<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ______________
COMMISSION FILE NUMBER: 1-8996
CAPSTEAD MORTGAGE CORPORATION
(Exact name of Registrant as specified in its Charter)
MARYLAND 75-2027937
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2711 NORTH HASKELL AVENUE, DALLAS, TEXAS 75204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 874-2323
The Registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) for Form 10-Q and is therefore filing this Form under the reduced disclosure
format.
Indicate by check mark whether the Registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
COMMON STOCK ($0.01 PAR VALUE) 61,542,603 AS OF NOVEMBER 12, 1998
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<PAGE> 2
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
PART I. -- FINANCIAL INFORMATION
PAGE
----
<S> <C> <C>
ITEM 1. Financial Statements
Consolidated Balance Sheet -- September 30, 1998 (unaudited) and
December 31, 1997.......................................................... 3
Consolidated Statement of Operations -- Quarter and Nine Months Ended
September 30, 1998 and 1997 (unaudited).................................... 4
Consolidated Statement of Cash Flows -- Nine Months Ended
September 30, 1998 and 1997 (unaudited).................................... 5
Notes to Consolidated Financial Statements (unaudited)....................... 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................... 15
PART II. -- OTHER INFORMATION
ITEM 1. Legal Proceedings..................................................... 25
ITEM 6. Exhibits and Reports on Form 8-K...................................... 26
SIGNATURES...................................................................... 27
</TABLE>
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<PAGE> 3
PART I. -- FINANCIAL INFORMATION
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Mortgage securities and other investments $ 3,831,640 $ 6,114,130
CMO collateral and investments 4,984,575 5,195,436
---------------- ----------------
8,816,215 11,309,566
Mortgage servicing rights 494,355 669,062
Prepaids, receivables and other 246,799 361,510
Cash and cash equivalents 58,860 17,377
---------------- ----------------
$ 9,616,229 $ 12,357,515
================ ================
LIABILITIES
Short-term borrowings $ 3,906,855 $ 7,099,706
Collateralized mortgage obligations 4,931,526 4,309,455
Accounts payable and accrued expenses 36,378 51,323
Mortgage servicing rights
acquisitions payable 35,993 8,423
---------------- ----------------
8,910,752 11,468,907
---------------- ----------------
STOCKHOLDERS' EQUITY
Preferred stock - $0.10 par value;
100,000 shares authorized:
$1.60 Cumulative Preferred Stock,
Series A, 374 and 408 shares
issued and outstanding ($6,134
aggregate liquidation preference) 5,228 5,698
$1.26 Cumulative Convertible
Preferred Stock, Series B, 17,298
and 17,081 shares issued and
outstanding ($196,851 aggregate
liquidation preference) 193,196 189,800
Common stock - $0.01 par value; 100,000
shares authorized; 61,534 and 58,541
shares issued and outstanding 615 585
Paid-in capital 781,154 732,295
Undistributed income (loss) (309,813) 12,676
Accumulated other comprehensive
income (loss) 35,097 (52,446)
---------------- ----------------
705,477 888,608
---------------- ----------------
$ 9,616,229 $ 12,357,515
================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 4
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Mortgage securities and other investments $ 67,625 $ 90,762 $ 270,622 $ 248,139
CMO collateral and investments 77,058 85,153 268,951 256,072
--------- --------- --------- ---------
Total interest income 144,683 175,915 539,573 504,211
--------- --------- --------- ---------
INTEREST AND RELATED EXPENSE:
Short-term borrowings:
Mortgage securities and other investments 68,834 80,688 252,673 214,192
CMO investments 325 7,336 22,648 19,358
Collateralized mortgage obligations 92,914 65,617 254,667 203,227
Mortgage insurance and other 818 1,224 2,912 4,005
--------- --------- --------- ---------
Total interest and related expense 162,891 154,865 532,900 440,782
--------- --------- --------- ---------
Net margin on mortgage assets and
other investments (18,208) 21,050 6,673 63,429
--------- --------- --------- ---------
MORTGAGE BANKING REVENUE:
Servicing fees 32,833 31,307 99,666 92,166
Production and other 22,825 13,263 57,072 32,682
--------- --------- --------- ---------
Total mortgage banking revenue 55,658 44,570 156,738 124,848
--------- --------- --------- ---------
MORTGAGE SERVICING EXPENSE:
Direct servicing expense 5,866 4,498 17,263 12,794
Indirect servicing expense 992 2,089 4,222 5,640
Amortization of mortgage servicing
rights and related costs 32,329 15,738 74,737 46,150
Interest 5,200 5,992 16,553 16,404
--------- --------- --------- ---------
Total mortgage servicing expense 44,387 28,317 112,775 80,988
--------- --------- --------- ---------
Net margin on mortgage banking
operations, before impairment 11,271 16,253 43,963 43,860
--------- --------- --------- ---------
OTHER REVENUE (EXPENSE):
Gain (loss) on sale of mortgage assets (991) 5,615 (273,773) 16,591
Impairment on mortgage servicing
rights and CMO investments (148,229) -- (199,615) --
Gain on financial instruments held to
offset the effects of impairment 146,122 -- 180,846 --
CMO administration and other 1,062 1,005 3,063 2,998
Other operating expense (2,852) (2,056) (6,044) (7,952)
--------- --------- --------- ---------
Total other revenue (expense) (4,888) 4,564 (295,523) 11,637
--------- --------- --------- ---------
NET INCOME (LOSS) $ (11,825) $ 41,867 $(244,887) $ 118,926
========= ========= ========= =========
Net income (loss) $ (11,825) $ 41,867 $(244,887) $ 118,926
Less cash dividends on preferred stock (5,600) (6,073) (16,744) (19,934)
--------- --------- --------- ---------
Net income available (loss attributable)
to common stockholders $ (17,425) $ 35,794 $(261,631) $ 98,992
========= ========= ========= =========
NET INCOME (LOSS) PER COMMON SHARE:
Basic $ (0.28) $ 0.66 $ (4.30) $ 1.96
Diluted (0.28) 0.61 (4.30) 1.78
CASH DIVIDENDS PAID PER SHARE:
Common $ -- $ 0.610 $ 1.000 $ 1.785
Series A Preferred 0.400 0.400 1.200 1.200
Series B Preferred 0.315 0.315 0.945 0.945
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 5
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
--------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (244,887) $ 118,926
Noncash items:
Impairment on mortgage servicing rights and
CMO investments 199,615 --
Amortization of mortgage servicing
rights and related costs 74,737 46,150
Amortization of discount and premium 121,023 76,268
Depreciation and other amortization 3,885 2,625
Gain on sale of financial instruments held to offset
the effects of impairment (180,846) --
Loss (gain) on sale of mortgage assets 271,552 (16,591)
Net change in prepaids, receivables, other assets,
accounts payable and accrued expenses (8,133) (844)
-------------- --------------
Net cash provided by operating activities 236,946 226,534
-------------- --------------
INVESTING ACTIVITIES:
Purchases of mortgage securities and other investments (4,022,469) (2,990,259)
Purchases of CMO collateral and investments (1,305,865) (359,268)
Purchases of mortgage servicing rights (90,584) (82,590)
Purchases of derivative financial instruments (76,243) (50,054)
Principal collections on mortgage investments 1,778,149 944,805
Proceeds from sales of mortgage assets 5,032,829 661,373
Proceeds from sales and settlements of derivative
financial instruments 299,547 305
CMO collateral:
Principal collections 771,098 357,330
Decrease in accrued interest receivable 6,015 1,152
Decrease (increase) in short-term investments 5,710 (2,133)
-------------- --------------
Net cash provided (used) by investing activities 2,398,187 (1,519,339)
-------------- --------------
FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings (3,192,851) 1,484,961
Increase (decrease) in mortgage servicing
acquisitions payable 27,569 (40,216)
Collateralized mortgage obligations:
Issuance of securities 1,494,853 284,672
Principal payments on securities (886,019) (474,417)
Increase (decrease) in accrued interest payable (9,642) 3,529
Capital stock transactions 50,042 137,677
Dividends paid (77,602) (110,509)
-------------- --------------
Net cash provided (used) by financing activities (2,593,650) 1,285,697
-------------- --------------
Net change in cash and cash equivalents 41,483 (7,108)
Cash and cash equivalents at beginning of period 17,377 21,003
-------------- --------------
Cash and cash equivalents at end of period $ 58,860 $ 13,895
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 6
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 1 -- BUSINESS
Capstead Mortgage Corporation, a national mortgage banking firm, engages in
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, mortgage production and mortgage assets
with the goal of producing reasonably balanced operating results in a variety of
interest rate environments. However, the current interest rate environment,
where long-term interest rates have fallen to near and even lower than
short-term interest rates, has significantly decreased the Company's net
interest margins and led to higher mortgage prepayment rates. As discussed in
NOTE 3, NOTE 4 and NOTE 6, in the second and third quarters the Company recorded
losses on repositioning its mortgage asset portfolios and took impairment
charges against its investments in mortgage servicing rights, and to a lesser
extent its CMO investments.
NOTE 2 -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the quarter and nine months ended September
30, 1998 are not necessarily indicative of the results that may be expected for
the calendar year ending December 31, 1998. For further information refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1997.
On January 1, 1998 the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards for the reporting of comprehensive income and its
components in financial statements. As the term currently relates to the
Company, comprehensive income (loss) consists of net income (loss) plus the
change in unrealized gain (loss) on debt securities classified as
available-for-sale (see NOTE 8). The adoption of SFAS 130 has not had any impact
on the results of operations or financial position of the Company.
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (i) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an
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<PAGE> 7
unrecognized firm commitment; (ii) a hedge of the exposure to variable cash
flows of a forecasted transaction; or (iii) in certain circumstances, a hedge of
a foreign currency exposure. This statement becomes effective in fiscal year
ending December 31, 2001. The adoption of SFAS 133 is not expected to have a
material impact on the financial position of the Company.
Certain amounts for prior periods have been reclassified to conform to the 1998
presentation.
NOTE 3 -- PORTFOLIO REPOSITIONINGS
In mid-June the Company committed to a significant repositioning of its mortgage
asset portfolios involving the sale of approximately $1.0 billion of
interest-only mortgage securities and $1.3 billion of adjustable-rate mortgage
securities. Also as part of this repositioning, sales of $795 million of
fixed-rate securities were completed by mid-July. Losses in connection with
these transactions were recorded in the second quarter. In September the Company
committed to the sale of an additional $1.1 billion of mortgage securities, $513
million of which settled in October. Losses in connection with these
transactions were recorded in the third quarter.
NOTE 4 -- MORTGAGE SERVICING PORTFOLIO
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 December 31, 1997 $ 42,059,027 441,277 $ 669,062
Additions:
Purchases 2,225,295 19,922 44,714
Loan production 597,586 5,702 8,497
Run-off/amortization (7,231,323) (61,769) (68,586)
Impairment reserve -- -- (195,564)
Results of hedging activity (see below) -- -- (1,141)
------------ ------------ ------------
Loans serviced at September 30, 1998 37,650,585 405,132 456,982
Purchases pending transfer 1,747,158 14,269 37,373
------------ ------------ ------------
Total portfolio at September 30, 1998 $ 39,397,743 419,401 $ 494,355
============ ============ ============
</TABLE>
In addition, as of September 30, 1998, the Company subserviced $19.9 billion of
single-family mortgage loans under a subservicing arrangement with a large
national mortgage conduit.
The Company's investment in mortgage servicing rights has been written down to
fair value at September 30, 1998 through amortization and impairment charges.
Derivative financial instruments, specifically interest rate floors, have been
held for several years to help mitigate the effect of changes in value of the
servicing portfolio caused by falling mortgage interest rates and were accorded
hedge accounting treatment through May of 1998. Beginning in June 1998, changes
in value of these derivatives have been included in income rather than recorded
as an adjustment to the carrying amount of the servicing asset.
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<PAGE> 8
The Company currently manages an expanded portfolio of U.S. Treasury-based
financial instruments that include interest rate floors, 10-year U.S. Treasury
note future contracts and 10-year U.S. Treasury notes to help mitigate the
effects of further declines in mortgage interest rates on the value of mortgage
servicing rights. Future contracts are derivative financial instruments that
require daily settlement for changes in value of the underlying Treasuries and
such changes in value are included in income. During the quarter the Company
recorded $122.7 million of gain on floors and futures in addition to $23.4
million of realized gain on the sale of U.S. Treasury notes. At September 30,
1998 interest rate floor positions had related notional amounts totaling $10.3
billion and a recorded fair value of $103.0 million. Futures contracts had
related notional amounts of $1.0 billion and a recorded investment of $21.9
million. There can be no assurance that any future declines in value of the
servicing portfolio will be offset by gains realized on these or other financial
instruments held by the Company.
NOTE 5 -- MORTGAGE SECURITIES AND OTHER INVESTMENTS
Mortgage securities and other investments and the related average effective
interest rates (calculated including mortgage insurance costs on non-agency
securities and excluding unrealized gains and losses) were as follows (dollars
in thousands):
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
ENDED ENDED
AS OF SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
----------------------------- ------------------------------ -----------------------------
1998 1997 1998 1997 1998 1997
------------- ------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Agency and U.S.
Treasury securities:
U.S. Treasury notes $ 653,890 $ -- 5.63% -- % 5.61% -- %
Fixed-rate 426,998 719,113 6.54 6.68 6.53 6.56
Medium-term 450,926 59,297 5.87 6.84 5.99 6.84
Adjustable-rate 2,158,049 4,933,738 4.75 6.14 5.55 6.23
Non-agency securities:
Fixed-rate -- 38,361 7.79 8.13 7.84 8.53
Medium-term 18,544 221,135 6.28 6.57 6.33 6.63
Adjustable-rate -- 174,206 6.67 7.15 6.81 7.15
Production warehouse 123,233 -- 6.62 -- 6.77 --
------------- -------------
$ 3,831,640 $ 6,145,850
============= =============
</TABLE>
The Company classifies its mortgage securities by interest rate characteristics
of the underlying mortgage loans. Fixed-rate mortgage securities 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 securities either
(i) have 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) have
initial interest rates that adjust one time, approximately 5 years following
origination of the mortgage loan, based on a specified margin over Fannie Mae
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 securities 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
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<PAGE> 9
Treasuries, or (iii) were previously classified as medium-term and have begun
adjusting annually based on a specified margin over 1-year Treasuries.
Agency and U.S. Treasury securities consist of mortgage-backed securities issued
by government-sponsored entities, either Fannie Mae, Freddie Mac or Ginnie Mae,
and U.S. government-issued fixed-rate securities, commonly referred to as U.S.
Treasury notes or bills (collectively, "Agency and U.S. Treasury Securities").
Non-agency securities consist of AAA-rated private mortgage pass-through and
other AAA-rated private mortgage securities (together, "Non-agency Securities")
and also include mortgage loans held for sale in connection with loan production
activities. The maturity of mortgage-backed securities is directly affected by
the rate of principal prepayments on the underlying mortgage loans.
On September 29, 1998 the Company issued a CMO that was collateralized by $351.5
million of Non-agency Securities. This transaction allowed the Company to
finance these assets until maturity at attractive long-term rates, while at the
same time, reducing the Company's short-term borrowing requirements. At
September 30, 1998 Agency and U.S. Treasury Securities and remaining Non-agency
Securities were pledged to secure short-term borrowings.
NOTE 6 -- CMO COLLATERAL AND INVESTMENTS
Collateralized mortgage obligation ("CMO") collateral consists of
mortgage-backed securities and related investments pledged to secure CMO
borrowings ("Pledged CMO Collateral"). CMO investments have included investments
in Agency Trust interest-only mortgage securities (see NOTE 3) and investments
in other CMO securities such as other agency and private-issue interest-only and
principal-only mortgage securities. The components of CMO collateral and
investments are summarized as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
Pledged CMO collateral:
Pledged mortgage securities $ 4,923,764 $ 4,326,696
Short-term investments 9,890 15,600
Accrued interest receivable 29,713 26,760
--------------- ---------------
4,963,367 4,369,056
Unamortized premium 10,949 2,752
--------------- ---------------
4,974,316 4,371,808
CMO investments:
Agency Trust interest-only
mortgage securities -- 809,757
Other CMO investments 10,259 13,871
--------------- ---------------
$ 4,984,575 $ 5,195,436
=============== ===============
</TABLE>
Pledged mortgage securities consist of fixed-rate, medium-term and
adjustable-rate mortgage-backed securities. All principal and interest on
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 pledged mortgage securities and
reinvestment income earned thereon are available for the payment of principal
and interest on CMOs issued by the Company. The weighted average effective
interest rate for total Pledged CMO Collateral was 7.10 percent and 7.22 percent
during the quarter and nine months ended September 30, 1998, respectively.
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<PAGE> 10
During the second quarter of 1998, the Company committed to the sale of its
entire investment in Agency Trust interest-only mortgage securities (see NOTE 3
above). During the third quarter the Company wrote down to fair value its
remaining investment in interest-only mortgage securities through an impairment
charge of $4.1 million.
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>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
CMOs $ 4,925,168 $ 4,332,409
Accrued interest payable 27,944 28,417
----------------- -----------------
Total obligation 4,953,112 4,360,826
Less unamortized discount (21,586) (51,371)
----------------- -----------------
$ 4,931,526 $ 4,309,455
================= =================
Range of average interest rates 5.46% to 9.45% 5.60% to 9.95%
Range of stated maturities 2007 to 2028 2007 to 2027
Number of series 31 33
</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 8.54 percent and 7.78 percent during the quarter and nine months ended
September 30, 1998, respectively.
NOTE 8 -- DISCLOSURES REGARDING FAIR VALUES OF DEBT SECURITIES
Estimated fair values of debt securities have been determined using available
market information and appropriate valuation methodologies; however,
considerable judgment is required in interpreting market data to develop these
estimates. In addition, fair values fluctuate on a daily basis. Accordingly,
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 fair value of Agency and U.S. Treasury Securities, Non-agency Securities
(excluding mortgage loans held in the production warehouse) and CMO investments
was estimated using either quoted market prices when available, including quotes
made by lenders in connection with designating collateral for repurchase
arrangements, or offer prices for similar assets or market positions. Losses of
$3.7 million on certain sales that settled in October 1998 were recorded and the
cost bases of these securities have been reduced
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<PAGE> 11
accordingly. The fair value of Pledged CMO Collateral was based on projected
cash flows, after payment on the related CMOs, determined using market discount
rates and prepayment assumptions. The maturity of Pledged CMO Collateral is
directly affected by the rate of principal payments by mortgagors and Clean-up
Calls of the remaining CMOs outstanding.
The following tables summarize fair value disclosures for available-for-sale
debt securities (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
AS OF SEPTEMBER 30, 1998
Agency and U.S. Treasury
Securities:
U.S. Treasury notes $ 617,546 $ 36,344 $ -- $ 653,890
Fixed-rate 418,775 8,223 -- 426,998
Medium-term 452,030 353 1,457 450,926
Adjustable-rate 2,168,378 1,972 12,301 2,158,049
CMO collateral and investments 227,315 2,076 113 229,278
------------- ------------- ------------- -------------
$ 3,884,044 $ 48,968 $ 13,871 $ 3,919,141
============= ============= ============= =============
AS OF DECEMBER 31, 1997
Mortgage securities:
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
============= ============= ============= =============
</TABLE>
Held-to-maturity debt securities consist of Pledged CMO Collateral and
collateral released from the related CMO indentures pursuant to Clean-up Calls
and held as Non-agency Securities. The following tables summarize fair value
disclosures for debt securities held-to-maturity (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
AS OF SEPTEMBER 30, 1998
Pledged CMO Collateral $ 4,755,297 $ 2,021 $ 25,414 $ 4,731,904
Non-agency Securities 18,544 20 -- 18,564
------------- ------------- ------------- -------------
$ 4,773,841 $ 2,041 $ 25,414 $ 4,750,468
============= ============= ============= =============
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
============= ============= ============= =============
</TABLE>
Sales of released CMO collateral occasionally occur provided the collateral has
paid down to within 15 percent of its original issuance amounts.
-11-
<PAGE> 12
The following table summarizes disclosures related to the disposition of debt
securities held available-for-sale and held-to-maturity (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------------- ------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sale of securities held available-for-sale:
Amortized cost $ 1,523,853 $ 223,846 $ 4,790,144 $ 570,925
Gains (losses) 22,286 5,050 (254,646) 14,136
Sale of released CMO collateral held-to-maturity:
Amortized cost -- -- 5,022 73,324
Gains -- -- 471 2,986
</TABLE>
NOTE 9 -- NET INTEREST INCOME ANALYSIS
The following tables summarize interest income and interest expense and average
effective interest rates for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30
-------------------------------------------------------
1998 1997
-------------------------- -------------------------
AMOUNT AVERAGE AMOUNT AVERAGE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Mortgage securities and other
investments $ 67,625 5.53% $ 90,762 6.30%
CMO collateral and investments 77,058 7.10 85,153 7.95
----------- -----------
Total interest income 144,683 175,915
----------- -----------
Interest expense:
Short-term borrowings 69,159 5.58 88,024 5.54
CMOs 92,914 8.54 65,617 7.69
----------- -----------
Total interest expense 162,073 153,641
----------- -----------
Net interest $ (17,390) $ 22,274
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
-------------------------------------------------------
1998 1997
-------------------------- -------------------------
AMOUNT AVERAGE AMOUNT AVERAGE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Mortgage securities and other
investments $ 270,622 5.92% $ 248,139 6.37%
CMO collateral and investments 268,951 7.26 256,072 7.84
----------- -----------
Total interest income 539,573 504,211
----------- -----------
Interest expense:
Short-term borrowings 275,321 5.57 233,550 5.52
CMOs 254,667 7.78 203,227 7.57
----------- -----------
Total interest expense 529,988 436,777
----------- -----------
Net interest $ 9,585 $ 67,434
=========== ===========
</TABLE>
-12-
<PAGE> 13
The following tables summarize changes in interest income and interest expense
due to changes in interest rates versus changes in volume for the quarter and
nine months ended September 30, 1998 compared to the same periods in 1997 (in
thousands):
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30, 1998
--------------------------------------
RATE* VOLUME* TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Mortgage securities and other
investments $ (10,431) $ (12,706) $ (23,137)
CMO collateral and investments (9,261) 1,166 (8,095)
---------- ---------- ----------
Total interest income (19,692) (11,540) (31,232)
---------- ---------- ----------
Interest expense:
Short-term borrowings 632 (19,497) (18,865)
CMOs 7,826 19,471 27,297
---------- ---------- ----------
Total interest expense 8,458 (26) 8,432
---------- ---------- ----------
Net interest $ (28,150) $ (11,514) $ (39,664)
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
--------------------------------------
RATE* VOLUME* TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Mortgage securities and other $ (18,196) $ 40,679 $ 22,483
investments (19,738) 32,617 12,879
---------- ---------- ----------
CMO collateral and investments (37,934) 73,296 35,362
---------- ---------- ----------
Total interest income
Interest expense:
Short-term borrowings 2,349 39,422 41,771
CMOs 5,780 45,660 51,440
---------- ---------- ----------
Total interest expense 8,129 85,082 93,211
---------- ---------- ----------
Net interest $ (46,063) $ (11,786) $ (57,849)
========== ========== ==========
</TABLE>
* THE CHANGE IN INTEREST DUE TO BOTH VOLUME AND RATE HAS BEEN ALLOCATED TO
VOLUME AND RATE CHANGES IN PROPORTION TO THE RELATIONSHIP OF THE ABSOLUTE
DOLLAR AMOUNTS OF THE CHANGE IN EACH.
NOTE 10 -- COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is net income (loss) plus other comprehensive income
(loss), which, for the periods presented, consists of the change in unrealized
gain (loss) on debt securities classified as available-for-sale. The following
table provides information regarding comprehensive income (loss) for the periods
indicated (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss) $ (11,825) $ 41,867 $ (244,887) $ 118,926
Other comprehensive income (loss):
Unrealized gain (loss) on debt securities:
Change in unrealized gain
(loss) during period 41,445 (23,361) (167,103) 19,003
Reclassification adjustment
for (gain) loss included
in net income (loss) (22,286) (5,050) 254,646 (14,136)
---------- ---------- ---------- ----------
Other comprehensive income (loss) 19,159 (28,411) 87,543 4,867
---------- ---------- ---------- ----------
Comprehensive income (loss) $ 7,334 $ 13,456 $ (157,344) $ 123,793
========== ========== ========== ==========
</TABLE>
-13-
<PAGE> 14
NOTE 11 -- STOCKHOLDER LITIGATION
During the third quarter, the Company and certain of its officers were served
with 24 purported class action lawsuits alleging, among other things, that the
defendants violated United States securities laws by publicly issuing false and
misleading statements and omitting disclosure of material adverse information
regarding the Company's business during a period extending from April 17, 1997
through July 24, 1998. Each of the complaints claims that as a result of such
alleged improper actions, the market price of the Company's equity securities
were artificially inflated at the time stockholders in the classes acquired
those securities. The complaints seek monetary damages for the losses allegedly
incurred by the members of the various classes on whose behalf these actions are
brought. The Company has not yet responded to the complaints, but intends to
defend itself vigorously.
Based on available information, management believes the resolution of these
suits will not have a material adverse effect on the financial position of the
Company.
-14-
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
OVERVIEW
The Company's business plan has been to build a mortgage banking operation with
investments in mortgage securities, mortgage servicing and mortgage production
with the goal of producing reasonably balanced operating results in a variety of
interest rate environments. However, the current interest rate environment
represents one of the most challenging periods in recent history for the
financial markets and for the Company. During 1998 long-term interest rates have
fallen to near and even lower than short-term interest rates which has
significantly decreased the Company's net interest margins and mortgage
servicing income because of high mortgage prepayments without any relief, until
very recently, from lower borrowing costs. In addition, late in the third
quarter the availability of credit tightened considerably throughout the
financial markets and in particular the mortgage finance markets.
In response to these market conditions, the Company has taken several steps
designed to preserve stockholders' equity. These include (i) reducing exposure
to prepayment risk by disposing of a $1.0 billion investment in Agency Trust
interest-only mortgage securities and more fully protecting the value of the
mortgage servicing portfolio through actively managing a portfolio of U.S.
Treasury-based financial instruments, (ii) significantly downsizing mortgage
securities portfolios to improve the Company's credit profile by reducing
reliance on short-term borrowings and by focusing the remaining mortgage
securities portfolios almost exclusively on Fannie Mae, Freddie Mac and Ginnie
Mae mortgage-backed securities and U.S. Treasury notes (collectively, "Agency
and U.S. Treasury Securities"), and (iii) the elimination of common stock
dividends. The Company currently expects to continue to pay preferred stock
dividends.
Although long-term interest rates have partially recovered from the lows reached
during the first week of October, they remain low enough to keep mortgage
prepayment risk high on the Company's investments in mortgage assets and
mortgage servicing. The Company is encouraged by actions taken by the Federal
Reserve on September 29 and October 14, 1998 to lower short-term interest rates
by a total of one-half of one percentage point which should help lower the
Company's future borrowing costs and help alleviate some of the liquidity
concerns in the financial markets, in particular the mortgage finance markets.
RECENT CHANGES IN THE INTEREST RATE ENVIRONMENT
In April 1997 the 10-year U.S. Treasury rate reached a high of 6.98 percent
before declining to 5.74 percent by December 31, 1997. Interest rates for
30-year, fixed-rate mortgage loans reported in Freddie Mac's weekly Primary
Mortgage Market Survey peaked at 8.18 percent in April 1997 before declining to
6.94 percent for the week ended January 9, 1998. During the most recent quarter,
the 10-year U.S. Treasury rate declined over one full percentage point, from
5.44 percent at June 30, 1998 to 4.40 percent at September 30, 1998, while
30-year fixed-rate mortgage rates declined over three-eighths of
-15-
<PAGE> 16
one percentage point, from 6.98 percent for the week ended July 3, 1998 to 6.60
percent for the week ended October 2, 1998, according to the Primary Mortgage
Market Survey. Most of this third quarter decline occurred in the month of
September. Subsequent to quarter-end, the 10-year U.S. Treasury rate reached a
low of 4.16 percent on October 5, 1998 before rising to 4.60 percent by the end
of October. According to the Primary Mortgage Market Survey, 30-year fixed-rate
mortgage rates reached a low of 6.49 percent the week ended October 9 before
rebounding to 6.83 percent the week ended October 30, 1998. The Federal Reserve
lowered the Federal Funds Rate one-fourth of one percent on September 29 and
again on October 14, 1998.
MORTGAGE SECURITIES AND OTHER INVESTMENTS
The mortgage securities and other investments portfolios consist of Agency and
U.S. Treasury Securities and, to a lesser extent, AAA-rated private mortgage
pass-through and other AAA-rated private mortgage securities("Non-agency
Securities"). Non-agency Securities also include mortgage loans held for sale in
connection with loan production activities. The mortgage securities and other
investment portfolios are financed under repurchase arrangements with investment
banking firms pursuant to which the portfolios are pledged as collateral (see
"Liquidity and Capital Resources").
In the current interest rate environment, adjustable-rate ("ARM") mortgage
securities have been particularly hard hit by higher prepayments because
homeowners have found it increasingly advantageous to refinance into fixed-rate
mortgage loans with lower interest rates. With the rapid decline in long-term
interest rates late in the third quarter, the prepayment risk on ARM mortgage
securities has further increased and, as a result, these securities are now
expected to prepay faster than previously anticipated. Consequently, in the
third quarter the Company wrote-off an additional $5.3 million of the purchase
premiums paid by the Company for these securities through premium amortization
adjustments. These write-offs have decreased but not eliminated the Company's
exposure to future increases in prepayments relative to remaining purchase
premiums. Should future prepayments increase beyond the Company's current
expectations, additional write-offs of remaining premiums may be necessary (see
"Effects of Interest Rate Changes").
In connection with portfolio repositioning efforts in June, the Company sold
$1.3 billion of ARM mortgage securities and $795 million of fixed-rate
securities. In response to the liquidity concerns developing in the mortgage
finance markets beginning in the latter part of the third quarter as discussed
above, the Company further repositioned its investment portfolios in order to
reduce short-term borrowings and improve its credit profile by focusing almost
exclusively on Agency and U.S. Treasury Securities. During the third quarter
short-term borrowings were reduced by over $2 billion primarily through the sale
of $1.5 billion of mortgage securities and other investments and the issuance of
a $345 million CMO collateralized by Non-agency Securities. These transactions
resulted in the reduction of the Company's leverage ratio (short-term borrowings
to equity, before accumulated other comprehensive income) from 8.7:1 at June 30,
1998 to 5.8:1 at September 30, 1998. Approximately 93 percent of the Company's
short-term borrowings at quarter-end were secured by Agency and U.S. Treasury
Securities. Portfolio repositioning transactions subsequent to quarter-end will
further lower the Company's leverage ratio.
-16-
<PAGE> 17
CMO COLLATERAL AND INVESTMENTS
Prior to 1995 the Company had been an active issuer of 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) the Company
has not been an active issuer of CMOs since 1994. In lieu of issuing CMOs, the
Company had increased its CMO investments (defined as CMO collateral and
investments, net of related bonds) by acquiring interest-only mortgage
securities. In June 1998 the Company committed to the sale of its entire
investment in Fannie Mae and Freddie Mac Trust interest-only mortgage securities
at a substantial loss. The June disposition of the Agency Trust interest-only
mortgage securities proved to be a prudent decision as this type of security has
continued to decline in value during the third quarter. As of September 30,
1998, the Company's CMO investments had been reduced to $53.0 million, down from
$81.7 million at June 30, 1998 and $886.0 million at December 31, 1997.
With the further increase in prepayment risk late in the third quarter as
discussed above, the CMO collateral underlying CMO investments is now expected
to prepay faster than previously anticipated. Consequently, in the third quarter
the Company wrote-off a significant portion of remaining CMO investments through
CMO bond discount amortization adjustments aggregating $15.7 million and a $4.1
million impairment charge to write-down remaining investments in interest-only
mortgage securities to fair market value. These write-offs have decreased but
not eliminated the Company's exposure to future increases in prepayments
relative to remaining CMO investments. Should future prepayments increase beyond
the Company's current expectations, additional write-downs of remaining CMO
collateral premiums and bond discounts may be necessary (see "Effects of
Interest Rate Changes").
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 potentially
add to the Company's CMO administration activities, the Company may, from time
to time, purchase mortgage loans from originators or conduits and issue CMOs or
other securities backed by these loans. The Company may or may not retain a
significant residual economic interest in these securitizations. In the latter
half of 1997 the Company completed two such CMO transactions totaling $1.1
billion and during 1998 issued two additional such CMOs totaling $1.1 billion.
Additionally, as mentioned above, the Company issued a $345.4 million CMO backed
by Non-agency Securities in September 1998, retaining a $6.1 million residual
interest.
MORTGAGE BANKING OPERATIONS
The Company commenced mortgage servicing operations in 1993 and is currently one
of the 20 largest and one of the most efficient mortgage servicers in the
country with a total mortgage servicing portfolio (including primary servicing
and subservicing) of $59.3 billion, a $2.7 billion increase from the previous
quarter. During 1996 the Company entered into a subservicing arrangement with a
large national mortgage conduit. As of September 30, 1998, the subservicing
portfolio totaled $19.9 billion, an increase of $3.5 billion during the quarter.
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
-17-
<PAGE> 18
mortgage servicing rights. This arrangement is viewed by the Company as a
confirmation of the quality and cost effectiveness of the mortgage servicing
operation.
The primary mortgage servicing portfolio (which excludes subservicing) declined
$755 million, or 1.9 percent, during the quarter to $39.4 billion with a
weighted average interest rate of 7.39 percent and earning an average annual
service fee, excluding ancillary revenue and earnings on escrows, (the "Average
Service Fee") of 31.5 basis points. The September 30, 1998 investment in
mortgage servicing rights related to this portfolio has been reduced to $494.4
million (125.5 basis points, or a 3.98 multiple of the Average Service Fee)
through amortization and impairment charges. Primary mortgage servicing
portfolio runoff, consisting of prepayments and scheduled payments on mortgage
loans serviced, was 26.5 percent during the quarter, up from 25.7 percent in the
second quarter of 1998 and 20.4 percent in the first quarter of 1998.
Because of the continued high level of runoff experienced in 1998 and the
increase in prepayment risk as discussed above, future cash flows from the
mortgage servicing portfolio are expected to be less than previously
anticipated. As a result, substantially higher amortization expense and large
impairment charges have been recorded in 1998. Should prepayments continue at
current levels or accelerate further, higher amortization expense and further
impairment of the mortgage servicing asset are likely. In the past, the Company
attempted to partially protect the value of its investment in mortgage servicing
rights against declining interest rates with derivative financial instruments,
specifically interest rate floors. These instruments under-performed in the
second quarter relative to declines in the value of servicing rights such that a
net impairment charge after related hedge gains was recorded. The Company
currently manages an expanded portfolio of U.S. Treasury-based financial
instruments that include interest rate floors, 10-year U.S. Treasury note
futures contracts and 10-year U.S. Treasury notes to help mitigate the effects
of further declines in mortgage interest rates on the value of mortgage
servicing rights. These instruments performed well in the third quarter such
that related gains more than offset related impairment charges (see "Results of
Operations"). At September 30, 1998 interest rate floor positions had related
notional amounts totaling $10.3 billion and a recorded fair value of $103.0
million. Futures contracts had related notional amounts of $1.0 billion and a
recorded investment of $21.9 million. There can be no assurance that any future
declines in value of the servicing portfolio will be offset by gains realized on
these or other financial instruments held by the Company (see "Effects of
Interest Rate Changes").
In January 1998 the Company entered the mortgage production business with the
introduction of a technology-driven refinancing program which allows the
Company's existing homeowners to take advantage of a low cost, efficient
refinancing alternative. This streamline refinance program has been well
received with the Company closing a total of 2,935 loans having an unpaid
principal balance of $303.6 million during the current quarter, up from 2,245
loans having an unpaid principal balance of $238.3 million in the previous
quarter. Given the current level of mortgage interest rates, monthly production
is expected to average $100 million or more this year and is contributing
significantly to 1998 income.
-18-
<PAGE> 19
CAPITAL
The following table summarizes the Company's utilization of capital as of
September 30, 1998 (in thousands):
<TABLE>
<CAPTION>
CAPITAL
ASSETS BORROWINGS EMPLOYED
------------ ------------ ------------
<S> <C> <C> <C>
Agency and U.S. Treasury securities:
U.S. Treasury notes $ 653,890 $ 643,978 $ 9,912
Fixed-rate 426,998 410,274 16,724
Medium-term 450,926 449,357 1,569
Adjustable-rate 2,158,049 2,127,691 30,358
Non-agency securities:
Medium-term 18,544 27,968 (9,424)
Production warehouse 123,233 62,810 60,423
CMO collateral and investments* 4,984,575 4,941,208 43,367
Mortgage servicing rights** 494,355 186,993 307,362
Derivative financial instruments 127,316 24,095 103,221
------------ ------------ ------------
$ 9,437,886 $ 8,874,374 563,512
============ ============
Other assets, net of other liabilities 141,965
------------
Total stockholders' equity $ 705,477
============
</TABLE>
* INCLUDES APPROXIMATELY $10 MILLION OF RELATED SHORT-TERM BORROWINGS.
** REPRESENTS AMOUNTS OWED UNDER CONTRACTS FOR BULK PURCHASES OF MORTGAGE
SERVICING RIGHTS AND $151 MILLION DRAWN OF AN AVAILABLE $276 MILLION
UNDER A $625 MILLION LINE OF CREDIT SECURED BY EXISTING MORTGAGE
SERVICING RIGHTS (SEE "LIQUIDITY AND CAPITAL RESOURCES").
The Company raised $51.9 million of new capital earlier in 1998 through the
issuance of stock (i) directly to investors pursuant to its direct stock
purchase and dividend reinvestment programs, (ii) daily sales of stock into the
open market and (iii) stock compensation programs. Effective early June the
Company suspended its stock purchase program and open market sales until further
notice. Stockholders' equity, including unrealized gains on securities held
available-for-sale that are included in accumulated other comprehensive income,
increased slightly in the current quarter to $705.5 million at September 30,
1998 from $703.9 million at June 30, 1998. Book value per common share
(calculated assuming liquidation of the preferred stock) increased to $8.17 per
common share from $8.13 at June 30, 1998. The large loss recorded in the second
quarter had previously reduced stockholders' equity considerably from $888.6
million or $11.74 per common share at December 31, 1997.
The Company currently expects to continue to pay preferred stock dividends.
-19-
<PAGE> 20
RESULTS OF OPERATIONS
Comparative net operating results (interest income or fee revenues, net of
related interest expense and, in the case of mortgage banking and CMO
administration, related direct and indirect operating expenses) by source were
as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Agency and U.S. Treasury Securities $ (2,935) $ 8,376 $ 12,147 $ 27,948
Non-agency securities 1,431 1,245 4,686 4,593
CMO collateral and investments (16,704) 11,429 (10,160) 30,888
Mortgage banking operations 11,271 16,253 43,963 43,860
CMO administration and other 1,062 1,005 3,063 2,998
------------ ------------ ------------ ------------
(5,875) 38,308 53,699 110,287
Gain (loss) on sale of
mortgage assets (991) 5,615 (273,773) 16,591
Impairment on mortgage servicing (148,229) -- (199,615) --
rights and CMO investments
Gain on financial instruments 146,122 -- 180,846 --
held to offset the effects
of impairment
Other operating expense (2,852) (2,056) (6,044) (7,952)
------------ ------------ ------------ ------------
Net income (loss) $ (11,825) $ 41,867 $ (244,887) $ 118,926
============ ============ ============ ============
Net income (loss) per common share:
Basic $ (0.28) $ 0.66 $ (4.30) $ 1.96
Diluted (0.28) 0.61 $ (4.30) 1.78
</TABLE>
Operating results for the quarter and nine months ended September 30, 1998
reflect the impact on the Company of the current interest rate environment and
steps taken by the Company in response, most notably the downsizing of its
mortgage asset portfolios (including the second quarter sale of interest-only
and other mortgage securities at a substantial loss) which has reduced the
Company's current earnings capacity. Third quarter results were also impacted
significantly by increased prepayment risk that resulted in the write-off of a
total of $21.0 million of purchase premiums and CMO bond discounts. Substantial
impairment charges taken in the third quarter primarily on the Company's
investment in mortgage servicing rights were largely offset by gains realized on
a portfolio of U.S. Treasury-based financial instruments.
Agency and U.S. Treasury Securities contributed less to income during the
quarter and nine months ended September 30, 1998 than during the same periods in
1997. The benefit to operating results of increased average holdings of these
securities earlier in 1998 was offset by lower financing spreads while third
quarter results were also impacted by the downsizing of this portfolio in June
and July. Financing spreads were lower primarily because of higher prepayments,
expectations that future prepayments will be faster because of increased
prepayment risk and investments made in lower yielding securities reflecting the
general decline in long-term interest rates. Financing spreads for the quarter
and nine months ended September 30, 1998 were a negative 24 basis points and 23
basis points, respectively, 88 and 50 basis points lower than spreads achieved
in the corresponding periods in 1997. Average yields for this portfolio were
5.32 percent and 5.79 percent during
-20-
<PAGE> 21
the quarter and nine months ended September 30, 1998, respectively, compared to
6.21 percent and 6.27 percent during the same periods in 1997, while borrowing
rates were 5.56 percent for both the quarter and nine months ended September 30,
1998, compared to 5.57 percent and 5.54 percent during the same periods in 1997.
The average outstanding portfolio was $4.3 billion and $5.5 billion during the
quarter and nine months ended September 30, 1998, respectively, compared to $5.3
billion and $4.7 billion for the same periods in 1997.
The Non-agency Securities contribution to income during the quarter and nine
months ended September 30, 1998 were nearly the same as in the same periods in
1997 due primarily to increases in the average outstanding portfolios. Higher
prepayments were not as significant an influence on the decline in financing
spreads for this portfolio because of lower amounts of investment premiums.
However, the yields on new asset purchases are lower reflecting the general
decline in long-term interest rates. As a result of asset purchases (primarily
mortgage loans from the new streamline refinance program) and CMO redemptions,
the average outstanding portfolio was $593 million and $639 million during the
quarter and nine months ended September 30, 1998, respectively, compared to $451
million and $461 million for the same periods in 1997. Average yields for this
portfolio (calculated including mortgage insurance costs) were 6.84 percent and
6.80 percent during the quarter and nine months ended September 30, 1998,
respectively, compared to 6.95 percent and 6.99 percent during the same periods
in 1997, while average borrowing rates were at 5.84 percent and 5.80 percent,
respectively, compared to 5.76 percent and 5.72 percent during the same periods
in 1997.
CMO investments contributed substantially less to income during the quarter and
nine months ended September 30, 1998 than during the same periods in 1997 due
primarily to the liquidation of the Agency Trust interest-only mortgage
securities portfolio in June (see above, "Financial Condition"). Results from
remaining CMO investments were less than in the same periods in 1997 due to
higher prepayments on underlying collateral and expectations that future
prepayments will be faster because of increased prepayment risk. This resulted
in the write-off of $15.7 million of CMO bond discounts and an impairment charge
of $4.1 million to write-down to fair value remaining investments in
interest-only securities. Results were also impacted by CMO redemptions which
have the effect of transferring the related financing spread from this portfolio
to Non-agency Securities.
Modestly higher year-to-date mortgage banking results (before the impairment
charge, see above) reflect $10.8 billion of growth in the subservicing portfolio
to $19.9 billion at the end of the third quarter from $9.1 billion at September
30, 1997 while the primary servicing portfolio fell to $39.4 billion from $41.0
billion at September 30, 1997. The Company's recent entry into the mortgage
production business through refinancing mortgage loans in its primary servicing
portfolio also contributed $5.7 million to current quarter results, up from $4.5
million the previous quarter (see above, "Financial Condition"). Revenues
increased to $55.7 million and $156.7 million during the quarter and nine months
ended September 30, 1998, respectively, compared to $44.6 million and $124.8
million during the same periods in 1997. Direct servicing expenses increased
over prior periods primarily due to continued growth of the total servicing
portfolio. Indirect servicing expenses were lower in the current quarter because
of a year-to-date reclassification of cost allocations between the servicing
operation and other operations of the Company.
-21-
<PAGE> 22
Amortization of mortgage servicing rights of $32.3 million and $74.7 million
during the quarter and nine months ended September 30, 1998, respectively, was
higher than the $15.7 million and $46.2 million recorded during the same periods
in 1997 primarily due to higher levels of prepayments and expectations that
future prepayments will be faster. In addition, the Company recorded impairment
charges to write-down its investment in mortgage servicing rights of $144.2
million and $195.6 million for the quarter and nine months ended September 30,
1998, respectively. Offsetting these impairment charges were $122.7 million and
$129.1 million of gain on interest rate floors and U.S. Treasury futures
positions for the quarter and nine months ended September 30, 1998,
respectively, in addition to $23.4 million of realized gain in the third quarter
on the sale of U.S. Treasury notes also held to offset the effects of servicing
impairment. Should future prepayments increase beyond the Company's current
expectations, higher amortization expense and further impairment of the mortgage
servicing asset are likely (see "Effects of Interest Rate Changes").
Operating expenses for the nine months ended September 30, 1998 were also
impacted by the year-to-date reclassification of cost allocations between the
servicing operation and other operations of the Company. Operating expenses for
the nine months ended September 30, 1998 were lower than during the same period
in 1997 primarily because of lower compensation-related costs due in part to the
effects of a January 2, 1998 restructuring of long-term compensation for key
officers.
Included in gain (loss) on sale of mortgage assets for the quarter ended
September 30, 1998 are $1.1 million in losses on the sale of $1.1 billion of
agency securities. Year-to-date losses totaled $277.6 million on sales of
mortgage assets totaling $4.3 billion. In addition, the Company earned $116,000
and $3.8 million in the quarter and nine months ended September 30, 1998,
respectively, from a strategy of writing call options on a portion of the
Company's fixed-rate mortgage securities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds include monthly principal and interest
payments on mortgage securities and other investments, short-term borrowings,
excess cash flows on CMO investments, servicing fees and other revenue from the
mortgage banking operation, 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 (see "Financial Condition").
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. Because of the perceived credit-worthiness of
securities issued by government-sponsored entities and the U.S. government, in
its repositioning efforts the Company has focused its remaining investments that
-22-
<PAGE> 23
are financed using repurchase arrangements almost exclusively on these
securities.
In addition to a repurchase arrangement to fund a portion of its production
warehouse, at September 30, 1998 the mortgage banking operation had available an
additional $125 million under a revolving line of credit agreement maturing
September 30, 1999 with an investment banking firm. This line is used to finance
mortgage servicing rights on a collateralized basis. Amounts available under
this line are limited to a percentage of the value of eligible mortgage
servicing rights owned or to be acquired by the Company not to exceed aggregate
borrowings of $625 million. The agreement requires, among other things, that the
mortgage banking operation maintain certain financial ratios and specified
levels of unencumbered servicing rights. The mortgage banking operation is in
compliance with these requirements. Interest rates on borrowings under this
facility are based on LIBOR.
In 1996 the board of directors approved the repurchase of up to one million
shares of common stock to fund employee stock option and stock grant programs.
As of September 30, 1998 no such share repurchases 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 securities and other investments and the interest paid on
related short-term borrowings. The resulting spread may be reduced in a rising
short-term 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 long-term 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 short-term interest rates as the underlying ARM loans reset at lower
rates.
Changes in interest rates also impact earnings recognized from CMO investments,
which have consisted primarily of interest-only mortgage securities and
fixed-rate CMO residuals (see above, "Financial Condition"). The amount of
income that may be generated from interest-only mortgage securities is dependent
upon the rate of principal prepayments on the
-23-
<PAGE> 24
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 these investments. Sustained
periods of high prepayments can result in losses. Conversely, if mortgage
interest rates rise, interest-only mortgage securities tend to perform favorably
because underlying mortgage loans will generally prepay at slower rates, thereby
increasing overall returns.
CMO residuals behave similarly to interest-only mortgage securities. If mortgage
interest rates fall, prepayments on the underlying mortgage loans generally will
be higher thereby reducing or even eliminating overall returns on these
investments. 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.
The Company periodically sells mortgage assets. Such sales may become attractive
as values of mortgage assets fluctuate with changes in interest rates. At other
times it may become prudent to reposition investment portfolios, for example, to
mitigate exposure to further declines in mortgage interest rates (see above,
"Financial Condition"). In either case, sales of mortgage assets may increase
income volatility because of the recognition of transactional gains or losses.
The above discussion regarding how changes in interest rates impact mortgage
assets also applies to the Company's investment in mortgage servicing rights.
When mortgage 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. Under these conditions, mortgage servicing
rights become more valuable. Conversely, lower mortgage 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 supplements its business plan from time to time with Derivatives
held to hedge against the loss in value of certain assets, such as mortgage
servicing rights, should long-term interest rates decline further. Historically,
most Derivatives used by the Company have been interest rate floors that
generally decrease in value when interest rates rise and increase in value when
rates decline. Should interest rates remain at or near current levels, the fair
value of these Derivatives will erode over time and could also be impacted by
other factors such as changes in market demand for these instruments. Other
Derivatives acquired from time to time may include 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 accorded hedge
accounting treatment, changes in value adjust the basis of the assets hedged. In
instances where Derivatives are held for trading purposes or are no longer
accorded hedge accounting treatment (see NOTE 4 to the accompanying consolidated
financial statements), changes in
-24-
<PAGE> 25
value are recorded in income as they occur, which could increase income
volatility.
YEAR 2000
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 early 1999. The financial cost of becoming Year 2000
compliant has not been and is not expected to be material to the Company or
results of operations.
Although the Company expects that all its systems and applications will be Year
2000 compliant per the above schedule and well prior to December 31, 1999, there
can be no assurance that all of the vendors it utilizes and institutions that it
interfaces with will complete their compliance efforts. The Company will
continue to monitor their efforts in this regard and will take all prudent steps
possible to ensure operations are not disrupted including the use of other
vendors or other methodologies and processes to transact the Company's business.
The effect of any disruption to the Company's operations of any such instances
of non-compliance is presently not determinable.
FORWARD-LOOKING STATEMENTS
This document contains "forward-looking statements" (within the meaning of the
Private Securities Litigation Reform Act of 1995) that inherently involve risks
and uncertainties. The Company's actual results and liquidity could differ
materially from those anticipated in these forward-looking statements as a
result of unforeseen external factors. As discussed in the Company's filings
with the Securities and Exchange Commission, these factors may include, but are
not limited to, changes in general economic conditions, fluctuations in and
market expectations for fluctuations in interest rates and levels of mortgage
prepayments, increases in costs and other general competitive factors.
PART II. -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Between July 23, 1998 and November 11, 1998, the Company and certain of its
senior officers were sued in 24 different lawsuits, each of which alleged
violations of the federal securities laws. All of the lawsuits are pending in
the United States District Court for the Northern District of Texas. In 23 of
the lawsuits, the individual defendants were Ronn K. Lytle, Christopher T.
Gilson, Julie A. Moore, Andrew F. Jacobs and William H. Rudluff. In one of the
lawsuits, the individual defendants included only Messrs. Lytle and Jacobs and
Ms. Moore. Each of the actions is filed as a purported class action, but the
persons on behalf of whom the lawsuits are allegedly filed and the alleged class
period vary somewhat among the various
-25-
<PAGE> 26
actions. The earliest starting date for the alleged class period is April 17,
1997, the date on which the Company issued a press release announcing its
operating results for the first quarter of fiscal year 1997, and 23 of the
lawsuits conclude the alleged class period on June 26, 1998, the date on which
the Company announced a portfolio repositioning in which the Company incurred
substantial losses. One of the lawsuits concludes July 24, 1998, the date on
which the Company announced its operating results for the second quarter of
fiscal 1998 and also announced that it was eliminating the common stock dividend
for a period of time.
In substance, each of the lawsuits alleges that the Company caused the market
price for its securities to be artificially inflated during the alleged class
periods as a result of the Company having issued false and misleading statements
concerning the Company's business, operations, and financial condition and
omitting disclosure of material adverse information regarding the same matters.
Each of the complaints seeks monetary damages. The Company intends to defend
vigorously the claims asserted against it.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits: The following Exhibits are presented herewith:
Exhibit 11 -- Computation of Earnings Per Share for the Quarter and Nine
Months Ended September 30, 1998 and 1997.
Exhibit 12 -- Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends.
Exhibit 27 -- Financial Data Schedule (electronic filing only).
(b) Reports on Form 8-K: None.
-26-
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPSTEAD MORTGAGE CORPORATION
Date: November 12, 1998 By /s/ RONN K. LYTLE
---------------------------------------
Ronn K. Lytle
Chairman and Chief Executive Officer
Date: November 12, 1998 By /s/ ANDREW F. JACOBS
---------------------------------------
Andrew F. Jacobs
Executive Vice President - Finance,
Treasurer and Secretary
-27-
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
---------- -----------
<S> <C>
Exhibit 11 -- Computation of Earnings Per Share for the Quarter and Nine
Months Ended September 30, 1998 and 1997.
Exhibit 12 -- Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
Exhibit 27 -- Financial Data Schedule (electronic filing only).
</TABLE>
<PAGE> 1
EXHIBIT 11
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BASIC:
Average number of common
shares outstanding 61,575 52,765 60,786 49,431
Net income (loss) $ (11,825) $ 41,867 $ (244,887) $ 118,926
Less cash dividends paid on
convertible preferred stock:
Series A ($0.40 per share) (150) (166) (460) (519)
Series B ($0.315 per share) (5,449) (5,907) (16,284) (19,415)
----------- ----------- ----------- -----------
Net income (loss) available to
common stockholders $ (17,424) $ 35,794 $ (261,631) $ 98,992
=========== =========== =========== ===========
Basic net (loss) income per
common share $ (0.28) $ 0.66 $ (4.30) $ 1.96
=========== =========== =========== ===========
DILUTED:*
Average number of common
shares outstanding 52,765 49,431
Assumed conversion of
convertible preferred stock:
Series A 865 904
Series B 14,208 15,431
Incremental shares calculated
using the Treasury Stock
method 1,190 1,214
----------- -----------
69,028 66,980
=========== ===========
Net income $ 41,867 $ 118,926
=========== ===========
Diluted net income (loss)
per common share $ (0.28) $ 0.61 $ (4.30) $ 1.78
=========== =========== =========== ===========
</TABLE>
* AS PREFERRED SHARE CONVERSIONS ARE ANTI-DILUTIVE IN CALCULATING NET INCOME
PER COMMON SHARE FOR 1998, DILUTED EARNINGS PER SHARE IS THE SAME AS BASIC
EARNINGS PER SHARE FOR THE 1998 PERIODS PRESENTED.
<PAGE> 1
EXHIBIT 12
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(IN THOUSANDS, EXCEPT RATIOS)
(UNAUDITED)
(a) Computation of ratio of earnings to combined fixed charges and preferred
stock dividends (including CMO debt):
<TABLE>
<CAPTION>
NINE YEAR ENDED DECEMBER 31
MONTHS ENDED --------------------------------------------------------------
SEPTEMBER 30, 1998 1997 1996 1995 1994 1993
------------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fixed charges $ 546,541 $ 633,845 $ 598,312 $ 584,137 $ 474,844 $ 491,076
Preferred stock dividends 16,744 25,457 36,356 39,334 38,876 38,592
---------------- ---------- ---------- ---------- ---------- ----------
Combined fixed charges and
preferred stock dividends 563,285 659,302 634,668 623,471 513,720 529,668
Net income (loss) (244,887) 159,926 127,228 77,359 85,579 94,256
---------------- ---------- ---------- ---------- ---------- ----------
Total $ 318,398 $ 819,228 $ 761,896 $ 700,830 $ 599,299 $ 623,924
================ ========== ========== ========== ========== ==========
Ratio of earnings to
combined fixed charges
and preferred stock
dividends 0.57:1 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>
NINE YEAR ENDED DECEMBER 31
MONTHS ENDED --------------------------------------------------------------
SEPTEMBER 30, 1998 1997 1996 1995 1994 1993
------------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fixed charges $ 291,874 $ 352,348 $ 283,974 $ 223,751 $ 139,188 $ 80,923
Preferred stock dividends 16,744 25,457 36,356 39,334 38,876 38,592
---------------- ---------- ---------- ---------- ---------- ----------
Combined fixed charges and
preferred stock dividends 308,618 377,805 320,330 263,085 178,064 119,515
Net income (loss) (244,887) 159,926 127,228 77,359 85,579 94,256
---------------- ---------- ---------- ---------- ---------- ----------
Total $ 63,731 $ 537,731 $ 447,558 $ 340,444 $ 263,643 $ 213,771
================ ========== ========== ========== ========== ==========
Ratio of earnings to
combined fixed charges
and preferred stock
dividends 0.21:1 1.42:1 1.40:1 1.29:1 1.48:1 1.79:1
================ ========== ========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Capstead
Mortgage Corporation's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 58,860
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,616,229
<CURRENT-LIABILITIES> 3,979,226
<BONDS> 4,931,526
0
198,424
<COMMON> 615
<OTHER-SE> 506,438
<TOTAL-LIABILITY-AND-EQUITY> 9,616,229
<SALES> 0
<TOTAL-REVENUES> 606,447
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 304,793
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 546,541
<INCOME-PRETAX> (244,887)
<INCOME-TAX> 0
<INCOME-CONTINUING> (244,887)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (244,887)
<EPS-PRIMARY> (4.30)
<EPS-DILUTED> (4.30)
</TABLE>
