-----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, Is2LWLT1/mfvYjbLtFI2dQ42ir2vEkm00O0XUuC9LSavK2Xmcv+gfhwxxy6Mra3M LFj5bSuq2wBxfKZ+dmGV1A== 0000930661-97-001861.txt : 19970812 0000930661-97-001861.hdr.sgml : 19970812 ACCESSION NUMBER: 0000930661-97-001861 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970811 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: 97654861 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-Q 1 10-Q (QE 6-30-97) =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ----- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 1997 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) 52,245,515 as of July 28, 1997 =========================================================================== CAPSTEAD MORTGAGE CORPORATION FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997 INDEX PART I. -- FINANCIAL INFORMATION PAGE ------ ITEM 1. Financial Statements Consolidated Balance Sheet -- June 30, 1997 and December 31, 1996.. 3 Consolidated Statement of Income -- Quarter and Six Months Ended June 30, 1997 and 1996........................................... 4 Consolidated Statement of Cash Flows -- Six Months Ended June 30, 1997 and 1996........................................... 5 Notes to Consolidated Financial Statements........................ 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 12 PART II. -- OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K.......................... 18 SIGNATURES........................................................ 19 -2- PART I. -- FINANCIAL INFORMATION CAPSTEAD MORTGAGE CORPORATION CONSOLIDATED BALANCE SHEET (IN THOUSANDS) ITEM 1. FINANCIAL STATEMENTS
JUNE 30, 1997 DECEMBER 31, 1996 ------------- ----------------- (UNAUDITED) ASSETS Mortgage investments $ 5,453,108 $ 4,840,417 CMO collateral and investments 4,287,200 4,501,646 ----------- ----------- 9,740,308 9,342,063 Mortgage servicing rights 662,489 637,979 Prepaids, receivables and other 169,096 156,293 Cash and cash equivalents 11,884 21,003 ----------- ----------- $10,583,777 $10,157,338 =========== =========== LIABILITIES Short-term borrowings $ 6,143,314 $ 5,462,856 Collateralized mortgage obligations 3,531,285 3,861,892 Accounts payable and accrued expenses 37,379 33,924 Mortgage servicing rights acquisitions payable 25,590 71,797 ----------- ----------- 9,737,568 9,430,469 ----------- ----------- STOCKHOLDERS' EQUITY Preferred stock - $0.10 par value; 100,000 shares authorized: $1.60 Cumulative Preferred Stock, Series A, 432 and 470 shares issued and outstanding ($7,085 aggregate liquidation preference) 6,043 6,567 $1.26 Cumulative Convertible Preferred Stock, Series B, 20,585 and 23,932 shares issued and outstanding ($234,257 aggregate liquidation preference) 225,788 259,829 Common stock - $0.01 par value; 100,000 shares authorized; 51,056 and 44,743 shares issued and outstanding 510 447 Paid-in capital 575,873 461,045 Undistributed income 10,318 4,582 Unrealized gain (loss) on debt 27,677 (5,601) securities ----------- ----------- 846,209 726,869 ----------- ----------- $10,583,777 $10,157,338 =========== ===========
See accompanying notes to consolidated financial statements. -3- CAPSTEAD MORTGAGE CORPORATION CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 -------------------- -------------------- 1997 1996 1997 1996 --------- --------- --------- --------- INTEREST INCOME: Mortgage investments $ 79,473 $ 77,787 $157,377 $154,469 CMO collateral and investments 83,542 88,472 170,919 178,173 -------- -------- -------- -------- Total interest income 163,015 166,259 328,296 332,642 -------- -------- -------- -------- INTEREST AND RELATED EXPENSES: Short-term borrowings: Mortgage investments 68,649 65,508 133,504 130,892 CMO investments 5,788 1,966 12,023 2,126 Collateralized mortgage obligations 67,110 79,730 137,609 162,907 Mortgage insurance and other 1,355 2,118 2,781 4,402 -------- -------- -------- -------- Total interest and related expenses 142,902 149,322 285,917 300,327 -------- -------- -------- -------- Net margin on mortgage assets 20,113 16,937 42,379 32,315 -------- -------- -------- -------- MORTGAGE SERVICING REVENUES: Servicing fees 30,726 23,739 60,859 46,314 Other 10,813 6,806 19,419 12,202 -------- -------- -------- -------- Total mortgage servicing revenues 41,539 30,545 80,278 58,516 -------- -------- -------- -------- MORTGAGE SERVICING EXPENSES: Direct servicing expenses 4,281 3,799 8,296 6,956 Indirect servicing expenses 1,826 1,514 3,551 2,987 Amortization of mortgage servicing 16,385 10,139 30,412 20,226 rights Interest 5,482 3,929 10,412 7,228 -------- -------- -------- -------- Total mortgage servicing expenses 27,974 19,381 52,671 37,397 -------- -------- -------- -------- Net margin on mortgage servicing 13,565 11,164 27,607 21,119 -------- -------- -------- -------- OTHER REVENUES: Gain on sales and other 8,685 6,403 11,285 10,324 CMO administration 864 867 1,684 1,700 -------- -------- -------- -------- Total other revenues 9,549 7,270 12,969 12,024 -------- -------- -------- -------- OTHER OPERATING EXPENSES 3,556 3,198 5,896 6,457 -------- -------- -------- -------- NET INCOME $ 39,671 $ 32,173 $ 77,059 $ 59,001 ======== ======== ======== ======== Net income $ 39,671 $ 32,173 $ 77,059 $ 59,001 Less cash dividends on preferred stock (6,663) (9,800) (13,862) (19,690) -------- -------- -------- -------- Net income available to common $ 33,008 $ 22,373 $ 63,197 $ 39,311 stockholders ======== ======== ======== ======== NET INCOME PER SHARE: Primary $ 0.66 $ 0.60 $ 1.30 $ 1.07 Fully diluted 0.59 0.53 1.17 0.98 CASH DIVIDENDS PAID PER SHARE: Common $ 0.595 $ 0.533 $ 1.175 $ 1.000 Series A Preferred 0.400 0.400 0.800 0.800 Series B Preferred 0.315 0.315 0.630 0.630
See accompanying notes to consolidated financial statements. -4- CAPSTEAD MORTGAGE CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30 -------------------------- 1997 1996 ------------ ------------ OPERATING ACTIVITIES: Net income $ 77,059 $ 59,001 Noncash items: Amortization of discount and premium 47,116 25,674 Amortization of mortgage servicing rights 30,412 20,226 Depreciation and other amortization 1,904 1,564 Net change in prepaids, receivables, other assets, accounts payable and accrued expenses (10,970) 6,612 Net gain from investing activities (10,976) (10,375) ----------- ----------- Net cash provided by operating activities 134,545 102,702 ----------- ----------- INVESTING ACTIVITIES: Purchases of mortgage investments (1,415,694) (1,086,927) Purchases of CMO investments (170,942) (307,005) Purchases of mortgage servicing rights (49,542) (114,038) Purchases of derivative financial instruments (21,582) (33,972) Principal collections on mortgage investments 553,507 581,182 Proceeds from sales and redemptions of mortgage assets 432,475 581,538 Proceeds from sales of derivative financial instruments 305 - CMO collateral: Principal collections 219,936 305,406 Decrease in accrued interest receivable 2,167 2,344 Decrease (increase) in short-term investments (2,370) 3,949 ----------- ----------- Net cash used by investing activities (451,740) (67,523) ----------- ----------- FINANCING ACTIVITIES: Increase in short-term borrowings 680,458 332,509 Decrease in mortgage servicing acquisitions payable (46,207) (6,778) Collateralized mortgage obligations: Principal payments on securities (335,199) (317,936) Increase in accrued interest payable 630 324 Capital stock transactions 79,717 17,812 Dividends paid (71,323) (56,437) ----------- ----------- Net cash provided (used) by financing activities 308,076 (30,506) ----------- ----------- Net change in cash and cash equivalents (9,119) 4,673 Cash and cash equivalents at beginning of period 21,003 18,702 ----------- ----------- Cash and cash equivalents at end of period $ 11,884 $ 23,375 =========== ===========
See accompanying notes to consolidated financial statements. -5- CAPSTEAD MORTGAGE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 (UNAUDITED) NOTE 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 a mortgage banking operation with investments in mortgage servicing and mortgage securities with the goal of producing reasonably balanced operating results in a variety of interest rate environments. NOTE 2 -- BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and six months ended June 30, 1997 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 1997. 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, 1996. On January 1, 1997 the Company adopted Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"). SFAS 125 provides accounting and reporting standards for all types of securitization transactions involving the transfer of financial assets including repurchase agreements and collateralized borrowing arrangements. Under SFAS 125 most securitizations of financial assets other than repurchase arrangements are recorded as sales. The adoption of SFAS 125 has not had a material impact on the results of operations or financial position of the Company. Certain amounts for prior periods have been reclassified to conform to the 1997 presentation. -6- NOTE 3 -- MORTGAGE SERVICING The following table provides information regarding the primary mortgage servicing portfolio (which excludes subservicing) and the related investment in mortgage servicing rights (dollars in thousands):
UNPAID MORTGAGE PRINCIPAL NUMBER SERVICING BALANCE OF LOANS RIGHTS ------------ --------- ---------- Loans serviced at December 31, 1996 $35,562,597 366,373 $559,857 Additions 5,581,772 56,557 103,065 Run-off/amortization* (2,073,598) (15,569) (27,918) Results of hedging activity - - 3,199 ----------- ------- -------- Loans serviced at June 30, 1997 39,070,771 407,361 638,203 Purchases pending transfer 1,569,908 16,318 24,286 ----------- ------- -------- Total portfolio at June 30, 1997 $40,640,679 423,679 $662,489 =========== ======= ========
* EXCLUDES AMORTIZATION OF HEDGE INSTRUMENTS AND PURCHASES PENDING TRANSFER. In addition, as of June 30, 1997 the Company subserviced $6.8 billion of single- family mortgage loans under a subservicing arrangement with a large national mortgage conduit. NOTE 4 -- MORTGAGE INVESTMENTS Mortgage investments and the related average effective interest rates (calculated including mortgage insurance costs and excluding unrealized gains and losses) were as follows (dollars in thousands):
QUARTER SIX MONTHS ENDED ENDED AS OF JUNE 30 JUNE 30 JUNE 30 ---------------------- ------------ ------------ 1997 1996 1997 1996 1997 1996 ---------- ---------- ----- ----- ----- ----- Agency securities: Fixed-rate $ 687,276 $ 462,692 6.56% 6.37% 6.48% 6.37% Adjustable-rate 4,290,764 3,454,504 6.28 6.09 6.28 6.11 Callable notes - - - - - 7.05 AAA-rated private mortgage pass- through securities: Fixed-rate 47,771 8,639 8.48 8.10 8.75 8.82 Medium-term 239,366 302,474 6.61 6.64 6.65 6.65 Adjustable-rate 187,931 229,824 7.15 7.17 7.15 7.15 ---------- ---------- $5,453,108 $4,458,133 ========== ==========
The Company classifies its mortgage investments by 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 Federal National Mortgage Association ("FNMA") yields for 30-year fixed- rate -7- commitments at the time of adjustment. Adjustable-rate mortgage investments either adjust (i) semiannually 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, FNMA or the Government National Mortgage Association (collectively, "Agency Securities"). At June 30, 1997 the AAA-rated private mortgage pass-through securities ("Mortgage Pass-Throughs") and Agency Securities were pledged to secure short- term borrowings. NOTE 5 -- CMO COLLATERAL AND INVESTMENTS CMO collateral consists of mortgage securities and related investments pledged to secure Company-issued collateralized mortgage obligations ("Pledged CMO Collateral"). CMO investments include investments in FNMA Trust interest-only mortgage securities and investments in other CMO securities such as other agency or private-issue interest-only and principal-only mortgage securities. The components of CMO collateral and investments are summarized as follows (in thousands):
JUNE 30, 1997 DECEMBER 31, 1996 -------------- ------------------ Pledged mortgage securities $3,572,074 $3,908,623 Short-term investments 13,425 11,055 Accrued interest receivable 21,845 24,012 ---------- ---------- Total Pledged CMO Collateral 3,607,344 3,943,690 Unamortized discount (7,465) (7,166) ---------- ---------- 3,599,879 3,936,524 FNMA Trust interest-only mortgage securities 670,549 546,539 Other CMO investments 16,772 18,583 ---------- ---------- $4,287,200 $4,501,646 ========== ==========
Pledged mortgage securities consist of fixed-rate, medium-term and adjustable- rate mortgage-backed securities. All principal and interest on pledged mortgage securities 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 pledged mortgage securities and reinvestment income earned thereon are available for the payment of principal and interest on CMOs issued by the Company. The weighted average effective interest rate for total Pledged CMO Collateral was 7.31 percent and 7.34 percent during the quarter and six months ended June 30, 1997, respectively. FNMA Trust interest-only mortgage securities are entitled to receive 100 percent of coupon interest stripped from pools of FNMA mortgage-backed securities. At June 30, 1997 the Company's investment in FNMA Trust interest-only mortgage securities, after certain hedging costs, yielded 10.52 percent with related notional amounts aggregating $2.0 billion. These and certain other CMO investments were pledged to secure short-term borrowings at June 30, 1997. NOTE 6 -- DISCLOSURES REGARDING FAIR VALUES OF DEBT SECURITIES Estimated fair values of debt securities have been determined using available market information and appropriate valuation methodologies; however, -8- considerable judgment is required in interpreting market data to develop these estimates. In addition, fair values fluctuate on a daily basis. Accordingly, 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 estimated fair values. The fair values of debt securities were estimated using quoted market prices when available, including quotes made by lenders in connection with designating collateral for repurchase arrangements. Pledged CMO Collateral has been permanently financed through the issuance of CMOs. Gross unrealized gains and losses are based on projected net cash flows of the Pledged CMO Collateral after payment on the related CMOs determined using market discount rates and prepayment assumptions. The maturity of Pledged CMO Collateral is directly affected by the rate of principal payments by mortgagors and clean-up calls of the remaining CMOs outstanding. Held-to-maturity debt securities consist of Pledged CMO Collateral and collateral released from the related CMO indentures pursuant to clean-up calls and held as Mortgage Pass-Throughs. The following tables summarize fair value disclosures for available-for-sale and held-to-maturity debt securities for the periods indicated (in thousands):
GROSS GROSS UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------- ---------- ---------- ---------- AVAILABLE-FOR-SALE: - ------------------ JUNE 30, 1997 Mortgage investments: Agency Securities: Fixed-rate $ 704,768 $ 3,634 $21,126 $ 687,276 Adjustable-rate 4,256,057 35,033 326 4,290,764 Mortgage Pass-Throughs: Fixed-rate 11,044 282 19 11,307 Medium-term 238,779 587 - 239,366 Adjustable-rate 183,848 4,083 - 187,931 CMO investments 681,792 5,961 432 687,321 ---------- ------- ------- ---------- $6,076,288 $49,580 $21,903 $6,103,965 ========== ======= ======= ========== DECEMBER 31, 1996 Mortgage investments: Agency Securities: Fixed-rate $ 490,893 $ - $23,006 $ 467,887 Adjustable-rate 3,858,339 20,977 489 3,878,827 Mortgage Pass-Throughs: Fixed-rate 4,144 44 - 4,188 Medium-term 278,473 283 569 278,187 Adjustable-rate 128,110 2,691 - 130,801 CMO collateral and investments 653,748 2,119 7,651 648,216 ---------- ------- ------- ---------- $5,413,707 $26,114 $31,715 $5,408,106 ========== ======= ======= ========== HELD-TO-MATURITY: - ----------------- JUNE 30, 1997 Pledged CMO Collateral $3,599,879 $ 3,218 $52,438 $3,550,659 Mortgage Pass-Throughs 36,464 1,133 - 37,597 ---------- ------- ------- ---------- $3,636,343 $ 4,351 $52,438 $3,588,256 ========== ======= ======= ========== DECEMBER 31, 1996 Pledged CMO Collateral $3,853,430 $ 3,150 $54,889 $3,801,691 Mortgage Pass-Throughs 80,527 2,314 94 82,747 ---------- ------- ------- ---------- $3,933,957 $ 5,464 $54,983 $3,884,438 ========== ======= ======= ==========
-9- Sales of released CMO collateral occasionally occur provided the collateral has paid down to within 15 percent of its original issuance amounts. The following table summarizes disclosures related to the disposition of debt securities held available-for-sale and held-to-maturity (in thousands):
QUARTER ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------ ------------------ 1997 1996 1997 1996 -------- -------- -------- -------- Sale of securities held available-for-sale: Cost basis $245,662 $345,103 $347,079 $485,356 Gains 8,209 5,297 9,086 9,249 Redemption of callable agency notes and sale of Released CMO Collateral held-to-maturity: Cost basis - 14,655 73,324 63,632 Gains - 1,098 2,986 1,098
NOTE 7 -- NET INTEREST INCOME ANALYSIS The following table summarizes interest income and interest expense and average effective interest rates for the periods indicated (dollars in thousands):
QUARTER ENDED JUNE 30 -------------------------------------- 1997 1996 ------------------ ------------------ AMOUNT AVERAGE AMOUNT AVERAGE -------- -------- -------- -------- Interest income: Mortgage investments $ 79,473 6.41% $ 77,787 6.32% CMO collateral and investments 83,542 7.76 88,472 7.62 -------- -------- Total interest income 163,015 166,259 -------- -------- Interest expense: Short-term borrowings 74,437 5.57 67,474 5.41 CMOs 67,110 7.50 79,730 7.49 -------- -------- Total interest expense 141,547 147,204 -------- -------- Net interest $ 21,468 $ 19,055 ======== ======== SIX MONTHS ENDED JUNE 30 ------------------------------------- 1997 1996 ----------------- ----------------- AMOUNT AVERAGE AMOUNT AVERAGE -------- ------- -------- ------- Interest income: Mortgage investments $157,377 6.41% $154,469 6.36% CMO collateral and investments 170,919 7.80 178,173 7.60 -------- -------- Total interest income 328,296 332,642 -------- -------- Interest expense: Short-term borrowings 145,527 5.50 133,018 5.46 CMOs 137,609 7.51 162,907 7.51 -------- -------- Total interest expense 283,136 295,925 -------- -------- Net interest $ 45,160 $ 36,717 ======== ========
-10- The following table summarizes changes in interest income and interest expense due to changes in interest rates versus changes in volume for the quarter and six months ended June 30, 1997 compared to the same periods in 1996 (in thousands):
QUARTER ENDED JUNE 30, 1997 -------------------------------- RATE* VOLUME* TOTAL -------- ---------- ---------- Interest income: Mortgage investments $1,076 $ 610 $ 1,686 CMO collateral and investments 1,682 (6,612) (4,930) ------ -------- -------- Total interest income 2,758 (6,002) (3,244) ------ -------- -------- Interest expense: Short-term borrowings 1,984 4,979 6,963 CMOs 64 (12,684) (12,620) ------ -------- -------- Total interest expense 2,048 (7,705) (5,657) ------ -------- -------- Net interest $ 710 $ 1,703 $ 2,413 ====== ======== ======== SIX MONTHS ENDED JUNE 30, 1997 ------------------------------ RATE* VOLUME* TOTAL ------- --------- -------- Interest income: Mortgage investments $1,171 $ 1,737 $ 2,908 CMO collateral and investments 4,668 (11,922) (7,254) ------ -------- -------- Total interest income 5,839 (10,185) (4,346) ------ -------- -------- Interest expense: Short-term borrowings 1,049 11,460 12,509 CMOs 22 (25,320) (25,298) ------ -------- -------- Total interest expense 1,071 (13,860) (12,789) ------ -------- -------- Net interest $4,768 $ 3,675 $ 8,443 ====== ======== ========
* 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. -11- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION - ------------------- The Company's business plan is to build a mortgage banking operation with investments in mortgage servicing and mortgage securities with the goal of producing reasonably balanced operating results in a variety of interest rate environments. The Company commenced mortgage servicing operations in 1993 and through steady growth has become one of the 20 largest mortgage servicers in the country with a total mortgage servicing portfolio of $45.9 billion (including primary servicing and subservicing), an increase of $1.9 billion over the previous quarter. The primary mortgage servicing portfolio (which excludes pending transfers and subservicing) increased to $39.1 billion at June 30, 1997, with a weighted average interest rate of 7.43 percent and earning an average annual service fee, excluding ancillary revenue and earnings on escrows, (the "Average Service Fee"), of 30.3 basis points. The June 30, 1997 balance of mortgage servicing rights related to this portfolio was $638 million (163 basis points, or a 5.39 multiple of the Average Service Fee). An additional $1.6 billion of mortgage servicing acquired during the quarter is pending transfer into the portfolio and is being subserviced by the sellers. These pending acquisitions have a weighted average interest rate of 7.42 percent earning an Average Service Fee of 29.2 basis points. At an average cost of 155 basis points, these acquisitions are being acquired at a 5.30 multiple. Primary mortgage servicing portfolio run-off, consisting of prepayments and scheduled payments on mortgage loans serviced, was 12.12 percent during the quarter, down from 13.17 percent in the second quarter of 1996 but up from 9.70 percent in the first quarter of 1997. The increase in prepayments experienced in the second quarter of 1997 was prompted by lower mortgage interest rates and seasonal factors. Derivative financial instruments, specifically interest rate floors, are held from time to time as partial hedges against prepayment risk (see "Effects of Interest Rate Changes"). Outstanding hedge positions, with a $8.7 billion notional amount, carried a $61,000 unrealized gain at June 30, 1997. During the second quarter of 1996, the Company entered into a subservicing arrangement with a large national mortgage conduit. As of June 30, 1997 the subservicing portfolio totaled $6.8 billion. An advantage of subservicing arrangements is that further growth and enhanced efficiencies can be achieved without the cost of acquiring additional mortgage servicing rights. This arrangement is viewed by the Company as a confirmation of the quality and cost effectiveness of the mortgage servicing operation. As of June 30, 1997, holdings of mortgage investments totaled $5.5 billion with adjustable-rate mortgage ("ARM") mortgage-backed securities representing nearly $4.5 billion of the total. During the quarter and six months ended June 30, 1997, the Company acquired $793 million and $1.2 billion of ARM 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"). During the current quarter, the Company also acquired $217 million of fixed-rate Agency Securities. Sales of ARM Agency Securities and AAA-rated private mortgage pass-through securities -12- ("Mortgage Pass-Throughs") totaled $201 million and $376 million during the quarter and six months ended June 30, 1997, respectively. Prior to 1995 the Company had been an active issuer of collateralized mortgage obligations ("CMOs") and other CMO securities backed by jumbo mortgage loans. In lieu of issuing CMOs, the Company has increased its net CMO investments (defined as CMO collateral, net of related bonds, plus other CMO investments) by acquiring interest-only mortgage securities. During 1996 and the six months ended June 30, 1997, the Company acquired $522 million and $171 million of interest-only mortgage securities, respectively. Most of these securities have been FNMA Trust interest-only mortgage securities, which represent the right to receive 100 percent of coupon interest stripped from pools of FNMA mortgage- backed securities. After considering these acquisitions, current quarter sales of $44 million of interest-only mortgage securities, run-off and changes in market value (see below), net CMO investments increased $38 million during the quarter to $756 million. Derivative financial instruments, specifically interest rate floors, are held from time to time as partial hedges against prepayment risk on interest-only mortgage securities (see "Effects of Interest Rate Changes"). Outstanding hedge positions, with a $4.8 billion notional amount, carried a $1.5 million unrealized gain at June 30, 1997. The following table summarizes the Company's utilization of capital as of June 30, 1997 (in thousands):
CAPITAL ASSETS BORROWINGS EMPLOYED ----------- ----------- -------- Agency Securities: Fixed-rate $ 687,276 $ 677,430 $ 9,846 Adjustable-rate 4,290,764 4,201,054 89,710 Mortgage Pass-Throughs: Fixed-rate 47,771 46,483 1,288 Medium-term 239,366 231,933 7,433 Adjustable-rate 187,931 182,537 5,394 CMO collateral and investments 4,287,200 4,235,163* 52,037 Mortgage servicing rights 662,489 125,590** 536,899 ----------- ----------- -------- $10,402,797 $ 9,700,190 702,607 =========== =========== Other assets, net of other liabilities 143,602 -------- Total stockholders' equity $846,209 ========
* INCLUDES APPROXIMATELY $704 MILLION OF RELATED SHORT-TERM BORROWINGS. ** REPRESENTS AMOUNTS OWED UNDER CONTRACTS FOR BULK PURCHASES OF MORTGAGE SERVICING RIGHTS AND $100 MILLION DRAWN ON A $450 MILLION LINE OF CREDIT SECURED BY EXISTING MORTGAGE SERVICING RIGHTS. During the quarter and six months ended June 30, 1997, the Company raised $44.0 million and $79.7 million, respectively, of new capital through its dividend reinvestment and stock purchase plans, stock option exercises and open market sales. The proceeds from these issuances were profitably employed to increase investments in mortgage assets and mortgage servicing. Assuming favorable market conditions continue, the Company anticipates raising modestly more capital in each of the third and fourth quarters. Because the Company distributes virtually all of its net income in dividends, it is important that the Company access the capital markets at favorable prices to continue its growth. The more capital raised at favorable prices, the greater the benefit to future income and dividends. During the quarter and six months ended June 30, 1997, 1,723,558 and 3,795,924 shares of Series B Preferred Stock, respectively, were converted into 1,248,789 and 2,750,325 shares of common stock, respectively. Had these shares been converted as of the beginning of the quarter and six months, -13- primary earnings per share would have been marginally lower at $0.65 and $1.27 per share, respectively. Fully diluted earnings would not have been impacted as such shares are already deemed converted in that calculation. It is anticipated that holders of the Series B Preferred Stock will continue to convert their shares into common shares as long as it is advantageous to do so from a dividend yield perspective. Securities held available-for-sale were carried at a net unrealized gain of $27.7 million at June 30, 1997, a $33.3 million improvement in value from December 31, 1996. Higher prevailing interest rates, particularly in March and April 1997, afforded the Company the opportunity to acquire mortgage investments at favorable pricing relative to their value at quarter-end, contributing to a $22.2 million improvement in value of mortgage investments carried available- for-sale. Similarly, acquisitions of interest-only securities late in the quarter when interest rates had declined to near the levels prevailing at December 31, 1996, contributed to a $11.1 million increase in value of CMO investments. The Company has the ability to hold mortgage assets for the foreseeable future and, therefore does not expect to realize losses on security sales. RESULTS OF OPERATIONS - --------------------- Comparative net operating results (interest income or fee revenues, net of related interest expense and, in the case of mortgage servicing and CMO administration, related operating expenses), were as follows (in thousands, except percentages and per share amounts):
QUARTER ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------ ------------------ 1997 1996 1997 1996 -------- -------- -------- -------- Agency Securities $ 8,928 $ 8,735 $19,572 $15,906 Mortgage Pass-Throughs 1,402 2,743 3,348 5,929 CMO investments 9,783 5,459 19,459 10,480 Mortgage servicing 13,565 11,164 27,607 21,119 CMO administration 864 867 1,684 1,700 Gain on sales and other 8,685 6,403 11,285 10,324 ------- ------- ------- ------- Contribution to income 43,227 35,371 82,955 65,458 Other operating expenses (3,556) (3,198) (5,896) (6,457) ------- ------- ------- ------- Net income $39,671 $32,173 $77,059 $59,001 ======= ======= ======= ======= Net income per share: Primary $ 0.66 $ 0.60 $ 1.30 $ 1.07 Fully diluted 0.59 0.53 1.17 0.98 Return on average stockholders' equity 19.79% 19.01% 19.75% 17.57%
Operating results for the quarter and six months ended June 30, 1997, improved substantially over those achieved in the same periods in 1996. Increased investments in interest-only mortgage securities, together with improved mortgage servicing results, contributed to higher net income compared to the same periods in 1996. Record quarterly net income of $39.7 million represents an increase of over 23 percent over the second quarter of 1996, while primary net income per common share increased 10 percent. Agency Securities contributed slightly more to income during the second quarter of 1997 than in the same period in 1996. The benefit to earnings of a $367 million increase in average holdings of these securities was offset by -14- higher borrowing costs due to higher prevailing short-term interest rates and higher average borrowings outstanding. Net interest margins declined 1 basis point to 73 basis points. Agency Security yields averaged 6.32 percent and 6.31 percent during the quarter and six months ended June 30, 1997, respectively, compared to 6.13 percent and 6.14 percent during the same periods in 1996, while borrowing rates were 5.59 percent and 5.52 percent, respectively, compared to 5.39 percent and 5.43 percent during the same periods in 1996. Mortgage Pass-Throughs contributed less to income during the current quarter than in the same period in 1996 due primarily to a 19 basis point decrease in net interest margins and a 42% reduction in the average outstanding portfolio. As a result of asset sales and run-off, the average outstanding portfolio was $458 million and $466 million during the quarter and six months ended June 30, 1997, respectively, compared to $785 million and $847 million for the same periods in 1996. Average yields for this portfolio (calculated including mortgage insurance costs) were 6.90 percent and 7.00 percent during the quarter and six months ended June 30, 1997, respectively, compared to 6.95 percent and 6.99 percent during the same periods in 1996, while average borrowing rates were higher at 5.81 percent and 5.69 percent, respectively, compared to 5.67 percent and 5.71 percent during the same periods in 1996. Higher borrowing rates reflect higher prevailing short-term interest rates (see "Effects of Interest Rate Changes"). Net CMO investments contributed significantly more to income during the current quarter than in the same period in 1996 due primarily to substantial investments made during the past 18 months in interest-only mortgage securities (see above, "Financial Condition"). Higher mortgage servicing results reflect continued growth in this operation (see above "Financial Condition"). Revenues increased to $41.5 million and $80.3 million during the quarter and six months ended June 30, 1997, respectively, compared to $30.5 million and $58.5 million during the same periods in 1996. Servicing expenses also increased, but not to the same extent as revenues, which reflects efficiencies gained in the servicing process primarily due to improved economies of scale. Amortization of mortgage servicing rights of $16.4 million and $30.4 million during the quarter and six months ended June 30, 1997, respectively, was higher than the $10.1 million and $20.2 million recorded during the same periods in 1996 due primarily to portfolio growth. Greater use of external borrowings secured by the mortgage servicing portfolio to finance growth contributed to higher borrowing costs in 1997 compared to 1996. Operating expenses during the current quarter were higher than in same period in 1996 and the first quarter of 1997 primarily because of higher compensation- related accruals. During the quarter and six months ended June 30, 1997, the Company sold $246 million and $420 million, respectively, of mortgage assets consisting of Agency Securities, Mortgage Pass-Throughs and interest-only mortgage securities for gains totaling $8.2 million and $12.1 million, respectively. This compares to sales of mortgage assets totaling $372 million and $522 million during the same periods in 1996. Derivative financial instruments held for trading purposes contributed $0.3 million to earnings during the current quarter after having lost $1.4 million in value during the first quarter of 1997. Interest rates increased from December 31, 1996 to March 31, 1997 and then declined somewhat during the current quarter. These instruments (primarily interest-rate floors) tend to decrease in value in a rising interest-rate environment and increase in value when interest rates fall (see "Effects of Interest Rate Changes"). -15- LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Company's primary sources of funds include monthly principal and interest payments on mortgage investments, short-term borrowings, excess cash flows on CMO investments, servicing fees and other revenue from mortgage servicing, proceeds from sales of mortgage assets and equity offerings (see above "Financial Condition"). The Company currently believes that these funds are sufficient for growth of the mortgage servicing portfolio, the acquisition of mortgage assets, repayments on short-term borrowings, the payment of cash dividends as required for Capstead's continued qualification as a Real Estate Investment Trust ("REIT") and common stock repurchases, if any, as described below. It is the Company's policy to remain strongly capitalized and conservatively leveraged. 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 London Interbank Offered Rate ("LIBOR") rates. The terms and conditions of these arrangements, including interest rates, are negotiated on a transaction-by- transaction basis. At June 30, 1997 the mortgage servicing operation had available $350 million of a $450 million revolving line of credit agreement with an investment banking firm that matures September 30, 1998. The line is to be used primarily to finance acquisitions of mortgage servicing rights on a collateralized basis. The agreement requires, among other things, that the mortgage servicing operation maintain certain financial ratios and specified levels of unencumbered servicing rights. The mortgage servicing operation is in compliance with all requirements. Interest rates on borrowings under this facility are based on LIBOR. In 1996 the board of directors approved the repurchase of up to 1 million shares of common stock to fund employee stock option and stock grant programs. As of June 30, 1997 no such share repurchases had occurred. 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. The resulting spread may be reduced in a rising interest rate environment. Because most of the Company's mortgage investments are ARM mortgage securities, the risk of rising short-term interest rates is offset to some extent by increases in the rates of interest earned on underlying ARM 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, interest rates on borrowings can rise to levels that may exceed the interest rates on the underlying ARM loans resulting in a negative interest spread. The Company may invest in derivative financial instruments from time to time, specifically interest rate caps, as a hedge against rising interest rates on a portion of its short-term borrowings. Interest rate caps increase in value as interest rates rise and decline in value when rates fall. 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 -16- affected. Because prolonged periods of high prepayments can significantly reduce the expected life of mortgage investments, the actual yields realized can be lower due to faster amortization of purchase premiums. In addition, the rates of interest earned on ARM investments generally will decline during periods of falling interest rates as the underlying ARM loans reset at lower rates. The Company may, from time to time, sell mortgage assets. This may increase income volatility because of the recognition of transactional gains or losses. Such sales may become attractive as values of mortgage assets fluctuate with changes in interest rates. Changes in interest rates also impact earnings recognized from net CMO investments, which consist primarily of fixed-rate CMO residuals and interest- only mortgage 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 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 interest rates on the collateral, principal prepayments will typically diminish, improving the overall return on an investment in a fixed- rate CMO residual because of an increase in time over which the Company receives the net interest spread. Interest-only mortgage securities behave similarly to CMO residuals. In a falling interest rate environment, prepayments on the underlying mortgage loans generally will be higher thereby reducing or even eliminating overall returns on these securities. Sustained periods of high prepayments can result in losses. Conversely, in periods of rising interest rates, interest-only mortgage securities tend to perform favorably because underlying mortgage loans will generally prepay at slower rates thereby increasing overall returns. The above discussion regarding how changes in interest rates impact mortgage assets also applies to the Company's investment in mortgage servicing rights. When interest rates rise, periodic amortization of amounts paid for mortgage servicing rights is less since the average lives of the related mortgage loans tend to be longer and earnings from large, temporarily held cash balances will be greater. Additionally, mortgage servicing rights become more valuable under these conditions. Conversely, lower interest rates will spur prepayments thus reducing the 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, particularly since this investment is evaluated for impairment on a disaggregated basis and impairment charges are necessary if the amount for an individual servicing stratum exceeds its fair value. The Company's business plan is to build a mortgage banking operation with investments in mortgage servicing and mortgage securities with the goal of producing reasonably balanced operating results in a variety of interest rate environments. The Company supplements its business plan from time to time with derivative financial instruments, primarily interest rate floors, which may be used to hedge certain assets, such as mortgage servicing rights or interest-only mortgage securities or may be held for trading purposes. Interest rate floors decrease in value when interest rates rise and increase in value when rates decline. In instances where floors are designated as hedges, any changes in value will adjust the basis of the assets hedged. In instances where floors are held for trading purposes, changes in value will be recorded in income as they occur, which could increase income volatility. -17- RECENT ACCOUNTING PRONOUNCEMENTS In February 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 establishes simplified standards for computing and presenting earnings per share ("EPS"). Under SFAS 128 the presentation of primary EPS will be replaced with a presentation of basic EPS. Basic EPS is computed excluding dilution caused by common stock equivalents such as stock options and, therefore, will tend to be slightly higher than primary EPS. The presentation of fully diluted EPS is replaced with a presentation of diluted EPS. Diluted EPS is computed in a similar fashion to how fully diluted EPS is computed. The Company will adopt this pronouncement to report results of operations for the fourth quarter of 1997 and for the year ended December 31, 1997. Previously reported EPS will be restated at that time to conform to SFAS 128. This adoption is not expected to have a material impact on EPS as currently presented by the Company. 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 and Six Months Ended June 30, 1997 and 1996. Exhibit 27 - Financial Data Schedule (electronic filing only). (b) Reports on Form 8-K: None. ------------------- -18- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CAPSTEAD MORTGAGE CORPORATION Date: July 28, 1997 By:/s/ RONN K. LYTLE ------------------------------------ Ronn K. Lytle Chairman and Chief Executive Officer Date: July 28, 1997 By:/s/ ANDREW F. JACOBS ------------------------------------ Andrew F. Jacobs Senior Vice President - Control and Treasurer -19- EX-11 2 COMPUTATION OF NET INCOME PER SHARE EXHIBIT 11 CAPSTEAD MORTGAGE CORPORATION COMPUTATION OF NET INCOME PER SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------ -------------------- 1997 1996 1997 1996 -------- -------- --------- --------- PRIMARY: Average number of common shares outstanding 49,231 36,528 47,736 36,141 Incremental shares calculated using the Treasury Stock method 1,005 720 1,063 644 ------- ------- -------- -------- 50,236 37,248 48,799 36,785 ======= ======= ======== ======== Net income $39,671 $32,173 $ 77,059 $ 59,001 Less cash dividends paid on convertible preferred stock: Series A ($0.40 per share) (173) (206) (353) (420) Series B ($0.315 per share) (6,490) (9,594) (13,509) (19,270) ------- ------- -------- -------- Net income available to common stockholders $33,008 $22,373 $ 63,197 $ 39,311 ======= ======= ======== ======== Primary net income per share $0.66 $0.60 $1.30 $1.07 ======= ======= ======== ======== FULLY DILUTED: Average number of common shares outstanding 49,231 36,528 47,736 36,141 Assumed conversion of convertible preferred stock: Series A 908 1,065 924 1,080 Series B 15,472 22,114 16,052 22,101 Incremental shares calculated using the Treasury Stock method 1,110 1,019 1,146 1,028 ------- ------- -------- -------- 66,721 60,726 65,858 60,350 ======= ======= ======== ======== Net income available to common stockholders $39,671 $32,173 $ 77,059 $ 59,001 ======= ======= ======== ======== Fully diluted net income per share $0.59 $0.53 $1.17 $0.98 ======= ======= ======== ========
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 JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 11,884 0 0 0 0 0 0 0 10,583,777 6,206,283 3,531,285 0 231,831 510 613,868 10,583,777 0 421,543 0 0 50,936 0 293,548 77,059 0 77,059 0 0 0 77,059 1.30 1.17
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