Exhibit 99.1
| CONTACT: | Lindsey Crabbe | FOR IMMEDIATE RELEASE |
| (214) 874-2339 | |
CAPSTEAD MORTGAGE CORPORATION
ANNOUNCES SECOND QUARTER 2016 RESULTS
DALLAS – July 27, 2016 – Capstead Mortgage Corporation (NYSE: CMO) (“Capstead” or the “Company”) today announced financial results for the quarter ended June 30, 2016.
Second Quarter 2016 Highlights
| · | Generated earnings of $21.6 million or $0.19 per diluted common share |
| · | Paid common dividend of $0.23 per common share |
| · | Book value decreased 0.4%, or $0.04, to $11.21 per common share |
| · | Yields on residential mortgage investments decreased 18 basis points to 1.54% while rates on related secured borrowings increased two basis points to 0.84% |
| · | Total financing spreads decreased 18 basis points to 0.64% while financing spreads on residential mortgage investments, a non-GAAP financial measure, decreased 20 basis points to 0.70% |
| · | Agency-guaranteed ARM portfolio and leverage ended the quarter at $13.90 billion and 9.28 times long-term investment capital, respectively |
Capstead reported net income of $21.6 million or $0.19 per diluted common share for the quarter ended June 30, 2016. This compares to net income of $27.4 million or $0.25 per diluted common share for the quarter ended March 31, 2016. The Company paid a second quarter 2016 dividend of $0.23 per common share on July 20, 2016.
Second Quarter Earnings and Related Discussion
Capstead is a self-managed real estate investment trust, or REIT, for federal income tax purposes. The Company earns income from investing in a leveraged portfolio of short-duration residential adjustable-rate mortgage pass-through securities, referred to as ARM securities, issued and guaranteed by government-sponsored enterprises, either Fannie Mae or Freddie Mac, or by an agency of the federal government, Ginnie Mae. This strategy differentiates the Company from its peers because the ARM loans underlying its investment portfolio reset to more current interest rates within a relatively short period of time. As a result, the Company is positioned to benefit from future recoveries in financing spreads that typically contract during periods of rising interest rates and to experience smaller fluctuations in portfolio values compared to portfolios containing a significant amount of longer-duration ARM or fixed-rate mortgage securities. Duration is a common measure of market price sensitivity to interest rate movements. A shorter duration generally indicates less interest rate risk.
For the quarter ended June 30, 2016, the Company reported net interest margins of $24.4 million compared to $31.1 million for the quarter ended March 31, 2016. The decrease in net interest margins was primarily attributable to higher investment premium amortization caused by higher mortgage prepayments during the quarter.
Yields on Capstead’s $13.90 billion portfolio of residential mortgage investments averaged 1.54% during the second quarter of 2016, compared to 1.72% reported for the first quarter of 2016. Cash yields (yields on the portfolio before investment premium amortization) increased three basis points to 2.50% largely attributable to mortgage loans underlying the portfolio resetting to higher rates based on higher prevailing six- and 12-month interest rate indices. The negative yield adjustment for investment premium amortization increased 21 basis points to (0.96%) as a result of higher mortgage prepayment levels. Mortgage prepayment rates for the second quarter averaged an annualized constant prepayment rate, or CPR, of 23.19% compared to 18.23% CPR reported for the first quarter of 2016.
The following table illustrates the progression of the Company’s portfolio of residential mortgage investments for the quarter and six months ended June 30, 2016 (dollars in thousands):
| | | Quarter Ended June 30, 2016 | | | Six Months Ended June 30, 2016 | |
| Residential mortgage investments, beginning of period | | $ | 13,835,131 | | | $ | 14,154,737 | |
| Portfolio acquisitions (principal amount) at average lifetime purchased yields of 2.24% and 2.30%, respectively | | | 1,016,192 | | | | 1,464,188 | |
Investment premiums on acquisitions* | | | 33,786 | | | | 48,549 | |
| Portfolio runoff (principal amount) | | | (967,431 | ) | | | (1,736,268 | ) |
| Investment premium amortization | | | (33,052 | ) | | | (59,063 | ) |
| Increase in net unrealized gains on securities classified as available-for-sale | | | 16,917 | | | | 29,400 | |
| Residential mortgage investments, end of period | | $ | 13,901,543 | | | $ | 13,901,543 | |
| | | | | | | | | |
| Increase (decrease) in residential mortgage investments during the indicated periods | | $ | 66,412 | | | $ | (253,194 | ) |
| * | Residential mortgage investments typically are acquired at a premium to the securities’ unpaid principal balances. Investment premiums are recognized in earnings as portfolio yield adjustments using the interest method over the estimated lives of the related investments. As such, the level of mortgage prepayments impacts how quickly investment premiums are amortized. |
Rates on Capstead’s $12.80 billion in secured borrowings, after adjusting for hedging activities, averaged 0.84% during the second quarter of 2016, compared to 0.82% for the first quarter of 2016. Hedging costs increased as older, lower-rate interest rate swap agreements were replaced at higher rates. The Company uses pay-fixed, receive-variable interest rate swap agreements supplemented with longer-maturity secured borrowings when available at attractive rates and terms to help mitigate exposure to rising short-term interest rates. Excluding $700 million notional amount of swap agreements that expired July 1, 2016, at quarter-end the Company held $7.35 billion notional amount of portfolio financing-related swap agreements with contract expirations occurring at various dates through the second quarter of 2019 and a weighted average expiration of 15 months.
Operating costs expressed as an annualized percentage of long-term investment capital averaged 0.93% during the second quarter of 2016 compared to an average of 1.26% for the first quarter of 2016. Operating costs were higher in the first quarter primarily as a result of finalizing 2015 performance-based compensation program results in March 2016. Capstead is a leader in terms of operating cost efficiency among its mortgage REIT peers.
Long-Term Investment Capital, Portfolio Leverage and Book Value per Common Share
Capstead’s long-term investment capital, which consists of common and perpetual preferred stockholders’ equity and $98 million of long-term unsecured borrowings, was largely unchanged during the quarter at $1.38 billion. Portfolio leverage (secured borrowings divided by long-term investment capital) increased to 9.28 to one at June 30, 2016 from 9.14 to one at March 31, 2016, primarily because of higher secured borrowings supporting larger portfolio and cash balances.
The following table illustrates the progression of the Company’s book value per common share (total stockholders’ equity, less preferred share liquidation preferences, divided by shares of common stock outstanding) as well as changes in book value expressed as percentages of beginning book value for the quarter and six months ended June 30, 2016:
| | | Quarter Ended June 30, 2016 | | | Six Months Ended June 30, 2016 | |
| Book value per common share, beginning of period | | $ | 11.25 | | | | | | $ | 11.42 | | | | |
| Change in unrealized gains and losses on mortgage securities classified as available-for-sale | | | 0.17 | | | | | | | 0.31 | | | | |
| Change in unrealized gains and losses on interest rate swap agreements designated as cash flow hedges of: | | | | | | | | | | | | | | |
| Secured borrowings | | | (0.11 | ) | | | | | | (0.28 | ) | | | |
| Unsecured borrowings | | | (0.06 | ) | | | | | | (0.17 | ) | | | |
| | | | – | | | | – | % | | | (0.14 | ) | | | (1.2 | )% |
| Capital transactions: | | | | | | | | | | | | | | | | |
| Dividend distributions in excess of earnings | | | (0.04 | ) | | | | | | | (0.06 | ) | | | | |
| Other (principally related to equity awards) | | | – | | | | | | | | (0.01 | ) | | | | |
| | | | (0.04 | ) | | | (0.4 | )% | | | (0.07 | ) | | | (0.6 | )% |
| Book value per common share, end of period | | $ | 11.21 | | | | | | | $ | 11.21 | | | | | |
| Decrease in book value per common share during the indicated periods | | $ | (0.04 | ) | | | (0.4 | )% | | $ | (0.21 | ) | | | (1.8 | )% |
Nearly all of Capstead’s residential mortgage investments and all interest rate swap agreements are reflected at fair value on the Company’s balance sheet and related unrealized gains and losses are included in the calculation of book value per common share. The Company’s borrowings, however, are not reflected at fair value on the balance sheet. Fair value is impacted by market conditions, including changes in interest rates, and the availability of financing at reasonable rates and leverage levels, among other factors. The Company’s investment strategy attempts to mitigate these risks by focusing on investments in agency-guaranteed residential mortgage pass-through securities, which are considered to have little, if any, credit risk and are collateralized by ARM loans with interest rates that reset periodically to more current levels, generally within five years. Because of these characteristics, the fair value of the Company’s portfolio is less vulnerable to significant pricing declines caused by credit concerns or rising interest rates compared to leveraged portfolios containing a significant amount of non-agency-guaranteed securities or agency-guaranteed securities backed by longer-duration ARM or fixed-rate loans.
Management Remarks
Commenting on current operating and market conditions, Phillip A. Reinsch, President and Chief Executive Officer, said, “Our second quarter earnings were negatively impacted by higher mortgage prepayment levels due to higher refinancing activity as well as seasonal factors. This contributed to $7.0 million in higher investment premium amortization, more than offsetting the benefits of increasing cash yields. Given the current interest rate environment, we expect further increases in investment premium amortization to weigh on our third quarter results before this refinancing wave begins to dissipate.
“Cash yields benefited from higher coupon interest rate resets as mortgage loans underlying our portfolio of agency-guaranteed residential ARM securities reset to higher rates based on higher prevailing six- and 12-month interest rate indices. We anticipate additional improvements in cash yields in the coming quarters in this rate environment. Regarding borrowing rates, the funding markets remain healthy for financing agency-guaranteed residential mortgage securities leading to expectations for relatively stable borrowing rates given low market expectations for future increases in the Federal Funds Rate.
“We remain confident in and focused on our investment strategy of managing a leveraged portfolio of agency-guaranteed residential ARM securities that can produce attractive risk-adjusted returns over the long term while reducing, but not eliminating, sensitivity to changes in interest rates.”
Earnings Conference Call Details
An earnings conference call and live audio webcast will be hosted Thursday, July 28, 2016 at 9:00 a.m. ET. The conference call may be accessed by dialing toll free (877) 505-6547 in the U.S., (855) 669-9657 for Canada, or (412) 902-6660 for international callers. A live audio webcast of the conference call can be accessed via the investor relations section of the Company’s website at www.capstead.com or www.capstead.reit, and an audio archive of the webcast will be available for approximately 60 days. The audio replay will be available one hour after the end of the conference call through October 28, 2016. The replay can be accessed by dialing toll free (877) 344-7529 in the U.S., (855) 669-9658 for Canada, or (412) 317-0088 for international callers and entering conference number 10089598.
Revised Remaining 2016 Common Share Dividend Dates
| Quarter | Declaration Date | Record Date | Payable Date |
| Third | September 15 | September 30 | October 20 |
| Fourth | December 15 | December 30 | January 20, 2017 |
Statement Concerning Forward-looking Statements
This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “intend,” “will be,” “will likely continue,” “will likely result,” or words or phrases of similar meaning.
Forward-looking statements are based largely on the expectations of management and are subject to a number of risks and uncertainties including, but not limited to, the following:
| · | changes in general economic conditions; |
| · | fluctuations in interest rates and levels of mortgage prepayments; |
| · | the effectiveness of risk management strategies; |
| · | the impact of differing levels of leverage employed; |
| · | liquidity of secondary markets and credit markets; |
| · | the availability of financing at reasonable levels and terms to support investing on a leveraged basis; |
| · | the availability of new investment capital; |
| · | the availability of suitable qualifying investments from both an investment return and regulatory perspective; |
| · | changes in legislation or regulation affecting Fannie Mae, Freddie Mac, Ginnie Mae, the Federal Home Loan Bank system and similar federal government agencies and related guarantees; |
| · | other changes in legislation or regulation affecting the mortgage and banking industries; |
| · | changes in market conditions as a result of Federal Reserve monetary policy or federal government fiscal challenges; |
| · | deterioration in credit quality and ratings of existing or future issuances of Fannie Mae, Freddie Mac or Ginnie Mae securities; |
| · | changes in legislation or regulation affecting exemptions for mortgage REITs from regulation under the Investment Company Act of 1940; and |
| · | increases in costs and other general competitive factors. |
In addition to the above considerations, actual results and liquidity are affected by other risks and uncertainties which could cause actual results to be significantly different from those expressed or implied by any forward-looking statements included herein. It is not possible to identify all of the risks, uncertainties and other factors that may affect future results. In light of these risks and uncertainties, the forward-looking events and circumstances discussed herein may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements. Forward-looking statements speak only as of the date the statement is made and the Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, readers of this document are cautioned not to place undue reliance on any forward-looking statements included herein.
CAPSTEAD MORTGAGE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except ratios, pledged and per share amounts)
| | | June 30, 2016 | | | December 31, 2015 | |
| | | (unaudited) | | | | |
| Assets | | | | | | |
| Residential mortgage investments ($13.48 and $13.54 billion pledged at June 30, 2016 and December 31, 2015, respectively) | | $ | 13,901,543 | | | $ | 14,154,737 | |
| Cash collateral receivable from interest rate swap counterparties | | | 93,170 | | | | 50,193 | |
| Interest rate swap agreements at fair value | | | 24 | | | | 7,720 | |
| Cash and cash equivalents | | | 129,171 | | | | 54,185 | |
| Receivables and other assets | | | 179,449 | | | | 179,531 | |
| | | $ | 14,303,357 | | | $ | 14,446,366 | |
| Liabilities | | | | | | | | |
| Secured borrowings | | $ | 12,802,629 | | | $ | 12,958,394 | |
| Interest rate swap agreements at fair value | | | 62,003 | | | | 26,061 | |
| Unsecured borrowings | | | 98,040 | | | | 97,986 | |
| Common stock dividend payable | | | 22,738 | | | | 25,979 | |
| Accounts payable and accrued expenses | | | 36,825 | | | | 39,622 | |
| | | | 13,022,235 | | | | 13,148,042 | |
| Stockholders’ equity | | | | | | | | |
| Preferred stock - $0.10 par value; 100,000 shares authorized: 7.50% Cumulative Redeemable Preferred Stock, Series E, 8,204 and 8,156 shares issued and outstanding ($205,107 and $203,902 aggregate liquidation preferences) at June 30, 2016 and December 31, 2015, respectively | | | 198,331 | | | | 197,172 | |
| Common stock - $0.01 par value; 250,000 shares authorized: 95,947 and 95,825 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively | | | 959 | | | | 958 | |
| Paid-in capital | | | 1,305,893 | | | | 1,310,563 | |
| Accumulated deficit | | | (346,464 | ) | | | (346,464 | ) |
| Accumulated other comprehensive income | | | 122,403 | | | | 136,095 | |
| | | | 1,281,122 | | | | 1,298,324 | |
| | | $ | 14,303,357 | | | $ | 14,446,366 | |
Long-term investment capital (consists of stockholders’ equity and unsecured borrowings) (unaudited) | | $ | 1,379,162 | | | $ | 1,396,310 | |
Portfolio leverage (secured borrowings divided by long-term investment capital) (unaudited) | | 9.28:1 | | | 9.28:1 | |
Book value per common share (based on common shares outstanding and calculated assuming liquidation preferences for preferred stock) (unaudited) | | $ | 11.21 | | | $ | 11.42 | |
CAPSTEAD MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
| | Quarter Ended June 30 | | | Six Months Ended June 30 | |
| | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
| Interest income: | | | | | | | | | | | | |
| Residential mortgage investments | | $ | 53,309 | | | $ | 50,341 | | | $ | 112,809 | | | $ | 108,986 | |
| Other | | | 128 | | | | 99 | | | | 320 | | | | 193 | |
| | | | 53,437 | | | | 50,440 | | | | 113,129 | | | | 109,179 | |
| Interest expense: | | | | | | | | | | | | | | | | |
| Secured borrowings | | | (27,014 | ) | | | (20,098 | ) | | | (53,596 | ) | | | (39,312 | ) |
| Unsecured borrowings | | | (1,976 | ) | | | (2,122 | ) | | | (3,953 | ) | | | (4,245 | ) |
| | | | (28,990 | ) | | | (22,220 | ) | | | (57,549 | ) | | | (43,557 | ) |
| | | | 24,447 | | | | 28,220 | | | | 55,580 | | | | 65,622 | |
| Other revenue (expense): | | | | | | | | | | | | | | | | |
| Compensation-related expense | | | (2,042 | ) | | | (2,160 | ) | | | (5,266 | ) | | | (4,509 | ) |
| Other general and administrative expense | | | (1,157 | ) | | | (1,170 | ) | | | (2,326 | ) | | | (2,319 | ) |
| Miscellaneous other revenue | | | 382 | | | | 54 | | | | 995 | | | | 107 | |
| | | | (2,817 | ) | | | (3,276 | ) | | | (6,597 | ) | | | (6,721 | ) |
| Net income | | $ | 21,630 | | | $ | 24,944 | | | $ | 48,983 | | | $ | 58,901 | |
| Net income available to common stockholders: | | | | | | | | | | | | | | | | |
| Net income | | $ | 21,630 | | | $ | 24,944 | | | $ | 48,983 | | | $ | 58,901 | |
| Less preferred stock dividends | | | (3,843 | ) | | | (3,788 | ) | | | (7,669 | ) | | | (7,530 | ) |
| | | $ | 17,787 | | | $ | 21,156 | | | $ | 41,314 | | | $ | 51,371 | |
| | | | | | | | | | | | | | | | | |
| Net income per common share: | | | | | | | | | | | | | | | | |
| Basic and diluted | | $ | 0.19 | | | $ | 0.22 | | | $ | 0.43 | | | $ | 0.54 | |
| | | | | | | | | | | | | | | | | |
| Weighted average common shares outstanding: | | | | | | | | | | | | | | | | |
| Basic | | | 95,648 | | | | 95,501 | | | | 95,631 | | | | 95,485 | |
| Diluted | | | 95,786 | | | | 95,689 | | | | 95,766 | | | | 95,682 | |
| | | | | | | | | | | | | | | | | |
| Cash dividends declared per share: | | | | | | | | | | | | | | | | |
| Common | | $ | 0.23 | | | $ | 0.31 | | | $ | 0.49 | | | $ | 0.62 | |
| Series E Preferred | | | 0.47 | | | | 0.47 | | | | 0.94 | | | | 0.94 | |
CAPSTEAD MORTGAGE CORPORATION
QUARTERLY STATEMENTS OF INCOME AND SELECT OPERATING STATISTICS
(unaudited, in thousands, except per share amounts, percentages annualized)
| | | 2016 | | | 2015 | |
| | | | Q2 | | | | Q1 | | | | Q4 | | | | Q3 | | | | Q2 | | | | Q1 | |
| Quarterly Statements of Income: | | | | | | | | | | | | | | | | | | | | | |
| Interest income: | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential mortgage investments | | $ | 53,309 | | | $ | 59,500 | | | $ | 57,518 | | | $ | 49,485 | | | $ | 50,341 | | | $ | 58,645 | |
| Other | | | 128 | | | | 192 | | | | 60 | | | | 88 | | | | 99 | | | | 94 | |
| | | | 53,437 | | | | 59,692 | | | | 57,578 | | | | 49,573 | | | | 50,440 | | | | 58,739 | |
| Interest expense: | | | | | | | | | | | | | | | | | | | | | | | | |
| Secured borrowings | | | (27,014 | ) | | | (26,582 | ) | | | (23,937 | ) | | | (22,272 | ) | | | (20,098 | ) | | | (19,214 | ) |
| Unsecured borrowings | | | (1,976 | ) | | | (1,977 | ) | | | (2,087 | ) | | | (2,122 | ) | | | (2,122 | ) | | | (2,123 | ) |
| | | | (28,990 | ) | | | (28,559 | ) | | | (26,024 | ) | | | (24,394 | ) | | | (22,220 | ) | | | (21,337 | ) |
| | | | 24,447 | | | | 31,133 | | | | 31,554 | | | | 25,179 | | | | 28,220 | | | | 37,402 | |
| Other revenue (expense): | | | | | | | | | | | | | | | | | | | | | | | | |
| Compensation-related expense | | | (2,042 | ) | | | (3,224 | ) | | | (2,627 | ) | | | (3,064 | ) | | | (2,160 | ) | | | (2,349 | ) |
| Other general and administrative expense | | | (1,157 | ) | | | (1,169 | ) | | | (1,170 | ) | | | (1,309 | ) | | | (1,170 | ) | | | (1,149 | ) |
| Miscellaneous other revenue | | | 382 | | | | 613 | | | | 600 | | | | 261 | | | | 54 | | | | 53 | |
| | | | (2,817 | ) | | | (3,780 | ) | | | (3,197 | ) | | | (4,112 | ) | | | (3,276 | ) | | | (3,445 | ) |
| Net income | | $ | 21,630 | | | $ | 27,353 | | | $ | 28,357 | | | $ | 21,067 | | | $ | 24,944 | | | $ | 33,957 | |
| Net income per diluted common share | | $ | 0.19 | | | $ | 0.25 | | | $ | 0.26 | | | $ | 0.18 | | | $ | 0.22 | | | $ | 0.32 | |
| Average diluted common shares outstanding | | | 95,786 | | | | 95,745 | | | | 95,718 | | | | 95,721 | | | | 95,689 | | | | 95,674 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Select Operating Statistics: | | | | | | | | | | | | | | | | | | | | | | | | |
Average portfolio outstanding (cost basis) | | $ | 13,837,817 | | | $ | 13,848,718 | | | $ | 14,115,691 | | | $ | 13,884,830 | | | $ | 13,853,972 | | | $ | 13,833,613 | |
| Average long-term investment capital (“LTIC”) | | | 1,388,476 | | | | 1,398,088 | | | | 1,431,338 | | | | 1,475,333 | | | | 1,501,740 | | | | 1,500,176 | |
| Investment premium amortization | | | 33,052 | | | | 26,011 | | | | 28,732 | | | | 34,323 | | | | 33,057 | | | | 25,078 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Constant prepayment rate (“CPR”) | | | 23.19 | % | | | 18.23 | % | | | 19.62 | % | | | 23.21 | % | | | 21.98 | % | | | 16.66 | % |
| Total financing spreads | | | 0.64 | | | | 0.82 | | | | 0.83 | | | | 0.66 | | | | 0.74 | | | | 1.01 | |
| Financing spreads on residential mortgage investments, a non-GAAP financial measure | | | 0.70 | | | | 0.90 | | | | 0.90 | | | | 0.74 | | | | 0.84 | | | | 1.11 | |
| Operating costs as a percentage of LTIC | | | 0.93 | | | | 1.26 | | | | 1.05 | | | | 1.18 | | | | 0.89 | | | | 0.95 | |
| Return on common equity capital | | | 6.55 | | | | 8.58 | | | | 8.57 | | | | 5.80 | | | | 7.02 | | | | 10.10 | |
CAPSTEAD MORTGAGE CORPORATION
QUARTERLY FINANCING SPREAD ANALYSIS
(annualized)
| | | 2016 | | | 2015 | | | 2014 | |
| | | | Q2 | | | | Q1 | | | | Q4 | | | | Q3 | | | | Q2 | | | | Q1 | | | | Q4 | | | | Q3 | |
Total financing spreads: (a) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Yields on all interest-earning assets | | | 1.53 | % | | | 1.69 | % | | | 1.62 | % | | | 1.40 | % | | | 1.42 | % | | | 1.66 | % | | | 1.61 | % | | | 1.56 | % |
| Borrowing rates on all interest-paying liabilities | | | 0.89 | | | | 0.87 | | | | 0.79 | | | | 0.74 | | | | 0.68 | | | | 0.65 | | | | 0.63 | | | | 0.57 | |
| Total financing spreads | | | 0.64 | | | | 0.82 | | | | 0.83 | | | | 0.66 | | | | 0.74 | | | | 1.01 | | | | 0.98 | | | | 0.99 | |
| Financing spreads on residential mortgage investments, a non-GAAP financial measure: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash yields on residential mortgage investments (b) | | | 2.50 | % | | | 2.47 | % | | | 2.44 | % | | | 2.42 | % | | | 2.41 | % | | | 2.42 | % | | | 2.43 | % | | | 2.44 | % |
Investment premium amortization (b) | | | (0.96 | ) | | | (0.75 | ) | | | (0.81 | ) | | | (0.99 | ) | | | (0.95 | ) | | | (0.72 | ) | | | (0.77 | ) | | | (0.84 | ) |
| Yields on residential mortgage investments | | | 1.54 | | | | 1.72 | | | | 1.63 | | | | 1.43 | | | | 1.46 | | | | 1.70 | | | | 1.66 | | | | 1.60 | |
Unhedged secured borrowing rates (c) | | | 0.67 | | | | 0.65 | | | | 0.48 | | | | 0.45 | | | | 0.41 | | | | 0.38 | | | | 0.36 | | | | 0.32 | |
Hedged secured borrowing rates (c) | | | 0.96 | | | | 0.93 | | | | 0.87 | | | | 0.84 | | | | 0.77 | | | | 0.75 | | | | 0.72 | | | | 0.66 | |
| Secured borrowing rates | | | 0.84 | | | | 0.82 | | | | 0.73 | | | | 0.69 | | | | 0.62 | | | | 0.59 | | | | 0.56 | | | | 0.51 | |
| Financing spreads on residential mortgage investments | | | 0.70 | | | | 0.90 | | | | 0.90 | | | | 0.74 | | | | 0.84 | | | | 1.11 | | | | 1.10 | | | | 1.09 | |
| CPR | | | 23.19 | | | | 18.23 | | | | 19.62 | | | | 23.21 | | | | 21.98 | | | | 16.66 | | | | 17.58 | | | | 19.18 | |
| (a) | All interest-earning assets include residential mortgage investments, overnight investments and cash collateral receivable from interest rate swap counterparties. All interest-paying liabilities include unsecured borrowings and cash collateral payable to interest rate swap counterparties. |
| (b) | Cash yields are based on the cash component of interest income. Investment premium amortization is determined using the interest method which incorporates actual and anticipated future mortgage prepayments. Both are expressed as a percentage calculated on average amortized cost basis for the indicated periods. |
| (c) | Unhedged borrowing rates represent average rates on secured borrowings, before consideration of related currently-paying interest rate swap agreements. Hedged borrowing rates represent the average fixed-rate payments made on currently-paying interest rate swap agreements held for portfolio hedging purposes adjusted for differences between LIBOR-based variable-rate payments received on these swaps and unhedged borrowing rates, as well as the effects of any hedge ineffectiveness. Average fixed-rate swap payments were 73 and 69 basis points for the second and first quarters of 2016, respectively, while the variable-rate payment adjustments equated to 23 and 24 basis points on average currently-paying swap notional amounts outstanding for the same periods. |
Financing spreads on residential mortgage investments, a non-GAAP financial measure, differs from total financing spreads, an all-inclusive GAAP measure, that is based on all interest-earning assets and all interest-paying liabilities. Management believes that presenting financing spreads on residential mortgage investments provides useful information for evaluating the performance of the Company’s portfolio. The following reconciles these two measures:
| | | 2016 | | | 2015 | | | 2014 | |
| | | | Q2 | | | | Q1 | | | | Q4 | | | | Q3 | | | | Q2 | | | | Q1 | | | | Q4 | | | | Q3 | |
| Total financing spreads | | | 0.64 | % | | | 0.82 | % | | | 0.83 | % | | | 0.66 | % | | | 0.74 | % | | | 1.01 | % | | | 0.98 | % | | | 0.99 | % |
| Impact of yields on other interest-earning assets | | | 0.01 | | | | 0.03 | | | | 0.01 | | | | 0.03 | | | | 0.04 | | | | 0.04 | | | | 0.05 | | | | 0.04 | |
| Impact of borrowing rates on other interest-paying liabilities | | | 0.05 | | | | 0.05 | | | | 0.06 | | | | 0.05 | | | | 0.06 | | | | 0.06 | | | | 0.07 | | | | 0.06 | |
| Financing spreads on residential mortgage investments | | | 0.70 | | | | 0.90 | | | | 0.90 | | | | 0.74 | | | | 0.84 | | | | 1.11 | | | | 1.10 | | | | 1.09 | |
CAPSTEAD MORTGAGE CORPORATION
FAIR VALUE ANALYSIS
(dollars in thousands, unaudited)
| | | June 30, 2016 | | | December 31, 2015 | |
| | | Unpaid Principal Balance | | | Investment Premiums | | | Basis or Notional Amount | | | Fair Value | | | Unrealized Gains (Losses) | | | | Unrealized Gains (Losses) | |
Residential mortgage investments classified as available-for-sale: (a) | | | | | | | | | | | | | | | | | | |
| Fannie Mae/Freddie Mac securities: | | | | | | | | | | | | | | | | | | |
| Current-reset ARMs | | $ | 5,794,727 | | | $ | 171,688 | | | $ | 5,966,415 | | | $ | 6,101,200 | | | $ | 134,785 | | | $ | 161,400 | |
| Longer-to-reset ARMs | | | 4,274,091 | | | | 147,464 | | | | 4,421,555 | | | | 4,454,329 | | | | 32,774 | | | | (5,561 | ) |
| Fixed-rate | | | 13 | | | | – | | | | 13 | | | | 13 | | | | – | | | | 1 | |
| Ginnie Mae securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Current-reset ARMs | | | 1,806,541 | | | | 62,010 | | | | 1,868,551 | | | | 1,877,290 | | | | 8,739 | | | | 6,268 | |
| Longer-to-reset ARMs | | | 1,410,833 | | | | 45,098 | | | | 1,455,931 | | | | 1,463,562 | | | | 7,631 | | | | (7,579 | ) |
| | | $ | 13,286,205 | | | $ | 426,260 | | | $ | 13,712,465 | | | $ | 13,896,394 | | | $ | 183,929 | | | $ | 154,529 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swap agreements: (b) | | | | | | | | | | | | | | | | | | | | | | | | |
| Secured borrowings-related | | | | | | | | | | $ | 8,050,000 | | | $ | (20,939 | ) | | $ | (20,486 | ) | | $ | 6,576 | |
| Unsecured borrowings-related | | | | | | | | | | | 100,000 | | | | (41,040 | ) | | | (41,040 | ) | | | (25,010 | ) |
| (a) | Unrealized gains and losses on residential mortgage securities classified as available-for-sale are recorded as a component of Accumulated other comprehensive income in Stockholders’ equity. Gains or losses are generally recognized in earnings only if sold. Residential mortgage securities classified as held-to-maturity with a cost basis of $2 million and unsecuritized investments in residential mortgage loans with a cost basis of $3 million are not subject to fair value accounting and therefore have been excluded from this analysis. Capstead segregates its residential ARM securities based on the average length of time until the loans underlying each security reset to more current rates. |
| (b) | To help mitigate exposure to higher interest rates, Capstead uses one-month LIBOR-indexed, pay-fixed, receive-variable interest rate swap agreements supplemented with longer-maturity secured borrowings when available at attractive rates and terms. The Company has also entered into $100 million notional amount of swap agreements with terms coinciding with the 20-year variable-rate terms of the Company’s unsecured borrowings. Swap positions are designated as cash flow hedges for accounting purposes and carried on the balance sheet at fair value with related unrealized gains or losses reflected as a component of Accumulated other comprehensive income in Stockholders’ equity. Related hedge ineffectiveness is recognized in Interest expense. |
The following reflects Capstead’s portfolio financing-related swap positions and secured borrowings with remaining maturities of greater than six months, sorted by quarter of swap contract expiration and borrowing maturity. Average combined rates reflect related swap fixed-rate payment requirements and secured borrowing rates and exclude adjustments for hedge ineffectiveness and differences between LIBOR-based variable payments received on these swaps and unhedged borrowing rates.
| Contract Expiration/Borrowing Maturity | | Swap Notional Amounts | | | Longer-Maturity Secured Borrowings | | | Total | | | Average Combined Rates | |
| Third quarter 2016 (expired July 1, 2016) | | $ | 700,000 | | | $ | – | | | $ | 700,000 | | | | 0.56 | % |
| Fourth quarter 2016 | | | 800,000 | | | | – | | | | 800,000 | | | | 0.66 | |
| First quarter 2017 | | | 1,000,000 | | | | 100,000 | | | | 1,100,000 | | | | 0.74 | |
| Second quarter 2017 | | | 900,000 | | | | – | | | | 900,000 | | | | 0.74 | |
| Third quarter 2017 | | | 400,000 | | | | – | | | | 400,000 | | | | 0.74 | |
| Fourth quarter 2017 | | | 1,500,000 | | | | – | | | | 1,500,000 | | | | 0.79 | |
| First quarter 2018 | | | 1,700,000 | | | | – | | | | 1,700,000 | | | | 0.76 | |
| Second quarter 2018 | | | 600,000 | | | | – | | | | 600,000 | | | | 0.79 | |
| Second quarter 2019 | | | 450,000 | | | | – | | | | 450,000 | | | | 0.77 | |
| | | $ | 8,050,000 | | | $ | 100,000 | | | $ | 8,150,000 | | | | | |
After consideration of portfolio financing-related swap positions, Capstead’s residential mortgage investments and related secured borrowings had durations as of June 30, 2016 of approximately 10½ and 8¾ months, respectively, for a net duration gap of approximately 1¾ months. Duration is a measure of market price sensitivity to changes in interest rates. A shorter duration generally indicates less interest rate risk.
CAPSTEAD MORTGAGE CORPORATION
RESIDENTIAL ARM SECURITIES PORTFOLIO STATISTICS
(as of June 30, 2016)
(dollars in thousands, unaudited)
ARM Type | | Amortized Cost Basis (a) | | | Net WAC (b) | | | Fully Indexed WAC (b) | | | Average Net Margins (b) | | | Average Periodic Caps (b) | | | Average Lifetime Caps (b) | | | Months To Roll (c) | |
| Current-reset ARMs: | | | | | | | | | | | | | | | | | | | | | |
| Fannie Mae Agency Securities | | $ | 4,235,884 | | | | 2.55 | % | | | 2.71 | % | | | 1.70 | % | | | 3.25 | % | | | 9.56 | % | | | 5.7 | |
| Freddie Mac Agency Securities | | | 1,730,531 | | | | 2.64 | | | | 2.86 | | | | 1.82 | | | | 2.70 | | | | 9.63 | | | | 6.7 | |
| Ginnie Mae Agency Securities | | | 1,868,551 | | | | 2.32 | | | | 1.98 | | | | 1.51 | | | | 1.06 | | | | 8.33 | | | | 6.6 | |
| Residential mortgage loans | | | 2,123 | | | | 3.82 | | | | 2.68 | | | | 2.07 | | | | 1.65 | | | | 11.09 | | | | 4.9 | |
| (57% of total) | | | 7,837,089 | | | | 2.52 | | | | 2.57 | | | | 1.68 | | | | 2.61 | | | | 9.28 | | | | 6.1 | |
| Longer-to-reset ARMs: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fannie Mae Agency Securities | | | 2,443,884 | | | | 2.75 | | | | 2.86 | | | | 1.63 | | | | 3.42 | | | | 7.76 | | | | 41.7 | |
| Freddie Mac Agency Securities | | | 1,977,671 | | | | 2.74 | | | | 2.88 | | | | 1.67 | | | | 2.72 | | | | 7.82 | | | | 42.9 | |
| Ginnie Mae Agency Securities | | | 1,455,931 | | | | 2.88 | | | | 1.96 | | | | 1.51 | | | | 1.04 | | | | 7.92 | | | | 42.0 | |
| (43% of total) | | | 5,877,486 | | | | 2.78 | | | | 2.65 | | | | 1.61 | | | | 2.59 | | | | 7.82 | | | | 42.2 | |
| | | $ | 13,714,575 | | | | 2.63 | | | | 2.60 | | | | 1.65 | | | | 2.60 | | | | 8.66 | | | | 21.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross WAC (rate paid by borrowers) (d) | | | | | | | 3.22 | | | | | | | | | | | | | | | | | | | | | |
| (a) | Amortized cost basis represents the Company’s investment (unpaid principal balance plus unamortized investment premiums) before unrealized gains and losses. At June 30, 2016, the ratio of amortized cost basis to unpaid principal balance for the Company’s ARM holdings was 103.21. This table excludes $3 million in fixed-rate agency-guaranteed mortgage pass-through securities, residential mortgage loans and private residential mortgage pass-through securities held as collateral for structured financings. |
| (b) | Net WAC, or weighted average coupon, is the weighted average interest rate of the mortgage loans underlying the indicated investments, net of servicing and other fees as of the indicated date. Net WAC is expressed as a percentage calculated on an annualized basis on the unpaid principal balances of the mortgage loans underlying these investments. As such, it is similar to the cash yield on the portfolio which is calculated using amortized cost basis. Fully indexed WAC represents the weighted average coupon upon one or more resets using interest rate indexes and net margins as of the indicated date. Average net margins represent the weighted average levels over the underlying indexes that the portfolio can adjust to upon reset, usually subject to initial, periodic and/or lifetime caps on the amount of such adjustments during any single interest rate adjustment period and over the contractual term of the underlying loans. ARM securities with initial fixed-rate periods of five years or longer typically have either 200 or 500 basis point initial caps with 200 basis point periodic caps. Additionally, certain ARM securities held by the Company are subject only to lifetime caps or are not subject to a cap. For presentation purposes, average periodic caps in the table above reflect initial caps until after an ARM security has reached its initial reset date and lifetime caps, less the current net WAC, for ARM securities subject only to lifetime caps. At quarter-end, 69% of current-reset ARMs were subject to periodic caps averaging 1.74%; 22% were subject to initial caps averaging 3.52%; 8% were subject to lifetime caps averaging 7.44%; and 1% were not subject to a cap. All longer-to-reset ARM securities at June 30, 2016 were subject to initial caps. |
| (c) | Capstead classifies its ARM securities based on the average length of time until the loans underlying each security reset to more current rates (“months-to-roll”) (less than 18 months for “current-reset” ARM securities, and 18 months or greater for “longer-to-reset” ARM securities). After consideration of any applicable initial fixed-rate periods, at June 30, 2016 approximately 89%, 7% and 4% of the Company’s ARM securities were backed by mortgage loans that reset annually, semi-annually and monthly, respectively. Approximately 78% of the Company’s current-reset ARM securities have reached an initial coupon reset date, while none of its longer-to-reset ARM securities have reached an initial coupon reset date. |
| (d) | Gross WAC is the weighted average interest rate of the mortgage loans underlying the indicated investments, including servicing and other fees paid by borrowers, as of the indicated balance sheet date. |
