-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, tmcW5uhTjHIw8Gd+lOE0DxwRUNeeFDz+tqE0sRenH+c5l+814e3y9es5l2tqYVPv QIonH/sa2PPNGLvoaoo3sw== 0000930661-95-000140.txt : 19950516 0000930661-95-000140.hdr.sgml : 19950516 ACCESSION NUMBER: 0000930661-95-000140 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950331 FILED AS OF DATE: 19950515 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPSTEAD MORTGAGE CORP CENTRAL INDEX KEY: 0000766701 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 752027937 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08896 FILM NUMBER: 95538733 BUSINESS ADDRESS: STREET 1: 2711 NORTH HASKELL AVE STREET 2: STE 900 CITY: DALLAS STATE: TX ZIP: 75204 BUSINESS PHONE: 2148742323 MAIL ADDRESS: STREET 1: 2001 BRYAN TOWER STREET 2: STE 3300 CITY: DALLAS STATE: TX ZIP: 75201 FORMER COMPANY: FORMER CONFORMED NAME: LOMAS MORTGAGE CORP DATE OF NAME CHANGE: 19891105 10-Q 1 FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ----- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: MARCH 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: 1-8996 CAPSTEAD MORTGAGE CORPORATION (Exact name of Registrant as specified in its Charter) MARYLAND 75-2027937 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2711 NORTH HASKELL, DALLAS, TEXAS 75204 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (214) 874-2323 The Registrant meets the conditions set forth in General Instruction H(1)(a) and (b) for Form 10-Q and is therefore filing this Form under the reduced disclosure format. Indicate by check mark whether the Registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date. Common Stock ($0.01 par value) 15,316,786 as of May 8, 1995 ================================================================================ CAPSTEAD MORTGAGE CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1995 INDEX
PAGE ---- PART I. - FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Balance Sheet - March 31, 1995 and December 31, 1994.. 3 Consolidated Statement of Income - Quarter Ended March 31, 1995 and 1994........................................... 4 Consolidated Statement of Cash Flows - Quarter Ended March 31, 1995 and 1994........................................... 5 Notes to Consolidated Financial Statements......................... 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 10 ITEM 4. Submission of Matters to a Vote of Security Holders......... 17 PART II. - OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K ........................... 17 SIGNATURES.......................................................... 18
-2- PART I. -- FINANCIAL INFORMATION CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS) ITEM 1. FINANCIAL STATEMENTS
MARCH 31, 1995 DECEMBER 31, 1994 --------------- ------------------ (UNAUDITED) ASSETS Mortgage securities collateral $5,232,210 $5,270,103 Mortgage investments 3,377,449 3,305,984 ---------- ---------- 8,609,659 8,576,087 Less allowance for possible losses (6,474) (7,354) ---------- ---------- 8,603,185 8,568,733 Cash and cash equivalents 27,720 21,741 Prepaids, receivables and other 66,205 70,415 Mortgage servicing rights and excess servicing receivables 307,829 282,969 ---------- ---------- $9,004,939 $8,943,858 ========== ========== LIABILITIES Collateralized mortgage securities $4,996,129 $5,102,145 Short-term borrowings 3,350,906 3,190,582 Accounts payable and accrued expenses 13,322 11,568 Mortgage servicing acquisitions payable 27,840 75,888 ---------- ---------- 8,388,197 8,380,183 ---------- ---------- STOCKHOLDERS' EQUITY Preferred stock - $0.10 par value; 100,000 shares authorized: $1.60 Cumulative Preferred Stock, Series A, 620 and 623 shares issued and outstanding ($10,168 aggregate liquidation preference) 8,685 8,720 $1.26 Cumulative Convertible Preferred Stock, Series B, 30,355 and 30,277 shares issued and outstanding ($345,440 aggregate liquidation preference) 326,051 324,779 Common stock - $0.01 par value; 100,000 shares authorized; 15,306 and 15,304 shares issued and outstanding 153 153 Paid-in capital 310,801 310,766 Undistributed income (deficit) (2,171) (2,228) Unrealized loss on debt and equity securities (26,777) (78,515) ---------- ---------- 616,742 563,675 ---------- ---------- $9,004,939 $8,943,858 ========== ==========
See accompanying notes to consolidated financial statements. -3- CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
QUARTER ENDED MARCH 31 -------------------- 1995 1994 --------- --------- INTEREST INCOME: Mortgage securities collateral $ 98,352 $ 81,465 Mortgage investments 53,747 44,269 -------- -------- Total interest income 152,099 125,734 -------- -------- INTEREST AND RELATED EXPENSES: Collateralized mortgage securities 94,185 77,075 Short-term borrowings 48,214 21,134 Mortgage insurance and other 2,928 3,957 Provision for possible losses 600 500 -------- -------- Total interest and related expenses 145,927 102,666 -------- -------- Net margin on mortgage assets 6,172 23,068 -------- -------- MORTGAGE SERVICING REVENUES: Servicing fees 14,415 2,336 Other 2,775 121 -------- -------- Total mortgage servicing revenues 17,190 2,457 -------- -------- MORTGAGE SERVICING EXPENSES: Salaries and related costs 991 288 General, administrative and other 2,478 250 Amortization of mortgage servicing rights and excess servicing receivables 4,251 737 -------- -------- Total mortgage servicing expenses 7,720 1,275 -------- -------- Net margin on mortgage servicing operations 9,470 1,182 -------- -------- OTHER REVENUES: Gain on sales 1,300 1,999 CMO administration 983 834 Other 319 227 -------- -------- Total other revenues 2,602 3,060 -------- -------- OTHER EXPENSES: Salaries and related costs 1,875 2,420 General and administrative 1,003 1,421 -------- -------- Total other expenses 2,878 3,841 -------- -------- NET INCOME $ 15,366 $ 23,469 ======== ======== Net income $ 15,366 $ 23,469 Less cash dividends on preferred stock (9,798) (9,680) -------- -------- Net income available to common stockholders $ 5,568 $ 13,789 ======== ======== NET INCOME PER SHARE: Primary $0.36 $ 0.90 Fully diluted * 0.88 CASH DIVIDENDS PAID PER SHARE: Common 0.36 0.83 Series A preferred 0.40 0.40 Series B preferred 0.32 0.32
* 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. See accompanying notes to consolidated financial statements. -4- CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
QUARTER ENDED MARCH 31 -------------------------- 1995 1994 ----------- ----------- OPERATING ACTIVITIES: Net income $ 15,366 $ 23,469 Noncash items: Amortization of discount and premium 2,355 1,212 Amortization of mortgage servicing rights and excess servicing receivables 4,251 737 Depreciation and other amortization 616 412 Provision for possible losses 600 500 Net change in prepaids, receivables, other assets, accounts payable and accrued expenses 5,485 1,085 Net gain from investing activities (1,300) (1,999) --------- ----------- Net cash provided by operating activities 27,373 25,416 --------- ----------- INVESTING ACTIVITIES: Mortgage securities collateral: Principal collections on collateral 82,949 577,747 Decrease (increase) in accrued interest receivable 998 (4,829) (Increase) decrease in short-term investments (8,415) 84,103 Purchases of mortgage loans (34,776) (1,075,639) Purchases of agency securities (131,778) (216,387) Purchase of equity securities - (3,623) Purchases of other mortgage securities (75,365) - Purchases of mortgage servicing rights and excess servicing receivables (29,111) (59,571) Principal collections on mortgage investments 82,829 80,544 Proceeds from sales of mortgage assets 100,937 19,396 --------- ----------- Net cash used by investing activities (11,732) (598,259) --------- ----------- FINANCING ACTIVITIES: Collateralized mortgage securities: Issuance of securities - 1,611,841 Principal payments on securities (108,973) (669,487) Increase in accrued interest payable 1,072 2,206 Capital stock transactions 1,272 1,926 Dividends paid (15,309) (22,317) (Decrease) increase in mortgage servicing acquisitions payable (48,048) 36,480 Increase (decrease) in short-term borrowings 160,324 (364,993) --------- ----------- Net cash (used) provided by financing activities (9,662) 595,656 --------- ----------- Net increase in cash and cash equivalents 5,979 22,813 Cash and cash equivalents at beginning of period 21,741 87,760 --------- ----------- Cash and cash equivalents at end of period $ 27,720 $ 110,573 ========= ===========
See accompanying notes to consolidated financial statements. -5- CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1995 (UNAUDITED) NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter ended March 31, 1995 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 1995. For further information refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1994. Certain amounts for prior periods have been reclassified to conform to the 1995 presentation. NOTE B - MORTGAGE INVESTMENTS Mortgage investments and the related average effective interest rates (calculated excluding unrealized gains and losses) were as follows (dollars in thousands):
AS OF QUARTER ENDED MARCH 31 MARCH 31 ---------------------- --------------- 1995 1994 1995 1994 ---------- ---------- ------- ------ MORTGAGE LOANS HELD FOR SALE $ 4,833 $ - 9.46% -% MORTGAGE LOAN PORTFOLIO: Fixed-rate mortgage loans 5,695 700,780 7.89 6.73 Medium-term mortgage loans 2,991 71,718 7.93 6.51 Adjustable-rate mortgage loans 265 143,155 6.11 4.48 AAA-RATED PRIVATE MORTGAGE PASS- THROUGH SECURITIES PORTFOLIO: Fixed-rate mortgage securities 1,914 - 8.58 - Medium-term mortgage securities 467,562 414,467 6.97 6.89 Adjustable-rate mortgage securities 882,633 457,395 6.48 5.18 AGENCY SECURITIES PORTFOLIO: Fixed-rate mortgage securities 503,011 504,453 6.35 6.44 Adjustable-rate mortgage securities 1,142,001 114,714 5.67 3.97 Notes 366,544 - 6.90 - ---------- ---------- ---- ---- $3,377,449 $2,406,682 6.33% 6.37% ========== ========== ==== ====
The Company classifies its mortgage investments by term and interest rate characteristics of the underlying mortgage loans. Fixed-rate mortgage investments (i) have fixed rates of interest for their entire terms, or (ii) have an initial fixed rate period of ten years after origination and then adjust annually based on a specified margin over 1-year United States Treasury Securities ("1-year Treasuries"). Medium-term mortgage investments (i) have an initial fixed-rate period of three or five years after origination and then adjust annually based on a specified margin over 1-year Treasuries or (ii) have initial interest rates that adjust one time, approximately five years following origination of the mortgage loan, based on a specified margin over the Federal National Mortgage Association ("FNMA") yields for 30-year -6- fixed-rate commitments at the time of adjustment. Adjustable-rate mortgage investments either (i) adjust semiannually based on a specified margin over the 6-month London Interbank Offered Rate ("LIBOR"), or (ii) adjust annually based on a specified margin over 1-year Treasuries. Fixed-rate and adjustable-rate mortgage agency securities consist of mortgage-backed securities issued by government-sponsored entities, either the Federal Home Loan Mortgage Corporation ("FHLMC"), FNMA or the Government National Mortgage Association ("GNMA"). Agency notes are unsecured, fixed-rate notes issued by FNMA, FHLMC, or the Federal Home Loan Bank Board ("FHLBB") and mature in 1997. Some agency notes may be redeemed earlier by FNMA, FHLMC or FHLBB. At March 31, 1995 the AAA-rated private mortgage pass-through securities ("Mortgage Pass-Throughs") and the agency securities were pledged to secure short-term borrowings. NOTE C - NET INTEREST INCOME ANALYSIS The following table summarizes interest income and interest expense and average effective interest rates for the quarter ended March 31, 1995 compared to the same period in 1994 (dollars in thousands):
QUARTER ENDED MARCH 31 -------------------------------------- 1995 1994 ------------------ ------------------ AMOUNT AVERAGE AMOUNT AVERAGE -------- -------- -------- -------- Interest income: Mortgage securities collateral $ 98,352 7.57% $ 81,465 7.89% Mortgage investments 53,747 6.33 44,269 6.37 -------- -------- Total interest income 152,099 125,734 -------- -------- Interest expense: Collateralized mortgage securities 94,185 7.57 77,075 7.66 Short-term borrowings 48,214 5.96 21,134 3.63 -------- -------- Total interest expense 142,399 98,209 -------- -------- Net interest $ 9,700 $ 27,525 ======== ========
The following table summarizes changes in interest income and interest expense due to changes in effective interest rates versus changes in volume for the quarter ended March 31, 1995 compared to the same period in 1994 (in thousands):
RATE* VOLUME* TOTAL --------- ------- --------- Interest income: Mortgage securities collateral $ (3,455) $20,342 $ 16,887 Mortgage investments (287) 9,765 9,478 -------- ------- -------- Total interest income (3,742) 30,107 26,365 -------- ------- -------- Interest expense: Collateralized mortgage securities (977) 18,087 17,110 Short-term borrowings 16,864 10,216 27,080 -------- ------- -------- Total interest expense 15,887 28,303 44,190 -------- ------- -------- Net interest $(19,629) $ 1,804 $(17,825) ======== ======= ========
* THE CHANGE IN INTEREST DUE TO BOTH VOLUME AND RATE HAS BEEN ALLOCATED TO VOLUME AND RATE CHANGES IN PROPORTION TO THE RELATIONSHIP OF THE ABSOLUTE DOLLAR AMOUNTS OF THE CHANGE IN EACH. NOTE D - DISCLOSURES REGARDING FAIR VALUES OF DEBT AND EQUITY SECURITIES The estimated fair values of debt and equity securities have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop these estimates. In addition, fair values fluctuate on a daily basis. Accordingly, the estimates presented herein are not necessarily indicative of -7- 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 following tables summarize available-for-sale and held-to-maturity debt and equity securities as of March 31, 1995 and December 31, 1994 (in thousands):
MARCH 31, 1995: AVAILABLE-FOR-SALE DEBT AND EQUITY SECURITIES --------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------- ---------- ---------- --------- Debt securities: Mortgage Pass-Throughs: Fixed-rate mortgage securities $ 1,896 $ 18 $ - $ 1,914 Medium-term mortgage securities 30,302 - 8,906 21,396 Adjustable-rate mortgage securities 887,254 - 4,621 882,633 Agency securities: Adjustable-rate mortgage securities 1,155,840 - 13,839 1,142,001 Notes 32,548 289 - 32,837 Other mortgage securities 85,095 1,710 1,190 85,615 ---------- ------ -------- ---------- Total debt securities 2,192,935 2,017 28,267 2,166,396 Equity securities 1,113 - 238 875 ---------- ------ -------- ---------- $2,194,048 $2,017 $ 28,794 $2,167,271 ========== ====== ======== ========== HELD-TO-MATURITY DEBT SECURITIES --------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------- ---------- ---------- ------- Medium-term Mortgage Pass- Throughs $ 446,166 $ - $ 354 $ 445,812 Agency securities: Fixed-rate mortgage securities 503,011 - 44,065 458,946 Notes 333,707 - 2,286 331,421 Mortgage securities collateral 5,146,595 5,439 59,634 5,092,400 ---------- ------ -------- ---------- $6,429,479 $5,439 $106,339 $6,328,579 ========== ====== ======== ========== DECEMBER 31, 1994: AVAILABLE-FOR-SALE DEBT AND EQUITY SECURITIES --------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------- ---------- ---------- -------- Debt securities: Mortgage Pass-Throughs: Fixed-rate mortgage securities $ 427 $ - $ 18 $ 409 Medium-term mortgage securities 9,054 - 9,054 - Adjustable-rate mortgage securities 780,224 - 24,601 755,623 Adjustable-rate mortgage agency securities 1,088,252 - 45,391 1,042,861 Other mortgage securities 10,369 1,734 810 11,293 ---------- ------ -------- ---------- Total debt securities 1,888,326 1,734 79,874 1,810,186 Equity securities 1,113 - 375 738 ---------- ------ -------- ---------- $1,889,439 $1,734 $ 80,249 $1,810,924 ========== ====== ======== ==========
-8-
HELD-TO-MATURITY DEBT SECURITIES -------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------- ---------- ---------- -------- Medium-term mortgage Pass-Throughs $ 459,874 $ - $ 12,342 $ 447,532 Agency securities: Fixed-rate mortgage securities 504,023 - 62,586 441,437 Notes 333,687 - 9,690 323,997 Mortgage securities collateral 5,258,810 7,159 61,700 5,204,269 ---------- ------ -------- ---------- $6,556,394 $7,159 $146,318 $6,417,235 ========== ====== ======== ==========
The fair value of debt and equity securities was estimated using either (i) quoted market prices when available, including quotes made by lenders in connection with designating collateral for repurchase arrangements, (ii) offer prices by the Company for similar mortgage assets, or (iii) expected securitization results. Mortgage securities collateral has been permanently financed through the issuance of collateralized mortgage securities and, as a result, the exposure to changes in the fair value of the underlying assets (and liabilities) is limited. For this reason, the table above presents the fair value of the net projected cash flows of the mortgage securities collateral after payments on the related collateralized mortgage securities discounted at market rates and prepayment assumptions. The maturity of the Company's mortgage assets is directly affected by the rate of principal prepayments by mortgagors and redemptions by issuers, including the Company, of remaining debt securities outstanding (referred to as "clean-up calls"). As a result, the actual maturity of the Company's mortgage assets usually occurs well in advance of stated maturities. The Company anticipates that through prepayments and exercising clean-up calls, a significant portion of its higher cost collateralized mortgage securities will be retired within the next several years and a residual amount of high coupon mortgage securities collateral will be released and can be sold or continued to be held as investments. Included in mortgage securities collateral is $3,697,000 and $4,646,000 of collateral released from the related indentures as of March 31, 1995 and December 31, 1994, respectively. During the three months ended March 31, 1995, $35,893,000 of mortgage securities collateral previously released from the related indentures pursuant to clean-up calls was sold at gross realized gains aggregating $966,000. Similar sales aggregating $17,397,000, which resulted in gross realized gains of $1,999,000, occurred during the quarter ended March 31, 1994. No other sales of debt or equity securities occurred during these periods. Net adjustments to unrealized holding gains (losses) on available-for-sale securities included as a separate component of stockholders' equity totaled $51,738,000 and ($4,006,000) during the quarters ended March 31, 1995 and 1994, respectively. -9- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION - ------------------- Purchase and commitment volumes have fallen significantly from previous year levels due to the increase in mortgage interest rates in 1994 and corresponding declines in mortgage loan originations. Although mortgage interest rates have declined since early February 1995, origination levels have not yet increased appreciably. As a result the Company purchased only 133 mortgage loans totaling $35 million during the quarter ended March 31, 1995 compared to purchases of 3,632 mortgage loans totaling $1.1 billion during the same period in 1994. Purchases for the fourth quarter of 1994 were 429 mortgage loans totaling $104 million. To meet the challenges of a smaller mortgage loan origination market in 1995, the Company has implemented a strategy of selling individual mortgage loans to private investors shortly after the commitment to purchase, instead of accumulating $100 million or more of similar mortgage loans for an efficient securitization (typically a publicly offered collateralized mortgage obligation or "CMO"). This strategy allows the Company to offer more competitive pricing and reduces market risk associated with accumulating and securitizing jumbo mortgage loans. During the quarter ended March 31, 1995, $64 million of mortgage loans were sold. These sales, together with the formation of $160 million of AAA-rated private mortgage pass-through securities ("Mortgage Pass- Throughs") and low purchase volume, has substantially reduced holdings of mortgage loans. Of the $160 million of Mortgage Pass-Throughs formed during the quarter ended March 31, 1995, $137 million were backed by adjustable-rate mortgage ("ARM") loans. In addition to reducing exposure to fraud and credit risk, a primary benefit of pooling mortgage loans into Mortgage Pass-Throughs is the improved liquidity of AAA-rated securities over that of individual loans. As a result, when securing short-term borrowings, the Company is able to negotiate more favorable terms. The Company plans to continue to retain a large portfolio of primarily ARM Mortgage Pass-Throughs. The Company increased its ARM investments to over $2 billion at March 31, 1995 by purchasing $100 million of ARM agency securities. The Company also added approximately $32 million of fixed-rate unsecured agency notes to its portfolio of fixed-rate agency securities. During the quarter ended March 31, 1995, the Company did not issue any CMOs; however, the Company did acquire approximately $75 million of FNMA trust interest-only securities thus increasing the CMO investment portfolio to approximately $236 million at March 31, 1995, compared to a portfolio of approximately $168 million at December 31, 1994 and $135 million at March 31, 1994. The mortgage servicing portfolio (excluding pending transfers) increased during the quarter to $19.2 billion with a weighted average interest rate of 7.24% and earning an average annual service fee excluding ancillary revenue and earnings on escrows (the "Average Service Fee") of 30.74 basis points. The March 31, 1995 balance of mortgage servicing rights and excess servicing receivables ("servicing assets") related to this portfolio was approximately $279 million (145 basis points, or a 4.72 multiple of the Average Service Fee). Annualized portfolio runoff, consisting of prepayments and scheduled payments on mortgage loans serviced, was a low 6.15% for the quarter, due to the low weighted average interest rate of the mortgage servicing portfolio -10- compared to prevailing mortgage interest rates. In addition, pending transfers as of quarter-end totaled another $1.8 billion of mortgage servicing with a weighted average interest rate of 7.69% and earning an Average Service Fee of 29.9 basis points. At an average cost of 160.9 basis points, these servicing assets are being acquired at a 5.4 multiple of the Average Service Fee. The Company should end the second quarter of 1995 with a mortgage servicing portfolio of nearly $21 billion. The Company currently plans to grow the mortgage servicing portfolio to more than $25 billion by the end of 1995. The following table summarizes the Company's utilization of capital as of March 31, 1995 (in thousands):
CAPITAL ASSETS BORROWINGS EMPLOYED ---------- -------------- -------- Mortgage loans held for sale $ 4,833 $ - $ 4,833 Mortgage loan portfolio: Fixed-rate mortgage loans 5,695 - 5,695 Medium-term mortgage loans 2,991 - 2,991 Adjustable-rate mortgage loans 265 - 265 Mortgage Pass-Through portfolio: Fixed-rate mortgage securities 1,914 1,843 71 Medium-term mortgage securities 467,562 444,176 23,386 Adjustable-rate mortgage securities 882,633 847,270 35,363 Agency securities portfolio: Fixed-rate mortgage securities 503,011 454,055 48,956 Adjustable-rate mortgage securities 1,142,290 1,117,846 24,444 Notes 366,255 366,088 167 CMO investment portfolio 5,232,210 5,115,757/(A)/ 116,453 Mortgage servicing rights and excess servicing receivables 307,829 27,840/(B)/ 279,989 ---------- ---------- -------- $8,917,488 $8,374,875 542,613 ========== ========== Other assets, net of other liabilities 74,129 -------- Total stockholders' equity $616,742 ========
(A) INCLUDES APPROXIMATELY $120 MILLION OF RELATED SHORT-TERM BORROWINGS. (B) REPRESENTS AMOUNTS OWED UNDER CONTRACTS FOR BULK PURCHASES OF MORTGAGE SERVICING RIGHTS AND EXCESS SERVICING RECEIVABLES. A significant impact of the rise in mortgage interest rates in 1994 was a corresponding decline in value of most of the Company's mortgage assets (excluding servicing rights). The decline in intermediate- and long-term interest rates since early February 1995 has restored much of the value to these assets. The effect is most apparent on the $2.2 billion of mortgage assets and equity securities held-available-for-sale at March 31, 1995 where the unrealized loss declined to $26.8 million compared to $78.5 million at December 31, 1995. These losses will only be realized if the related assets are sold. The Company has no interest in selling these assets under current market conditions. Changes in value and ongoing market value risk associated with remaining mortgage securities will not have a direct impact on the earnings of the Company as these assets are classified as held-to-maturity and can only be sold under very limited circumstances. -11- RESULTS OF OPERATIONS - --------------------- Comparative net operating results (interest income or fee revenues, net of related interest expense or direct operating costs), by source, were as follows (in thousands, except percentages and per share amounts):
QUARTER ENDED MARCH 31 ----------------------- 1995 1994 ------- ------- Mortgage loans $ 715 $13,570 Mortgage Pass-Throughs 1,525 4,777 Agency securities 2,925 3,889 CMO investments 1,607 1,332 Mortgage servicing 9,470 1,182 Gain from sales 1,300 1,999 CMO administration 983 834 Other income 319 227 ------- ------- Contribution to income 18,844 27,810 Provision for possible losses 600 500 General and administrative expenses 2,878 3,841 ------- ------- Net income $15,366 $23,469 ======= ======= Net income per share: Primary $0.36 $ 0.90 Fully diluted * 0.88 Return on average stockholders' equity 9.54% 14.60%
* 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. Operating results for the quarter ended March 31, 1995 declined nearly 35% from those achieved in the first quarter of 1994 and over 22% from the $19,813,000 earned the fourth quarter of 1994. The Federal Reserve, in a series of moves beginning February 4, 1994, raised short-term interest rates 3 percentage points, including a 3/4 of 1% increase in November 1994 and another 1/2 of 1% in February 1995. These increases resulted in corresponding increases in the Company's borrowing costs which had the effect of substantially reducing the Company's net interest spread on mortgage investments. However, since February 1995, intermediate- and long-term interest rates have declined considerably in response to a spate of economic indicators suggesting a slowing of the U.S. economy. While this significant decrease in rates has not effected the Company's borrowing costs, there is a growing consensus that the economic slowdown may be sufficient to convince the Federal Reserve not to increase short-term interest rates further this business cycle. Should the Company's borrowing costs remain stable, the net interest spread on mortgage investments will widen as interest rates on ARM investments adjust higher (see "Effects of Interest Rate Changes"). The net interest spread earned from mortgage loans contributed significantly less to current quarter net operating results than in the first quarter of 1994 due primarily to significantly lower average holdings of mortgage loans during the current period. Average holdings in the current quarter were $154 million, compared to the $1.4 billion held during the same quarter of 1994. Lower mortgage loan purchase volume, particularly in the latter part of 1994 and in the current quarter, along with 1994 CMO issuances, the formation of Mortgage Pass-Throughs and $64 million of sales in the current quarter have substantially reduced holdings of mortgage loans. This reflects the Company's current position of significantly reducing market risk associated with -12- aggregating and securitizing jumbo mortgage loans (see the discussion above under "Financial Condition"). Higher short-term borrowing costs were also a factor in lower current quarter earnings with an average cost of 6.46% in the current quarter compared to 3.91% in the first quarter of 1994. Mortgage Pass-Throughs contributed less to current quarter net operating results compared to the same period in 1994 primarily due to higher borrowing costs offset somewhat by higher yields and a higher average portfolio outstanding. Borrowing costs for this portfolio averaged 6.21% for the quarter ended March 31, 1995, compared to 3.59% for the same period in 1994. Mortgage Pass-Through yields were higher at 6.66% for the quarter ended March 31, 1995, compared to 5.95% for the same period in 1994 due primarily to the rise in ARM Mortgage Pass-Through yields as the underlying ARM loans reset periodically (see "Effects of Interest Rate Changes"). The average portfolio outstanding was nearly $1.3 billion for the quarter ended March 31, 1995, compared to $891 million for the same period in 1994. The increase was the result of the formation of nearly $1 billion of Mortgage Pass-Throughs since April 1, 1994, offset by portfolio runoff and a $350 million CMO issuance late 1994 that was secured largely by fixed-rate Mortgage Pass-Throughs. Agency securities contributed less to current quarter net operating results compared to the same period in 1994 despite a sizable increase in average portfolio outstanding due to lower agency security yields (6.07% in the current quarter compared to 6.44% in the same quarter of the prior year) and higher short-term borrowing costs (5.81% in the current quarter compared to 3.08% in the same quarter of the prior year). Lower yields were due to investments made mid-1994 in newly issued ARM securities that had not yet reset to a fully- indexed rate (either the 1-year treasury rate or 6-month LIBOR, i.e. "teaser- rate ARM securities"). These teaser-rate ARM securities produced an average yield of 5.49% during the quarter, 51 basis points less than related borrowing costs. This negative spread reflects the rapid rise in short-term interest rates late in 1994 well in excess of upward adjustments in the interest rates on ARM securities. Yields on these securities improved 50 basis points during the current quarter and are expected to continue to improve in future quarters (see "Effects of Interest Rate Changes"). The average agency securities portfolio outstanding was nearly $2.0 billion for the quarter ended March 31, 1995, compared to $455 million for the same period in 1994. The increase was the result of the acquisition of nearly $1.2 billion of ARM securities and $366 million of fixed-rate unsecured agency notes since April 1, 1994. CMO investments contributed more to net operating results during the quarter ended March 31, 1995 than in the same period in 1994 primarily due to the acquisition in the current quarter of approximately $75 million of FNMA trust interest-only securities. Additionally, prepayments on mortgage securities collateral were still relatively high in the first quarter of 1994 due to refinancing activity. During the quarter ended March 31, 1995, the Company received principal collections on mortgage securities collateral totaling $83 million, compared to $578 million of runoff in the same period in 1994. Lower levels of prepayments has the effect of lowering amortization of bond discounts and improving operating results. The mortgage servicing operation continues grow. The first quarter of 1994 was the first profitable quarter for mortgage servicing since commencing operations in March 1993. Revenues have increased to over $17 million in the current quarter compared to approximately $2.5 million the first quarter of 1994. Direct operating costs have also increased, but not to the same extent as revenues, which is reflective of efficiencies being gained in the servicing process as the servicing portfolio continues to grow. Amortization of -13- servicing assets amounted to $4.3 million during the current quarter, representing an annual rate consistent with portfolio runoff. During the quarter ended March 31, 1995, the Company sold $36 million of mortgage securities collateral previously released from CMOs pursuant to "clean- up calls" and $64 million of mortgage loans either acquired during the quarter or previously held in the mortgage loan portfolio recognizing gains aggregating $1.3 million. During the quarter ended March 31, 1994, the Company sold $17 million of released mortgage securities collateral recognizing gains aggregating $2.0 million. General and administrative expenses were lower for the first quarter of 1995 compared to the same period in 1994 primarily due to lower bonus and incentive compensation accruals and more precise allocations of costs to the mortgage servicing operation. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Company's primary sources of funds include monthly principal and interest payments on mortgage loans and mortgage securities, short-term borrowings, excess cash flows on issued CMOs, proceeds from securitizations and sales of mortgage assets, servicing fees and other revenue from its mortgage servicing portfolio, and equity offerings when available. The Company currently believes that these funds are sufficient for the acquisition of additional mortgage loans and other mortgage assets, repayments on short-term borrowings, growth of the mortgage servicing portfolio and the payment of cash dividends as required for Capstead's continued qualification as a Real Estate Investment Trust ("REIT"). It is the Company's policy to remain strongly capitalized and conservatively leveraged. During the first quarter, the Company began selling its mortgage loan acquisitions directly to private investors in increments of up to $10 million rather than accumulating the $100 million or more in mortgage loans necessary to efficiently issue CMOs. Additionally, the Company may, from time to time, sell a portion of its investments in other mortgage assets classified as available- for-sale. Such sales may be accomplished by issuing publicly-offered, multi- class Mortgage Pass-Through certificates ("MPCs"). This sale activity may increase quarterly income volatility because of the recognition of transactional gains or losses. Sales in the current quarter were limited to reducing holdings of mortgage loans and collateral released from CMOs pursuant to clean-up calls. Short-term borrowings are primarily made under repurchase arrangements. At March 31, 1995 the Company had uncommitted repurchase facilities with investment banking firms of approximately $5 billion to finance the mortgage loan holdings and the Mortgage Pass-Through portfolio, subject to certain conditions. Interest rates on borrowings under these facilities are based on overnight to 30-day London Interbank Offered Rate ("LIBOR") rates. The Company also enters into repurchase and dollar repurchase arrangements with investment banking firms to whom the Company pledges agency securities and other mortgage assets as collateral. The terms and conditions of these arrangements, including interest rates, are negotiated on a transaction-by-transaction basis. Other short-term financing arrangements that the Company may use include entering into repurchase transactions prior to the issuance of CMOs or MPCs whereby the Company may pledge the mortgage assets that are expected to secure the issuance as collateral for a repurchase transaction with the managing underwriter of the related issuance. -14- At March 31, 1995 the Company had available a $200 million line of credit with an investment banking firm to be secured by servicing assets, $120 million of which is committed. Advances have separate maturities and rates of interest with interest due monthly. Interest rates on advances under this facility are based on LIBOR rates related to the term of the advance. EFFECTS OF INTEREST RATE CHANGES Changes in interest rates may impact the Company's earnings in various ways. The Company's earnings depend, in part, on the difference between the interest received on mortgage investments and the interest paid on related short-term borrowings (primarily repurchase arrangements). The resulting spread may be reduced in a rising interest rate environment. For ARM loans the risk of rising short-term interest rates is offset to some extent by increases in the rates of interest earned on these loans. Since ARM loans generally limit the amount of such increase during any single interest rate adjustment period and over the life of the loan, the interest rates on the repurchase arrangements can rise to levels that may exceed the interest rates on the underlying ARM loans resulting in a negative interest spread. This occurred in late 1994 on many of the Company's ARM investments. The Company expects that once interest rates stabilize or decline these spreads will recover. Rising interest rates may not only reduce interest spreads, but also the volume of mortgage loan purchases through our conduit operations as mortgage loan origination activity slows, which may result in lower average mortgage loan holdings during these periods. In addition, earnings are impacted if long-term interest rates change during the period after the Company has committed to purchase fixed-rate mortgage loans but before these loans have been pledged to secure CMOs and MPCs or otherwise committed for sale. If long-term interest rates increase during this period, the interest payable on the CMOs issued will increase while the yield on the underlying mortgage loans pledged to collateralize the CMOs will not change; as a consequence, the interest spread on the CMO will be lower. Conversely, if long-term interest rates decrease during this period, the interest payable on the CMO issued will decrease, while the yield on the underlying mortgage loans pledged to collateralize the CMO will not change; as a consequence, the interest spread on the CMO will be higher. Similarly, proceeds received on the issuance of MPCs and other sales, and related gains or losses, will be negatively impacted by an increase in long-term interest rates during this period due to the resulting decline in market value of the related collateral. Conversely, these transactional gains or losses will be favorably impacted by a decrease in long-term interest rates during this period. The Company historically has attempted to manage its exposure to long-term interest rate changes in part by pricing CMO and MPC issuances prior to the purchase of, but subsequent to the commitment to purchase, all of the mortgage loans that will collateralize the issuances or from time to time, entering into forward sale agreements for hedging purposes. Beginning in 1995 the Company shortened the holding period for mortgage loan acquisitions to usually about a week, in an effort to eliminate the market risk associated with aggregating and securitizing mortgage loans. Changes in interest rates also impact earnings recognized from the CMO investment portfolio, which consists of fixed-rate CMO residuals and interest- only and principal-only securities. The amount of income that may be generated from the typical CMO residual is dependent upon the rate of principal prepayments on the underlying mortgage collateral. If mortgage interest rates fall significantly below the interest rate on the collateral, -15- principal prepayments will increase, reducing or even eliminating the overall return on the investment in the CMO residual. This is due primarily to the acceleration of the amortization of bond discounts, a noncash item, as bond classes are repaid more rapidly than originally anticipated. Conversely, if mortgage interest rates rise significantly above the interest rate on the collateral, principal prepayments will typically diminish, resulting in a greater overall return on the investment in the fixed-rate CMO residual because of an increase in the period of time over which the Company receives the larger positive interest spread. During periods of increasing interest rates, the Company's volume of mortgage loan acquisitions generally will diminish due, among other things, to decreased refinancing activity. Similarly, in a falling interest rate environment, prepayments on the mortgage collateral underlying investments in interest-only securities generally will be high and the Company could incur losses on these securities. Conversely, in periods of rising interest rates, interest-only securities will tend to perform favorably because the underlying mortgage collateral will generally prepay at slower rates. Principal-only securities react differently to changes in interest rates. Lower interest rates result in the recovery of these investments more rapidly thus increasing yields. During periods of rising rates, it takes longer for the Company to recover its investments thus lowering yields. Principal-only securities retained by the Company generally represent a much smaller investment than interest-only investments. Another effect of changes in interest rates is that when interest rates decrease, the rate of prepayment of mortgage loans generally increases. To the extent the proceeds of prepayments on the mortgage investment portfolios cannot be reinvested at a rate of interest at least equal to the rate previously earned on such investments, earnings may be adversely affected. In addition, the rates of interest earned on ARM loans generally will decline during periods of falling interest rates. The above discussion regarding how changes in interest rates impact investments in mortgage assets also applies to the Company's growing investment in mortgage servicing rights and excess servicing receivables. When interest rates rise, mortgage servicing rights and excess servicing receivables become more valuable since the average lives of the related mortgage loans will tend to be longer and earnings from large, temporarily held cash balances will be greater. Conversely, lower interest rates will spur prepayments thus reducing the period of time the Company can service the related loans. Because the Company began mortgage servicing in 1993, exposure to lower interest rates is less than for other servicers that acquired servicing portfolios in previous years when interest rates were substantially higher. -16- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: (a) The annual meeting of stockholders was held April 20, 1995. (b) The following directors were elected to Board of Directors (constituting the entire Board of Directors): Bevis Longstreth Harriet E. Miers Paul M. Low William R. Smith Ronn K. Lytle John C. Tolleson (c) The following items were voted on at the annual meeting:
VOTES ---------------------------------------------- WITHHELD/ BROKER FOR AGAINST ABSTENTIONS NON-VOTES ---------- --------- ----------- --------- Election of Board Members: Bevis Longstreth...................... 13,241,939 - 163,343 - Paul M. Low........................... 13,241,308 - 163,974 - Ronn K. Lytle......................... 13,242,048 - 163,234 - Harriet E. Miers...................... 13,240,098 - 165,184 - William R. Smith...................... 13,242,121 - 163,161 - John C. Tolleson...................... 13,243,768 - 161,514 - Ratification of Ernst & Young as independent auditors of the Company.... 13,174,717 110,229 120,336 - Other matters (no other matters)........ 11,877,718 1,167,425 360,139 -
PART II. - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: (a) Exhibits: -------- The following Exhibits are presented herewith: Exhibit 11 - Computation of Earnings Per Share for the quarter ended March 31, 1995 and 1994. Exhibit 27 - Financial Data Schedule (electronic filing only). (b) Reports on Form 8-K: None. ------------------- -17- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CAPSTEAD MORTGAGE CORPORATION Date: May 8, 1995 By /s/ RONN K. LYTLE ------------------------------------ Ronn K. Lytle Chairman and Chief Executive Officer Date: May 8, 1995 By /s/ ANDREW F. JACOBS ------------------------------------ Andrew F. Jacobs Senior Vice President - Control and Treasurer -18- EX-11 2 COMP OF NET INCOME EXHIBIT 11 CAPSTEAD MORTGAGE CORPORATION COMPUTATION OF NET INCOME PER SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED MARCH 31 -------------------------- 1995 1994 ------- ------- PRIMARY: Average number of common shares outstanding 15,304 15,202 Incremental shares calculated using the Treasury Stock method 4 84 ------- ------- 15,308 15,286 ======= ======= Net income $15,366 $23,469 Less cash dividends paid on convertible preferred stock: Series A paid ($0.40 paid per share) (248) (273) Series B paid ($0.315 paid per share) (9,550) (9,407) ------- ------- Net income available to common stockholders $ 5,568 $13,789 ======= ======= Primary net income per share $0.36 $0.90 ===== ===== FULLY DILUTED: Average number of common shares outstanding 15,304 15,202 Assumed conversion of convertible preferred stock: Series A 560 632 Series B (A) (A) Incremental shares calculated using the Treasury Stock method 4 82 ------- ------- 15,868 15,916 ======= ======= Net income $15,366 $23,469 Less cash dividends paid on the Series B Preferred Stock (9,550) (9,407) ------- ------- Net income $ 5,816 $14,062 ======= ======= Fully diluted net income per share (B) $0.88 =====
(A) THE SERIES B PREFERRED STOCK IS NOT CONSIDERED CONVERTIBLE FOR PURPOSES OF CALCULATING FULLY DILUTED NET INCOME PER SHARE AS IT IS CURRENTLY ANTIDILUTIVE. (B) 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. EX-27 3 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Capstead Mortgage Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 and is qualified in its entirety by reference to such financial statements. 1,000 U.S. DOLLAR 3-MOS DEC-31-1995 JAN-01-1995 MAR-31-1995 1 27,720 0 0 0 0 0 0 0 9,004,939 3,392,068 4,996,129 153 0 334,736 281,853 9,004,939 0 171,891 0 0 13,526 600 142,399 15,366 0 15,366 0 0 0 15,366 0.36 0
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