbered servicing rights, as defined. Capstead Inc. is in compliance with all requirements. Interest rates on borrowings under this facility are based on LIBOR with interest due monthly. Borrowings under this facility totaled $43,500,000 at 8.19 percent and $10,000,000 at 7.24 percent at December 31, 1995 and 1994, respectively. Accrued interest on short-term borrowings totaled $9,594,000 at December 31, 1995. The weighted average effective interest rate on all short-term borrowings was 6.06 percent and 4.64 percent during 1995 and 1994, respectively. Interest paid on short-term borrowings totaled $217,028,000, $136,442,000 and $81,722,000 during 1995, 1994 and 1993, respectively. 8 Disclosures Regarding Fair Values of Financial Instruments The estimated fair values of financial instruments 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. The carrying amounts of cash and cash equivalents, receivables, payables and short-term borrowings approximate fair value. The fair value of equity securities, if any, and derivative financial instruments are based on quoted market prices. The fair value of mortgage assets 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 for similar mortgage assets, or (iii) expected securitization results. The fair value of collateralized mortgage securities is dependent upon the characteristics of the mortgage securities collateral pledged to secure the issuance. Therefore, fair value was based on the same method used for determining fair value for the underlying mortgage securities collateral adjusted for credit enhancements. 12 Capstead Mortgage Corporation The following tables summarize fair values of financial instruments (in thousands):
December 31, 1995 December 31, 1994 - ----------------------------------------------------------------------- ----------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------ ------------ ------------ ------------ Assets: Cash and cash equivalents $ 18,702 $ 18,702 $ 21,741 $ 21,741 Receivables and equity securities 79,710 79,858 50,558 51,545 Mortgage securities collateral 4,830,020 4,791,722 5,270,103 4,850,391 Mortgage investments 4,522,954 4,522,954 3,305,984 3,220,486 Derivative financial instruments: Interest rate floors ($5.5 billion notional amount) 11,588 22,911 -- -- Interest rate caps ($625 million notional amount) 4,422 463 -- -- Liabilities: Payables 71,237 71,237 87,456 87,456 Collateralized mortgage securities 4,538,863 4,553,184 5,102,145 4,736,974 Short-term borrowings 4,628,782 4,628,782 3,190,582 3,190,582
The Company adopted the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115") as of January 1, 1994. In accordance with SFAS 115, prior period financial statements have not been restated to reflect the change in accounting principle. There was no cumulative effect as of January 1, 1994 of adopting SFAS 115 on net income. The January 1, 1994 opening balance of stockholders' equity was increased by $7,512,000 to reflect net unrealized gains on securities classified as available-for-sale that were previously carried at amortized cost. In response to transition rules for adopting SFAS 115 released in November 1995, $393,478,000 of medium-term Mortgage Pass-Throughs, $546,759,000 of Agency Securities, and $195,474,000 of mortgage securities collateral were transferred from held-to-maturity to available-for-sale. These securities had a net unrealized gain of $7,701,000 on the December 31, 1995 transfer date. The following table summarizes securities held available-for-sale at December 31, 1995 (in thousands):
Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value - ------------------------------------------------------------------------------------------------ Mortgage Pass-Throughs: Fixed-rate $ 1,723 $ 48 $ -- $ 1,771 Medium-term 420,910 3,455 36 424,329 Adjustable-rate 555,944 7,259 -- 563,203 Agency Securities: Fixed-rate 497,785 -- 8,096 489,689 Adjustable-rate 2,977,794 6,657 -- 2,984,451 Callable notes 48,974 118 -- 49,092 Mortgage securities collateral 356,159 9,063 10,566 354,656 ---------- ------- ------- ---------- Total debt securities $4,859,289 $26,600 $18,698 $4,867,191 ========== ======= ======= ==========
Mortgage securities collateral classified as held-to-maturity has been permanently financed through the issuance of collateralized mortgage securities. Gross unrealized gains and losses are based on projected net cash flows of the mortgage securities collateral after payment on the related collateralized mortgage securities determined using market discount rates and 13 Capstead Mortgage Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) prepayment assumptions. At December 31, 1995, $4,475,364,000 of mortgage securities collateral held-to-maturity (cost basis) had gross unrealized gains and losses of $5,042,000 and $60,920,000, respectively, resulting in a fair value of $4,419,486,000; however, because the Company intends to hold these assets to maturity, it does not anticipate realizing such gains or losses and instead expects these assets will continue to make a positive contribution to income in future periods. The following tables summarize available-for-sale and held-to-maturity securities as of December 31, 1994 (in thousands):
Available-For-Sale Securities - ----------------------------------------------------------------------------------------- Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value ----------- ---------- ----------- ----------- Mortgage Pass-Throughs: Fixed-rate $ 427 $ - $ 18 $ 409 Medium-term* 9,054 - 9,054 - Adjustable-rate 780,224 - 24,601 755,623 Adjustable-rate Agency Securities 1,088,252 - 45,391 1,042,861 Other mortgage securities 10,369 1,734 810 11,293 Equity securities 1,113 - 375 738 ---------- ------ ------- ---------- $1,889,439 $1,734 $80,249 $1,810,924 ========== ====== ======= ==========
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 504,023 - 62,586 441,437 Callable 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 ========== ====== ======== ==========
* The investment in medium-term Mortgage Pass-Throughs was transferred to the held-to-maturity classification during the third quarter of 1994. As a result, the unrealized loss at the transfer date remained as a component of the recorded mark-to-market for available-for-sale securities at December 31, 1994. The maturity of mortgage assets is directly affected by the rate of principal prepayments by mortgagors and clean-up calls by issuers of remaining debt securities outstanding. Included in mortgage securities collateral is $31,822,000 and $4,646,000 of collateral released from the related indentures at December 31, 1995 and 1994, respectively. During 1995 and 1994, mortgage collateral previously released from the related indentures pursuant to clean-up calls totaling $35,893,000 and $77,087,000 were sold at gross realized gains aggregating $966,000 and $2,938,000, respectively. During 1995 and 1994, available-for-sale securities totaling $784,600,000 and $16,695,000 (cost basis) were sold at gross realized gains aggregating $9,511,000 and $6,223,000, respectively. Principal collections on mortgage investments and mortgage collateral released from the related indentures while held-to-maturity totaled $84,020,000 and $47,895,000 during 1995 and 1994, respectively. During 1995, $284,950,000 of callable agency notes held-to-maturity were redeemed by issuers. 14 Capstead Mortgage Corporation 9 Allowance for Possible Losses The Company has limited exposure to losses on mortgage investments and mortgage collateral. Losses due to typical mortgagor default may be reduced by mortgage pool insurance from AAA-rated mortgage pool insurers, which supplements primary mortgage insurance, if any, and homeowner equity, if any. The amount of coverage under mortgage pool insurance policies is the amount (typically 7 to 15 percent of the aggregate amount in such pool of mortgage loans) determined by one or more national statistical rating agencies necessary to allow the related securities to be rated AAA when combined with homeowner equity or other insurance coverage. Certain other risks, however, are not covered by mortgage pool insurance and may subject the Company to losses. These risks include fraud or misrepresentation during origination of a mortgage loan and special hazards that are not covered by standard hazard insurance policies (e.g., earthquakes). In cases of fraud, the Company generally will not be able to recover its losses from the mortgage insurance company, but will generally have recourse to the prior owner of a loan based on representations and warranties made at the time the loan was purchased. However, to the extent the prior owner does not perform its repurchase obligation, the Company may incur a loss. Special hazards are typically catastrophic events that are unable to be predicted. The Company limits its exposure to special hazard losses by acquiring special hazard insurance coverage from a AAA-rated insurer. As of December 31, 1995, 48 percent of the Company's mortgage assets (excluding Agency Securities) were covered by a special hazard insurance policy. Management does not believe that fraud or special hazard risks pose a material exposure to the Company. In late 1993 the Company began issuing CMOs in a senior/subordinate structure (in lieu of purchasing mortgage pool insurance and special hazard insurance) where the investor in the subordinate classes assumes credit and special hazard risks. The Company has retained an aggregate of approximately $2.0 million of credit and special hazard risk on certain of these issuances. Actual losses to the Company due to this risk are dependent upon the timing and magnitude of related collateral defaults. Activity in the allowance for possible losses was as follows (in thousands):
Year Ended December 31 - ---------------------------------------------------------------- 1995 1994 ------- ------- Beginning balance $ 7,354 $ 6,927 Provision for possible losses 2,200 3,500 Charge-offs due to: Mortgagor default (680) (893) Fraud/misrepresentation (2,041) (1,973) Special hazard losses (914) (207) ------- ------- $ 5,919 $ 7,354 ======= =======
As of December 31, 1995, approximately 49 percent of mortgage assets (excluding Agency Securities) were secured by properties located in California. Exposure arising from this geographic concentration has been reduced by either the acquisition of mortgage pool insurance and special hazard insurance or the use of the senior/subordinate structure for securitizations. 15 Capstead Mortgage Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 10 Income Taxes Capstead and its qualified REIT subsidiaries file a separate federal income tax return that does not include the operations of the non-REIT subsidiaries. Provided all taxable income of Capstead and its qualified REIT subsidiaries is distributed to stockholders within time limits prescribed by the Code, no income taxes are due on this income. Taxable income of the non-REIT subsidiaries is fully taxable. Income taxes paid by the non-REIT subsidiaries during 1995 totaled $481,000. No income taxes were paid in prior years. Effective tax rates will differ substantially from statutory federal income tax rates because of the effect of the following items (in thousands):
Year Ended December 31 - --------------------------------------------------------------------------------------------------------------- 1995 1994 1993 --------- --------- ---------- Income taxes computed at the federal statutory rate $ 27,241 $ 29,097 $ 32,047 Income not subject to tax due to REIT status (21,712) (27,289) (32,422) --------- --------- --------- Net income (loss) of non-REIT subsidiaries at the statutory rate 5,529 1,808 (375) Alternative minimum tax 456 -- -- Losses not benefited for income tax purposes -- -- 375 Benefit of previously unrecognized deferred income tax asset (5,859) (1,261) -- Other 346 (547) -- ---------- --------- -------- $ 472 $ -- $ -- ---------- --------- --------
Significant components of deferred income tax assets and liabilities are as follows (in thousands):
December 31 - ------------------------------------------------------------------------------------------------------------- 1995 1994 -------- ------- Deferred tax assets: Net operating loss carryforwards $19,065 $26,504 Capital loss carryforwards -- 1,949 Hedging transactions 5,967 -- Other 1,158 370 ------- ------- 26,190 28,823 ------- ------- Deferred tax liabilities: Mark-to-market 1,139 1,981 Securitizations -- 15,429 Amortization of mortgage servicing rights 2,765 119 Other -- 85 ------- ------- 3,904 17,614 ------- ------- Net deferred tax assets $22,286 $11,209 ======= ======= Valuation allowance $22,286 $11,209 ======= =======
16 Capstead Mortgage Corporation The increase in the valuation allowance during 1995 is primarily the result of hedging transactions and a reorganization of certain subsidiaries. At December 31, 1995 the non-REIT subsidiaries had net operating loss carryforwards for tax purposes of approximately $55 million, which expire beginning in the year 2007. 11 Stockholders' Equity The Series A Preferred Stock issued in connection with a 1989 acquisition is nonvoting. Each share is entitled to a cumulative fixed dividend at an annual rate of $1.60 and is eligible for conversion into 1.35 shares of common stock. The Series A Preferred Stock has a liquidation preference of $16.40 per share and is currently redeemable at the Company's option, in whole or in part, at a redemption price equal to the liquidation preference. During 1995, 73,107 shares of the Series A Preferred Stock were converted into 98,694 shares of common stock. The Series B Preferred Stock issued in connection with a 1992 acquisition is nonvoting. Each share is entitled to a cumulative fixed dividend at an annual rate of $1.26 and is eligible for conversion into 0.4794 of 1 share of common stock. The Series B Preferred Stock has a liquidation preference of $11.38 per share and is redeemable at the Company's option, in whole or in part, at a redemption price of $12.50 after December 2, 1997. During 1995, 2,190 shares of the Series B Preferred Stock were converted into 1,050 shares of common stock. During 1995, 1994 and 1993, the Company issued 104,151; 31,119 and 15,543 shares of common stock through its dividend reinvestment plan for net proceeds of $2,044,000, $534,000 and $395,000, respectively. During 1995, 1994 and 1993, the Company also issued 411,142; 481,384 and 381,473 shares of Series B Preferred Stock through its dividend reinvestment plan for Series B stockholders on which net proceeds were received of $5,312,000, $5,254,000 and $4,662,000, respectively. The Company modified its dividend reinvestment plan for common stock during 1995 to allow investors to purchase additional shares directly from the Company. The Company issued 305,769 shares for net proceeds of $6,223,000 pursuant to this modification. Also during 1995 the Company began a program whereby the Company may issue new shares of common stock on a daily basis, subject to certain limitations. The Company issued 42,800 shares for net proceeds of $974,000 pursuant to this program. Outstanding options, other than those issued pursuant to employee and director benefit plans, are limited to a 6-year option issued July 31, 1992 to acquire 1,125,000 shares of common stock at $21.75 per share. The Company's Charter provides that if the Board of Directors determines in good faith that the direct or indirect ownership of stock of Capstead has become concentrated to an extent which would cause Capstead to fail to qualify as a REIT, the Company may redeem or repurchase, at fair market value, any number of shares of common stock and/or preferred stock sufficient to maintain or bring such ownership into conformity with the Code and may refuse to transfer or issue shares of common stock and/or preferred stock to any person whose acquisition would result in Capstead being unable to comply with the requirements of the Code. In addition, the Charter provides that the Company may redeem or refuse to transfer any shares of capital stock of Capstead necessary to prevent the imposition of a penalty tax as a result of ownership of such shares by certain disqualified organizations, including governmental bodies and tax-exempt entities that are not subject to tax on unrelated business taxable income. 17 Capstead Mortgage Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 12 Employee Benefit Plans The Company sponsors stock option plans for directors and employees and also sponsors the 1994 Flexible Long-Term Incentive Plan, which provide for the issuance of stock options and other incentive-based stock awards (collectively, the "Plans"). The Plans provide for the issuance of up to an aggregate of 2,475,000 shares of common stock. Most of the outstanding grants provide for the annual granting of dividend equivalent rights that permit the option holder to obtain additional shares of common stock based upon formulas set forth in the Plans.
Year Ended December 31 - --------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 --------- -------- --------- Outstanding options at beginning of year: 1,046,185 228,920 211,161 Options granted 324,750 877,500 99,000 Options exercised (11,964) (41,437) (87,451) Options canceled (25,258) (26,555) -- Dividend equivalent rights earned 36,993 7,757 6,210 --------- --------- ------- Outstanding options at end of year 1,370,706 1,046,185 228,920 ========= ========= ======= Exercise price per share: For options exercised during year $8.67 - 18.00 $8.67 - 26.17 $8.67 - 23.00 For options outstanding at end of year 8.67 - 27.33 8.67 - 27.33 8.67 - 26.17
As of December 31, 1995, options were immediately exercisable for 862,147 shares. In accordance with the terms of the Plans, on January 1, 1996 the Company granted dividend equivalent rights for the issuance of an additional 47,131 shares. The Company also sponsors a qualified defined contribution retirement plan created in late 1993 for all employees. The Company matches up to 50 percent of a participant's voluntary contribution up to a maximum of 6 percent of a participant's compensation. The Company also may make additional contributions of up to another 3 percent of a participant's compensation. All Company contributions are subject to certain vesting requirements. Contribution expenses were $758,891, $369,624 and $16,092 in 1995, 1994 and 1993, respectively. 13 Management and Non-Competition Agreements Since its inception in 1985 and through September 30, 1993, the Company operated under a management agreement with a subsidiary (the "Manager") of Lomas Mortgage USA, Inc. ("LMUSA"). In 1992 the Company entered into a 65-month management agreement with the Manager and a 65-month non-competition agreement with the parent company of LMUSA. In 1993 the Company negotiated the termination of these agreements and on October 1, 1993 became fully self-administered. Termination costs incurred in 1993 totaled $11,891,000 including $4,363,000 of unamortized amounts paid under the non-competition agreement. 18 Capstead Mortgage Corporation 14 Net Interest Income Analysis (Unaudited) The following tables summarize interest income and interest expense and average effective interest rates for the periods indicated (dollars in thousands):
1995 1994 1993 - ------------------------------------------------------------------------------- ------------------- -------------------- Average Average Average Amount Rate Amount Rate Amount Rate ------ ------ ------ ------- ------ ------- Interest income: Mortgage securities collateral $ 382,425 7.59% $ 354,603 7.63% $ 390,690 8.38% Mortgage investments 240,735 6.50 202,398 6.07 184,136 6.56 --------- --------- --------- Total interest income 623,160 557,001 574,826 --------- --------- --------- Interest expense: Collateralized mortgage securities 360,386 7.57 335,656 7.49 410,153 9.05 Short-term borrowings 216,650 6.04 139,092 4.64 80,923 3.40 --------- --------- --------- Total interest expense 577,036 474,748 491,076 --------- --------- --------- Net interest $ 46,124 $ 82,253 $ 83,750 ========= ========= =========
The following tables summarize the changes in interest income and interest expense due to changes in interest rates versus changes in volume for the periods indicated (in thousands):
1995/1994* 1994/1993* - ------------------------------------------------------------------------------- ------------------------------------ Rate Volume Total Rate Volume Total --------- --------- -------- -------- -------- --------- Interest income: Mortgage securities collateral $ (1,587) $29,409 $ 27,822 $(34,775) $ (1,312) $(36,087) Mortgage investments 14,813 23,524 38,337 (14,544) 32,806 18,262 --------- ------- -------- -------- -------- -------- 13,226 52,933 66,159 (49,319) 31,494 (17,825) --------- ------- -------- -------- -------- -------- Interest expense: Collateralized mortgage securities 3,708 21,022 24,730 (69,859) (4,638) (74,497) Short-term borrowings 47,140 30,418 77,558 33,440 24,729 58,169 --------- ------- ------- -------- -------- -------- 50,848 51,440 102,288 (36,419) 20,091 (16,328) --------- ------- ------- --------- -------- --------- $(37,622) $ 1,493 $(36,129) $(12,900) $11,403 $ (1,497) ========= ======== ======== ======== ======= =========
* 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. 19 Capstead Mortgage Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 15 Quarterly Results (Unaudited) The following is a summary of quarterly results of operations (in thousands, except per share amounts):
Year Ended December 31, 1995 - ----------------------------------------------------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter -------- -------- -------- -------- Interest income $152,099 $152,980 $156,543 $161,538 Interest and related expenses 145,927 145,692 148,591 150,411 Net margin on mortgage assets 6,172 7,288 7,952 11,127 Net margin on mortgage servicing operations 9,470 10,105 9,729 11,948 Other revenues 2,602 3,448 6,371 4,049 Net income 15,366 17,739 21,297 22,958 Net income per share: Primary 0.24 0.35 0.49 0.56 Fully diluted * 0.34 0.49 0.55
* Fully diluted earnings per share is not presented for the quarter ended March 31, 1995 because the effect of converting potentially dilutive securities is antidilutive.
Year Ended December 31, 1994 - ----------------------------------------------------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Interest income $125,734 $135,819 $144,891 $150,557 Interest and related expenses 102,666 118,227 131,208 139,623 Net margin on mortgage assets 23,068 17,592 13,683 10,934 Net margin on mortgage servicing operations 1,182 4,315 6,494 9,028 Other revenues 3,060 1,724 6,140 3,254 Net income 23,469 20,030 22,267 19,813 Net income per share: Primary 0.60 0.45 0.55 0.44 Fully diluted 0.59 0.45 0.54 0.43
16 Market and Dividend Information (Unaudited) The New York Stock Exchange trading symbol for the Company's common stock is CMO. There were 2,503 holders of record of the Company's common stock at December 31, 1995. In addition, depository companies held stock for 19,099 beneficial owners. During the last two years, the high and low stock sales prices and dividends declared on common stock were:
Year Ended December 31, 1995 Year Ended December 31, 1994 - ----------------------------------------------------------- ---------------------------------- Stock Prices Stock Prices ------------ Dividends ------------ Dividends High Low Declared High Low Declared ---- ------ -------- ---- ------ ---------- First quarter $16.58 $11.17 $0.24 $28.08 $18.08 $0.55 Second quarter 20.25 13.67 0.35 19.83 15.33 0.55 Third quarter 23.17 17.33 0.49 19.16 15.08 0.55 Fourth quarter 24.50 20.92 0.56 16.25 11.16 0.48
20 Capstead Mortgage Corporation SELECTED FINANCIAL DATA
(In thousands, except percentages and per share amounts) Year Ended December 31 - -------------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 --------- ---------- ---------- ---------- ---------- Selected consolidated statement of income data:(1) Interest income $ 623,160 $ 557,001 $ 574,826 $ 500,587 $ 235,567 Interest and related expenses 590,621 491,724 513,960 437,004 194,665 Net margin on mortgage assets 32,539 65,277 60,866 63,583 40,902 Net margin on mortgage servicing operations 41,253 21,019 (1,056) -- -- Other revenues 16,468 14,178 64,573 3,862 2,682 Net income 77,359 85,579 94,256 53,191 33,717 Net income per share:(2) Primary(3) 1.64 2.04 2.45 2.25 1.95 Fully diluted 1.61 2.01 2.38 2.15 1.64 Return on average total stockholders' equity 11.91% 13.27% 14.65% 16.08% 13.25% Cash dividends paid per share:(2) Common $ 1.64 $ 2.14 $ 2.44 $ 2.17 $ 1.71 Series A Preferred 1.60 1.60 1.60 1.60 1.60 Series B Preferred 1.26 1.26 1.26 0.10 -- Average number of shares outstanding:(2) Primary 23,119 22,917 22,719 21,591 13,446 Fully diluted 24,153 23,813 23,895 23,387 20,525 Selected consolidated balance sheet data: Mortgage investments $ 4,522,954 $ 3,305,984 $ 2,842,151 $1,904,600 $ 983,024 Mortgage securities collateral 4,830,020 5,270,103 3,995,956 5,269,600 2,806,616 Total assets 9,903,606 8,943,858 6,980,324 7,229,608 3,824,546 Short-term borrowings 4,628,782 3,190,582 2,443,807 1,449,209 855,572 Collateralized mortgage securities 4,538,863 5,102,145 3,891,134 5,143,157 2,708,630 Stockholders' equity 664,724 563,675 638,190 631,499 253,339 Other data: Mortgage loans acquired during the year 117,839 1,944,507 4,393,273 5,483,602 2,171,362 Mortgage servicing portfolio(4) 25,557,629 14,392,182 2,393,267 -- --
- ------------------- (1) On December 2, 1992 the Company exchanged 29,429,815 shares of the Company's Series B Preferred Stock for all the common stock of a closed-end diversified management investment company. The acquisition has been accounted for as a purchase and the net income earned on the assets and liabilities acquired have been included in the Consolidated Statement of Income from the date of the acquisition. (2) Adjusted for the 3-for-2 common stock split effective October 30, 1995. (3) During the years ended December 31, 1992 and 1991, 1,382,551 and 3,140,304 shares of the Series A Preferred Stock were converted into 1,866,392 and 4,239,384 shares of common stock, respectively. If these conversions had occurred at the beginning of the respective years, primary net income per share would have been $2.21 and $1.73 per share for the years ended December 31, 1992 and 1991, respectively. (4) Excludes $3.1 billion of mortgage servicing rights acquired in 1995 that will be transferred into the mortgage servicing portfolio by the end of the first quarter of 1996. Also excludes an additional $5.0 billion of mortgage servicing rights acquired in January 1996 that will be transferred into the portfolio by May 1996. By May 1996 the mortgage servicing portfolio is expected to exceed $32 billion. 21 Capstead Mortgage Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition The jumbo mortgage loan market has changed dramatically over the last several years. Mortgage loan originations reached all time highs in 1992 and 1993 due to steadily declining mortgage interest rates that made refinancing increasingly attractive to mortgagors. Mortgage interest rates reached 20 year lows by the fall of 1993; however, by early 1994 rates began a steady rise. As rising rates choked off the 1992/1993 refinancing boom, competition to acquire remaining originations intensified. At this same time, the cost of mortgage pool insurance rose in response to mounting credit losses being incurred by these insurers, most of whom ultimately withdrew from this business entirely. In order to compete with other buyers of jumbo loans as a long-term investor, the Company had to be willing to once again accept credit risk on these mortgage assets or find buyers for subordinate classes of its securitizations willing to do so at a fair price. Beginning in January 1995, the Company implemented a strategy of selling individual mortgage loans purchased through its jumbo mortgage loan conduit operation to private investors shortly after the commitment to purchase, instead of accumulating $100 million or more of similar mortgage loans for an efficient securitization. This strategy allowed the Company to reduce the risks associated with accumulating and securitizing jumbo mortgage loans but was not intended to be a long-term solution. In November 1995 the Company exited the jumbo mortgage loan conduit business after concluding that as a long-term investor in mortgage assets, accepting the associated credit risk was not in the best interest of the stockholders. While this decision represents a change in strategy for accumulating mortgage assets, it has been successfully replaced by the acquisition of mortgage-backed securities issued by government-sponsored entities, as discussed below. The Company purchased or originated mortgage loans totaling $127 million during 1995 compared to purchases totaling $1.9 billion during 1994. Mortgage loan sales, low purchase volume and the formation of $160 million of AAA-rated private mortgage pass-through securities ("Mortgage Pass-Throughs") substantially reduced holdings of mortgage loans. In addition to reducing exposure to 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 or selling these securities, the Company is able to negotiate more favorable terms. In November 1995 the Company sold $180 million of adjustable-rate mortgage ("ARM") Mortgage Pass-Throughs. During 1995 the Company acquired $2.6 billion of ARM mortgage-backed securities issued by government-sponsored entities, either the Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage Association ("FNMA") or the Government National Mortgage Association ("GNMA") (collectively, "Agency Securities"). Sales during 1995 included $469 million of ARM Agency Securities. After considering sales and run-off of existing portfolio, holdings of ARM Agency Securities increased $1.9 billion during the year to $3.0 billion. 22 Capstead Mortgage Corporation In past years, the Company has been an active issuer of collateralized mortgage obligations ("CMOs") and other securities backed by jumbo mortgage loans. The Company generally retained residual interests in CMOs issued consisting primarily of interest-only and principal-only strips. During 1995 the Company did not issue any CMOs; however, the Company did acquire $132 million of agency-issued, interest-only securities, which increased the CMO investment portfolio to $291 million at December 31, 1995 compared to a portfolio of $168 million at December 31, 1994. Interest-only securities have characteristics similar to investments in mortgage servicing in that the mortgage loans underlying these securities are subject to prepayment risk. Derivative financial instruments, specifically 10-year U.S. Treasury interest rate floor agreements, are held as a partial hedge against this risk (see "Effects of Interest Rate Changes"). Certain of these hedge positions were closed out during 1995 at gains aggregating $5.0 million which were deferred. Open hedge positions, with a $2.0 billion notional amount, carried a $3.6 million unrealized gain at December 31, 1995. The mortgage servicing portfolio (excluding pending transfers) increased during the year to $25.6 billion with a weighted average interest rate of 7.37 percent and earning an average annual service fee excluding ancillary revenue and earnings on escrows (the "Average Service Fee") of 30.4 basis points. The December 31, 1995 balance of mortgage servicing rights related to this portfolio was $369.6 million (145 basis points, or a 4.8 multiple of the Average Service Fee). Another $3.1 billion of servicing had been acquired as of December 31, 1995 that was pending transfer into the portfolio and was being subserviced by the sellers. Additional mortgage servicing has been acquired subsequent to year- end. Including January 1996 acquisitions, pending transfers of mortgage servicing totaled $8.1 billion with a weighted average interest rate of 7.39 percent and earning an Average Service Fee of 29.0 basis points. At an average cost of 151 basis points, these servicing assets are being acquired at a 5.2 multiple of the Average Service Fee. By May 1996 the mortgage servicing portfolio is expected to exceed $32 billion. Annualized portfolio run-off, consisting of prepayments and scheduled payments on mortgage loans serviced, was 9.44 percent in 1995, up from 7.22 percent in 1994 due primarily to lower prevailing interest rates. Derivative financial instruments, specifically 10-year U.S. Treasury and 3-month London Interbank Offered Rate ("LIBOR") interest rate floors, are held as a partial hedge against prepayment risk (see "Effects of Interest Rate Changes"). Certain of these hedge positions were closed out during 1995 at gains aggregating $17.8 million which were deferred. Open hedge positions with a $3.5 billion notional amount carried a $7.7 million unrealized gain at December 31, 1995. 23 Capstead Mortgage Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The following table summarizes the Company's utilization of capital at December 31, 1995 (in thousands):
Capital Assets Borrowings Employed - ---------------------------------------------------------------------- Mortgage loans $ 10,419 $ $ 10,419 Mortgage Pass-Throughs: Fixed-rate 1,771 1,711 60 Medium-term 424,329 407,576 16,753 Adjustable-rate 563,203 553,168 10,035 Agency Securities: Fixed-rate 489,689 483,327 6,362 Adjustable-rate 2,984,451 2,921,618 62,833 Callable notes 49,092 49,857 (765) CMO investments 4,830,020 4,706,888(a) 123,132 Mortgage servicing rights 423,360 91,398(b) 331,962 ---------- ---------- -------- $9,776,334 $9,215,543 560,791 ========== ========== Other assets, net of other liabilities 103,933 -------- Total stockholders' equity $664,724 ========
- ----------------- (a) Includes $168 million of related short-term borrowings. (b) Represents amounts owed under contracts for bulk purchases of mortgage servicing rights and $43.5 million drawn on a $300 million line of credit secured by existing mortgage servicing rights. The decline in intermediate- and long-term interest rates since early 1995 restored much of the loss in market value of the Company's mortgage assets caused by the rise in mortgage interest rates in 1994. The effect is most apparent on the value of securities held available-for-sale. At December 31, 1995 securities held available-for-sale were carried at a net unrealized gain of $7.9 million compared to a net unrealized loss of $78.5 million at December 31, 1994. 24 Capstead Mortgage Corporation Result 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):
Year Ended December 31 - ----------------------------------------------------------------------------- 1995 1994 1993 -------- -------- -------- Mortgage loans $ 1,399 $ 26,467 $ 49,368 Mortgage Pass-Throughs 6,880 17,341 30,389 Agency Securities 12,589 15,933 18,355 CMO investments 13,871 9,036 (34,446) Mortgage servicing 41,253 21,019 (1,056) Gain on sales 11,144 9,161 61,216 CMO administration 3,645 4,067 1,482 Other income 1,679 950 1,875 -------- -------- -------- Contribution to income 92,460 103,974 127,183 Salaries, general and administrative (12,901) (14,895) (30,127) Provision for possible losses (2,200) (3,500) (2,800) -------- -------- -------- Net income $ 77,359 $ 85,579 $ 94,256 ======== ======== ======== Net income per share:* Primary $ 1.64 $ 2.04 $ 2.45 Fully diluted 1.61 2.01 2.38 Return on average total stockholders' equity 11.91% 13.27% 14.65%
- --------------- * Adjusted for the 3-for-2 common stock split effective October 30, 1995. 1995 Compared to 1994 Operating results improved steadily throughout 1995 although for the year results were 10 percent below those achieved in 1994. Results were significantly affected by a series of moves by the Federal Reserve beginning in February 1994 raising short-term interest rates a total of 3 percentage points by February of 1995. These increases resulted in corresponding increases in the Company's borrowing costs that had the effect of substantially reducing net interest spreads on mortgage investments. Since February 1995 intermediate- and long-term interest rates have declined considerably. While this decline in intermediate- and long-term interest rates has had little effect on borrowing costs, the Federal Reserve did reduce short-term interest rates 1/4 of 1 percent in early July and again in December. The decline in intermediate- and long-term interest rates during 1995 made asset sales attractive as values on mortgage assets improved. Offsetting these increases in value to some extent were higher prepayment rates on mortgage loans, which were also due to declining interest rates. These higher prepayments resulted in increased amortization costs associated with the mortgage servicing portfolio and interest-only securities as well as increased amortization of premiums paid on Agency Securities. The net interest spread earned from mortgage loans contributed significantly less to net operating results than in prior years due primarily average holdings of mortgage loans during 1995. Average holdings for the year ended December 31, 25 Capstead Mortgage Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) 1995 were $48 million compared to $799 million held during 1994. This reflects the Company's efforts to reduce market risk associated with aggregating and securitizing jumbo mortgage loans culminating in the decision in November 1995 to exit the jumbo mortgage loan conduit business (see the discussion above under "Financial Condition"). Mortgage Pass-Throughs contributed less to net operating results compared to 1994 primarily due to substantially higher borrowing costs offset somewhat by higher yields resulting in a 50 percent reduction in net interest spreads over the prior year. Borrowing costs for this portfolio averaged 6.17 percent during 1995 compared to 4.68 percent in 1994 while average yields were higher at 6.92 percent during 1995 compared to 6.17 percent in 1994. The rise in yields is due primarily to the periodic resetting of coupon rates on underlying ARM loans (see "Effects of Interest Rate Changes"). The average portfolio outstanding was $1.3 billion in both 1995 and 1994. Agency Securities contributed less to net operating results compared to 1994 despite a sizable increase in average portfolio outstanding because of substantially higher borrowing costs offset somewhat by higher yields resulting in a 70 percent reduction in net interest spreads over the prior year. Borrowing costs averaged 5.84 percent during 1995 compared to 4.12 percent in 1994 while yields averaged 6.26 percent during 1995 compared to 5.58 percent in 1994. The rise in yields is due primarily to the periodic resetting of coupon rates on underlying ARM loans and the acquisition of higher yielding ARM securities (see "Effects of Interest Rate Changes"). The average Agency Securities portfolio outstanding was $2.4 billion for the year ended December 31, 1995 compared to $1.3 billion in 1994. The increase in average portfolio outstanding was primarily the result of acquisitions of ARM securities in 1994 and 1995. CMO investments contributed more to net operating results during 1995 compared to 1994 due primarily to investments made during 1995 in agency-issued, interest-only securities. Additionally, prepayments on mortgage securities collateral were still relatively high in the first quarter of 1994, the end of the last major refinancing boom. Principal collections on mortgage securities collateral totaled $501 million during 1995 compared to $1.2 billion in 1994. Lower levels of prepayments have the effect of lowering amortization of bond discounts and improving operating results (see "Effects of Interest Rate Changes"). Higher mortgage servicing results reflect growth in this operation. Revenues increased to $88.2 million during 1995 compared to $32.9 million during 1994. Operating costs also increased, but not to the same extent as revenues, which reflects efficiencies gained in the servicing process as the servicing portfolio continues to grow. Amortization of mortgage servicing rights totaled $26.6 million during 1995, significantly higher than the $6.0 million recorded in 1994 due to portfolio growth and higher levels of prepayments caused by lower interest rates. During 1995 the Company sold $1.0 billion of mortgage assets consisting of Agency Securities, mortgage loans and mortgage collateral released from CMOs pursuant to clean-up calls, recognizing gains of $11.1 million. Salaries, general and administrative expenses were lower in 1995 due primarily to higher absorption of costs by the mortgage servicing operation in light of this operation's growth relative to that of the rest of the Company. Included in general and administrative expenses in 1995 is a charge of $750,000 consisting primarily of personnel costs associated with exiting the jumbo mortgage loan conduit business. 26 Capstead Mortgage Corporation The provision for possible losses declined in 1995 due to reductions in fraud exposure resulting from reduced mortgage purchase activity. 1994 Compared to 1993 Operating results in 1994 declined over 9 percent from those achieved in 1993 primarily because of rising interest rates. Higher mortgage loan interest rates, along with other factors, had the effect of substantially curtailing the jumbo mortgage loan conduit operation's purchase and commitment volumes and shifting the product mix from fixed-rate mortgage loans to relatively lower rate ARM and medium-term mortgage products. During this period steadily rising yields on ARM mortgage investments did not keep pace with increases in borrowing costs, therefore, net interest spreads on mortgage loans, Mortgage Pass-Throughs and Agency Securities declined markedly. On a more positive note, the CMO investment portfolio and the mortgage servicing operation performed well in this environment. CMO investments contributed more to net operating results in 1994 than in 1993 primarily due to the impact of the rise in mortgage interest rates experienced in 1994 on actual and anticipated mortgage loan prepayments. By the end of the first quarter of 1994, prepayments began to slow considerably. As a result, estimates of expected future prepayments were revised, lowering amortization of bond discounts and improving operating results. During 1994 principal collections on mortgage securities collateral totaled $1.2 billion compared to $2.4 billion in 1993. Mortgage servicing revenues increased significantly during 1994 as a result of the addition of mortgage servicing rights on $12.5 billion of mortgage loans for an average servicing portfolio of $7.8 billion compared to an average servicing portfolio of $864 million in 1993 (servicing operations commenced March 1993). Direct operating costs for the mortgage servicing operation also increased, but not to the same extent as revenues, reflecting efficiencies gained in the servicing process as the servicing portfolio grew. In 1994 the Company acquired 800,000 shares of the common stock of North American Mortgage Corporation, a mortgage banking company, for $17.8 million. Consolidation trends in the mortgage banking industry during 1994 allowed the Company to realize gains aggregating $6.2 million from the sale of 750,000 of these shares. Due to rising interest rates in 1994, the Company did not sell mortgage assets other than sales of mortgage collateral released from CMOs pursuant to clean-up calls. During 1994, $77 million of released mortgage collateral were sold for gains of $2.9 million. During 1993, $3.9 billion of mortgage assets were sold for gains of $61.2 million. After excluding $16.2 million of non-competition and management agreement expenses and termination costs incurred in 1993, salaries, general and administrative expenses increased in 1994 primarily due to costs associated with establishing the infrastructure necessary to take advantage of opportunities in the mortgage banking industry. 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 27 Capstead Mortgage Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) sales of mortgage assets, servicing fees and other revenue from mortgage servicing and equity offerings, when available. The Company currently believes that these funds are sufficient for the acquisition of 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. The Company may, from time to time, sell mortgage assets which may increase income volatility because of the recognition of transactional gains or losses. Sales in 1995 were related to reducing holdings of mortgage loans and mortgage collateral released from CMOs pursuant to clean-up calls and sales of certain Agency Securities made attractive as values on our mortgage investments improved during the year because of declines in interest rates. Short-term borrowings are primarily made under repurchase arrangements. The Company has uncommitted repurchase facilities with investment banking firms to finance mortgage assets, subject to certain conditions. Interest rates on borrowings under these facilities are based on overnight to 30-day LIBOR rates. The terms and conditions of these arrangements, including interest rates, are negotiated on a transaction-by-transaction basis. At December 31, 1995 the mortgage servicing operation had available $256.5 million of a $300 million revolving line of credit agreement with an investment banking firm that matures in October 1997, of which $120 million is committed. The line is to be used primarily to finance acquisitions of mortgage servicing rights and will be collateralized by those rights, as well as certain existing servicing rights. The agreement requires, among other things, that the mortgage servicing operation maintain certain financial ratios and specified levels of unencumbered servicing rights, as defined. The mortgage servicing operation is in compliance with all requirements. Interest rates on borrowings under this facility are based on LIBOR with interest due monthly. 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. Changes in interest rates also impact earnings recognized from CMO investments, which consist primarily 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 interest rates 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 an acceleration of the 28 Capstead Mortgage Corporation 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 interest rates on the collateral, principal prepayments will typically diminish, resulting in a greater overall return on an investment in a fixed-rate CMO residual because of an increase in the period of time over which the Company receives the larger positive interest spread. Similarly, in a falling interest rate environment, prepayments on mortgage loans underlying the Company's growing investment 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 underlying mortgage loans 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 owned by the Company represent a much smaller investment than interest-only investments. Another effect of changes in interest rates is that as interest rates decrease, the rate of prepayment of mortgage loans underlying mortgage investments generally increases. To the extent the proceeds of prepayments on mortgage investments 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 mortgage investments also applies to the Company's 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. Sustained periods of high prepayments can result in losses on the Company's investment in mortgage servicing rights. The Company's business plan is to build its mortgage securities and mortgage servicing portfolios with the goal of producing reasonably balanced results in a rising or falling interest rate environment. The Company supplements its business plan with interest rate hedges from time to time; however, hedging of interest rate risks is imprecise and costly. To fully protect income from every interest rate scenario would be cost prohibitive. Recent Accounting Pronouncements In May 1995 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 122 "Accounting for Mortgage Servicing Rights," which sets forth new accounting principles for capitalizing originated mortgage servicing rights and recording impairment of existing mortgage servicing rights. The Company will adopt this pronouncement on a prospective basis effective January 1, 1996. This adoption is not expected to have a material impact on the results of operations or financial position of the Company. 29 EX-21 5 SUBSIDIARIES EXHIBIT 21 At December 31, 1995 the subsidiaries of Capstead Mortgage Corporation were as follows:
STATE OF DOMICILE -------- PARENT COMPANY SUBSIDIARY Capstead Mortgage Corporation ("CMC")............... Maryland Capstead Advisers, Inc............................. Nevada Capstead Capital Corporation....................... Delaware Capstead Select Corporation........................ Delaware Capstead Securities Corporation I.................. Delaware Capstead Securities Corporation II................. Delaware Capstead Securities Corporation III................ Delaware Capstead Securities Corporation IV................. Delaware CMC Securities Corporation I....................... Nevada CMC Securities Corporation III..................... Delaware CMC Securities Corporation IV...................... Delaware CMC ARM Securities Corporation..................... Delaware Capstead Inc.(1)................................... Delaware CMC Securities Corporation II(2).................. Delaware CMC Investment Partnership(3)...................... Texas
(1) CMC owns all of the issued and outstanding preferred stock. (2) Capstead Inc. owns all the issued and outstanding common stock. (3) CMC Investment Partnership is a general partnership owned by CMC and Capstead Inc. EX-23 6 CONSENT EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Capstead Mortgage Corporation of our report dated January 29, 1996, included in the 1995 Annual Report to Stockholders of Capstead Mortgage Corporation. Our audit also included the financial statement schedules of Capstead Mortgage Corporation listed in Item 14(a). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-40116) pertaining to the 1990 Employee Stock Option Plan, the Registration Statement (Form S-8 No. 33-40117) pertaining to the 1990 Directors' Stock Option Plan, the Registration Statement (Form S-3 No. 33-62212) pertaining to the Universal Shelf, the Registration Statement (Form S-3 No. 33-52415) pertaining to the registration of 1,000,000 shares of common stock for the Company's Stockholder Investment Program, the Registration Statement (Form S-8 No. 33-53555) pertaining to the 1994 Flexible Long Term Incentive Plan, the Registration Statement (Form S-3 No. 33-57164) pertaining to the Series B Preferred Stock Dividend Reinvestment Plan, and in the related prospectuses of our report dated January 29, 1996, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedules included in this Annual Report (Form 10-K) of Capstead Mortgage Corporation. ERNST & YOUNG LLP Dallas, Texas March 22, 1996 EX-27 7 ARTICLE 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CAPSTEAD MORTGAGE CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLAR 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 1 18,702 0 0 0 0 0 0 0 9,903,606 4,700,019 4,538,863 0 337,750 235 326,739 664,724 0 727,800 0 0 71,205 2,200 577,036 77,359 0 77,359 0 0 0 77,359 1.64 1.61
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