-----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, BjEH0kLAemnh9c266RYLXHjs75fpQ3845TZw75oayjNQ/sjZ/21PVrcZg/4wAbag o0x9rBgeoEKhOpX7iNrhnA== 0000950134-98-004022.txt : 19980512 0000950134-98-004022.hdr.sgml : 19980512 ACCESSION NUMBER: 0000950134-98-004022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980511 SROS: NONE 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: SEC FILE NUMBER: 001-08896 FILM NUMBER: 98615661 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 FORM 10-Q FOR QUARTER ENDED MARCH 31, 1998 1 ================================================================================ 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, 1998 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) 61,000,520 as of May 4, 1998 ================================================================================ 2 CAPSTEAD MORTGAGE CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998 INDEX
PAGE ---- PART I. -- FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Balance Sheet -- March 31, 1998 and December 31, 1997..................................... 3 Consolidated Statement of Income -- Quarter Ended March 31, 1998 and 1997.............................................................................. 4 Consolidated Statement of Stockholders' Equity -- Quarter Ended March 31, 1998 and 1997................................................................ 5 Consolidated Statement of Cash Flows -- Quarter Ended March 31, 1998 and 1997.............................................................................. 6 Notes to Consolidated Financial Statements............................................................. 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................... 13 ITEM 4. Submission of Matters to a Vote of Security Holders............................................... 22 PART II. -- OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K.................................................................. 22 SIGNATURES................................................................................................ 23
-2- 3 PART I. -- FINANCIAL INFORMATION CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ITEM 1. FINANCIAL STATEMENTS
MARCH 31, 1998 DECEMBER 31, 1997 -------------- ----------------- (UNAUDITED) ASSETS Mortgage investments $ 6,709,131 $ 6,114,130 CMO collateral and investments 5,588,415 5,195,436 ------------ ------------ 12,297,546 11,309,566 Mortgage servicing rights 713,326 684,765 Prepaids, receivables and other 305,147 345,807 Cash and cash equivalents 27,245 17,377 ------------ ------------ $ 13,343,264 $ 12,357,515 ============ ============ LIABILITIES Short-term borrowings $ 7,777,926 $ 7,099,706 Collateralized mortgage obligations 4,644,969 4,309,455 Accounts payable and accrued expenses 29,321 51,323 Mortgage servicing rights acquisitions payable 33,808 8,423 ------------ ------------ 12,486,024 11,468,907 ------------ ------------ STOCKHOLDERS' EQUITY Preferred stock - $0.10 par value; 100,000 shares authorized: $1.60 Cumulative Preferred Stock, Series A, 399 and 408 shares issued and outstanding ($6,544 aggregate liquidation preference) 5,574 5,698 $1.26 Cumulative Convertible Preferred Stock, Series B, 17,215 and 17,081 shares issued and outstanding ($195,907 aggregate liquidation preference) 191,933 189,800 Common stock - $0.01 par value; 100,000 shares authorized; 60,453 and 58,541 shares issued and outstanding 605 585 Paid-in capital 759,952 732,295 Undistributed income 12,113 12,676 Accumulated other comprehensive income (loss) (112,937) (52,446) ------------ ------------ 857,240 888,608 ------------ ------------ $ 13,343,264 $ 12,357,515 ============ ============
See accompanying notes to consolidated financial statements. -3- 4 CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
QUARTER ENDED MARCH 31 -------------------------- 1998 1997 --------- --------- INTEREST INCOME: Mortgage investments $ 98,784 $ 77,904 CMO collateral and investments 94,235 87,377 --------- --------- Total interest income 193,019 165,281 --------- --------- INTEREST AND RELATED EXPENSES: Short-term borrowings: Mortgage investments 88,410 64,855 CMO investments 11,326 6,235 Collateralized mortgage obligations 77,803 70,499 Mortgage insurance and other 1,112 1,426 --------- --------- Total interest and related expenses 178,651 143,015 --------- --------- Net margin on mortgage assets 14,368 22,266 --------- --------- MORTGAGE SERVICING REVENUES: Servicing fees 33,517 30,132 Other 14,303 8,606 --------- --------- Total mortgage servicing revenues 47,820 38,738 --------- --------- MORTGAGE SERVICING EXPENSES: Direct servicing expenses 5,628 4,016 Indirect servicing expenses 1,679 1,725 Amortization of mortgage servicing rights 19,928 14,026 Interest 5,740 4,929 --------- --------- Total mortgage servicing expenses 32,975 24,696 --------- --------- Net margin on mortgage servicing 14,845 14,042 --------- --------- OTHER REVENUES: Gain on sales and other 6,869 2,600 CMO administration 829 820 --------- --------- Total other revenues 7,698 3,420 --------- --------- OTHER OPERATING EXPENSES 1,841 2,340 --------- --------- NET INCOME $ 35,070 $ 37,388 ========= ========= Net income $ 35,070 $ 37,388 Less cash dividends on preferred stock (5,555) (7,198) --------- --------- Net income available to common stockholders $ 29,515 $ 30,190 ========= ========= NET INCOME PER COMMON SHARE: Basic $ 0.50 $ 0.65 Diluted 0.48 0.58 CASH DIVIDENDS PAID PER SHARE: Common $ 0.500 0.580 Series A Preferred 0.400 0.400 Series B Preferred 0.315 0.315
See accompanying notes to consolidated financial statements. -4- 5 CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
ACCUMULATED OTHER PREFERRED COMMON PAID-IN UNDISTRIBUTED COMPREHENSIVE STOCK STOCK CAPITAL INCOME INCOME (LOSS) TOTAL --------- --------- --------- --------- ------------ --------- MARCH 31, 1998 Balance at December 31, 1997 $ 195,498 $ 585 $ 732,295 $ 12,676 $ (52,446) $ 888,608 --------- Comprehensive income (loss): Net income -- -- -- 35,070 -- 35,070 Other comprehensive income: Change in unrealized loss on debt securities, net of reclassification amount -- -- -- -- (60,491) (60,491) -------- Total comprehensive (25,421) income (loss) -------- Cash dividends: Common ($0.50 per share) -- -- -- (30,078) -- (30,078) Preferred: Series A ($0.40 per share) -- -- -- (160) -- (160) Series B ($0.315 per share) -- -- -- (5,395) -- (5,395) Conversion of preferred stock (529) 6 523 -- -- -- Additions to capital 2,538 14 27,134 -- -- 29,686 --------- --------- --------- --------- ------------ --------- Balance at March 31, 1998 $ 197,507 $ 605 $ 759,952 $ 12,113 $ (112,937) $ 857,240 ========= ========= ========= ========= ============ ========= MARCH 31, 1997 Balance at December 31, 1996 $ 266,396 $ 447 $ 461,045 $ 4,582 $ (5,601) $ 726,869 --------- Comprehensive income: Net income -- -- -- 37,388 -- 37,388 Other comprehensive income: Change in unrealized loss on debt securities, net of reclassification amount -- -- -- -- 13,235 13,235 --------- Total comprehensive 50,623 income --------- Cash dividends: Common ($0.58 per share) -- -- -- (27,344) -- (27,344) Preferred: Series A ($0.40 per share) -- -- -- (180) -- (180) Series B ($0.315 per share) -- -- -- (7,018) -- (7,018) Conversion of preferred stock (22,793) 15 22,778 -- -- -- Additions to capital 3,881 16 32,162 -- -- 36,059 --------- --------- --------- --------- ------------ --------- Balance at March 31, 1997 $ 247,484 $ 478 $ 515,985 $ 7,428 $ 7,634 $ 779,009 ========= ========= ========= ========= ============ =========
See accompanying notes to consolidated financial statements. -5- 6 CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
QUARTER ENDED MARCH 31 ------------------------------ 1998 1997 ----------- ----------- OPERATING ACTIVITIES: Net income $ 35,070 $ 37,388 Noncash items: Amortization of discount and premium 42,563 23,352 Amortization of mortgage servicing rights 19,928 14,028 Depreciation and other amortization 1,465 1,016 Net change in prepaids, receivables, other assets, accounts payable and accrued expenses (4,259) 2,211 Net gain from investing activities (6,826) (2,453) ----------- ----------- Net cash provided by operating activities 87,941 75,542 ----------- ----------- INVESTING ACTIVITIES: Purchases of mortgage investments (1,778,499) (405,272) Purchases of CMO collateral (597,934) -- Purchases of CMO investments (123,240) (52,058) Purchases of mortgage servicing rights (39,832) (31,656) Purchases of derivative financial instruments (54,250) (10,937) Principal collections on mortgage investments 568,790 258,983 Proceeds from sales of mortgage assets 682,690 178,605 Proceeds from sales of derivative financial instruments 32,360 -- CMO collateral: Principal collections 202,891 111,157 Decrease in accrued interest receivable 1,841 723 Increase in short-term investments (2,509) (1,910) ----------- ----------- Net cash provided (used) by investing activities (1,107,692) 47,635 ----------- ----------- FINANCING ACTIVITIES: Increase in short-term borrowings 678,220 22,558 Increase (decrease) in mortgage servicing acquisitions payable 25,385 (39,544) Collateralized mortgage obligations: Issuance of securities 597,934 -- Principal payments on securities (264,118) (110,792) Increase (decrease) in accrued interest payable (1,012) 962 Capital stock transactions 28,843 35,776 Dividends paid (35,633) (34,542) ----------- ----------- Net cash provided (used) by financing activities 1,029,619 (125,582) ----------- ----------- Net change in cash and cash equivalents 9,868 (2,405) Cash and cash equivalents at beginning of period 17,377 21,003 ----------- ----------- Cash and cash equivalents at end of period $ 27,245 $ 18,598 =========== ===========
See accompanying notes to consolidated financial statements. -6- 7 CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 (UNAUDITED) NOTE 1 -- BUSINESS Capstead Mortgage Corporation, a national mortgage banking firm, earns income from servicing mortgage loans, investing in mortgage assets and other investment strategies. The Company's business plan is to build a mortgage banking operation with investments in mortgage servicing and mortgage assets 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 ended March 31, 1998 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 1998. 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, 1997. On January 1, 1997 the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting of comprehensive income and its components in financial statements. Currently, as the term relates to the Company, comprehensive income consists of net income plus the change in unrealized gains and losses on debt securities classified as available-for-sale that is included as a component of stockholders' equity. The Company has elected to meet the reporting requirements of SFAS 130 by providing a modified consolidated statement of stockholders' equity with its interim financial data issued for external reporting purposes. The adoption of SFAS 130 has not had any impact on the results of operations or financial position of the Company. -7- 8 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, 1997 $ 42,059,027 441,277 $ 684,765 Additions: Adjustments to prior acquisitions -- -- 785 Purchases -- -- -- Production 55,805 523 979 Run-off/amortization* (2,118,508) (17,406) (18,084) Results of hedging activity -- -- 7,132 ------------ ------------ ------------ Loans serviced at March 31, 1998 39,996,324 424,394 675,577 Purchases pending transfer 1,766,690 16,112 37,749 ------------ ------------ ------------ Total portfolio at March 31, 1998 $ 41,763,014 440,506 $ 713,326 ============ ============ ============
* EXCLUDES HEDGE INSTRUMENT AMORTIZATION. In addition, as of March 31, 1998, the Company subserviced $13.7 billion of single-family mortgage loans under a subservicing arrangement with a large national mortgage conduit. The Company's investment in mortgage servicing rights had an aggregate fair value of approximately $721 million at March 31, 1998. The fair value of the servicing rights for each stratum of the servicing portfolio exceeded recorded amounts (adjusted for hedging activities); therefore, no impairment charges or direct write-offs of mortgage servicing rights have been recorded. At March 31, 1998 floors held as hedges of servicing rights had related notional amounts totaling $9.7 billion and unrealized gains of $10.1 million. NOTE 4 -- MORTGAGE INVESTMENTS Mortgage investments and the related average effective interest rates (calculated including mortgage insurance costs on non-agency securities and excluding unrealized gains and losses) were as follows (dollars in thousands):
AS OF QUARTER ENDED MARCH 31 MARCH 31 --------------------------- ---------------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Agency securities: Fixed-rate $1,384,641 $ 455,512 6.53% 6.38% Medium-term 716,677 -- 6.16 -- Adjustable-rate 3,924,110 3,945,105 5.90 6.28 Non-agency securities: Fixed-rate 141,006 3,952 8.33 8.82 Medium-term 357,319 261,188 6.33 6.69 Adjustable-rate 147,673 123,988 7.00 7.16 Production warehouse 37,705 -- 6.82 -- ---------- ---------- ---------- ---------- $6,709,131 $4,789,745 6.14% 6.37% ========== ========== ========== ==========
-8- 9 The Company classifies its mortgage investments by interest rate characteristics of the underlying mortgage loans. Fixed-rate mortgage investments either (i) have fixed rates of interest for their entire terms, (ii) have 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"), or (iii) were previously classified as medium-term and have adjusted to a fixed rate for the remainder of their terms. Medium-term mortgage investments either 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, (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 ("Fannie Mae") yields for 30-year, fixed-rate commitments at the time of adjustment, or (iii) fixed-rate mortgage securities that have expected weighted average lives of 5 years or less. Adjustable-rate mortgage investments either (i) adjust semiannually based on a specified margin over the 6-month London Interbank Offered Rate ("LIBOR"), (ii) adjust annually based on a specified margin over 1-year Treasuries, or (iii) were previously classified as medium-term and have begun adjusting annually based on a specified margin over 1-year Treasuries. Agency securities consist of mortgage-backed securities issued by government-sponsored entities, either Freddie Mac, Fannie Mae or Ginnie Mae (collectively, "Agency Securities"). Non-agency securities consist of AAA-rated private mortgage pass-through and other AAA-rated private mortgage securities (together, "Non-agency Securities") and also includes mortgage loans held for sale in connection with production activities. The maturity of mortgage-backed securities is directly affected by the rate of principal prepayments on the underlying mortgage loans. At March 31, 1998 Agency Securities and Non-agency Securities were pledged to secure short-term borrowings. NOTE 5 -- CMO COLLATERAL AND INVESTMENTS Collateralized mortgage obligation ("CMO") collateral consists of mortgage securities and related investments pledged to secure CMO borrowings ("Pledged CMO Collateral"). CMO investments include investments in Agency Trust interest-only mortgage securities (see below) and investments in other CMO securities such as other agency and private-issue interest-only and principal-only mortgage securities. The components of CMO collateral and investments are summarized as follows (in thousands):
MARCH 31, 1998 DECEMBER 31, 1997 -------------- ----------------- Pledged CMO collateral: Pledged mortgage securities $ 4,654,115 $ 4,326,696 Short-term investments 18,109 15,600 Accrued interest receivable 28,414 26,760 ------------ ------------ 4,700,638 4,369,056 Unamortized premium 2,684 2,752 ------------ ------------ 4,703,322 4,371,808 CMO investments: Agency Trust interest-only mortgage securities 871,185 809,757 Other CMO investments 13,908 13,871 ------------ ------------ $ 5,588,415 $ 5,195,436 ============ ============
-9- 10 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 7.13 percent during the quarter ended March 31, 1998. Agency Trust interest-only mortgage securities are entitled to receive 100 percent of coupon interest stripped from pools of Fannie Mae and Freddie Mac mortgage-backed securities. At March 31, 1998 the Company's investment in Agency Trust interest-only mortgage securities, after certain hedging costs, yielded 7.23 percent with related notional amounts aggregating $3.0 billion. Floors held as hedges of these investments had related notional amounts totaling $12.3 billion and unrealized gains of $6.0 million at March 31, 1998. These and certain other CMO investments were pledged to secure short-term borrowings as of March 31, 1998. 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, 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 value of mortgage and CMO investments was estimated using (i) quoted market prices when available, including quotes made by lenders in connection with designating collateral for repurchase arrangements, or (ii) offer prices for similar assets or market positions. The fair value of Pledged CMO Collateral was based on projected cash flows 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. -10- 11 The following table summarizes fair value disclosures for available-for-sale debt securities (in thousands):
GROSS GROSS UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ----------- ----------- ----------- ----------- AS OF MARCH 31, 1998 Mortgage investments: Agency Securities: Fixed-rate $ 1,392,799 $ 1,827 $ 9,985 $ 1,384,641 Medium-term 715,311 1,649 283 716,677 Adjustable-rate 3,912,295 18,313 6,498 3,924,110 Non-agency Securities: Fixed-rate 46,796 981 -- 47,777 Medium-term 272,193 703 180 272,716 Adjustable-rate 144,735 2,938 -- 147,673 CMO investments 1,007,495 991 123,393 885,093 ----------- ----------- ----------- ----------- $ 7,491,624 $ 27,402 $ 140,339 $ 7,378,687 =========== =========== =========== =========== AS OF DECEMBER 31, 1997 Mortgage investments: Agency Securities: Fixed-rate $ 875,928 $ 2,903 $ 7,454 $ 871,377 Medium-term 615,360 1,678 46 616,992 Adjustable-rate 4,017,109 19,850 6,499 4,030,460 Non-agency Securities: Fixed-rate 39,416 878 -- 40,294 Medium-term 222,054 398 28 222,424 Adjustable-rate 161,116 3,459 -- 164,575 CMO investments 891,213 332 67,917 823,628 ----------- ----------- ----------- ----------- $ 6,822,196 $ 29,498 $ 81,944 $ 6,769,750 =========== =========== =========== ===========
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 Non-agency Securities. The following table summarizes fair value disclosures for debt securities held-to-maturity (in thousands):
GROSS GROSS UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------- ---------- ---------- ---------- AS OF MARCH 31, 1998 Pledged CMO Collateral $4,703,322 $ 2,958 $ 47,025 $4,659,255 Non-agency Securities 215,537 3,239 -- 218,776 ---------- ---------- ---------- ---------- $4,918,859 $ 6,197 $ 47,025 $4,878,031 ========== ========== ========== ========== AS OF DECEMBER 31, 1997 Pledged CMO Collateral $4,371,808 $ 2,988 $ 48,955 $4,325,841 Non-agency Securities 168,008 918 -- 168,926 ---------- ---------- ---------- ---------- $4,539,816 $ 3,906 $ 48,955 $4,494,767 ========== ========== ========== ==========
-11- 12 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 dispositions of debt securities held available-for-sale and held-to-maturity (in thousands):
QUARTER ENDED MARCH 31 ----------------------- 1998 1997 -------- -------- Sale of securities held available-for-sale: Amortized cost $651,473 $101,418 Gains* 4,721 877 Sale of released CMO collateral held-to-maturity: Amortized cost 5,022 73,324 Gains 471 2,986
* REPRESENTS THE RECLASSIFICATION AMOUNT INCLUDED IN OTHER COMPREHENSIVE INCOME AS A COMPONENT OF THE CHANGE IN UNREALIZED LOSSES ON DEBT SECURITIES HELD AVAILABLE-FOR-SALE. 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 MARCH 31 ------------------------------------------------------------------ 1998 1997 ----------------------------- ----------------------------- AMOUNT AVERAGE AMOUNT AVERAGE ----------- ----------- ----------- ----------- Interest income: Mortgage investments $ 98,784 6.17% $ 77,904 6.41% CMO collateral and investments 94,235 7.18 87,377 7.83 ----------- ----------- Total interest income 193,019 165,281 ----------- ----------- Interest expense: Short-term borrowings 99,736 5.63 71,090 5.43 CMOs 77,803 7.36 70,499 7.51 ----------- ----------- Total interest expense 177,539 141,589 ----------- ----------- Net interest $ 15,480 $ 23,692 =========== ===========
The following table summarizes increases (decreases) in interest income and interest expense due to changes in interest rates versus changes in volume for the quarter ended March 31, 1998 compared to the same period in 1997 (in thousands):
RATE* VOLUME* TOTAL ---------- ---------- ---------- Interest income: Mortgage investments $ (3,053) $ 23,933 $ 20,880 CMO collateral and investments (7,605) 14,463 6,858 ---------- ---------- ---------- Total interest income (10,658) 38,396 27,738 ---------- ---------- ---------- Interest expense: Short-term borrowings 2,662 25,984 28,646 CMOs (1,461) 8,765 7,304 ---------- ---------- ---------- Total interest expense 1,201 34,749 35,950 ---------- ---------- ---------- Net interest $ (11,859) $ 3,647 $ (8,212) ========== ========== ==========
* 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. -12- 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION OVERVIEW The Company's business plan is to build a mortgage banking operation with investments in mortgage securities and mortgage servicing with the goal of producing reasonably balanced operating results in a variety of interest rate environments. During 1997 mortgage interest rates peaked in late spring and then declined nearly 1 1/2 percentage points by early January 1998 which has spurred prepayments on the Company's mortgage and collateralized mortgage obligation ("CMO") investments and its mortgage servicing portfolio. Although having recovered somewhat from their January lows, as of quarter-end mortgage rates were lower than at year-end and prepayment rates remain high. Meanwhile, the Company's borrowing rates have remained above 5 1/2 percent for the quarter. This relatively flat yield curve environment, where short-term interest rates are near or equal to long-term interest rates, has significantly narrowed the net interest margin earned by the Company on its mortgage and CMO investments. The Company does not believe that the current flat yield curve environment will persist indefinitely. At some point it is expected to steepen allowing net interest margins to recover to more acceptable levels (see "Effects of Interest Rate Changes"). Lower long-term interest rates have also negatively impacted the value of the Company's CMO investments, which consist primarily of interest-only mortgage securities and the Company's mortgage servicing portfolio. Neither portfolio was impaired at quarter-end which would have required a charge to earnings. If the current interest rate environment persists for the remainder of 1998, including current levels of prepayments, the interest-only securities will not become impaired; however, the mortgage servicing portfolio may become impaired. If long-term rates decline further, the Company may be required to take impairment charges on both portfolios sooner. For instance, if the 10-year U.S. Treasury rate were to decline from its level at quarter-end of 5.65 percent to 5.00 percent, the Company may be required to take impairment charges, net of the benefits of hedges, totaling up to $125 million against earnings. Derivative financial instruments, specifically interest rate floors, are held as a partial hedge against interest rate risk on interest-only mortgage securities and mortgage servicing (see "Effects of Interest Rate Changes"). Throughout 1997 and early in the current quarter, the Company increased its interest rate floor positions in light of the potential for further declines in long-term interest rates. Although the partial recovery in long-term rates by quarter-end negatively impacted the value of interest rate floors acquired during the current quarter, these floor positions will benefit these portfolios if rates decline further. The Company continues to evaluate its investment strategies and may decide it is prudent to restructure its portfolios to mitigate exposure to potential impairment (see "Effects of Interest Rate Changes"). It is important to note that any such impairment and/or restructuring charges are not expected to negatively impact the common stock dividend. In fact, future earnings and dividends would be enhanced to the extent the Company will have less amortization expense related to these assets. -13- 14 MORTGAGE INVESTMENTS Adjustable-rate mortgage ("ARM") mortgage-backed securities have been particularly hard hit by prepayments because homeowners are finding that it has become increasingly advantageous to refinance into lower rate fixed-rate mortgage loans. As a result, purchase premiums paid by the Company for ARM securities must be amortized to income sooner than originally anticipated (see "Effects of Interest Rate Changes"). In light of expected high prepayments on ARM securities, the Company began expanding its investment focus in the third quarter of 1997 to include more medium-term and fixed-rate mortgage securities. This restructuring continued in the first quarter of 1998. In addition, the Company has continued to reduce its exposure to prepayment risk by decreasing the average premium paid for mortgage securities and purchasing lower interest rate mortgage securities. Facilitating this restructuring has been a decline in premium prices commanded by the market for ARM securities, making these securities more attractive investment opportunities going forward. These changes have improved the Company's ongoing earnings performance in the current interest rate environment. As of March 31, 1998, holdings of mortgage investments totaled $6.7 billion with ARM mortgage-backed securities representing $4.1 billion, or 61 percent of the total. This compares to $4.5 billion of ARM securities representing 82 percent of total mortgage investments at June 30, 1997. As of March 31, 1998, medium-term and fixed-rate mortgage securities totaled $2.6 billion and represented 39 percent of total mortgage investments, up from $1.0 billion, or 18 percent at June 30, 1997. During the quarter ended March 31, 1998, the Company acquired a total of $1.6 billion of mortgage-backed securities issued by government-sponsored entities, either Freddie Mac, Fannie Mae or Ginnie Mae (collectively, "Agency Securities"), and $101 million of medium-term, AAA-rated fixed-rate private mortgage securities (together with AAA-rated private mortgage pass-through securities and mortgage loans held for sale in connection with production activities, referred to as "Non-agency Securities"). CMO COLLATERAL AND INVESTMENTS Prior to 1995 the Company had been an active issuer of CMOs and other securities backed by jumbo mortgage loans. The Company retained residual interests in these securitizations consisting primarily of interest-only and principal-only mortgage securities. Other than occasional CMO issuances (see below) or modest issuances of previously held residual interests, the Company has not been an active issuer of CMOs since 1994. In lieu of issuing CMOs, the Company has increased its CMO investments (defined as CMO collateral and investments, net of related bonds) by acquiring interest-only mortgage securities. During the quarter ended March 31, 1998, the Company acquired $123 million of Agency Trust interest-only mortgage securities, which represent the right to receive 100 percent of coupon interest stripped from pools of Agency mortgage-backed securities. After considering these acquisitions, CMO issuances, run-off and sales, as well as changes in market value, total CMO investments increased $57 million during the quarter to $943 million. Outstanding interest rate hedge positions, with a $12.3 billion notional amount, had a fair value of $123.0 million and carried a $6.0 million unrealized gain at March 31, 1998 that has been applied to the basis of the Company's investment in interest-only securities. -14- 15 Since the Company exited the jumbo mortgage loan conduit business in 1995, it has maintained several finance subsidiaries with remaining capacity to issue CMOs and other securitizations ("securitization shelves"). In an effort to recover costs associated with these securitization shelves, and to add to the Company's CMO administration activities, the Company may, from time to time, purchase mortgage loans from originators or conduits and issue CMOs or other securities backed by these loans. The Company may or may not retain any residual economic interest in these securitizations. In the latter half of 1997 the Company completed two such CMO transactions totaling $1.1 billion and during the first quarter of 1998 issued a $598 million CMO. MORTGAGE SERVICING 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 $53.7 billion (including primary servicing and subservicing), a $9.7 billion increase from March 31, 1997. The primary mortgage servicing portfolio (which excludes pending transfers and subservicing) increased to $40.0 billion with a weighted average interest rate of 7.42 percent and earning an average annual service fee, excluding ancillary revenue and earnings on escrows, (the "Average Service Fee") of 30.8 basis points. The March 31, 1998 investment in mortgage servicing rights related to this portfolio was $676 million (169 basis points, or a 5.5 multiple of the Average Service Fee). An additional $1.8 billion of mortgage servicing acquired during the current quarter is pending transfer into the portfolio and is being subserviced by the sellers. These pending acquisitions have a weighted average interest rate of 7.94 percent earning an Average Service Fee of 44.7 basis points. At an average cost of 214 basis points, these acquisitions are being acquired at a 4.8 multiple. Primary mortgage servicing portfolio run-off, consisting of prepayments and scheduled payments on mortgage loans serviced, was 20.39 percent during the quarter, up from 9.70 percent in the first quarter of 1997 and 15.11 percent in the fourth quarter of 1997. Outstanding interest rate hedge positions, with a $9.7 billion notional amount, had a fair value of $54.2 million at March 31, 1998 and carried a $11.0 million unrealized gain that has been applied to the basis of the Company's investment in mortgage servicing rights. To help offset the increased run-off currently being experienced, the Company introduced a technology-driven refinancing program in January which allows the Company to offer a low cost, efficient refinancing alternative to its existing homeowners. This program has been well received with the Company closing a total of 523 loans having an unpaid principal balance of $55.8 million between February and quarter-end. Monthly production is expected to average $100 million or more this year and contribute significantly to 1998 income. During 1996 the Company entered into a subservicing arrangement with a large national mortgage conduit. As of March 31, 1998, the subservicing portfolio totaled $13.7 billion. An advantage of subservicing arrangements is that further growth and enhanced efficiencies can be achieved without the capital investment and prepayment risk associated with owning 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 and could lead to other such relationships in the future. -15- 16 CAPITAL The following table summarizes the Company's utilization of capital as of March 31, 1998 (in thousands):
CAPITAL ASSETS BORROWINGS EMPLOYED ----------- ----------- ----------- Agency Securities: Fixed-rate $ 1,384,641 $ 1,376,079 $ 8,562 Medium-term 716,677 698,310 18,367 Adjustable-rate 3,924,110 3,830,383 93,727 Non-agency Securities: Fixed-rate 141,006 142,273 (1,267) Medium-term 357,319 384,449 (27,130) Adjustable-rate 147,673 145,728 1,945 Production warehouse 37,705 26,501 11,204 CMO collateral and investments 5,588,415 5,545,724* 42,691 Mortgage servicing rights 713,326 248,808** 464,518 Derivative financial instruments 178,238 58,448 119,790 ----------- ----------- ----------- $13,189,110 $12,456,703 732,407 =========== =========== Other assets, net of other liabilities 124,833 ----------- Total stockholders' equity $ 857,240 ===========
* INCLUDES APPROXIMATELY $901 MILLION OF RELATED SHORT-TERM BORROWINGS. ** REPRESENTS AMOUNTS OWED UNDER CONTRACTS FOR BULK PURCHASES OF MORTGAGE SERVICING RIGHTS AND $215 MILLION DRAWN ON A $625 MILLION LINE OF CREDIT SECURED BY EXISTING MORTGAGE SERVICING RIGHTS. During the current quarter the Company raised $30 million of new capital through its dividend reinvestment and stock purchase programs, open market sales and stock compensation programs. As a result, book value per common share, before unrealized losses on debt securities held available-for-sale, rose modestly during the quarter to $13.16 per diluted share at March 31, 1998, compared to $13.12 at December 31, 1997. The proceeds from these issuances were profitably employed to increase investments in mortgage assets and mortgage servicing, enhancing the Company's earning capacity in aggregate, and more importantly, on a per share basis. The Company anticipates raising $120 million of capital in 1998. 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. -16- 17 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 direct and indirect operating expenses) by source were as follows (in thousands, except percentages and per share amounts):
QUARTER ENDED MARCH 31 ---------------------------- 1998 1997 ---------- ---------- Agency securities $ 8,137 $ 10,644 Non-agency securities 1,807 1,946 CMO investments 4,424 9,676 Mortgage servicing 14,845 14,042 Gain on sales and other 6,869 2,600 CMO administration 829 820 ---------- ---------- Contribution to income 36,911 39,728 Other operating expenses 1,841 2,340 ---------- ---------- Net income $ 35,070 $ 37,388 ========== ========== Net income per common share: Basic $ 0.50 $ 0.65 Diluted 0.48 0.58 Return on average stockholders' equity 14.59% 19.76%
Operating results for the quarter ended March 31, 1998 declined from those achieved in the first quarter of 1997. Net income of $35.1 million represents a decrease of 6.2 percent over the same quarter in 1997 while diluted net income per common share decreased 17.2 percent. The benefit of larger holdings of mortgage assets was offset by a narrowing of financing spreads due to high levels of prepayments and higher short-term borrowing rates (see above, "Financial Condition"). Likewise, mortgage servicing results, while benefiting from growth in the subservicing portfolio and the Company's recent entry into production through selective refinancing of its existing customers, were hampered by higher amortization of mortgage servicing rights due to high prepayments. Lower long-term interest rates did allow for greater gain on sales during the quarter compared to the same period in 1997. Agency Securities contributed less to income during the first quarter of 1998 than the same period in 1997. The benefit to operating results of a $1.3 billion (31 percent) increase in average holdings of these securities during the current quarter was offset by lower financing spreads primarily because of higher prepayments (see above, "Financial Condition"). Financing spreads for the first quarter of 1998 of 45 basis points were 40 basis points lower than spreads achieved in the same quarter of 1997. Agency Securities yields averaged 6.06 percent during the quarter, compared to 6.29 percent during the same period in 1997, while borrowing rates were higher at 5.61 percent, compared to 5.44 percent in the first quarter of 1997. Non-agency Securities contributed less to income during the current quarter than in the same period in 1997 due primarily to a 49 basis point decrease in financing spreads despite a 44 percent increase in the average outstanding portfolio. Higher prepayments were not as significant an influence on the decline in financing spreads for this portfolio because of lower amounts of purchased premiums. However, the yields on new asset purchases are lower -17- 18 reflecting the general decline in interest rates. As a result of asset purchases (including the inclusion of mortgage loans from the new refinancing program) and CMO redemptions, the average outstanding portfolio was $681 million during the current quarter, compared to $473 million in the same period in 1997. Average yields for this portfolio (calculated including mortgage insurance costs) were 6.82 percent during the quarter, compared to 7.11 percent during the same period in 1997, while average borrowing rates were higher at 5.80 percent during the current quarter, compared to 5.60 percent during the same quarter in 1997. CMO investments contributed substantially less to income during the current quarter than in the same period in 1997 despite a higher average portfolio of Agency Trust interest-only securities outstanding because of the impact of faster prepayment rates and higher hedging costs. Average holdings of these securities, including related hedge positions, increased 67 percent over the same period in 1997, while average yields (including hedging costs) dropped to 7.48 percent from 10.73 percent. Average borrowings were $903 million during the current quarter, compared to $638 million during the same period in 1997. Average borrowing rates were higher at 5.71 percent during the current quarter, compared to 5.51 percent during the same period in 1997. Modestly higher mortgage servicing results reflect growth in the subservicing portfolio to $13.7 billion at the end of the current quarter from $5.1 billion at March 31, 1997 while the primary servicing portfolio grew only marginally to $41.8 billion from $40.7 billion at March 31, 1997. The Company's recent entry into refinancing mortgage loans in its primary servicing portfolio also contributed to current quarter results (see above, "Financial Condition"). Revenues increased to $47.8 million during the first quarter of 1998, compared to $38.7 million during the same quarter in 1997. Direct and indirect servicing expenses also increased, but not to the same extent as revenues, reflecting further efficiencies gained in the servicing process with continued growth in the total servicing portfolio. Amortization of mortgage servicing rights of $19.9 million during the first quarter of 1998 was higher than the $14.0 million recorded during the same quarter in 1997 primarily due to higher levels of prepayments caused by lower prevailing mortgage interest rates. Greater use of external borrowings secured by the primary mortgage servicing portfolio contributed to higher borrowing costs during the first quarter of 1998 compared to the same quarter in 1997. Operating expenses during 1998 were lower than 1997 primarily because of lower compensation-related accruals. During the quarter the Company sold $677 million of mortgage assets consisting of Agency Securities, Non-agency Securities and interest-only mortgage securities for gains totaling $5.3 million. This compares to sales of mortgage assets totaling $175 million during the same quarter in 1997 for gains of $3.9 million. In addition, the Company earned $1.6 million in the current quarter from a new strategy of writing call options on a portion of the Company's fixed-rate mortgage investments. If the calls are ultimately exercised, these securities will be sold at a gain in addition to earning the call premiums received when the calls were written. This compares to $1.4 million in losses incurred in the same period in 1997 on interest rate floor positions held for trading purposes. -18- 19 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 March 31, 1998 the mortgage servicing operation had available $410 million of a $625 million revolving line of credit agreement with an investment banking firm that matures September 30, 1999. 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. 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 short-term interest rate environment. Because a substantial portion 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 financing spread. The Company may invest in derivative financial instruments ("Derivatives") 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 related interest rates rise and decline in value when such rates fall. Another effect of changes in interest rates is that, as long-term interest rates decrease, the rate of prepayment of mortgage loans underlying mortgage investments generally increases. To the extent the proceeds of prepayments on mortgage investments cannot be reinvested at a rate of interest at least equal to the rate previously earned on such investments, earnings may be adversely affected. Because prolonged periods of high prepayments can -19- 20 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. Changes in interest rates also impact earnings recognized from CMO investments, which consist primarily of interest-only mortgage securities and fixed-rate CMO residuals. The amount of income that may be generated from interest-only mortgage securities 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 these investments. Sustained periods of high prepayments can result in losses. Conversely, if mortgage interest rates rise, interest-only mortgage securities tend to perform favorably because underlying mortgage loans will generally prepay at slower rates thereby increasing overall returns. CMO residuals behave similarly to interest-only mortgage securities . If mortgage interest rates fall, prepayments on the underlying mortgage loans generally will be higher thereby reducing or even eliminating overall returns on these investments. 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 larger positive interest spread. The Company periodically sells mortgage assets. Such sales may become attractive as values of mortgage assets fluctuate with changes in interest rates. At other times it may become prudent to restructure investment portfolios, for example, to mitigate exposure to potential impairment as discussed above (see "Financial Condition"). In either case, sales of mortgage assets may increase income volatility because of the recognition of transactional gains or losses. The above discussion regarding how changes in interest rates impact mortgage assets also applies to the Company's investment in mortgage servicing rights. When mortgage 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. Under these conditions, mortgage servicing rights become more valuable. Conversely, lower mortgage 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 recorded 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 assets and mortgage servicing 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 Derivatives held for trading purposes or to hedge certain assets, primarily interest-only mortgage securities and mortgage servicing rights. Most Derivatives used by the Company are interest rate floors that decrease in value when interest rates rise and -20- 21 increase in value when rates decline. Other Derivatives acquired from time to time may include interest rate caps, treasury futures contracts and options, written options on mortgage assets or various other Derivatives available in the market place that are compatible with the Company's risk management objectives. In instances where such Derivatives are designated as hedges, any changes in value adjust the basis of the assets hedged. In instances where Derivatives are held for trading purposes, changes in value are recorded in income as they occur, which could increase income volatility. OTHER Many existing computer software programs use only two digits to identify the year in date fields and, as such, could fail or create erroneous results by or at the Year 2000. The Company utilizes a number of software systems to service mortgage loans, administer securitizations and manage its mortgage assets. The Company has made and will continue to make investments in its software systems and applications to ensure the Company is Year 2000 compliant. In addition, the Company has taken steps to ensure that the vendors it utilizes in various capacities and institutions that it interfaces with are also taking the necessary steps to become Year 2000 compliant. This process is expected to be essentially complete by mid-1998. The financial impact of becoming Year 2000 compliant has not been and is not expected to be material to the Company or results of operations. This document contains "forward-looking statements" (within the meaning of the Private Securities Litigation Act of 1995) that inherently involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of unforeseen external factors. These factors may include, but are not limited to, changes in general economic conditions, fluctuations in interest rates, increases in costs and other general competitive factors. -21- 22 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The annual meeting of stockholders was held April 22, 1998. (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.............. 50,584,781 - 448,632 - Paul M. Low................... 50,571,999 - 461,414 - Ronn K. Lytle................. 50,580,644 - 452,769 - Harriet E. Miers.............. 50,580,301 - 453,111 - William R. Smith.............. 50,589,871 - 443,542 - John C. Tolleson.............. 50,570,435 - 462,978 -
Other matters (no other matters) 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, 1998 and 1997. Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges. Exhibit 27 - Financial Data Schedule (electronic filing only). (b) Reports on Form 8-K: None. -22- 23 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 4, 1998 By /s/ RONN K. LYTLE ------------------------------------- Ronn K. Lytle Chairman and Chief Executive Officer Date: May 4, 1998 By /s/ JULIE MOORE ------------------------------------- Julie Moore Senior Vice President - Control and Treasurer -23- 24 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------ ----------- Exhibit 11 - Computation of Earnings Per Share for the quarter ended March 31, 1998 and 1997. Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges. Exhibit 27 - Financial Data Schedule (electronic filing only).
EX-11 2 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES COMPUTATION OF NET INCOME PER SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED MARCH 31 ---------------------------- 1998 1997 ---------- ---------- BASIC: Average number of common shares outstanding 59,594 46,225 ========== ========== Net income $ 35,070 $ 37,388 Less cash dividends paid on convertible preferred stock: Series A ($0.40 per share) (160) (180) Series B ($0.315 per share) (5,395) (7,018) ---------- ---------- Net income available to common stockholders $ 29,515 $ 30,190 ========== ========== Basic net income per common share $ 0.50 $ 0.65 ========== ========== DILUTED: Average number of common shares outstanding 59,594 46,225 Assumed conversion of convertible preferred stock: Series A 827 940 Series B 12,416 16,640 Incremental shares calculated using the Treasury Stock method 555 1,131 ---------- ---------- 73,392 64,936 ========== ========== Net income $ 35,070 $ 37,388 ========== ========== Diluted net income per common share $ 0.48 $ 0.58 ========== ==========
EX-12 3 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12 CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (IN THOUSANDS, EXCEPT RATIOS) (UNAUDITED) (a) Computation of ratio of earnings to combined fixed charges and preferred stock dividends (including CMO debt):
THREE YEAR ENDED DECEMBER 31 MONTHS ENDED ------------------------------------------------------------- MARCH 31, 1998 1997 1996 1995 1994 -------------- ---------- ---------- ---------- ---------- Fixed charges $ 183,279 $ 633,845 $ 598,312 $ 584,137 $ 474,844 Preferred stock dividends 5,555 25,457 36,356 39,334 38,876 ---------- ---------- ---------- ---------- ---------- Combined fixed charges and preferred stock dividends 188,834 659,302 634,668 623,471 513,720 Net income 35,070 159,926 127,228 77,359 85,579 ---------- ---------- ---------- ---------- ---------- Total $ 223,904 $ 819,228 $ 761,896 $ 700,830 $ 599,299 ========== ========== ========== ========== ========== Ratio of earnings to combined fixed charges and preferred stock dividends 1.19:1 1.24:1 1.20:1 1.12:1 1.17:1 ========== ========== ========== ========== ==========
(b) Computation of ratio of earnings to combined fixed charges and preferred stock dividends (excluding CMO debt):
THREE YEAR ENDED DECEMBER 31 MONTHS ENDED ------------------------------------------------------------- MARCH 31, 1998 1997 1996 1995 1994 -------------- ---------- ---------- ---------- ---------- Fixed charges $ 105,476 $ 352,348 $ 283,974 $ 223,751 $ 139,188 Preferred stock dividends 5,555 25,457 36,356 39,334 38,876 ---------- ---------- ---------- ---------- ---------- Combined fixed charges and preferred stock dividends 111,031 377,805 320,330 263,085 178,064 Net income 35,070 159,926 127,228 77,359 85,579 ---------- ---------- ---------- ---------- ---------- Total $ 146,101 $ 537,731 $ 447,558 $ 340,444 $ 263,643 ========== ========== ========== ========== ========== Ratio of earnings to combined fixed charges and preferred stock dividends 1.32:1 1.42:1 1.40:1 1.29:1 1.48:1 ========== ========== ========== ========== ==========
EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM CAPSTEAD MORTGAGE CORPORATION'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STAEMENTS. 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 27,245 0 0 0 0 0 0 0 13,343,264 7,841,055 4,644,969 0 197,507 605 659,128 13,343,264 0 248,537 0 0 30,188 0 183,279 35,070 0 35,070 0 0 0 35,070 0.50 0.48
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