<PAGE> 1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
------ SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 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, 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) 61,000,520 as of May 4, 1998
================================================================================
<PAGE> 2
CAPSTEAD MORTGAGE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
----
PART I. -- FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheet -- March 31, 1998 and December 31, 1997..................................... 3
Consolidated Statement of Income -- Quarter Ended
March 31, 1998 and 1997.............................................................................. 4
Consolidated Statement of Stockholders' Equity --
Quarter Ended March 31, 1998 and 1997................................................................ 5
Consolidated Statement of Cash Flows -- Quarter Ended
March 31, 1998 and 1997.............................................................................. 6
Notes to Consolidated Financial Statements............................................................. 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................................... 13
ITEM 4. Submission of Matters to a Vote of Security Holders............................................... 22
PART II. -- OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.................................................................. 22
SIGNATURES................................................................................................ 23
</TABLE>
-2-
<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>
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Mortgage investments $ 6,709,131 $ 6,114,130
CMO collateral and investments 5,588,415 5,195,436
------------ ------------
12,297,546 11,309,566
Mortgage servicing rights 713,326 684,765
Prepaids, receivables and other 305,147 345,807
Cash and cash equivalents 27,245 17,377
------------ ------------
$ 13,343,264 $ 12,357,515
============ ============
LIABILITIES
Short-term borrowings $ 7,777,926 $ 7,099,706
Collateralized mortgage obligations 4,644,969 4,309,455
Accounts payable and accrued expenses 29,321 51,323
Mortgage servicing rights
acquisitions payable 33,808 8,423
------------ ------------
12,486,024 11,468,907
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock - $0.10 par value;
100,000 shares authorized:
$1.60 Cumulative Preferred Stock,
Series A, 399 and 408 shares
issued and outstanding ($6,544
aggregate liquidation preference) 5,574 5,698
$1.26 Cumulative Convertible
Preferred Stock, Series B, 17,215
and 17,081 shares issued and
outstanding ($195,907 aggregate
liquidation preference) 191,933 189,800
Common stock - $0.01 par value; 100,000
shares authorized; 60,453 and 58,541
shares issued and outstanding 605 585
Paid-in capital 759,952 732,295
Undistributed income 12,113 12,676
Accumulated other comprehensive
income (loss) (112,937) (52,446)
------------ ------------
857,240 888,608
------------ ------------
$ 13,343,264 $ 12,357,515
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE> 4
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31
--------------------------
1998 1997
--------- ---------
<S> <C> <C>
INTEREST INCOME:
Mortgage investments $ 98,784 $ 77,904
CMO collateral and investments 94,235 87,377
--------- ---------
Total interest income 193,019 165,281
--------- ---------
INTEREST AND RELATED EXPENSES:
Short-term borrowings:
Mortgage investments 88,410 64,855
CMO investments 11,326 6,235
Collateralized mortgage obligations 77,803 70,499
Mortgage insurance and other 1,112 1,426
--------- ---------
Total interest and related expenses 178,651 143,015
--------- ---------
Net margin on mortgage assets 14,368 22,266
--------- ---------
MORTGAGE SERVICING REVENUES:
Servicing fees 33,517 30,132
Other 14,303 8,606
--------- ---------
Total mortgage servicing revenues 47,820 38,738
--------- ---------
MORTGAGE SERVICING EXPENSES:
Direct servicing expenses 5,628 4,016
Indirect servicing expenses 1,679 1,725
Amortization of mortgage servicing rights 19,928 14,026
Interest 5,740 4,929
--------- ---------
Total mortgage servicing expenses 32,975 24,696
--------- ---------
Net margin on mortgage servicing 14,845 14,042
--------- ---------
OTHER REVENUES:
Gain on sales and other 6,869 2,600
CMO administration 829 820
--------- ---------
Total other revenues 7,698 3,420
--------- ---------
OTHER OPERATING EXPENSES 1,841 2,340
--------- ---------
NET INCOME $ 35,070 $ 37,388
========= =========
Net income $ 35,070 $ 37,388
Less cash dividends on preferred stock (5,555) (7,198)
--------- ---------
Net income available to common stockholders $ 29,515 $ 30,190
========= =========
NET INCOME PER COMMON SHARE:
Basic $ 0.50 $ 0.65
Diluted 0.48 0.58
CASH DIVIDENDS PAID PER SHARE:
Common $ 0.500 0.580
Series A Preferred 0.400 0.400
Series B Preferred 0.315 0.315
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE> 5
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
PREFERRED COMMON PAID-IN UNDISTRIBUTED COMPREHENSIVE
STOCK STOCK CAPITAL INCOME INCOME (LOSS) TOTAL
--------- --------- --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
MARCH 31, 1998
Balance at December 31, 1997 $ 195,498 $ 585 $ 732,295 $ 12,676 $ (52,446) $ 888,608
---------
Comprehensive income (loss):
Net income -- -- -- 35,070 -- 35,070
Other comprehensive income:
Change in unrealized loss
on debt securities, net
of reclassification amount -- -- -- -- (60,491) (60,491)
--------
Total comprehensive (25,421)
income (loss) --------
Cash dividends:
Common ($0.50 per share) -- -- -- (30,078) -- (30,078)
Preferred:
Series A ($0.40 per share) -- -- -- (160) -- (160)
Series B ($0.315 per share) -- -- -- (5,395) -- (5,395)
Conversion of preferred stock (529) 6 523 -- -- --
Additions to capital 2,538 14 27,134 -- -- 29,686
--------- --------- --------- --------- ------------ ---------
Balance at March 31, 1998 $ 197,507 $ 605 $ 759,952 $ 12,113 $ (112,937) $ 857,240
========= ========= ========= ========= ============ =========
MARCH 31, 1997
Balance at December 31, 1996 $ 266,396 $ 447 $ 461,045 $ 4,582 $ (5,601) $ 726,869
---------
Comprehensive income:
Net income -- -- -- 37,388 -- 37,388
Other comprehensive income:
Change in unrealized loss
on debt securities, net
of reclassification amount -- -- -- -- 13,235 13,235
---------
Total comprehensive 50,623
income ---------
Cash dividends:
Common ($0.58 per share) -- -- -- (27,344) -- (27,344)
Preferred:
Series A ($0.40 per share) -- -- -- (180) -- (180)
Series B ($0.315 per share) -- -- -- (7,018) -- (7,018)
Conversion of preferred stock (22,793) 15 22,778 -- -- --
Additions to capital 3,881 16 32,162 -- -- 36,059
--------- --------- --------- --------- ------------ ---------
Balance at March 31, 1997 $ 247,484 $ 478 $ 515,985 $ 7,428 $ 7,634 $ 779,009
========= ========= ========= ========= ============ =========
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE> 6
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 35,070 $ 37,388
Noncash items:
Amortization of discount and premium 42,563 23,352
Amortization of mortgage servicing rights 19,928 14,028
Depreciation and other amortization 1,465 1,016
Net change in prepaids, receivables, other
assets, accounts payable and accrued expenses (4,259) 2,211
Net gain from investing activities (6,826) (2,453)
----------- -----------
Net cash provided by operating activities 87,941 75,542
----------- -----------
INVESTING ACTIVITIES:
Purchases of mortgage investments (1,778,499) (405,272)
Purchases of CMO collateral (597,934) --
Purchases of CMO investments (123,240) (52,058)
Purchases of mortgage servicing rights (39,832) (31,656)
Purchases of derivative financial instruments (54,250) (10,937)
Principal collections on mortgage investments 568,790 258,983
Proceeds from sales of mortgage assets 682,690 178,605
Proceeds from sales of derivative financial instruments 32,360 --
CMO collateral:
Principal collections 202,891 111,157
Decrease in accrued interest receivable 1,841 723
Increase in short-term investments (2,509) (1,910)
----------- -----------
Net cash provided (used) by investing activities (1,107,692) 47,635
----------- -----------
FINANCING ACTIVITIES:
Increase in short-term borrowings 678,220 22,558
Increase (decrease) in mortgage servicing
acquisitions payable 25,385 (39,544)
Collateralized mortgage obligations:
Issuance of securities 597,934 --
Principal payments on securities (264,118) (110,792)
Increase (decrease) in accrued interest payable (1,012) 962
Capital stock transactions 28,843 35,776
Dividends paid (35,633) (34,542)
----------- -----------
Net cash provided (used) by financing activities 1,029,619 (125,582)
----------- -----------
Net change in cash and cash equivalents 9,868 (2,405)
Cash and cash equivalents at beginning of period 17,377 21,003
----------- -----------
Cash and cash equivalents at end of period $ 27,245 $ 18,598
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-6-
<PAGE> 7
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
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 -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the quarter ended March 31, 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, 1997 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. Currently, as the term relates to the
Company, comprehensive income consists of net income plus the change in
unrealized gains and losses on debt securities classified as available-for-sale
that is included as a component of stockholders' equity. The Company has elected
to meet the reporting requirements of SFAS 130 by providing a modified
consolidated statement of stockholders' equity with its interim financial data
issued for external reporting purposes. The adoption of SFAS 130 has not had any
impact on the results of operations or financial position of the Company.
-7-
<PAGE> 8
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 December 31, 1997 $ 42,059,027 441,277 $ 684,765
Additions:
Adjustments to prior acquisitions -- -- 785
Purchases -- -- --
Production 55,805 523 979
Run-off/amortization* (2,118,508) (17,406) (18,084)
Results of hedging activity -- -- 7,132
------------ ------------ ------------
Loans serviced at March 31, 1998 39,996,324 424,394 675,577
Purchases pending transfer 1,766,690 16,112 37,749
------------ ------------ ------------
Total portfolio at March 31, 1998 $ 41,763,014 440,506 $ 713,326
============ ============ ============
</TABLE>
* EXCLUDES HEDGE INSTRUMENT AMORTIZATION.
In addition, as of March 31, 1998, the Company subserviced $13.7 billion of
single-family mortgage loans under a subservicing arrangement with a large
national mortgage conduit.
The Company's investment in mortgage servicing rights had an aggregate fair
value of approximately $721 million at March 31, 1998. 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. At March 31,
1998 floors held as hedges of servicing rights had related notional amounts
totaling $9.7 billion and unrealized gains of $10.1 million.
NOTE 4 -- MORTGAGE INVESTMENTS
Mortgage 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>
AS OF QUARTER ENDED
MARCH 31 MARCH 31
--------------------------- ----------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Agency securities:
Fixed-rate $1,384,641 $ 455,512 6.53% 6.38%
Medium-term 716,677 -- 6.16 --
Adjustable-rate 3,924,110 3,945,105 5.90 6.28
Non-agency securities:
Fixed-rate 141,006 3,952 8.33 8.82
Medium-term 357,319 261,188 6.33 6.69
Adjustable-rate 147,673 123,988 7.00 7.16
Production warehouse 37,705 -- 6.82 --
---------- ---------- ---------- ----------
$6,709,131 $4,789,745 6.14% 6.37%
========== ========== ========== ==========
</TABLE>
-8-
<PAGE> 9
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-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 ("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 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 Freddie Mac, Fannie Mae or Ginnie Mae
(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") and also includes mortgage loans held for
sale in connection with production activities. The maturity of mortgage-backed
securities is directly affected by the rate of principal prepayments on the
underlying mortgage loans. At March 31, 1998 Agency Securities and Non-agency
Securities were pledged to secure short-term borrowings.
NOTE 5 -- CMO COLLATERAL AND INVESTMENTS
Collateralized mortgage obligation ("CMO") collateral consists of mortgage
securities and related investments pledged to secure CMO borrowings ("Pledged
CMO Collateral"). CMO investments include investments in Agency Trust
interest-only mortgage securities (see below) 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>
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
<S> <C> <C>
Pledged CMO collateral:
Pledged mortgage securities $ 4,654,115 $ 4,326,696
Short-term investments 18,109 15,600
Accrued interest receivable 28,414 26,760
------------ ------------
4,700,638 4,369,056
Unamortized premium 2,684 2,752
------------ ------------
4,703,322 4,371,808
CMO investments:
Agency Trust interest-only
mortgage securities 871,185 809,757
Other CMO investments 13,908 13,871
------------ ------------
$ 5,588,415 $ 5,195,436
============ ============
</TABLE>
-9-
<PAGE> 10
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 7.13 percent during the
quarter ended March 31, 1998.
Agency Trust interest-only mortgage securities are entitled to receive 100
percent of coupon interest stripped from pools of Fannie Mae and Freddie Mac
mortgage-backed securities. At March 31, 1998 the Company's investment in Agency
Trust interest-only mortgage securities, after certain hedging costs, yielded
7.23 percent with related notional amounts aggregating $3.0 billion. Floors held
as hedges of these investments had related notional amounts totaling $12.3
billion and unrealized gains of $6.0 million at March 31, 1998. These and
certain other CMO investments were pledged to secure short-term borrowings as of
March 31, 1998.
NOTE 6 -- 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 mortgage and CMO investments was estimated using (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 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.
-10-
<PAGE> 11
The following table summarizes 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 MARCH 31, 1998
Mortgage investments:
Agency Securities:
Fixed-rate $ 1,392,799 $ 1,827 $ 9,985 $ 1,384,641
Medium-term 715,311 1,649 283 716,677
Adjustable-rate 3,912,295 18,313 6,498 3,924,110
Non-agency Securities:
Fixed-rate 46,796 981 -- 47,777
Medium-term 272,193 703 180 272,716
Adjustable-rate 144,735 2,938 -- 147,673
CMO investments 1,007,495 991 123,393 885,093
----------- ----------- ----------- -----------
$ 7,491,624 $ 27,402 $ 140,339 $ 7,378,687
=========== =========== =========== ===========
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
=========== =========== =========== ===========
</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 table summarizes 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 MARCH 31, 1998
Pledged CMO Collateral $4,703,322 $ 2,958 $ 47,025 $4,659,255
Non-agency Securities 215,537 3,239 -- 218,776
---------- ---------- ---------- ----------
$4,918,859 $ 6,197 $ 47,025 $4,878,031
========== ========== ========== ==========
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>
-11-
<PAGE> 12
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 dispositions of debt securities held
available-for-sale and held-to-maturity (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Sale of securities held available-for-sale:
Amortized cost $651,473 $101,418
Gains* 4,721 877
Sale of released CMO collateral held-to-maturity:
Amortized cost 5,022 73,324
Gains 471 2,986
</TABLE>
* REPRESENTS THE RECLASSIFICATION AMOUNT INCLUDED IN OTHER COMPREHENSIVE
INCOME AS A COMPONENT OF THE CHANGE IN UNREALIZED LOSSES ON DEBT SECURITIES
HELD AVAILABLE-FOR-SALE.
NOTE 7 -- NET INTEREST INCOME ANALYSIS
The following table summarizes interest income and interest expense and average
effective interest rates for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31
------------------------------------------------------------------
1998 1997
----------------------------- -----------------------------
AMOUNT AVERAGE AMOUNT AVERAGE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Mortgage investments $ 98,784 6.17% $ 77,904 6.41%
CMO collateral and investments 94,235 7.18 87,377 7.83
----------- -----------
Total interest income 193,019 165,281
----------- -----------
Interest expense:
Short-term borrowings 99,736 5.63 71,090 5.43
CMOs 77,803 7.36 70,499 7.51
----------- -----------
Total interest expense 177,539 141,589
----------- -----------
Net interest $ 15,480 $ 23,692
=========== ===========
</TABLE>
The following table summarizes increases (decreases) in interest income and
interest expense due to changes in interest rates versus changes in volume for
the quarter ended March 31, 1998 compared to the same period in 1997 (in
thousands):
<TABLE>
<CAPTION>
RATE* VOLUME* TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Mortgage investments $ (3,053) $ 23,933 $ 20,880
CMO collateral and investments (7,605) 14,463 6,858
---------- ---------- ----------
Total interest income (10,658) 38,396 27,738
---------- ---------- ----------
Interest expense:
Short-term borrowings 2,662 25,984 28,646
CMOs (1,461) 8,765 7,304
---------- ---------- ----------
Total interest expense 1,201 34,749 35,950
---------- ---------- ----------
Net interest $ (11,859) $ 3,647 $ (8,212)
========== ========== ==========
</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.
-12-
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
OVERVIEW
The Company's business plan is to build a mortgage banking operation with
investments in mortgage securities and mortgage servicing with the goal of
producing reasonably balanced operating results in a variety of interest rate
environments.
During 1997 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 collateralized mortgage obligation
("CMO") investments and its mortgage servicing portfolio. Although having
recovered somewhat from their January lows, as of quarter-end mortgage rates
were lower than at year-end and prepayment rates remain high. Meanwhile, the
Company's borrowing rates have remained above 5 1/2 percent for the quarter.
This relatively flat yield curve environment, where short-term interest rates
are near or equal to long-term interest rates, has significantly narrowed the
net interest margin earned by the Company on its mortgage and CMO investments.
The Company does not believe that the current flat yield curve environment will
persist indefinitely. At some point it is expected to steepen allowing net
interest margins to recover to more acceptable levels (see "Effects of Interest
Rate Changes").
Lower long-term interest rates have also negatively impacted the value of the
Company's CMO investments, which consist primarily of interest-only mortgage
securities and the Company's mortgage servicing portfolio. Neither portfolio was
impaired at quarter-end which would have required a charge to earnings. If the
current interest rate environment persists for the remainder of 1998, including
current levels of prepayments, the interest-only securities will not become
impaired; however, the mortgage servicing portfolio may become impaired. If
long-term rates decline further, the Company may be required to take impairment
charges on both portfolios sooner. For instance, if the 10-year U.S. Treasury
rate were to decline from its level at quarter-end of 5.65 percent to 5.00
percent, the Company may be required to take impairment charges, net of the
benefits of hedges, totaling up to $125 million against earnings. Derivative
financial instruments, specifically interest rate floors, are held as a partial
hedge against interest rate risk on interest-only mortgage securities and
mortgage servicing (see "Effects of Interest Rate Changes"). Throughout 1997 and
early in the current quarter, the Company increased its interest rate floor
positions in light of the potential for further declines in long-term interest
rates. Although the partial recovery in long-term rates by quarter-end
negatively impacted the value of interest rate floors acquired during the
current quarter, these floor positions will benefit these portfolios if rates
decline further.
The Company continues to evaluate its investment strategies and may decide it is
prudent to restructure its portfolios to mitigate exposure to potential
impairment (see "Effects of Interest Rate Changes"). It is important to note
that any such impairment and/or restructuring charges are not expected to
negatively impact the common stock dividend. In fact, future earnings and
dividends would be enhanced to the extent the Company will have less
amortization expense related to these assets.
-13-
<PAGE> 14
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.
This restructuring continued in the first quarter of 1998. In addition, the
Company has continued to reduce its exposure to prepayment risk by decreasing
the average premium paid for mortgage securities and purchasing lower interest
rate mortgage securities. Facilitating this restructuring has been a decline in
premium prices commanded by the market for ARM securities, making these
securities more attractive investment opportunities going forward. These changes
have improved the Company's ongoing earnings performance in the current interest
rate environment.
As of March 31, 1998, holdings of mortgage investments totaled $6.7 billion with
ARM mortgage-backed securities representing $4.1 billion, or 61 percent of the
total. This compares to $4.5 billion of ARM securities representing 82 percent
of total mortgage investments at June 30, 1997. As of March 31, 1998,
medium-term and fixed-rate mortgage securities totaled $2.6 billion and
represented 39 percent of total mortgage investments, up from $1.0 billion, or
18 percent at June 30, 1997. During the quarter ended March 31, 1998, the
Company acquired a total of $1.6 billion of mortgage-backed securities issued by
government-sponsored entities, either Freddie Mac, Fannie Mae or Ginnie Mae
(collectively, "Agency Securities"), and $101 million of medium-term, AAA-rated
fixed-rate private mortgage securities (together with AAA-rated private mortgage
pass-through securities and mortgage loans held for sale in connection with
production activities, referred to as "Non-agency Securities").
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) 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
quarter ended March 31, 1998, the Company acquired $123 million of Agency Trust
interest-only mortgage securities, which represent the right to receive 100
percent of coupon interest stripped from pools of Agency mortgage-backed
securities. After considering these acquisitions, CMO issuances, run-off and
sales, as well as changes in market value, total CMO investments increased $57
million during the quarter to $943 million. Outstanding interest rate hedge
positions, with a $12.3 billion notional amount, had a fair value of $123.0
million and carried a $6.0 million unrealized gain at March 31, 1998 that has
been applied to the basis of the Company's investment in interest-only
securities.
-14-
<PAGE> 15
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,
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 and during the
first quarter of 1998 issued a $598 million CMO.
MORTGAGE SERVICING
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 $53.7 billion (including primary servicing
and subservicing), a $9.7 billion increase from March 31, 1997. The primary
mortgage servicing portfolio (which excludes pending transfers and subservicing)
increased to $40.0 billion with a weighted average interest rate of 7.42 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 March
31, 1998 investment in mortgage servicing rights related to this portfolio was
$676 million (169 basis points, or a 5.5 multiple of the Average Service Fee).
An additional $1.8 billion of mortgage servicing acquired during the current
quarter is pending transfer into the portfolio and is being subserviced by the
sellers. These pending acquisitions have a weighted average interest rate of
7.94 percent earning an Average Service Fee of 44.7 basis points. At an average
cost of 214 basis points, these acquisitions are being acquired at a 4.8
multiple.
Primary mortgage servicing portfolio run-off, consisting of prepayments and
scheduled payments on mortgage loans serviced, was 20.39 percent during the
quarter, up from 9.70 percent in the first quarter of 1997 and 15.11 percent in
the fourth quarter of 1997. Outstanding interest rate hedge positions, with a
$9.7 billion notional amount, had a fair value of $54.2 million at March 31,
1998 and carried a $11.0 million unrealized gain that has been applied to the
basis of the Company's investment in mortgage servicing rights.
To help offset the increased run-off currently being experienced, the Company
introduced a technology-driven refinancing program in January which allows the
Company to offer a low cost, efficient refinancing alternative to its existing
homeowners. This program has been well received with the Company closing a total
of 523 loans having an unpaid principal balance of $55.8 million between
February and quarter-end. Monthly production is expected to average $100 million
or more this year and contribute significantly to 1998 income.
During 1996 the Company entered into a subservicing arrangement with a large
national mortgage conduit. As of March 31, 1998, the subservicing portfolio
totaled $13.7 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.
-15-
<PAGE> 16
CAPITAL
The following table summarizes the Company's utilization of capital as of March
31, 1998 (in thousands):
<TABLE>
<CAPTION>
CAPITAL
ASSETS BORROWINGS EMPLOYED
----------- ----------- -----------
<S> <C> <C> <C>
Agency Securities:
Fixed-rate $ 1,384,641 $ 1,376,079 $ 8,562
Medium-term 716,677 698,310 18,367
Adjustable-rate 3,924,110 3,830,383 93,727
Non-agency Securities:
Fixed-rate 141,006 142,273 (1,267)
Medium-term 357,319 384,449 (27,130)
Adjustable-rate 147,673 145,728 1,945
Production warehouse 37,705 26,501 11,204
CMO collateral and investments 5,588,415 5,545,724* 42,691
Mortgage servicing rights 713,326 248,808** 464,518
Derivative financial instruments 178,238 58,448 119,790
----------- ----------- -----------
$13,189,110 $12,456,703 732,407
=========== ===========
Other assets, net of other liabilities 124,833
-----------
Total stockholders' equity $ 857,240
===========
</TABLE>
* INCLUDES APPROXIMATELY $901 MILLION OF RELATED SHORT-TERM BORROWINGS.
** REPRESENTS AMOUNTS OWED UNDER CONTRACTS FOR BULK PURCHASES OF MORTGAGE
SERVICING RIGHTS AND $215 MILLION DRAWN ON A $625 MILLION LINE OF CREDIT
SECURED BY EXISTING MORTGAGE SERVICING RIGHTS.
During the current quarter the Company raised $30 million 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 modestly
during the quarter to $13.16 per diluted share at March 31, 1998, compared to
$13.12 at December 31, 1997. The proceeds from these issuances were profitably
employed to increase investments in mortgage assets and mortgage servicing,
enhancing the Company's earning capacity in aggregate, and more importantly, on
a per share basis. The Company anticipates raising $120 million of 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.
-16-
<PAGE> 17
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>
QUARTER ENDED
MARCH 31
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
Agency securities $ 8,137 $ 10,644
Non-agency securities 1,807 1,946
CMO investments 4,424 9,676
Mortgage servicing 14,845 14,042
Gain on sales and other 6,869 2,600
CMO administration 829 820
---------- ----------
Contribution to income 36,911 39,728
Other operating expenses 1,841 2,340
---------- ----------
Net income $ 35,070 $ 37,388
========== ==========
Net income per common share:
Basic $ 0.50 $ 0.65
Diluted 0.48 0.58
Return on average stockholders' equity 14.59% 19.76%
</TABLE>
Operating results for the quarter ended March 31, 1998 declined from those
achieved in the first quarter of 1997. Net income of $35.1 million represents a
decrease of 6.2 percent over the same quarter in 1997 while diluted net income
per common share decreased 17.2 percent. The benefit of larger holdings of
mortgage assets was offset 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 growth in the subservicing portfolio and the Company's recent entry into
production through selective refinancing of its existing customers, were
hampered by higher amortization of mortgage servicing rights due to high
prepayments. Lower long-term interest rates did allow for greater gain on sales
during the quarter compared to the same period in 1997.
Agency Securities contributed less to income during the first quarter of 1998
than the same period in 1997. The benefit to operating results of a $1.3 billion
(31 percent) increase in average holdings of these securities during the current
quarter was offset by lower financing spreads primarily because of higher
prepayments (see above, "Financial Condition"). Financing spreads for the first
quarter of 1998 of 45 basis points were 40 basis points lower than spreads
achieved in the same quarter of 1997. Agency Securities yields averaged 6.06
percent during the quarter, compared to 6.29 percent during the same period in
1997, while borrowing rates were higher at 5.61 percent, compared to 5.44
percent in the first quarter of 1997.
Non-agency Securities contributed less to income during the current quarter than
in the same period in 1997 due primarily to a 49 basis point decrease in
financing spreads despite a 44 percent increase in the average outstanding
portfolio. Higher prepayments were not as significant an influence on the
decline in financing spreads for this portfolio because of lower amounts of
purchased premiums. However, the yields on new asset purchases are lower
-17-
<PAGE> 18
reflecting the general decline in interest rates. As a result of asset purchases
(including the inclusion of mortgage loans from the new refinancing program) and
CMO redemptions, the average outstanding portfolio was $681 million during the
current quarter, compared to $473 million in the same period in 1997. Average
yields for this portfolio (calculated including mortgage insurance costs) were
6.82 percent during the quarter, compared to 7.11 percent during the same period
in 1997, while average borrowing rates were higher at 5.80 percent during the
current quarter, compared to 5.60 percent during the same quarter in 1997.
CMO investments contributed substantially less to income during the current
quarter than in the same period in 1997 despite a higher average portfolio of
Agency Trust interest-only securities outstanding because of the impact of
faster prepayment rates and higher hedging costs. Average holdings of these
securities, including related hedge positions, increased 67 percent over the
same period in 1997, while average yields (including hedging costs) dropped to
7.48 percent from 10.73 percent. Average borrowings were $903 million during the
current quarter, compared to $638 million during the same period in 1997.
Average borrowing rates were higher at 5.71 percent during the current quarter,
compared to 5.51 percent during the same period in 1997.
Modestly higher mortgage servicing results reflect growth in the subservicing
portfolio to $13.7 billion at the end of the current quarter from $5.1 billion
at March 31, 1997 while the primary servicing portfolio grew only marginally to
$41.8 billion from $40.7 billion at March 31, 1997. The Company's recent entry
into refinancing mortgage loans in its primary servicing portfolio also
contributed to current quarter results (see above, "Financial Condition").
Revenues increased to $47.8 million during the first quarter of 1998, compared
to $38.7 million during the same quarter in 1997. Direct and indirect 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 total servicing portfolio. Amortization of mortgage servicing rights of
$19.9 million during the first quarter of 1998 was higher than the $14.0 million
recorded during the same quarter in 1997 primarily due to higher levels of
prepayments caused by lower prevailing mortgage interest rates. Greater use of
external borrowings secured by the primary mortgage servicing portfolio
contributed to higher borrowing costs during the first quarter of 1998 compared
to the same quarter in 1997.
Operating expenses during 1998 were lower than 1997 primarily because of lower
compensation-related accruals.
During the quarter the Company sold $677 million of mortgage assets consisting
of Agency Securities, Non-agency Securities and interest-only mortgage
securities for gains totaling $5.3 million. This compares to sales of mortgage
assets totaling $175 million during the same quarter in 1997 for gains of $3.9
million. In addition, the Company earned $1.6 million in the current quarter
from a new strategy of writing call options on a portion of the Company's
fixed-rate mortgage investments. If the calls are ultimately exercised, these
securities will be sold at a gain in addition to earning the call premiums
received when the calls were written. This compares to $1.4 million in losses
incurred in the same period in 1997 on interest rate floor positions held for
trading purposes.
-18-
<PAGE> 19
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 March 31, 1998 the mortgage servicing operation had available $410 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.
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 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
-19-
<PAGE> 20
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.
Changes in interest rates also impact earnings recognized from CMO investments,
which consist primarily of interest-only mortgage securities and fixed-rate CMO
residuals. The amount of income that may be generated from interest-only
mortgage securities 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 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 restructure investment portfolios, for example,
to mitigate exposure to potential impairment as discussed above (see "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's business plan is to build a mortgage banking operation with
investments in mortgage assets and mortgage servicing 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, primarily
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
-20-
<PAGE> 21
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 adjust the basis of the assets hedged. In instances where Derivatives are
held for trading purposes, changes in value are 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.
-21-
<PAGE> 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of stockholders was held April 22, 1998.
(b) The following directors were elected to Board of Directors (constituting the
entire Board of Directors):
Bevis Longstreth Harriet E. Miers
Paul M. Low William R. Smith
Ronn K. Lytle John C. Tolleson
(c) The following items were voted on at the annual meeting:
<TABLE>
<CAPTION>
VOTES
--------------------------------------------------------------
WITHHELD/ BROKER
FOR AGAINST ABSTENTIONS NON-VOTES
---------- --------- ------------- -----------
<S> <C> <C> <C> <C>
Election of Board Members:
Bevis Longstreth.............. 50,584,781 - 448,632 -
Paul M. Low................... 50,571,999 - 461,414 -
Ronn K. Lytle................. 50,580,644 - 452,769 -
Harriet E. Miers.............. 50,580,301 - 453,111 -
William R. Smith.............. 50,589,871 - 443,542 -
John C. Tolleson.............. 50,570,435 - 462,978 -
</TABLE>
Other matters (no other matters)
PART II. -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following Exhibits are presented herewith:
Exhibit 11 - Computation of Earnings Per Share for the quarter ended
March 31, 1998 and 1997.
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges.
Exhibit 27 - Financial Data Schedule (electronic filing only).
(b) Reports on Form 8-K: None.
-22-
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPSTEAD MORTGAGE CORPORATION
Date: May 4, 1998 By /s/ RONN K. LYTLE
-------------------------------------
Ronn K. Lytle
Chairman and Chief Executive Officer
Date: May 4, 1998 By /s/ JULIE MOORE
-------------------------------------
Julie Moore
Senior Vice President - Control
and Treasurer
-23-
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
Exhibit 11 - Computation of Earnings Per Share for the quarter ended
March 31, 1998 and 1997.
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges.
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
MARCH 31
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
BASIC:
Average number of common shares outstanding 59,594 46,225
========== ==========
Net income $ 35,070 $ 37,388
Less cash dividends paid on convertible
preferred stock:
Series A ($0.40 per share) (160) (180)
Series B ($0.315 per share) (5,395) (7,018)
---------- ----------
Net income available to common stockholders $ 29,515 $ 30,190
========== ==========
Basic net income per common share $ 0.50 $ 0.65
========== ==========
DILUTED:
Average number of common shares outstanding 59,594 46,225
Assumed conversion of convertible
preferred stock:
Series A 827 940
Series B 12,416 16,640
Incremental shares calculated using the
Treasury Stock method 555 1,131
---------- ----------
73,392 64,936
========== ==========
Net income $ 35,070 $ 37,388
========== ==========
Diluted net income per common share $ 0.48 $ 0.58
========== ==========
</TABLE>
<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>
THREE YEAR ENDED DECEMBER 31
MONTHS ENDED -------------------------------------------------------------
MARCH 31, 1998 1997 1996 1995 1994
-------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Fixed charges $ 183,279 $ 633,845 $ 598,312 $ 584,137 $ 474,844
Preferred stock dividends 5,555 25,457 36,356 39,334 38,876
---------- ---------- ---------- ---------- ----------
Combined fixed charges and
preferred stock dividends 188,834 659,302 634,668 623,471 513,720
Net income 35,070 159,926 127,228 77,359 85,579
---------- ---------- ---------- ---------- ----------
Total $ 223,904 $ 819,228 $ 761,896 $ 700,830 $ 599,299
========== ========== ========== ========== ==========
Ratio of earnings to combined
fixed charges and preferred
stock dividends 1.19:1 1.24:1 1.20:1 1.12:1 1.17:1
========== ========== ========== ========== ==========
</TABLE>
(b) Computation of ratio of earnings to combined fixed charges and preferred
stock dividends (excluding CMO debt):
<TABLE>
<CAPTION>
THREE YEAR ENDED DECEMBER 31
MONTHS ENDED -------------------------------------------------------------
MARCH 31, 1998 1997 1996 1995 1994
-------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Fixed charges $ 105,476 $ 352,348 $ 283,974 $ 223,751 $ 139,188
Preferred stock dividends 5,555 25,457 36,356 39,334 38,876
---------- ---------- ---------- ---------- ----------
Combined fixed charges and
preferred stock dividends 111,031 377,805 320,330 263,085 178,064
Net income 35,070 159,926 127,228 77,359 85,579
---------- ---------- ---------- ---------- ----------
Total $ 146,101 $ 537,731 $ 447,558 $ 340,444 $ 263,643
========== ========== ========== ========== ==========
Ratio of earnings to combined
fixed charges and preferred
stock dividends 1.32:1 1.42:1 1.40:1 1.29:1 1.48:1
========== ========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM CAPSTEAD
MORTGAGE CORPORATION'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH
31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STAEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 27,245
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,343,264
<CURRENT-LIABILITIES> 7,841,055
<BONDS> 4,644,969
0
197,507
<COMMON> 605
<OTHER-SE> 659,128
<TOTAL-LIABILITY-AND-EQUITY> 13,343,264
<SALES> 0
<TOTAL-REVENUES> 248,537
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 30,188
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 183,279
<INCOME-PRETAX> 35,070
<INCOME-TAX> 0
<INCOME-CONTINUING> 35,070
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,070
<EPS-PRIMARY> 0.50
<EPS-DILUTED> 0.48
</TABLE>
