<PAGE> 1
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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, 1997
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:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
------------------- ------------------------------------
<S> <C>
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
</TABLE>
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 16, 1998 THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NONAFFILIATES WAS $1,146,290,000.
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT FEBRUARY 16, 1998: 59,469,559
DOCUMENTS INCORPORATED BY REFERENCE:
(1) PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR
ENDED DECEMBER 31, 1997 ARE INCORPORATED BY REFERENCE INTO PARTS II AND IV.
(2) PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT DATED MARCH 6,
1998, ISSUED IN CONNECTION WITH THE ANNUAL MEETING OF STOCKHOLDERS OF THE
REGISTRANT, ARE INCORPORATED BY REFERENCE INTO PART III.
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<PAGE> 2
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I
ITEM 1. BUSINESS............................................................................ 1
ITEM 2. PROPERTIES.......................................................................... 3
ITEM 3. LEGAL PROCEEDINGS................................................................... 3
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................. 3
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS................................................... 3
ITEM 6. SELECTED FINANCIAL DATA............................................................. 3
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................................... 3
ITEM 3. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................................... 3
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................................... 3
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................................. 4
ITEM 11. EXECUTIVE COMPENSATION.............................................................. 4
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT............................................................. 4
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................... 4
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K............................................................... 4
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS.
Capstead Mortgage Corporation ("CMC" or the "Company") was incorporated on April
15, 1985 in Maryland and commenced operations in September 1985. The Company's
business plan is to build a mortgage banking operation with investments in
mortgage servicing and mortgage assets with the goal of producing reasonably
balanced operating results in a variety of interest rate environments.
Initially, the Company structured and managed mortgage investments. In late 1992
the Company entered into the mortgage servicing business. 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.
For further discussion of the Company's business, see the Registrant's Annual
Report to Stockholders for the year ended December 31, 1997 on pages 38 through
40.
EFFECTS OF INTEREST RATE CHANGES
For 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, 1997 on pages 38, 42 and 43.
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. The competition for the acquisition
of mortgage servicing rights is primarily with mortgage bankers, commercial
banks and savings banks.
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,
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<PAGE> 4
demands for indemnification or loan repurchases, class action lawsuits and
administrative enforcement actions.
EMPLOYEES
As of December 31, 1997, the Company had 218 full-time employees.
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.
As 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,
return of capital or capital gains. For 1997, capital gains are classified as
medium-term on sold assets that were held 12 to 18 months, and long-term on sold
assets that were held longer than 18 months. During 1997, 83.7 percent, 7.5
percent, 7.4 percent and 1.4 percent of the common stock distributions were
characterized as ordinary income, nontaxable return of capital, medium-term
capital gain and long-term capital gain, respectively, while 90.5 percent, 8.6
percent and 0.9 percent of the preferred stock distributions were characterized
as ordinary income, medium-term capital gain and long-term capital gain,
respectively. During 1996, 83.7 percent, 10.4 percent and 5.9 percent of the
common stock distributions were characterized as ordinary income, nontaxable
return of capital and long-term capital gain, respectively, while 93.4 percent
and 6.6 percent of the preferred stock distributions were characterized as
ordinary income and long-term capital gain, respectively. During 1995 all
distributions made 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 Capstead Holdings, Inc., and its primary subsidiary
Capstead Inc. (which conducts mortgage servicing 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 distribution of such earnings, and only if these distributions are made out
of current earnings and profits.
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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 in Dallas, Texas on properties leased by
the Company.
ITEM 3. LEGAL PROCEEDINGS.
At December 31, 1997 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.
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, 1997 on page 36 under the
caption "Note 14 - 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, 1997 on page 37 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, 1997 on pages 38 through
43 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, 1997 on pages 17 through
36, 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.
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<PAGE> 6
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 6, 1998 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 6, 1998 on pages 7 through 14 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).
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 6, 1998 on pages 16 and 17 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.
None.
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 1997 Annual Report to Stockholders, are incorporated
herein by reference:
<TABLE>
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PAGE
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<S> <C>
Consolidated Statement of Income - Years
Ended December 31, 1997, 1996 and 1995........................................ *
Consolidated Balance Sheet -
December 31, 1997 and 1996.................................................... *
Consolidated Statement of Stockholders' Equity -
Three Years Ended December 31, 1997........................................... *
Consolidated Statement of Cash Flows - Years
Ended December 31, 1997, 1996 and 1995........................................ *
Notes to Consolidated Financial Statements -
December 31, 1997............................................................. *
2. Financial statement schedule:
Schedule IV - Mortgage Loans on Real Estate..................................... 9
</TABLE>
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, 1997.
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<PAGE> 7
PART IV
ITEM 14. -- CONTINUED
3. Exhibits:
EXHIBIT
NUMBER
1.3 Sales Agency Agreement dated as of December 6,
1995 between Capstead Mortgage Corporation and
PaineWebber Incorporated (the "Sales Agency
Agreement")(6)
1.4 Amendment No. 1 to the Sales Agency Agreement
dated as of September 10, 1996 between Capstead
Mortgage Corporation and PaineWebber
Incorporated (the "Common Stock Sales Agency
Agreement")(8)
1.5 Sales Agency Agreement dated as of August 17,
1996 Capstead Mortgage Corporation and
PaineWebber Incorporated (the "Series B
Preferred Stock 1996 Sales Agency
Agreement")(8)
1.6 The Second Amendment dated as of March 4, 1997
to the Sales Agency Agreement dated as of
December 6, 1995 between the Company and
PaineWebber Incorporated (the "Common Stock
Sales Agency Agreement")(9)
1.7 The First Amendment dated as of March 4, 1997
to the Sales Agency Agreement dated as of
September 17, 1996 between the Company and
PaineWebber Incorporated (the "Series B
Preferred Stock 1996 Sales Agency
Agreement")(9)
1.8 The Third Amendment dated as of November 17,
1997 to the Sales Agency Agreement dated as of
December 6, 1995 between the Company and
PaineWebber Incorporated (the "Sales Agency
Agreement")(11)
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(4)
3.1(b) Articles Supplementary ($1.26 Cumulative
Convertible Preferred Stock, Series B)(3)
3.2 Bylaws of the Company, as amended(4)
10.21 1990 Employee Stock Option Plan(1)
10.22 1990 Directors' Stock Option Plan(2)
Employment Agreement dated August 1, 1992
between Capstead Mortgage Corporation
10.23 and Ronn K. Lytle(3)
10.24 Restricted Stock Grant Agreement dated
August 1, 1992 between Capstead Mortgage
Corporation and Ronn K. Lytle(3)
10.25 1994 Flexible Long Term Incentive Plan(5)
10.26 1994 Capstead Inc. Restricted Stock Plan(5)
10.27 Capstead Mortgage Corporation Deferred
Compensation Plan(5)
10.28 Summary of Employment Agreement dated
December 9, 1993 between Capstead Mortgage
Corporation and Christopher T. Gilson(5)
10.29 Capstead Mortgage Corporation Incentive Bonus
Plan(7)
10.30 Amendment to the 1994 Flexible Long Term
Incentive Plan(7)
10.31 Amendment No. 1 dated March 31, 1997 to the
Employment Agreement dated August 1, 1992
between the Company and Ronn K. Lytle(10)
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<PAGE> 8
PART IV
ITEM 14. -- CONTINUED
3. Exhibits (continued):
EXHIBIT
NUMBER
10.32 1997 Flexible Long Term Incentive Plan(10)
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,
1997*
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 the Company's Annual Report on
Form 10-K for the year ended December 31, 1992
(4) Incorporated by reference to the Company's Registration
Statement on Form S-3 (No. 33-62212) dated May 6, 1993
(5) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994
(6) Incorporated by reference to the Company's Current Report
of Form 8-K dated December 6, 1995
(7) Incorporated by reference to the Company's 10-Q for the
quarterly period ended March 31, 1996
(8) Incorporated by reference to the Company's Current Report
of Form 8-K dated August 20, 1996
(9) Incorporated by reference to the Company's Current Report
of Form 8-K dated March 26, 1997
(10) Incorporated by reference to the Company's 10-Q for the
quarterly period ended March 31, 1997
(11) Incorporated by reference to the Company's Current Report
of Form 8-K dated December 23, 1997
* Filed herewith
(b) Reports on Form 8-K:
Current Report on Form 8-K dated December 22, 1997 to file the
following:
Exhibit 1.8 - The Third Amendment dated as of November 17, 1997 to
the Sales Agency Agreement dated as of December 6, 1995 between
the Company and PaineWebber Incorporated (the "Sales Agency
Agreement").
(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 10, 1998 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.
<TABLE>
<S> <C> <C>
/s/ RONN K. LYTLE Chairman, Chief March 10, 1998
- ------------------------------- Executive Officer
(Ronn K. Lytle) and Director
/s/ ANDREW F. JACOBS Senior Vice President- March 10, 1998
- ------------------------------- Control, Treasurer
(Andrew F. Jacobs) and Secretary
/s/ BEVIS LONGSTRETH Director March 11, 1998
- -------------------------------
(Bevis Longstreth)
/s/ PAUL M. LOW Director March 12, 1998
- -------------------------------
(Paul M. Low)
/s/ HARRIET E. MIERS Director March 11, 1998
- -------------------------------
(Harriet E. Miers)
/s/ WILLIAM R. SMITH Director March 10, 1998
- -------------------------------
(William R. Smith)
/s/ JOHN C. TOLLESON Director March 11, 1998
- -------------------------------
(John C. Tolleson)
</TABLE>
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<PAGE> 10
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, 1997
CAPSTEAD MORTGAGE CORPORATION
DALLAS, TEXAS
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<PAGE> 11
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
SCHEDULE IV -- MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1997
<TABLE>
<CAPTION>
PART 1 - MORTGAGE LOANS ON REAL ESTATE AT CLOSE OF PERIOD(1)
- --------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C
- ----------------------------------------------- -------- ---------------
PRIOR CARRYING AMOUNT
DESCRIPTION LIENS OF MORTGAGES(2)
- ----------------------------------------------- ----- ---------------
<S> <C> <C>
$ -0- - $ 49,999( 3) .................... None $ 99,000
$ 50,000 - $ 99,999( 11) .................... None 901,000
$100,000 - $ 149,999( 33) .................... None 4,437,000
$150,000 - $ 199,999(176) .................... None 32,440,000
$200,000 - $ 249,999(569) .................... None 127,407,000
$250,000 - $ 299,999(304) .................... None 83,280,000
$300,000 - $ 349,999(145) .................... None 47,076,000
$350,000 - $ 399,999( 98) .................... None 36,917,000
$400,000 - $ 449,999( 47) .................... None 20,390,000
$450,000 - $ 499,999( 24) .................... None 11,862,000
$500,000 - $1,500,000( 60) .................... None 35,427,000
------------
400,236,000
Plus premium .......................... 1,978,000
Plus unrealized gain on mortgage
loans included in debt securities ... 4,651,000
------------
$406,865,000
============
<CAPTION>
PART 2 - INTEREST
PART 1 - MORTGAGE LOANS ON REAL ESTATE AT CLOSE OF PERIOD(1) EARNED ON MORTGAGES
- --------------------------------------------------------------------------------------------------------- ------------------------
COLUMN A COLUMN D COLUMN E COLUMN F AND COLUMN G(4)
- ----------------------------------------------- -------------------------------- ------------- ------------------------
AMOUNT OF PRINCIPAL UNPAID AT
CLOSE OF PERIOD
--------------------------------- AMOUNT OF
SUBJECT TO MORTGAGE
DELINQUENT BEING WEIGHTED AVERAGE
DESCRIPTION TOTAL INTEREST(3) FORECLOSED(3) INTEREST RATE
- ----------------------------------------------- ------------ ------------- ------------- ---------------
<S> <C> <C> <C> <C>
$ -0- - $ 49,999( 3) .................... $ 99,000 $ 37,000 $ 37,000 8.60%
$ 50,000 - $ 99,999( 11) .................... 901,000 78,000 78,000 8.09%
$100,000 - $ 149,999( 33) .................... 4,437,000 941,000 268,000 8.15%
$150,000 - $ 199,999(176) .................... 32,440,000 3,375,000 1,119,000 8.45%
$200,000 - $ 249,999(569) .................... 127,407,000 8,228,000 3,540,000 8.08%
$250,000 - $ 299,999(304) .................... 83,280,000 7,327,000 2,449,000 8.09%
$300,000 - $ 349,999(145) .................... 47,076,000 6,128,000 1,643,000 8.01%
$350,000 - $ 399,999( 98) .................... 36,917,000 2,192,000 722,000 8.44%
$400,000 - $ 449,999( 47) .................... 20,390,000 1,278,000 853,000 8.62%
$450,000 - $ 499,999( 24) .................... 11,862,000 2,339,000 1,861,000 8.18%
$500,000 - $1,500,000( 60) .................... 35,427,000 3,440,000 2,883,000 8.13%
------------ ------------ ------------
$400,236,000 $ 35,363,000 $ 15,453,000
============ ============
Plus premium ..........................
Plus unrealized gain on mortgage
loans included in debt securities ...
</TABLE>
See accompanying notes to Schedule IV.
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<PAGE> 12
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO SCHEDULE IV
(1) Mortgage loans at December 31, 1997 consisted of single-family,
conventional, first mortgage loans most of which are included in
AAA-rated private mortgage pass-through securities ("Mortgage
Pass-Throughs"). The Company classifies its mortgage loans by interest
rate characteristics of the underlying mortgage loans. Fixed-rate
mortgage loans (i) have fixed rates of interest for their entire terms,
(ii) have 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"), or (iii) were previously
classified as medium-term and have adjusted to a fixed rate for the
remainder of their terms. 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, (ii) initial
interest rates that adjust one time, approximately 5 years following
origination of the mortgage loan, based on a specified margin over
Federal National Mortgage Association ("FNMA") yields for 30-year,
fixed-rate commitments at the time of adjustment (together referred to as
"hybrid securities") or (iii) fixed-rate mortgage securities that have
expected weighted average lives of 5 years or less. Adjustable-rate
mortgage loans either (i) adjust semiannually based on a specified margin
over the 6-month London Interbank Offered Rate ("LIBOR"), (ii) adjust
annually based on a specified margin over 1-year Treasuries, or (iii)
were previously classified as medium-term and have begun adjusting
annually based on a specified margin over 1-year Treasuries. Principal
amount of mortgage loans in the portfolio totaling $82,953,000, or 20.4
percent, were fixed-rate loans; $159,337,000, or 39.2 percent, were
medium-term loans; and $164,575,000, or 40.4 percent, were
adjustable-rate loans.
<TABLE>
<S> <C> <C>
(2) Reconciliation of mortgage loans:
Balance at December 31, 1996 (after reclassification to
conform to the current-year presentation)................... $493,702,000
Additions:
Transfers of mortgage loans
from CMO investments................................. 135,607,000
Change in fair value of
Mortgage Pass-Throughs............................... 2,202,000 137,809,000
----------- -----------
631,511,000
Deductions:
Principal collections.................................. 150,604,000
Amortization of discount............................... 715,000
Sales 73,327,000 224,646,000
------------ ------------
Balance at December 31, 1997................................ $406,865,000
============
</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, $35.3 million is covered by mortgage pool
insurance that effectively limits the Company's loss. Similarly, $7.8
million of the amount of mortgages being foreclosed is covered by pool
insurance.
(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
$2,562,000 at December 31, 1997.
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<PAGE> 13
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO SCHEDULE IV -- CONTINUED
(5) The geographic distribution of the Company's portfolio at December 31,
1997 was as follows:
<TABLE>
<CAPTION>
NUMBER PRINCIPAL
STATE OF LOANS AMOUNT
------------------------------------------------------------------ -------- ---------
<S> <C> <C>
Alabama............................................................. 2 $ 266,000
Arizona............................................................. 4 1,124,000
California.......................................................... 1,172 310,617,000
Colorado............................................................ 5 1,443,000
Connecticut......................................................... 3 768,000
Delaware............................................................ 2 847,000
District of Columbia................................................ 9 3,175,000
Florida............................................................. 29 9,092,000
Georgia............................................................. 31 7,736,000
Hawaii.............................................................. 3 517,000
Illinois............................................................ 8 2,426,000
Indiana............................................................. 1 147,000
Louisiana........................................................... 6 1,707,000
Maryland............................................................ 27 9,240,000
Massachusetts....................................................... 7 1,996,000
Michigan............................................................ 7 3,150,000
Missouri............................................................ 3 1,072,000
Nevada.............................................................. 5 744,000
New Jersey.......................................................... 32 8,089,000
New Mexico.......................................................... 9 2,958,000
New York............................................................ 9 2,780,000
North Carolina...................................................... 2 496,000
Ohio................................................................ 1 366,000
Oklahoma............................................................ 7 1,983,000
Pennsylvania........................................................ 8 3,165,000
Tennessee........................................................... 1 161,000
Texas............................................................... 23 7,294,000
Virginia............................................................ 42 14,798,000
Washington.......................................................... 11 1,947,000
Wisconsin........................................................... 1 132,000
----- ------------
400,236,000
Plus premium........................................................ 1,978,000
Plus unrealized gain on mortgage loans
included in debt securities....................................... 4,651,000
------------
Total.......................................................... 1,470 $406,865,000
===== ============
</TABLE>
-11-
<PAGE> 14
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
------
<S> <C>
1.3 Sales Agency Agreement dated as of December 6,
1995 between Capstead Mortgage Corporation and
PaineWebber Incorporated (the "Sales Agency
Agreement")(6)
1.4 Amendment No. 1 to the Sales Agency Agreement
dated as of September 10, 1996 between Capstead
Mortgage Corporation and PaineWebber
Incorporated (the "Common Stock Sales Agency
Agreement")(8)
1.5 Sales Agency Agreement dated as of August 17,
1996 Capstead Mortgage Corporation and
PaineWebber Incorporated (the "Series B
Preferred Stock 1996 Sales Agency
Agreement")(8)
1.6 The Second Amendment dated as of March 4, 1997
to the Sales Agency Agreement dated as of
December 6, 1995 between the Company and
PaineWebber Incorporated (the "Common Stock
Sales Agency Agreement")(9)
1.7 The First Amendment dated as of March 4, 1997
to the Sales Agency Agreement dated as of
September 17, 1996 between the Company and
PaineWebber Incorporated (the "Series B
Preferred Stock 1996 Sales Agency
Agreement")(9)
1.8 The Third Amendment dated as of November 17,
1997 to the Sales Agency Agreement dated as of
December 6, 1995 between the Company and
PaineWebber Incorporated (the "Sales Agency
Agreement")(11)
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(4)
3.1(b) Articles Supplementary ($1.26 Cumulative
Convertible Preferred Stock, Series B)(3)
3.2 Bylaws of the Company, as amended(4)
10.21 1990 Employee Stock Option Plan(1)
10.22 1990 Directors' Stock Option Plan(2)
Employment Agreement dated August 1, 1992
between Capstead Mortgage Corporation
10.23 and Ronn K. Lytle(3)
10.24 Restricted Stock Grant Agreement dated
August 1, 1992 between Capstead Mortgage
Corporation and Ronn K. Lytle(3)
10.25 1994 Flexible Long Term Incentive Plan(5)
10.26 1994 Capstead Inc. Restricted Stock Plan(5)
10.27 Capstead Mortgage Corporation Deferred
Compensation Plan(5)
10.28 Summary of Employment Agreement dated
December 9, 1993 between Capstead Mortgage
Corporation and Christopher T. Gilson(5)
10.29 Capstead Mortgage Corporation Incentive Bonus
Plan(7)
10.30 Amendment to the 1994 Flexible Long Term
Incentive Plan(7)
10.31 Amendment No. 1 dated March 31, 1997 to the
Employment Agreement dated August 1, 1992
between the Company and Ronn K. Lytle(10)
</TABLE>
<PAGE> 15
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
------
<S> <C>
10.32 1997 Flexible Long Term Incentive Plan(10)
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,
1997*
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 the Company's Annual Report on
Form 10-K for the year ended December 31, 1992
(4) Incorporated by reference to the Company's Registration
Statement on Form S-3 (No. 33-62212) dated May 6, 1993
(5) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994
(6) Incorporated by reference to the Company's Current Report
of Form 8-K dated December 6, 1995
(7) Incorporated by reference to the Company's 10-Q for the
quarterly period ended March 31, 1996
(8) Incorporated by reference to the Company's Current Report
of Form 8-K dated August 20, 1996
(9) Incorporated by reference to the Company's Current Report
of Form 8-K dated March 26, 1997
(10) Incorporated by reference to the Company's 10-Q for the
quarterly period ended March 31, 1997
(11) Incorporated by reference to the Company's Current Report
of Form 8-K dated December 23, 1997
* Filed herewith
<PAGE> 1
EXHIBIT 11
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
BASIC:*
Average number of common shares
outstanding 51,257,000 38,317,000 34,631,000
============= ============= =============
Net income $ 159,926,000 $ 127,228,000 $ 77,359,000
Less cash dividends paid on
convertible preferred stock:
Series A ($1.60 paid per share) (683,000) (804,000) (939,000)
Series B ($1.26 paid per share) (24,774,000) (35,552,000) (38,395,000)
------------- ------------- -------------
Net income available to common
stockholders $ 134,469,000 $ 90,872,000 $ 38,025,000
============= ============= =============
Basic net income per common share $ 2.62 $ 2.37 $ 1.10
DILUTED:*
Average number of common shares
outstanding 51,257,000 38,317,000 34,631,000
Assumed conversion of convertible
preferred stock:
Series A 889,000 1,048,000 1,204,000
Series B 14,776,000 21,176,000 **
Incremental shares calculated
using the treasury stock method 1,101,000 960,000 48,000
------------- ------------- -------------
68,023,000 61,501,000 35,883,000
============= ============= =============
Net income $ 159,926,000 $ 127,228,000 $ 77,359,000
Less cash dividends paid on
Series B Preferred Stock - - (38,395,000)
------------- ------------- -------------
Net income $ 159,926,000 $ 127,228,000 $ 38,964,000
============= ============= =============
Diluted net income per common share $ 2.35 $ 2.07 $ 1.09
</TABLE>
* AMOUNTS PRIOR TO 1997 HAVE BEEN RESTATED AS REQUIRED TO COMPLY WITH
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS PER
SHARE." FOR FURTHER DISCUSSION OF NET INCOME PER COMMON SHARE, SEE THE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. AMOUNTS HAVE BEEN
ADJUSTED FOR 3-FOR-2 COMMON STOCK SPLITS EFFECTIVE OCTOBER 30, 1995 AND
JULY 31, 1996.
** THE SERIES B PREFERRED STOCK WAS NOT CONSIDERED CONVERTIBLE FOR PURPOSES OF
CALCULATING DILUTED NET INCOME PER SHARE AS IT WAS ANTIDILUTIVE.
<PAGE> 1
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
------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Fixed charges $633,845 $598,312 $584,137 $474,844 $491,076
Preferred stock dividends 25,457 36,356 39,334 38,876 38,592
-------- -------- -------- -------- --------
Combined fixed charges and
preferred stock dividends 659,302 634,668 623,471 513,720 529,668
Net income 159,926 127,228 77,359 85,579 94,256
-------- -------- -------- -------- --------
Total $819,228 $761,896 $700,830 $599,299 $623,924
======== ======== ======== ======== ========
Ratio of earnings to combined
fixed charges and preferred
stock dividends 1.24:1 1.20:1 1.12:1 1.17:1 1.18:1
======== ======== ======== ======== ========
</TABLE>
(b) Computation of ratio of earnings to combined fixed charges and preferred
stock dividends (excluding CMO debt):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Fixed charges $352,348 $283,974 $223,751 $139,188 $ 80,923
Preferred stock dividends 25,457 36,356 39,334 38,876 38,592
-------- -------- -------- -------- --------
Combined fixed charges and
preferred stock dividends 377,805 320,330 263,085 178,064 119,515
Net income 159,926 127,228 77,359 85,579 94,256
-------- -------- -------- -------- --------
Total $537,731 $447,558 $340,444 $263,643 $213,771
======== ======== ======== ======== ========
Ratio of earnings to combined
fixed charges and preferred
stock dividends 1.42:1 1.40:1 1.29:1 1.48:1 1.79:1
======== ======== ======== ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 13
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
PORTIONS OF THE
ANNUAL REPORT TO STOCKHOLDERS
FOR THE YEAR ENDED DECEMBER 31, 1997
<PAGE> 2
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, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Dallas, Texas
January 21, 1998
<PAGE> 3
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
INTEREST INCOME:
Mortgage investments $ 339,980 $ 303,212 $ 242,805
CMO collateral and investments 354,279 359,752 380,355
--------- --------- ---------
Total interest income 694,259 662,964 623,160
--------- --------- ---------
INTEREST AND RELATED EXPENSES:
Short-term borrowings:
Mortgage investments 300,391 255,481 215,308
CMO investments 29,244 12,044 1,342
Collateralized mortgage obligations 281,497 314,338 360,386
Mortgage insurance and other 5,155 7,743 11,385
--------- --------- ---------
Total interest and related expenses 616,287 589,606 588,421
--------- --------- ---------
Net margin on mortgage assets 77,972 73,358 34,739
--------- --------- ---------
MORTGAGE SERVICING REVENUES:
Servicing fees 125,954 101,815 68,510
Other 46,962 28,738 19,662
--------- --------- ---------
Total mortgage servicing revenues 172,916 130,553 88,172
--------- --------- ---------
MORTGAGE SERVICING EXPENSES:
Direct servicing expenses 18,016 13,626 10,781
Indirect servicing expenses 7,873 6,561 2,461
Amortization of mortgage servicing rights 64,892 44,795 26,576
Interest 22,713 16,449 7,101
--------- --------- ---------
Total mortgage servicing expenses 113,494 81,431 46,919
--------- --------- ---------
Net margin on mortgage servicing 59,422 49,122 41,253
--------- --------- ---------
OTHER REVENUES:
Gain on sales and other 28,485 16,316 12,823
CMO administration 3,252 3,405 3,645
--------- --------- ---------
Total other revenues 31,737 19,721 16,468
--------- --------- ---------
OTHER OPERATING EXPENSES 9,205 14,973 15,101
--------- --------- ---------
NET INCOME $ 159,926 $ 127,228 $ 77,359
========= ========= =========
Net income $ 159,926 $ 127,228 $ 77,359
Less cash dividends on preferred stock (25,457) (36,356) (39,334)
--------- --------- ---------
Net income available to common stockholders $ 134,469 $ 90,872 $ 38,025
========= ========= =========
NET INCOME PER COMMON SHARE:
Basic $ 2.62 $ 2.37 $ 1.10
Diluted 2.35 2.07 1.09
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic 51,257 38,317 34,631
Diluted 68,023 61,501 35,883
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Mortgage investments $ 6,114,130 $ 4,840,417
CMO collateral and investments 5,195,436 4,501,646
------------ ------------
11,309,566 9,342,063
Mortgage servicing rights 684,765 637,979
Prepaids, receivables and other 345,807 156,293
Cash and cash equivalents 17,377 21,003
------------ ------------
$ 12,357,515 $ 10,157,338
============ ============
LIABILITIES
Short-term borrowings $ 7,099,706 $ 5,462,856
Collateralized mortgage obligations 4,309,455 3,861,892
Accounts payable and accrued expenses 51,323 33,924
Mortgage servicing rights
acquisitions payable 8,423 71,797
------------ ------------
11,468,907 9,430,469
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock - $0.10 par value;
100,000 shares authorized:
$1.60 Cumulative Preferred Stock,
Series A, 408 and 470 shares
issued and outstanding ($6,691
aggregate liquidation preference) 5,698 6,567
$1.26 Cumulative Convertible
Preferred Stock, Series B, 17,081 and 23,932
shares issued and outstanding ($194,382 aggregate
liquidation preference) 189,800 259,829
Common stock - $0.01 par value; 100,000
shares authorized; 58,541 and 44,743
shares issued and outstanding 585 447
Paid-in capital 732,295 461,045
Undistributed income 12,676 4,582
Unrealized loss on debt securities (52,446) (5,601)
------------ ------------
888,608 726,869
------------ ------------
$ 12,357,515 $ 10,157,338
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNDISTRIBUTED UNREALIZED
PREFERRED STOCK INCOME GAIN (LOSS)
----------------------- COMMON PAID-IN (ACCUMULATED ON DEBT
SERIES A SERIES B STOCK CAPITAL DEFICIT) SECURITIES TOTAL
--------- --------- --------- --------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ 8,720 $ 324,779 $ 344 $ 310,782 $ (2,435) $ (78,515) $ 563,675
Net income - - - - 77,359 - 77,359
Cash dividends:
Common ($1.09 1/3 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 - - -
Additions to capital - 5,312 8 9,380 - - 14,700
Change in unrealized gain
(loss) on debt securities - - - - - 86,417 86,417
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1995 7,685 330,065 353 321,222 (2,503) 7,902 664,724
Net income - - - - 127,228 - 127,228
Cash dividends:
Common ($2.11 1/2 per share) - - - - (83,787) - (83,787)
Preferred:
Series A ($1.60 per share) - - - - (804) - (804)
Series B ($1.26 per share) - - - - (35,552) - (35,552)
Conversion of preferred stock (1,118) (79,372) 54 80,412 - - (24)
Additions to capital - 9,136 40 59,411 - - 68,587
Change in unrealized gain
(loss) on debt securities - - - - - (13,503) (13,503)
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1996 6,567 259,829 447 461,045 4,582 (5,601) 726,869
Net income - - - - 159,926 - 159,926
Cash dividends: - - - - (126,375) - (126,375)
Common ($2.40 per share)
Preferred: - - - - (683) - (683)
Series A ($1.60 per share)
Series B ($1.26 per share) - - - - (24,774) - (24,774)
Conversion of preferred stock (869) (84,228) 57 85,040 - - -
Additions to capital - 14,199 81 186,210 - - 200,490
Change in unrealized gain
(loss) on debt securities - - - - - (46,845) (46,845)
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 $ 5,698 $ 189,800 $ 585 $ 732,295 $ 12,676 $ (52,446) $ 888,608
========= ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 159,926 $ 127,228 $ 77,359
Noncash items:
Amortization of premium and discount 114,603 61,520 25,829
Amortization of mortgage servicing rights 64,892 44,795 26,576
Depreciation and other amortization 3,585 3,670 3,260
Net change in prepaids, receivables, other
assets, accounts payable and accrued expenses (26,994) 8,364 (17,130)
Net gain from investing activities (27,737) (15,991) (11,144)
----------- ----------- -----------
Net cash provided by operating activities 288,275 229,586 104,750
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchases of mortgage investments (4,467,187) (1,813,735) (2,914,774)
Purchases of CMO collateral (1,109,412) - -
Purchases of CMO investments (574,883) (521,539) (131,531)
Purchases of mortgage servicing rights (139,997) (251,505) (184,082)
Purchases of derivative financial instruments (112,417) (49,301) (27,381)
Principal collections on mortgage investments 1,459,956 975,640 559,046
Proceeds from sales and redemptions of
mortgage assets 2,020,450 730,807 1,281,057
Proceeds from sales of derivative
financial instruments 34,191 6,782 32,480
CMO collateral:
Principal collections 537,817 552,430 491,522
Decrease in accrued interest receivable 4,724 5,119 4,092
Decrease (increase) in short-term investments (4,546) 13,650 4,603
----------- ----------- -----------
Net cash used by investing activities (2,351,304) (351,652) (884,968)
----------- ----------- -----------
FINANCING ACTIVITIES:
Increase in short-term borrowings 1,636,850 834,074 1,438,200
Increase (decrease) in mortgage servicing
acquisitions payable (63,374) 23,899 (27,990)
Collateralized mortgage obligations:
Issuances of securities 1,109,411 41,323 -
Principal payments on securities (673,119) (723,881) (572,191)
Increase in accrued interest payable 2,253 1,383 1,887
Capital stock transactions 199,214 67,712 14,700
Dividends paid (151,832) (120,143) (77,427)
----------- ----------- -----------
Net cash provided by financing activities 2,059,403 124,367 777,179
----------- ----------- -----------
Net change in cash and cash equivalents (3,626) 2,301 (3,039)
Cash and cash equivalents at beginning of year 21,003 18,702 21,741
----------- ----------- -----------
Cash and cash equivalents at end of year $ 17,377 $ 21,003 $ 18,702
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 7
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 -- BUSINESS
Capstead Mortgage Corporation, a national mortgage banking firm, earns income
from servicing mortgage loans, investing in mortgage assets and other investment
strategies. The Company's business plan is to build a mortgage banking operation
with investments in mortgage servicing and mortgage assets with the goal of
producing reasonably balanced operating results in a variety of interest rate
environments.
NOTE 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 obligations ("CMOs")
and are not available for the satisfaction of general claims of Capstead.
Capstead has no responsibility for CMOs 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 CMOs, as well as 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. Actual results could differ from those estimates. 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 CMO investments, and in a falling interest rate environment, such as
mortgage investments, as supplemented from time to time by hedging activities.
MORTGAGE ASSETS
Mortgage assets held in the form of mortgage-backed securities are debt
securities. Management determines the appropriate classification of debt
securities at the time of purchase and periodically reevaluates such
designation. 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. 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
(losses) reported as a separate component of stockholders' equity.
<PAGE> 8
Interest income is recorded as income when earned. Any premium or discount is
recognized as an adjustment to interest income by the interest method over the
life of the related mortgage asset. Realized gains (losses) are included in
other revenues. The cost of assets sold is based on the specific identification
method.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and highly liquid investments
with original maturities of three months or less.
MORTGAGE SERVICING RIGHTS
The cost of acquiring mortgage servicing rights is capitalized and 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.
Mortgage servicing rights are evaluated for impairment on a disaggregated basis
by predominant risk characteristics. A valuation allowance is established
through a charge to income to the extent that the recorded amount for servicing
rights within an individual stratum exceeds fair value. Any such valuation
allowance may be adjusted in the future, again through a charge or benefit to
income, as the fair value of the servicing rights changes. Fair values are
established through use of a discounted cash flow valuation model that
incorporates assumptions the Company believes market participants would use in
estimating the fair value of future net servicing income including assumptions
regarding prepayment speeds, discount rates and servicing costs. For impairment
evaluation purposes, the Company stratifies its servicing portfolio on the basis
of term, interest rate and loan type (fixed-rate versus adjustable-rate).
DERIVATIVE FINANCIAL INSTRUMENTS
The Company acquires derivative financial instruments ("Derivatives") for
trading purposes or as hedges. Derivatives acquired from time to time may
include interest rate floors and caps; treasury futures contracts and options;
written options on mortgage assets or various other Derivatives available in the
market place that are compatible with the Company's risk management objectives.
Realized and unrealized gains (losses) on Derivatives held for trading purposes
are marked to market through income, while realized and unrealized gains
(losses) on Derivatives designated as hedges reduce (increase) the carrying
amount of the assets hedged. Ongoing correlation and effectiveness of such
Derivatives are measured by comparing the change in value of the hedges 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 or expense and hedge accounting would cease.
The Company primarily uses interest rate floors to protect against increased
prepayments on investments in mortgage servicing rights and CMO investments.
Interest rate floors increase in value when interest rates decline. To a more
limited extent, the Company uses interest rate caps to protect against rising
interest rates on short-term borrowings. Interest rate caps increase in value
when interest rates increase. Because interest rate floors and caps
<PAGE> 9
are one-sided options, the Company's exposure to losses on these instruments is
limited to the current basis in the instruments. The Company may receive cash
payments from the counterparties to interest rate floors and caps should certain
specified interest rates fall below (floors) or rise above (caps) a specified
level. Any such payments will be accrued and taken to income as other revenue
or, for hedges, as a component of interest income on CMO investments,
amortization expense of mortgage servicing rights or interest expense on
short-term borrowings, as applicable. The cost of acquiring interest rate floors
and caps designated as hedges is taken as a charge to income as a component of
the applicable hedged item over the contractual lives of the instruments. The
fair value of interest rate floors and the unamortized cost of interest rate
caps are included in prepaids, receivables and other on the balance sheet. The
Company has credit risk associated with the counterparties to Derivatives. The
Company manages credit risk by dealing only with large, financially sound
investment banking firms.
BORROWINGS
CMOs 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.
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
Income taxes are accounted for using the liability method, and deferred income
tax assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using enacted
tax rates and laws that will be in effect when the differences are expected to
reverse.
Capstead 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, Capstead is not taxed on taxable income distributed to
stockholders, provided that certain REIT qualification tests are met. 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 and are subject to income taxes.
STOCK-BASED COMPENSATION
Compensation cost for stock-based awards is measured as the excess, if any, of
the quoted market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock.
<PAGE> 10
NET INCOME PER COMMON SHARE
In 1997 the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" ("SFAS 128"). SFAS 128 replaced the calculation of primary
and fully diluted net income per share with basic and diluted net income per
share. Unlike primary net income per share, basic net income per share excludes
any dilutive effects of options and convertible securities. Diluted net income
per share is similar to the previously reported fully diluted net income per
share. All net income per share amounts for all periods have been presented and,
where appropriate, restated to conform to the SFAS 128 requirements.
Basic net income per common share is computed by dividing net income, after
deduction of preferred stock dividends, by the weighted average number of common
shares outstanding after retroactively giving effect to stock splits. Diluted
net income per common share is computed by dividing net income 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") and the
$1.26 Cumulative Convertible Preferred Stock, Series B ("Series B Preferred
Stock"). The Series B Preferred Stock was not considered convertible for
purposes of calculating diluted net income per common share prior to 1996
because the effects of conversion were antidilutive.
RECLASSIFICATION AND STOCK SPLITS
Certain amounts for prior years have been reclassified to conform to the 1997
presentation. On October 30, 1995 and July 31, 1996, the Company completed
3-for-2 common stock splits. The affected capital accounts as well as 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 splits.
NOTE 3 - MORTGAGE SERVICING
The following table provides information regarding the primary mortgage
servicing portfolio (which excludes subservicing) 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, 1996 $ 25,557,629 246,885 $ 369,600
Additions 13,663,775 146,527 227,143
Results of hedging activity - - 5,774
Run-off/amortization* (3,658,807) (27,039) (42,660)
------------ ------------ ------------
Loans serviced at December 31, 1996 35,562,597 366,373 559,857
Additions 11,479,030 113,530 218,120
Results of hedging activity - - (33,387)
Run-off/amortization* (4,982,600) (38,626) (59,825)
------------ ------------ ------------
Loans serviced at December 31, 1997 $ 42,059,027 441,277 $ 684,765
============ ============ ============
</TABLE>
* EXCLUDES HEDGE INSTRUMENT AMORTIZATION.
<PAGE> 11
In addition, the Company subserviced $11.8 billion of single-family mortgage
loans under a subservicing arrangement with a large national mortgage conduit as
of December 31, 1997. Subsequent to year-end, the Company acquired an additional
$934 million of primary mortgage servicing.
The Company's investment in mortgage servicing rights had a fair value of
approximately $708 million at December 31, 1997. Unrealized gains on interest
rate floors held as a partial hedge against declines in value of this investment
increased by $33.4 million during 1997 which have been applied to the basis of
the servicing rights. Through floor sales, $10.8 million of these gains were
realized during 1997. At December 31, 1997 floors held as hedges of servicing
rights had related notional amounts totaling $10.9 billion and unrealized gains
of $28.3 million. Throughout 1997 and 1996 the fair value of the servicing
rights for each stratum of the servicing portfolio exceeded recorded amounts
(adjusted for hedging activities); therefore, no impairment charges or direct
write-offs of mortgage servicing rights have been recorded.
The Company services mortgage loans in all 50 states and the District of
Columbia. As of December 31, 1997, 17 percent of loans serviced were located in
California (based on the 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,
1997 and 1996, escrow and fiduciary funds for loans serviced totaled $725
million and $484 million, respectively, and are excluded from the accompanying
consolidated balance sheet.
NOTE 4 - MORTGAGE INVESTMENTS
Mortgage investments and the related average effective interest rates
(calculated including mortgage insurance costs and excluding unrealized gains
and losses) were as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
AS OF DECEMBER 31 DECEMBER 31
------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Agency securities:
Fixed-rate $ 871,377 $ 467,887 6.55% 6.37%
Medium-term 616,992 - 6.34 -
Adjustable-rate 4,030,460 3,878,827 6.12 6.22
Non-agency securities:
Fixed-rate 82,954 69,672 8.59 8.55
Medium-term 347,772 293,230 6.58 7.21
Adjustable-rate 164,575 130,801 7.12 6.67
---------- ----------
$6,114,130 $4,840,417
========== ==========
</TABLE>
The Company classifies its mortgage investments by interest rate characteristics
of the underlying mortgage loans. Fixed-rate mortgage investments either (i)
have fixed rates of interest for their entire terms, (ii) have 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"), or (iii) were previously classified as medium-term and have
adjusted to a fixed rate for the remainder of their terms. Medium-term mortgage
investments either have (i) an initial fixed-
<PAGE> 12
rate period of 3 or 5 years after origination and then adjust annually based on
a specified margin over 1-year Treasuries, (ii) initial interest rates that
adjust one time, approximately 5 years following origination of the mortgage
loan, based on a specified margin over Federal National Mortgage Association
("FNMA") yields for 30-year, fixed-rate commitments at the time of adjustment,
or (iii) fixed-rate mortgage securities that have expected weighted average
lives of 5 years or less. Adjustable-rate mortgage investments either (i) adjust
semiannually based on a specified margin over the 6-month London Interbank
Offered Rate ("LIBOR"), (ii) adjust annually based on a specified margin over
1-year Treasuries, or (iii) were previously classified as medium-term and have
begun adjusting annually based on a specified margin over 1-year Treasuries.
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 (collectively,
"Agency Securities"). Non-agency securities consist of AAA-rated private
mortgage pass-through and other AAA-rated private mortgage securities (together,
"Non-agency Securities"). The maturity of mortgage-backed securities is directly
affected by the rate of principal prepayments on the underlying mortgage loans.
At December 31, 1997 Agency Securities and Non-agency Securities were pledged to
secure short-term borrowings.
NOTE 5 - CMO COLLATERAL AND INVESTMENTS
CMO collateral consists of mortgage securities and related investments pledged
to secure CMO borrowings ("Pledged CMO Collateral"). CMO investments include
investments in FNMA and FHLMC Trust interest-only mortgage securities, and
investments in other similar interest-only and principal-only mortgage
securities. The components of CMO collateral and investments are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Pledged mortgage securities $ 4,326,696 $ 3,908,623
Short-term investments 15,600 11,055
Accrued interest receivable 26,760 24,012
----------- -----------
4,369,056 3,943,690
Unamortized premium (discount) 2,752 (7,166)
----------- -----------
Pledged CMO Collateral 4,371,808 3,936,524
FNMA and FHLMC Trust interest-only
mortgage securities 809,757 546,539
Other CMO investments 13,871 18,583
----------- -----------
$ 5,195,436 $ 4,501,646
=========== ===========
</TABLE>
Pledged mortgage securities consist primarily of fixed-rate, medium-term and
adjustable-rate mortgage-backed securities. All principal and interest on these
pledged mortgage securities 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 pledged mortgage securities
and the reinvestment income earned thereon are available for the payment of
principal and interest on CMO borrowings. The weighted average effective
interest rate for total Pledged CMO Collateral was 7.38 percent and 7.40 percent
during 1997 and 1996, respectively.
<PAGE> 13
FNMA and FHLMC Trust interest-only mortgage securities are entitled to receive
100 percent of coupon interest stripped from pools of FNMA and FHLMC
mortgage-backed securities. At December 31, 1997 the Company's investment in
FNMA and FHLMC Trust interest-only mortgage securities yielded 7.90 percent with
related notional amounts aggregating $2.8 billion. These and certain other CMO
investments were pledged to secure short-term borrowings as of December 31,
1997.
Unrealized gains on interest rate floors held as a partial hedge against
declines in value of CMO investments increased by $54 million during 1997 which
have been applied to the basis of the investments hedged. Through floor sales,
$9.2 million of these gains were realized during 1997. At December 31, 1997
floors held as hedges of CMO investments had related notional amounts totaling
$10.4 billion and unrealized gains of $52.4 million.
NOTE 6 - SHORT-TERM BORROWINGS
Short-term borrowings are primarily made under repurchase arrangements with
investment banking firms pursuant to which the Company pledges mortgage assets
as collateral. The terms and conditions of these arrangements, including
interest rates, are negotiated on a transaction-by-transaction basis. Repurchase
arrangements, 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, 1997 DECEMBER 31, 1996
----------------------- -------------------------
WEIGHTED WEIGHTED
BORROWINGS AVERAGE BORROWINGS AVERAGE
OUTSTANDING RATE OUTSTANDING RATE
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Agency Securities $5,419,261 5.84% $4,275,701 5.67%
Non-agency Securities 582,823 6.12 425,257 5.75
CMO investments 870,816 5.98 581,898 5.90
---------- ----------
$6,872,900 $5,282,856
========== ==========
</TABLE>
In 1997 Capstead Inc. increased its revolving line of credit agreement with an
investment banking firm from $450 million to $625 million and extended the
maturity one year to September 30, 1999. A fee was paid on a $275 million
committed portion of this facility. The line is used primarily to finance
acquisitions of mortgage servicing rights. Interest rates on borrowings under
this facility are based on LIBOR with interest due monthly. Borrowings under
this facility totaled $179,600,000 at 7.50 percent and $180,000,000 at 8.60
percent at December 31, 1997 and 1996, respectively. In addition, the Company
may borrow against Derivative positions on an overnight basis from the
counterparties to these instruments. Borrowings under such arrangements totaled
$47,206,000 at December 31, 1997 at a weighted average rate of 5.90 percent.
There were no such borrowings in 1996.
The weighted average effective interest rate on short-term borrowings secured by
mortgage assets was 5.53 percent during both 1997 and 1996. Interest paid on
short-term borrowings totaled $339,077,000, $279,160,000 and $217,028,000 during
1997, 1996 and 1995, respectively.
<PAGE> 14
NOTE 7 - COLLATERALIZED MORTGAGE OBLIGATIONS
Each series of CMOs 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 CMOs along
with selected other information are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
CMOs $ 4,332,409 $ 3,905,048
Accrued interest payable 63,538 54,548
------------ ------------
Total obligation 4,395,947 3,959,596
Less unamortized discount (86,492) (97,704)
------------ ------------
$ 4,309,455 $ 3,861,892
============ ============
Range of average interest rates 5.60% to 9.95% 5.70% to 9.88%
Range of stated maturities 2007 to 2027 2007 to 2025
Number of series 33 34
</TABLE>
The maturity of each CMO series is directly affected by the rate of principal
prepayments on the related Pledged CMO Collateral. Each series 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 is likely to occur
earlier than its stated maturity. The average effective interest rate for all
CMOs was 7.63 percent and 7.53 percent during 1997 and 1996, respectively.
Interest paid on CMOs totaled $263,151,000, $304,670,000 and $351,477,000 during
1997, 1996 and 1995, respectively.
NOTE 8 -- DISCLOSURES REGARDING FAIR VALUES OF FINANCIAL INSTRUMENTS
Estimated fair values of financial instruments have been determined using
available market information and appropriate valuation methodologies; however,
considerable judgment is often required in interpreting market data to develop
these estimates. In addition, fair values fluctuate on a daily basis.
Accordingly, 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 estimated fair values.
The carrying amounts of cash and cash equivalents, receivables, payables and
short-term borrowings approximate fair value. The fair value of mortgage
investments, CMO investments and Derivatives was estimated using either (i)
quoted market prices when available, including quotes made by lenders in
connection with designating collateral for repurchase arrangements, or (ii)
offer prices for similar assets or market positions. The fair value of CMO
collateral was based on projected cash flows after payment on the related CMOs
determined using market discount rates and prepayment assumptions. The fair
value of CMOs was based on the same method used for determining fair value for
the CMO collateral adjusted for credit enhancements.
<PAGE> 15
The following table summarizes fair value disclosures for financial instruments
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents $ 17,377 $ 17,377 $ 21,003 $ 21,003
Receivables 120,542 120,542 74,719 74,719
Mortgage investments 6,114,130 6,115,048 4,840,417 4,842,637
CMO collateral and
investments 5,195,436 5,253,299 4,501,646 4,460,497
Derivatives 207,343 203,375 56,049 52,310
LIABILITIES:
Payables 59,746 59,746 105,721 105,721
Short-term borrowings 7,099,706 7,099,706 5,462,856 5,462,856
CMOs 4,309,455 4,413,285 3,861,892 3,872,482
</TABLE>
The following table summarizes fair value disclosures for available-for-sale
debt securities for the periods indicated (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997
Mortgage investments:
Agency Securities:
Fixed-rate $ 875,928 $ 2,903 $ 7,454 $ 871,377
Medium-term 615,360 1,678 46 616,992
Adjustable-rate 4,017,109 19,850 6,499 4,030,460
Non-agency Securities:
Fixed-rate 39,416 878 - 40,294
Medium-term 222,054 398 28 222,424
Adjustable-rate 161,116 3,459 - 164,575
CMO investments 891,213 332 67,917 823,628
---------- ---------- ---------- ----------
$6,822,196 $ 29,498 $ 81,944 $6,769,750
========== ========== ========== ==========
AS OF DECEMBER 31, 1996
Mortgage investments:
Agency Securities:
Fixed-rate $ 490,893 $ - $ 23,006 $ 467,887
Adjustable-rate 3,858,339 20,977 489 3,878,827
Non-agency Securities:
Fixed-rate 4,144 44 - 4,188
Medium-term 278,473 283 569 278,187
Adjustable-rate 128,110 2,691 - 130,801
CMO collateral and investments 653,748 2,119 7,651 648,216
---------- ---------- ---------- ----------
$5,413,707 $ 26,114 $ 31,715 $5,408,106
========== ========== ========== ==========
</TABLE>
The Company has the ability to hold mortgage assets for the foreseeable future
and, therefore, does not expect to realize losses on security sales.
Held-to-maturity debt securities consist of Pledged CMO Collateral and
collateral released from related CMO indentures pursuant to Clean-up Calls and
held as Non-agency Securities. The following table summarizes fair value
disclosures for held-to-maturity debt securities for the periods indicated (in
thousands):
<PAGE> 16
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997
Pledged CMO Collateral $4,371,808 $ 2,988 $ 48,955 $4,325,841
Non-agency Securities 168,008 918 - 168,926
---------- ---------- ---------- ----------
$4,539,816 $ 3,906 $ 48,955 $4,494,767
========== ========== ========== ==========
AS OF DECEMBER 31, 1996
Pledged CMO Collateral $3,853,430 $ 3,150 $ 54,889 $3,801,691
Non-agency Securities 80,527 2,314 94 82,747
---------- ---------- ---------- ----------
$3,933,957 $ 5,464 $ 54,983 $3,884,438
========== ========== ========== ==========
</TABLE>
Sales of released CMO collateral occasionally occur provided the collateral has
paid down to within 15 percent of its original issuance amounts. The following
table summarizes disclosures related to the disposition of debt securities (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Sale of securities held available-for-sale:
Amortized cost $1,920,097 $ 624,151 $ 784,600
Gains 24,043 13,936 9,511
Redemption of callable agency notes and sale
of released CMO collateral
held-to-maturity:
Amortized cost 73,324 64,753 320,843
Gains 2,986 1,098 966
</TABLE>
NOTE 9 - 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 1997 and 1996. 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
------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Income taxes computed at the federal
statutory rate $ 55,974 $ 44,530 $ 27,241
Benefit of REIT status (46,893) (35,384) (21,712)
-------- -------- --------
Income taxes computed on income
of non-REIT subsidiaries 9,081 9,146 5,529
Alternative minimum tax - - 456
Benefit of previously unrecognized
deferred income tax asset (10,889) (8,308) (5,859)
Other 1,808 (838) 346
-------- -------- --------
$ - $ - $ 472
======== ======== ========
</TABLE>
<PAGE> 17
Significant components of deferred income tax assets and liabilities are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1997 1996
------- -------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards $31,762 $25,947
Hedging transactions 6,660 4,432
Other 1,943 2,834
------- -------
40,365 33,213
------- -------
Deferred income tax liabilities:
Mortgage servicing rights 37,276 18,684
Other - 551
------- -------
37,276 19,235
------- -------
Net deferred tax assets $ 3,089 $13,978
======= =======
Valuation allowance $ 3,089 $13,978
======= =======
</TABLE>
At December 31, 1997 the non-REIT subsidiaries had net operating loss
carryforwards for tax purposes of approximately $95 million, which expire
beginning in the year 2007.
NOTE 10 - STOCKHOLDERS' EQUITY
The Series A Preferred Stock is entitled to a cumulative fixed dividend at an
annual rate of $1.60, is eligible for conversion into 2.0421 shares of common
stock and is nonvoting. The Series A Preferred Stock is currently redeemable at
the Company's option at a redemption price of $16.40. During 1997, 62,109 shares
of the Series A Preferred Stock were converted into 126,779 shares of common
stock.
The Series B Preferred Stock is entitled to a cumulative fixed dividend at an
annual rate of $1.26, is eligible for conversion into 0.7246 of 1 share of
common stock and is nonvoting. The Series B Preferred Stock is currently
redeemable at the Company's option at a redemption price of $12.50. During 1997,
7,683,296 shares of the Series B Preferred Stock were converted into 5,566,746
shares of common stock.
The weighted average shares used to calculate diluted net income per common
share differs from weighted average common shares outstanding because of the
dilutive effects of stock options and the potential conversion of preferred
stock into common stock. Dilutive options increased weighted average shares by
1,101,000; 960,000 and 48,000 shares in 1997, 1996 and 1995, respectively. In
1997 and 1996 the assumed conversion of the Series A and B Preferred Stock
increased weighted average shares by 15,665,000 and 22,224,000 shares,
respectively. In 1995, only the Series A Preferred Stock was dilutive, the
assumed conversion of which increased weighted average shares by 1,204,000
shares.
<PAGE> 18
The Company utilizes several programs designed to raise new equity capital at
favorable prices in order to enhance growth prospects for all stockholders. The
following table summarizes capital raised through these programs for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- ---------------------- -------------------
NET NET NET
SHARES PROCEEDS SHARES PROCEEDS SHARES PROCEEDS
--------- -------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK:
Dividend reinvestments 810,791 $ 18,195 413,030 $ 8,326 156,227 $ 2,044
Direct stock purchases 2,565,434 63,121 647,289 12,091 458,654 6,223
Structured equity shelf 4,108,900 97,938 1,954,550 37,443 64,200 974
--------- -------- --------- ------- ------- -------
7,485,125 179,254 3,014,869 57,860 679,081 9,241
========= -------- ========= ------- ======= -------
SERIES B PREFERRED STOCK:
Dividend reinvestments 185,523 3,120 310,434 4,259 411,142 5,312
Structured equity shelf 646,500 11,079 309,200 4,877 - -
--------- -------- --------- ------- ------- -------
832,023 14,199 619,634 9,136 411,142 5,312
========= -------- ========= ------- ======= -------
$193,453 $66,996 $14,553
======== ======= =======
</TABLE>
Dividend reinvestments allow existing stockholders to convert cash dividends
into newly issued shares. Similarly, direct stock purchases allow investors the
opportunity to acquire additional shares directly from the Company, subject to
certain limitations. Structured equity shelf issuances represent new shares
issued by the Company on a daily basis either directly into the market or in
larger blocks to qualified buyers, subject to certain limitations. As a result
of these programs, book value per share, before unrealized losses on debt
securities held available-for-sale, rose from $11.14 per diluted share at
December 31, 1994, to $13.12 at December 31, 1997. By profitably employing this
additional capital, the Company has significantly enhanced its earnings capacity
in aggregate and, more importantly, on a per share basis.
Option exercises by employees during 1997, 1996 and 1995 resulted in net
additions to capital of $5,761,000, $7,246,000 and $147,000, respectively.
During 1996 a 6-year option issued in 1992 to acquire 1,687,500 shares of common
stock at $14.50 per share was reacquired from a non-affiliated holder at a cost
of $6,506,000.
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. In addition, the Company 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. Finally, 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.
NOTE 11 - EMPLOYEE BENEFIT PLANS
The Company sponsors stock plans for directors and employees to 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
<PAGE> 19
aggregate of 7,512,500 shares of common stock. Most of the outstanding stock
options provide for the annual granting of dividend equivalent rights ("DERs")
that permit the option holder to obtain additional shares of common stock based
upon formulas set forth in the Plans (see below) and all options granted have
terms and vesting requirements at the grant date of up to ten years. The
following table provides information regarding stock option activity for the
periods indicated:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
As of December 31, 1994 (646,243 exercisable) 1,569,278 $13.16
Granted 487,125 11.20
Exercised (17,944) 6.69
Canceled (34,508) 12.80
DERs granted 55,472 -
---------
As of December 31, 1995 (1,293,221 exercisable) 2,059,423 12.41
Granted 821,250 15.42
Exercised (563,230) 12.23
Canceled (17,559) 12.01
DERs granted 70,686 -
---------
As of December 31, 1996 (1,716,334 exercisable) 2,370,570 13.12
Granted 622,250 23.51
Exercised (431,568) 11.00
Canceled (1,125) 12.00
DERs granted 188,328 -
---------
As of December 31, 1997 (1,878,421 exercisable) 2,748,455 14.91
=========
</TABLE>
Weighted average exercise price and remaining life information for significant
option grants outstanding at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS OPTIONS EXERCISE REMAINING
OUTSTANDING EXERCISABLE PRICE LIFE (YEARS)
----------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Options granted January 1997 622,250 164,000 $ 23.53 9
Options granted January 1996 825,710 413,926 14.41 8
Options granted April 1994 1,089,202 1,089,202 11.07 6
</TABLE>
In 1997 and 1996 the Company issued restricted stock grants for 201,000 and
144,000 shares, to all employees at grant date fair values averaging $24.35 and
$21.50 per share, respectively, subject to restrictions as to continuous
employment. Additionally, in 1996 the Company issued restricted stock grants for
262,500 shares of common stock to key officers at a grant date fair value of
$15.42 per share, also subject to restrictions as to continuous employment.
Restrictions generally expire over a period of 4 to 10 years from the date of
grant. Compensation expense is recognized over the period restricted. At
December 31, 1997 a total of 515,400 restricted shares were outstanding under
these grants.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations in accounting for stock
awards. Accordingly, no compensation expense has been recognized for stock
awards
<PAGE> 20
other than for DERs and restricted stock grants. Related compensation costs
totaled $6,323,000, $6,032,000 and $798,000 in 1997, 1996 and 1995,
respectively. The effect of determining compensation cost for stock options
granted since the beginning of 1995, including the accrual for DERs granted in
January 1998, based upon the fair value at the grant date consistent with the
methodology prescribed under Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," would have been less than 3
cents per year on diluted net income per common share for 1997, 1996 and 1995.
This effect on diluted net income per common share was determined using a
Black-Scholes option pricing model and, depending upon each individual option
grant during the last three years, dividend yields of 10 to 12 percent,
volatility factors of 27.8 to 32.5 percent, expected life assumptions of 3 to 5
years and risk-free rates of 5 to over 7 percent. This effect may not be
representative of the pro forma effect on future net income.
In connection with a restructuring of long-term incentive compensation for key
officers, on January 2, 1998 the Company canceled existing DER option grants
totaling 452,627 shares (including 231,115 DER shares granted January 2, 1998)
and eliminated the right to receive future DER award grants in exchange for cash
settlements aggregating $10,524,000 and 452,627 shares of restricted common
stock. The restricted stock vests over 5 years and is subject to certain
restrictions including continuous employment. This restructuring was fully
accrued in 1997 and is expected to result in lower compensation-related accruals
in future periods.
The Company also sponsors a qualified defined contribution retirement plan 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 and
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 $634,000, $677,000 and $759,000 in
1997, 1996 and 1995, respectively.
<PAGE> 21
NOTE 12 - NET INTEREST INCOME ANALYSIS (UNAUDITED)
The following table summarizes interest income and interest expense on mortgage
assets and average effective interest rates for the periods indicated (dollars
in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- -------------------
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ------- -------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Mortgage investments $339,980 6.28% $303,212 6.41% $242,805 6.51%
CMO collateral and investments 354,279 7.84 359,752 7.73 380,355 7.59
-------- -------- --------
Total interest income 694,259 662,964 623,160
Interest expense:
Short-term borrowings 329,635 5.53 267,525 5.53 216,650 6.04
CMOs 281,497 7.63 314,338 7.53 360,386 7.57
-------- -------- --------
Total interest expense 611,132 581,863 577,036
- -------- --------
Net interest $ 83,127 $ 81,101 $ 46,124
======== ======== ========
</TABLE>
The following table summarizes 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>
1997/1996* 1996/1995*
------------------------------------ ------------------------------------
RATE VOLUME TOTAL RATE VOLUME TOTAL
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Mortgage investments $ (6,163) $ 42,931 $ 36,768 $ (3,936) $ 64,343 $ 60,407
CMO collateral
and investments 5,117 (10,590) (5,473) 7,014 (27,617) (20,603)
-------- -------- -------- -------- -------- --------
Total interest income (1,046) 32,341 31,295 3,078 36,726 39,804
-------- -------- -------- -------- -------- --------
Interest expense:
Short-term borrowings - 62,110 62,110 (19,609) 70,484 50,875
CMOs 4,002 (36,843) (32,841) (2,035) (44,013) (46,048)
-------- -------- -------- -------- -------- --------
Total interest expense 4,002 25,267 29,269 (21,644) 26,471 4,827
-------- -------- -------- -------- -------- --------
Net interest $ (5,048) $ 7,074 $ 2,026 $ 24,722 $ 10,255 $ 34,977
======== ======== ======== ======== ======== ========
</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.
<PAGE> 22
NOTE 13 - QUARTERLY RESULTS (UNAUDITED)
The following is a summary of quarterly results of operations (in thousands,
except percentages and per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income $165,281 $163,015 $175,915 $190,048
Interest and related expenses 143,015 142,902 154,865 175,505
Net margin on mortgage assets 22,266 20,113 21,050 14,543
Net margin on mortgage servicing
operations 14,042 13,565 16,253 15,563
Other revenues 3,420 9,549 6,620 12,147
Net income 37,388 39,671 41,867 41,000
Net income per common share:*
Basic 0.65 0.67 0.68 0.63
Diluted 0.58 0.60 0.61 0.57
Return on average stockholders'
equity 19.76% 19.79% 19.58% 17.81%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income $166,384 $166,259 $165,104 $165,217
Interest and related expenses 151,006 149,322 145,467 143,816
Net margin on mortgage assets 15,378 16,937 19,637 21,401
Net margin on mortgage servicing
operations 9,955 11,164 13,310 14,694
Other revenues 4,754 7,270 2,734 4,965
Net income 26,828 32,173 32,428 35,798
Net income per common share:*
Basic 0.47 0.61 0.62 0.66
Diluted 0.45 0.53 0.53 0.57
Return on average stockholders'
equity 16.12% 19.01% 18.72% 19.82%
</TABLE>
* NET INCOME PER COMMON SHARE AMOUNTS FOR 1996 AND FIRST THREE QUARTERS OF
1997 HAVE BEEN RESTATED TO CONFORM WITH SFAS 128.
NOTE 14 - MARKET AND DIVIDEND INFORMATION (UNAUDITED)
The New York Stock Exchange trading symbol for the Company's common stock is
CMO. There were 3,804 holders of record of the Company's common stock at
December 31, 1997. In addition, depository companies held stock for 47,322
beneficial owners. The high and low stock sales prices and dividends declared on
common stock for the periods indicated were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
-------------------------------------- --------------------------------------
STOCK PRICES STOCK PRICES
--------------------- DIVIDENDS -------------------- DIVIDENDS
HIGH LOW DECLARED HIGH LOW DECLARED
--------- ------- ---------- -------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
First quarter $ 25 3/8 $19 1/2 $0.58 $17 1/4 $14.42 $0.46 2/3
Second quarter 25 1/4 19 7/8 0.59 1/2 19 1/2 14.33 0.53 1/3
Third quarter 27 13/16 24 1/2 0.61 22 1/2 17.42 0.55
Fourth quarter 27 1/4 17 5/16 0.61 1/2 24 5/8 20 3/4 0.56 1/2
</TABLE>
<PAGE> 23
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PERCENTAGES AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
SELECTED CONSOLIDATED
STATEMENT OF INCOME
DATA:
Interest income $ 694,259 $ 662,964 $ 623,160 $ 557,001 $ 574,826
Interest and related
expenses 616,287 589,606 588,421 488,224 511,160
Net margin on mortgage
assets 77,972 73,358 34,739 68,777 63,666
Net margin on mortgage
servicing 59,422 49,122 41,253 21,019 (1,056)
Gain on sales and
other revenues 31,737 19,721 16,468 14,178 64,573
Net income 159,926 127,228 77,359 85,579 94,256
Net income per common
share:*
Basic $ 2.62 $ 2.37 $ 1.10 $ 1.36 $ 1.64
Diluted 2.35 2.07 1.09 1.34 1.59
Return on average
stockholders' equity 19.12% 18.41% 11.91% 13.27% 14.65%
Cash dividends paid per
share:*
Common $ 2.40 $ 2.11 1/2 $ 1.09 1/3 $ 1.42 2/3 $ 1.62 2/3
Series A Preferred 1.60 1.60 1.60 1.60 1.60
Series B Preferred 1.26 1.26 1.26 1.26 1.26
Average number of common
shares outstanding:*
Basic 51,257 38,317 34,631 34,316 33,871
Diluted 68,023 61,501 35,883 35,720 35,748
SELECTED CONSOLIDATED
BALANCE SHEET DATA:
Mortgage investments $ 6,114,130 $ 4,840,417 $ 4,556,049 $ 3,310,629 $ 2,875,428
CMO collateral
and investments 5,195,436 4,501,646 4,796,925 5,265,458 3,962,679
Mortgage servicing rights 684,765 637,979 423,360 282,969 25,146
Total assets 12,357,515 10,157,338 9,903,606 8,943,858 6,980,324
Short-term borrowings 7,099,706 5,462,856 4,628,782 3,190,582 2,443,807
Collateralized mortgage
obligations 4,309,455 3,861,892 4,538,863 5,102,145 3,891,134
Stockholders' equity 888,608 726,869 664,724 563,675 638,190
MORTGAGE SERVICING DATA:
Primary servicing
portfolio $42,059,027 $35,562,597 $25,557,629 $14,392,182 $ 2,393,267
Subservicing portfolio 11,834,091 2,155,873 - - -
</TABLE>
* NET INCOME PER COMMON SHARE AND AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
AMOUNTS PRIOR TO 1997 HAVE BEEN RESTATED AS REQUIRED TO COMPLY WITH
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE."
FOR FURTHER DISCUSSION OF NET INCOME PER COMMON SHARE, SEE THE NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS. AMOUNTS HAVE BEEN ADJUSTED FOR 3-FOR-2
COMMON STOCK SPLITS EFFECTIVE OCTOBER 30, 1995 AND JULY 31, 1996.
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Company's business plan is to build a mortgage banking operation with
investments in mortgage servicing and mortgage assets with the goal of producing
reasonably balanced operating results in a variety of interest rate
environments.
During 1997 long-term mortgage interest rates peaked in late spring and then
declined nearly 1 1/2 percentage points by early January 1998 which has spurred
prepayments on the Company's mortgage and CMO investments and its mortgage
servicing portfolio. In March 1997 the Federal Reserve increased short-term
interest rates 1/4 of 1 percentage point and the Company's borrowing rates
remained at or above 5 1/2 percent for the remainder of the year. This
relatively flat interest rate yield curve environment, where short-term interest
rates are equal to long-term interest rates has significantly narrowed the net
interest margin earned by the Company on its mortgage investments.
Adjustable-rate mortgage ("ARM") mortgage-backed securities have been
particularly hard hit by prepayments because homeowners are finding that it has
become increasingly advantageous to refinance into lower rate fixed-rate
mortgage loans. As a result, purchase premiums paid by the Company for ARM
securities must be amortized to income sooner than originally anticipated (see
"Effects of Interest Rate Changes").
In light of expected high prepayments on ARM securities, the Company began
expanding its investment focus in the third quarter of 1997 to include more
medium-term and fixed-rate mortgage securities and more interest rate hedges
were acquired to provide additional protection for mortgage servicing and CMO
investments should mortgage interest rates continue declining. This
restructuring is continuing in the first quarter of 1998. The Company does not
believe that the current flat yield curve environment will persist indefinitely
and that it will steepen at some point allowing net interest margins to recover
to more acceptable levels (see "Effects of Interest Rate Changes").
The Company commenced mortgage servicing operations in 1993 and through steady
growth has become one of the 20 largest mortgage servicers in the country with a
total mortgage servicing portfolio of $53.9 billion (including primary servicing
and subservicing), an increase of $16.2 billion from the prior year. The primary
mortgage servicing portfolio (which excludes pending transfers and subservicing)
increased to $42.1 billion with a weighted average interest rate of 7.43 percent
and earning an average annual service fee, excluding ancillary revenue and
earnings on escrows, (the "Average Service Fee") of 30.8 basis points. The
December 31, 1997 balance of mortgage servicing rights related to this portfolio
was $685 million (163 basis points, or a 5.3 multiple of the Average Service
Fee).
Primary mortgage servicing portfolio run-off, consisting of prepayments and
scheduled payments on mortgage loans serviced, was 12.82 percent in 1997, up
from 12.12 percent in 1996. During the fourth quarter of 1997, portfolio run-off
increased to 15.11 percent, up from 14.13 percent in the third quarter of 1997,
reflecting the recent further decline in mortgage interest rates. Derivative
financial instruments, specifically interest rate floors,
<PAGE> 25
are held as a partial hedge against prepayment risk (see "Effects of Interest
Rate Changes"). Outstanding hedge positions, with a $10.9 billion notional
amount, carried a $28.3 million unrealized gain at December 31, 1997 that has
been applied to the basis of the Company's investment in mortgage servicing
rights.
During 1996 the Company entered into a subservicing arrangement with a large
national mortgage conduit. As of December 31, 1997, the subservicing portfolio
totaled $11.8 billion. An advantage of subservicing arrangements is that further
growth and enhanced efficiencies can be achieved without the capital investment
and prepayment risk associated with owning additional mortgage servicing rights.
This arrangement is viewed by the Company as a confirmation of the quality and
cost effectiveness of the mortgage servicing operation and could lead to other
such relationships in the future.
As of December 31, 1997, holdings of mortgage investments totaled $6.1 billion
with ARM mortgage-backed securities representing $4.2 billion of the total. As
noted above, beginning in the third quarter of 1997 the Company began acquiring
more medium-term and fixed-rate mortgage securities, such that as of December
31, 1997, medium-term and fixed-rate mortgage securities represented 31 percent
of total mortgage investments, up from 18 percent at June 30, 1997 and 15
percent at December 31, 1996. During 1997 the Company acquired a total of $4.3
billion of 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
(collectively, "Agency Securities") and $190 million of medium-term, AAA-rated
fixed-rate private mortgage securities (together with AAA-rated private mortgage
pass-through securities, referred to as "Non-agency Securities").
Prior to 1995 the Company had been an active issuer of collateralized mortgage
obligations ("CMOs") and other securities backed by jumbo mortgage loans. The
Company retained residual interests in these securitizations consisting
primarily of interest-only and principal-only mortgage securities. Other than
occasional CMO issuances (see below) or modest issuances of previously held
residual interests, the Company has not been an active issuer of CMOs since
1994. In lieu of issuing CMOs, the Company has increased its CMO investments
(defined as CMO collateral and investments, net of related bonds) by acquiring
interest-only mortgage securities. During the year ended December 31, 1997, the
Company acquired $575 million of FNMA and FHLMC Trust interest-only mortgage
securities, which represent the right to receive 100 percent of coupon interest
stripped from pools of FNMA or FHLMC mortgage-backed securities. After
considering these acquisitions, CMO issuances, run-off and sales, as well as
changes in market value, total CMO investments increased $246 million during
1997 to $886 million. Derivative financial instruments, specifically interest
rate floors, are held as a partial hedge against prepayment risk on
interest-only mortgage securities (see "Effects of Interest Rate Changes").
Outstanding hedge positions, with a $10.4 billion notional amount, carried a
$52.4 million unrealized gain at December 31, 1997 that has been applied to the
basis of the Company's investment in interest-only securities.
Since the Company exited the jumbo mortgage loan conduit business in 1995, it
has maintained several finance subsidiaries with remaining capacity to issue
CMOs and other securitizations ("securitization shelves"). In an effort to
recover costs associated with these securitization shelves, and to add to the
Company's CMO administration activities, the Company may, from time to time,
<PAGE> 26
purchase mortgage loans from originators or conduits and issue CMOs or other
securities backed by these loans. The Company may or may not retain any residual
economic interest in these securitizations. In the latter half of 1997, the
Company completed two such CMO transactions totaling $1.1 billion.
The following table summarizes the Company's utilization of capital at December
31, 1997 (in thousands):
<TABLE>
<CAPTION>
CAPITAL
ASSETS BORROWINGS EMPLOYED
----------- ----------- -----------
<S> <C> <C> <C>
Mortgage investments:
Agency Securities:
Fixed-rate $ 871,377 $ 863,655 $ 7,722
Medium-term 616,992 598,144 18,848
Adjustable-rate 4,030,460 3,957,462 72,998
Non-agency securities:
Fixed-rate 82,954 83,955 (1,001)
Medium-term 347,772 339,444 8,328
Adjustable-rate 164,575 159,424 5,151
CMO collateral and investments 5,195,436 5,180,271* 15,165
Derivative financial instruments 207,343 47,206 160,137
Mortgage servicing rights 684,765 188,023** 496,742
$12,201,674 $11,417,584 784,090
=========== ===========
Other assets, net of other liabilities 104,518
-----------
Total stockholders' equity $ 888,608
===========
</TABLE>
* INCLUDES APPROXIMATELY $871 MILLION OF RELATED SHORT-TERM BORROWINGS.
** REPRESENTS AMOUNTS OWED UNDER CONTRACTS FOR BULK PURCHASES OF MORTGAGE
SERVICING RIGHTS AND $179.6 MILLION DRAWN ON A $625 MILLION LINE OF
CREDIT SECURED BY EXISTING MORTGAGE SERVICING RIGHTS.
During the years ended December 31, 1997 and 1996, the Company raised $200.5
million and $75.1 million, respectively, of new capital through its dividend
reinvestment and stock purchase programs, open market sales and stock
compensation programs. As a result, book value per common share, before
unrealized losses on debt securities held available-for-sale, rose $1.92 during
these two years to $13.12 per diluted share at December 31, 1997. The proceeds
from these issuances were profitably employed to increase investments in
mortgage assets and mortgage servicing, significantly enhancing the Company's
earning capacity in aggregate, and more importantly, on a per share basis.
Assuming favorable equity market conditions continue, the Company anticipates
raising additional capital in 1998. Because the Company distributes virtually
all of its net income in dividends, it is important that the Company access the
capital markets at favorable prices to continue its growth.
Securities held available-for-sale were carried at a net unrealized loss of
$52.4 million at December 31, 1997, a net decline of $46.8 million from December
31, 1996. Underlying this change was a $21.6 million increase in value of
fixed-rate and medium-term mortgage investments held available-for-sale that was
more than offset by a $6.4 million decline in value of ARM investments and a $62
million decline in value of CMO investments held available-for-sale. This
reflects the impact of recent declines in mortgage interest rates on market
values of these securities, as discussed above, along with purchase and sale
activity (see "Effects of Interest Rate Changes"). The Company has the ability
to hold mortgage assets for the foreseeable future; therefore, it does not
expect to realize losses on security sales.
<PAGE> 27
RESULTS OF OPERATIONS
Comparative net operating results (interest income or fee revenues, net of
related interest expense and, in the case of mortgage servicing and CMO
administration, related direct and indirect operating expenses) by source were
as follows (in thousands, except percentages and per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Agency Securities $ 31,892 $ 35,082 $ 12,589
Non-agency Securities 5,867 9,867 9,743
CMO investments 40,213 28,409 12,407
Mortgage servicing 59,422 49,122 41,253
Gain on sales and other 28,485 16,316 12,823
CMO administration 3,252 3,405 3,645
--------- --------- ---------
Contribution to income 169,131 142,201 92,460
Other operating expenses (9,205) (14,973) (15,101)
--------- --------- ---------
Net income $ 159,926 $ 127,228 $ 77,359
========= ========= =========
Net income per common share:*
Basic $ 2.62 $ 2.37 $ 1.10
Diluted 2.35 2.07 1.09
Return on average stockholders' equity 19.12% 18.41% 11.91%
</TABLE>
* NET INCOME PER COMMON SHARE FOR ALL PERIODS HAS BEEN PRESENTED IN
CONFORMITY WITH THE PROVISIONS OF STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS NO. 128 "EARNINGS PER SHARE."
1997 COMPARED TO 1996
Operating results for 1997 reached record levels easily surpassing 1996 results.
Net income of $159.9 million represents an increase of 25.7 percent over the
prior year while diluted net income per common share increased 13.5 percent.
Much of the improvement in operating results is attributable to the profitable
investment of new capital raised over the past two years into mortgage assets
and mortgage servicing. However, the benefit of larger holdings of mortgage
assets was offset somewhat by a narrowing of financing spreads due to high
levels of prepayments and higher short-term borrowing rates (see above,
"Financial Condition"). Likewise, mortgage servicing results, while benefiting
from significant growth in the servicing portfolio over the past two years, were
hampered to some extent by higher amortization of mortgage servicing rights due
to high prepayments. Lower long-term interest rates allowed for greater gain on
sales in 1997 compared to prior years.
Agency Securities contributed less to income during 1997 than in 1996. The
benefit to operating results of an $891 million (22 percent) increase in average
holdings of these securities during 1997 was offset by declining financing
spreads primarily because of higher prepayments (see above, "Financial
Condition"). Additionally, lower 6-month LIBOR and 1-year U.S. Treasury rates
have led to declining yields on ARM securities because underlying ARM loans
reset periodically to those indexes. Finally, yields on acquisitions of newly
created ARM securities have trended lower because many of these securities have
initial mortgage interest rates below the referenced indexes (referred to as
"teaser-rate ARM securities"). During 1997 financing spreads averaged only 20
basis points lower at 61 basis points; however, financing spreads for the fourth
quarter of 1997 were 65 basis points lower at 28 basis points than spreads
achieved in the fourth quarter of 1996. Agency
<PAGE> 28
Securities yields averaged 6.18 percent during 1997, compared to 6.24 percent
during 1996, while borrowing rates were higher at 5.57 percent, compared to 5.43
percent during 1996.
Non-agency Securities contributed less to income during 1997 than in 1996 due
primarily to a 13 basis point decrease in financing spreads and a 30 percent
reduction in the average outstanding portfolio. As a result of asset sales and
run-off, the average outstanding portfolio was $476 million during 1997,
compared to $682 million in 1996. Average yields for this portfolio (calculated
including mortgage insurance costs) were 6.96 percent during 1997, compared to
7.01 percent during 1996, while average borrowing rates were higher at 5.75
percent during 1997, compared to 5.67 percent during 1996.
Net CMO investments contributed substantially more to income in 1997 than in
1996 primarily because of substantial investments made during the past two years
in interest-only mortgage securities (see above, "Financial Condition"). Average
holdings of interest-only mortgage securities increased over 100 percent during
1997 to $723 million from $346 million during 1996, while average yields for
this portfolio (after hedging costs) declined to 10.24 percent during 1997 from
11.85 percent during 1996. Yields were negatively impacted by higher prepayments
and increased hedging costs.
Higher mortgage servicing results reflect continued growth in this operation
(see above, "Financial Condition"). Revenues increased to $173 million in 1997,
compared to $131 million in 1996. Servicing expenses also increased, but not to
the same extent as revenues, reflecting further efficiencies gained in the
servicing process with continued growth in the servicing portfolio. Amortization
of mortgage servicing rights of $65 million during 1997 was higher than the $45
million recorded in 1996 due to portfolio growth and higher levels of
prepayments caused by lower prevailing mortgage interest rates. Greater use of
external borrowings secured by the mortgage servicing portfolio to finance
portfolio growth contributed to higher borrowing costs in 1997 compared to 1996.
Operating expenses during 1997 were lower than 1996 primarily because of lower
compensation-related accruals.
During 1997 the Company sold $2.0 billion of mortgage assets consisting of
Agency Securities, Non-agency Securities and interest-only mortgage securities
for gains totaling $27.0 million. This compares to sales of mortgage assets
totaling $667 million during 1996 for gains of $14.9 million. Derivative
financial instruments held for trading purposes contributed $708,000 to
operating results during 1997 compared to $1.1 million during 1996. These
instruments (primarily interest rate floors) tend to decrease in value in a
rising interest rate environment and increase in value when interest rates fall
(see "Effects of Interest Rate Changes").
1996 COMPARED TO 1995
Operating results for 1996 improved substantially over those achieved in 1995.
Improved interest spreads on a larger mortgage investment portfolio, together
with improved mortgage servicing results, contributed to significantly higher
net income compared to 1995. Modest 1/4 of 1 percentage point reductions in
short-term interest rates by the Federal Reserve in July and December 1995 and
again in January 1996 contributed to improved interest spreads by lowering
average borrowing rates by nearly 1/2 of 1 percentage point to 5.53 percent.
Investment yields remained fairly steady. Increased investments in interest-only
mortgage securities also contributed to the Company's improved profitability.
<PAGE> 29
Higher mortgage servicing results reflected an over 47 percent increase in the
total mortgage servicing portfolio to $37.7 billion at December 31, 1996.
Revenues increased to $131 million in 1996, compared to $88 million in 1995.
Servicing expenses also increased, but not to the same extent as revenues,
reflecting efficiencies gained in the servicing process with the strong
servicing portfolio growth. Amortization of mortgage servicing rights of $45
million during 1996 was higher than the $27 million recorded in 1995 due to
portfolio growth and higher levels of prepayments caused by lower prevailing
mortgage interest rates. Greater use of external borrowings secured by the
mortgage servicing portfolio to finance portfolio growth contributed to higher
borrowing costs in 1996 compared to 1995.
Operating expenses in 1996 were marginally lower than in 1995 despite higher
compensation-related accruals because of the November 1995 closure of a mortgage
conduit unit and, to a lesser extent, the closure of a telephone origination
unit in the second quarter of 1996. These two decisions also reduced
requirements for loan loss provisions. In addition, with the growth of the
mortgage servicing operation, more indirect operating costs were identified with
that unit than in 1995.
During 1996 the Company sold $667 million of mortgage assets compared to sales
in 1995 totaling $1.0 billion. Higher gain on sales reflects lower interest
rates experienced during 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds include monthly principal and interest
payments on mortgage investments, short-term borrowings, excess cash flows on
CMO investments, servicing fees and other revenue from mortgage servicing,
proceeds from sales of mortgage assets and equity offerings (see above,
"Financial Condition"). The Company currently believes that these funds are
sufficient for growth of the mortgage servicing portfolio, the acquisition of
mortgage assets, repayments on short-term borrowings, the payment of cash
dividends as required for Capstead's continued qualification as a Real Estate
Investment Trust ("REIT") and common stock repurchases, if any, as described
below. It is the Company's policy to remain strongly capitalized and
conservatively leveraged.
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 London
Interbank Offered Rate ("LIBOR") rates. The terms and conditions of these
arrangements, including interest rates, are negotiated on a
transaction-by-transaction basis.
At December 31, 1997 the mortgage servicing operation had available $445 million
of a $625 million revolving line of credit agreement with an investment banking
firm that matures September 30, 1999. The line is to be used primarily to
finance acquisitions of mortgage servicing rights on a collateralized basis. The
agreement requires, among other things, that the mortgage servicing operation
maintain certain financial ratios and specified levels of unencumbered servicing
rights. The mortgage servicing operation is in compliance with all requirements.
Interest rates on borrowings under this facility are based on LIBOR.
<PAGE> 30
In 1996 the board of directors of the Company approved the repurchase of up to 1
million shares of common stock to fund employee stock option and stock grant
programs. As of December 31, 1997 no such share repurchases had occurred.
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. The resulting spread may be reduced in a rising interest rate
environment. Because a substantial portion of the Company's mortgage investments
are ARM mortgage securities, the risk of rising short-term interest rates is
offset to some extent by increases in the rates of interest earned on underlying
ARM 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,
interest rates on borrowings can rise to levels that may exceed the interest
rates on the underlying ARM loans resulting in a negative financing spread. The
Company may invest in derivative financial instruments ("Derivatives") from time
to time, specifically interest rate caps, as a hedge against rising interest
rates on a portion of its short-term borrowings.
Interest rate caps increase in value as related interest rates rise and decline
in value when such rates fall.
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.
Because prolonged periods of high prepayments can significantly reduce the
expected life of mortgage investments, the actual yields realized can be lower
due to faster amortization of purchase premiums. In addition, the rates of
interest earned on ARM investments generally will decline during periods of
falling interest rates as the underlying ARM loans reset at lower rates. The
Company may, from time to time, sell mortgage assets. This may increase income
volatility because of the recognition of transactional gains or losses. Such
sales may become attractive as values of mortgage assets fluctuate with changes
in interest rates.
Changes in interest rates also impact earnings recognized from CMO investments,
which consist primarily of fixed-rate CMO residuals and interest-only mortgage
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 eliminating the overall return on the investment in the CMO residual. This is
due primarily to the acceleration of the amortization of bond discounts, a
noncash item, as bond classes are repaid more rapidly than originally
anticipated. Conversely, if mortgage interest rates rise significantly above
interest rates on the collateral, principal prepayments will typically diminish,
improving the overall return on an investment in a fixed-rate CMO residual
because of an increase in time over which the Company receives the larger
positive interest spread.
<PAGE> 31
Interest-only mortgage securities behave similarly to CMO residuals. In a
falling interest rate environment, prepayments on the underlying mortgage loans
generally will be higher thereby reducing or even eliminating overall returns on
these securities. Sustained periods of high prepayments can result in losses.
Conversely, in periods of rising interest rates, interest-only mortgage
securities tend to perform favorably because underlying mortgage loans will
generally prepay at slower rates thereby increasing overall returns.
The above discussion regarding how changes in interest rates impact mortgage
assets also applies to the Company's investment in mortgage servicing rights.
When interest rates rise, periodic amortization of amounts paid for mortgage
servicing rights is less since the average lives of the related mortgage loans
tend to be longer and earnings from temporarily held cash balances will be
greater. Under these conditions, mortgage servicing rights become more valuable.
Conversely, lower interest rates will spur prepayments thus reducing the 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,
particularly since this investment is evaluated for impairment on a
disaggregated basis and impairment charges are necessary if the recorded amount
for an individual servicing stratum exceeds its fair value.
The Company's business plan is to build a mortgage banking operation with
investments in mortgage servicing and mortgage assets with the goal of producing
reasonably balanced operating results in a variety of interest rate
environments. The Company supplements its business plan from time to time with
Derivatives held for trading purposes or to hedge certain assets, principally
interest-only mortgage securities and mortgage servicing rights. Most
Derivatives used by the Company are interest rate floors that decrease in value
when interest rates rise and increase in value when rates decline. Other
Derivatives acquired from time to time may include interest rate caps, treasury
futures contracts and options, written options on mortgage assets or various
other Derivatives available in the market place that are compatible with the
Company's risk management objectives. In instances where such Derivatives are
designated as hedges, any changes in value will adjust the basis of the assets
hedged. In instances where Derivatives are held for trading purposes, changes in
value will be recorded in income as they occur, which could increase income
volatility.
OTHER
Many existing computer software programs use only two digits to identify the
year in date fields and, as such, could fail or create erroneous results by or
at the Year 2000. The Company utilizes a number of software systems to service
mortgage loans, administer securitizations and manage its mortgage assets. The
Company has made and will continue to make investments in its software systems
and applications to ensure the Company is Year 2000 compliant. In addition, the
Company has taken steps to ensure that the vendors it utilizes in various
capacities and institutions that it interfaces with are also taking the
necessary steps to become Year 2000 compliant. This process is expected to be
essentially complete by mid-1998. The financial impact of becoming Year 2000
compliant has not been and is not expected to be material to the Company or
results of operations.
This document contains "forward-looking statements" (within the meaning of the
Private Securities Litigation Act of 1995) that inherently involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of unforeseen
external factors. These factors may include, but are not limited to, changes in
general economic conditions, fluctuations in interest rates, increases in costs
and other general competitive factors.
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES OF
CAPSTEAD MORTGAGE CORPORATION
At December 31, 1997 the subsidiaries of Capstead Mortgage Corporation were as
follows:
<TABLE>
<CAPTION>
STATE OF
DOMICILE
--------
<S> <C>
PARENT COMPANY
SUBSIDIARY
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 Mortgage Services Corporation............................................... Delaware
Capstead Holdings, Inc.(1)........................................................... Delaware
Capstead Inc.(2)................................................................... 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 Holdings, Inc. owns all the issued and outstanding common
stock.
(3) A general partnership owned by CMC and Capstead Holdings, Inc.
<PAGE> 1
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 21, 1998, included
in the 1997 Annual Report to Stockholders of Capstead Mortgage Corporation.
Our audits also included the financial statement schedule of Capstead Mortgage
Corporation listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audit. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the following registration
statements and the related prospectuses, our report dated January 21, 1998, 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 schedule included in the Form 10-K of Capstead Mortgage
Corporation:
o Form S-8 (No. 33-40116);
o Form S-8 (No. 33-40117);
o Form S-3 (No. 33-62212);
o Form S-3 (No. 33-52415);
o Form S-8 (No. 33-53555);
o Form S-3 (No. 33-57164);
o Form S-3 (No. 333-03187);
o Form S-8 (No. 333-12719);
o Form S-3 (No. 333-26419);
o Form S-3 (No. 333-26865);
o A pre-effective amendment to Form S-3 (No. 333-26419);
o Form S-8 (No. 333-27215);
o A post-effective amendment to Form S-3 (No. 333-26865); and
o Form S-3 (No. 333-43169).
ERNST & YOUNG LLP
Dallas, Texas
March 10, 1998
<TABLE> <S> <C>
<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, 1997 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 17,377
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,357,515
<CURRENT-LIABILITIES> 7,159,452
<BONDS> 4,309,455
0
195,498
<COMMON> 585
<OTHER-SE> 692,525
<TOTAL-LIABILITY-AND-EQUITY> 12,357,515
<SALES> 0
<TOTAL-REVENUES> 898,912
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 105,141
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 633,845
<INCOME-PRETAX> 159,926
<INCOME-TAX> 0
<INCOME-CONTINUING> 159,926
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 159,926
<EPS-PRIMARY> 2.62
<EPS-DILUTED> 2.35
</TABLE>
