<PAGE>
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
-----
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
- ------
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ______________
COMMISSION FILE NUMBER: 1-8996
CAPSTEAD MORTGAGE CORPORATION
(Exact name of Registrant as specified in its Charter)
MARYLAND 75-2027937
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2711 NORTH HASKELL, DALLAS, TEXAS 75204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 874-2323
The Registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) for Form 10-Q and is therefore filing this Form under the reduced disclosure
format.
Indicate by check mark whether the Registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Common Stock ($0.01 par value) 15,316,786 as of May 8, 1995
================================================================================
<PAGE>
CAPSTEAD MORTGAGE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1995
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheet - March 31, 1995 and December 31, 1994.. 3
Consolidated Statement of Income - Quarter Ended
March 31, 1995 and 1994........................................... 4
Consolidated Statement of Cash Flows - Quarter Ended
March 31, 1995 and 1994........................................... 5
Notes to Consolidated Financial Statements......................... 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 10
ITEM 4. Submission of Matters to a Vote of Security Holders......... 17
PART II. - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K ........................... 17
SIGNATURES.......................................................... 18
</TABLE>
-2-
<PAGE>
PART I. -- FINANCIAL INFORMATION
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MARCH 31, 1995 DECEMBER 31, 1994
--------------- ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Mortgage securities collateral $5,232,210 $5,270,103
Mortgage investments 3,377,449 3,305,984
---------- ----------
8,609,659 8,576,087
Less allowance for possible losses (6,474) (7,354)
---------- ----------
8,603,185 8,568,733
Cash and cash equivalents 27,720 21,741
Prepaids, receivables and other 66,205 70,415
Mortgage servicing rights and excess
servicing receivables 307,829 282,969
---------- ----------
$9,004,939 $8,943,858
========== ==========
LIABILITIES
Collateralized mortgage securities $4,996,129 $5,102,145
Short-term borrowings 3,350,906 3,190,582
Accounts payable and accrued expenses 13,322 11,568
Mortgage servicing acquisitions payable 27,840 75,888
---------- ----------
8,388,197 8,380,183
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock - $0.10 par value;
100,000 shares authorized:
$1.60 Cumulative Preferred Stock,
Series A, 620 and 623 shares
issued and outstanding ($10,168
aggregate liquidation preference) 8,685 8,720
$1.26 Cumulative Convertible
Preferred Stock, Series B, 30,355
and 30,277 shares issued and
outstanding ($345,440 aggregate
liquidation preference) 326,051 324,779
Common stock - $0.01 par value; 100,000
shares authorized; 15,306 and 15,304
shares issued and outstanding 153 153
Paid-in capital 310,801 310,766
Undistributed income (deficit) (2,171) (2,228)
Unrealized loss on debt and equity
securities (26,777) (78,515)
---------- ----------
616,742 563,675
---------- ----------
$9,004,939 $8,943,858
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31
--------------------
1995 1994
--------- ---------
<S> <C> <C>
INTEREST INCOME:
Mortgage securities collateral $ 98,352 $ 81,465
Mortgage investments 53,747 44,269
-------- --------
Total interest income 152,099 125,734
-------- --------
INTEREST AND RELATED EXPENSES:
Collateralized mortgage securities 94,185 77,075
Short-term borrowings 48,214 21,134
Mortgage insurance and other 2,928 3,957
Provision for possible losses 600 500
-------- --------
Total interest and related expenses 145,927 102,666
-------- --------
Net margin on mortgage assets 6,172 23,068
-------- --------
MORTGAGE SERVICING REVENUES:
Servicing fees 14,415 2,336
Other 2,775 121
-------- --------
Total mortgage servicing revenues 17,190 2,457
-------- --------
MORTGAGE SERVICING EXPENSES:
Salaries and related costs 991 288
General, administrative and other 2,478 250
Amortization of mortgage servicing rights and
excess servicing receivables 4,251 737
-------- --------
Total mortgage servicing expenses 7,720 1,275
-------- --------
Net margin on mortgage servicing operations 9,470 1,182
-------- --------
OTHER REVENUES:
Gain on sales 1,300 1,999
CMO administration 983 834
Other 319 227
-------- --------
Total other revenues 2,602 3,060
-------- --------
OTHER EXPENSES:
Salaries and related costs 1,875 2,420
General and administrative 1,003 1,421
-------- --------
Total other expenses 2,878 3,841
-------- --------
NET INCOME $ 15,366 $ 23,469
======== ========
Net income $ 15,366 $ 23,469
Less cash dividends on preferred stock (9,798) (9,680)
-------- --------
Net income available to common stockholders $ 5,568 $ 13,789
======== ========
NET INCOME PER SHARE:
Primary $0.36 $ 0.90
Fully diluted * 0.88
CASH DIVIDENDS PAID PER SHARE:
Common 0.36 0.83
Series A preferred 0.40 0.40
Series B preferred 0.32 0.32
</TABLE>
* FULLY DILUTED EARNINGS PER SHARE IS NOT PRESENTED FOR THE QUARTER ENDED MARCH
31, 1995 BECAUSE THE EFFECT OF CONVERTING POTENTIALLY DILUTIVE SECURITIES IS
ANTIDILUTIVE.
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31
--------------------------
1995 1994
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 15,366 $ 23,469
Noncash items:
Amortization of discount and premium 2,355 1,212
Amortization of mortgage servicing rights and
excess servicing receivables 4,251 737
Depreciation and other amortization 616 412
Provision for possible losses 600 500
Net change in prepaids, receivables, other assets,
accounts payable and accrued expenses 5,485 1,085
Net gain from investing activities (1,300) (1,999)
--------- -----------
Net cash provided by operating activities 27,373 25,416
--------- -----------
INVESTING ACTIVITIES:
Mortgage securities collateral:
Principal collections on collateral 82,949 577,747
Decrease (increase) in accrued interest receivable 998 (4,829)
(Increase) decrease in short-term investments (8,415) 84,103
Purchases of mortgage loans (34,776) (1,075,639)
Purchases of agency securities (131,778) (216,387)
Purchase of equity securities - (3,623)
Purchases of other mortgage securities (75,365) -
Purchases of mortgage servicing rights and excess
servicing receivables (29,111) (59,571)
Principal collections on mortgage investments 82,829 80,544
Proceeds from sales of mortgage assets 100,937 19,396
--------- -----------
Net cash used by investing activities (11,732) (598,259)
--------- -----------
FINANCING ACTIVITIES:
Collateralized mortgage securities:
Issuance of securities - 1,611,841
Principal payments on securities (108,973) (669,487)
Increase in accrued interest payable 1,072 2,206
Capital stock transactions 1,272 1,926
Dividends paid (15,309) (22,317)
(Decrease) increase in mortgage servicing
acquisitions payable (48,048) 36,480
Increase (decrease) in short-term borrowings 160,324 (364,993)
--------- -----------
Net cash (used) provided by financing activities (9,662) 595,656
--------- -----------
Net increase in cash and cash equivalents 5,979 22,813
Cash and cash equivalents at beginning of period 21,741 87,760
--------- -----------
Cash and cash equivalents at end of period $ 27,720 $ 110,573
========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE>
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the quarter ended March 31, 1995 are not
necessarily indicative of the results that may be expected for the calendar year
ending December 31, 1995. For further information refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1994. Certain amounts for
prior periods have been reclassified to conform to the 1995 presentation.
NOTE B - MORTGAGE INVESTMENTS
Mortgage investments and the related average effective interest rates
(calculated excluding unrealized gains and losses) were as follows (dollars in
thousands):
<TABLE>
<CAPTION>
AS OF QUARTER ENDED
MARCH 31 MARCH 31
---------------------- ---------------
1995 1994 1995 1994
---------- ---------- ------- ------
<S> <C> <C> <C> <C>
MORTGAGE LOANS HELD FOR SALE $ 4,833 $ - 9.46% -%
MORTGAGE LOAN PORTFOLIO:
Fixed-rate mortgage loans 5,695 700,780 7.89 6.73
Medium-term mortgage loans 2,991 71,718 7.93 6.51
Adjustable-rate mortgage loans 265 143,155 6.11 4.48
AAA-RATED PRIVATE MORTGAGE PASS-
THROUGH SECURITIES PORTFOLIO:
Fixed-rate mortgage securities 1,914 - 8.58 -
Medium-term mortgage securities 467,562 414,467 6.97 6.89
Adjustable-rate mortgage securities 882,633 457,395 6.48 5.18
AGENCY SECURITIES PORTFOLIO:
Fixed-rate mortgage securities 503,011 504,453 6.35 6.44
Adjustable-rate mortgage securities 1,142,001 114,714 5.67 3.97
Notes 366,544 - 6.90 -
---------- ---------- ---- ----
$3,377,449 $2,406,682 6.33% 6.37%
========== ========== ==== ====
</TABLE>
The Company classifies its mortgage investments by term and interest rate
characteristics of the underlying mortgage loans. Fixed-rate mortgage
investments (i) have fixed rates of interest for their entire terms, or (ii)
have an initial fixed rate period of ten years after origination and then adjust
annually based on a specified margin over 1-year United States Treasury
Securities ("1-year Treasuries"). Medium-term mortgage investments (i) have an
initial fixed-rate period of three or five years after origination and then
adjust annually based on a specified margin over 1-year Treasuries or (ii) have
initial interest rates that adjust one time, approximately five years following
origination of the mortgage loan, based on a specified margin over the Federal
National Mortgage Association ("FNMA") yields for 30-year
-6-
<PAGE>
fixed-rate commitments at the time of adjustment. Adjustable-rate mortgage
investments either (i) adjust semiannually based on a specified margin over the
6-month London Interbank Offered Rate ("LIBOR"), or (ii) adjust annually based
on a specified margin over 1-year Treasuries. Fixed-rate and adjustable-rate
mortgage agency securities consist of mortgage-backed securities issued by
government-sponsored entities, either the Federal Home Loan Mortgage Corporation
("FHLMC"), FNMA or the Government National Mortgage Association ("GNMA"). Agency
notes are unsecured, fixed-rate notes issued by FNMA, FHLMC, or the Federal Home
Loan Bank Board ("FHLBB") and mature in 1997. Some agency notes may be redeemed
earlier by FNMA, FHLMC or FHLBB.
At March 31, 1995 the AAA-rated private mortgage pass-through securities
("Mortgage Pass-Throughs") and the agency securities were pledged to secure
short-term borrowings.
NOTE C - NET INTEREST INCOME ANALYSIS
The following table summarizes interest income and interest expense and average
effective interest rates for the quarter ended March 31, 1995 compared to the
same period in 1994 (dollars in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31
--------------------------------------
1995 1994
------------------ ------------------
AMOUNT AVERAGE AMOUNT AVERAGE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income:
Mortgage securities collateral $ 98,352 7.57% $ 81,465 7.89%
Mortgage investments 53,747 6.33 44,269 6.37
-------- --------
Total interest income 152,099 125,734
-------- --------
Interest expense:
Collateralized mortgage securities 94,185 7.57 77,075 7.66
Short-term borrowings 48,214 5.96 21,134 3.63
-------- --------
Total interest expense 142,399 98,209
-------- --------
Net interest $ 9,700 $ 27,525
======== ========
</TABLE>
The following table summarizes changes in interest income and interest expense
due to changes in effective interest rates versus changes in volume for the
quarter ended March 31, 1995 compared to the same period in 1994 (in thousands):
<TABLE>
<CAPTION>
RATE* VOLUME* TOTAL
--------- ------- ---------
<S> <C> <C> <C>
Interest income:
Mortgage securities collateral $ (3,455) $20,342 $ 16,887
Mortgage investments (287) 9,765 9,478
-------- ------- --------
Total interest income (3,742) 30,107 26,365
-------- ------- --------
Interest expense:
Collateralized mortgage securities (977) 18,087 17,110
Short-term borrowings 16,864 10,216 27,080
-------- ------- --------
Total interest expense 15,887 28,303 44,190
-------- ------- --------
Net interest $(19,629) $ 1,804 $(17,825)
======== ======= ========
</TABLE>
* THE CHANGE IN INTEREST DUE TO BOTH VOLUME AND RATE HAS BEEN ALLOCATED TO
VOLUME AND RATE CHANGES IN PROPORTION TO THE RELATIONSHIP OF THE ABSOLUTE
DOLLAR AMOUNTS OF THE CHANGE IN EACH.
NOTE D - DISCLOSURES REGARDING FAIR VALUES OF DEBT AND EQUITY SECURITIES
The estimated fair values of debt and equity securities have been determined
using available market information and appropriate valuation methodologies.
However, considerable judgment is required in interpreting market data to
develop these estimates. In addition, fair values fluctuate on a daily basis.
Accordingly, the estimates presented herein are not necessarily indicative of
-7-
<PAGE>
the amounts that could be realized in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair values.
The following tables summarize available-for-sale and held-to-maturity debt and
equity securities as of March 31, 1995 and December 31, 1994 (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1995: AVAILABLE-FOR-SALE DEBT AND EQUITY SECURITIES
---------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Debt securities:
Mortgage Pass-Throughs:
Fixed-rate mortgage
securities $ 1,896 $ 18 $ - $ 1,914
Medium-term mortgage
securities 30,302 - 8,906 21,396
Adjustable-rate mortgage
securities 887,254 - 4,621 882,633
Agency securities:
Adjustable-rate mortgage
securities 1,155,840 - 13,839 1,142,001
Notes 32,548 289 - 32,837
Other mortgage securities 85,095 1,710 1,190 85,615
---------- ------ -------- ----------
Total debt securities 2,192,935 2,017 28,267 2,166,396
Equity securities 1,113 - 238 875
---------- ------ -------- ----------
$2,194,048 $2,017 $ 28,794 $2,167,271
========== ====== ======== ==========
HELD-TO-MATURITY DEBT SECURITIES
---------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- -------
Medium-term Mortgage Pass-
Throughs $ 446,166 $ - $ 354 $ 445,812
Agency securities:
Fixed-rate mortgage securities 503,011 - 44,065 458,946
Notes 333,707 - 2,286 331,421
Mortgage securities collateral 5,146,595 5,439 59,634 5,092,400
---------- ------ -------- ----------
$6,429,479 $5,439 $106,339 $6,328,579
========== ====== ======== ==========
DECEMBER 31, 1994: AVAILABLE-FOR-SALE DEBT AND EQUITY SECURITIES
---------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- --------
Debt securities:
Mortgage Pass-Throughs:
Fixed-rate mortgage
securities $ 427 $ - $ 18 $ 409
Medium-term mortgage
securities 9,054 - 9,054 -
Adjustable-rate mortgage
securities 780,224 - 24,601 755,623
Adjustable-rate mortgage
agency securities 1,088,252 - 45,391 1,042,861
Other mortgage securities 10,369 1,734 810 11,293
---------- ------ -------- ----------
Total debt securities 1,888,326 1,734 79,874 1,810,186
Equity securities 1,113 - 375 738
---------- ------ -------- ----------
$1,889,439 $1,734 $ 80,249 $1,810,924
========== ====== ======== ==========
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
HELD-TO-MATURITY DEBT SECURITIES
--------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Medium-term mortgage
Pass-Throughs $ 459,874 $ - $ 12,342 $ 447,532
Agency securities:
Fixed-rate mortgage securities 504,023 - 62,586 441,437
Notes 333,687 - 9,690 323,997
Mortgage securities collateral 5,258,810 7,159 61,700 5,204,269
---------- ------ -------- ----------
$6,556,394 $7,159 $146,318 $6,417,235
========== ====== ======== ==========
</TABLE>
The fair value of debt and equity securities was estimated using either (i)
quoted market prices when available, including quotes made by lenders in
connection with designating collateral for repurchase arrangements, (ii) offer
prices by the Company for similar mortgage assets, or (iii) expected
securitization results. Mortgage securities collateral has been permanently
financed through the issuance of collateralized mortgage securities and, as a
result, the exposure to changes in the fair value of the underlying assets (and
liabilities) is limited. For this reason, the table above presents the fair
value of the net projected cash flows of the mortgage securities collateral
after payments on the related collateralized mortgage securities discounted at
market rates and prepayment assumptions.
The maturity of the Company's mortgage assets is directly affected by the rate
of principal prepayments by mortgagors and redemptions by issuers, including the
Company, of remaining debt securities outstanding (referred to as "clean-up
calls"). As a result, the actual maturity of the Company's mortgage assets
usually occurs well in advance of stated maturities. The Company anticipates
that through prepayments and exercising clean-up calls, a significant portion of
its higher cost collateralized mortgage securities will be retired within the
next several years and a residual amount of high coupon mortgage securities
collateral will be released and can be sold or continued to be held as
investments. Included in mortgage securities collateral is $3,697,000 and
$4,646,000 of collateral released from the related indentures as of March 31,
1995 and December 31, 1994, respectively. During the three months ended March
31, 1995, $35,893,000 of mortgage securities collateral previously released from
the related indentures pursuant to clean-up calls was sold at gross realized
gains aggregating $966,000. Similar sales aggregating $17,397,000, which
resulted in gross realized gains of $1,999,000, occurred during the quarter
ended March 31, 1994. No other sales of debt or equity securities occurred
during these periods. Net adjustments to unrealized holding gains (losses) on
available-for-sale securities included as a separate component of stockholders'
equity totaled $51,738,000 and ($4,006,000) during the quarters ended March 31,
1995 and 1994, respectively.
-9-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
- -------------------
Purchase and commitment volumes have fallen significantly from previous year
levels due to the increase in mortgage interest rates in 1994 and corresponding
declines in mortgage loan originations. Although mortgage interest rates have
declined since early February 1995, origination levels have not yet increased
appreciably. As a result the Company purchased only 133 mortgage loans totaling
$35 million during the quarter ended March 31, 1995 compared to purchases of
3,632 mortgage loans totaling $1.1 billion during the same period in 1994.
Purchases for the fourth quarter of 1994 were 429 mortgage loans totaling $104
million.
To meet the challenges of a smaller mortgage loan origination market in 1995,
the Company has implemented a strategy of selling individual mortgage loans to
private investors shortly after the commitment to purchase, instead of
accumulating $100 million or more of similar mortgage loans for an efficient
securitization (typically a publicly offered collateralized mortgage obligation
or "CMO"). This strategy allows the Company to offer more competitive pricing
and reduces market risk associated with accumulating and securitizing jumbo
mortgage loans. During the quarter ended March 31, 1995, $64 million of
mortgage loans were sold. These sales, together with the formation of $160
million of AAA-rated private mortgage pass-through securities ("Mortgage Pass-
Throughs") and low purchase volume, has substantially reduced holdings of
mortgage loans.
Of the $160 million of Mortgage Pass-Throughs formed during the quarter ended
March 31, 1995, $137 million were backed by adjustable-rate mortgage ("ARM")
loans. In addition to reducing exposure to fraud and credit risk, a primary
benefit of pooling mortgage loans into Mortgage Pass-Throughs is the improved
liquidity of AAA-rated securities over that of individual loans. As a result,
when securing short-term borrowings, the Company is able to negotiate more
favorable terms. The Company plans to continue to retain a large portfolio of
primarily ARM Mortgage Pass-Throughs.
The Company increased its ARM investments to over $2 billion at March 31, 1995
by purchasing $100 million of ARM agency securities. The Company also added
approximately $32 million of fixed-rate unsecured agency notes to its portfolio
of fixed-rate agency securities.
During the quarter ended March 31, 1995, the Company did not issue any CMOs;
however, the Company did acquire approximately $75 million of FNMA trust
interest-only securities thus increasing the CMO investment portfolio to
approximately $236 million at March 31, 1995, compared to a portfolio of
approximately $168 million at December 31, 1994 and $135 million at March 31,
1994.
The mortgage servicing portfolio (excluding pending transfers) increased during
the quarter to $19.2 billion with a weighted average interest rate of 7.24% and
earning an average annual service fee excluding ancillary revenue and earnings
on escrows (the "Average Service Fee") of 30.74 basis points. The March 31,
1995 balance of mortgage servicing rights and excess servicing receivables
("servicing assets") related to this portfolio was approximately $279 million
(145 basis points, or a 4.72 multiple of the Average Service Fee). Annualized
portfolio runoff, consisting of prepayments and scheduled payments on mortgage
loans serviced, was a low 6.15% for the quarter, due to the low weighted average
interest rate of the mortgage servicing portfolio
-10-
<PAGE>
compared to prevailing mortgage interest rates. In addition, pending transfers
as of quarter-end totaled another $1.8 billion of mortgage servicing with a
weighted average interest rate of 7.69% and earning an Average Service Fee of
29.9 basis points. At an average cost of 160.9 basis points, these servicing
assets are being acquired at a 5.4 multiple of the Average Service Fee. The
Company should end the second quarter of 1995 with a mortgage servicing
portfolio of nearly $21 billion. The Company currently plans to grow the
mortgage servicing portfolio to more than $25 billion by the end of 1995.
The following table summarizes the Company's utilization of capital as of March
31, 1995 (in thousands):
<TABLE>
<CAPTION>
CAPITAL
ASSETS BORROWINGS EMPLOYED
---------- -------------- --------
<S> <C> <C> <C>
Mortgage loans held for sale $ 4,833 $ - $ 4,833
Mortgage loan portfolio:
Fixed-rate mortgage loans 5,695 - 5,695
Medium-term mortgage loans 2,991 - 2,991
Adjustable-rate mortgage loans 265 - 265
Mortgage Pass-Through portfolio:
Fixed-rate mortgage securities 1,914 1,843 71
Medium-term mortgage securities 467,562 444,176 23,386
Adjustable-rate mortgage securities 882,633 847,270 35,363
Agency securities portfolio:
Fixed-rate mortgage securities 503,011 454,055 48,956
Adjustable-rate mortgage securities 1,142,290 1,117,846 24,444
Notes 366,255 366,088 167
CMO investment portfolio 5,232,210 5,115,757/(A)/ 116,453
Mortgage servicing rights and excess
servicing receivables 307,829 27,840/(B)/ 279,989
---------- ---------- --------
$8,917,488 $8,374,875 542,613
========== ==========
Other assets, net of other liabilities 74,129
--------
Total stockholders' equity $616,742
========
</TABLE>
(A) INCLUDES APPROXIMATELY $120 MILLION OF RELATED SHORT-TERM BORROWINGS.
(B) REPRESENTS AMOUNTS OWED UNDER CONTRACTS FOR BULK PURCHASES OF MORTGAGE
SERVICING RIGHTS AND EXCESS SERVICING RECEIVABLES.
A significant impact of the rise in mortgage interest rates in 1994 was a
corresponding decline in value of most of the Company's mortgage assets
(excluding servicing rights). The decline in intermediate- and long-term
interest rates since early February 1995 has restored much of the value to these
assets. The effect is most apparent on the $2.2 billion of mortgage assets and
equity securities held-available-for-sale at March 31, 1995 where the unrealized
loss declined to $26.8 million compared to $78.5 million at December 31, 1995.
These losses will only be realized if the related assets are sold. The Company
has no interest in selling these assets under current market conditions.
Changes in value and ongoing market value risk associated with remaining
mortgage securities will not have a direct impact on the earnings of the Company
as these assets are classified as held-to-maturity and can only be sold under
very limited circumstances.
-11-
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
Comparative net operating results (interest income or fee revenues, net of
related interest expense or direct operating costs), by source, were as follows
(in thousands, except percentages and per share amounts):
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31
-----------------------
1995 1994
------- -------
<S> <C> <C>
Mortgage loans $ 715 $13,570
Mortgage Pass-Throughs 1,525 4,777
Agency securities 2,925 3,889
CMO investments 1,607 1,332
Mortgage servicing 9,470 1,182
Gain from sales 1,300 1,999
CMO administration 983 834
Other income 319 227
------- -------
Contribution to income 18,844 27,810
Provision for possible losses 600 500
General and administrative expenses 2,878 3,841
------- -------
Net income $15,366 $23,469
======= =======
Net income per share:
Primary $0.36 $ 0.90
Fully diluted * 0.88
Return on average stockholders' equity 9.54% 14.60%
</TABLE>
* FULLY DILUTED EARNINGS PER SHARE IS NOT PRESENTED FOR THE QUARTER ENDED MARCH
31, 1995 BECAUSE THE EFFECT OF CONVERTING POTENTIALLY DILUTIVE SECURITIES IS
ANTIDILUTIVE.
Operating results for the quarter ended March 31, 1995 declined nearly 35% from
those achieved in the first quarter of 1994 and over 22% from the $19,813,000
earned the fourth quarter of 1994. The Federal Reserve, in a series of moves
beginning February 4, 1994, raised short-term interest rates 3 percentage
points, including a 3/4 of 1% increase in November 1994 and another 1/2 of 1% in
February 1995. These increases resulted in corresponding increases in the
Company's borrowing costs which had the effect of substantially reducing the
Company's net interest spread on mortgage investments. However, since February
1995, intermediate- and long-term interest rates have declined considerably in
response to a spate of economic indicators suggesting a slowing of the U.S.
economy. While this significant decrease in rates has not effected the
Company's borrowing costs, there is a growing consensus that the economic
slowdown may be sufficient to convince the Federal Reserve not to increase
short-term interest rates further this business cycle. Should the Company's
borrowing costs remain stable, the net interest spread on mortgage investments
will widen as interest rates on ARM investments adjust higher (see "Effects of
Interest Rate Changes").
The net interest spread earned from mortgage loans contributed significantly
less to current quarter net operating results than in the first quarter of 1994
due primarily to significantly lower average holdings of mortgage loans during
the current period. Average holdings in the current quarter were $154 million,
compared to the $1.4 billion held during the same quarter of 1994. Lower
mortgage loan purchase volume, particularly in the latter part of 1994 and in
the current quarter, along with 1994 CMO issuances, the formation of Mortgage
Pass-Throughs and $64 million of sales in the current quarter have substantially
reduced holdings of mortgage loans. This reflects the Company's current
position of significantly reducing market risk associated with
-12-
<PAGE>
aggregating and securitizing jumbo mortgage loans (see the discussion above
under "Financial Condition"). Higher short-term borrowing costs were also a
factor in lower current quarter earnings with an average cost of 6.46% in the
current quarter compared to 3.91% in the first quarter of 1994.
Mortgage Pass-Throughs contributed less to current quarter net operating results
compared to the same period in 1994 primarily due to higher borrowing costs
offset somewhat by higher yields and a higher average portfolio outstanding.
Borrowing costs for this portfolio averaged 6.21% for the quarter ended March
31, 1995, compared to 3.59% for the same period in 1994. Mortgage Pass-Through
yields were higher at 6.66% for the quarter ended March 31, 1995, compared to
5.95% for the same period in 1994 due primarily to the rise in ARM Mortgage
Pass-Through yields as the underlying ARM loans reset periodically (see "Effects
of Interest Rate Changes"). The average portfolio outstanding was nearly $1.3
billion for the quarter ended March 31, 1995, compared to $891 million for the
same period in 1994. The increase was the result of the formation of nearly $1
billion of Mortgage Pass-Throughs since April 1, 1994, offset by portfolio
runoff and a $350 million CMO issuance late 1994 that was secured largely by
fixed-rate Mortgage Pass-Throughs.
Agency securities contributed less to current quarter net operating results
compared to the same period in 1994 despite a sizable increase in average
portfolio outstanding due to lower agency security yields (6.07% in the current
quarter compared to 6.44% in the same quarter of the prior year) and higher
short-term borrowing costs (5.81% in the current quarter compared to 3.08% in
the same quarter of the prior year). Lower yields were due to investments made
mid-1994 in newly issued ARM securities that had not yet reset to a fully-
indexed rate (either the 1-year treasury rate or 6-month LIBOR, i.e. "teaser-
rate ARM securities"). These teaser-rate ARM securities produced an average
yield of 5.49% during the quarter, 51 basis points less than related borrowing
costs. This negative spread reflects the rapid rise in short-term interest
rates late in 1994 well in excess of upward adjustments in the interest rates on
ARM securities. Yields on these securities improved 50 basis points during the
current quarter and are expected to continue to improve in future quarters (see
"Effects of Interest Rate Changes"). The average agency securities portfolio
outstanding was nearly $2.0 billion for the quarter ended March 31, 1995,
compared to $455 million for the same period in 1994. The increase was the
result of the acquisition of nearly $1.2 billion of ARM securities and $366
million of fixed-rate unsecured agency notes since April 1, 1994.
CMO investments contributed more to net operating results during the quarter
ended March 31, 1995 than in the same period in 1994 primarily due to the
acquisition in the current quarter of approximately $75 million of FNMA trust
interest-only securities. Additionally, prepayments on mortgage securities
collateral were still relatively high in the first quarter of 1994 due to
refinancing activity. During the quarter ended March 31, 1995, the Company
received principal collections on mortgage securities collateral totaling $83
million, compared to $578 million of runoff in the same period in 1994. Lower
levels of prepayments has the effect of lowering amortization of bond discounts
and improving operating results.
The mortgage servicing operation continues grow. The first quarter of 1994 was
the first profitable quarter for mortgage servicing since commencing operations
in March 1993. Revenues have increased to over $17 million in the current
quarter compared to approximately $2.5 million the first quarter of 1994.
Direct operating costs have also increased, but not to the same extent as
revenues, which is reflective of efficiencies being gained in the servicing
process as the servicing portfolio continues to grow. Amortization of
-13-
<PAGE>
servicing assets amounted to $4.3 million during the current quarter,
representing an annual rate consistent with portfolio runoff.
During the quarter ended March 31, 1995, the Company sold $36 million of
mortgage securities collateral previously released from CMOs pursuant to "clean-
up calls" and $64 million of mortgage loans either acquired during the quarter
or previously held in the mortgage loan portfolio recognizing gains aggregating
$1.3 million. During the quarter ended March 31, 1994, the Company sold $17
million of released mortgage securities collateral recognizing gains aggregating
$2.0 million.
General and administrative expenses were lower for the first quarter of 1995
compared to the same period in 1994 primarily due to lower bonus and incentive
compensation accruals and more precise allocations of costs to the mortgage
servicing operation.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary sources of funds include monthly principal and interest
payments on mortgage loans and mortgage securities, short-term borrowings,
excess cash flows on issued CMOs, proceeds from securitizations and sales of
mortgage assets, servicing fees and other revenue from its mortgage servicing
portfolio, and equity offerings when available. The Company currently believes
that these funds are sufficient for the acquisition of additional mortgage loans
and other mortgage assets, repayments on short-term borrowings, growth of the
mortgage servicing portfolio and the payment of cash dividends as required for
Capstead's continued qualification as a Real Estate Investment Trust ("REIT").
It is the Company's policy to remain strongly capitalized and conservatively
leveraged.
During the first quarter, the Company began selling its mortgage loan
acquisitions directly to private investors in increments of up to $10 million
rather than accumulating the $100 million or more in mortgage loans necessary to
efficiently issue CMOs. Additionally, the Company may, from time to time, sell
a portion of its investments in other mortgage assets classified as available-
for-sale. Such sales may be accomplished by issuing publicly-offered, multi-
class Mortgage Pass-Through certificates ("MPCs"). This sale activity may
increase quarterly income volatility because of the recognition of transactional
gains or losses. Sales in the current quarter were limited to reducing holdings
of mortgage loans and collateral released from CMOs pursuant to clean-up calls.
Short-term borrowings are primarily made under repurchase arrangements. At
March 31, 1995 the Company had uncommitted repurchase facilities with investment
banking firms of approximately $5 billion to finance the mortgage loan holdings
and the Mortgage Pass-Through portfolio, subject to certain conditions.
Interest rates on borrowings under these facilities are based on overnight to
30-day London Interbank Offered Rate ("LIBOR") rates. The Company also enters
into repurchase and dollar repurchase arrangements with investment banking firms
to whom the Company pledges agency securities and other mortgage assets as
collateral. The terms and conditions of these arrangements, including interest
rates, are negotiated on a transaction-by-transaction basis. Other short-term
financing arrangements that the Company may use include entering into repurchase
transactions prior to the issuance of CMOs or MPCs whereby the Company may
pledge the mortgage assets that are expected to secure the issuance as
collateral for a repurchase transaction with the managing underwriter of the
related issuance.
-14-
<PAGE>
At March 31, 1995 the Company had available a $200 million line of credit with
an investment banking firm to be secured by servicing assets, $120 million of
which is committed. Advances have separate maturities and rates of interest
with interest due monthly. Interest rates on advances under this facility are
based on LIBOR rates related to the term of the advance.
EFFECTS OF INTEREST RATE CHANGES
Changes in interest rates may impact the Company's earnings in various ways.
The Company's earnings depend, in part, on the difference between the interest
received on mortgage investments and the interest paid on related short-term
borrowings (primarily repurchase arrangements). The resulting spread may be
reduced in a rising interest rate environment. For ARM loans the risk of rising
short-term interest rates is offset to some extent by increases in the rates of
interest earned on these loans. Since ARM loans generally limit the amount of
such increase during any single interest rate adjustment period and over the
life of the loan, the interest rates on the repurchase arrangements can rise to
levels that may exceed the interest rates on the underlying ARM loans resulting
in a negative interest spread. This occurred in late 1994 on many of the
Company's ARM investments. The Company expects that once interest rates
stabilize or decline these spreads will recover. Rising interest rates may not
only reduce interest spreads, but also the volume of mortgage loan purchases
through our conduit operations as mortgage loan origination activity slows,
which may result in lower average mortgage loan holdings during these periods.
In addition, earnings are impacted if long-term interest rates change during the
period after the Company has committed to purchase fixed-rate mortgage loans but
before these loans have been pledged to secure CMOs and MPCs or otherwise
committed for sale. If long-term interest rates increase during this period,
the interest payable on the CMOs issued will increase while the yield on the
underlying mortgage loans pledged to collateralize the CMOs will not change; as
a consequence, the interest spread on the CMO will be lower. Conversely, if
long-term interest rates decrease during this period, the interest payable on
the CMO issued will decrease, while the yield on the underlying mortgage loans
pledged to collateralize the CMO will not change; as a consequence, the interest
spread on the CMO will be higher. Similarly, proceeds received on the issuance
of MPCs and other sales, and related gains or losses, will be negatively
impacted by an increase in long-term interest rates during this period due to
the resulting decline in market value of the related collateral. Conversely,
these transactional gains or losses will be favorably impacted by a decrease in
long-term interest rates during this period.
The Company historically has attempted to manage its exposure to long-term
interest rate changes in part by pricing CMO and MPC issuances prior to the
purchase of, but subsequent to the commitment to purchase, all of the mortgage
loans that will collateralize the issuances or from time to time, entering into
forward sale agreements for hedging purposes. Beginning in 1995 the Company
shortened the holding period for mortgage loan acquisitions to usually about a
week, in an effort to eliminate the market risk associated with aggregating and
securitizing mortgage loans.
Changes in interest rates also impact earnings recognized from the CMO
investment portfolio, which consists of fixed-rate CMO residuals and interest-
only and principal-only securities. The amount of income that may be generated
from the typical CMO residual is dependent upon the rate of principal
prepayments on the underlying mortgage collateral. If mortgage interest rates
fall significantly below the interest rate on the collateral,
-15-
<PAGE>
principal prepayments will increase, reducing or even eliminating the overall
return on the investment in the CMO residual. This is due primarily to the
acceleration of the amortization of bond discounts, a noncash item, as bond
classes are repaid more rapidly than originally anticipated. Conversely, if
mortgage interest rates rise significantly above the interest rate on the
collateral, principal prepayments will typically diminish, resulting in a
greater overall return on the investment in the fixed-rate CMO residual because
of an increase in the period of time over which the Company receives the larger
positive interest spread. During periods of increasing interest rates, the
Company's volume of mortgage loan acquisitions generally will diminish due,
among other things, to decreased refinancing activity.
Similarly, in a falling interest rate environment, prepayments on the mortgage
collateral underlying investments in interest-only securities generally will be
high and the Company could incur losses on these securities. Conversely, in
periods of rising interest rates, interest-only securities will tend to perform
favorably because the underlying mortgage collateral will generally prepay at
slower rates. Principal-only securities react differently to changes in
interest rates. Lower interest rates result in the recovery of these
investments more rapidly thus increasing yields. During periods of rising
rates, it takes longer for the Company to recover its investments thus lowering
yields. Principal-only securities retained by the Company generally represent a
much smaller investment than interest-only investments.
Another effect of changes in interest rates is that when interest rates
decrease, the rate of prepayment of mortgage loans generally increases. To the
extent the proceeds of prepayments on the mortgage investment portfolios cannot
be reinvested at a rate of interest at least equal to the rate previously earned
on such investments, earnings may be adversely affected. In addition, the rates
of interest earned on ARM loans generally will decline during periods of falling
interest rates.
The above discussion regarding how changes in interest rates impact investments
in mortgage assets also applies to the Company's growing investment in mortgage
servicing rights and excess servicing receivables. When interest rates rise,
mortgage servicing rights and excess servicing receivables become more valuable
since the average lives of the related mortgage loans will tend to be longer and
earnings from large, temporarily held cash balances will be greater.
Conversely, lower interest rates will spur prepayments thus reducing the period
of time the Company can service the related loans. Because the Company began
mortgage servicing in 1993, exposure to lower interest rates is less than for
other servicers that acquired servicing portfolios in previous years when
interest rates were substantially higher.
-16-
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
(a) The annual meeting of stockholders was held April 20, 1995.
(b) The following directors were elected to Board of Directors (constituting the
entire Board of Directors):
Bevis Longstreth Harriet E. Miers
Paul M. Low William R. Smith
Ronn K. Lytle John C. Tolleson
(c) The following items were voted on at the annual meeting:
<TABLE>
<CAPTION>
VOTES
----------------------------------------------
WITHHELD/ BROKER
FOR AGAINST ABSTENTIONS NON-VOTES
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Election of Board Members:
Bevis Longstreth...................... 13,241,939 - 163,343 -
Paul M. Low........................... 13,241,308 - 163,974 -
Ronn K. Lytle......................... 13,242,048 - 163,234 -
Harriet E. Miers...................... 13,240,098 - 165,184 -
William R. Smith...................... 13,242,121 - 163,161 -
John C. Tolleson...................... 13,243,768 - 161,514 -
Ratification of Ernst & Young as
independent auditors of the Company.... 13,174,717 110,229 120,336 -
Other matters (no other matters)........ 11,877,718 1,167,425 360,139 -
</TABLE>
PART II. - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
--------
The following Exhibits are presented herewith:
Exhibit 11 - Computation of Earnings Per Share for the quarter ended March
31, 1995 and 1994.
Exhibit 27 - Financial Data Schedule (electronic filing only).
(b) Reports on Form 8-K: None.
-------------------
-17-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPSTEAD MORTGAGE CORPORATION
Date: May 8, 1995 By /s/ RONN K. LYTLE
------------------------------------
Ronn K. Lytle
Chairman and Chief Executive Officer
Date: May 8, 1995 By /s/ ANDREW F. JACOBS
------------------------------------
Andrew F. Jacobs
Senior Vice President - Control
and Treasurer
-18-
<PAGE>
EXHIBIT 11
CAPSTEAD MORTGAGE CORPORATION
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31
--------------------------
1995 1994
------- -------
<S> <C> <C>
PRIMARY:
Average number of common shares outstanding 15,304 15,202
Incremental shares calculated using the
Treasury Stock method 4 84
------- -------
15,308 15,286
======= =======
Net income $15,366 $23,469
Less cash dividends paid on convertible
preferred stock:
Series A paid ($0.40 paid per share) (248) (273)
Series B paid ($0.315 paid per share) (9,550) (9,407)
------- -------
Net income available to common stockholders $ 5,568 $13,789
======= =======
Primary net income per share $0.36 $0.90
===== =====
FULLY DILUTED:
Average number of common shares outstanding 15,304 15,202
Assumed conversion of convertible
preferred stock:
Series A 560 632
Series B (A) (A)
Incremental shares calculated using the
Treasury Stock method 4 82
------- -------
15,868 15,916
======= =======
Net income $15,366 $23,469
Less cash dividends paid on the Series B
Preferred Stock (9,550) (9,407)
------- -------
Net income $ 5,816 $14,062
======= =======
Fully diluted net income per share (B) $0.88
=====
</TABLE>
(A) THE SERIES B PREFERRED STOCK IS NOT CONSIDERED CONVERTIBLE FOR PURPOSES OF
CALCULATING FULLY DILUTED NET INCOME PER SHARE AS IT IS CURRENTLY
ANTIDILUTIVE.
(B) FULLY DILUTED EARNINGS PER SHARE IS NOT PRESENTED FOR THE QUARTER ENDED
MARCH 31, 1995 BECAUSE THE EFFECT OF CONVERTING POTENTIALLY DILUTIVE
SECURITIES IS ANTIDILUTIVE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Capstead
Mortgage Corporation's Quarterly Report on Form 10-Q for the quarter ended March
31, 1995 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<EXCHANGE-RATE> 1
<CASH> 27,720
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,004,939
<CURRENT-LIABILITIES> 3,392,068
<BONDS> 4,996,129
<COMMON> 153
0
334,736
<OTHER-SE> 281,853
<TOTAL-LIABILITY-AND-EQUITY> 9,004,939
<SALES> 0
<TOTAL-REVENUES> 171,891
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,526
<LOSS-PROVISION> 600
<INTEREST-EXPENSE> 142,399
<INCOME-PRETAX> 15,366
<INCOME-TAX> 0
<INCOME-CONTINUING> 15,366
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,366
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0
</TABLE>
