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Thu, May 5, 2011
Wed, May 4, 2011

Capstead Mortgage Corporation Announces First Quarter 2011 Results


Published on 2011-05-04 19:41:26 - Market Wire
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DALLAS--([ BUSINESS WIRE ])--Capstead Mortgage Corporation (NYSE: CMO) (aCapsteada or the aCompanya) today reported net income of $34,692,000 or $0.41 per diluted common share for the quarter ended March31, 2011. This compares to net income of $33,027,000 or $0.40 per diluted common share for the quarter ended December31, 2010. The Company paid a first quarter 2011 dividend of $0.41 per common share on April20, 2011.

"We remain confident in and focused on our investment strategy of managing a conservatively 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."

First Quarter Earnings and Related Discussion

Capstead is a self-managed real estate investment trust for federal income tax purposes that invests in a leveraged portfolio of residential adjustable-rate mortgage, or ARM securities, issued and guaranteed by federal government-sponsored enterprises, either Fannie Mae or Freddie Mac (the aGSEsa), or by an agency of the federal government, Ginnie Mae. For the quarter ended March31, 2011, the Company reported a 5% increase in net interest margin on interest-earning assets to $38,741,000 from $36,961,000 for the quarter ended December31, 2010. Net interest margin benefited from acquisitions of agency-guaranteed ARM securities well in excess of portfolio runoff, which led to a substantial increase in portfolio leverage. Total financing spreads averaged 1.62% during the current quarter compared to 1.71% during the fourth quarter of 2010.

Yields on the Companya™s interest-earning assets averaged 2.31% during the first quarter of 2011, a decrease of 13 basis points from yields reported for the fourth quarter of 2010, reflecting lower coupon interest rates on ARM loans underlying the portfolio that reset to more current interest rates, as well as marginally higher mortgage prepayments. Average yields for the current quarter did not fully benefit from higher yielding acquisitions because most of these purchases were made later in the quarter. Total portfolio runoff averaged 19.9% on an annualized basis during the first quarter (a constant prepayment rate, or CPR of 17.4%) compared to 19.4% (a 16.5% CPR) during the fourth quarter of 2010. Monthly annualized runoff rates were 18.3%, 23.6% and 17.7% for January, February and March 2011, respectively.

Interest rates on all interest-bearing liabilities, including the Companya™s long-term unsecured borrowings, averaged 0.69% during the first quarter of 2011, a decrease of 4 basis points from rates incurred during the fourth quarter of 2010, reflecting favorable 30- to 90-day borrowing rates and the expiration of $400million notional amount of higher-rate interest rate swap agreements in late January 2011. The Companya™s repurchase arrangements and similar borrowings at March31, 2011 totaled $9.45billion consisting primarily of 30-day borrowings with 24 counterparties with rates averaging 0.28%, before consideration of interest rate swap agreements held for hedging purposes. At March31, 2011 currently-paying swap positions required paying fixed rates of interest averaging 1.03% on notional amounts totaling $3.50billion and average maturities of 13 months. Additionally, during the first quarter the Company entered into forward-starting swap agreements with notional amounts totaling $600million that will begin requiring interest payments at fixed rates averaging 0.99% in May 2011 and will expire in May 2013. Variable payments based on one- and three-month London Interbank Offered Rate (LIBOR) received by the Company under interest rate swap agreements tend to offset a significant portion of the interest owed on a like amount of the Companya™s borrowings.

During the first quarter of 2011 the Companya™s long-term investment capital, which consists of common and perpetual preferred stockholdersa™ equity and long-term unsecured borrowings (net of related investments in statutory trusts) increased by $67million to $1.19billion, primarily as a result of issuing $60million in new common equity capital and increases in fair value of interest rate swap agreements held for hedging purposes. The Company acquired $2.31billion (principal amount) of agency-guaranteed ARM securities during the first quarter contributing to a 22% increase in the portfolio to $10.43billion. As a result, portfolio leverage (borrowings under repurchase arrangements divided by long-term investment capital) increased to 7.91 to one at March31, 2011 from 6.91 to one at December31, 2010. The following table illustrates the progression of the Companya™s portfolio of mortgage securities and similar investments for the quarter ended March31, 2011 (in thousands):

Mortgage securities and similar investments, beginning of quarter $ 8,515,691
Increase in unrealized gains on securities classified as available-for-sale 1,008
Portfolio acquisitions (principal amount) at average purchased yields of 2.85% 2,308,861
Investment premiums on acquisitions 90,314
Portfolio runoff (principal amount) (475,039)
Investment premium amortization (12,832)
Mortgage securities and similar investments, end of quarter $ 10,428,003
Average mortgage securities and similar investments outstanding during the quarter $ 8,993,926



First Quarter Common Equity Issuances

During the first quarter of 2011 Capstead raised $60million in new common equity capital, after underwriting discounts and offering expenses, by issuing 4.6million common shares at an average price of $12.95 per share, after expenses, through the Companya™s at-the-market, continuous offering program. Subsequent to quarter-end and through the date of this press release, the Company used this program to increase its common equity capital by an additional $30million through the issuance of 2.3million common shares at an average issue price of $12.83, after expenses. Additionally, on April 4, 2011 the Company registered an additional 5million common shares for future issuance under this program. The Company may raise additional capital in future periods using this program or by other means, subject to market conditions and blackout periods associated with the dissemination of earnings and dividend announcements and other important company-specific news.



Book Value per Common Share

Nearly all of Capsteada™s mortgage investments and all of its interest rate swap agreements are reflected at fair value on the Companya™s balance sheet and are therefore included in the calculation of book value per common share. The fair value of these positions is impacted by market conditions, including changes in interest rates, and for mortgage securities, the availability of financing at reasonable rates and leverage levels. The Companya™s investment strategy attempts to mitigate these risks by focusing almost exclusively on investments in agency-guaranteed 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. Because of these characteristics, the fair value of Capsteada™s portfolio is considerably less vulnerable to significant pricing declines caused by credit concerns or rising interest rates compared to portfolios that contain a significant amount of non-agency and/or fixed-rate mortgage securities. The following table illustrates the progression of book value per common share outstanding (calculated assuming liquidation preferences for the Series A and B preferred stock) for the quarter ended March31, 2011:

Book value per common share, beginning of quarter $12.02
Accretion from capital transactions 0.06
Dividend distributions in excess of earnings (0.01)
Increase in fair value of mortgage securities classified
as available-for-sale 0.01
Increase in fair value of interest rate swap agreements
designated as cash flow hedges of:
Repurchase arrangements and similar borrowings 0.05
Unsecured borrowings 0.02
Book value per common share, end of quarter $ 12.15
Increase in book value per common share during the quarter $ 0.13



Management Remarks

Commenting on current operating and market conditions, Andrew F. Jacobs, President and Chief Executive Officer, said, aMarket conditions remain favorable for investing in agency-guaranteed residential ARM securities on a leveraged basis, with attractive risk-adjusted returns achievable in todaya™s stable financing environment. We took advantage of market opportunities this quarter to significantly add to our investment portfolio allowing us to increase our portfolio leverage one full multiple to 7.9 times our long-term investment capital by quarter-end. Additionally, we raised $60million in new common equity capital under our continuous offering program during the quarter, which added $0.06 to our book value per common share. Although mortgage prepayments picked up somewhat in February as a result of buyouts by Freddie Mac of seriously delinquent, lower coupon interest rate mortgage loans that had not been previously repurchased in 2010, prepayments on our seasoned portfolio trended lower in March and April, which should benefit portfolio yields and financing spreads in future quarters.

aWith this quartera™s portfolio growth, we have completed re-leveraging our investment capital, which should benefit financial results in future quarters. In our view, borrowing at current levels represents an appropriate and prudent use of leverage for an agency-guaranteed mortgage securities portfolio in todaya™s market conditions, particularly for a portfolio consisting almost entirely of short-duration ARM securities. Provided capital can continue to be deployed at attractive levels and financing conditions remain favorable, we anticipate maintaining our portfolio leverage near current levels in future quarters. We may continue augmenting our existing capital base through our continuous offering program or by other means if conditions warrant, focusing on transactions that are accretive to our existing common stockholders.

aWe remain confident in and focused on our investment strategy of managing a conservatively 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.a

Earnings Conference Call Details

An earnings conference call and live audio webcast will be hosted Thursday, May5, 2011 at 9:00a.m. ET. The conference call may be accessed by dialing toll free (877)407-8033 in the U.S. and Canada or (201) 689-8033 for international callers. A live audio webcast of the conference call can be accessed via the investor relations section of the Companya™s website at [ www.capstead.com ], and an audio archive of the webcast will be available for approximately 60 days. A replay of the call will be available through June5, 2011 by dialing toll free (877) 660-6853 in the U.S. and Canada or (201)612-7415 for international callers and entering account number 286 and conference ID 371005.

Cautionary Statement Concerning Forward-looking Statements

This document contains aforward-looking statementsa 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 abelieve,a aanticipate,a aexpect,a aestimate,a aintend,a aproject,a awill be,a awill likely continue,a awill likely result,a 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 the GSEs and similar federal government agencies and related guarantees;
  • deterioration in credit quality and ratings of existing or future issuances of GSE or Ginnie Mae securities; 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 and per share amounts)

March 31, 2011 December 31, 2010
(unaudited)
Assets
Mortgage securities and similar investments
($9.94 billion pledged under repurchase arrangements) $ 10,428,003 $ 8,515,691
Cash collateral receivable from interest rate swap counterparties 27,650 35,289
Interest rate swap agreements at fair value 11,851 9,597
Cash and cash equivalents 162,936 359,590
Receivables and other assets 84,670 76,078
Investments in unconsolidated affiliates 3,117 3,117
$10,718,227 $8,999,362
Liabilities
Repurchase arrangements and similar borrowings $ 9,449,490 $7,792,743
Cash collateral payable to interest rate swap counterparties 9,950 9,024
Interest rate swap agreements at fair value 13,212 16,337
Unsecured borrowings 103,095 103,095
Common stock dividend payable 30,798 27,401
Accounts payable and accrued expenses 17,196 23,337
9,623,741 7,971,937
Stockholdersa™ equity
Preferred stock - $0.10 par value; 100,000 shares authorized:
$1.60 Cumulative Preferred Stock, Series A,
187 shares issued and outstanding at

March 31, 2011 and December 31, 2010, respectively

($3,072 aggregate liquidation preference)

2,618 2,620
$1.26 Cumulative Convertible Preferred Stock, Series B,
15,819 shares issued and outstanding at

March 31, 2011 and December 31, 2010

($180,023 aggregate liquidation preference) 176,703 176,703
Common stock - $0.01 par value; 250,000 shares authorized:
74,994 and 70,259 shares issued and outstanding at

March 31, 2011 and December 31, 2010, respectively

750 703
Paid-in capital 1,088,955 1,028,382
Accumulated deficit (354,883) (354,883)
Accumulated other comprehensive income 180,343 173,900
1,094,486 1,027,425
$10,718,227 $8,999,362

Long-term investment capital (Stockholdersa™ equity and Unsecured
borrowings, net of investments in related unconsolidated affiliates) (unaudited)

$ 1,194,464 $1,127,403

Portfolio leverage (Repurchase arrangements and similar borrowings divided
by long-term investment capital) (unaudited)

7.91:1 6.91:1

Book value per common share (based on common shares outstanding and
calculated assuming liquidation preferences for the Series A and B preferred stock)
(unaudited)

$12.15 $12.02



CAPSTEAD MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)

(unaudited)

Quarter Ended

March 31

2011 2010
Interest income:
Mortgage securities and similar investments $ 53,141 $ 60,150
Other 113 92
53,254 60,242
Interest expense:
Repurchase arrangements and similar borrowings (12,322) (13,368)
Unsecured borrowings (2,187) (2,187)
Other (4) a"
(14,513) (15,555)
38,741 44,687
Other revenue (expense):
Miscellaneous other revenue (expense) (218) (205)
Incentive compensation expense (1,233) (1,415)
General and administrative expense (2,663) (2,695)
(4,114) (4,315)
Income before equity in earnings of
unconsolidated affiliates 34,627 40,372
Equity in earnings of unconsolidated affiliates 65 65
Net income $ 34,692 $ 40,437
Net income available to common stockholders:
Net income $ 34,692 $ 40,437
Less cash dividends paid on preferred shares (5,058) (5,058)
$ 29,634 $ 35,379
Net income per common share:
Basic $0.41 $0.51
Diluted 0.41 0.51
Weighted average common shares outstanding:
Basic 71,182 68,990
Diluted 71,557 79,419
Cash dividends declared per share:
Common $0.410 $0.500
Series A Preferred 0.400 0.400
Series B Preferred 0.315 0.315



CAPSTEAD MORTGAGE CORPORATION
FAIR VALUE ANALYSIS
(dollars in thousands, unaudited)

March 31, 2011 December 31, 2010
Principal

Balance

Premiums Basis or

Notional

Amount

Fair

Value

Unrealized Gains

(Losses)

Unrealized Gains

(Losses)

Mortgage securities classified as
available-for-sale: (a) (b)
Agency-guaranteed securities:
Fannie Mae/Freddie Mac:

Current-reset ARMs

$ 7,396,068 $ 164,892 $ 7,560,960 $ 7,719,515 $ 158,555 $ 155,186
Longer-to-reset ARMs 1,627,743 55,442 1,683,185 1,696,829 13,644 17,407
Fixed-rate 154 a" 154 166 12 14
Ginnie Mae:
Current-reset ARMs 460,880 5,812 466,692 475,241 8,549 7,633
Longer-to-reset ARMs 499,728 17,628 517,356 517,978 622 134
$ 9,984,573 $ 243,774 $ 10,228,347 $ 10,409,729 $ 181,382 $ 180,374
Interest rate swap positions (c) $ 4,200,000 $ (1,361) $ (1,039) $ (6,474)

(a)Unrealized gains and losses on mortgage securities classified as available-for-sale are recorded as a component of Accumulated other comprehensive income in Stockholdersa™ equity.Gains or losses are generally recognized in earnings only if sold.Mortgage securities classified as held-to-maturity with a cost basis of $8million and unsecuritized investments in residential mortgage loans with a cost basis of $10million are not subject to mark-to-market accounting and therefore have been excluded from this analysis.
(b)Capstead classifies its ARM securities based on the average length of time until the loans underlying each security reset to more current rates (see page 10 of this release for further information).
(c)The Company uses two-year term, one- and three-month LIBOR-indexed, pay-fixed, receive-variable, interest rate swap agreements (or longer-term committed borrowings, if available at attractive rates and terms), to help mitigate exposure to higher short-term interest rates.Additionally, theCompany has entered into three forward-starting swap agreements with notional amounts totaling $100million and terms coinciding with the variable-rate terms of the Companya™s unsecured borrowings that begin in 2015 and 2016 and end with their maturities in 2035 and 2036.Swap positions are carried on the balance sheet at fair value with related unrealized gains or losses arising while designated as cash flow hedges for accounting purposes reflected as a component of Accumulated other comprehensive income in Stockholdersa™ equity and related hedge ineffectiveness recognized in Interest expense.As of March31, 2011, these swap positions had the following characteristics (in thousands):

Period of

Contract Expiration

Notional

Amount

Average Fixed Rate

Payment Requirement

Fair Value

Unrealized

Gains (Losses)

Contracts hedging short-term interest rates:
Currently-paying contracts:
Second quarter 2011 $ 100,000 1.19% $ (126) $ (110)
Third quarter 2011 400,000 1.33 (1,741) (1,697)
Fourth quarter 2011 900,000 1.15 (4,451) (4,436)
First quarter 2012 800,000 1.10 (4,885) (4,861)
Third quarter 2012 200,000 0.83 (849) (837)
First quarter 2013 1,100,000 0.81 (81) 142
3,500,000 1.03 (12,133) (11,799)
Forward-starting contracts:
Second quarter 2013 600,000 0.99 482 470
$ 4,100,000 $ (11,651) $ (11,329)
Forward-starting contracts hedging borrowing
rates on long-term unsecured borrowings:
2035 and 2036 $ 100,000 4.09 $ 10,290 $ 10,290

After consideration of related swap positions, the Companya™s mortgage investments portfolio and related borrowings under repurchase arrangements had durations of approximately 10 and 6 months, respectively, for a net duration gap of approximately 3 months.Duration is a measure of market price sensitivity to interest rate movements.



CAPSTEAD MORTGAGE CORPORATION
YIELD/COST ANALYSIS
(dollars in thousands, unaudited))

1st Quarter 2011 Average (a)

4th Quarter 2010 Average (a)

Basis

Yield/Cost RunoffBasis Yield/Cost Runoff
Agency-guaranteed securities:
Fannie Mae/Freddie Mac:
Fixed-rate $ 4,890 6.68% 8.9% $ 5,106 6.60% 18.3%
ARMs 8,293,715 2.34 20.5 7,600,085 2.49 19.4
Ginnie Mae ARMs 681,375 2.59 11.8 486,215 2.57 12.7
8,979,980 2.36 19.9 8,091,406 2.50 19.0
Unsecuritized residential mortgage loans:
Fixed-rate 3,433 5.89 6.7 3,491 7.03 6.4
ARMs 7,036 3.36 21.2 7,353 3.79 7.6
10,469 4.19 17.2 10,844 4.83 7.2
Commercial loans a" a" a" 4,339 8.75 100.0
Collateral for structured

financings

3,477 7.65 3.3 3,506 8.07 3.5
8,993,926 2.36 19.9 8,110,095 2.51 19.4
Other interest-earning assets(b) 235,864 0.19 273,016 0.20
9,229,790 2.31 8,383,111 2.44
Secured borrowings based on:
30-day to 90-day interest

rates, as adjusted for

hedging transactions

8,304,926 0.59 7,465,108 0.62
Structured financings 3,477 7.65 3,506 8.07
8,308,403 0.59 7,468,614 0.62
Other interest-paying
liabilities(b) 10,344 0.16 4,323 0.19
Unsecured borrowings(c) 103,095 8.49 103,095 8.49
8,421,842 0.69 7,576,032 0.73
Capital employed/total
financing spread $ 807,948 1.62 $ 807,079 1.71

(a)Basis represents the Companya™s average investment before unrealized gains and losses.Average asset yields, runoff rates, borrowing rates and resulting financing spreads are presented on an annualized basis.
(b)Other interest-earning assets consist of overnight investments and cash collateral receivable from interest rate swap counterparties.Other interest-paying liabilities consist of cash collateral payable to interest rate swap counterparties.
(c)Unsecured borrowings consist of junior subordinated notes with original terms of 30 years that were issued in 2005 and 2006 by Capstead to statutory trusts formed to issue $3million of the trustsa™ common securities to Capstead and to privately place $100million of preferred securities to unrelated third party investors.Capstead reflects its investment in the trusts as unconsolidated affiliates and considers the unsecured borrowings, net of these affiliates, a component of its long-term investment capital.



CAPSTEAD MORTGAGE CORPORATION
RESIDENTIAL ARM SECURITIES PORTFOLIO STATISTICS
(as of March31, 2011)
(dollars in thousands, unaudited))

ARM Type (a)

Basis (b)

Net(b)

WAC (c)

Fully

Indexed(b)

WAC (c)

Average

Net(b)

Margins (c)

Average

Periodic(b)

Caps(c)

Average

Lifetime(b)

Caps (c)

Months

To(b)

Roll (a)

Current-reset ARMs:
Fannie Mae Agency Securities $ 5,695,694 2.75% 2.28% 1.71% 3.45% 10.17% 4.8
Freddie Mac Agency Securities 1,865,266 3.47 2.43 1.89 2.82 10.76 7.0
Ginnie Mae Agency Securities 466,692 2.62 1.78 1.52 1.00 9.80 5.6
Residential mortgage loans 6,711 3.46 2.40 2.05 1.53 11.01 5.0
8,034,363 2.91 2.29 1.74 3.16 10.28 5.3
Longer-to-reset ARMs:
Fannie Mae Agency Securities 1,016,433 3.70 2.54 1.76 4.39 8.89 43.7
Freddie Mac Agency Securities 666,752 4.82 2.56 1.78 4.82 9.91 31.9
Ginnie Mae Agency Securities 517,356 3.65 1.78 1.51 1.03 8.68 46.9
2,200,541 4.02 2.37 1.71 3.73 9.15 40.9
$ 10,234,904 3.15 2.30 1.73 3.28 10.04 12.9

(a)Capstead classifies its ARM securities based on the average length of time until the loans underlying each security reset to more current rates (amonths-to-rolla) (less than 18 months for acurrent-reseta ARM securities, and 18 months or greater for alonger-to-reseta ARM securities).Once an ARM loan reaches its initial reset date, it will reset at least once a year to a margin over a corresponding interest rate index, subject to periodic and lifetime limits or caps.
(b)Basis represents the Companya™s investment (unpaid principal balance plus unamortized investment premium) before unrealized gains and losses.As of March31, 2011, the ratio of basis to related unpaid principal balance for the Companya™s ARM securities was 102.44.This table excludes $5million in fixed-rate Agency Securities, $3million in fixed-rate residential mortgage loans and $3million in private residential mortgage pass-through securities held as collateral for structured financings.
(c)Net WAC, or weighted average coupon, is presented net of servicing and other fees and represents the cash yield inherent in the portfolio as of the indicated date before amortization of investment premiums.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 represents the weighted average level over the underlying indexes that the portfolio can adjust to upon reset, usually subject to initial, periodic and/or lifetime limits, or 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 issued by the GSEs with initial fixed-rate periods of five years or longer typically have 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.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, 71% of current-reset ARMs were subject to periodic caps averaging 1.86%; 9% were subject to initial caps averaging 5.22%; and 20% were subject to lifetime caps, less the current net WAC, averaging 7.23%.All longer-to-reset ARM securities at March 31, 2011 were subject to initial caps.

Contributing Sources