-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, QXoJVt371FUwOBAEgaTf+w5ekrpg7p85MM3iMCfo5lFHstRBDWim6ku21R6657lf ro3h73tUQ3xuy9V/7/Qwxw== 0000950109-94-001535.txt : 19940822 0000950109-94-001535.hdr.sgml : 19940822 ACCESSION NUMBER: 0000950109-94-001535 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPSTEAD MORTGAGE CORP CENTRAL INDEX KEY: 0000766701 STANDARD INDUSTRIAL CLASSIFICATION: 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: 94544160 BUSINESS ADDRESS: STREET 1: 2001 BRYAN TOWER STREET 2: STE 3300 CITY: DALLAS STATE: TX ZIP: 75201 BUSINESS PHONE: 2149992350 MAIL ADDRESS: STREET 1: 2001 BRYAN TOWER STREET 2: STE 3300 CITY: DALLAS STATE: TX ZIP: 75201 FORMER COMPANY: FORMER CONFORMED NAME: LOMAS MORTGAGE CORP DATE OF NAME CHANGE: 19891105 10-Q 1 FORM 10-Q =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ----- EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 1994 OR ______ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ______________ Commission File Number: 1-8996 CAPSTEAD MORTGAGE CORPORATION (Exact name of Registrant as specified in its Charter) Maryland 75-2027937 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2001 Bryan Tower, Dallas, Texas 75201 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (214) 999-2323 The Registrant meets the conditions set forth in General Instruction H(1)(a) and (b) for Form 10-Q and is therefore filing this Form under the reduced disclosure format. Indicate by check mark whether the Registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ______ ----- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date. Common Stock ($.01 par value) 15,256,381 as of August 10, 1994 =============================================================================== CAPSTEAD MORTGAGE CORPORATION FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1994 INDEX Page ---- PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Balance Sheet - June 30, 1994 and December 31, 1993.... 3 Consolidated Statement of Income - Quarter and Six Months Ended June 30, 1994 and 1993............................................. 4 Consolidated Statement of Cash Flows - Six Months Ended June 30, 1994 and 1993............................................. 5 Notes to Consolidated Financial Statements.......................... 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 11 PART II. - OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K............................. 18 SIGNATURES........................................................... 19 -2- PART I. -- FINANCIAL INFORMATION CAPSTEAD MORTGAGE CORPORATION CONSOLIDATED BALANCE SHEET (in thousands)
ITEM 1. FINANCIAL STATEMENTS June 30, 1994 December 31, 1993 -------------- ------------------ (Unaudited) Assets Mortgage securities collateral $4,869,488 $3,995,956 Mortgage investments 3,579,799 2,842,151 ---------- ---------- 8,449,287 6,838,107 Less allowance for possible losses (6,832) (6,927) ---------- ---------- 8,442,455 6,831,180 Cash and cash equivalents 19,324 87,760 Prepaids, receivables and other 73,864 36,238 Purchased mortgage servicing rights 132,731 25,146 ---------- ---------- $8,668,374 $6,980,324 ========== ========== Liabilities Collateralized mortgage securities $4,722,864 $3,891,134 Repurchase arrangements 3,284,568 2,443,807 Accounts payable and accrued expenses 44,254 7,193 ---------- ---------- 8,051,686 6,342,134 ---------- ---------- Stockholders' Equity Preferred stock - $0.10 par value; 100,000 shares authorized: $1.60 Cumulative Preferred Stock, Series A, 664 and 735 shares issued and outstanding ($11,136 aggregate liquidation preference) 9,300 10,295 $1.26 Cumulative Convertible Preferred Stock, Series B, 30,005 and 29,797 shares issued and outstanding ($340,228 aggregate liquidation preference) 322,324 319,543 Common stock - $0.01 par value; 100,000 shares authorized; 15,247 and 15,154 shares issued and outstanding 152 152 Paid-in capital 309,695 308,140 Undistributed income (deficit) (1,119) 60 Unrealized loss on debt and equity securities held available-for-sale (23,664) - ---------- ---------- 616,688 638,190 ---------- ---------- $8,668,374 $6,980,324 ========== ==========
-3- CAPSTEAD MORTGAGE CORPORATION CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) (in thousands, except per share amounts)
Quarter Ended Six MonthsEnded June 30 June 30 ------------------------ ------------------------ 1994 1993 1994 1993 --------- -------- --------- ----------- Interest income: Mortgage securities collateral $ 90,667 $106,755 $172,136 $219,125 Mortgage investments 45,152 46,374 89,421 83,536 -------- -------- -------- -------- Total interest income 135,819 153,129 261,557 302,661 -------- -------- -------- -------- Interest and related expenses: Collateralized mortgage securities 85,941 105,234 163,019 210,389 Short-term borrowings 28,494 19,713 49,628 36,000 Mortgage insurance and other 3,292 5,414 7,249 10,429 Provision for possible losses 500 500 1,000 1,800 -------- -------- -------- -------- Total interest and related expenses 118,227 130,861 220,896 258,618 -------- -------- -------- -------- Net margin on mortgage assets 17,592 22,268 40,661 44,043 -------- -------- -------- -------- Mortgage servicing revenues: Servicing fees 5,333 59 7,669 59 Other 423 - 544 - -------- -------- -------- -------- Total mortgage servicing revenues 5,756 59 8,213 59 -------- -------- -------- -------- Mortgage servicing expenses: Salaries and related costs 664 155 955 155 General and administrative 354 72 602 72 Amortization of purchased mortgage servicing rights 423 - 1,159 - -------- -------- -------- -------- Total mortgage servicing expenses 1,441 227 2,716 227 -------- -------- -------- -------- Net margin on servicing operations 4,315 (168) 5,497 (168) -------- -------- -------- -------- Other revenues: Gain on sales 160 6,065 2,157 15,340 Bond administration revenues 1,193 124 2,027 183 Other 371 41 600 351 -------- -------- -------- -------- Total other revenues 1,724 6,230 4,784 15,874 -------- -------- -------- -------- Other expenses: Salaries and related costs 1,954 1,723 4,374 3,659 General and administrative 1,647 1,826 3,069 3,289 Management fees and termination costs - 1,526 - 6,641 -------- -------- -------- -------- Total other expenses 3,601 5,075 7,443 13,589 -------- -------- -------- -------- Net income $ 20,030 $ 23,255 $ 43,499 $ 46,160 ======== ======== ======== ========a Net income $ 20,030 $ 23,255 $ 43,499 $ 46,160
See accompanying notes to consolidated financial statements. -4- Less cash dividends on preferred stock (9,706) (9,642) (19,386) (19,268) -------- -------- -------- -------- Net income available to common stockholders $ 10,324 $ 13,613 $ 24,113 $ 26,892 ======== ======== ======== ======== Net income per share: Primary $0.68 $ 0.90 $1.58 $ 1.78 Fully diluted 0.67 0.88 1.55 1.74 Cash dividends paid per share: Common $0.83 $ 0.90 $1.66 $ 1.78 Series A Preferred 0.40 0.40 0.80 0.80 Series B Preferred 0.31 0.31 0.63 0.63
See accompanying notes to consolidated financial statements. -5- CAPSTEAD MORTGAGE CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (in thousands)
Six Months Ended June 30 ------------------------------ 1994 1993 ----------- ----------- Operating activities: Net income $ 43,499 $ 46,160 Noncash items: Amortization of discount and premium 2,503 10,301 Amortization of purchased mortgage servicing rights 1,159 - Provision for possible losses 1,000 1,800 Net gain from investing activities (2,157) (15,768) Net change in prepaids, receivables and other assets (40,254) (9,227) Net change in accounts payable and accrued expenses excluding payables for bulk purchases of mortgage servicing rights 667 450 ----------- ----------- Net cash provided by operating activities 6,417 33,716 ----------- ----------- Investing activities: Mortgage securities collateral: Principal collections on collateral 859,829 962,604 Decrease (increase) in accrued interest receivable (3,934) 3,089 Decrease (increase) in short-term investments 145,653 (59,786) Purchases of mortgage loans (1,623,486) (1,645,256) Purchases of agency securities (1,197,053) (1,244,523) Principal collections on mortgage investments 161,962 96,400 Purchases of mortgage servicing rights (68,533) - Proceeds from sales of mortgage investments 22,808 1,005,130 ----------- ----------- Net cash used by investing activities (1,702,754) (882,342) ----------- ----------- Financing activities: Collateralized mortgage securities: Issuance of securities 1,846,957 722,341 Principal payments on securities (1,019,831) (904,252) Increase (decrease) in accrued interest payable 1,351 (3,833) Capital stock transactions 3,341 3,469 Dividends paid (44,678) (46,047) Increase in short-term borrowings 840,761 1,054,349 ----------- ----------- Net cash provided by financing activities 1,627,901 826,027 ----------- ----------- Net (decrease) increase in cash and cash equivalents (68,436) 22,599 Cash and cash equivalents at beginning of period 87,760 30,302 ----------- ----------- Cash and cash equivalents at end of period $ 19,324 $ 7,703 =========== =========== Noncash investing and financing activities: Charges to allowance for losses $ 1,095 $ 736 Transfers from mortgage investments to mortgage securities collateral $ 1,898,253
See accompanying notes to consolidated financial statements. -6- CAPSTEAD MORTGAGE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1994 (UNAUDITED) NOTE A - BASIS OF PRESENTATION The accompanying unaudited 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, 1994 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 1994. For further information refer to the financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1993. Certain amounts for prior periods have been reclassified to conform to the 1994 presentation. NOTE B - MORTGAGE INVESTMENTS Mortgage investments and the related average effective interest rates (calculated excluding unrealized gains and losses) during the periods indicated were (dollars in thousands):
Quarter Six Months Ended Ended As of June 30 June 30 June 30 ---------------------- ------------ ------------ 1994 1993 1994 1993 1994 1993 ---------- ---------- ----- ----- ----- ----- Mortgage loan portfolio: Fixed-rate mortgage loans $ 396,311 $ 720,696 6.86% 7.71% 6.78% 7.95% Medium-term mortgage loans 8,127 127,741 6.62 6.67 6.55 7.18 Adjustable-rate mortgage ("ARM")loans 142,864 58,374 4.57 5.47 4.53 5.78 AAA-rated mortgage pass- through securities portfolio: Fixed-rate mortgage securities 308,683 - 6.77 - 6.77 - Medium-term mortgage securities 477,203 363,427 6.86 7.30 6.87 7.42 ARM securities 677,834 1,115,175 5.08 5.82 5.13 5.83 Agency securities portfolio: Fixed-rate agency securities 504,650 604,094 6.44 6.91 6.45 6.86 ARM agency securities 1,064,127 - 4.55 - 4.55 - ---------- ---------- $3,579,799 $2,989,507 ========== ==========
-7- The Company classifies its mortgage investments by term and interest rate characteristics of the underlying mortgage loans. The Company's fixed-rate mortgage loans (i) have fixed rates of interest for their entire terms, or (ii) adjust annually based on a specified margin over one-year United States Treasury Securities ("one-year Treasuries") after an initial fixed rate period of ten years after origination. Medium-term mortgage loans (i) adjust annually based on a specified margin over one-year Treasuries after an initial fixed rate period of three or five years after origination, or (ii) have initial interest rates that adjust one time, approximately five years following origination of the mortgage loan, based on a specified margin over the Federal National Mortgage Association ("FNMA") yields for 30-year fixed-rate commitments at the time of adjustment. ARM loans either (i) adjust semiannually based on a specified margin over the six-month London interbank offered rate ("LIBOR"), or (ii) adjust annually based on a specified margin over one-year Treasuries. At June 30, 1994 the AAA-rated mortgage pass-through securities ("Mortgage Pass- Throughs") portfolio, the agency securities portfolio, and $451 million of the mortgage loan portfolio was pledged to secure short-term borrowings. As of June 30, 1994, the Company had outstanding commitments to purchase mortgage loans of approximately $124 million. During the quarter, the Company entered into forward delivery contracts for the purpose of reducing exposure to the effect of changes in interest rates on certain fixed-rate mortgage loans which it has purchased or has committed to purchase. These contracts have terms of not more than 90 days. Gains and losses on such contracts will be deferred as an adjustment of the carrying value of the related mortgage loans and amortized into interest income using the effective yield method over the expected remaining life of the mortgage loans. As of June 30, 1994, the Company had outstanding for hedging purposes forward delivery contracts with an aggregate gross contract amount of $410 million. NOTE C - SECURITIZATION ACTIVITY During the quarter ended June 30, 1994, the Company pledged $254 million of 15- and 20-year fixed-rate whole loans with an average coupon interest rate of 6.55% as collateral for the issuance of $254 million of collateralized mortgage securities (CMO Series 1994-F). CMO Series 1994-F has a 20-year stated maturity and an average coupon interest rate of 6.25%. NOTE D - NET INTEREST INCOME ANALYSIS The following tables summarize the amount of interest income and interest expense and the average effective interest rate (dollars in thousands):
Quarter Ended June 30 -------------------------------------- 1994 1993 ------------------ ------------------ Average Average Amount Rate Amount Rate -------- -------- -------- -------- Interest income: Mortgage securities collateral $ 90,667 7.57% $106,755 8.45%
-8- Mortgage investments 45,152 5.93 46,374 6.58 -------- -------- Total interest income 135,819 153,129 -------- -------- Interest expense: Collateralized mortgage securities 85,941 7.31 105,234 8.57 Short-term borrowings 28,494 4.26 19,713 3.36 -------- -------- Total interest expense 114,435 124,947 -------- -------- Net interest $ 21,384 $ 28,182 ======== ========
Six Months Ended June 30 --------------------------------------- 1994 1993 ------------------- ----------------- Average Average Amount Rate Amount Rate -------- ------- -------- ------- Interest income: Mortgage securities collateral $172,136 7.71% $219,125 8.58% Mortgage investments 89,421 6.14 83,536 6.62 -------- -------- Total interest income 261,557 302,661 -------- -------- Interest expense: Collateralized mortgage securities 163,019 7.08 210,389 8.47 Short-term borrowings 49,628 3.96 36,000 3.49 -------- -------- Total interest expense 212,647 246,389 -------- -------- Net interest $ 48,910 $ 56,272 ======== ========
The following tables summarize the amount of change in interest income on mortgage securities collateral and interest expense on collateralized mortgage securities due to changes in effective interest rates versus changes in volume for the quarter and six months ended June 30, 1994 compared to the same periods in 1993 (in thousands):
Quarter Ended June 30, 1994 --------------------------------- Rate Volume Total ---------- ---------- --------- Interest income: Mortgage securities collateral $(10,623) $ (5,465) $(16,088) Mortgage investments (4,790) 3,568 (1,222) -------- -------- -------- Total interest income (15,413) (1,897) (17,310) -------- -------- -------- Interest expense: Collateralized mortgage securities (14,891) (4,402) (19,293) Short-term borrowings 5,824 2,957 8,781 -------- -------- -------- Total interest expense (9,067) (1,445) (10,512) -------- -------- -------- Net interest $ (6,346) $ (452) $ (6,798) ======== ======== ========
Six Months Ended June 30, 1994 ------------------------------- Rate Volume Total -------- -------- -------- Interest income: Mortgage securities collateral $(20,885) $(26,104) $(46,989) Mortgage investments (6,425) 12,310 5,885 -------- -------- -------- Total interest income (27,310) (13,794) (41,104) -------- -------- -------- Interest expense: Collateralized mortgage securities (32,745) (14,625) (47,370) Short-term borrowings 5,354 8,274 13,628 -------- -------- -------- Total interest expense (27,391) (6,351) (33,742) -------- -------- -------- Net interest $ 81 $ (7,443) $ (7,362) ======== ======== ========
-9- NOTE E - DISCLOSURES REGARDING FAIR VALUES OF CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES In May 1993 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (the "Statement"). The Company adopted the provisions of the Statement as of January 1, 1994. In accordance with the Statement, prior period financial statements have not been restated to reflect the change in accounting principle. There was no cumulative effect as of January 1, 1994 of adopting the Statement on net income. The opening balance of stockholders' equity was increased by $7,512,000 to reflect net unrealized holding gains on securities classified as available-for-sale previously carried at amortized cost. The following tables summarize available-for-sale securities and held-to- maturity securities as of June 30, 1994 (in thousands):
Available-for-Sale Securities ---------------------------------------------- Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- Mortgage Pass-Throughs: Medium-term securities $ 486,491 $ - $ 9,288 $ 477,203 ARM securities 684,651 - 6,817 677,834 ARM agency securities 1,075,056 - 10,929 1,064,127 Other mortgage securities 11,792 2,327 349 13,770 ---------- ------- ------- ---------- Total debt securities 2,257,990 2,327 27,383 2,232,934 Equity securities 17,808 1,392 - 19,200 ---------- ------- ------- ---------- $2,275,798 $ 3,719 $27,383 $2,252,134 ========== ======= ======= ==========
Held-to-Maturity Securities ---------------------------------------------- Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- Fixed-rate Mortgage Pass- Throughs $308,683 $ - $19,863 $288,820 Fixed-rate agency securities 504,650 - 49,619 455,031 Mortgage securities collateral, net* 132,853 10,153 23,048 119,958 -------- ------- ------- -------- $946,186 $10,153 $92,530 $863,809 ======== ======= ======= ========
* All mortgage securities collateral has been permanently financed through the issuance of collateralized mortgage securities and, as a result, the Company's exposure to changes in the fair value of the underlying assets (and liabilities) is limited. For this reason, the table above presents the fair value of the net cash flows of the mortgage securities collateral after payments on the related collateralized mortgage securities (i.e., the CMO residual). This fair value was estimated based on projected net cash flows discounted at what management believes to be appropriate discount rates and prepayment assumptions. Considered on a stand-alone basis, mortgage securities collateral has a fair value of approximately -10- $4.7 billion, with unrealized losses of approximately $180 million, offset by unrealized gains of over $18 million. The maturity of the Company's mortgage assets is directly affected by the rate of principal prepayments by mortgagors and redemptions by issuers, including the Company, of remaining debt securities outstanding (referred to as "clean-up calls"). As a result, the actual maturity of the Company's mortgage assets usually occurs well in advance of stated maturities. The Company anticipates that through prepayments and exercising clean-up calls, a significant portion of its higher cost collateralized mortgage securities will be retired within the next several years and a residual amount of high coupon mortgage securities collateral will be released and can be sold or continued to be held as investments. Included in mortgage securities collateral is $34,325,000 and $33,277,000 of collateral released from the related indentures at June 30, 1994 and December 31, 1993, respectively. During the quarter and six months ended June 30, 1994, $3,254,000 and $20,651,000, respectively, of mortgage securities collateral previously released from the related indentures pursuant to clean-up calls was sold at gross realized gains of $160,000 and $2,157,000, respectively. No available-for-sale securities were sold. Net adjustments to unrealized holding gains (losses) on available-for-sale securities included as a separate component of stockholders' equity totaled $(27,170,000) and $(31,176,000) during the quarter and six months ended June 30, 1994, respectively. Since trading securities consisted solely of overnight deposits during the quarter, no net unrealized holding gains or losses were included in income during the quarter and six months ended June 30, 1994. NOTE F -- CONTINGENCY RELATED TO THE CALIFORNIA EARTHQUAKE On January 17, 1994, the Los Angeles region of southern California suffered a relatively severe earthquake. The Company has exposure to earthquake losses in cases where a homeowner defaults on his mortgage and the property has structural damage from an earthquake, exclusive of fire or water damage (the standard homeowners policy covers fire and water damage even if such damage was the result of an earthquake). The Company has determined, through property inspections and discussions with homeowners, that properties underlying approximately $18 million of mortgage loans are not insured by either the Company or the homeowner for special hazards, such as an earthquake, and may have significant structural damage. The Company expects some of these homeowners may default. However, the Company believes any losses incurred as a result of this earthquake will not be material and that its allowance for possible losses at June 30, 1994 is adequate to absorb any such losses. -11- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition - - ------------------- During the second quarter of 1994, the Company purchased 2,008 mortgage loans totaling $553,653,000, compared to purchases of 2,981 mortgage loans totaling $951,771,000 during the same period in 1993. During the six months ended June 30, 1994, the Company purchased 5,640 mortgage loans totaling $1,626,765,000 compared to purchases of 5,177 mortgage loans totaling $1,639,515,000 during the same period in 1993. Purchase and commitment volumes have fallen significantly due to increases in mortgage interest rates. General market interest rates have risen sharply as a result of improvement in the overall U.S. economy and the Federal Reserve's efforts to keep inflation low. Inflation fears have caused long-term interest rates to increase significantly. The Company's current interest rate on fixed-rate mortgage loans is nearly two percentage points higher than the low of October 1993. This recent rise in mortgage rates is likely to result in low mortgage loan production through the remainder of the year. During 1993 the Company was able to expand its correspondent network resulting in less reliance on the California market. During the second quarter of 1994, 41% of the Company's mortgage loan acquisitions were secured by properties located in California, down from 44% in calendar year 1993 and 75% in calendar year 1992. As of June 30, 1994, approximately 52% of the Company's mortgage assets were secured by properties located in California, compared to 73% as of June 30, 1993. Although the Company continues to expand its marketing efforts to acquire mortgage loans from other regions of the United States, California is the largest market for jumbo mortgage loans; therefore, no assurance can be given that the Company's operations would not be materially affected by economic or other events in California. On January 17, 1994, the Los Angeles region of southern California suffered a relatively severe earthquake. The Company has exposure to earthquake losses in cases where a homeowner defaults on his mortgage and the property has structural damage from an earthquake, exclusive of fire or water damage (the standard homeowners policy covers fire and water damage even if such damage was the result of an earthquake). The Company has determined, through property inspections and discussions with homeowners, that properties underlying approximately $18 million of mortgage loans are not insured by either the Company or the homeowner for special hazards, such as an earthquake, and may have significant structural damage. The Company expects some of these homeowners may default. However, the Company believes any losses incurred as a result of this earthquake will not be material and that its allowance for possible losses at June 30, 1994 is adequate to absorb any such losses. The Company formed $354 million and $438 million of AAA-rated private mortgage pass-through securities ("Mortgage Pass-Throughs") during the quarter and six months ended June 30, 1994, respectively. In addition to reducing the Company's exposure to fraud and credit risk, a primary benefit of pooling mortgage loans into Mortgage Pass-Throughs is the liquidity of AAA-rated securities over that of individual loans. As a result, when securing short-term borrowings, the Company is able to negotiate more favorable terms. The -12- Company plans to continue to retain a large portfolio of primarily adjustable- rate mortgage loan ("ARM") Mortgage Pass-Throughs. In order to expedite growth of the Company's adjustable-rate mortgage investments, the Company began purchasing ARM agency securities during the first quarter. Approximately $978 million of ARM agency securities were acquired during the second quarter of 1994. The Company also has a portfolio of fixed- rate agency securities that it intends to continue to finance using dollar repurchase agreements or repurchase agreements and eventually place into a collateralized mortgage obligation ("CMO"). During the quarter the Company issued one CMO totaling $254 million through a special-purpose finance subsidiary secured by 15- and 20-year fixed-rate mortgage loans. The Company's net investment in this financing at issuance totaled $14,886,000. Year to date, the Company has issued approximately $1.9 billion in CMOs retaining net investments in these financings of approximately $57 million. The Company's 1994 CMO executions were negatively impacted by the general rise in interest rates causing the Company to secure higher rate bonds with lower rate collateral which the Company had committed to purchase in late 1993 to early 1994 when long-term interest rates were lower. The Company's CMO investment portfolio, (excluding collateral of $34,325,000 released from related indentures through redemption or pay off of the related bonds) declined from $115,349,000 at June 30, 1993 to $110,321,000 this quarter-end, as record levels of prepayments on mortgage securities collateral seen in 1993 continued through January 1994, dramatically reducing outstanding balances of existing CMOs during the intervening period. Recently, the Company began issuing CMOs with a senior/subordinate structure in lieu of purchasing pool insurance where bond investors or the Company assumes credit and special hazard risks by purchasing/retaining subordinate classes of securitization. During the current quarter the Company retained $763,000 of these subordinate classes for its CMO investment portfolio at a cost of $267,000. Year-to-date, the Company has retained $3,321,000 of subordinated securities at a cost of $1,162,000. The cost and yield characteristics of subordinate securities reflects the market's and the Company's expectation of the risks assumed and, therefore, the Company does not anticipate a need to increase its provision for losses for this added exposure. The Company formed its mortgage servicing unit early in 1993, and has obtained Federal National Mortgage Association and Federal Home Loan Mortgage Corporation servicing approvals so that the Company could begin servicing conforming loans guaranteed by these government-sponsored entities. The Company's mortgage servicing portfolio (excluding pending transfers) increased substantially during the quarter to $6.7 billion with a weighted average interest rate of only 7.03%. The current balance of purchased mortgage servicing rights related to this portfolio was approximately $83 million (124 basis points) at June 30, 1994. In addition, pending transfers as of quarter-end, together with contracts to acquire servicing rights entered into after quarter-end, totaled another $6.8 billion of servicing with a weighted average interest rate of 7.10% at an average cost of 151 basis points. These pending transfers, together with normal jumbo servicing acquisitions, should allow the Company to end the year with a servicing portfolio of more than $15.0 billion. Portfolio run-off, consisting of prepayments and scheduled payments on -13- mortgage loans serviced, was at an annual rate of only 6.20% during the quarter, owing to the very low weighted average interest rate of the servicing portfolio compared to today's mortgage interest rates. -14- The following table summarizes the Company's utilization of capital as of June 30, 1994 (in thousands):
Funded Through -------------------- Assets Borrowings Equity ---------- ---------- -------- Mortgage loan portfolio: Fixed-rate mortgage loans $ 396,311 $ 333,630 $ 62,681 Medium-term mortgage loans 8,127 3,026 5,101 Adjustable-rate mortgage loans 142,864 71,810 71,054 AAA-rated mortgage pass-through securities portfolio: Fixed-rate mortgage securities 308,683 273,227 35,456 Medium-term mortgage securities 477,203 454,833 22,370 Adjustable-rate mortgage securities 677,834 645,500 32,334 Agency securities portfolio: Fixed-rate agency securities 504,650 467,281 37,369 Adjustable-rate agency securities 1,064,127 1,035,261 28,866 CMO investment portfolio 4,869,488 4,722,864 146,624 Purchased mortgage servicing rights 132,731 - 132,731 ---------- ---------- -------- $8,582,018 $8,007,432 574,586 ========== ========== -------- Other assets, net of other liabilities including $36 million owed under contracts for bulk purchases of mortgage servicing rights 42,102 -------- Total stockholders' equity $616,688 ========
A significant impact of the recent rise in mortgage interest rates has been a corresponding decline in value of most of the Company's mortgage investments, as evidenced by a $23.7 million unrealized loss on certain of the Company's debt and equity securities classified as available-for-sale at June 30, 1994. This unrealized loss has been reflected as a separate component of stockholders' equity in accordance with Statement of Financial Accounting Standards No. 115 "Accounting for certain Investments in Debt and Equity Securities" which was adopted by the Company this year. These losses will only be realized by the Company if the related assets are sold. The Company does not intend to sell these assets under current market conditions. As of June 30, 1994, the Company's mortgage investments and its commitments to acquire mortgage loans ("Pipeline") totaled approximately $3.6 billion. Market value risk associated with holding or acquiring these assets was reduced by entering into forward sale agreements for hedging purposes totaling $410 million. In addition, approximately $1.9 billion was invested or committed for investment in ARM loans, which generally tend to hold their market value in a rising interest rate environment. Remaining mortgage assets and Pipeline (adjusted for expected Pipeline fallout of 20% on "best efforts" commitments and 35% on "optional" commitments) that was subject to market value risk as of June 30, 1994 was approximately $1.3 billion. As the Company continues to acquire mortgage loans, it may pool such loans into CMOs or other securitizations, thereby periodically reducing the amount of mortgage loans subject to market value risk (see "Effects of Interest Rate Changes"). -15- Results of Operations - - --------------------- Comparative net operating results (interest income or fee revenues, net of related interest expense or direct operating costs), by source, are as follows (in thousands, except per share amounts):
Quarter Ended Six Months Ended June 30 June 30 ------------------ ------------------- 1994 1993 1994 1993 -------- -------- -------- --------- Mortgage loan portfolio $ 6,904 $11,004 $20,474 $ 21,479 Mortgage Pass-Through portfolio 4,270 9,178 9,048 16,568 Agency securities portfolio 4,440 4,964 8,329 6,867 CMO investment portfolio 2,478 (2,378) 3,810 929 Mortgage servicing 4,315 (168) 5,497 (168) Gains from sales 160 6,065 2,157 15,340 Bond administration 1,193 124 2,027 183 Other income 371 41 600 351 ------- ------- ------- -------- Contribution to income 24,131 28,830 51,942 61,549 Provision for losses (500) (500) (1,000) (1,800) General and administrative expenses (3,601) (5,075) (7,443) (13,589) ------- ------- ------- -------- Net income $20,030 $23,255 $43,499 $ 46,160 ======= ======= ======= ======== Net income per share: Primary $ 0.68 $ 0.90 $ 1.58 $ 1.78 Fully diluted 0.67 0.88 1.55 1.74 Return on average total stockholders' equity 12.45% 14.60% 13.51% 14.49%
The mortgage loan portfolio contributed significantly less to the current quarter net operating results than in the second quarter of the prior year due to (i) lower yields on mortgage loans: 6.56% in the current quarter compared to 7.28% in the second quarter of the prior year, (ii) higher short-term borrowing costs: 4.65% in the current quarter compared to 4.23% in the second quarter of the prior year, and (iii) greater use of leverage: the average ratio of short- term debt to capital employed increased to 1.2:1 in the current quarter compared to 1:1 in the second quarter of the prior year. Average portfolio outstanding in the current quarter of $820 million remained comparable to the $846 million outstanding during the same period of the prior year. A higher average portfolio outstanding and lower borrowing costs in the first quarter of 1994 are the primary reasons that year-to-date results for 1994 are not significantly lower than those achieved year-to-date in 1993. Borrowing costs on the mortgage loan portfolio have risen 104 basis points since January 1994. The Company has increased its leverage of this portfolio as it has employed more of its available capital into its servicing portfolio. The Mortgage Pass-Through portfolio contributed less to net operating results for the quarter and six months ended June 30, 1994 compared to the same periods in 1993 due to a decline in the average portfolio outstanding as a result of sales of ARM Mortgage Pass-Throughs in the latter half of 1993. The average portfolio outstanding declined to $1.1 billion and $1.0 billion for the quarter and six months ended June 30, 1994, respectively, compared to $1.6 billion and $1.4 billion for the same periods in 1993. Additionally, borrowing costs have risen 106 basis points since February 1994, averaging 4.33% and 3.98% for the quarter and six months ended June 30, 1994, -16- respectively, compared to 3.44% and 3.48% for the same periods in 1993. Mortgage Pass-Through yields have declined to 5.94% and 5.97% for the quarter and six months ended June 30, 1994, respectively, compared to 6.10% and 6.13% for the same periods in 1993, primarily because of a portfolio mix containing less seasoned ARM securities. Despite a sizable increase in average portfolio outstanding to $1.1 billion in the current quarter compared to $417 million in the second quarter of the prior year, the agency securities portfolio contributed less to the current quarter net operating results due to lower agency security yields (5.42% in the current quarter compared to 6.91% in the second quarter of the prior year) and higher short-term borrowing costs (3.98% in the current quarter compared to 2.18% in the second quarter of the prior year). The lower yields reflect the Company's decision to invest in recently issued ARM securities that have not yet reset to a fully-indexed rate (either the one-year treasury rate or 6-month LIBOR)("teaser-rate ARM securities"). These teaser-rate ARM securities produced a yield of 4.55% during the quarter, only 43 basis points more than related borrowing costs. Additionally, borrowing rates in the dollar repurchase agreement market have risen considerably over those achieved in 1993. Year-to- date results were higher in 1994 due primarily to the higher average portfolio outstanding compared to the same period in 1993. Operating results produced by the CMO investment portfolio are represented by interest income on mortgage securities collateral (including interest earned on collateral released from the related indenture due to redemption or payoff of the related bonds), less interest expense and professional fees on collateralized mortgage securities, and mortgage pool insurance expense on mortgage securities collateral, and includes net investment income or loss on other mortgage securities held by the Company. Operating results produced by the CMO investment portfolio during the quarter and six months ended June 30, 1994 were higher than those achieved in the same periods in 1993 due primarily to the impact of the rise in mortgage interest rates experienced in 1994 on current and expected future prepayments. During the year ended December 31, 1993 the Company received principal collections on mortgage securities collateral totaling $2.4 billion, nearly double the $1.3 billion of runoff in 1992. In the first quarter of 1994, prepayments began to slow considerably. As a result, the Company has revised its estimates of expected future prepayments, which has had the effect of lowering required amortization of collateral and bond premiums and discounts and improving operating results. Net income from mortgage servicing for the quarter and six months ended June 30, 1994 totaled $4,315,000 and $5,497,000, respectively. Net income from servicing is represented by mortgage servicing fees, net of subservicing fees paid to the sellers of bulk servicing prior to the transfers of purchased portfolios to the Company, interest on escrows, late charges and ancillary revenues earned, less amortization of purchased mortgage servicing rights and other direct expenses (including employee and system costs, and general and administrative expenses). During the quarter ended June 30, 1994, the servicing portfolio (excluding pending transfers) averaged $5.2 billion. During the second quarter of 1994 the Company sold $3.3 million of mortgage securities collateral previously released from CMOs pursuant to "clean-up calls" recognizing a gain of $160,000. This compares to mortgage asset sales of $643 million for gains of $6,493,000 during the same period in 1993. For -17- the six months ended June 30, 1994, the Company sold $20.7 million of released mortgage securities collateral recognizing gains of $2,157,000. This compares to mortgage asset sales of $989 million for gains of $15,768,000 during the same period in 1993. Rising interest rates have limited the Company's opportunities to recognize gains on the sale of mortgage assets in 1994. Bond administration revenues were higher for the quarter and six months ended June 30, 1994 than in the same periods of 1993 due to increased fees for master servicing the collateral placed into securitizations issued by the Company and administrating the related bonds or pass-throughs. The Company began master servicing securitized collateral in February 1993 and receiving fees for administering its securitizations in October 1993. The Company provided $500,000 and $1,000,000 for possible losses during the quarter and six months ended June 30, 1994, compared to $500,000 and $1,800,000 for the same periods in 1993. Management believes that the Company's allowance for possible losses is adequate to cover any exposure to the January 17, 1994 earthquake in California. After excluding $1,526,000 and $6,641,000 incurred in the quarter and six months ended June 30, 1993, respectively, of non-competition and management agreement expenses and termination costs, general and administrative expenses for the periods presented were comparable. Liquidity and Capital Resources - - ------------------------------- The Company's primary sources of funds include monthly mortgage loan principal and interest payments, servicing revenues, short-term financing arrangements, excess cash flows on issued CMOs, proceeds from securitizations, and equity offerings when available. The Company currently believes that these funds are sufficient for the acquisition of additional mortgage loans and other mortgage assets, repayments on short-term borrowings, growth of its servicing unit and the payment of cash dividends as required for Capstead's continued qualification as a Real Estate Investment Trust ("REIT"). It is the Company's policy to remain strongly capitalized and conservatively leveraged. The Company may, from time to time, sell a portion of its fixed-rate mortgage loans and its investments in other mortgage loans, by issuing publicly-offered, multi-class pass-through certificates ("MPCs") and electing Real Estate Mortgage Investment Conduit ("REMIC") status for tax purposes on these transactions. Such sales may make quarterly income more volatile than in the past because of the recognition of transactional gains or losses. Short-term borrowings are primarily made under repurchase arrangements. At June 30, 1994, the Company had uncommitted repurchase facilities with investment banking firms with approved credit limits of $2 billion, subject to certain conditions, to finance the mortgage loan portfolio. Interest rates on borrowings under these facilities are based on overnight London interbank offered rate ("LIBOR") rates. The Company currently uses other repurchase arrangements as needed. As the Company commits to the issuance of CMOs or MPCs, the Company may deliver the mortgage loans that are expected to secure the issuance as collateral for a repurchase transaction with the managing underwriter of the related issuance. The Company also enters into repurchase and dollar repurchase arrangements with investment banking firms pursuant to -18- which the Company pledges Mortgage Pass-Throughs and agency securities. The terms and conditions of these arrangements, including interest rates, are negotiated on a transaction-by-transaction basis. Effects of Interest Rate Changes - - -------------------------------- Changes in interest rates may impact the Company's earnings in various ways. The Company's earnings depend, in part, on the difference between the interest received on mortgage investments and the interest paid on related short-term borrowings (primarily repurchase arrangements). The resulting spread may be reduced in a rising interest rate environment. For ARM loans the risk of rising short-term interest rates is offset to some extent by increases in the rates of interest earned on these loans. Since ARM loans generally limit the amount of such increase during any single interest rate adjustment period and over the life of the loan, it is possible that the interest rates on the repurchase arrangements could rise to levels that may exceed the interest rates on the underlying ARM loans which may cause the Company to realize a negative interest spread. In addition, the Company's earnings are impacted if long-term interest rates change during the period after the Company has committed to purchase fixed-rate mortgage loans, but before these loans have been pledged to secure CMOs or MPCs. If long-term interest rates increase during this period, the interest payable on the CMOs issued will increase, while the yield on the underlying mortgage loans pledged to collateralize the CMOs will not change; as a consequence, the interest spread on the CMO will be lower. Conversely, if long-term interest rates decrease during this period, the interest payable on the CMO issued will decrease, while the yield on the underlying mortgage loans pledged to collateralize the CMO will not change; as a consequence, the interest spread on the CMO will be higher. Similarly, proceeds received on the issuance of MPCs, and related gains or losses, will be negatively impacted by an increase in long- term interest rates during this period due to the resulting decline in market value of the related collateral. Conversely, these transactional gains or losses will be favorably impacted by a decrease in long-term interest rates during this period. The Company attempts to manage its exposure to long-term interest rate changes in part by pricing CMOs and MPCs prior to the purchase of, but subsequent to the commitment to purchase, all of the mortgages that will collateralize the issuance, and may from time to time elect to enter into forward sale agreements for hedging purposes. A change in interest rates also impacts earnings recognized from the Company's CMO investment portfolio, which consists primarily of fixed-rate CMO residuals. 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 loans. If mortgage interest rates fall significantly below the interest rate on the collateral pledged to secure the CMO, principal prepayments will increase, reducing or even eliminating the overall return on the investment in the CMO residual. This is due primarily to the acceleration of the amortization of bond discounts, a noncash item, as bond classes are repaid more rapidly than originally anticipated. During 1993 the Company experienced such a period of declining rates and high prepayments and having concluded that high levels of prepayments may continue, accelerated the amortization of remaining bond discounts accordingly. -19- Interest-only and principal-only securities that are held by the Company in the CMO Investment portfolio are carried at the present value of the future cash flows expected to be received during the remaining terms of the investments, discounted at a constant effective yield. Income recognized is the excess of cash received over the reduction of the carrying value. In a falling interest rate environment, prepayments on the underlying mortgage collateral generally will be high and the Company could incur losses on investments in interest-only securities. Conversely, in periods of rising interest rates, interest-only securities will tend to perform very favorably because the underlying mortgage collateral will generally prepay at slower rates. Principal-only securities react differently to changes in interest rates. Lower interest rates result in the recovery of this investment more rapidly thus increasing yields. During periods of rising rates, it takes longer for the Company to recover its investments thus lowering yields. Principal-only securities retained by the Company generally represent a much smaller investment than interest-only investments. -20- Another effect of changes in interest rates is that if interest rates decrease, the rate of prepayment of mortgage loans may increase. To the extent the proceeds of prepayments of mortgage loans or agency securities in the Company's mortgage investment portfolios cannot be reinvested at a rate of interest at least equal to the rate previously earned on such mortgage loans or agency securities, the Company's earnings may be adversely affected. In addition, the rates of interest earned on the Company's ARM loans generally will decline during periods of falling interest rates. The above discussion regarding how changes in interest rates impact our investments in mortgage loans and other mortgage assets also applies to our growing investment in purchased mortgage servicing rights. If interest rates rise, our servicing assets become more valuable since the average lives of the related mortgage loans will tend to be longer and earnings from large, temporarily-held cash balances will be greater. Conversely, lower interest rates will spur prepayments thus reducing the period of time the Company can service the related loans. Because the Company began servicing in 1993, exposure to lower interest rates is less than for other servicers that acquired servicing portfolios in previous years when interest rates were substantially higher. PART II. - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: (a) Exhibits: -------- The following Exhibit is presented herewith: Exhibit 11 - Computation of Earnings Per Share for the quarter and six months ended June 30, 1994 and 1993. (b) Reports on Form 8-K: None. ------------------- -21- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CAPSTEAD MORTGAGE CORPORATION Date: August 10, 1994 By ------------------------------------ Ronn K. Lytle Chairman and Chief Executive Officer Date: August 10, 1994 By ------------------------------------ Andrew F. Jacobs Senior Vice President - Control and Treasurer -22- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CAPSTEAD MORTGAGE CORPORATION Date: August 10, 1994 By /s/ RONN K. LYTLE ------------------------------------ Ronn K. Lytle Chairman and Chief Executive Officer Date: August 10, 1994 By /s/ ANDREW F. JACOBS ------------------------------------ Andrew F. Jacobs Senior Vice President - Control and Treasurer -23- EX-11 2 EXHIBIT 11 EXHIBIT 11 CAPSTEAD MORTGAGE CORPORATION COMPUTATION OF NET INCOME PER SHARE (in thousands, except per share amounts)
Quarter Ended Six Months Ended -------------------- -------------------- 1994 1993 1994 1993 -------- -------- -------- -------- Primary: Average number of common shares outstanding 15,238 15,046 15,220 14,995 Incremental shares calculated using the Treasury Stock method 9 70 46 81 ------- ------- -------- -------- 15,247 15,116 15,266 15,076 ======= ======= ======== ======== Net income $20,030 $23,255 $ 43,499 $ 46,160 Less cash dividends paid on convertible preferred stock: Series A paid ($0.40 paid per share) (266) (328) (538) (672) Series B paid ($0.315 paid per share) (9,440) (9,314) (18,848) (18,596) ------- ------- -------- -------- Net income available to common stockholders $10,324 $13,613 $ 24,113 $ 26,892 ======= ======= ======== ======== Primary net income per share $0.68 $0.90 $1.58 $1.78 Fully diluted: Average number of common shares outstanding 15,238 15,046 15,220 14,995 Assumed conversion of convertible preferred stock: Series A 606 755 619 787 Series B * * * * Incremental shares calculated using the Treasury Stock method 9 72 45 90 ------- ------- -------- -------- 15,853 15,873 15,884 15,872 ======= ======= ======== ======== Net income $20,030 $23,255 $ 43,499 $ 46,160 Less cash dividends paid on the Series B Preferred Stock (9,440) (9,314) (18,848) (18,596) ------- ------- -------- -------- Net income $10,590 $13,941 $ 24,651 $ 27,564 ======= ======= ======== ======== Fully diluted net income per share $0.67 $0.88 $1.55 $1.74
* The Series B Preferred Stock is not considered convertible for purposes of calculating fully diluted net income per share as it is currently antidilutive. -----END PRIVACY-ENHANCED MESSAGE-----