CMO - Earnings call transcript Q2 2019

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Operator

Good morning, and welcome to the Capstead Second Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded.

I would like to now turn the conference over to Lindsey Crabbe. ahead. go Please

Lindsey Crabbe

you call. Thank Capstead's quarter second Good for conference earnings morning. attending

The yesterday under was and release second earnings quarter issued tab. on website Relations is our July at Investor www.capstead.com the posted XXXX XX,

The in link in Relations replay this of Details section October of of the is yesterday's this website. are archive be and for the XX, available An through Investor our webcast this to webcast release. also a included call replay will XXXX.

Chief and and President Officer; Reinsch, Vice Phil are today and Officer; me Executive Spears, Investment President Officer. President Lance Executive Vice Financial With Robert Senior and Chief Chief Phillips,

the we get Act of Securities and of forward-looking some be Litigation are Before that XXXX considered assumptions certain based management. I of started, statements of pursuant remind Safe and Private you comments the expectations could to Reform today's to on want Provisions Harbor

which refer of website. call assumes business, only update detailed July filings with a made statements with associated of is For our any including SEC, available The during XXXX. obligation of call. XX, this any factors call no list to date to in the this our risk as information forward-looking contained the are on please this current all company the statements, The our

will I it that, turn Phil. With over to

Phil Reinsch

remarks Lindsey. call after the in will Thank the a give then brief you, close we'll quarter Lance questions. few After a and recap of

face volatility. of Our core market earnings well held significant up the in quarter this

XXXX. points As basis in in XX basis year, points XX to so this to the fed as or market much from as now recalibrated expecting XXX basis expecting cut, points cuts rate another

produce the week. at market and if meeting the that of next we our the to by this per the anticipated at quarter. pace take adjusted next, This funds reduces can or second its this one $X.XX sprint, done by and belief increased common the stance our the dividend consecutive strong fed returns rate regardless more XX% For quarterly $X.XX share reflects we fed risk year a earning

fed of by fed considering the outstanding balances, will balances billion in On end. the billion number benefit the with hand represented as of should expected reduced end $X.X our our quarter XX% rate maturing swap funds repo a in that swaps one at by the another market, significantly $X.XX we times year

to us leave rate lower will cuts. of prepayment by This costs plenty resulting effects mortgage higher rates. spurred help for benefits many lower The cost room insulate earnings borrowing activity our with will from borrowing of mortgage pertaining from

fed well lower rate the the expected, through as a we use rate fund cuts fixed year relative three liberal unhedged having rates reasonable pay swaps repo as with effectively should rates. hand, to reduce not other banked feds the the and much remain On managed two at cost,

from margins net more fed. to our hawkish while has interest This insulate threat improved a us helping

Additionally with to market recalibrating expect in higher prepayment mortgage this scenario the pressure should rates. subside

were put book this our the The higher underperform to MBS rising negative of mortgage a to is occurred these in quarter. and on that swap activities declines largely a prior with for This because prepayment. of positions agency decline slight lost in a on our mark-to-market value rates due we expectations basis many these hedging pricing

the benefit not marks will funds has reducing market the these of end fed rate rapidly. These the fed quarter At the relatively book as been valuations the could stable. swaps value, by improve of disappoint book value much negative to terms as more dissipate should expected, over and

call to over the that, Lance. I'll turn With

Lance Phillips

net incurred $XX.X We Phil. you, or quarter this a loss common million share. Thank of $X.XX diluted GAAP per

certain Phil net difference unrealized loss our realized of earnings a other valuation release. our core on X as on earnings swap page per from include common GAAP diluted amounts were between We as reconciliation The Our excluded and our $XX.X these losses as differences well mentioned. primarily portfolio press core $X.XX earnings core million of our and or share. reflects described,

Portfolio reported in yields rates while first on mortgage during averaged of benefited the higher the portfolio Yields of quarter. on reset effect in X from directly yields from we mortgage X.XX% X.XX% the cash increase levels. basis the the our loans acquisitions prepayment points quarter, as absorbing underlying higher, an higher

with relatively increased higher previous quarter. LIBOR. new were prior over portfolio primarily hedging Our interest to were costs at entered swap impacted rates rate higher borrowing XX the from rates in related variable costs into as were matured, receipts due Unhedged months increase was the swaps quarter. borrowing points lower This fixed the and rate swaps declines three unchanged rates negatively by basis

ending $X.XX increased portfolio related $X.XX pricing at quarter, decrease partially a our per during $X.XX hedging reflects by that share was in value The XX% share. per associated only second decline activities the increase offset with common Book changes.

With will that, the questions. up we open call to

Operator

of Please ahead. KBW. [Operator comes Instructions] Hagen Eric question go first The from

Eric Hagen

one, of what prepayment Two do to that Thank expectation? you. speed you Number that slow; prepayment good is the amortization number corresponds which that premium currently when speeds the questions speeds. to expect are morning. amount Thanks, expecting and on slowdown two, you you're booking,

Phil Reinsch

fourth how cutting So we any in then stand we fed would amount will prepays then aggressive and expect decline elevated some are next on rates and the this up is going in remain they assume, year. will to to the of moderation start quarter recede summer and

Eric Hagen

Okay.

Phil Reinsch

actually estimated future guys be do, But life what our we to-date. have portfolio. that not prepayment we some know I but that of for make don't – the made disclosure should our of a disclosure

Eric Hagen

expectation, CPR isn't want second in the you. paid teens, the maybe guide mean that that quarter, be that us Okay, know down but XX can high to. portfolio I the you is sort you is in I that in at something it can has the in that number Thank provide, to you appreciate exact it low mid-XX’s. range something a XX’s, the is to there of an

Phil Reinsch

have the see look you interesting the generically, XX declining market XX or originated in securities earlier factors will ARM are at think ARM gone fourth. if more where from third high down somewhat speed in the right that kick the you I and the teens. may in now where few But token ARM from year that assumptions estimated a resetting mid-XXs would generically, and to Eric, that the speeds have very we last a right gone so time an where you’ve think life the two reset now number to quarter seasoned at up in in longer were securities we have are speed have I Well before the you mid-XX’s, same that now

to on is paper issue at ramping receiving are the [ph] time have bonds, their So expectations the you down. where new are reset going up, starting same convergence life

the to like rates think I back probably natural would So settles mid-XXs upon do, take to somewhere, CPR, think upper-XXs low-XXs that. in, it you to over progression you would context to that know be from in know I depending lower-XXs aggregate what and down all in something time then XX

paid that speed the I projected think we entire ARM of a market. be in ramp a would –

I think at. that's looking kind of what you'd be

Eric Hagen

Okay, of higher ARMs time. you hammer and little to call low-XXs right, a securities, I what at with the go much the you required how okay, it today range, a time But figure point at expecting doesn't then the or you after focus materialize? expectation you know up actually slowdown charge that into slow be what’s speeds would if that catch that, take will is eventually effectively to kind a presumably are because are over maybe the low-XXs back timing on so in in booking want short to yield they'll such we duration should

Phil Reinsch

charge would Well we that’s, and that them I to look answer in know don't necessarily whether as at be a actually speeds that an required. I We we need wouldn't our and speeds, can keep life eye really on we’ll change sharp anticipate have if we that a we would the time adjust catch-up all question, required.

concern on – a we just lower is we've prepayments that doing quarter working discussed process been to know amortization speeds, this portfolio you things but lower to leads to is also time, estimation costs. speeds, to the this that balances large lessen acquisition were of lower improve seasonality, They and our levels last in bit outstanding with also we've we for conservative and the ARMs. impact two relative the I at little quarter part pick-up acquisitions average our a cyclicality in as know of Premium and recent in diverse different different a cohorts. have are While and

Eric Hagen

the understand expectations, bond know Right. relative to needs realizing I on your understand just effective to that, but I like guess place? I'm actually to the around that was amortization take what true-up when and the trying timing you

Phil Reinsch

quarter, every I happening question. get I things, the don't, so of don't true-up It’s the

Eric Hagen

Okay.

Lance Phillips

an make the and but dollar is as that thing bond I prepaid adjustment through do think and book does it’s we amortization through We I one premium our on spend might timing do the say whether every core eventually through earnings not or paid, core earnings. rolls scheduled. actuals Eric come on premium we either catch-ups, is the

to you're but earnings, traditionally know expect we plus and I have cache-up wouldn't So core with I others conservative minus adjust their that or describing. that. be on the catch-up been like continue

whatever be We just earnings. spend – are dollar will amortized we through core premium on

Eric Hagen

curve follow-up. in can rolled. of I rolling aspect the this can swap been that's quarter; but did may replace swaps Okay, swaps? on amortization, the are already $XXX follow-up yeah kind Talk]. along that we you Yeah, well yield the million timing maybe of side, [Cross the we Where on over offline those assume

Phil Reinsch

upon looking whatever, duration replace really at they GAAP. depends don't accomplish many are in or with we the roll-off. necessarily on last every our and swaps We trying as however we months swap to just It we're what put

two have We all putting that etcetera, the lower are in curve. three have but – the looking the to on costs year been at the been we been we’ve potentially swaps of in locking future, part financing staying

gone haven’t the any or most longer for part. shorter any We

a that of whatever, and cheaper thought obviously is the increased fairly a, outstanding obviously wouldn’t at somewhat have if our looking then swaps that And average the upside new liabilities we want then, June time which cuts swap cheaper cut. know as the of that market than look you the you but since does were position we conservative swap our rally pricing if X.XX many yeah at XX% swap a a to fed implied swap so May our and of repo. so, on financing the at still obviously you fed and repo rallied over hedged but around effectively do most it’s through was and rates lot But we than that were and remaining hindsight XX% on, from still coupon markets came was in and our or

and the be less, it simple in point, book be over value swaps do of will could on of assume spreads if we more, hedge, duration, math essentially a will what two a we time kind bonds that half improved year and that's a this Now on value those a our point it and at we swaps the our swaps was the could may monitor a XX% just kind decline had not over quarter little our be mortgage roughly you only about as liabilities because happened widened. of offer and but

Our if margin so hedged, widened math, and spreads XX% of XX liability kind we points basis had to into value numbers. it XX you the roughly book the backs of our

Eric Hagen

of has that two swap Yep, that and this a roughly XXX, a a you had into XXX. know quarter, rate speaking previous that of but confirming swap assume $XXX swap that rate million pay year rolled just pay I the was and XXX, new new

Phil Reinsch

Well, was they what are necessarily swaps saying over maturing. was because I the just think rolling it wouldn't be Robert

We we be. not adding picture swaps, total and may some be are the at may looking we

to enjoy swaps rates, remarks my looking year the I by reduce benefit fewer out with that and that can with more end. in pointed do have think swaps we the I we of maturing fed

Eric Hagen

are Okay, the today? and month guys you where repo one rolling

Phil Reinsch

in recent a think XXX does rolled week, of fed kind the XX that mid-XXX’s, or most that be pricing we new needs that's rolling to with next we the kind so [ph] and week It’s a Well, XXX so stuff if would the moving we’ll repo ago. area. fed in partially these the target of

Eric Hagen

Okay. the you Alright, comments. thank for

Phil Reinsch

Sure.

Operator

from next of Please question Delaney comes ahead. Steve Securities. [Operator go Instructions]. The JMP

Steve Delaney

Hey, Thanks. good everyone. morning

down in sheet. busy balance second pretty quarter You're the sides on there both of the

million we we $X know portfolio at obviously to I'd guess $XX.X closer little looking looking had looking my model is, trying your you of figure pre at to million, up are over model. a at and you had you income shift that like on reported I'm I to sense definitely and million pays interest the our greatest possible. the a and higher $XX to know you and in environment start I'm know you where advantage the know So

certainly thumb CPR of out you morning, maybe Phil, and to like a should to know a up cost a the Is in EPS a you shift that that almost So have in the increase can was you've had throw figure when from $X.XX of of that you we X% on I'm that in us It time? give quantify that made look X% know CPR guys about the comments this would there in didn't CPR at it applicable the where X% you window. hearing you impact rule either a second EPS increase figure, this used kind or down quarter.

Phil Reinsch

we going cyclicality morph But result ARM is we taken the be, the figure, I amortization level with estimate prepays. seasonality don't specific think have of with see, is prepayments to going we are a equation point out because it and the to more prepayments of we in going can of how amortization. to to some it higher the

you you past but could we are as could how also we in argue you with not conservative But amortized. definitely were – know very the being that we're we conservatives, argue

Steve Delaney

you right, terms but volatility, is, seasonality in be. for had up that Eric know of XQ, people kind it quarter-to-quarter Well follow, makes and as our the led in and I, really to story aren’t especially model and moves regardless close you kind you and in know to down that know know crazy might is XQ, you you the rate obviously down just crazy, it it of to it and of know you were, of

I comment. appreciate your But do

you to your are about to are You sort convey for words Phil, in your clearly premium you're opposed trying methodology that earlier volatility put of big smooth is impact trying on hearing you get you will are these to of your quarter-to-quarter saying basis the something, and as a true-up out on – an to response in some CPR I'm my the that I'm if – you annual words, kind that of smoothing and are not quarter-to-quarter. not an

simplistic, I'm up to that So CPR range would those to I is that to like I – the of we to your along midpoint XX% change and what, around sound a just my type more or come XX% or would do that the and curious, at to of be in on think if XX-ish like if that CPR, XX% of need is from CMO? the take low come the modeling probably advice approach just it a going something purpose new be decide something to you the at and to quarterly to coverage lines. And high, pick give analysts that was

Lance Phillips

is fair. Yeah Lance. say Steve, this that’s I would

you a those I we look to similar one of our those move latest think in described you real we because model I that know not hard the news and estimates have described, lifetime as estimate longer with at could estimates on, the In and… we a estimates we couple things horizon ultimately Phil a what times, You are tried careful think to and looking of estimate. lifetime more something generically have

Steve Delaney

it's you I'm quarter-to-quarter, I of use a and helpful want use life I – think long, didn't the I that's as know appreciate lifetime, - to assumption. - but be glad the peers many that you that term because context they is Well, your but can used lifetime

the some because fact me it disclose you concept, on kind used of where don't, Some are but this. guys understand I helps phrase, it that you appreciate that

Phil Reinsch

I will basis that on also be do say a and continue we lifetime regular I are best Phil that's caveat will Steve know challenge, to mentioned, good try ARMs to hopefully it, help we as you estimates use you something those with unique, know a can No, the you and some looked so that. gives but that for purposes. at and modeling to

Steve Delaney

and comments Yeah, repo. for you Robert on your thank

it a sounds know we where know getting mid-XXXs. market your the worth cut, we XX from You are had that relief may but be assumed priced had in fully really already, ago it in days not like some you you –

Robert Spears

[Cross it price anticipated best. Yeah, Talk]. of never it’s kind and They

Steve Delaney

LIBOR the just XXX know work but August-September know oh, with into towards and I all right, and much course. you definitely It of we - XXst. pretty real end, sit will like here there we the that sounds you get the going get is owe it you Yeah, XXX, the it, to going hadn't done timeframe. fed say because we on a market dealers something anything, so anything, the LIBOR prices don't in, are

My last million it’s mind it to I to and that totally have move terminated, going my need just in positive some to that. very for say hedge comfort, you June. $XXX and was support was quarter the EPS, just question the know guys want I swap made in quarter an this dropping core accounting is, a you you I last

like it core you I of EPS, a GAAP anything EPS, GAAP there in Looks different derivative question or your look like you adding there's were – guess like see but know my and reflected the reconciliation three is exactly, in that. in $XX.X doesn't items core then and that the that a million one-timer is it adds is, your is I’d you not you like back already have reconciliation have in something expense that up

Phil Reinsch

of have Well, quarter. portfolio this been book through would realized we We loss through bonds had loss a and unrealized running million did. did an so that value. earnings ran million about that sell Ordinarily $XXX $X.X of we just

out rate. XX realized to with month more lower There terminated swaps XX new term at and them swap $XXX of million month replace early was significantly loss, because swaps we

realized between and relationship the the swap distorted the swaps So result. unrealized that kind of loss

Steve Delaney

add question – guess loss, is, – unrealized it a there add back loss guess, – Phil. for back relate reclassifying I’m honing is The I the on unrealized I you my loss? to realized that XX.X realized million are that’s So is just

Phil Reinsch

terminated Well effectively because you’ve positions. we are, those

those the on loss locked you we’ve hedging that us but in rates then the the as same perspective, effectively position position in the and realized new a So swaps. pay book fixed from puts lower on new came

you our so a months component. was on XX which very we that Now on doing that from went term important those trade, reduced to duration, know XX we actually to swaps

Steve Delaney

refer you and Lance. Okay go – ahead

Lance Phillips

as want we absolutely Phil’s realized earnings. is in GAAP core that to was I correct. just noted in make answer realized sure and

and is and there unrealized to switch I sure between what… So and GAAP between earnings. if want core make you no realized – know swap unrealized that that’s

Phil Reinsch

flows core cash include that swaps Yeah, is when just active running and that were in we gain continues February. the million at the to off there X.X seized hedge accounting the those of swaps, end off positives the

Steve Delaney

Correct, I while, that is quarter that run that off. have each would we that, so remember for a

guys you. comments. If thanks I the anything else going have okay we're Thank through reach model look, So I will for out. the as

Phil Reinsch

You bet.

Operator

question Poggi comes Capital. next from Shoals Our go Gabe of Please ahead.

Gabe Poggi

provide kind point estimated. pays are I guys, that How what’s to taking pre for and guys you the into of about question. the a shape thinking about Erick’s know Hey are Lance adjustment. lifetime guys and assumptions the know appreciate you of are you guys estimated thanks you Steve’s forward going to specifically curve? about going you how mortgage it’s go Can of thinking the what you assumption, forward that talk

we in get continue suit if a flattener guys to points what estimates. those that we gauge XX as and about and trying you. getting I'm next think end probably Thank but is, the about big happens with prepayment And rates the curves follows at get a I'm basis lowering get of just what how conjunction and fed talk week, obviously long you the

Lance Phillips

on or much fixed. a there I three out. prepayments not out different models estimated on there consensus spent Sure, four is and is prepayments we��re far this on speeds our on modeling uniform time there and mean There not as is prepaid is

on are a there you parts and three of So moving lot models. different answers different can get three

than speeds, the the earlier, what's Obviously, the ARMs going at forward kick instance for when curve others. them time. adverse, will up we're those so curve bonds certain said seasoned I we point and in and to And But on models right more long static going now to looking model bonds. at given in to a and on as things, are very

to basis were rate these of are their points last mortgage guys XXX seeing XX from reset year. drop a where they Some

X.X and versus those assumes the speeds where are slower. And take a CPR months because lot bonds you it life Conversely have you now, months new it may a the ago, XX now at been know model six you at ago modeled now. a on it, call if to coupon, they that of and bonds, forwards right at issue might it if it with CPR six XX are XX those [inaudible] look

the what it, at in – when curve our We our we we everything, what and goes potential So really there’s look static know, versus anticipated many into we and at model when point at at you look scenarios it don’t we look forward don't life so are look speeds on out lifetime that’s assumption. that there, we at time, bonds. those but

Gabe Poggi

obviously gauge of XX estimate. guys, a it’s there's specifically of estimate? of there, up lot about because understand really are come the but know months get a that X% or mentioned models they've in of what guys know I'm you, you focused new you with last to just you up to on And that trying at what look – speeds out CPR, Steve few you Hey the the just ramped thinking statics and and conjunction but I

curve forward today now Kind you I basing have that of showing two last a and answer curve. the of change if things correct? taking make that being – quarters flow change depending the that it the with are but that how you and of I things shape you to Is how you I in you that and you and off just the at assume on the kind with the change. mortgage ebb conservative and looking is how guess is what past, of appreciate

Phil Reinsch

have bonds right that we speeds XX and prepaying XX as have models Yeah, CPR are to now and life as at XX. are point at for instance where high a we

point. paying have going XX that so very are bonds right interesting speed now, XX have the and where We pre a have at down life models you

convergence I mean paper reset now and said are I you newer going have we between projected are And months now. speed very ago, to trend speeds whatever kind those, totally you know to go as know different issue, where were basically reset that lower, that’s where the the are are they in six is what so projected kind of now. be higher, seasoned, of six different totally from paper, is, market go right than you post a but longer it's and adjusting and it earlier, life could to months

Gabe Poggi

the Correct so. couple having prepaid me the of or a of last if months seasoned fast in I’m or stuff couple years lot though pretty XX of wrong, last

Phil Reinsch

declined so on for from speeds very drop a seeing up the saying, and they know [Cross seasoned ARMs and lot than cohorts. lot of sped what more aggregate much that’s so ARM was precipitous July seeing right actually increase as have I’m a these rates now cohorts They – declined the paper, its their are yeah, the beyond and you other Their were instance and sped to month. XX% June much X%. life the as you our of would last Yeah, season because Talk] up expected borrowers

to... starting are you So

Gabe Poggi

coming also right. a speeds. was of were they But That really off XX% high decline very prepays, off high

Phil Reinsch

you etcetera, but law, as as Yeah, drop. much land, a it the well CPR X saw on the depends

XX were the were at with XX with prepaying some XX, bonds So seasoned at the XX prepaying bonds on cohorts. that

Gabe Poggi

That’s you. thank helpful. okay, it, Got

Phil Reinsch

Sure.

Operator

Lindsey This the like any turn our Crabbe I remarks. question-and-answer to session. concludes to for over go conference closing ahead. back would Please

Lindsey Crabbe

us joining for today. again Thanks

give speaking further call. you us please forward you to with next look quarter. We If a question have

Capstead Mortgage (CMO) 25 Jul 192019 Q2 Earnings call transcript