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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 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: 1-8896
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
------------------- ------------------------------------
Common Stock ($0.01 par value) New York Stock Exchange
$1.60 Cumulative Preferred Stock,
Series A ($0.10 par value) New York Stock Exchange
$1.26 Cumulative Convertible Preferred
Stock, Series B ($0.10 par value) New York Stock Exchange
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [_]
AT FEBRUARY 22, 1996 THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NONAFFILIATES WAS $544,736,000.
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT FEBRUARY 22, 1996: 23,818,162
DOCUMENTS INCORPORATED BY REFERENCE:
(1) PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR
ENDED DECEMBER 31, 1995 ARE INCORPORATED BY REFERENCE INTO PARTS II AND IV.
(2) PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT DATED MARCH 7, 1996,
ISSUED IN CONNECTION WITH THE ANNUAL MEETING OF STOCKHOLDERS OF THE
REGISTRANT, ARE INCORPORATED BY REFERENCE INTO PART III.
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CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
1995 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
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ITEM 1. BUSINESS........................................... 1
ITEM 2. PROPERTIES......................................... 7
ITEM 3. LEGAL PROCEEDINGS.................................. 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS................... 8
ITEM 6. SELECTED FINANCIAL DATA............................ 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............... 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........ 8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............... 8
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. 8
ITEM 11. EXECUTIVE COMPENSATION............................. 8
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT............................. 9
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..... 9
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K............................... 10
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PART I
ITEM 1. BUSINESS.
ORGANIZATION
Capstead Mortgage Corporation ("CMC" or the "Company") was incorporated on April
15, 1985 in the state of Maryland and commenced operations in September 1985.
The Company is a national mortgage banking firm, earning income from servicing
mortgage loans, investing in mortgage-backed securities and other investment
strategies. The Company's business plan is to build its mortgage servicing and
mortgage securities portfolios with the goal of producing reasonably balanced
operating results in a rising or falling interest rate environment. The
mortgage servicing operation has grown rapidly since its inception in 1993
primarily through bulk acquisitions of mortgage servicing rights to become one
of the 25th largest mortgage servicers in the country. Until late in 1995, the
Company operated a mortgage conduit that purchased and securitized various types
of single-family residential mortgage loans. This strategy for accumulating
mortgage assets has been successfully replaced by the acquisition of mortgage-
backed securities issued by government-sponsored entities.
CMC, and its qualified real estate investment trust ("REIT") subsidiaries, have
elected to be taxed as a REIT and intend to continue to do so. As a result of
this election, CMC is not taxed at the corporate level on taxable income
distributed to stockholders, provided that certain REIT qualification tests are
met. All taxable income of certain other subsidiaries, including the mortgage
servicing operation, is subject to federal and state income taxes, where
applicable.
MORTGAGE CONDUIT
Through November 1995, the Company purchased non-conforming or jumbo mortgage
loans from mortgage banking companies, savings banks, commercial banks, credit
unions, mortgage brokers and other financial intermediaries ("Correspondents")
throughout the United States.
The jumbo mortgage loan market changed dramatically over the last several years.
Mortgage loan originations reached all time highs in 1992 and 1993 due to
steadily declining mortgage interest rates that made refinancing increasingly
attractive to mortgagors. Mortgage interest rates reached 20-year lows by the
fall of 1993; however, by early 1994 rates began a steady rise. As rising rates
choked off the 1992/1993 refinancing boom, competition to acquire remaining
originations intensified. At this same time, the cost of mortgage pool
insurance rose in response to mounting credit losses being incurred by these
insurers, most of whom ultimately withdrew from this business entirely. In
order to compete with other buyers of non-conforming loans as a long-term
investor, the Company had to be willing to once again accept credit risk on
these mortgage assets or find buyers for subordinate classes of its
securitizations willing to do so at a fair price.
Beginning in January 1995, the Company implemented a strategy of selling
individual mortgage loans purchased through its mortgage conduit to private
investors shortly after the commitment to purchase, instead of accumulating $100
million or more of similar mortgage loans for an efficient securitization. This
strategy allowed the Company to reduce the risks associated with accumulating
and securitizing jumbo mortgage loans but was not intended to be a long-term
solution. However, in November 1995 the Company exited the mortgage conduit
business after concluding that as a long-term
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investor in mortgage assets, accepting the associated credit risk was not in the
best interest of the stockholders. While this decision represents a change in
strategy for accumulating mortgage assets, it has been successfully replaced by
the acquisition of mortgage-backed securities issued by government-sponsored
entities.
MORTGAGE LOAN HOLDINGS
Prior to exiting the mortgage conduit business, the Company purchased mortgage
loans from Correspondents on a daily basis. These loans purchased were
warehoused until a long-term investment strategy was implemented. Periodically,
mortgage loans were pledged to secure collateralized mortgage obligations
("CMOs"), publicly-offered, multi-class mortgage pass-through certificates
("MPCs"), or AAA-rated private mortgage pass-through securities ("Mortgage Pass-
Throughs") issued by the Company's special-purpose finance subsidiaries. The
Company currently has limited holdings of unsecuritized mortgage loans, most of
which arise from limited origination activities conducted by the Company's new
telemarketing origination group - "The Home Loan Center" (as discussed below).
MORTGAGE PASS-THROUGH PORTFOLIO
The Company maintains a sizable investment in Mortgage Pass-Throughs backed by
adjustable-rate and medium-term non-conforming mortgage loans that were acquired
through the mortgage conduit. Medium-term mortgage loans have (i) an initial
fixed-rate period of 3 or 5 years after origination and then adjust annually
based on a specified margin over 1-year U.S. Treasury Securities ("1-year
Treasuries") or (ii) initial interest rates that adjust one time, approximately
5 years following origination of the mortgage loan, based on a specified margin
over the Federal National Mortgage Association ("FNMA") yields for 30-year,
fixed-rate commitments at the time of adjustment. Adjustable-rate mortgage
loans either adjust (i) semi-annually based on a specified margin over the 6-
month London Interbank Offered Rate ("LIBOR") or (ii) annually based on a
specified margin over 1-year Treasuries. This investment strategy primarily
features adjustable-rate mortgage loans that, because of their adjustable
interest rates, are more likely to retain value.
Mortgage Pass-Throughs are insured against mortgagor defaults by a mortgage pool
insurer. The level of coverage under any mortgage pool insurance policy is
determined by one or more of the national statistical rating agencies ("Rating
Agencies"), and is at a level necessary to allow the insured pool of mortgage
loans, or the securities such pools are pledged to secure, to be AAA-rated. At
such time, the Company also insures or reserves against bankruptcy and special
hazard risks. Special hazards are risks that are not covered by standard hazard
insurance policies (e.g., earthquakes). The Company also has exposure to fraud
or misrepresentation in the origination of the mortgage loan. Defaults on
mortgage loans, if linked to fraud or misrepresentation, may be mitigated by the
Correspondent's obligation to repurchase such mortgage loan. However, to the
extent the Correspondent does not perform on its repurchase obligation, the
Company may incur a loss.
The Company utilizes repurchase agreements to finance the Mortgage Pass-Through
portfolio. A repurchase agreement is a form of short-term financing pursuant to
which mortgage loans or mortgage-backed securities are pledged as collateral for
funds borrowed at short-term interest rates, typically 30 to 60 days. The
formation of Mortgage Pass-Throughs enhances the marketability of the underlying
mortgage loans, thus enabling the Company to reduce its borrowing costs below
the level paid on non-rated loans.
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AGENCY SECURITIES PORTFOLIO
With the decline of the mortgage conduit business, the Company increased
acquisitions of agency securities that consist primarily of adjustable-rate
mortgage-backed securities guaranteed by government sponsored entities such as
FNMA, Government National Mortgage Association ("GNMA") or Federal Home Loan
Mortgage Corporation ("FHLMC"). The agency securities portfolio also includes
investments in fixed-rate agency securities and callable agency notes. Callable
agency notes currently held by the Company are unsecured, 3-year fixed-rate
notes issued by FHLMC, FNMA, or the Federal Home Loan Bank Board ("FHLBB") and
mature in 1997, unless redeemed earlier.
The Company primarily utilizes repurchase agreements to finance the agency
securities portfolio. Because of the quality of agency securities, the Company
is able to borrow at its lowest cost, thereby achieving more attractive interest
rate spreads on the financing of these assets.
CMO INVESTMENT PORTFOLIO AND RELATED SECURITIZATION ACTIVITY
In past years, the Company has been an active issuer of CMOs and other
securities generally backed by fixed-rate, non-conforming mortgage loans
acquired through the mortgage conduit. The Company generally retained residual
interests in CMOs issued consisting primarily of interest-only and principal-
only strips. Interest-only securities represent ownership in an undivided
interest in interest payments on the underlying collateral. Principal-only
securities represent ownership in an undivided interest in principal payments on
the underlying collateral. Most of the CMOs were structured as financings in
which the Company recognizes economic gains or losses over the term of the
collateral. During 1995 no CMOs were issued; however, the Company did acquire
agency-issued, interest-only securities, which increased the CMO investment
portfolio substantially.
Each series of CMOs consists of multiple classes of bonds, each having its own
maturity. The segmentation of CMOs into classes of bonds with varying
maturities, along with mortgage pool insurance or other credit enhancements
provided to make all or most of the CMO bonds AAA-rated, enabled the Company to
issue CMO classes with shorter scheduled maturities and lower interest rates
than those on the underlying mortgage loans. Each of these factors contributed
to a positive difference between the payments received on the mortgage loans
pledged to secure such CMOs and the payments made on the CMOs issued (the
"Excess Cash Flow"). Because the shorter-term classes of CMO bonds typically
bear lower rates of interest than longer-term classes, the Excess Cash Flow on a
CMO is typically greatest in the early years of the CMO. As the mortgage loans
are repaid and the shorter-term classes of CMO bonds are retired, the average
interest cost of the CMOs outstanding increases. Thus, the Excess Cash Flow
will decline over time.
The right to receive the Excess Cash Flow, along with the noncash amortization
of collateral and bond premiums and discounts is referred to as the "CMO
Residual." CMO structures have evolved in recent years such that the Excess
Cash Flow portion of a CMO Residual has been virtually eliminated by the
formation of additional CMO securities including various forms of interest-only
and/or principal-only securities. Since the fall of 1992 the Company typically
sold much of the noncash portion of its CMO Residuals and retained for its CMO
investment portfolio certain of the interest-only and/or principal-only
securities formed in connection with CMO issuances and other securitizations.
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In late 1993 the Company began issuing CMOs in a senior/subordinate structure
(in lieu of purchasing mortgage pool insurance and special hazard insurance)
where the investor in the subordinate classes assumes credit and special hazard
risks. The Company has retained an aggregate of approximately $2 million of
credit and special hazard risk on certain of these issuances. Actual losses to
the Company due to these risks are dependent upon the timing and magnitude of
related collateral defaults.
SERVICING OPERATIONS
Mortgage servicing includes collecting and accounting for payments of principal
and interest from borrowers, remitting such payments to investors, holding
escrow funds for payment of mortgage-related expenses such as taxes and
insurance, making advances to cover delinquent payments, inspecting the mortgage
premises as required, contacting delinquent mortgagors, supervising foreclosures
and property dispositions in the event of unremedied defaults, and generally
administering the loans. Fees are received for servicing residential mortgage
loans ranging generally from 0.25 to 0.38 percent per annum on the declining
principal balances of the loans and are collected out of monthly mortgage
payments.
The Company formed its mortgage servicing unit early in 1993. Initially, growth
was accomplished primarily by retaining mortgage servicing rights on mortgage
loans purchased through the mortgage conduit. Beginning in late 1993 the
Company began committing to bulk acquisitions of mortgage servicing rights for
primarily conforming mortgage loan portfolios. Capstead Inc., the Company's
mortgage servicing subsidiary, has grown dramatically to become one of the top
25 mortgage servicers in the country. Capstead Inc. is also an industry leader
in efficiency in part due to efforts to service only conventional mortgage
loans, excluding FHA and VA loans, and a minimum number of adjustable-rate
mortgage loans. In addition, Capstead Inc. services for only 3 investors:
FNMA, FHLMC and itself.
During 1995, 143,000 mortgage loans with an aggregate principal balance of $13.1
billion were added to the portfolio. At year-end the mortgage servicing
portfolio totaled 247,000 loans with a balance of $25.6 billion, had a weighted
average interest rate of 7.37 percent, and delinquencies of 30 days and over of
only 1.83 percent. The prepayment rate on mortgage loans held in the mortgage
servicing portfolio was 9.44 percent during 1995. Another $3.1 billion of
servicing had been acquired as of December 31, 1995 that was pending transfer
into the portfolio and was being subserviced by the sellers. Additional
mortgage servicing has been acquired subsequent to year-end. Including January
1996 acquisitions, pending transfers of mortgage servicing totaled $8.1 billion
with a weighted average interest rate of 7.39 percent. By May 1996 the mortgage
servicing portfolio is expected to exceed $32 billion.
In an effort to capture as much run-off of the servicing portfolio as possible,
in 1995 the Company formed the "Home Loan Center," a centralized mortgage
origination unit that offers a variety of loan programs including first mortgage
loans and home equity loans. The Home Loan Center relies heavily on outsourcing
labor intensive aspects of the loan origination process in an effort to remain
as efficient as possible. Loans originated by the Home Loan Center generally
are sold to FNMA or FHLMC shortly after the commitment to purchase.
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EFFECTS OF INTEREST RATE CHANGES
Changes in interest rates may impact earnings in various says. The Company's
business plan is to build its mortgage servicing and mortgage securities
portfolios with the goal of producing reasonably balanced operating results in a
rising or falling interest rate environment. The Company has acquired
derivative financial instruments, specifically interest rate floors, as hedges
against increased prepayments on investments in mortgage servicing rights and
interest-only securities. Interest rate floors partially protect the value of
the assets hedged from the impact of increased prepayments by increasing in
value when interest rates decline. Realized gains from effective hedge
transactions reduce the carrying amount of the assets hedged. The Company has
acquired other derivative financial instruments, specifically interest rate
caps, as a hedge against rising interest rates on a portion of its short-term
borrowings. The Company may receive cash payments from the counterparties to
these instruments should certain specified interest rates fall (floors) or rise
(caps). For further discussion of effects of interest rate changes on the
Company's mortgage securities and mortgage servicing portfolios, see the
Registrant's Annual Report to Stockholders for the year ended December 31, 1995
on pages 46 and 47 under the caption "Management's Discussion and Analysis -
Effects of Interest Rate Changes."
OTHER INVESTMENT STRATEGIES
The Company may enter into other short- or long-term investment strategies as
the opportunities arise.
COMPETITION
In purchasing mortgage securities, the Company competes with savings banks,
commercial banks, mortgage and investment bankers, conduits, insurance
companies, other lenders, and mutual funds, many of whom may have greater
financial resources than the Company. The competition for the acquisition of
mortgage servicing rights is primarily with mortgage bankers, commercial banks
and savings banks. Additionally, the Company must compete with many of these
same entities for refinancings of mortgage loans in the Company's existing
servicing portfolio in order to help mitigate the effects of run-off.
REGULATION AND RELATED MATTERS
The Company's mortgage servicing unit is subject to the rules and regulations of
FNMA and FHLMC with respect to servicing mortgage loans. In addition, there are
other federal and state statutes and regulations affecting such activities.
Moreover, the Company is required annually to submit audited financial
statements to FNMA and FHLMC, and each regulatory entity has its own financial
requirements. The Company's affairs are also subject to examination by FNMA and
FHLMC at all times to assure compliance with applicable regulations, policies
and procedures. Many of the aforementioned regulatory requirements are designed
to protect the interests of consumers, while others protect the owners or
insurers of mortgage loans. Failure to comply with these requirements can lead
to loss of approved status, termination of servicing contracts without
compensation to the servicer, demands for indemnification or loan repurchases,
class action lawsuits and administrative enforcement actions.
EMPLOYEES
As of December 31, 1995, the Company had 172 full-time employees.
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TAX STATUS
As used herein, "Capstead REIT" refers to CMC and the entities that are
consolidated with CMC for federal income tax purposes. Capstead REIT has
elected to be taxed as a REIT for federal income tax purposes and intends to
continue to do so. As a result of this election, Capstead REIT will not be
taxed at the corporate level on taxable income distributed to stockholders,
provided that certain requirements concerning the nature and composition of its
income and assets are met and that at least 95 percent of its REIT taxable
income is distributed.
If Capstead REIT fails to qualify as a REIT in any taxable year, it would be
subject to federal income tax at regular corporate rates and would not receive a
deduction for dividends paid to stockholders. If this were the case, the amount
of after-tax earnings available for distribution to stockholders would decrease
substantially.
So long as Capstead REIT qualifies as a REIT, it will generally be taxable only
on its undistributed taxable income. Distributions out of current or
accumulated earnings and profits will be taxed to stockholders as ordinary
income or capital gain, as the case may be. Distributions in excess of the
Company's accumulated and current earnings and profits will constitute a non-
taxable return of capital to the stockholders (except insofar as such
distributions exceed the cost basis of the shares of stock) resulting in a
corresponding reduction in the cost basis of the shares of stock. The Company
notifies its stockholders of the proportion of distributions made during the
taxable year that constitutes ordinary income, capital gain or a return of
capital. During 1993, 20 percent of distributions made were characterized as
long-term capital gains. Other distributions during the last 3 years were
characterized as ordinary income. Distributions by the Company will not
normally be eligible for the dividends received deduction for corporations.
Should the Company incur losses, stockholders will not be entitled to include
such losses in their individual income tax returns.
All taxable income of certain other subsidiaries, including Capstead Inc., that
conduct mortgage servicing and formerly conducted securitization operations, is
subject to federal and state income taxes, where applicable. Capstead REIT's
taxable income will include earnings of these subsidiaries only upon payment to
Capstead REIT by dividend of such earnings.
The foregoing is general in character. Reference should be made to pertinent
Internal Revenue Code sections and the Regulations issued thereunder for a
comprehensive statement of applicable federal income tax consequences.
ITEM 2. PROPERTIES.
The Company's operations are conducted primarily in Dallas, Texas on properties
leased by the Company.
ITEM 3. LEGAL PROCEEDINGS.
At December 31, 1995 there were no material pending legal proceedings, outside
the normal course of business, to which the Company or its subsidiaries were a
party or of which any of their property was the subject.
ITEM 4. RESULTS OF SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required by this item is included in the Registrant's Annual
Report to Stockholders for the year ended December 31, 1995 on page 38 under the
caption "Note 16 - Market and Dividend Information," and is incorporated herein
by reference, pursuant to General Instruction G(2).
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is included in the Registrant's Annual
Report to Stockholders for the year ended December 31, 1995 on page 39 under the
caption "Selected Financial Data," and is incorporated herein by reference,
pursuant to General Instruction G(2).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required by this item is included in the Registrant's Annual
Report to Stockholders for the year ended December 31, 1995 on pages 40 through
47 under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and is incorporated herein by reference,
pursuant to General Instruction G(2).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is included in the Registrant's Annual
Report to Stockholders for the year ended December 31, 1995 on pages 19 through
38, and is incorporated herein by reference, pursuant to General Instruction
G(2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is included in the Registrant's definitive
Proxy Statement dated March 7, 1996 on pages 3 through 6 under the captions
"Election of Directors," "Board of Directors" and "Executive Officers," which is
incorporated herein by reference pursuant to General Instruction G(3).
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included in the Registrant's definitive
Proxy Statement dated March 7, 1996 on pages 7 through 13 under the captions
"Executive Compensation," "Compensation Committee Report on Executive
Compensation," and "Performance Graph," which is incorporated herein by
reference pursuant to General Instruction G(3).
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ITEM 12. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS.
The information required by this item is included in the Registrant's definitive
Proxy Statement dated March 7, 1996 on pages 14 and 15 under the caption
"Security Ownership of Management and Certain Beneficial Owners," which is
incorporated herein by reference pursuant to General Instruction G(3).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is included in the Registrant's Annual
Report to Stockholders for the year ended December 31, 1995 on page 36 under the
caption "Notes to Consolidated Financial Statements - Note 13 - Management and
Non-Competition Agreements", which is incorporated herein by reference pursuant
to General Instruction G(2).
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
1. The following financial statements of the Company, included in the
1994 Annual Report to Stockholders, are incorporated herein by
reference:
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Consolidated Statement of Income - Years
Ended December 31, 1995, 1994 and 1993............ *
Consolidated Balance Sheet -
December 31, 1995 and 1994........................ *
Consolidated Statement of Stockholders' Equity -
Three Years Ended December 31, 1995............... *
Consolidated Statement of Cash Flows - Years
Ended December 31, 1995, 1994 and 1993............ *
Notes to Consolidated Financial Statements -
December 31, 1995................................. *
2. Financial statement schedules:
Schedule II - Valuation and Qualifying Accounts.... 14
Schedule IV - Mortgage Loans on Real Estate........ 15
NOTE: All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and
therefore have been omitted.
* Incorporated herein by reference from the Company's Annual Report to
Stockholders for the year ended December 31, 1995.
3. Exhibits:
EXHIBIT
NUMBER
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3.1(a) Charter of the Company, which includes Articles of
Incorporation, Articles Supplementary for each outstanding
Series of Preferred Stock and all other amendments to such
Articles of Incorporation(5)
3.1(b) Articles Supplementary ($1.26 Cumulative Convertible
Preferred Stock, Series B)(4)
3.2 Bylaws of the Company, as amended(5)
10.17 Amendment to Management Agreement dated March 31, 1993,
between the Registrant and Capstead Advisers, Inc.(5)
10.18 Second Amendment to Management Agreement dated September 3,
1993, between the Registrant and Capstead Advisers, Inc.(6)
10.19 Stock Option Agreement, dated June 16, 1992, between the
Company and Lomas Financial Corporation(5)
10.20 Form of Loan Sale Agreement(3)
10.21 1990 Employee Stock Option Plan(1)
10.22 1990 Directors' Stock Option Plan(2)
10.23 Employment Agreement dated August 1, 1992 between Capstead
Mortgage Corporation and Ronn K. Lytle(4)
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CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
PART IV
ITEM 14. - CONTINUED
EXHIBIT
NUMBER
-------
10.24 Restricted Stock Grant Agreement dated August 1, 1992 between
Capstead Mortgage Corporation and Ronn K. Lytle(4)
10.25 1994 Flexible Long Term Incentive Plan(7)
10.26 1994 Capstead Inc. Restricted Stock Plan(7)
10.27 Capstead Mortgage Corporation Deferred Compensation Plan(7)
10.28 Summary of Employment Agreement dated December 9, 1993
between Capstead Mortgage Corporation and Christopher T.
Gilson(7)
11 Computation of per share earnings*
12 Computation of ratio of earnings to combined fixed charges
and preferred stock dividends*
13 Portions of the Annual Report to Stockholders of the
Company for the year ended December 31, 1995*
21 List of subsidiaries of the Company*
23 Consent of Ernst & Young LLP, Independent Auditors*
27 Financial Data Schedule (electronic filing only)*
(1) Incorporated by reference to the Company's Registration Statement on
Form S-8 (No. 33-40016) dated April 29, 1991
(2) Incorporated by reference to the Company's Registration Statement on
Form S-8 (No. 33-40017) dated April 29, 1991
(3) Incorporated by reference to Amendment No. 1 on Form 8 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1991
(4) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1992
(5) Incorporated by reference to the Company's Registration Statement on
Form S-3 (No. 33-62212) dated May 6, 1993
(6) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993
(7) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994
* Filed herewith
(b) Reports on Form 8-K: None.
(c) Exhibits - The response to this section of ITEM 14 is submitted as a
separate section of this report.
(d) Financial Statement Schedules - The response to this section of ITEM 14
is submitted as a separate section of this report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CAPSTEAD MORTGAGE CORPORATION
REGISTRANT
Date: March 12, 1996 By: /s/ ANDREW F. JACOBS
------------------------------
Andrew F. Jacobs
Senior Vice President-Control,
Treasurer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated below and on the dates indicated.
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/s/ RONN K. LYTLE Chairman, Chief March 15, 1996
- ------------------------------- Executive Officer
(Ronn K. Lytle) and Director
/s/ ANDREW F. JACOBS Senior Vice President- March 12, 1996
- ------------------------------- Control, Treasurer
(Andrew F. Jacobs) and Secretary
/s/ BEVIS LONGSTRETH Director March 18, 1996
- -------------------------------
(Bevis Longstreth)
/s/ PAUL M. LOW Director March 18, 1996
- -------------------------------
(Paul M. Low)
/s/ HARRIET E. MIERS Director March 21, 1996
- -------------------------------
(Harriet E. Miers)
/s/ WILLIAM R. SMITH Director March 18, 1996
- -------------------------------
(William R. Smith)
/s/ JOHN C. TOLLESON Director March 21, 1996
- -------------------------------
(John C. Tolleson)
</TABLE>
11
<PAGE>
PORTIONS OF THE
ANNUAL REPORT ON FORM 10-K
ITEMS 14(A)(1), (2) AND (3)
FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
YEAR ENDED DECEMBER 31, 1995
CAPSTEAD MORTGAGE CORPORATION
DALLAS, TEXAS
12
<PAGE>
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------------- ---------- ----------------------- ----------- --------------
ADDITIONS
-----------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING COSTS ACCOUNTS- DEDUCTIONS- BALANCE AT END
DESCRIPTION OF PERIOD AND EXPENSES DESCRIBE DESCRIBE * OF PERIOD
- ---------------------------------- ---------- ------------ ---------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Reserves and Allowances Deducted
From Mortgage Investments:
Year ended December 31, 1995
Allowance for losses........... $7,354,000 $2,200,000 - $3,635,000 $5,919,000
Year ended December 31, 1994
Allowance for losses........... $6,927,000 $3,500,000 - $3,073,000 $7,354,000
Year ended December 31, 1993
Allowance for losses........... $8,228,000 $2,800,000 - $4,101,000 $6,927,000
</TABLE>
* Charge-offs due to mortgagor default, fraud or misrepresentation, or special
hazard losses, and charge-offs of other mortgage securities.
13
<PAGE>
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PART 1 - MORTGAGE LOANS ON REAL ESTATE AT CLOSE OF PERIOD
- ---------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------------- -------- ------------------ ---------------------------------- ----------------------
AMOUNT OF PRINCIPAL UNPAID AT
CLOSE OF PERIOD
---------------------------------- AMOUNT OF
SUBJECT TO MORTGAGE
PRIOR CARRYING AMOUNT DELINQUENT BEING
DESCRIPTION LIENS OF MORTGAGES(2) TOTAL INTEREST(3) FORECLOSED(3)
- --------------------------- ------------------ ------------------ ------------ ---------------- ----------------------
<S> <C> <C> <C> <C> <C>
$ -0- - $ 49,999 None $ 190,000 $ 190,000 $ 68,000 $ -
( 7)..................
$ 50,000 - $ 99,999 None 2,533,000 2,533,000 198,000 63,000
( 32)..................
$100,000 - $ 149,999 None 15,809,000 15,809,000 1,019,000 397,000
( 122)..................
$150,000 - $ 199,999 None 40,820,000 40,820,000 1,455,000 907,000
( 228)..................
$200,000 - $ 249,999 None 293,351,000 293,351,000 17,089,000 5,726,000
(1,328)..................
$250,000 - $ 299,999 None 202,653,000 202,653,000 12,331,000 4,663,000
( 741)..................
$300,000 - $ 349,999 None 138,622,000 138,622,000 8,051,000 1,623,000
( 429)..................
$350,000 - $ 399,999 None 89,510,000 89,510,000 4,519,000 1,485,000
( 240)..................
$400,000 - $ 449,999 None 51,346,000 51,346,000 2,141,000 842,000
( 121)..................
$450,000 - $ 499,999 None 39,441,000 39,441,000 2,370,000 1,409,000
( 83)..................
$500,000 - $1,500,000 None 111,303,000 111,303,000 5,141,000 2,293,000
( 190).................. ------------ ------------ ----------- ------------
985,578,000 $985,578,000 $54,382,000 $ 19,408,000
============ =========== ============
Plus premium 3,417,000
Plus unrealized gain on mortgage
loans included in debt
securities 10,727,000
------------
$999,722,000
============
</TABLE>
<TABLE>
<CAPTION>
PART 2 - INTEREST
EARNED ON MORTGAGES
- --------------------------- ---------------------------
COLUMN A COLUMN F AND AND COLUMN G(4)
- --------------------------- ----------------------------
WEIGHTED AVERAGE
DESCRIPTION INTEREST RATE
- --------------------------- ----------------
<S> <C>
$ -0- - $ 49,999 9.56%
( 7)..................
$ 50,000 - $ 99,999 8.16%
( 32)..................
$100,000 - $ 149,999 7.91%
( 122)..................
$150,000 - $ 199,999 7.88%
( 228)..................
$200,000 - $ 249,999 7.64%
(1,328)..................
$250,000 - $ 299,999 7.57%
( 741)..................
$300,000 - $ 349,999 7.63%
( 429)..................
$350,000 - $ 399,999 7.60%
( 240)..................
$400,000 - $ 449,999 7.61%
( 121)..................
$450,000 - $ 499,999 7.60%
( 83)..................
$500,000 - $1,500,000 7.64%
( 190)..................
</TABLE>
See accompanying notes to Schedule IV.
14
<PAGE>
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO SCHEDULE IV
(1) Mortgage loans at December 31, 1995 consisted of single-family,
conventional, first mortgage loans. The Company classifies its mortgage
loans by term and interest rate characteristics. Fixed-rate mortgage loans
have (i) fixed rates of interest for their entire terms or (ii) an initial
fixed-rate period of 10 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 loans have (i) an initial
fixed-rate period of 3 or 5 years after origination and then adjust annually
based on a specified margin over 1-year Treasuries or (ii) initial interest
rates then adjust one time, approximately 5 years following origination of
the mortgage loan, based on a specified margin over the Federal National
Mortgage Association ("FNMA") yields for 30-year, fixed-rate commitments at
the time of adjustment. Adjustable-rate mortgage loans either adjust (i)
semi-annually based on a specified margin over the 6-month London Interbank
Offered Rate ("LIBOR") or (ii) annually based on a specified margin over 1-
year Treasuries. Principal amount of mortgage loans in the portfolio
totaling $8,930,000, or 0.9 percent, were fixed-rate loans; $566,899,000, or
56.3 percent, were medium-term loans; and $423,166,000, or 42.8 percent,
were adjustable-rate loans.
(2) Reconciliation of mortgage loans:
<TABLE>
<CAPTION>
<S> <C> <C>
Balance at December 31, 1994.......... $1,425,413,000
Additions:
Purchases and originations of
mortgage loans..................... 126,786,000
Unrealized gains on mortgage loans
included in debt securities........ 44,400,000 171,186,000
-------------- --------------
1,596,599,000
Deductions:
Principal collections............... 257,239,000
Amortization of discount............ 447,000
Sales............................... 339,191,000 596,877,000
----------- --------------
Balance at December 31, 1995.......... $ 999,722,000
==============
</TABLE>
(3) Consists of all mortgage loans delinquent 90 days or more. Note that of the
amount of principal unpaid at the close of the period that is subject to
delinquent principal, $52.8 million is covered by mortgage pool insurance
that effectively limits the Company's loss. Similarly, $18.5 million of the
amount of mortgages being foreclosed is covered by pool insurance. For a
discussion of the Company's exposure to possible loan losses, see the
Registrant's Annual Report to Stockholders for the year ended December 31,
1995 on page 33 under the caption "Note 9 - Allowance for Possible Losses".
(4) Interest due and accrued at the end of the period and interest income earned
applicable to the period for each of the categories presented above is not
available without unreasonable effort or expense and therefore has been
omitted in accordance with Rule 12-23 of Regulation S-X. Total accrued
interest for the above listed mortgage loans totaled $6,415,000 at December
31, 1995.
15
<PAGE>
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO SCHEDULE IV - CONTINUED
(5) The geographic distribution of the Company's portfolio at December 31, 1995
was as follows:
<TABLE>
<CAPTION>
NUMBER PRINCIPAL
STATE OF LOANS AMOUNT
----- -------- ------------
<S> <C> <C>
Alabama................................. 7 $ 1,477,000
Arizona................................. 19 5,037,000
Arkansas................................ 1 245,000
California.............................. 2,523 701,556,000
Colorado................................ 30 8,048,000
Connecticut............................. 15 4,434,000
Delaware................................ 3 1,107,000
District of Columbia.................... 24 7,469,000
Florida................................. 103 31,961,000
Georgia................................. 107 30,675,000
Hawaii.................................. 6 2,324,000
Idaho................................... 1 218,000
Illinois................................ 31 8,690,000
Indiana................................. 4 434,000
Kentucky................................ 1 364,000
Louisiana............................... 12 3,409,000
Maryland................................ 81 23,827,000
Massachusetts........................... 12 3,073,000
Michigan................................ 36 10,349,000
Minnesota............................... 1 219,000
Missouri................................ 6 2,112,000
Nebraska................................ 1 209,000
Nevada.................................. 11 2,408,000
New Hampshire........................... 1 218,000
New Jersey.............................. 71 20,204,000
New Mexico.............................. 34 9,987,000
New York................................ 36 11,598,000
North Carolina.......................... 4 1,103,000
Ohio.................................... 7 1,750,000
Oklahoma................................ 13 3,532,000
Oregon.................................. 2 317,000
Pennsylvania............................ 32 9,401,000
South Carolina.......................... 1 255,000
Tennessee............................... 1 229,000
Texas................................... 112 28,874,000
Utah.................................... 12 2,204,000
Vermont................................. 3 976,000
Virginia................................ 116 35,150,000
Washington.............................. 39 9,472,000
Wisconsin............................... 2 663,000
---------- ------------
985,578,000
Plus premium............................ 3,417,000
Plus unrealized gain on mortgage loans
included in debt securities............ 10,727,000
------------
Total.......................... 3,521 $999,722,000
========== ============
</TABLE>
16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGE
- ------- ------------
<C> <S> <C>
3.1(a) Charter of the Company, which includes Articles of Incorporation,
Articles Supplementary for each outstanding Series of Preferred Stock and
all other amendments to such Articles of Incorporation(5)
3.1(b) Articles Supplementary ($1.26 Cumulative Convertible Preferred Stock,
Series B)(4)
3.2 Bylaws of the Company, as amended(5)
10.17 Amendment to Management Agreement dated March 31, 1993, between the
Registrant and Capstead Advisers, Inc.(5)
10.18 Second Amendment to Management Agreement dated September 3, 1993, between
the Registrant and Capstead Advisers, Inc.(6)
10.19 Stock Option Agreement, dated June 16, 1992, between the Company and
Lomas Financial Corporation(5)
10.20 Form of Loan Sale Agreement(3)
10.21 1990 Employee Stock Option Plan(1)
10.22 1990 Directors' Stock Option Plan(2)
10.23 Employment Agreement dated August 1, 1992 between Capstead Mortgage
Corporation and Ronn K. Lytle(4)
10.24 Restricted Stock Grant Agreement dated August 1, 1992 between Capstead
Mortgage Corporation and Ronn K. Lytle(4)
10.25 1994 Flexible Long Term Incentive Plan(7)
10.26 1994 Capstead Inc. Restricted Stock Plan(7)
10.27 Capstead Mortgage Corporation Deferred Compensation Plan(7)
10.28 Summary of Employment Agreement dated December 9, 1993 between Capstead
Mortgage Corporation and Christopher T. Gilson(7)
11 Computation of per share earnings*
12 Computation of ratio of earnings to combined fixed charges and preferred
stock dividends*
13 Portions of the Annual Report to Stockholders of the Company for the year
ended December 31, 1995*
21 List of subsidiaries of the Company*
23 Consent of Ernst & Young LLP, Independent Auditors*
27 Financial Data Schedule (electronic filing only)*
</TABLE>
(1) Incorporated by reference to the Company's Registration Statement on Form S-
8 (No. 33-40016) dated April 29, 1991
(2) Incorporated by reference to the Company's Registration Statement on Form S-
8 (No. 33-40017) dated April 29, 1991
(3) Incorporated by reference to Amendment No. 1 on Form 8 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1991
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992
(5) Incorporated by reference to the Company's Registration Statement on Form S-
3 (No. 33-62212) dated May 6, 1993
(6) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1993
(7) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994
* Filed herewith
<PAGE>
EXHIBIT 11
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
PRIMARY:*
Average number of common shares
outstanding 23,087,000 22,877,000 22,580,000
Incremental shares calculated
using the Treasury Stock method 32,000 40,000 139,000
------------ ------------ ------------
23,119,000 22,917,000 22,719,000
============ ============ ============
Net income $ 77,359,000 $ 85,579,000 $ 94,256,000
Less cash dividends paid on
convertible preferred stock:
Series A ($1.60 paid per share) (939,000) (1,042,000) (1,274,000)
Series B ($1.26 paid per share) (38,395,000) (37,834,000) (37,318,000)
------------ ------------ ------------
Net income available to common
stockholders $ 38,025,000 $ 46,703,000 $ 55,664,000
============ ============ ============
Primary net income per share $1.64 $2.04 $2.45
FULLY DILUTED:*
Average number of common shares
outstanding 23,087,000 22,877,000 22,580,000
Assumed conversion of convertible
preferred stock:
Series A 803,000 896,000 1,111,000
Series B ** ** **
Incremental shares calculated
using the Treasury Stock method 263,000 40,000 204,000
------------ ------------ ------------
24,153,000 23,813,000 23,895,000
============ ============ ============
Net income $ 77,359,000 $ 85,579,000 $ 94,256,000
Less cash dividends paid on
Series B Preferred Stock (38,395,000) (37,834,000) (37,318,000)
------------ ------------ ------------
Net income $ 38,964,000 $ 47,745,000 $ 56,938,000
============ ============ ============
Fully diluted net income per share $1.61 $2.01 $2.38
</TABLE>
* Adjusted for the 3-for-2 common stock split effective October 30, 1995.
** The Series B Preferred Stock is not considered convertible for purposes of
calculating fully diluted net income per share as it is currently
antidilutive.
<PAGE>
EXHIBIT 12
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(IN THOUSANDS, EXCEPT RATIOS)
(UNAUDITED)
(a) Computation of ratio of earnings to combined fixed charges and preferred
stock dividends (including CMO debt):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Fixed charges $577,036 $474,748 $491,076 $415,433 $189,840
Preferred stock dividends 39,334 38,876 38,592 4,707 7,499
-------- -------- -------- -------- --------
Combined fixed charges and
preferred stock dividends 616,370 513,624 529,668 420,140 197,339
Net income 77,359 85,579 94,256 53,191 33,717
-------- -------- -------- -------- --------
Total $693,729 $599,203 $623,924 $473,331 $231,056
======== ======== ======== ======== ========
Ratio of earnings to combined
fixed charges and preferred
stock dividends 1.13:1 1.17:1 1.18:1 1.13:1 1.17:1
======== ======== ======== ======== ========
</TABLE>
(b) Computation of ratio of earnings to combined fixed charges and preferred
stock dividends (excluding CMO debt):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Fixed charges $216,650 $139,092 $ 80,923 $ 62,077 $31,474
Preferred stock dividends 39,334 38,876 38,592 4,707 7,499
-------- -------- -------- -------- -------
Combined fixed charges and
preferred stock dividends 255,984 177,968 119,515 66,784 38,973
Net income 77,359 85,579 94,256 53,191 33,717
-------- -------- -------- -------- -------
Total $333,343 $263,547 $213,771 $119,975 $72,690
======== ======== ======== ======== =======
Ratio of earnings to combined
fixed charges and preferred
stock dividends 1.30:1 1.48:1 1.79:1 1.80:1 1.87:1
======== ======== ======== ======== =======
</TABLE>
<PAGE>
EXHIBIT 13
Capstead Mortgage Corporation
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Capstead Mortgage Corporation
We have audited the accompanying consolidated balance sheet of Capstead
Mortgage Corporation and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Capstead
Mortgage Corporation and subsidiaries at December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
[SIGNATURE OF ERNST & YOUNG LLP GOES HERE]
Dallas, Texas
January 29, 1996
1
<PAGE>
Capstead Mortgage Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
(In thousands, except per share amounts) Year Ended December 31
- -------------------------------------------------------------------------------------------------------
1995 1994 1993
-------- -------- ---------
<S> <C> <C> <C>
Interest income:
Mortgage securities collateral $382,425 $354,603 $390,690
Mortgage investments 240,735 202,398 184,136
-------- -------- ---------
Total interest income 623,160 557,001 574,826
-------- -------- ---------
Interest and related expenses:
Collateralized mortgage securities 360,386 335,656 410,153
Short-term borrowings 216,650 139,092 80,923
Mortgage insurance and other 11,385 13,476 20,084
Provision for possible losses 2,200 3,500 2,800
-------- -------- ---------
Total interest and related expenses 590,621 491,724 513,960
-------- -------- ---------
Net margin on mortgage assets 32,539 65,277 60,866
-------- -------- ---------
Mortgage servicing revenues:
Servicing fees 68,510 28,973 1,539
Other 19,662 3,913 (132)
-------- -------- ---------
Total mortgage servicing revenues 88,172 32,886 1,407
-------- -------- ---------
Mortgage servicing expenses:
Salaries and related costs 6,079 2,867 648
General, administrative and other 14,264 3,002 492
Amortization of mortgage servicing rights 26,576 5,998 1,323
-------- -------- ---------
Total mortgage servicing expenses 46,919 11,867 2,463
-------- -------- ---------
Net margin on mortgage servicing operations 41,253 21,019 (1,056)
-------- -------- ---------
Other revenues:
Gain on sales 11,144 9,161 61,216
CMO administration 3,645 4,067 1,482
Other 1,679 950 1,875
-------- -------- ---------
Total other revenues 16,468 14,178 64,573
-------- -------- ---------
Other expenses:
Salaries and related costs 6,477 8,263 7,456
General and administrative 6,424 6,632 6,505
Management fees and termination costs -- -- 16,166
-------- -------- ---------
Total other expenses 12,901 14,895 30,127
-------- -------- ---------
Net income $ 77,359 $ 85,579 $ 94,256
======== ======== =========
Net income $ 77,359 $ 85,579 $ 94,256
Less cash dividends on preferred stock (39,334) (38,876) (38,592)
-------- -------- ---------
Net income available to common stockholders $ 38,025 $ 46,703 $ 55,664
======== ======== =========
Net income per share:
Primary $ 1.64 $ 2.04 $ 2.45
Fully diluted 1.61 2.01 2.38
Average number of shares outstanding:
Primary 23,119 22,917 22,719
Fully diluted 24,153 23,813 23,895
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
Capstead Mortgage Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(In thousands, except per share amounts) December 31
- ----------------------------------------------------------------------------
1995 1994
---------- ----------
<S> <C> <C>
Assets
Mortgage securities collateral $4,830,020 $5,270,103
Mortgage investments 4,522,954 3,305,984
---------- ----------
9,352,974 8,576,087
Less allowance for possible losses (5,919) (7,354)
---------- ----------
9,347,055 8,568,733
Cash and cash equivalents 18,702 21,741
Prepaids, receivables and other 114,489 70,415
Mortgage servicing rights 423,360 282,969
---------- ----------
$9,903,606 $8,943,858
========== ==========
Liabilities
Collateralized mortgage securities $4,538,863 $5,102,145
Short-term borrowings 4,628,782 3,190,582
Accounts payable and accrued expenses 23,339 11,568
Mortgage servicing rights acquisitions
payable 47,898 75,888
---------- ----------
9,238,882 8,380,183
---------- ----------
Stockholders' Equity
Preferred stock - $0.10 par value;
100,000 shares authorized:
$1.60 Cumulative Preferred Stock, Series A,
550 and 623 shares issued and outstanding
($9,020 aggregate liquidation preference) 7,685 8,720
$1.26 Cumulative Convertible Preferred Stock,
Series B, 30,686 and 30,277 shares issued and
outstanding ($349,207 aggregate
liquidation preference) 330,065 324,779
Common stock - $0.01 par value; 100,000 shares
authorized; 23,521 and 22,956 shares issued
and outstanding 235 229
Paid-in capital 321,207 310,764
Undistributed income (accumulated deficit) (2,370) (2,302)
Unrealized gain (loss) on debt and equity
securities 7,902 (78,515)
---------- ----------
664,724 563,675
---------- ----------
$9,903,606 $8,943,858
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
Capstead Mortgage Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands, except per share amounts) Three Years Ended December 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Unrealized
Undistributed Gain (Loss)
Preferred Stock Income on Debt
------------------------- Common Paid-in (Accumulated and Equity
Series A Series B Stock Capital Deficit) Securities Total
---------- --------- -------- --------- --------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993 $13,205 $315,025 $223 $303,503 $ (457) $ -- $631,499
Net income -- -- -- -- 94,256 -- 94,256
Cash dividends:
Common ($2.44 per share) -- -- -- -- (55,221) -- (55,221)
Preferred:
Series A ($1.60 per share) -- -- -- -- (1,274) -- (1,274)
Series B ($1.26 per share) -- -- -- -- (37,318) -- (37,318)
Conversion of preferred stock (2,910) (144) 3 3,051 -- -- --
Other -- 4,662 1 1,585 -- -- 6,248
-------- --------- ------ -------- ----------- ------------ ---------
Balance at December 31, 1993 10,295 319,543 227 308,139 (14) -- 638,190
Adjustment for change
in accounting method -- -- -- -- -- 7,512 7,512
Net income -- -- -- -- 85,579 -- 85,579
Cash dividends:
Common ($2.14 per share) -- -- -- -- (48,991) -- (48,991)
Preferred:
Series A ($1.60 per share) -- -- -- -- (1,042) -- (1,042)
Series B ($1.26 per share) -- -- -- -- (37,834) -- (37,834)
Conversion of preferred stock (1,575) (18) 2 1,591 -- -- --
Other -- 5,254 -- 1,034 -- -- 6,288
Change in unrealized gain (loss)
on debt and equity securities -- -- -- -- -- (86,027) (86,027)
-------- --------- ------ -------- ----------- ------------ ---------
Balance at December 31, 1994 8,720 324,779 229 310,764 (2,302) (78,515) 563,675
Net income -- -- -- -- 77,359 -- 77,359
Cash dividends:
Common ($1.64 per share) -- -- -- -- (38,093) -- (38,093)
Preferred:
Series A ($1.60 per share) -- -- -- -- (939) -- (939)
Series B ($1.26 per share) -- -- -- -- (38,395) -- (38,395)
Conversion of preferred stock (1,035) (26) 1 1,060 -- -- --
Other -- 5,312 5 9,383 -- -- 14,700
Change in unrealized gain (loss)
on debt and equity securities -- -- -- -- -- 86,417 86,417
-------- --------- ------ -------- ----------- ------------ ---------
Balance at December 31, 1995 $ 7,685 $330,065 $235 $321,207 (2,370) $ 7,902 $664,724
======== ========= ====== ======== =========== ============ =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
Capstead Mortgage Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands) Year Ended December 31
- --------------------------------------------------------------------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net income $ 77,359 $ 85,579 $ 94,256
Noncash items:
Amortization of discount and premium 25,829 6,265 47,988
Amortization of mortgage servicing rights 26,576 5,998 1,323
Depreciation and other amortization 3,260 1,932 819
Provision for possible losses 2,200 3,500 2,800
Net change in prepaids, receivables,
other assets, accounts payable and
accrued expenses (19,330) (46,330) (2,273)
Net gain from investing activities (11,144) (9,161) (61,216)
----------- ----------- -----------
Net cash provided by operating activities 104,750 47,783 83,697
----------- ----------- -----------
Investing activities:
Mortgage securities collateral:
Principal collections on collateral 501,110 1,157,248 2,437,768
Decrease in accrued interest receivable 4,092 9,065 11,302
Decrease (increase) in short-term investments 4,603 166,150 (25,361)
Purchases and originations of mortgage loans (126,786) (1,935,136) (4,410,950)
Purchases of agency securities (2,787,988) (1,631,294) (1,747,931)
Purchases of equity securities -- (17,808) --
Purchases of other mortgage securities (131,531) -- --
Purchases of mortgage servicing rights (184,082) (263,821) (26,469)
Principal collections on mortgage investments 549,458 349,806 266,347
Proceeds from sales and redemptions of mortgage assets 1,281,057 105,288 3,859,993
Purchases of hedge instruments (27,381) -- --
Proceeds from sales of hedge instruments 32,480 -- --
----------- ----------- -----------
Net cash provided (used) by investing activities (884,968) (2,060,502) 364,699
----------- ----------- -----------
Financing activities:
Collateralized mortgage securities:
Issuance of securities -- 2,565,540 1,185,482
Principal payments on securities (572,191) (1,352,288) (2,469,026)
Increase (decrease) in accrued interest payable 1,887 (7,636) (14,427)
Capital stock transactions 14,774 6,288 6,248
Dividends paid (77,501) (87,867) (93,813)
Increase (decrease) in mortgage servicing
acquisitions payable (27,990) 75,888 --
Increase in short-term borrowings 1,438,200 746,775 994,598
----------- ----------- -----------
Net cash provided (used) by financing activities 777,179 1,946,700 (390,938)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents (3,039) (66,019) 57,458
Cash and cash equivalents at beginning of year 21,741 87,760 30,302
----------- ----------- -----------
Cash and cash equivalents at end of year $ 18,702 $ 21,741 $ 87,760
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
Capstead Mortgage Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
1 Business
Capstead Mortgage Corporation, a national mortgage banking firm, earns income
from servicing mortgage loans, investing in mortgage-backed securities and other
investment strategies. The Company's business plan is to build its mortgage
servicing and mortgage securities portfolios with the goal of producing
reasonably balanced operating results in a rising or falling interest rate
environment.
2 Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Capstead Mortgage
Corporation ("Capstead"), its mortgage servicing subsidiary ("Capstead Inc."),
its special-purpose finance subsidiaries and certain other entities
(collectively, the "Company"). Intercompany balances and transactions have been
eliminated. Substantially all of the assets of the special-purpose finance
subsidiaries are pledged to secure collateralized mortgage securities and are
not available for the satisfaction of general claims of Capstead. Capstead has
no obligation for the collateralized mortgage securities beyond the assets
pledged as collateral.
Use of Estimates
The use of estimates is inherent in the preparation of financial statements in
conformity with generally accepted accounting principles. The amortization of
premiums and discounts on mortgage assets and collateralized mortgage securities
and the amortization of mortgage servicing rights is based on expectations of
future movements in interest rates and how resulting rates will impact
prepayments on underlying mortgage loans. It is possible that prepayments could
rise to levels that would adversely affect profitability if such levels are
sustained for more than a brief period of time. The Company attempts to mitigate
this risk by achieving a balance of investments that perform well in a rising
interest rate environment, such as mortgage servicing rights and interest-only
securities, and in a falling interest rate environment, such as mortgage
investments, as supplemented from time to time by hedging activities.
Mortgage Assets
Mortgage investments and mortgage securities collateral held in the form of
mortgage-backed securities are debt securities. Management determines the
appropriate classification of debt securities at the time of purchase or
securitization and reevaluates such designation as of each balance sheet date.
Debt securities are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost. Marketable equity securities and debt
securities not classified as held-to-maturity are classified as available-for-
sale. Available-for-sale securities are stated at fair value with unrealized
gains and losses, net of tax, reported as a separate component of stockholders'
equity.
Mortgage investments held in the form of mortgage loans are carried at their
unpaid principal balance, net of unamortized discount or premium. The Company
may, from time to time, hold mortgage loans for sale. Such loans are carried at
the lower
6
<PAGE>
Capstead Mortgage Corporation
of cost or market on an aggregate basis. Transfers from loans held for sale
to loans held for investment are recorded at the lower of cost or market.
Interest income, net of servicing fees, is recorded as income when earned.
Any discount or premium is recognized as an adjustment to interest income by
the interest method over the life of the related mortgage asset. Interest and
dividends are included in interest income and other revenues, respectively.
Realized gains and losses are included in other revenues. The cost of assets
sold is based on the specific identification method.
Allowance For Possible Losses
The Company provides for possible losses due to mortgagor default on
mortgage loans not covered by mortgage pool insurance, fraud in the origination
of mortgage loans and special hazards on mortgage loans not covered by special
hazard insurance. The Company also provides for possible losses related to the
Company's limited exposure to credit and special hazard risks in certain
securitizations utilizing a senior/subordinate structure.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and highly liquid investments
with original maturities of 3 months or less.
Mortgage Servicing Rights
The cost of acquiring mortgage servicing rights is capitalized and then
amortized in proportion to and over the period of estimated net servicing
income. Estimated net servicing income is evaluated periodically and
adjustments are made to the rate of amortization.
Hedging Activities
The Company has acquired derivative financial instruments, specifically
interest rate floors, as hedges against increased prepayments on investments in
mortgage servicing rights and interest-only securities. Interest rate floors
partially protect the value of the assets hedged from the impact of increased
prepayments by increasing in value when interest rates decline. Realized gains
from effective hedge transactions reduce the carrying amount of the assets
hedged. Ongoing correlation and effectiveness of the hedges is measured by
comparing the change in value of the floors with the change in value of the
assets hedged. Should a hedge prove ineffective, results in excess of a
corresponding change in value of the assets hedged would be taken to income and
hedge accounting would cease. The Company has acquired other derivative
financial instruments, specifically interest rate caps, as a hedge against
rising interest rates on a portion of its short-term borrowings. The Company
may receive cash payments from the counterparties to these instruments should
certain specified interest rates fall (floors) or rise (caps). Any such
payments will be accrued and taken to income as a component of interest income
on interest-only securities, amortization expense of mortgage servicing rights
or interest expense on short-term borrowings, as applicable. The cost of
acquiring floors and caps is taken to income as a component of the applicable
hedged item over the contractual lives of the instruments. The Company has
credit risk with regard to the counterparties to derivative financial
instruments. The Company manages credit risk by dealing only with large,
financially-sound investment banking firms. The unamortized balance of the
instruments is included in prepaids, receivables and other on the balance sheet.
Borrowings
Collateralized mortgage securities and short-term borrowings are carried at
their unpaid principal balances, net of unamortized discount or premium. Any
discount or premium is recognized as an adjustment to interest expense by the
interest method over the expected term of the related borrowings.
7
<PAGE>
Capstead Mortgage Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Mortgage Servicing Revenues
Mortgage servicing revenues represent fees received for servicing mortgage
loans. Servicing fees are calculated based on a contractual percentage of the
outstanding monthly principal balance of mortgage loans serviced and are
recognized as income when collected.
Income Taxes
Capstead and its qualified real estate investment trust ("REIT") subsidiaries
("qualified REIT subsidiaries") have elected to be taxed as a REIT and intend to
continue to do so. As a result of this election, Capstead is not taxed on
taxable income distributed to stockholders, provided that certain REIT
qualification tests are met. Currently, it is Capstead's policy to distribute
100 percent of taxable income of the REIT within the time limits prescribed by
the Internal Revenue Code (the "Code"), which may extend into the subsequent
taxable year. Accordingly, no provision has been made for income taxes for
Capstead and its qualified REIT subsidiaries. Capstead's non-REIT subsidiaries,
principally Capstead Inc., file a separate federal income tax return.
Stock Option Plans
Employee and director stock options are accounted for under the provisions
of Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25") and Related Interpretations. Under APB 25, a fair value
methodology is not utilized in determining expense recognition for stock option
awards to employees and directors.
Net Income Per Share
Primary net income per share is computed by dividing net income, after
deduction of preferred stock dividends, by the weighted average number of
common shares and common stock equivalents outstanding, after retroactively
giving effect to stock splits. Fully diluted net income per share is computed
by dividing net income, after deducting dividends on the $1.26 Cumulative
Convertible Preferred Stock, Series B ("Series B Preferred Stock"), by the
weighted average number of common shares and common stock equivalents
outstanding, after retroactively giving effect to stock splits, and assuming
conversion of the $1.60 Cumulative Preferred Stock, Series A ("Series A
Preferred Stock"). The Series B Preferred Stock is not considered convertible
for purposes of calculating fully diluted net income per share as it is
currently antidilutive.
Reclassification and Stock Split
Certain amounts for prior years have been reclassified to conform to the 1995
presentation. On October 30, 1995 a 3-for-2 split of the Company's $0.01 par
value common stock was accomplished. All references to the number of common
shares and share amounts in the accompanying consolidated financial statements
and related notes have been restated to reflect the stock split.
Recent Accounting Pronouncements
In May 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122 "Accounting for Mortgage Servicing
Rights" ("SFAS 122"). SFAS 122 sets forth new accounting principles for
capitalizing originated mortgage servicing rights and recording impairment of
existing mortgage servicing rights. The Company will adopt SFAS 122 on a
prospective basis effective January 1, 1996 as required. This adoption is not
expected to have a material impact on the results of operations or financial
position of the Company.
8
<PAGE>
Capstead Mortgage Corporation
3 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>
Year Ended
As of December 31 December 31
- ----------------------------------------------------------------------------
1995 1994 1995 1994
---------- ---------- ------ ------
<S> <C> <C> <C> <C>
Mortgage loans held for sale $ 5,155 $ -- 7.76% --%
Mortgage loans 5,264 209,507 7.07 6.68
AAA-rated mortgage
pass-through securities:
Fixed-rate 1,771 409 8.76 6.69
Medium-term 424,329 459,874 6.96 6.92
Adjustable-rate 563,203 755,623 6.90 5.48
Agency securities:
Fixed-rate 489,689 504,023 6.32 6.44
Adjustable-rate 2,984,451 1,042,861 6.13 4.74
Callable notes 49,092 333,687 6.98 6.96
---------- ----------
$4,522,954 $3,305,984
========== ==========
</TABLE>
The Company classifies its mortgage investments by term and interest rate
characteristics of the underlying mortgage loans. Fixed-rate mortgage
investments have (i) fixed rates of interest for their entire terms or (ii) an
initial fixed-rate period of 10 years after origination and then adjust
annually based on a specified margin over 1-year U.S. Treasury Securities
("1-year Treasuries"). Medium-term mortgage investments have (i) an initial
fixed-rate period of 3 or 5 years after origination and then adjust annually
based on a specified margin over 1-year Treasuries or (ii) initial interest
rates that adjust one time, approximately 5 years following origination of the
mortgage loan, based on a specified margin over the Federal National Mortgage
Association ("FNMA") yields for 30-year, fixed-rate commitments at the time of
adjustment. Adjustable-rate mortgage investments either adjust (i)
semi-annually based on a specified margin over the 6-month London Interbank
Offered Rate ("LIBOR") or (ii) annually based on a specified margin over 1-year
Treasuries. Fixed- 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"). Callable agency notes are unsecured,
3-year, fixed-rate notes issued by FHLMC, FNMA or the Federal Home Loan Bank
Board ("FHLBB") and mature in 1997, unless redeemed earlier. Collectively,
mortgage-backed securities and callable notes issued by government-sponsored
entities are referred to as "Agency Securities."
At December 31, 1995 the AAA-rated private mortgage pass-through securities
("Mortgage Pass-Throughs") and the Agency Securities were pledged to secure
short-term borrowings. Transfers from mortgage investments to mortgage
securities collateral totaled $2,688,361,000 and $1,197,947,000 in 1994 and
1993, respectively.
9
<PAGE>
Capstead Mortgage Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4 Mortgage Securities Collateral
Mortgage securities collateral consists primarily of collateral pledged to
secure borrowings through collateralized mortgage securities. All principal and
interest on the collateral is remitted directly to a collection account
maintained by a trustee. The trustee is responsible for reinvesting those funds
in short-term investments. All collections on the collateral and the
reinvestment income earned thereon are available for the payment of principal
and interest on the collateralized mortgage securities.
The components of mortgage securities collateral are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
December 31
- -------------------------------------------------------------------------------
1995 1994
---------- ----------
<S> <C> <C>
Mortgage collateral $4,660,504 $5,201,886
Short-term investments 24,705 29,308
Accrued interest receivable 29,130 33,221
---------- ----------
Total collateral 4,714,339 5,264,415
Unamortized discount (7,147) (7,962)
---------- ----------
Net collateral 4,707,192 5,256,453
Other mortgage securities 122,828 13,650
---------- ----------
$4,830,020 $5,270,103
========== ==========
</TABLE>
Mortgage collateral consists of fixed-rate, medium-term and adjustable-rate
mortgage securities and fixed-rate Agency Securities. The weighted average
effective interest rate for mortgage collateral was 7.55 percent and 7.63
percent during 1995 and 1994, respectively. Other mortgage securities at
December 31, 1995 consist primarily of agency-issued, interest-only
securities yielding 10.11 percent with a related notional amount of $800
million.
5 Mortgage Servicing
The following table provides information regarding the mortgage servicing
portfolio and the related investment in mortgage servicing rights (dollars in
thousands):
<TABLE>
<CAPTION>
Unpaid Mortgage
Principal Number Servicing
Balance of Loans Rights
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans serviced at January 1, 1994 $ 2,393,267 7,746 $ 25,146
Additions 12,524,522 110,078 170,268
Run-off/amortization (525,607) (2,215) (5,998)
----------- ------- --------
Loans serviced at December 31, 1994 14,392,182 115,609 189,416
Additions 13,090,200 143,153 224,505
Run-off/amortization (1,924,753) (11,877) (26,576)
Results of hedging activity - - (17,745)
----------- ------- --------
Loans serviced at December 31, 1995 25,557,629 246,885 369,600
Purchases pending transfer 3,064,000 30,600 53,760
----------- ------- --------
Total portfolio at December 31, 1995 $28,621,629 277,485 $423,360
=========== ======= ========
</TABLE>
10
<PAGE>
Capstead Mortgage Corporation
The Company services mortgage loans in all 50 states and the District of
Columbia. As of December 31, 1995, 16 percent of loans serviced and loans
pending transfer were located in California (based on unpaid principal
balances).
In connection with mortgage servicing activities, the Company maintains
segregated escrow deposits that are held in bank trust accounts. At December
31, 1995 and 1994, escrow and fiduciary funds for loans being serviced
approximated $316 million and $163 million, respectively, and are excluded from
the accompanying balance sheet.
6 Collateralized Mortgage Securities
Each series of collateralized mortgage securities issued consists of various
classes of bonds, most of which have fixed rates of interest. Interest is
payable monthly or quarterly at specified rates for all classes. Typically,
principal payments on each series are made to each class in the order of their
stated maturities so that no payment of principal will be made on any class of
bonds until all classes having an earlier stated maturity have been paid in
full.
The components of collateralized mortgage securities along with selected
other information are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31
- ------------------------------------------------------------------------------
1995 1994
---------- ----------
<S> <C> <C>
Collateralized mortgage securities $4,606,668 $5,177,445
Accrued interest payable 53,164 51,277
---------- ----------
Total obligation 4,659,832 5,228,722
Less unamortized discount (120,969) (126,577)
---------- ----------
Net obligation $4,538,863 $5,102,145
========== ==========
Range of average interest rates 5.80% to 9.70% 5.87% to 10.00%
Range of stated maturities 2007 to 2025 2007 to 2025
Number of series 41 45
</TABLE>
The maturity of each series of securities is directly affected by the rate
of principal prepayments on the related mortgage securities collateral. Each
series of securities is also subject to redemption at the Company's option
provided that certain requirements specified in the related indenture have been
met (referred to as "clean-up calls"). As a result, the actual maturity of any
series of securities is likely to occur earlier than its stated maturity. The
average effective interest rate for all collateralized mortgage securities was
7.57 percent and 7.49 percent during 1995 and 1994, respectively. Interest paid
on collateralized mortgage securities totaled $351,477,000, $324,229,000 and
$375,948,000 during 1995, 1994 and 1993, respectively.
7 Short-Term Borrowings
Short-term borrowings are primarily made under repurchase arrangements with
investment banking firms pursuant to which 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. Repurchase arrangements,
11
<PAGE>
Capstead Mortgage Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
all of which had maturities of less than 31 days, and the related average
effective interest rates are classified by type of collateral as follows
(dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
- ------------------------------------------------ ------------------------
Weighted Weighted
Borrowings Average Borrowings Average
Outstanding Rate Outstanding Rate
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Mortgage loans $ _ _% $ 190,060 6.45%
Mortgage Pass-Throughs 962,455 5.99 1,161,894 6.24
Agency Securities 3,454,802 5.75 1,783,996 5.67
Other mortgage assets 168,025 6.10 44,632 6.47
---------- ----------
$4,585,282 $3,180,582
========== ==========
</TABLE>
In October 1995 Capstead Inc. extended a $300 million revolving line of credit
agreement with an investment banking firm for an additional year. The new
maturity date of this agreement is October 1997. A fee was paid on the $120
million committed portion of this facility. The line will be used primarily to
finance future acquisitions of mortgage servicing rights and will be
collateralized by those rights, as well as certain existing servicing rights.
The agreement requires, among other things, that Capstead Inc. maintain certain
financial ratios and specified levels of unencumbered servicing rights, as
defined. Capstead Inc. is in compliance with all requirements. Interest rates on
borrowings under this facility are based on LIBOR with interest due monthly.
Borrowings under this facility totaled $43,500,000 at 8.19 percent and
$10,000,000 at 7.24 percent at December 31, 1995 and 1994, respectively.
Accrued interest on short-term borrowings totaled $9,594,000 at December 31,
1995. The weighted average effective interest rate on all short-term borrowings
was 6.06 percent and 4.64 percent during 1995 and 1994, respectively. Interest
paid on short-term borrowings totaled $217,028,000, $136,442,000 and $81,722,000
during 1995, 1994 and 1993, respectively.
8 Disclosures Regarding Fair Values of Financial Instruments
The estimated fair values of financial instruments 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 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 carrying amounts of cash and cash equivalents, receivables, payables and
short-term borrowings approximate fair value. The fair value of equity
securities, if any, and derivative financial instruments are based on quoted
market prices. The fair value of mortgage assets 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 for similar mortgage assets, or (iii) expected securitization results.
The fair value of collateralized mortgage securities is dependent upon the
characteristics of the mortgage securities collateral pledged to secure the
issuance. Therefore, fair value was based on the same method used for
determining fair value for the underlying mortgage securities collateral
adjusted for credit enhancements.
12
<PAGE>
Capstead Mortgage Corporation
The following tables summarize fair values of financial instruments (in
thousands):
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
- ----------------------------------------------------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 18,702 $ 18,702 $ 21,741 $ 21,741
Receivables and equity securities 79,710 79,858 50,558 51,545
Mortgage securities collateral 4,830,020 4,791,722 5,270,103 4,850,391
Mortgage investments 4,522,954 4,522,954 3,305,984 3,220,486
Derivative financial instruments:
Interest rate floors
($5.5 billion notional amount) 11,588 22,911 -- --
Interest rate caps
($625 million notional amount) 4,422 463 -- --
Liabilities:
Payables 71,237 71,237 87,456 87,456
Collateralized mortgage securities 4,538,863 4,553,184 5,102,145 4,736,974
Short-term borrowings 4,628,782 4,628,782 3,190,582 3,190,582
</TABLE>
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115") as of January 1, 1994. In accordance with SFAS 115,
prior period financial statements have not been restated to reflect the change
in accounting principle. There was no cumulative effect as of January 1, 1994 of
adopting SFAS 115 on net income. The January 1, 1994 opening balance of
stockholders' equity was increased by $7,512,000 to reflect net unrealized gains
on securities classified as available-for-sale that were previously carried at
amortized cost. In response to transition rules for adopting SFAS 115 released
in November 1995, $393,478,000 of medium-term Mortgage Pass-Throughs,
$546,759,000 of Agency Securities, and $195,474,000 of mortgage securities
collateral were transferred from held-to-maturity to available-for-sale. These
securities had a net unrealized gain of $7,701,000 on the December 31, 1995
transfer date. The following table summarizes securities held available-for-sale
at December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage Pass-Throughs:
Fixed-rate $ 1,723 $ 48 $ -- $ 1,771
Medium-term 420,910 3,455 36 424,329
Adjustable-rate 555,944 7,259 -- 563,203
Agency Securities:
Fixed-rate 497,785 -- 8,096 489,689
Adjustable-rate 2,977,794 6,657 -- 2,984,451
Callable notes 48,974 118 -- 49,092
Mortgage securities collateral 356,159 9,063 10,566 354,656
---------- ------- ------- ----------
Total debt securities $4,859,289 $26,600 $18,698 $4,867,191
========== ======= ======= ==========
</TABLE>
Mortgage securities collateral classified as held-to-maturity has been
permanently financed through the issuance of collateralized mortgage securities.
Gross unrealized gains and losses are based on projected net cash flows of the
mortgage securities collateral after payment on the related collateralized
mortgage securities determined using market discount rates and
13
<PAGE>
Capstead Mortgage Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
prepayment assumptions. At December 31, 1995, $4,475,364,000 of mortgage
securities collateral held-to-maturity (cost basis) had gross unrealized gains
and losses of $5,042,000 and $60,920,000, respectively, resulting in a fair
value of $4,419,486,000; however, because the Company intends to hold these
assets to maturity, it does not anticipate realizing such gains or losses and
instead expects these assets will continue to make a positive contribution to
income in future periods.
The following tables summarize available-for-sale and held-to-maturity
securities as of December 31, 1994 (in thousands):
<TABLE>
<CAPTION>
Available-For-Sale Securities
- -----------------------------------------------------------------------------------------
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Mortgage Pass-Throughs:
Fixed-rate $ 427 $ - $ 18 $ 409
Medium-term* 9,054 - 9,054 -
Adjustable-rate 780,224 - 24,601 755,623
Adjustable-rate Agency
Securities 1,088,252 - 45,391 1,042,861
Other mortgage securities 10,369 1,734 810 11,293
Equity securities 1,113 - 375 738
---------- ------ ------- ----------
$1,889,439 $1,734 $80,249 $1,810,924
========== ====== ======= ==========
</TABLE>
<TABLE>
<CAPTION>
Held-To-Maturity 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 504,023 - 62,586 441,437
Callable 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 investment in medium-term Mortgage Pass-Throughs was transferred to
the held-to-maturity classification during the third quarter of 1994. As
a result, the unrealized loss at the transfer date remained as a
component of the recorded mark-to-market for available-for-sale
securities at December 31, 1994.
The maturity of mortgage assets is directly affected by the rate of
principal prepayments by mortgagors and clean-up calls by issuers of remaining
debt securities outstanding. Included in mortgage securities collateral is
$31,822,000 and $4,646,000 of collateral released from the related indentures
at December 31, 1995 and 1994, respectively. During 1995 and 1994, mortgage
collateral previously released from the related indentures pursuant to clean-up
calls totaling $35,893,000 and $77,087,000 were sold at gross realized gains
aggregating $966,000 and $2,938,000, respectively. During 1995 and 1994,
available-for-sale securities totaling $784,600,000 and $16,695,000 (cost
basis) were sold at gross realized gains aggregating $9,511,000 and $6,223,000,
respectively. Principal collections on mortgage investments and mortgage
collateral released from the related indentures while held-to-maturity totaled
$84,020,000 and $47,895,000 during 1995 and 1994, respectively. During 1995,
$284,950,000 of callable agency notes held-to-maturity were redeemed by issuers.
14
<PAGE>
Capstead Mortgage Corporation
9 Allowance for Possible Losses
The Company has limited exposure to losses on mortgage investments and
mortgage collateral. Losses due to typical mortgagor default may be reduced by
mortgage pool insurance from AAA-rated mortgage pool insurers, which
supplements primary mortgage insurance, if any, and homeowner equity, if any.
The amount of coverage under mortgage pool insurance policies is the amount
(typically 7 to 15 percent of the aggregate amount in such pool of mortgage
loans) determined by one or more national statistical rating agencies necessary
to allow the related securities to be rated AAA when combined with homeowner
equity or other insurance coverage.
Certain other risks, however, are not covered by mortgage pool insurance and may
subject the Company to losses. These risks include fraud or misrepresentation
during origination of a mortgage loan and special hazards that are not covered
by standard hazard insurance policies (e.g., earthquakes). In cases of fraud,
the Company generally will not be able to recover its losses from the mortgage
insurance company, but will generally have recourse to the prior owner of a loan
based on representations and warranties made at the time the loan was purchased.
However, to the extent the prior owner does not perform its repurchase
obligation, the Company may incur a loss. Special hazards are typically
catastrophic events that are unable to be predicted. The Company limits its
exposure to special hazard losses by acquiring special hazard insurance coverage
from a AAA-rated insurer. As of December 31, 1995, 48 percent of the Company's
mortgage assets (excluding Agency Securities) were covered by a special hazard
insurance policy. Management does not believe that fraud or special hazard risks
pose a material exposure to the Company.
In late 1993 the Company began issuing CMOs in a senior/subordinate
structure (in lieu of purchasing mortgage pool insurance and special hazard
insurance) where the investor in the subordinate classes assumes credit and
special hazard risks. The Company has retained an aggregate of approximately
$2.0 million of credit and special hazard risk on certain of these issuances.
Actual losses to the Company due to this risk are dependent upon the timing and
magnitude of related collateral defaults.
Activity in the allowance for possible losses was as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31
- ----------------------------------------------------------------
1995 1994
------- -------
<S> <C> <C>
Beginning balance $ 7,354 $ 6,927
Provision for possible losses 2,200 3,500
Charge-offs due to:
Mortgagor default (680) (893)
Fraud/misrepresentation (2,041) (1,973)
Special hazard losses (914) (207)
------- -------
$ 5,919 $ 7,354
======= =======
</TABLE>
As of December 31, 1995, approximately 49 percent of mortgage assets
(excluding Agency Securities) were secured by properties located in California.
Exposure arising from this geographic concentration has been reduced by either
the acquisition of mortgage pool insurance and special hazard insurance or the
use of the senior/subordinate structure for securitizations.
15
<PAGE>
Capstead Mortgage Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10 Income Taxes
Capstead and its qualified REIT subsidiaries file a separate federal income
tax return that does not include the operations of the non-REIT subsidiaries.
Provided all taxable income of Capstead and its qualified REIT subsidiaries is
distributed to stockholders within time limits prescribed by the Code, no
income taxes are due on this income. Taxable income of the non-REIT
subsidiaries is fully taxable. Income taxes paid by the non-REIT subsidiaries
during 1995 totaled $481,000. No income taxes were paid in prior years.
Effective tax rates will differ substantially from statutory federal income tax
rates because of the effect of the following items (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31
- ---------------------------------------------------------------------------------------------------------------
1995 1994 1993
--------- --------- ----------
<S> <C> <C> <C>
Income taxes computed at the
federal statutory rate $ 27,241 $ 29,097 $ 32,047
Income not subject to tax due to REIT status (21,712) (27,289) (32,422)
--------- --------- ---------
Net income (loss) of non-REIT subsidiaries
at the statutory rate 5,529 1,808 (375)
Alternative minimum tax 456 -- --
Losses not benefited for income tax purposes -- -- 375
Benefit of previously unrecognized deferred
income tax asset (5,859) (1,261) --
Other 346 (547) --
---------- --------- --------
$ 472 $ -- $ --
---------- --------- --------
</TABLE>
Significant components of deferred income tax assets and liabilities are as
follows (in thousands):
<TABLE>
<CAPTION>
December 31
- -------------------------------------------------------------------------------------------------------------
1995 1994
-------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $19,065 $26,504
Capital loss carryforwards -- 1,949
Hedging transactions 5,967 --
Other 1,158 370
------- -------
26,190 28,823
------- -------
Deferred tax liabilities:
Mark-to-market 1,139 1,981
Securitizations -- 15,429
Amortization of mortgage servicing rights 2,765 119
Other -- 85
------- -------
3,904 17,614
------- -------
Net deferred tax assets $22,286 $11,209
======= =======
Valuation allowance $22,286 $11,209
======= =======
</TABLE>
16
<PAGE>
Capstead Mortgage Corporation
The increase in the valuation allowance during 1995 is primarily the result of
hedging transactions and a reorganization of certain subsidiaries. At December
31, 1995 the non-REIT subsidiaries had net operating loss carryforwards for tax
purposes of approximately $55 million, which expire beginning in the year 2007.
11 Stockholders' Equity
The Series A Preferred Stock issued in connection with a 1989 acquisition is
nonvoting. Each share is entitled to a cumulative fixed dividend at an annual
rate of $1.60 and is eligible for conversion into 1.35 shares of common stock.
The Series A Preferred Stock has a liquidation preference of $16.40 per share
and is currently redeemable at the Company's option, in whole or in part, at a
redemption price equal to the liquidation preference. During 1995, 73,107
shares of the Series A Preferred Stock were converted into 98,694 shares of
common stock.
The Series B Preferred Stock issued in connection with a 1992 acquisition is
nonvoting. Each share is entitled to a cumulative fixed dividend at an annual
rate of $1.26 and is eligible for conversion into 0.4794 of 1 share of common
stock. The Series B Preferred Stock has a liquidation preference of $11.38 per
share and is redeemable at the Company's option, in whole or in part, at a
redemption price of $12.50 after December 2, 1997. During 1995, 2,190 shares of
the Series B Preferred Stock were converted into 1,050 shares of common stock.
During 1995, 1994 and 1993, the Company issued 104,151; 31,119 and 15,543
shares of common stock through its dividend reinvestment plan for net proceeds
of $2,044,000, $534,000 and $395,000, respectively. During 1995, 1994 and 1993,
the Company also issued 411,142; 481,384 and 381,473 shares of Series B
Preferred Stock through its dividend reinvestment plan for Series B
stockholders on which net proceeds were received of $5,312,000, $5,254,000 and
$4,662,000, respectively.
The Company modified its dividend reinvestment plan for common stock during
1995 to allow investors to purchase additional shares directly from the
Company. The Company issued 305,769 shares for net proceeds of $6,223,000
pursuant to this modification. Also during 1995 the Company began a program
whereby the Company may issue new shares of common stock on a daily basis,
subject to certain limitations. The Company issued 42,800 shares for net
proceeds of $974,000 pursuant to this program.
Outstanding options, other than those issued pursuant to employee and
director benefit plans, are limited to a 6-year option issued July 31, 1992 to
acquire 1,125,000 shares of common stock at $21.75 per share.
The Company's Charter provides that if the Board of Directors determines in
good faith that the direct or indirect ownership of stock of Capstead has
become concentrated to an extent which would cause Capstead to fail to qualify
as a REIT, the Company may redeem or repurchase, at fair market value, any
number of shares of common stock and/or preferred stock sufficient to maintain
or bring such ownership into conformity with the Code and may refuse to
transfer or issue shares of common stock and/or preferred stock to any person
whose acquisition would result in Capstead being unable to comply with the
requirements of the Code. In addition, the Charter provides that the Company
may redeem or refuse to transfer any shares of capital stock of Capstead
necessary to prevent the imposition of a penalty tax as a result of ownership
of such shares by certain disqualified organizations, including governmental
bodies and tax-exempt entities that are not subject to tax on unrelated
business taxable income.
17
<PAGE>
Capstead Mortgage Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12 Employee Benefit Plans
The Company sponsors stock option plans for directors and employees and also
sponsors the 1994 Flexible Long-Term Incentive Plan, which provide for the
issuance of stock options and other incentive-based stock awards (collectively,
the "Plans"). The Plans provide for the issuance of up to an aggregate of
2,475,000 shares of common stock. Most of the outstanding grants provide for
the annual granting of dividend equivalent rights that permit the option holder
to obtain additional shares of common stock based upon formulas set forth in
the Plans.
<TABLE>
<CAPTION>
Year Ended December 31
- ---------------------------------------------------------------------------------------------------------------------
1995 1994 1993
--------- -------- ---------
<S> <C> <C> <C>
Outstanding options at beginning of year: 1,046,185 228,920 211,161
Options granted 324,750 877,500 99,000
Options exercised (11,964) (41,437) (87,451)
Options canceled (25,258) (26,555) --
Dividend equivalent rights earned 36,993 7,757 6,210
--------- --------- -------
Outstanding options at end of year 1,370,706 1,046,185 228,920
========= ========= =======
Exercise price per share:
For options exercised during year $8.67 - 18.00 $8.67 - 26.17 $8.67 - 23.00
For options outstanding at end of year 8.67 - 27.33 8.67 - 27.33 8.67 - 26.17
</TABLE>
As of December 31, 1995, options were immediately exercisable for 862,147
shares. In accordance with the terms of the Plans, on January 1, 1996 the
Company granted dividend equivalent rights for the issuance of an additional
47,131 shares.
The Company also sponsors a qualified defined contribution retirement plan
created in late 1993 for all employees. The Company matches up to 50 percent of
a participant's voluntary contribution up to a maximum of 6 percent of a
participant's compensation. The Company also may make additional contributions
of up to another 3 percent of a participant's compensation. All Company
contributions are subject to certain vesting requirements. Contribution
expenses were $758,891, $369,624 and $16,092 in 1995, 1994 and 1993,
respectively.
13 Management and Non-Competition Agreements
Since its inception in 1985 and through September 30, 1993, the Company operated
under a management agreement with a subsidiary (the "Manager") of Lomas Mortgage
USA, Inc. ("LMUSA"). In 1992 the Company entered into a 65-month management
agreement with the Manager and a 65-month non-competition agreement with the
parent company of LMUSA. In 1993 the Company negotiated the termination of these
agreements and on October 1, 1993 became fully self-administered. Termination
costs incurred in 1993 totaled $11,891,000 including $4,363,000 of unamortized
amounts paid under the non-competition agreement.
18
<PAGE>
Capstead Mortgage Corporation
14 Net Interest Income Analysis (Unaudited)
The following tables summarize interest income and interest expense and
average effective interest rates for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------------------------- ------------------- --------------------
Average Average Average
Amount Rate Amount Rate Amount Rate
------ ------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Mortgage securities
collateral $ 382,425 7.59% $ 354,603 7.63% $ 390,690 8.38%
Mortgage investments 240,735 6.50 202,398 6.07 184,136 6.56
--------- --------- ---------
Total interest income 623,160 557,001 574,826
--------- --------- ---------
Interest expense:
Collateralized mortgage
securities 360,386 7.57 335,656 7.49 410,153 9.05
Short-term borrowings 216,650 6.04 139,092 4.64 80,923 3.40
--------- --------- ---------
Total interest expense 577,036 474,748 491,076
--------- --------- ---------
Net interest $ 46,124 $ 82,253 $ 83,750
========= ========= =========
</TABLE>
The following tables summarize the changes in interest income and interest
expense due to changes in interest rates versus changes in volume for the
periods indicated (in thousands):
<TABLE>
<CAPTION>
1995/1994* 1994/1993*
- ------------------------------------------------------------------------------- ------------------------------------
Rate Volume Total Rate Volume Total
--------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Mortgage securities collateral $ (1,587) $29,409 $ 27,822 $(34,775) $ (1,312) $(36,087)
Mortgage investments 14,813 23,524 38,337 (14,544) 32,806 18,262
--------- ------- -------- -------- -------- --------
13,226 52,933 66,159 (49,319) 31,494 (17,825)
--------- ------- -------- -------- -------- --------
Interest expense:
Collateralized mortgage securities 3,708 21,022 24,730 (69,859) (4,638) (74,497)
Short-term borrowings 47,140 30,418 77,558 33,440 24,729 58,169
--------- ------- ------- -------- -------- --------
50,848 51,440 102,288 (36,419) 20,091 (16,328)
--------- ------- ------- --------- -------- ---------
$(37,622) $ 1,493 $(36,129) $(12,900) $11,403 $ (1,497)
========= ======== ======== ======== ======= =========
</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.
19
<PAGE>
Capstead Mortgage Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15 Quarterly Results (Unaudited)
The following is a summary of quarterly results of operations (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31, 1995
- -----------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income $152,099 $152,980 $156,543 $161,538
Interest and related expenses 145,927 145,692 148,591 150,411
Net margin on mortgage assets 6,172 7,288 7,952 11,127
Net margin on mortgage servicing operations 9,470 10,105 9,729 11,948
Other revenues 2,602 3,448 6,371 4,049
Net income 15,366 17,739 21,297 22,958
Net income per share:
Primary 0.24 0.35 0.49 0.56
Fully diluted * 0.34 0.49 0.55
</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.
<TABLE>
<CAPTION>
Year Ended December 31, 1994
- -----------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $125,734 $135,819 $144,891 $150,557
Interest and related expenses 102,666 118,227 131,208 139,623
Net margin on mortgage assets 23,068 17,592 13,683 10,934
Net margin on mortgage servicing operations 1,182 4,315 6,494 9,028
Other revenues 3,060 1,724 6,140 3,254
Net income 23,469 20,030 22,267 19,813
Net income per share:
Primary 0.60 0.45 0.55 0.44
Fully diluted 0.59 0.45 0.54 0.43
</TABLE>
16 Market and Dividend Information (Unaudited)
The New York Stock Exchange trading symbol for the Company's common stock is
CMO. There were 2,503 holders of record of the Company's common stock at
December 31, 1995. In addition, depository companies held stock for 19,099
beneficial owners. During the last two years, the high and low stock sales
prices and dividends declared on common stock were:
<TABLE>
<CAPTION>
Year Ended December 31, 1995 Year Ended December 31, 1994
- ----------------------------------------------------------- ----------------------------------
Stock Prices Stock Prices
------------ Dividends ------------ Dividends
High Low Declared High Low Declared
---- ------ -------- ---- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
First quarter $16.58 $11.17 $0.24 $28.08 $18.08 $0.55
Second quarter 20.25 13.67 0.35 19.83 15.33 0.55
Third quarter 23.17 17.33 0.49 19.16 15.08 0.55
Fourth quarter 24.50 20.92 0.56 16.25 11.16 0.48
</TABLE>
20
<PAGE>
Capstead Mortgage Corporation
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(In thousands, except percentages and per share amounts) Year Ended December 31
- --------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
--------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Selected consolidated statement of
income data:(1)
Interest income $ 623,160 $ 557,001 $ 574,826 $ 500,587 $ 235,567
Interest and related expenses 590,621 491,724 513,960 437,004 194,665
Net margin on mortgage assets 32,539 65,277 60,866 63,583 40,902
Net margin on mortgage servicing
operations 41,253 21,019 (1,056) -- --
Other revenues 16,468 14,178 64,573 3,862 2,682
Net income 77,359 85,579 94,256 53,191 33,717
Net income per share:(2)
Primary(3) 1.64 2.04 2.45 2.25 1.95
Fully diluted 1.61 2.01 2.38 2.15 1.64
Return on average total stockholders'
equity 11.91% 13.27% 14.65% 16.08% 13.25%
Cash dividends paid per share:(2)
Common $ 1.64 $ 2.14 $ 2.44 $ 2.17 $ 1.71
Series A Preferred 1.60 1.60 1.60 1.60 1.60
Series B Preferred 1.26 1.26 1.26 0.10 --
Average number of shares outstanding:(2)
Primary 23,119 22,917 22,719 21,591 13,446
Fully diluted 24,153 23,813 23,895 23,387 20,525
Selected consolidated balance sheet data:
Mortgage investments $ 4,522,954 $ 3,305,984 $ 2,842,151 $1,904,600 $ 983,024
Mortgage securities collateral 4,830,020 5,270,103 3,995,956 5,269,600 2,806,616
Total assets 9,903,606 8,943,858 6,980,324 7,229,608 3,824,546
Short-term borrowings 4,628,782 3,190,582 2,443,807 1,449,209 855,572
Collateralized mortgage securities 4,538,863 5,102,145 3,891,134 5,143,157 2,708,630
Stockholders' equity 664,724 563,675 638,190 631,499 253,339
Other data:
Mortgage loans acquired
during the year 117,839 1,944,507 4,393,273 5,483,602 2,171,362
Mortgage servicing portfolio(4) 25,557,629 14,392,182 2,393,267 -- --
</TABLE>
- -------------------
(1) On December 2, 1992 the Company exchanged 29,429,815 shares of the
Company's Series B Preferred Stock for all the common stock of a closed-end
diversified management investment company. The acquisition has been
accounted for as a purchase and the net income earned on the assets and
liabilities acquired have been included in the Consolidated Statement of
Income from the date of the acquisition.
(2) Adjusted for the 3-for-2 common stock split effective October 30, 1995.
(3) During the years ended December 31, 1992 and 1991, 1,382,551 and
3,140,304 shares of the Series A Preferred Stock were converted into
1,866,392 and 4,239,384 shares of common stock, respectively. If these
conversions had occurred at the beginning of the respective years, primary
net income per share would have been $2.21 and $1.73 per share for the years
ended December 31, 1992 and 1991, respectively.
(4) Excludes $3.1 billion of mortgage servicing rights acquired in 1995 that
will be transferred into the mortgage servicing portfolio by the end of the
first quarter of 1996. Also excludes an additional $5.0 billion of mortgage
servicing rights acquired in January 1996 that will be transferred into the
portfolio by May 1996. By May 1996 the mortgage servicing portfolio is
expected to exceed $32 billion.
21
<PAGE>
Capstead Mortgage Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Financial Condition
The jumbo mortgage loan market has changed dramatically over the last
several years. Mortgage loan originations reached all time highs in 1992 and
1993 due to steadily declining mortgage interest rates that made refinancing
increasingly attractive to mortgagors. Mortgage interest rates reached 20 year
lows by the fall of 1993; however, by early 1994 rates began a steady rise. As
rising rates choked off the 1992/1993 refinancing boom, competition to acquire
remaining originations intensified. At this same time, the cost of mortgage
pool insurance rose in response to mounting credit losses being incurred by
these insurers, most of whom ultimately withdrew from this business entirely.
In order to compete with other buyers of jumbo loans as a long-term investor,
the Company had to be willing to once again accept credit risk on these
mortgage assets or find buyers for subordinate classes of its securitizations
willing to do so at a fair price.
Beginning in January 1995, the Company implemented a strategy of selling
individual mortgage loans purchased through its jumbo mortgage loan conduit
operation to private investors shortly after the commitment to purchase,
instead of accumulating $100 million or more of similar mortgage loans for an
efficient securitization. This strategy allowed the Company to reduce the risks
associated with accumulating and securitizing jumbo mortgage loans but was not
intended to be a long-term solution. In November 1995 the Company exited the
jumbo mortgage loan conduit business after concluding that as a long-term
investor in mortgage assets, accepting the associated credit risk was not in
the best interest of the stockholders. While this decision represents a change
in strategy for accumulating mortgage assets, it has been successfully replaced
by the acquisition of mortgage-backed securities issued by government-sponsored
entities, as discussed below.
The Company purchased or originated mortgage loans totaling $127 million during
1995 compared to purchases totaling $1.9 billion during 1994. Mortgage loan
sales, low purchase volume and the formation of $160 million of AAA-rated
private mortgage pass-through securities ("Mortgage Pass-Throughs")
substantially reduced holdings of mortgage loans. In addition to reducing
exposure to 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 or
selling these securities, the Company is able to negotiate more favorable terms.
In November 1995 the Company sold $180 million of adjustable-rate mortgage
("ARM") Mortgage Pass-Throughs.
During 1995 the Company acquired $2.6 billion of ARM mortgage-backed
securities issued by government-sponsored entities, either the Federal Home
Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage Association
("FNMA") or the Government National Mortgage Association ("GNMA")
(collectively, "Agency Securities"). Sales during 1995 included $469 million of
ARM Agency Securities. After considering sales and run-off of existing
portfolio, holdings of ARM Agency Securities increased $1.9 billion during the
year to $3.0 billion.
22
<PAGE>
Capstead Mortgage Corporation
In past years, the Company has been an active issuer of collateralized
mortgage obligations ("CMOs") and other securities backed by jumbo mortgage
loans. The Company generally retained residual interests in CMOs issued
consisting primarily of interest-only and principal-only strips. During 1995
the Company did not issue any CMOs; however, the Company did acquire $132
million of agency-issued, interest-only securities, which increased the CMO
investment portfolio to $291 million at December 31, 1995 compared to a
portfolio of $168 million at December 31, 1994. Interest-only securities have
characteristics similar to investments in mortgage servicing in that the
mortgage loans underlying these securities are subject to prepayment risk.
Derivative financial instruments, specifically 10-year U.S. Treasury interest
rate floor agreements, are held as a partial hedge against this risk (see
"Effects of Interest Rate Changes"). Certain of these hedge positions were
closed out during 1995 at gains aggregating $5.0 million which were deferred.
Open hedge positions, with a $2.0 billion notional amount, carried a $3.6
million unrealized gain at December 31, 1995.
The mortgage servicing portfolio (excluding pending transfers) increased during
the year to $25.6 billion with a weighted average interest rate of 7.37 percent
and earning an average annual service fee excluding ancillary revenue and
earnings on escrows (the "Average Service Fee") of 30.4 basis points. The
December 31, 1995 balance of mortgage servicing rights related to this portfolio
was $369.6 million (145 basis points, or a 4.8 multiple of the Average Service
Fee). Another $3.1 billion of servicing had been acquired as of December 31,
1995 that was pending transfer into the portfolio and was being subserviced by
the sellers. Additional mortgage servicing has been acquired subsequent to year-
end. Including January 1996 acquisitions, pending transfers of mortgage
servicing totaled $8.1 billion with a weighted average interest rate of 7.39
percent and earning an Average Service Fee of 29.0 basis points. At an average
cost of 151 basis points, these servicing assets are being acquired at a 5.2
multiple of the Average Service Fee. By May 1996 the mortgage servicing
portfolio is expected to exceed $32 billion.
Annualized portfolio run-off, consisting of prepayments and scheduled payments
on mortgage loans serviced, was 9.44 percent in 1995, up from 7.22 percent in
1994 due primarily to lower prevailing interest rates. Derivative financial
instruments, specifically 10-year U.S. Treasury and 3-month London Interbank
Offered Rate ("LIBOR") interest rate floors, are held as a partial hedge against
prepayment risk (see "Effects of Interest Rate Changes"). Certain of these hedge
positions were closed out during 1995 at gains aggregating $17.8 million which
were deferred. Open hedge positions with a $3.5 billion notional amount carried
a $7.7 million unrealized gain at December 31, 1995.
23
<PAGE>
Capstead Mortgage Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
The following table summarizes the Company's utilization of capital at
December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
Capital
Assets Borrowings Employed
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage loans $ 10,419 $ $ 10,419
Mortgage Pass-Throughs:
Fixed-rate 1,771 1,711 60
Medium-term 424,329 407,576 16,753
Adjustable-rate 563,203 553,168 10,035
Agency Securities:
Fixed-rate 489,689 483,327 6,362
Adjustable-rate 2,984,451 2,921,618 62,833
Callable notes 49,092 49,857 (765)
CMO investments 4,830,020 4,706,888(a) 123,132
Mortgage servicing rights 423,360 91,398(b) 331,962
---------- ---------- --------
$9,776,334 $9,215,543 560,791
========== ==========
Other assets, net of other
liabilities 103,933
--------
Total stockholders' equity $664,724
========
</TABLE>
- -----------------
(a) Includes $168 million of related short-term borrowings.
(b) Represents amounts owed under contracts for bulk purchases of mortgage
servicing rights and $43.5 million drawn on a $300 million line of credit
secured by existing mortgage servicing rights.
The decline in intermediate- and long-term interest rates since early 1995
restored much of the loss in market value of the Company's mortgage assets
caused by the rise in mortgage interest rates in 1994. The effect is most
apparent on the value of securities held available-for-sale. At December 31,
1995 securities held available-for-sale were carried at a net unrealized gain
of $7.9 million compared to a net unrealized loss of $78.5 million at December
31, 1994.
24
<PAGE>
Capstead Mortgage Corporation
Result 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>
Year Ended December 31
- -----------------------------------------------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Mortgage loans $ 1,399 $ 26,467 $ 49,368
Mortgage Pass-Throughs 6,880 17,341 30,389
Agency Securities 12,589 15,933 18,355
CMO investments 13,871 9,036 (34,446)
Mortgage servicing 41,253 21,019 (1,056)
Gain on sales 11,144 9,161 61,216
CMO administration 3,645 4,067 1,482
Other income 1,679 950 1,875
-------- -------- --------
Contribution to income 92,460 103,974 127,183
Salaries, general and administrative (12,901) (14,895) (30,127)
Provision for possible losses (2,200) (3,500) (2,800)
-------- -------- --------
Net income $ 77,359 $ 85,579 $ 94,256
======== ======== ========
Net income per share:*
Primary $ 1.64 $ 2.04 $ 2.45
Fully diluted 1.61 2.01 2.38
Return on average total stockholders' equity 11.91% 13.27% 14.65%
</TABLE>
- ---------------
* Adjusted for the 3-for-2 common stock split effective October 30, 1995.
1995 Compared to 1994
Operating results improved steadily throughout 1995 although for the year
results were 10 percent below those achieved in 1994. Results were significantly
affected by a series of moves by the Federal Reserve beginning in February 1994
raising short-term interest rates a total of 3 percentage points by February of
1995. These increases resulted in corresponding increases in the Company's
borrowing costs that had the effect of substantially reducing net interest
spreads on mortgage investments. Since February 1995 intermediate- and long-term
interest rates have declined considerably. While this decline in intermediate-
and long-term interest rates has had little effect on borrowing costs, the
Federal Reserve did reduce short-term interest rates 1/4 of 1 percent in early
July and again in December. The decline in intermediate- and long-term interest
rates during 1995 made asset sales attractive as values on mortgage assets
improved. Offsetting these increases in value to some extent were higher
prepayment rates on mortgage loans, which were also due to declining interest
rates. These higher prepayments resulted in increased amortization costs
associated with the mortgage servicing portfolio and interest-only securities as
well as increased amortization of premiums paid on Agency Securities.
The net interest spread earned from mortgage loans contributed significantly
less to net operating results than in prior years due primarily average holdings
of mortgage loans during 1995. Average holdings for the year ended December 31,
25
<PAGE>
Capstead Mortgage Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
1995 were $48 million compared to $799 million held during 1994. This
reflects the Company's efforts to reduce market risk associated with
aggregating and securitizing jumbo mortgage loans culminating in the decision
in November 1995 to exit the jumbo mortgage loan conduit business (see the
discussion above under "Financial Condition").
Mortgage Pass-Throughs contributed less to net operating results compared to
1994 primarily due to substantially higher borrowing costs offset somewhat by
higher yields resulting in a 50 percent reduction in net interest spreads over
the prior year. Borrowing costs for this portfolio averaged 6.17 percent during
1995 compared to 4.68 percent in 1994 while average yields were higher at 6.92
percent during 1995 compared to 6.17 percent in 1994. The rise in yields is due
primarily to the periodic resetting of coupon rates on underlying ARM loans
(see "Effects of Interest Rate Changes"). The average portfolio outstanding was
$1.3 billion in both 1995 and 1994.
Agency Securities contributed less to net operating results compared to 1994
despite a sizable increase in average portfolio outstanding because of
substantially higher borrowing costs offset somewhat by higher yields resulting
in a 70 percent reduction in net interest spreads over the prior year.
Borrowing costs averaged 5.84 percent during 1995 compared to 4.12 percent in
1994 while yields averaged 6.26 percent during 1995 compared to 5.58 percent in
1994. The rise in yields is due primarily to the periodic resetting of coupon
rates on underlying ARM loans and the acquisition of higher yielding ARM
securities (see "Effects of Interest Rate Changes"). The average Agency
Securities portfolio outstanding was $2.4 billion for the year ended December
31, 1995 compared to $1.3 billion in 1994. The increase in average portfolio
outstanding was primarily the result of acquisitions of ARM securities in 1994
and 1995.
CMO investments contributed more to net operating results during 1995
compared to 1994 due primarily to investments made during 1995 in
agency-issued, interest-only securities. Additionally, prepayments on mortgage
securities collateral were still relatively high in the first quarter of 1994,
the end of the last major refinancing boom. Principal collections on mortgage
securities collateral totaled $501 million during 1995 compared to $1.2 billion
in 1994. Lower levels of prepayments have the effect of lowering amortization
of bond discounts and improving operating results (see "Effects of Interest
Rate Changes").
Higher mortgage servicing results reflect growth in this operation. Revenues
increased to $88.2 million during 1995 compared to $32.9 million during 1994.
Operating costs also increased, but not to the same extent as revenues, which
reflects efficiencies gained in the servicing process as the servicing
portfolio continues to grow. Amortization of mortgage servicing rights totaled
$26.6 million during 1995, significantly higher than the $6.0 million recorded
in 1994 due to portfolio growth and higher levels of prepayments caused by
lower interest rates.
During 1995 the Company sold $1.0 billion of mortgage assets consisting of
Agency Securities, mortgage loans and mortgage collateral released from CMOs
pursuant to clean-up calls, recognizing gains of $11.1 million.
Salaries, general and administrative expenses were lower in 1995 due primarily
to higher absorption of costs by the mortgage servicing operation in light of
this operation's growth relative to that of the rest of the Company. Included in
general and administrative expenses in 1995 is a charge of $750,000 consisting
primarily of personnel costs associated with exiting the jumbo mortgage loan
conduit business.
26
<PAGE>
Capstead Mortgage Corporation
The provision for possible losses declined in 1995 due to reductions in
fraud exposure resulting from reduced mortgage purchase activity.
1994 Compared to 1993
Operating results in 1994 declined over 9 percent from those achieved in
1993 primarily because of rising interest rates. Higher mortgage loan interest
rates, along with other factors, had the effect of substantially curtailing the
jumbo mortgage loan conduit operation's purchase and commitment volumes and
shifting the product mix from fixed-rate mortgage loans to relatively lower
rate ARM and medium-term mortgage products. During this period steadily rising
yields on ARM mortgage investments did not keep pace with increases in
borrowing costs, therefore, net interest spreads on mortgage loans, Mortgage
Pass-Throughs and Agency Securities declined markedly. On a more positive note,
the CMO investment portfolio and the mortgage servicing operation performed
well in this environment.
CMO investments contributed more to net operating results in 1994 than in
1993 primarily due to the impact of the rise in mortgage interest rates
experienced in 1994 on actual and anticipated mortgage loan prepayments. By the
end of the first quarter of 1994, prepayments began to slow considerably. As a
result, estimates of expected future prepayments were revised, lowering
amortization of bond discounts and improving operating results. During 1994
principal collections on mortgage securities collateral totaled $1.2 billion
compared to $2.4 billion in 1993.
Mortgage servicing revenues increased significantly during 1994 as a result of
the addition of mortgage servicing rights on $12.5 billion of mortgage loans for
an average servicing portfolio of $7.8 billion compared to an average servicing
portfolio of $864 million in 1993 (servicing operations commenced March 1993).
Direct operating costs for the mortgage servicing operation also increased, but
not to the same extent as revenues, reflecting efficiencies gained in the
servicing process as the servicing portfolio grew.
In 1994 the Company acquired 800,000 shares of the common stock of North
American Mortgage Corporation, a mortgage banking company, for $17.8 million.
Consolidation trends in the mortgage banking industry during 1994 allowed the
Company to realize gains aggregating $6.2 million from the sale of 750,000 of
these shares. Due to rising interest rates in 1994, the Company did not sell
mortgage assets other than sales of mortgage collateral released from CMOs
pursuant to clean-up calls. During 1994, $77 million of released mortgage
collateral were sold for gains of $2.9 million. During 1993, $3.9 billion of
mortgage assets were sold for gains of $61.2 million.
After excluding $16.2 million of non-competition and management agreement
expenses and termination costs incurred in 1993, salaries, general and
administrative expenses increased in 1994 primarily due to costs associated
with establishing the infrastructure necessary to take advantage of
opportunities in the mortgage banking industry.
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 CMO investments, proceeds from securitizations and
27
<PAGE>
Capstead Mortgage Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
sales of mortgage assets, servicing fees and other revenue from mortgage
servicing and equity offerings, when available. The Company currently believes
that these funds are sufficient for the acquisition of 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.
The Company may, from time to time, sell mortgage assets which may increase
income volatility because of the recognition of transactional gains or losses.
Sales in 1995 were related to reducing holdings of mortgage loans and mortgage
collateral released from CMOs pursuant to clean-up calls and sales of certain
Agency Securities made attractive as values on our mortgage investments
improved during the year because of declines in interest rates.
Short-term borrowings are primarily made under repurchase arrangements. The
Company has uncommitted repurchase facilities with investment banking firms to
finance mortgage assets, subject to certain conditions. Interest rates on
borrowings under these facilities are based on overnight to 30-day LIBOR rates.
The terms and conditions of these arrangements, including interest rates, are
negotiated on a transaction-by-transaction basis.
At December 31, 1995 the mortgage servicing operation had available $256.5
million of a $300 million revolving line of credit agreement with an investment
banking firm that matures in October 1997, of which $120 million is committed.
The line is to be used primarily to finance acquisitions of mortgage servicing
rights and will be collateralized by those rights, as well as certain existing
servicing rights. The agreement requires, among other things, that the mortgage
servicing operation maintain certain financial ratios and specified levels of
unencumbered servicing rights, as defined. The mortgage servicing operation is
in compliance with all requirements. Interest rates on borrowings under this
facility are based on LIBOR with interest due monthly.
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.
Changes in interest rates also impact earnings recognized from CMO
investments, which consist primarily 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 interest rates on the collateral, principal
prepayments will increase, reducing or even eliminating the overall return on
the investment in the CMO residual. This is due primarily to an acceleration of
the
28
<PAGE>
Capstead Mortgage Corporation
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 interest rates on the collateral, principal prepayments will
typically diminish, resulting in a greater overall return on an investment in a
fixed-rate CMO residual because of an increase in the period of time over which
the Company receives the larger positive interest spread.
Similarly, in a falling interest rate environment, prepayments on mortgage
loans underlying the Company's growing investment 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 underlying mortgage loans 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 owned by the Company represent a much smaller
investment than interest-only investments.
Another effect of changes in interest rates is that as interest rates
decrease, the rate of prepayment of mortgage loans underlying mortgage
investments generally increases. To the extent the proceeds of prepayments on
mortgage investments 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 mortgage
investments also applies to the Company's investment in mortgage servicing
rights. When interest rates rise, mortgage servicing rights become more
valuable since the average lives of the related mortgage loans 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. Sustained periods of high
prepayments can result in losses on the Company's investment in mortgage
servicing rights.
The Company's business plan is to build its mortgage securities and mortgage
servicing portfolios with the goal of producing reasonably balanced results in
a rising or falling interest rate environment. The Company supplements its
business plan with interest rate hedges from time to time; however, hedging of
interest rate risks is imprecise and costly. To fully protect income from every
interest rate scenario would be cost prohibitive.
Recent Accounting Pronouncements
In May 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122 "Accounting for Mortgage Servicing
Rights," which sets forth new accounting principles for capitalizing originated
mortgage servicing rights and recording impairment of existing mortgage
servicing rights. The Company will adopt this pronouncement on a prospective
basis effective January 1, 1996. This adoption is not expected to have a
material impact on the results of operations or financial position of the
Company.
29
<PAGE>
EXHIBIT 21
At December 31, 1995 the subsidiaries of Capstead Mortgage Corporation were as
follows:
<TABLE>
<CAPTION>
STATE OF
DOMICILE
--------
PARENT COMPANY
SUBSIDIARY
<S> <C>
Capstead Mortgage Corporation ("CMC")............... Maryland
Capstead Advisers, Inc............................. Nevada
Capstead Capital Corporation....................... Delaware
Capstead Select Corporation........................ Delaware
Capstead Securities Corporation I.................. Delaware
Capstead Securities Corporation II................. Delaware
Capstead Securities Corporation III................ Delaware
Capstead Securities Corporation IV................. Delaware
CMC Securities Corporation I....................... Nevada
CMC Securities Corporation III..................... Delaware
CMC Securities Corporation IV...................... Delaware
CMC ARM Securities Corporation..................... Delaware
Capstead Inc.(1)................................... Delaware
CMC Securities Corporation II(2).................. Delaware
CMC Investment Partnership(3)...................... Texas
</TABLE>
(1) CMC owns all of the issued and outstanding preferred stock.
(2) Capstead Inc. owns all the issued and outstanding common stock.
(3) CMC Investment Partnership is a general partnership owned by CMC and
Capstead Inc.
<PAGE>
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Capstead Mortgage Corporation of our report dated January 29, 1996, included
in the 1995 Annual Report to Stockholders of Capstead Mortgage Corporation.
Our audit also included the financial statement schedules of Capstead Mortgage
Corporation listed in Item 14(a). These schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-40116) pertaining to the 1990 Employee Stock Option Plan, the
Registration Statement (Form S-8 No. 33-40117) pertaining to the 1990 Directors'
Stock Option Plan, the Registration Statement (Form S-3 No. 33-62212) pertaining
to the Universal Shelf, the Registration Statement (Form S-3 No. 33-52415)
pertaining to the registration of 1,000,000 shares of common stock for the
Company's Stockholder Investment Program, the Registration Statement (Form S-8
No. 33-53555) pertaining to the 1994 Flexible Long Term Incentive Plan, the
Registration Statement (Form S-3 No. 33-57164) pertaining to the Series B
Preferred Stock Dividend Reinvestment Plan, and in the related prospectuses of
our report dated January 29, 1996, with respect to the consolidated financial
statements incorporated herein by reference, and our report included in the
preceding paragraph with respect to the financial statement schedules included
in this Annual Report (Form 10-K) of Capstead Mortgage Corporation.
ERNST & YOUNG LLP
Dallas, Texas
March 22, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CAPSTEAD
MORTGAGE CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED DECEMBER
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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 18,702
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,903,606
<CURRENT-LIABILITIES> 4,700,019
<BONDS> 4,538,863
0
337,750
<COMMON> 235
<OTHER-SE> 326,739
<TOTAL-LIABILITY-AND-EQUITY> 664,724
<SALES> 0
<TOTAL-REVENUES> 727,800
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 71,205
<LOSS-PROVISION> 2,200
<INTEREST-EXPENSE> 577,036
<INCOME-PRETAX> 77,359
<INCOME-TAX> 0
<INCOME-CONTINUING> 77,359
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 77,359
<EPS-PRIMARY> 1.64
<EPS-DILUTED> 1.61
</TABLE>
