cmo-10q_20180930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

  

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2018

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:  001-08896

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.)

8401 North Central Expressway, Suite 800, Dallas, TX

 

75225-4404

(Address of principal executive offices)

 

(Zip Code)

(214) 874-2323

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all 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      NO          

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     YES          NO           

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer    Accelerated filer        Non-accelerated filer        Smaller reporting company        

Emerging growth company    

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES              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 latest practicable date.

 

Common Stock ($0.01 par value)

 

90,927,815 as of October 30, 2018

 


 

 

CAPSTEAD MORTGAGE CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2018

 

 

INDEX

 

 

PART I. FINANCIAL INFORMATION

 

 

 

Page

ITEM 1.

Financial Statements (unaudited)

 

 

 

 

Consolidated Balance Sheets September 30, 2018 and December 31, 2017

3

 

 

 

Consolidated Statements of Income Quarter and Nine Months Ended September 30, 2018 and 2017

4

 

 

 

Consolidated Statements of Comprehensive Income Quarter and Nine Months Ended September 30, 2018 and 2017

5

 

 

 

Consolidated Statements of Cash Flows Nine Months Ended September 30, 2018 and 2017

6

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosure of Market Risk

37

 

 

 

ITEM 4.

Controls and Procedures

37

 

 

 

PART II. OTHER INFORMATION

 

 

ITEM 1A.

Risk Factors

38

 

ITEM 6.

Exhibits

38

 

 

SIGNATURES

40

 

 

 

-2-


 

ITEM 1.    FINANCIAL STATEMENTS

PART I. FINANCIAL INFORMATION

CAPSTEAD MORTGAGE CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except pledged and per share amounts)

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Residential mortgage investments ($12.25 and $12.98 billion

   pledged at September 30, 2018 and December 31, 2017, respectively)

 

$

12,681,791

 

 

$

13,454,098

 

Cash collateral receivable from interest rate swap counterparties

 

 

26,293

 

 

 

42,506

 

Cash and cash equivalents

 

 

31,725

 

 

 

103,907

 

Receivables and other assets

 

 

152,216

 

 

 

132,938

 

 

 

$

12,892,025

 

 

$

13,733,449

 

Liabilities

 

 

 

 

 

 

 

 

Secured borrowings

 

$

11,619,966

 

 

$

12,331,060

 

Interest rate swap agreements at fair value

 

 

13,012

 

 

 

23,772

 

Unsecured borrowings

 

 

98,266

 

 

 

98,191

 

Common stock dividend payable

 

 

10,365

 

 

 

18,487

 

Accounts payable and accrued expenses

 

 

29,323

 

 

 

23,063

 

 

 

 

11,770,932

 

 

 

12,494,573

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Preferred stock - $0.10 par value; 100,000 shares authorized:

 

 

 

 

 

 

 

 

   7.50% Cumulative Redeemable Preferred Stock, Series E, 10,329

   shares issued and outstanding ($258,226 aggregate liquidation

   preference) at September 30, 2018 and December 31, 2017

 

 

250,946

 

 

 

250,946

 

Common stock - $0.01 par value; 250,000 shares authorized:

 

 

 

 

 

 

 

 

  91,068 and 95,698 shares issued and outstanding at September 30,

  2018 and December 31, 2017, respectively

 

 

911

 

 

 

957

 

Paid-in capital

 

 

1,220,415

 

 

 

1,271,425

 

Accumulated deficit

 

 

(346,570

)

 

 

(346,570

)

Accumulated other comprehensive (loss) income

 

 

(4,609

)

 

 

62,118

 

 

 

 

1,121,093

 

 

 

1,238,876

 

 

 

$

12,892,025

 

 

$

13,733,449

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

-3-


 

CAPSTEAD MORTGAGE CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(unaudited)

 

 

 

Quarter Ended

 

 

Nine Months Ended

 

 

 

September 30

 

 

September 30

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage investments

 

$

67,649

 

 

$

57,073

 

 

$

201,989

 

 

$

168,017

 

Other

 

 

350

 

 

 

366

 

 

 

1,063

 

 

 

757

 

 

 

 

67,999

 

 

 

57,439

 

 

 

203,052

 

 

 

168,774

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured borrowings

 

 

(54,393

)

 

 

(36,655

)

 

 

(147,655

)

 

 

(98,745

)

Unsecured borrowings

 

 

(1,910

)

 

 

(1,910

)

 

 

(5,701

)

 

 

(5,701

)

 

 

 

(56,303

)

 

 

(38,565

)

 

 

(153,356

)

 

 

(104,446

)

 

 

 

11,696

 

 

 

18,874

 

 

 

49,696

 

 

 

64,328

 

Other revenue (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation-related expense

 

 

(1,913

)

 

 

(1,073

)

 

 

(5,521

)

 

 

(4,021

)

Other general and administrative expense

 

 

(1,184

)

 

 

(1,097

)

 

 

(3,320

)

 

 

(3,435

)

Miscellaneous other revenue

 

 

81

 

 

 

48

 

 

 

233

 

 

 

130

 

 

 

 

(3,016

)

 

 

(2,122

)

 

 

(8,608

)

 

 

(7,326

)

Net income

 

$

8,680

 

 

$

16,752

 

 

$

41,088

 

 

$

57,002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

8,680

 

 

$

16,752

 

 

$

41,088

 

 

$

57,002

 

Less preferred stock dividends

 

 

(4,842

)

 

 

(4,718

)

 

 

(14,526

)

 

 

(12,600

)

 

 

$

3,838

 

 

$

12,034

 

 

$

26,562

 

 

$

44,402

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

0.04

 

 

$

0.13

 

 

$

0.29

 

 

$

0.46

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

91,206

 

 

 

95,792

 

 

 

92,202

 

 

 

95,768

 

Diluted

 

 

91,346

 

 

 

95,923

 

 

 

92,317

 

 

 

95,905

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

$

0.11

 

 

$

0.19

 

 

$

0.41

 

 

$

0.61

 

Series E preferred

 

 

0.47

 

 

 

0.47

 

 

 

1.41

 

 

 

1.41

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

-4-


 

CAPSTEAD MORTGAGE CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands, unaudited)

 

 

 

Quarter Ended

 

 

Nine Months Ended

 

 

 

September 30

 

 

September 30

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income

 

$

8,680

 

 

$

16,752

 

 

$

41,088

 

 

$

57,002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts related to available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized losses

 

 

(26,771

)

 

 

(7,072

)

 

 

(87,336

)

 

 

(14,496

)

Amounts related to cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized gains

 

 

7,580

 

 

 

1,827

 

 

 

46,385

 

 

 

3,541

 

Reclassification adjustment for amounts

   included in net income

 

 

(11,162

)

 

 

(3,213

)

 

 

(25,776

)

 

 

(2,207

)

 

 

 

(30,353

)

 

 

(8,458

)

 

 

(66,727

)

 

 

(13,162

)

Comprehensive (loss) income

 

$

(21,673

)

 

$

8,294

 

 

$

(25,639

)

 

$

43,840

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

-5-


 

CAPSTEAD MORTGAGE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

 

 

 

Nine Months Ended September 30

 

 

 

2018

 

 

2017

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

41,088

 

 

$

57,002

 

Noncash items:

 

 

 

 

 

 

 

 

Amortization of investment premiums

 

 

88,293

 

 

 

98,996

 

Amortization of equity-based awards

 

 

1,477

 

 

 

1,671

 

Other depreciation and amortization

 

 

79

 

 

 

89

 

Change in recorded measureable hedge ineffectiveness on

   interest rate swap agreements designated as cash flow hedges

 

 

 

 

 

36

 

Net change in receivables, other assets, accounts payable and

   accrued expenses

 

 

6,461

 

 

 

1,877

 

Net cash provided by operating activities

 

 

137,398

 

 

 

159,671

 

Investing activities:

 

 

 

 

 

 

 

 

Purchases of residential mortgage investments

 

 

(2,158,970

)

 

 

(3,380,199

)

Interest receivable acquired with the purchase of residential

   mortgage investments

 

 

(4,167

)

 

 

(5,410

)

Principal collections on residential mortgage investments,

   including changes in mortgage securities principal remittance

   receivable

 

 

2,739,267

 

 

 

2,972,002

 

Net cash provided by (used in) investing activities

 

 

576,130

 

 

 

(413,607

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from repurchase arrangements and similar

   borrowings

 

 

137,810,441

 

 

 

126,991,975

 

Principal payments on repurchase arrangements and similar

   borrowings

 

 

(138,521,532

)

 

 

(126,669,933

)

Increase (decrease) in cash collateral receivable from interest rate

   swap counterparties

 

 

16,213

 

 

 

(17,590

)

Net proceeds from interest rate swap settlements

 

 

10,906

 

 

 

8,842

 

Proceeds from issuance of preferred shares

 

 

 

 

 

52,051

 

Common stock repurchases

 

 

(41,313

)

 

 

 

Other capital stock transactions

 

 

(72

)

 

 

(261

)

Dividends paid

 

 

(60,353

)

 

 

(74,426

)

Net cash (used in) provided by financing activities

 

 

(785,710

)

 

 

290,658

 

Net change in cash and cash equivalents

 

 

(72,182

)

 

 

36,722

 

Cash and cash equivalents at beginning of period

 

 

103,907

 

 

 

56,732

 

Cash and cash equivalents at end of period

 

$

31,725

 

 

$

93,454

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

-6-


 

CAPSTEAD MORTGAGE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(unaudited)

 

NOTE 1 BUSINESS

Capstead Mortgage Corporation operates as a self-managed real estate investment trust for federal income tax purposes (a “REIT”) and is based in Dallas, Texas.  Unless the context otherwise indicates, Capstead Mortgage Corporation, together with its subsidiaries, is referred to as “Capstead” or the “Company.”  Capstead earns income from investing in a leveraged portfolio of residential mortgage pass-through securities consisting almost exclusively of adjustable-rate mortgage (“ARM”) securities issued and guaranteed by government-sponsored enterprises, either Fannie Mae, Freddie Mac, or by an agency of the federal government, Ginnie Mae.  Residential mortgage pass-through securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae are referred to as “Agency Securities” and are considered to have limited, if any, credit risk.

NOTE 2 BASIS OF PRESENTATION

Interim Financial Reporting

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) 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 GAAP 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, 2018 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2018.  For further information refer to the audited consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2017.

Recent Accounting Pronouncements

In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-18, Statement of Cash Flows: Restricted Cash (“ASU 2016-18”) which clarifies how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company adopted ASU 2016-18 on January 1, 2018, which had no effect on the Company’s results of operations, financial condition or cash flows.

In May 2017, the FASB issued Accounting Standards Update No. 2017-09, Compensation-Stock Compensation: Scope of Modification Accounting (“ASU 2017-09”) which allows companies to make certain changes to stock awards without accounting for them as modifications. It does not change the accounting for modifications. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company adopted ASU 2017-09 on January 1, 2018, which had no effect on the Company’s results of operations, financial condition or cash flows.

-7-


 

NOTE 3 NET INCOME PER COMMON SHARE

Basic net income per common share is computed by dividing net income, after deducting dividends paid or accrued on preferred stock and allocating earnings to equity awards deemed to be participating securities pursuant to the two-class method, by the average number of shares of common stock outstanding, calculated excluding unvested stock awards.  Participating securities include unvested equity awards that contain non-forfeitable rights to dividends prior to vesting.

Diluted net income per common share is computed by dividing the numerator used to compute basic net income per common share by the denominator used to compute basic net income per common share, further adjusted for the dilutive effect, if any, of equity awards and shares of preferred stock when and if convertible into shares of common stock.  Shares of the Company’s 7.50% Series E Cumulative Redeemable Preferred Stock are contingently convertible into shares of common stock only upon the occurrence of a change in control and therefore are not considered dilutive securities absent such an occurrence.  Any unvested equity awards that are deemed participating securities are included in the calculation of diluted net income per common share, if dilutive, under either the two-class method or the treasury stock method, depending upon which method produces the more dilutive result.  Components of the computation of basic and diluted net income per common share were as follows for the indicated periods (dollars in thousands, except per share amounts):

 

 

 

Quarter Ended

 

 

Nine Months Ended

 

 

 

September 30

 

 

September 30

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Basic net income per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator for basic net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

8,680

 

 

$

16,752

 

 

$

41,088

 

 

$

57,002

 

Preferred stock dividends

 

 

(4,842

)

 

 

(4,718

)

 

 

(14,526

)

 

 

(12,600

)

Earnings participation of unvested equity awards

 

 

(24

)

 

 

(36

)

 

 

(84

)

 

 

(116

)

 

 

$

3,814

 

 

$

11,998

 

 

$

26,478

 

 

$

44,286

 

Denominator for basic net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average number of shares of common stock outstanding

 

 

91,659

 

 

 

96,094

 

 

 

92,649

 

 

 

96,073

 

Average unvested stock awards outstanding

 

 

(453

)

 

 

(302

)

 

 

(447

)

 

 

(305

)

 

 

 

91,206

 

 

 

95,792

 

 

 

92,202

 

 

 

95,768

 

 

 

$

0.04

 

 

$

0.13

 

 

$

0.29

 

 

$

0.46

 

Diluted net income per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator for diluted net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator for basic net income per common share

 

$

3,814

 

 

$

11,998

 

 

$

26,478

 

 

$

44,286

 

Denominator for diluted net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic net income per common share

 

 

91,206

 

 

 

95,792

 

 

 

92,202

 

 

 

95,768

 

Net effect of dilutive equity awards

 

 

140

 

 

 

131

 

 

 

115

 

 

 

137

 

 

 

 

91,346

 

 

 

95,923

 

 

 

92,317

 

 

 

95,905

 

 

 

$

0.04

 

 

$

0.13

 

 

$

0.29

 

 

$

0.46

 

 

-8-


 

NOTE 4 RESIDENTIAL mortgage investments

Residential mortgage investments classified by collateral type and interest rate characteristics as of the indicated dates were as follows (dollars in thousands):

 

 

 

Unpaid

Principal

Balance

 

 

Investment Premiums

 

 

Amortized Cost Basis

 

 

Carrying

Amount (a)

 

 

Net

WAC (b)

 

 

Average

Yield (c)

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae/Freddie Mac:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate

 

$

138

 

 

$

 

 

$

138

 

 

$

138

 

 

 

6.50

%

 

 

5.65

%

ARMs

 

 

9,305,702

 

 

 

277,403

 

 

 

9,583,105

 

 

 

9,561,713

 

 

 

3.29

 

 

 

2.01

 

Ginnie Mae ARMs

 

 

3,058,570

 

 

 

79,388

 

 

 

3,137,958

 

 

 

3,117,258

 

 

 

3.17

 

 

 

2.30

 

 

 

 

12,364,410

 

 

 

356,791

 

 

 

12,721,201

 

 

 

12,679,109

 

 

 

3.26

 

 

 

2.08

 

Residential mortgage loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate

 

 

576

 

 

 

1

 

 

 

577

 

 

 

577

 

 

 

6.79

 

 

 

4.99

 

ARMs

 

 

1,045

 

 

 

6

 

 

 

1,051

 

 

 

1,051

 

 

 

4.04

 

 

 

3.18

 

 

 

 

1,621

 

 

 

7

 

 

 

1,628

 

 

 

1,628

 

 

 

5.01

 

 

 

3.81

 

Collateral for structured

   financings

 

 

1,037

 

 

 

17

 

 

 

1,054

 

 

 

1,054

 

 

 

8.02

 

 

 

9.42

 

 

 

$

12,367,068

 

 

$

356,815

 

 

$

12,723,883

 

 

$

12,681,791

 

 

 

3.26

 

 

 

2.08

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae/Freddie Mac:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate

 

$

265

 

 

$

1

 

 

$

266

 

 

$

266

 

 

 

6.51

%

 

 

6.22

%

ARMs

 

 

10,216,099

 

 

 

313,547

 

 

 

10,529,646

 

 

 

10,578,364

 

 

 

2.97

 

 

 

1.93

 

Ginnie Mae ARMs

 

 

2,791,340

 

 

 

84,297

 

 

 

2,875,637

 

 

 

2,872,163

 

 

 

2.78

 

 

 

1.83

 

 

 

 

13,007,704

 

 

 

397,845

 

 

 

13,405,549

 

 

 

13,450,793

 

 

 

2.93

 

 

 

1.91

 

Residential mortgage loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate

 

 

645

 

 

 

1

 

 

 

646

 

 

 

646

 

 

 

6.74

 

 

 

5.32

 

ARMs

 

 

1,211

 

 

 

7

 

 

 

1,218

 

 

 

1,218

 

 

 

4.04

 

 

 

3.19

 

 

 

 

1,856

 

 

 

8

 

 

 

1,864

 

 

 

1,864

 

 

 

4.98

 

 

 

3.91

 

Collateral for structured

   financings

 

 

1,418

 

 

 

23

 

 

 

1,441

 

 

 

1,441

 

 

 

7.94

 

 

 

7.67

 

 

 

$

13,010,978

 

 

$

397,876

 

 

$

13,408,854

 

 

$

13,454,098

 

 

 

2.93

 

 

 

1.91

 

 

(a)

Includes unrealized gains and losses for residential mortgage investments classified as available-for-sale.

(b)

Net WAC, or weighted average coupon, is the weighted average interest rate of the mortgage loans underlying the indicated investments net of servicing and other fees as of the indicated balance sheet date.  Net WAC is expressed as a percentage calculated on an annualized basis on the unpaid principal balances of the mortgage loans underlying these investments.

(c)

Average yield is presented for the quarter then ended and is based on the cash component of interest income expressed as a percentage calculated on an annualized basis on average amortized cost basis (the “cash yield”) less the effects of amortizing investment premiums.  Investment premium amortization is determined using the interest method and incorporates actual and anticipated future mortgage prepayments.

Agency Securities are considered to have limited, if any, credit risk because the timely payment of principal and interest is guaranteed by Fannie Mae and Freddie Mac, which are federally chartered corporations, or Ginnie Mae, which is an agency of the federal government.  Residential mortgage loans held by Capstead were originated prior to 1995 when the Company operated a mortgage conduit and the related credit risk is borne by the Company.  Collateral for structured financings consists of private residential mortgage securities that are backed by loans obtained through this mortgage conduit and are pledged to secure repayment of related structured financings.  Credit risk for these securities is borne by

-9-


 

the related bondholders. The maturity of Residential mortgage investments is directly affected by prepayments of principal on the underlying mortgage loans.  Consequently, actual maturities will be significantly shorter than the portfolio’s weighted average contractual maturity of 288 months.

Fixed-rate investments consist of residential mortgage loans and Agency Securities backed by residential mortgage loans with fixed rates of interest.  ARMs are adjustable-rate Agency Securities backed by residential mortgage loans that have coupon interest rates that adjust at least annually to more current interest rates or begin doing so after an initial fixed-rate period.  After the initial fixed-rate period, if applicable, mortgage loans underlying ARM securities typically either (i) adjust annually based on specified margins over the one-year London interbank offered rate (“LIBOR”) or the one-year Constant Maturity U.S. Treasury Note Rate (“CMT”), (ii) adjust semiannually based on specified margins over six-month LIBOR, or (iii) adjust monthly based on specified margins over indices such as one-month LIBOR, the Eleventh District Federal Reserve Bank Cost of Funds Index, or over a rolling twelve month average of the one-year CMT index, usually subject to periodic and lifetime limits, or caps, on the amount of such adjustments during any single interest rate adjustment period and over the contractual term of the underlying loans.

Capstead classifies its ARM investments based on average number of months until coupon reset (“months to roll”).  Months to roll is an indicator of asset duration which is a measure of market price sensitivity to interest rate movements.  A shorter duration generally indicates less interest rate risk.  Current-reset ARM investments have months to roll of less than 18 months while longer-to-reset ARM investments have months to roll of 18 months or greater.  As of September 30, 2018, the average months to roll for the Company’s $6.55 billion (amortized cost basis) in current-reset ARM investments was 6.2 months while the average months to roll for the Company’s $6.18 billion (amortized cost basis) in longer-to-reset ARM investments was 42.1 months.

NOTE 5 SECURED borrowings

Capstead pledges its Residential mortgage investments as collateral for secured borrowings primarily in the form of repurchase arrangements with commercial banks and other financial institutions (collectively referred to as “counterparties” or “lending counterparties”).  Repurchase arrangements entered into by the Company involve the sale and a simultaneous agreement to repurchase the transferred assets at a future date and are accounted for as financings.  The Company maintains the beneficial interest in the specific securities pledged during the term of each repurchase arrangement and receives the related principal and interest payments.  

The terms and conditions of secured borrowings are negotiated on a transaction-by-transaction basis when each such borrowing is initiated or renewed.  The amount borrowed is generally equal to the fair value of the securities pledged, as determined by the lending counterparty, less an agreed-upon discount, referred to as a “haircut.”  Interest rates are generally fixed based on prevailing rates corresponding to the terms of the borrowings. Interest may be paid monthly or at the termination of a borrowing at which time the
Company may enter into a new borrowing at prevailing haircuts and rates with the same lending counterparty or repay that counterparty and negotiate financing with a different lending counterparty.  None of the Company’s lending counterparties are obligated to renew or otherwise enter into new borrowings at the conclusion of existing borrowings.  In response to declines in fair value of pledged securities due to changes in market conditions or the publishing of monthly security pay-down factors, lending counterparties typically require the Company to post additional securities as collateral, pay down borrowings or fund cash margin accounts with the counterparties in order to re-establish the agreed-upon collateral requirements.  These actions are referred to as margin calls.  Conversely, in response to increases in fair value of pledged securities, the Company routinely margin calls its lending counterparties in order to have previously pledged collateral returned.

-10-


 

Secured borrowings (and related pledged collateral, including accrued interest receivable), classified by collateral type and remaining maturities, and related weighted average borrowing rates as of the indicated dates were as follows (dollars in thousands):

 

Collateral Type

 

Collateral

Carrying

Amount

 

 

Accrued

Interest

Receivable

 

 

Borrowings

Outstanding

 

 

Average

Borrowing

Rates

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings under repurchase arrangements with

   maturities of 30 days or less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Securities

 

$

11,973,233

 

 

$

33,105

 

 

$

11,352,886

 

 

 

2.28

%

Borrowings under repurchase arrangements with

   maturities greater than 30 days:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Securities (31 to 90 days)

 

 

280,255

 

 

 

775

 

 

 

266,026

 

 

 

2.34

 

Similar borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateral for structured financings

 

 

1,054

 

 

 

 

 

1,054

 

 

 

8.02

 

 

 

$

12,254,542

 

 

$

33,880

 

 

$

11,619,966

 

 

 

2.29

 

Quarter-end borrowing rates adjusted for effects

   of related derivative financial instruments

   (Derivatives) held as cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.93

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings under repurchase arrangements with

   maturities of 30 days or less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Securities

 

$

12,943,193

 

 

$

30,646

 

 

$

12,296,546

 

 

 

1.60

%

Borrowings under repurchase arrangements with

   maturities greater than 30 days:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Securities (31 to 90 days)

 

 

35,568

 

 

 

75

 

 

 

33,073

 

 

 

1.53

 

Similar borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateral for structured financings

 

 

1,441

 

 

 

 

 

1,441

 

 

 

7.94

 

 

 

$

12,980,202

 

 

$

30,721

 

 

$

12,331,060

 

 

 

1.60

 

Year-end borrowing rates adjusted for effects of

   related Derivatives held as cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.46

 

Average secured borrowings outstanding during the indicated periods differed from respective ending balances primarily due to changes in portfolio levels and differences in the timing of portfolio acquisitions relative to portfolio runoff as illustrated below (dollars in thousands):

 

 

 

Quarter Ended

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

Average

Borrowings

 

 

Average

Rate

 

 

Average

Borrowings

 

 

Average

Rate

 

Average borrowings and rates adjusted for the

   effects of related Derivatives held as cash flow

   hedges for the indicated periods

 

$

11,957,518

 

 

 

1.82

%

 

$

12,408,550

 

 

 

1.29

%


-11-


 

NOTE 6 USE OF DERIVATIVES, OFFSETTING DISCLOSURES AND CHANGES IN OTHER COMPREHENSIVE INCOME BY COMPONENT

Capstead attempts to mitigate exposure to higher interest rates by entering into one- and three-month LIBOR-indexed, pay-fixed, receive-variable, interest rate swap agreements for terms of two and three years.  These Derivatives are designated as cash flow hedges of the variability of the underlying benchmark interest rate of current and forecasted 30- to 90-day secured borrowings.  This hedge relationship establishes a relatively stable fixed rate on related borrowings because the variable-rate payments received on the swap agreements offset a significant portion of the interest accruing on the designated borrowings, leaving the fixed-rate swap payments as the Company’s effective borrowing rate, subject to certain adjustments.  These adjustments include differences between variable-rate payments received on the swap agreements and related unhedged borrowing rates as well as the effects of any measured hedge ineffectiveness.  Additionally, changes in fair value of these Derivatives tend to partially offset opposing changes in fair value of the Company’s residential mortgage investments that can occur in response to changes in market interest rates.

During the nine months ended September 30, 2018, Capstead entered into swap agreements with notional amounts of $1.2 billion requiring fixed-rate interest payments averaging 2.62%. The Company did not enter into any new swap agreements during the quarter ended September 30, 2018. During the quarter and nine months ended September 30, 2018, $400 million and $2.7 billion notional amount of swaps requiring fixed-rate interest payments averaging 0.88% and 0.78% matured, respectively.  At September 30, 2018, the Company’s portfolio financing-related swap positions had the following characteristics (dollars in thousands):

 

Period of

Contract Expiration

 

Notional

Amount

 

 

Average Fixed-Rate

Payment Requirement

 

Fourth quarter 2018

 

$

800,000

 

 

 

1.15

%

First quarter 2019

 

 

950,000

 

 

 

1.58

 

Second quarter 2019

 

 

1,650,000

 

 

 

1.33

 

Third quarter 2019

 

 

550,000

 

 

 

1.40

 

Fourth quarter 2019

 

 

700,000

 

 

 

1.72

 

First quarter 2020

 

 

600,000

 

 

 

2.07

 

Second quarter 2020

 

 

600,000

 

 

 

2.68

 

Third quarter 2020

 

 

200,000

 

 

 

1.64

 

Fourth quarter 2020

 

 

200,000

 

 

 

2.04

 

First quarter 2021

 

 

100,000

 

 

 

2.67

 

Second quarter 2021

 

 

200,000

 

 

 

2.87

 

 

 

$

6,550,000

 

 

 

 

 

 

The Company has three-month LIBOR-indexed, pay-fixed, receive-variable, interest rate swap agreements with notional amounts totaling $100 million and average fixed rates of 4.09% with 20-year payment terms coinciding with the floating-rate terms of the Company’s Unsecured borrowings.  These Derivatives are designated as cash flow hedges of the variability of the underlying contractual rate associated with the floating-rate terms of these long-term borrowings which began on various dates between October 2015 and September 2016.

 

Interest rate swap agreements are measured at fair value on a recurring basis primarily using Level Two Inputs in accordance with ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820).  In determining fair value estimates for these Derivatives, Capstead utilizes the standard methodology of netting the discounted future fixed cash payments and the discounted future variable cash receipts which are based on expected future interest rates derived from observable market interest rate curves.  The

-12-


 

Company also incorporates both its own nonperformance risk and its counterparties’ nonperformance risk in determining fair value.  In considering the effect of nonperformance risk, the Company considered the impact of netting and credit enhancements, such as collateral postings and guarantees, and has concluded that counterparty risk is not significant to the overall valuation.  

 

The fair value of exchange-traded swap agreements held as cash flow hedges of Secured borrowings is calculated including accrued interest and net of variation margin amounts received or paid through the exchange, resulting in separately presenting on the balance sheet a significantly reduced fair value amount representing the unsettled fair value of these Derivatives.  Non-exchange traded swap agreements held as cash flow hedges of Unsecured borrowings are reported at fair value calculated excluding accrued interest.  At September 30, 2018, Cash collateral receivable from interest rate swap counterparties includes initial margin for all swap agreements and variation margin for non-exchange traded swap agreements.  Accrued interest for non-exchange traded swap agreements is included in Accounts payable and accrued expenses.  

 

The following tables include fair value and other related disclosures regarding all Derivatives held as of and for the indicated periods (in thousands):

 

 

 

Balance Sheet

 

September 30

 

 

December 31

 

 

 

Location

 

2018

 

 

2017

 

Balance sheet-related

 

 

 

 

 

 

 

 

 

 

Swap agreements in a loss position (a liability) related to

 

 

 

 

 

 

 

 

 

 

unsecured borrowings

 

(a)

 

$

(13,012

)

 

$

(23,772

)

Related net interest payable

 

(b)

 

 

(916

)

 

 

(484

)

 

 

 

 

$

(13,928

)

 

$

(24,256

)

 

(a)

The fair value of Derivatives with unrealized gains are aggregated and recorded as an asset on the face of the Balance Sheets separately from the fair value of Derivatives with unrealized losses that are recorded as a liability.  The amount of unrealized gains, net of unrealized losses, scheduled to be recognized in the Statements of Income over the next twelve months primarily in the form of current market rates in excess of fixed-rate swap payments totaled $37.0 million at September 30, 2018.

(b)

Included in “Accounts payable and accrued expenses” on the face of the Balance Sheets.

 

Location of

Gain or (Loss)

Recognized in

 

Quarter Ended September 30

 

 

Nine Months Ended September 30

 

 

Net Income

 

 

2018

 

 

 

2017

 

 

 

2018

 

 

 

2017

 

Income statement-related

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Components of Secured borrowings-related effects

   on interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of gain (loss) reclassified from

   Accumulated other comprehensive income

 

 

$

11,585

 

 

$

3,912

 

 

$

27,277

 

 

$

4,412

 

Amount of loss recognized in income

 

 

 

 

 

1,141

 

 

 

 

 

 

(360

)

 

(a)

 

 

11,585

 

 

 

5,053

 

 

 

27,277

 

 

 

4,052

 

Component of Unsecured borrowings-related

   effects on interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of loss reclassified from Accumulated

   other comprehensive income

(b)

 

 

(423

)

 

 

(699

)

 

 

(1,501

)

 

 

(2,205

)

Decrease (increase) in interest expense and increase

    (decrease) in Net income as a result of the use

    of Derivatives

 

 

$

11,162

 

 

$

4,354

 

 

$

25,776

 

 

$

1,847

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income-related

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of gain recognized in Other

   comprehensive income

 

 

$

7,580

 

 

$

1,827

 

 

$

46,385

 

 

$

3,541

 

-13-


 

 

(a)

Included in “Interest expense:  Secured borrowings” on the face of the Statements of Income.

(b)

Included in “Interest expense:  Unsecured borrowings” on the face of the Statements of Income.

 

Capstead’s swap agreements and borrowings under repurchase arrangements are subject to master netting arrangements in the event of default on, or termination of, any one contract.  See NOTE 5 for more information on the Company’s use of secured borrowings.  The following tables provide disclosures concerning offsetting of financial liabilities and Derivatives as of the indicated dates (in thousands):

 

 

 

Offsetting of Derivative Assets

 

 

 

 

 

 

 

Gross

 

 

Net Amounts

 

 

Gross Amounts Not Offset

 

 

 

 

 

 

 

Gross

 

 

Amounts

 

 

of Assets

 

 

in the Balance Sheet (b)

 

 

 

 

 

 

 

Amounts of

 

 

Offset in

 

 

Presented in

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

Recognized

 

 

the Balance

 

 

the Balance

 

 

Financial

 

 

Collateral

 

 

Net

 

 

 

Assets (a)

 

 

Sheet (a)

 

 

Sheet

 

 

Instruments

 

 

Received

 

 

Amount

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparty 4

 

$

40,220

 

 

$

(40,220

)

 

$

 

 

$

 

 

$

 

 

$

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparty 4

 

$

30,676

 

 

$

(30,676

)

 

$

 

 

$

 

 

$

 

 

$

 

 

(a)

Included in gross amounts of recognized assets at September 30, 2018 is the fair value of exchange-traded swap agreements, calculated including accrued interest.  Included in gross amounts offset in the balance sheet are variation margin amounts associated with these swaps at September 30, 2018.

(b)

Amounts presented are limited to recognized liabilities and cash collateral received associated with the indicated counterparty sufficient to reduce the related Net Amount to zero in accordance with ASU No. 2011-11, as amended by ASU No. 2013-01.

 

 

 

Offsetting of Financial Liabilities and Derivative Liabilities

 

 

 

 

 

 

 

Gross

 

 

Net Amounts

 

 

Gross Amounts Not Offset

 

 

 

 

 

 

 

Gross

 

 

Amounts

 

 

of Liabilities

 

 

in the Balance Sheet (c)

 

 

 

 

 

 

 

Amounts of

 

 

Offset in

 

 

Presented in

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

Recognized

 

 

the Balance

 

 

the Balance

 

 

Financial

 

 

Collateral

 

 

Net

 

 

 

Liabilities (a)

 

 

Sheet (a)

 

 

Sheet (b)

 

 

Instruments

 

 

Pledged

 

 

Amount

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives by

   counterparty:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparty 1

 

$

13,927

 

 

$

 

 

$

13,927

 

 

$

 

 

$

(13,927

)

 

$

 

Counterparty 4

 

 

2,820

 

 

 

(2,820

)

 

 

 

 

 

 

 

 

 

 

 

16,747

 

 

 

(2,820

)

 

 

13,927

 

 

 

 

 

(13,927

)

 

 

Borrowings under

   repurchase

   arrangements (d)

 

 

11,631,352

 

 

 

 

 

11,631,352

 

 

 

(11,631,352

)

 

 

 

 

 

 

$

11,648,099

 

 

$

(2,820

)

 

$

11,645,279

 

 

$

(11,631,352

)

 

$

(13,927

)

 

$

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives by

   counterparty:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparty 1

 

$

24,256

 

 

$

 

 

$

24,256

 

 

$

 

 

$

(24,256

)

 

$

 

Counterparty 4

 

 

3,701

 

 

 

(3,701

)

 

 

 

 

 

 

 

 

 

 

 

 

 

27,957

 

 

 

(3,701

)

 

 

24,256

 

 

 

 

 

 

(24,256

)

 

 

Borrowings under

   repurchase

   arrangements (d)

 

 

12,337,299

 

 

 

 

 

12,337,299

 

 

 

(12,337,299

)

 

 

 

 

 

 

$

12,365,256

 

 

$

(3,701

)

 

$

12,361,555

 

 

$

(12,337,299

)

 

$

(24,256

)

 

$

 

-14-


 

 

(a)

Included in gross amounts of recognized liabilities at September 30, 2018 is the fair value of non-exchange traded swap agreements (Counterparty 1) and exchange-traded swap agreements (Counterparty 4), calculated including accrued interest.  Included in gross amounts offset in the balance sheet are variation margin amounts associated with exchange-traded swap agreements at September 30, 2018.

(b)

Amounts presented are limited to recognized liabilities and cash collateral received associated with the indicated counterparty sufficient to reduce the related Net Amount to zero in accordance with ASU No. 2011-11, as amended by ASU No. 2013-01.

(c)

Amounts presented are limited to recognized assets and collateral pledged associated with the indicated counterparty sufficient to reduce the related Net Amount to zero in accordance with ASU No. 2011-11, as amended by ASU No. 2013-01.

(d)

Amounts include accrued interest payable of $12.4 million and $7.7 million on borrowings under repurchase arrangements as of September 30, 2018 and December 31, 2017, respectively.

Changes in Accumulated other comprehensive income by component for the quarter and nine months ended September 30, 2018 were as follows (in thousands):

 

 

Unrealized

Gains and Losses

on Cash Flow

Hedges

 

 

Unrealized Gains

and Losses on

Available-for-Sale

Securities

 

 

Total

 

Balance at June 30, 2018

 

$

41,065

 

 

$

(15,321

)

 

$

25,744

 

Activity for the quarter ended September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before

   reclassifications

 

 

7,580

 

 

 

(26,771

)

 

 

(19,191

)

Amounts reclassified from accumulated

   other comprehensive income

 

 

(11,162

)

 

 

 

 

(11,162

)

Other comprehensive loss

 

 

(3,582

)

 

 

(26,771

)

 

 

(30,353

)

Balance at September 30, 2018

 

$

37,483

 

 

$

(42,092

)

 

$

(4,609

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

$

16,874

 

 

$

45,244

 

 

$

62,118

 

Activity for the nine months ended September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before

   reclassifications

 

 

46,385

 

 

 

(87,336

)

 

 

(40,951

)

Amounts reclassified from accumulated other

   comprehensive income

 

 

(25,776

)

 

 

 

 

(25,776

)

Other comprehensive income (loss)

 

 

20,609

 

 

 

(87,336

)

 

 

(66,727

)

Balance at September 30, 2018

 

$

37,483

 

 

$

(42,092

)

 

$

(4,609

)

 

NOTE 7 unsecured BORROWINGS

 

Unsecured borrowings consist of 30-year junior subordinated notes issued in 2005 and 2006 and maturing in 2035 and 2036, for a total face amount of $100 million.  Note balances net of deferred issuance costs, and related weighted average interest rates as of the indicated dates (calculated including issuance cost amortization and adjusted for effects of related Derivatives held as cash flow hedges) were as follows (dollars in thousands):

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

Borrowings

Outstanding

 

 

Average

Rate

 

 

Borrowings

Outstanding

 

 

Average

Rate

 

Junior subordinated notes maturing in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October 2035 ($35,000 face amount)

 

$

34,344

 

 

 

7.89

%

 

$

34,315

 

 

 

7.90

%

December 2035 ($40,000 face amount)

 

 

39,349

 

 

 

7.65

 

 

 

39,320

 

 

 

7.66

 

September 2036 ($25,000 face amount)

 

 

24,573

 

 

 

7.69

 

 

 

24,556

 

 

 

7.70

 

 

 

$

98,266

 

 

 

7.74

 

 

$

98,191

 

 

 

7.75

 

 

-15-


 

NOTE 8 Capital transactions

On November 1, 2017, Capstead’s Board of Directors authorized the reinstatement of its previously unused $100 million common stock repurchase program. During the quarter and nine months ended September 30, 2018 the Company repurchased 1.4 million and 4.9 million shares of common stock in the open market for approximately $11.8 million and $41.3 million, respectively (an average repurchase price, including program costs, of $8.25 and $8.50 per share). An additional 140,000 share repurchases settled subsequent to quarter-end for $1.0 million (an average repurchase price, including program costs, of $7.18), leaving a remaining repurchase program authorization of $54.3 million.  Repurchases made pursuant to the program are made in the open market in accordance with and as permitted by securities laws and other legal requirements.  The timing, manner, price and amount of any future repurchases will be determined by the Company in its discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors including alternative capital investment opportunities.  In addition, the Company may enter into Rule 10b5-1 plans under which repurchases can be made. The authorization does not obligate the Company to acquire any particular amount of common stock and repurchases under the program and the program itself may be suspended or discontinued at the Company’s discretion without prior notice.  

NOTE 9 FAIR VALUE

The fair value of Capstead’s financial assets and liabilities are influenced by changes in, and market expectations for changes in, interest rates and market liquidity conditions, as well as other factors beyond the control of management.  With the exception of the fair value of lending counterparty investments, all fair values were determined using Level 2 Inputs in accordance with ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820).  Lending counterparty investments are nonmarketable securities classified as assets for which Level 3 Inputs are used to determine fair value.  These assets are considered strategic investments that are carried at cost and periodically valued and evaluated for impairment.  No impairment charges have been recorded relative to these investments and the Company’s cost basis is deemed to approximate fair value.

Residential mortgage investments, nearly all of which are mortgage securities classified as available-for-sale, are measured at fair value on a recurring basis.  In determining fair value estimates the Company considers recent trading activity for similar investments and pricing levels indicated by lenders in connection with designating collateral for secured borrowings, provided such pricing levels are considered indicative of actual market clearing transactions.  In determining fair value estimates for Secured borrowings with initial terms of greater than 120 days, the Company considers pricing levels indicated by lenders for entering into new transactions using similar pledged collateral with terms equal to the remaining terms of these borrowings.  The Company currently bases fair value for Unsecured borrowings on discounted cash flows using Company estimates for market yields.  Excluded from these disclosures are financial instruments for which cost basis is deemed to approximate fair value due primarily to the short duration of these instruments, which are valued using primarily Level 1 measurements, including Cash and cash equivalents, Cash collateral receivable from, or payable to, interest rate swap counterparties, receivables, payables and secured borrowings with initial terms of 120 days or less.  See NOTE 6 for information relative to the valuation of interest rate swap agreements.

Fair value-related disclosures for financial instruments other than debt securities were as follows as of the indicated dates (in thousands):

 

-16-


 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

Carrying

Amount

 

 

Fair

Value

 

 

Carrying

Amount

 

 

Fair

Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage loans

 

$

1,628

 

 

$

1,600

 

 

$

1,864

 

 

$

1,900

 

Lending counterparty investments

 

 

5,002

 

 

 

5,002

 

 

 

5,002

 

 

 

5,002

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured borrowings with initial terms of

   greater than 120 days

 

 

 

 

 

 

 

 

33,073

 

 

 

33,100

 

Unsecured borrowings

 

 

98,266

 

 

 

85,500

 

 

 

98,191

 

 

 

74,100

 

Unsecured borrowings-related interest rate

   swap agreements

 

 

13,012

 

 

 

13,012

 

 

 

23,772

 

 

 

23,772

 

 

Fair value-related disclosures for debt securities were as follows as of the indicated dates (in thousands):

 

 

 

Amortized

 

 

Gross Unrealized

 

 

 

 

 

 

 

Cost Basis

 

 

Gains

 

 

Losses

 

 

Fair Value

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Securities classified as available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae/Freddie Mac

 

$

9,583,105

 

 

$

66,619

 

 

$

88,011

 

 

$

9,561,713

 

Ginnie Mae

 

 

3,137,958

 

 

 

7,235

 

 

 

27,935

 

 

 

3,117,258

 

Residential mortgage securities classified as

   held-to-maturity

 

 

1,192

 

 

 

4

 

 

 

 

 

1,196

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Securities classified as available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae/Freddie Mac

 

 

10,529,646

 

 

 

85,740

 

 

 

37,022

 

 

 

10,578,364

 

Ginnie Mae

 

 

2,875,637

 

 

 

8,958

 

 

 

12,432

 

 

 

2,872,163

 

Residential mortgage securities classified as

   held-to-maturity

 

 

1,706

 

 

 

17

 

 

 

 

 

1,723

 

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

Fair

Value

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

Unrealized

Loss

 

Securities in an unrealized loss position:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One year or greater

 

$

3,056,513

 

 

$

61,923

 

 

$

2,552,668

 

 

$

26,701

 

Less than one year

 

 

4,466,222

 

 

 

54,023

 

 

 

4,665,883

 

 

 

22,752

 

 

 

$

7,522,735

 

 

$

115,946

 

 

$

7,218,551

 

 

$

49,453

 

 

Capstead’s investment strategy involves managing a leveraged portfolio of relatively short-duration ARM Agency Securities and management expects these securities will be held until payoff absent a major shift in strategy or a severe contraction in the Company’s ability to obtain financing to support its portfolio.  Declines in fair value caused by increases in interest rates are typically modest for investments in short-duration ARM Agency Securities compared to investments in longer-duration ARM or fixed-rate assets.  These declines are generally recoverable in a relatively short period of time as coupon interest rates on the underlying mortgage loans reset to rates more reflective of the then-current interest rate environment.

 

From a credit risk perspective, federal government support for Fannie Mae and Freddie Mac helps ensure that fluctuations in value due to credit risk associated with these securities will be limited.  Given that (a) any existing unrealized losses on mortgage securities held by the Company are not attributable to credit risk and declines in fair value of ARM securities due to changes in interest rates are generally recoverable in a relatively short period of time, (b) the Company typically holds its investments to maturity, and (c) it

-17-


 

is more likely than not that the Company will not be required to sell any of its investments given the resiliency of the financing market for Agency Securities, none of these investments were considered other-than-temporarily impaired at September 30, 2018.

NOTE 10 COMPENSATION PROGRAMS

Capstead’s annual and long-term incentive compensation programs for key executives are largely nondiscretionary, formulaic and target-based, utilizing multiple pre-established performance goals (referred to as “metrics”) and defined threshold, target and maximum award amounts determined by reference to established percentages of base salaries. Metrics used include (a) relative and absolute economic return (change in book value per common share plus common stock dividends divided by beginning book value per common share), (b) relative operating cost efficiency (operating expenses divided by Unsecured borrowings and Stockholders’ equity), (c) relative total stockholder return (change in stock price plus reinvested dividends, and (d) attainment of individual goals and objectives.  Each performance metric is assigned a weighting and performance relative to each metric is calculated separately. No awards can be earned for performance below defined threshold return levels and awards are capped for performance above defined maximum return levels. Awards are made pursuant to the Company’s Amended and Restated 2014 Flexible Incentive Plan that was approved by stockholders in May 2014.  At September 30, 2018, this plan had 3,312,051 shares of common stock remaining available for future issuances.

Short-term Incentive Compensation Programs

Under the provisions of Capstead’s annual incentive compensation program, participating executives have overall target award opportunities ranging from 75% to 125% of base salary. Included in Accounts payable and accrued expenses at September 30, 2018 are annual incentive compensation accruals for participating executives, together with discretionary accruals for all other employees, totaling $1.1 million. Recognized in Compensation-related expense are $332,000 and $1.1 million related to annual incentive compensation for all employees for the quarter and nine months ended September 30, 2018, respectively.

The Company administers an additional performance-based short-term incentive compensation program for key executives that provides for quarterly cash payments equal to per share dividends declared on Capstead’s common stock multiplied by a notional amount of non-vesting shares of common stock (“Dividend Equivalent Rights” or “DERs”).  DERs only represent the right to receive the same cash distributions that the Company’s common stockholders are entitled to receive during the term of the grants, subject to certain conditions, including continuous service.  Included in Accounts payable and accrued expenses are third quarter 2018 DERs distribution amounts totaling $66,000 that were paid in October 2018. Recognized in Compensation-related expense are $66,000 and $246,000 related to the DERs program for the quarter and nine months ended September 30, 2018, respectively.

Long-term Equity-based Awards – Performance-based RSUs

Capstead’s performance-based long-term incentive compensation program for key executives provides for the grant of performance-based RSUs that are convertible into shares of common stock following three-year performance periods, contingent upon whether, and to what extent, performance metrics are met or exceeded.  The actual number of shares of common stock the units can convert into for each of the metrics, if any, can range from one-half of a share per unit if that metric’s threshold level of performance is met, to two shares per unit if the related maximum level of performance is met or exceeded, adjusted for the weighting assigned to the metric.  Dividends accrue from the date of grant and will be paid in cash to the extent the units convert into shares of common stock following completion of related performance periods.

-18-


 

Pursuant to this program, in January 2018 and 2017, as well as February 2016, respectively, the Company granted 183,137, 148,894 and 269,354 RSUs with three-year performance periods ending December 31, 2020, 2019 and 2018.  Initial grant date fair values developed for compensation cost purposes of $8.71, $10.52 and $8.03 were assigned to the units of each grant, respectively. Amounts actually expensed are largely predicated on estimated performance metric attainment. Recognized in Compensation-related expense are $211,000 and $228,000 related to this program during the quarter and nine months ended September 30, 2018, respectively.   

RSU activity for the nine months ended September 30, 2018 is summarized below:

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Average

 

 

 

Number of

 

 

Grant Date

 

 

 

Shares

 

 

Fair Value

 

Unvested RSU awards outstanding at December 31, 2017

 

 

435,976

 

 

$

9.10

 

January 2018 grants

 

 

183,137

 

 

 

8.71

 

Forfeiture of remaining 2015 grants

 

 

(117,255

)

 

 

8.83

 

Unvested RSU awards outstanding at September 30, 2018

 

 

501,858

 

 

 

9.02

 

Long-term Equity-based Awards – Stock Awards

In January 2018 and 2017, as well as February 2016, respectively, the Company granted service-based stock awards for 126,451, 74,446 and 67,337 shares of common stock with grant date fair values of $8.60, $10.41 and $9.32 per share to executives awarded RSUs. Outstanding awards under this program and related deferred dividends are scheduled to vest in January 2021, January 2020 and February 2019, respectively, assuming service conditions are met.  In January of 2018, 2017 and 2016, respectively, the Company granted service-based stock awards for 57,283, 49,416 and 61,272 shares of common stock with grant date fair values of $8.60, $10.41 and $7.87 per share to employees not awarded RSUs.  These awards vest in January of 2021, 2020 and 2019, respectively, assuming service conditions are met.

As a component of the Company’s director compensation program, directors are granted service-based stock awards annually upon election or re-election to the board of directors that vest approximately one year from issuance.  In July 2017 director common stock awards for a total of 41,797 shares with a grant date fair value of $10.05 per share were granted that vested in July 2018. In July 2018 director common stock awards for a total of 57,113 shares with a grant date fair value of $8.58 per share were granted that will vest in July 2019.

Performance-based and service-based stock award activity for the nine months ended September 30, 2018 is summarized below:

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Average

 

 

 

Number of

 

 

Grant Date

 

 

 

Shares

 

 

Fair Value

 

Unvested stock awards outstanding at December 31, 2017

 

 

296,940

 

 

$

9.90

 

Grants

 

 

240,847

 

 

 

8.60

 

Vestings

 

 

(76,696

)

 

 

11.15

 

Unvested stock awards outstanding at September 30, 2018

 

 

461,091

 

 

 

9.01

 

 

During the quarter and nine months ended September 30, 2018, the Company recognized in Compensation-related expense $307,000 and $922,000, respectively, related to amortization of the grant date fair value of employee stock awards.  In addition, the Company recognized in Other general and administrative expense $117,000 and $327,000 related to amortization of the grant date fair value of director stock awards during the quarter and nine months ended September 30, 2018, respectively.  

-19-


 

Unrecognized compensation expense for unvested stock awards for employees and directors totaled $2.2 million as of September 30, 2018, to be expensed over a weighted average period of 1.3 years.

Service-based stock awards issued to non-executive employees and to directors receive dividends on a current basis without risk of forfeiture if the related awards do not vest.  Stock awards issued to executives defer the payment of dividends accruing between the grant dates and the end of related service periods.  If these awards do not vest, the related accrued dividends will be forfeited.

-20-


 

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

FINANCIAL CONDITION

Overview

Capstead operates as a self-managed REIT earning income from investing in a leveraged portfolio of residential mortgage pass-through securities consisting almost exclusively of short-duration ARM Agency Securities, which reset to more current interest rates within a relatively short period of time and are considered to have limited, if any, credit risk.  See NOTE 1 to the consolidated financial statements (included under Item 1 of this report) for defined terms used in this discussion and analysis.  By investing in short-duration ARM Agency Securities, the Company is positioned to benefit from future recoveries in financing spreads that typically contract during periods of rising interest rates and to experience smaller fluctuations in portfolio values compared to leveraged portfolios containing a significant amount of longer-duration ARM or fixed-rate mortgage securities.  Duration is a common measure of market price sensitivity to interest rate movements.  A shorter duration generally indicates less interest rate risk.

 

Capstead finances its residential mortgage investments by leveraging its long-term investment capital with secured borrowings consisting primarily of borrowings under repurchase arrangements with commercial banks and other financial institutions.  Long-term investment capital totaled $1.22 billion at September 30, 2018, consisting of $870 million of common and $251 million of preferred stockholders’ equity, together with $98 million of unsecured borrowings maturing in 2035 and 2036 (recorded amounts).  Long-term investment capital decreased $118 million during the first nine months of 2018 as a result of common stock repurchases totaling $41 million, declines in portfolio valuations that outstripped increases in swap gains ($67 million net decline) and dividend distributions in excess of earnings ($11 million).  

 

Book value per common share (total stockholders’ equity, less liquidation preferences for outstanding shares of preferred stock, divided by outstanding shares of common stock) declined 7.5% ($0.77) to $9.48 per share during the first nine months of 2018, as declines in portfolio valuations and dividend distributions in excess of earnings were only partially offset by swap gains and common stock repurchases.

 

Capstead’s residential mortgage investments portfolio decreased $772 million during the first nine months of 2018 to $12.68 billion at September 30, 2018 as the portfolio declined in value and a portion of capital made available from portfolio runoff was used to fund stock repurchases. Secured borrowings decreased $711 million to $11.62 billion.  Portfolio leverage (secured borrowings divided by long-term investment capital) increased to 9.53 to one at September 30, 2018 from 9.22 to one at December 31, 2017.  Management believes current portfolio leverage levels represent an appropriate use of leverage under current market conditions for a portfolio consisting of seasoned, short-duration ARM Agency Securities.

 

Capstead reported net income of $9 million and $41 million or $0.04 and $0.29 per diluted common share for the quarter and nine months ended September 30, 2018, compared to $17 million and $57 million or $0.13 and $0.46 per diluted common share for the same periods in 2017, respectively. Capstead’s earnings in the 2018 periods benefited from higher cash yields and lower investment premium while being negatively impacted by higher borrowing costs. Investment premium amortization was lower due to portfolio basis trending lower in recent periods coupled with lower mortgage prepayment rates. Higher borrowing costs were driven by Federal Reserve actions to increase the Federal Funds rate by 25 basis points in December 2017, March 2018, June 2018 and, to a lesser extent, September 2018. The Company

-21-


 

declared a third quarter 2018 common dividend of $0.11 per share that was paid on October 19, 2018 to holders of record on September 30, 2018.  

Common Stock Repurchase Program

The Company repurchased 4.9 million shares of common stock in the open market during the nine months ended September 30, 2018 at an average repurchase price, including program costs, of $8.50 per share, or approximately 82.9% of the Company’s December 31, 2017 book value per common share. These repurchases, which primarily occurred during the first and third quarters of 2018, generated $0.09 per common share in book value accretion. An additional 140,000 share repurchases settled subsequent to quarter-end for $1 million at an average repurchase price, including program costs, of $7.18. Approximately $54 million remains under the repurchase program.  

Repurchases made pursuant to the program are made in the open market in accordance with and as permitted by securities laws and other legal requirements.  The timing, manner, price and amount of any repurchases will be determined by the Company in its discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors including alternative capital investment opportunities.  In addition, the Company may enter into Rule 10b5-1 plans under which repurchases can be made. The authorization does not obligate the Company to acquire any particular amount of common stock and repurchases under the program and the program itself may be suspended or discontinued at the Company’s discretion without prior notice.

 

Book Value per Common Share

All but $3 million of Capstead’s residential mortgage investments portfolio and all of its interest rate swap agreements are recorded at fair value on the Company’s balance sheet and are therefore included in the calculation of book value per common share. See NOTE 9 to the consolidated financial statements (included under Item 1 of this report) for additional disclosures regarding fair values of financial instruments held or issued by the Company.

 

Fair value is impacted by market conditions, including changes in interest rates, and the availability of financing at reasonable rates and leverage levels, among other factors.  The Company’s investment strategy attempts to mitigate these risks by focusing on investments in Agency Securities, which are considered to have little, if any, credit risk and are collateralized by ARM loans with interest rates that reset periodically to more current levels, generally within five years.  Because of these characteristics, the fair value of the Company’s portfolio is considerably less vulnerable to significant pricing declines caused by credit concerns or rising interest rates compared to leveraged portfolios containing a significant amount of non-agency securities or longer-duration ARM and/or fixed-rate Agency Securities.  

-22-


 

The following table illustrates the progression of Capstead’s book value per common share as well as changes in book value expressed as percentages of beginning book value for the quarter and nine months ended September 30, 2018:

 

 

 

Quarter Ended

September 30, 2018

 

 

Nine Months Ended

September 30, 2018

 

Book value per common share, beginning of period

 

$

9.85

 

 

 

 

 

 

$

10.25

 

 

 

 

 

Change in net unrealized gains on mortgage

   securities classified as available-for-sale

 

 

(0.29

)

 

 

 

 

 

 

(0.96

)

 

 

 

 

Change in net unrealized gains and losses on interest rate

   swap agreements designated as cash flow hedges of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured borrowings

 

 

(0.07

)

 

 

 

 

 

 

0.11

 

 

 

 

 

Unsecured borrowings

 

 

0.03

 

 

 

 

 

 

 

0.12

 

 

 

 

 

 

 

 

(0.33

)

 

 

(3.4

)%

 

 

(0.73

)

 

 

(7.1

)%

Capital transactions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accretion from common stock repurchases

 

 

0.03

 

 

 

 

 

 

 

0.09

 

 

 

 

 

Dividend distributions in excess of earnings

 

 

(0.07

)

 

 

 

 

 

 

(0.12

)

 

 

 

 

Stock compensation-related activity

 

 

 

 

 

 

 

 

 

(0.01

)

 

 

 

 

 

 

 

(0.04

)

 

 

(0.4

)%

 

 

(0.04

)

 

 

(0.4

)%

Book value per common share, end of period

 

$

9.48

 

 

 

 

 

 

$

9.48

 

 

 

 

 

Decrease in book value per common share during the

   indicated periods

 

$

(0.37

)

 

 

(3.8

)%

 

$

(0.77

)

 

 

(7.5

)%

Residential Mortgage Investments

The following table illustrates the progression of Capstead’s portfolio of residential mortgage investments for the quarter and nine months ended September 30, 2018 (dollars in thousands):

 

 

 

Quarter Ended

 

 

Nine Months Ended

 

 

 

September 30, 2018

 

 

September 30, 2018

 

Residential mortgage investments, beginning of period

 

$

13,017,107

 

 

$

13,454,098

 

Portfolio acquisitions (principal amount)

 

 

728,340

 

 

 

2,111,736

 

Investment premiums on acquisitions*

 

 

15,051

 

 

 

47,234

 

Portfolio runoff (principal amount)

 

 

(1,019,582

)

 

 

(2,755,648

)

Investment premium amortization*

 

 

(32,354

)

 

 

(88,293

)

Decrease in net unrealized gains on securities classified

   as available-for-sale

 

 

(26,771

)

 

 

(87,336

)

Residential mortgage investments, end of period

 

$

12,681,791

 

 

$

12,681,791

 

Decrease in residential mortgage investments during the

   indicated periods

 

$

(335,316

)

 

$

(772,307

)

 

*

Residential mortgage investments typically are acquired at a premium to the securities’ unpaid principal balances.  Investment premiums are recognized in earnings as portfolio yield adjustments using the interest method over the estimated lives of the related investments.  As such, the level of mortgage prepayments impacts how quickly investment premiums are amortized.

Capstead’s investment strategy focuses on managing a portfolio of residential mortgage investments consisting almost exclusively of ARM Agency Securities.  Agency Securities are considered to have limited, if any, credit risk because the timely payment of principal and interest is guaranteed by Fannie Mae and Freddie Mac, which are federally chartered corporations, or Ginnie Mae, which is an agency of the federal government.  Federal government support for Fannie Mae and Freddie Mac has largely alleviated market concerns regarding the ability of Fannie Mae and Freddie Mac to fulfill their guarantee obligations.  

-23-


 

By focusing on investing in short-duration ARM Agency Securities, changes in fair value caused by changes in interest rates are typically relatively modest compared to changes in fair value of longer-duration ARM or fixed-rate assets.  Declines in fair value caused by increases in interest rates are generally recoverable in a relatively short period of time as coupon interest rates on the underlying mortgage loans reset to rates more reflective of the then-current interest rate environment.  This investment strategy positions the Company to benefit from potential recoveries in financing spreads that typically contract during periods of rising interest rates.

 

ARM securities are backed by mortgage loans that generally have coupon interest rates that adjust at least annually to more current interest rates or begin doing so after an initial fixed-rate period.  These coupon adjustments are usually subject to periodic and lifetime limits, or caps, on the amount of such adjustments during any single interest rate adjustment period and over the contractual term of the underlying loans.  After the initial fixed-rate period, if applicable, the coupon interest rates of mortgage loans underlying the Company’s ARM securities typically adjust either (a) annually based on specified margins over the one-year London interbank offered rate (“LIBOR”) or the one-year Constant Maturity U.S. Treasury Note Rate (“CMT”), (b) semiannually based on specified margins over six-month LIBOR, or (c) monthly based on specified margins over indices such as one-month LIBOR, the Eleventh District Federal Reserve Bank Cost of Funds Index, or over a rolling twelve month average of the one-year CMT index.

Capstead classifies its ARM securities based on the average length of time until the loans underlying each security reset to more current rates (“months-to-roll”) (less than 18 months for “current-reset” ARM securities, and 18 months or greater for “longer-to-reset” ARM securities).  The Company’s ARM holdings featured the following characteristics at September 30, 2018 (dollars in thousands):

ARM Type

 

Amortized

Cost Basis (a)

 

Net

WAC (b)

 

Fully

Indexed

WAC (b)

 

Average

Net

Margins (b)

 

Average

Periodic

Caps (b)

 

Average

Lifetime

Caps (b)

 

Months

To

Roll

Current-reset ARMs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae Agency Securities

$

3,674,581

 

3.68

%

4.45

%

1.68

%

2.77

%

9.23

%

6.1

Freddie Mac Agency Securities

 

1,565,499

 

3.63

 

4.64

 

1.78

 

2.24

 

9.04

 

7.2

Ginnie Mae Agency Securities

 

1,305,026

 

3.12

 

4.10

 

1.51

 

1.06

 

8.28

 

5.6

Residential mortgage loans

 

1,051

 

4.04

 

4.70

 

2.11

 

1.72

 

11.17

 

5.3

(51% of total)

 

6,546,157

 

3.56

 

4.42

 

1.67

 

2.30

 

9.00

 

6.2

Longer-to-reset ARMs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae Agency Securities

 

2,910,692

 

2.85

 

4.51

 

1.59

 

3.07

 

7.86

 

40.0

Freddie Mac Agency Securities

 

1,432,333

 

2.79

 

4.56

 

1.64

 

2.72

 

7.87

 

37.7

Ginnie Mae Agency Securities

 

1,832,932

 

3.20

 

4.09

 

1.50

 

1.00

 

8.20

 

48.9

(49% of total)

 

6,175,957

 

2.94

 

4.40

 

1.58

 

2.15

 

7.98

 

42.1

 

$

12,722,114

 

3.26

 

4.41

 

1.62

 

2.24

 

8.59

 

23.7

Gross WAC (rate paid by

   borrowers) (c)

 

 

 

3.85

 

 

 

 

 

 

 

 

 

 

 

(a)

Amortized cost basis represents the Company’s investment (unpaid principal balance plus unamortized investment premiums) before unrealized gains and losses.  At September 30, 2018, the ratio of amortized cost basis to unpaid principal balance for the Company’s ARM holdings was 102.89.  This table excludes $2 million in fixed-rate agency-guaranteed mortgage pass-through securities, residential mortgage loans and private residential mortgage pass-through securities held as collateral for structured financings.  

(b)

Net WAC, or weighted average coupon, is the weighted average interest rate of the mortgage loans underlying the indicated investments, net of servicing and other fees as of the indicated date. Net WAC is expressed as a percentage calculated on an annualized basis on the unpaid principal balances of the mortgage loans underlying these investments.  As such, it is similar to the cash yield on the portfolio which is calculated using amortized cost basis.  Fully indexed WAC represents the weighted average coupon upon one or more resets using interest rate indexes and net margins as of the indicated date.  Average net margins represent the weighted average levels over the underlying indexes that the portfolio can adjust to upon reset, usually subject to initial, periodic and/or lifetime caps on the amount of such adjustments during any single interest rate adjustment period and over the contractual term of the underlying loans.  ARM securities with initial fixed-rate periods of five years or longer typically have either 200 or 500 basis point initial caps with 200 basis point periodic caps.  Additionally, certain ARM securities held by the Company are subject only to lifetime caps or are not subject to a cap.  For presentation

-24-


 

purposes, average periodic caps in the table above reflect initial caps until after an ARM security has reached its initial reset date and lifetime caps, less the current net WAC, for ARM securities subject only to lifetime caps.  At quarter-end, 74% of current-reset ARMs were subject to periodic caps averaging 1.76%; 19% were subject to initial caps averaging 2.90%; and 7% were subject to lifetime caps averaging 6.65%.  All longer-to-reset ARM securities at September 30, 2018 were subject to initial caps.  

(c)

Gross WAC is the weighted average interest rate of the mortgage loans underlying the indicated investments, including servicing and other fees paid by borrowers, as of the indicated balance sheet date.

After consideration of any applicable initial fixed-rate periods, at September 30, 2018 approximately 91%, 4% and 3% of the Company’s ARM securities were backed by mortgage loans that reset annually, semi-annually and monthly, respectively, while approximately 2% reset every five years.  Approximately 81% of the Company’s current-reset ARM securities have reached an initial coupon reset date, while none of its longer-to-reset ARM securities have reached an initial coupon reset date.  Additionally, at September 30, 2018 approximately 5% of the Company’s ARM securities were backed by interest-only loans, with remaining interest-only payment periods averaging 24 months.  All percentages are based on averages of the characteristics of mortgage loans underlying each security and calculated using unpaid principal balances as of the indicated date.  

Secured Borrowings

Capstead finances its residential mortgage investments by leveraging its long-term investment capital with secured borrowings consisting primarily of borrowings under repurchase arrangements with commercial banks and other financial institutions.  Repurchase arrangements entered into by the Company involve the sale and a simultaneous agreement to repurchase the transferred assets at a future date and are accounted for as financings.  The Company maintains the beneficial interest in the specific securities pledged during the term of each repurchase arrangement and receives the related principal and interest payments.  

 

The terms and conditions of secured borrowings are negotiated on a transaction-by-transaction basis when each such borrowing is initiated or renewed.  None of the Company’s counterparties are obligated to renew or otherwise enter into new borrowings at the conclusion of existing borrowings. Collateral requirements in excess of amounts borrowed (referred to as “haircuts”) averaged 4.6 percent of the fair value of pledged residential mortgage pass-through securities at September 30, 2018.  After considering haircuts and related interest receivable on the collateral, as well as interest payable on these borrowings, the Company had $656 million of capital at risk with its lending counterparties at September 30, 2018.  The Company did not have capital at risk with any single counterparty exceeding 6% of total stockholders’ equity at September 30, 2018.

Secured borrowing rates are generally fixed based on prevailing rates corresponding to the terms of the borrowings. Interest may be paid monthly or at the termination of a borrowing at which time the Company may enter into a new borrowing at prevailing haircuts and rates with the same counterparty or repay that counterparty and negotiate financing with a different counterparty.  When the fair value of pledged securities declines due to changes in market conditions or the publishing of monthly security pay-down factors, lenders typically require the Company to post additional securities as collateral, pay down borrowings or fund cash margin accounts with the counterparties in order to re-establish the agreed-upon collateral requirements, referred to as margin calls.  Conversely, if collateral fair values increase, lenders are required to release collateral back to the Company pursuant to Company-issued margin calls.  

 

As of September 30, 2018, the Company’s secured borrowings totaled $11.62 billion with 23 counterparties at average rates of 2.29%, before the effects of currently-paying interest rate swap agreements held as cash flow hedges and 1.93% including the effects of these derivatives.  The Company typically uses two- and three-year term interest rate swap agreements with variable rate receipts primarily based on three-month LIBOR to help mitigate exposure to rising short-term interest rates.  At quarter-end the Company held $6.55 billion notional amount of portfolio financing-related interest rate swap

-25-


 

agreements with contract expirations occurring at various dates through the second quarter of 2021 and a weighted average expiration of 11 months.  

 

After consideration of all portfolio financing-related swap positions entered into as of quarter-end, the Company’s residential mortgage investments and secured borrowings had estimated durations at September 30, 2018 of 12¼ and 6½ months, respectively, for a net duration gap of approximately 5¾ months – see “Interest Rate Risk” for further information about the Company’s sensitivity to changes in market interest rates.  The Company intends to continue to manage interest rate risk associated with holding and financing its residential mortgage investments by utilizing suitable derivative financial instruments such as interest rate swap agreements as well as longer-maturity secured borrowings, if available at attractive rates and terms.  

 

Utilization of Long-term Investment Capital and Potential Liquidity

Capstead’s investment strategy involves managing an appropriately leveraged portfolio of ARM Agency Securities that management believes can produce attractive risk-adjusted returns over the long term, while reducing, but not eliminating, sensitivity to changes in interest rates.  The potential liquidity inherent in the Company’s unencumbered residential mortgage investments is as important as the actual level of cash and cash equivalents carried on the balance sheet because secured borrowings generally can be increased or decreased on a daily basis to meet cash flow requirements and otherwise manage capital resources efficiently.  Potential liquidity is affected by, among other factors:

 

current portfolio leverage levels,

 

changes in market value of assets pledged and interest rate swap agreements held for hedging purposes as determined by lending and swap counterparties,

 

mortgage prepayment levels,

 

collateral requirements of lending and swap counterparties, and

 

general conditions in the commercial banking and mortgage finance industries.

Capstead’s utilization of its long-term investment capital and its estimated potential liquidity were as follows as of September 30, 2018 in comparison with December 31, 2017 (in thousands):

 

 

Investments (a)

 

 

Secured

Borrowings

 

 

Capital

Employed

 

 

Potential

Liquidity (b)

 

 

Portfolio

Leverage

Residential mortgage investments

 

$

12,681,791

 

 

$

11,619,966

 

 

$

1,061,825

 

 

$

481,770

 

 

 

Cash collateral receivable from swap

   counterparties, net (c)

 

 

 

 

 

 

 

 

 

 

13,281

 

 

 

 

 

Other assets, net of other liabilities

 

 

 

 

 

 

 

 

 

 

144,253

 

 

 

31,725

 

 

 

Balances as of September 30, 2018:

 

$

12,681,791

 

 

$

11,619,966

 

 

$

1,219,359

 

 

$

513,495

 

 

9.53:1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as of December 31, 2017

 

$

13,454,098

 

 

$

12,331,060

 

 

$

1,337,067

 

 

$

613,791

 

 

9.22:1

 

(a)

Investments are stated at balance sheet carrying amounts, which generally reflect estimated fair value as of the indicated dates.

(b)

Potential liquidity is based on maximum amounts of borrowings available under existing uncommitted financing arrangements considering management’s estimate of the fair value of residential mortgage investments held as of the indicated dates adjusted for other sources of liquidity such as cash and cash equivalents.

(c)

Cash collateral receivable from swap counterparties is presented net of cash collateral payable to swap counterparties, if applicable, and the fair value of interest rate swap positions as of the indicated date.

In order to efficiently manage its liquidity and capital resources, Capstead attempts to maintain sufficient liquidity reserves to fund borrowing and interest rate swap margin calls under stressed market conditions, including margin calls resulting from monthly principal payments (remitted to the Company 20 to 45 days after any given month-end), as well as reasonably possible declines in the market value of pledged assets

-26-


 

and swap positions.  Should market conditions deteriorate, management may reduce portfolio leverage and increase liquidity by raising new equity capital, selling mortgage securities and/or curtailing the replacement of portfolio runoff.  Additionally, the Company routinely does business with a large number of lending counterparties, which bolsters financial flexibility to address challenging market conditions and limits exposure to any individual counterparty.  

 

Future levels of portfolio leverage will be dependent on many factors, including the size and composition of the Company’s investment portfolio (see “Liquidity and Capital Resources”). Portfolio leverage increased from year-end primarily due to the decline in the market value of assets pledged. Potential liquidity declined during this period primarily as a result of the increase in leverage along with a decline in long-term investment capital. Management believes current portfolio leverage levels represent an appropriate use of leverage under current market conditions for a portfolio consisting of seasoned, short-duration ARM Agency Securities.  

Supplemental Analysis of Quarterly Financing Spreads

Quarterly financing spreads and mortgage prepayment rates were as follows for the indicated periods:

 

 

2018

 

 

2017

 

 

2016

 

 

 

Q3

 

 

Q2

 

 

Q1

 

 

Q4

 

 

Q3

 

 

Q2

 

 

Q1

 

 

Q4

 

Total financing spreads: (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Yields on all interest-earning

   assets

 

 

2.08

%

 

 

2.00

%

 

 

2.07

%

 

 

1.90

%

 

 

1.68

%

 

 

1.65

%

 

 

1.67

%

 

 

1.49

%

Borrowing rates on all

   interest-paying liabilities

 

 

1.87

 

 

 

1.67

 

 

 

1.52

 

 

 

1.34

 

 

 

1.22

 

 

 

1.13

 

 

 

0.99

 

 

 

0.94

 

Total financing spreads

 

 

0.21

 

 

 

0.33

 

 

 

0.55

 

 

 

0.56

 

 

 

0.46

 

 

 

0.52

 

 

 

0.68

 

 

 

0.55

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing spreads on residential

   mortgage investments, a non-

   GAAP financial measure:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash yields on residential

   mortgage investments (b)

 

 

3.07

 

 

 

2.93

 

 

 

2.85

 

 

 

2.79

 

 

 

2.72

 

 

 

2.66

 

 

 

2.60

 

 

 

2.55

 

Investment premium

   amortization (b)

 

 

(0.99

)

 

 

(0.93

)

 

 

(0.77

)

 

 

(0.88

)

 

 

(1.03

)

 

 

(1.00

)

 

 

(0.93

)

 

 

(1.05

)

Yields on residential

   mortgage investments

 

 

2.08

 

 

 

2.00

 

 

 

2.08

 

 

 

1.91

 

 

 

1.69

 

 

 

1.66

 

 

 

1.67

 

 

 

1.50

 

Unhedged secured borrowing

   rates (c)

 

 

2.21

 

 

 

1.97

 

 

 

1.64

 

 

 

1.39

 

 

 

1.33

 

 

 

1.09

 

 

 

0.89

 

 

 

0.79

 

Hedged secured borrowing

   rates (c)

 

 

1.52

 

 

 

1.36

 

 

 

1.35

 

 

 

1.23

 

 

 

1.10

 

 

 

1.08

 

 

 

0.96

 

 

 

0.95

 

Secured borrowing rates

 

 

1.82

 

 

 

1.62

 

 

 

1.47

 

 

 

1.29

 

 

 

1.17

 

 

 

1.08

 

 

 

0.93

 

 

 

0.89

 

Financing spreads on

   residential mortgage

   investments

 

 

0.26

 

 

 

0.38

 

 

 

0.61

 

 

 

0.62

 

 

 

0.52

 

 

 

0.58

 

 

 

0.74

 

 

 

0.61

 

Constant prepayment rate (“CPR”)

 

 

25.71

 

 

 

23.82

 

 

 

19.64

 

 

 

22.50

 

 

 

25.77

 

 

 

24.69

 

 

 

22.93

 

 

 

25.59

 

 

(a)

All interest-earning assets include residential mortgage investments, overnight investments and cash collateral receivable from interest rate swap counterparties.  All interest-paying liabilities include unsecured borrowings and cash collateral payable to interest rate swap counterparties.

(b)

Cash yields are based on the cash component of interest income.  Investment premium amortization is determined using the interest method which incorporates actual and anticipated future mortgage prepayments.  Both are expressed as a percentage calculated on average amortized cost basis for the indicated periods.

(c)

Unhedged borrowing rates represent average rates on secured borrowings, before consideration of related currently-paying interest rate swap agreements.  Hedged borrowing rates represent the average fixed-rate payments made on currently-

-27-


 

paying interest rate swap agreements held for portfolio hedging purposes adjusted for differences between LIBOR-based variable-rate payments received on these swaps and unhedged borrowing rates, as well as the effects of any hedge ineffectiveness.  Average fixed-rate swap payments were 1.66%, 1.53% and 1.34% for the third, second and first quarters of 2018, respectively, while variable-rate payment adjustments and clearing fees averaged (0.13)%, (0.17)% and 0.01% for the same periods.  During 2017, fixed-rate swap payments averaged 1.04% while variable-rate payment adjustments averaged 0.05% on average notional amounts outstanding.

Cash yields continue to benefit from higher coupon interest rates as mortgage loans underlying the Company’s current-reset ARM securities reset to higher rates based on higher prevailing six- and 12-month interest rate indices.  The majority of these loans reset annually based on margins over indices, such as 12-month LIBOR, which increased 81 bps during the first nine months of 2018 to 2.92% after increasing 42 bps during 2017.

Seasonal factors such as the summer home selling season and available processing days impact prepayment levels, which in turn are the primary determinant for investment premium amortization related portfolio yield adjustments. Prepayment levels are also heavily influenced by the availability of mortgage financing at attractive terms and the overall health of the housing markets. For the third quarter of 2018, prepayment levels, as measured by CPR, increased to nearly the same levels as in the corresponding period in 2017. Much of the increase is consistent with seasonal factors seen over past periods. However, with the recent flattening of the yield curve, more homeowners with currently resetting mortgages took advantage of opportunities to refinance. Management believes it is reasonable to expect prepayment levels will recede in the fourth quarter with the end of the summer home selling season and recent increases in prevailing mortgage rates should allow for further moderation this winter. 

 

Higher unhedged borrowing rates are heavily influenced by the Federal Reserve’s actions to set the level of short-term interest rates by adjusting the Federal Funds Rate. Increases thus far in 2018 are primarily attributable to 25 basis point Federal Funds Rate increases in December 2017, March 2018, June 2018 and, to a lesser extent, September 2018, while 2017 borrowing rates were impacted by four 25 basis point increases between December 2016 and December 2017. Fixed swap rates generally increased over the periods presented as older, lower-rate swap agreements expired and newer, higher-rate swaps were entered into in order to provide important balance sheet and future financing spread protection, particularly as it pertains to additions to the longer-to-reset portion of the Company’s ARM securities portfolio.  Receive-variable swap receipts benefited in recent quarters from holding more swaps linked to three-month rather than one-month LIBOR and higher three-month LIBOR rates relative to unhedged borrowing rates. However, with the recent narrowing of one- and three-month rates, this relative advantage is receding.

-28-


 

Reconciliation of GAAP and non-GAAP Financing Spread Disclosures

Financing spreads on residential mortgage investments differ from total financing spreads, an all-inclusive GAAP measure, that is based on all interest-earning assets and liabilities.  Management believes presenting financing spreads on residential mortgage investments provides useful information for evaluating portfolio performance.  The following reconciles these measures for the indicated periods:

 

 

 

2018

 

 

2017

 

 

2016

 

 

 

Q3

 

 

Q2

 

 

Q1

 

 

Q4

 

 

Q3

 

 

Q2

 

 

Q1

 

 

Q4

 

Total financing spreads

 

 

0.21

%

 

 

0.33

%

 

 

0.55

%

 

 

0.56

%

 

 

0.46

%

 

 

0.52

%

 

 

0.68

%

 

 

0.55

%

Impact of yields on other

   interest-earning assets*

 

 

 

 

 

 

 

 

0.01

 

 

 

0.01

 

 

 

0.01

 

 

 

0.01

 

 

 

 

 

 

0.01

 

Impact of borrowing rates on

   other interest-paying liabilities*

 

 

0.05

 

 

 

0.05

 

 

 

0.05

 

 

 

0.05

 

 

 

0.05

 

 

 

0.05

 

 

 

0.06

 

 

 

0.05

 

Financing spreads on residential

   mortgage investments

 

 

0.26

 

 

 

0.38

 

 

 

0.61

 

 

 

0.62

 

 

 

0.52

 

 

 

0.58

 

 

 

0.74

 

 

 

0.61

 

 

 

 

Nine Months Ended

 

 

 

September 30

 

 

 

2018

 

 

2017

 

Total financing spreads

 

 

0.37

%

 

 

0.54

%

Impact of yields on other interest-earning assets*

 

 

 

 

 

0.01

 

Impact of borrowing rates on other interest-paying liabilities*

 

 

0.05

 

 

 

0.06

 

Financing spreads on residential mortgage investments

 

 

0.42

 

 

 

0.61

 

 

 

*

Other interest-earning assets consist of overnight investments and cash collateral receivable from interest rate swap counterparties. Other interest-paying liabilities consist of unsecured borrowings (at average borrowing rates of 7.77%, 7.74% and 7.70% for the third, second and first quarters of 2018) and, at times, cash collateral payable to interest rate swap counterparties.

 


-29-


 

RESULTS OF OPERATIONS

 

 

Quarter Ended

 

 

Nine Months Ended

 

 

 

September 30

 

 

September 30

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Income statement data: (in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income on residential mortgage investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(before investment premium amortization)

 

$

100,003

 

 

$

92,023

 

 

$

290,282

 

 

$

267,013

 

Investment premium amortization

 

 

(32,354

)

 

 

(34,950

)

 

 

(88,293

)

 

 

(98,996

)

Related interest expense

 

 

(54,393

)

 

 

(36,655

)

 

 

(147,655

)

 

 

(98,745

)

 

 

 

13,256

 

 

 

20,418

 

 

 

54,334

 

 

 

69,272

 

Other interest income (expense)

 

 

(1,560

)

 

 

(1,544

)

 

 

(4,638

)

 

 

(4,944

)

 

 

 

11,696

 

 

 

18,874

 

 

 

49,696

 

 

 

64,328

 

Other revenue (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation-related expense

 

 

(1,913

)

 

 

(1,073

)

 

 

(5,521

)

 

 

(4,021

)

Other general and administrative expense

 

 

(1,184

)

 

 

(1,097

)

 

 

(3,320

)

 

 

(3,435

)

Miscellaneous other revenue

 

 

81

 

 

 

48

 

 

 

233

 

 

 

130

 

 

 

 

(3,016

)

 

 

(2,122

)

 

 

(8,608

)

 

 

(7,326

)

Net income

 

$

8,680

 

 

$

16,752

 

 

$

41,088

 

 

$

57,002

 

Net income per diluted common share

 

$

0.04

 

 

$

0.13

 

 

$

0.29

 

 

$

0.46

 

Average diluted shares outstanding

 

 

91,346

 

 

 

95,923

 

 

 

92,317

 

 

 

95,905

 

Key operating statistics: (dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average yields:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash yields

 

 

3.07

%

 

 

2.72

%

 

 

2.95

%

 

 

2.66

%

Investment premium amortization

 

 

(0.99

)

 

 

(1.03

)

 

 

(0.90

)

 

 

(0.99

)

Adjusted yields

 

 

2.08

 

 

 

1.69

 

 

 

2.05

 

 

 

1.67

 

Other interest-earning assets

 

 

1.91

 

 

 

0.98

 

 

 

1.59

 

 

 

0.78

 

Total average yields

 

 

2.08

 

 

 

1.68

 

 

 

2.05

 

 

 

1.66

 

Average borrowing rates:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unhedged borrowing rates

 

 

2.21

 

 

 

1.33

 

 

 

1.94

 

 

 

1.11

 

Hedged borrowing rates

 

 

1.52

 

 

 

1.10

 

 

 

1.41

 

 

 

1.04

 

Adjusted secured borrowing rates

 

 

1.82

 

 

 

1.17

 

 

 

1.63

 

 

 

1.06

 

Unsecured borrowings

 

 

7.77

 

 

 

7.78

 

 

 

7.74

 

 

 

7.75

 

Total average borrowing rates

 

 

1.87

 

 

 

1.22

 

 

 

1.68

 

 

 

1.12

 

Average total financing spreads

 

 

0.21

 

 

 

0.46

 

 

 

0.37

 

 

 

0.54

 

Average financing spreads on residential mortgage investments,

   a non-GAAP financial measure (a)

 

 

0.26

 

 

 

0.52

 

 

 

0.42

 

 

 

0.61

 

Average CPR

 

 

25.71

 

 

 

25.77

 

 

 

23.06

 

 

 

24.46

 

Average balance information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage investments (cost basis)

 

$

13,027

 

 

$

13,514

 

 

$

13,117

 

 

$

13,374

 

Other interest-earning assets

 

 

74

 

 

 

150

 

 

 

89

 

 

 

130

 

Secured borrowings

 

 

11,958

 

 

 

12,550

 

 

 

12,035

 

 

 

12,382

 

Unsecured borrowings (included in long-term

   investment capital)

 

 

98

 

 

 

98

 

 

 

98

 

 

 

98

 

Long-term investment capital (“LTIC”)

 

 

1,258

 

 

 

1,354

 

 

 

1,287

 

 

 

1,358

 

Operating costs as a percentage of average LTIC

 

 

0.98

%

 

 

0.64

%

 

 

0.92

%

 

 

0.73

%

Return on average LTIC

 

 

4.95

 

 

 

5.47

 

 

 

5.53

 

 

 

6.17

 

Return on average common equity capital

 

 

1.69

 

 

 

4.61

 

 

 

3.81

 

 

 

5.64

 

 

(a)

Financing spreads on residential mortgage investments is a non-GAAP financial measure based solely on yields on Capstead’s residential mortgage investments, net of secured borrowing rates, adjusted for currently-paying interest rate swap agreements held for hedging purposes.  This measure differs from total financing spreads, an all-inclusive GAAP measure that includes yields on all interest-earning assets, as well as rates paid on all interest-bearing liabilities, principally unsecured borrowings.  See “Reconciliation of GAAP and non-GAAP Financing Spread Disclosures” for a reconciliation of these financial measures and the Company’s rationale for using this non-GAAP financial measure.

-30-


 

Capstead’s net income totaled $9 million and $41 million or $0.04 and $0.29 per diluted common share for the quarter and nine months ended September 30, 2018, compared to $17 million and $57 million or $0.13 and $0.46 per diluted common share for the same periods in 2017.  Earnings in the first nine months of 2018 were negatively impacted by higher borrowing costs while benefiting from higher cash yields and lower investment premium amortization.  

Interest income on residential mortgage investments was higher by $10.6 million and $34.0 million for the quarter and nine months ended September 30, 2018 compared to the same periods in 2017.  The increases are attributable to $12.7 million and $37.5 million in increases related to higher average yields, net of $2.1 million and $3.5 million in decreases related to lower average portfolio balances.

Yields on residential mortgage investments for the quarter and nine months ended September 30, 2018 increased 39 and 38 basis points compared to the same periods in 2017, averaging 2.08% and 2.05, respectively. Cash yields increased 35 and 29 basis points, averaging 3.07% and 2.95% for the quarter and nine months ended September 30, 2018 compared to the same periods in 2017. This was largely due to ARM loan coupon interest rates resetting higher to more current rates and higher coupon interest rates on acquisitions. Negative yield adjustments for investment premium amortization decreased four and nine basis points during the quarter and nine months ended September 30, 2018 compared to the same periods in 2017 to average 99 and 90 basis points, primarily as a result of portfolio basis trending lower in recent periods and lower mortgage prepayment rates.  Mortgage prepayment levels are influenced by the availability of mortgage financing at attractive terms and the health of the housing markets as well as seasonal factors.  

Interest expense on secured borrowings was higher by $17.7 million and $48.9 million for the quarter and nine months ended September 30, 2018 compared to the same periods in 2017.  The increases are attributable to $19.5 million and $51.6 million in increases related to higher average borrowing rates, net of $1.8 million and $2.7 million in decreases related to lower average borrowings.

Secured borrowing rates adjusted for currently-paying interest rate swap agreements held for hedging purposes increased 65 and 58 basis points for the quarter and nine months ended September 30, 2018 compared to the same periods in 2017 to average 1.82% and 1.63%, respectively. Market conditions, including the 25 basis point increases in the Federal Funds Rate in December 2017, March 2018, June 2018 and, to a lesser extent, September 2018, contributed to higher borrowing rates.  Swap costs were impacted by the expiration of older, lower-rate swaps and the addition of new higher-rate swaps. Resulting higher rates were partially offset by higher variable rate swap receipts as a result of higher short-term LIBOR rates and holding more swaps linked to three-month LIBOR rather than one-month LIBOR.  Average fixed-rate swap payment rates were 166 and 151 basis points for the quarter and nine months ended September 30, 2018 compared to 108 and 100 basis points for the same periods in 2017.  Currently-paying swap balances were lower, averaging $6.8 billion and $6.9 billion for the quarter and nine months ended September 30, 2018, respectively, compared to $8.78 billion and $8.4 billion for the same periods in 2017.  Future secured borrowing rates are dependent on market conditions, including overall levels of market interest rates as well as the availability of longer-maturity borrowings and interest rate swap agreements at attractive rates.

 

Capstead sees its internally-managed structure and agency-focused investment strategy as key to its consistently low operating costs (compensation, general and administrative expenses). Operating costs were higher in the first nine months of 2018 compared to the same period in 2017 primarily due to higher short-term incentive compensation accruals, including the effects of adjustments made in the first quarter of 2017 to finalize the 2016 short-term incentive compensation plan.

 

-31-


 

liquidity and capital resources

Capstead’s primary sources of funds are secured borrowings and monthly principal and interest payments on its investments.  Other sources of funds may include proceeds from debt and equity offerings and asset sales.  The Company generally uses its liquidity to pay down secured borrowings to reduce borrowing costs and otherwise efficiently manage its long-term investment capital.  Because the level of these borrowings can generally be adjusted on a daily basis, the Company’s potential liquidity inherent in its unencumbered residential mortgage investments is as important as the level of cash and cash equivalents carried on the balance sheet.  The table included under “Utilization of Long-term Investment Capital and Potential Liquidity” illustrates management’s estimate of additional funds potentially available to the Company at September 30, 2018 and the accompanying discussion provides insight into the Company’s perspective on what level of portfolio leverage to employ under current market conditions.  The Company currently believes that it has sufficient liquidity and capital resources available for the acquisition of additional investments, repayments on borrowings and the payment of cash dividends as required for the Company’s continued qualification as a REIT.  

Capstead finances its residential mortgage investments primarily by borrowing under repurchase arrangements, the terms and conditions of which are negotiated on a transaction-by-transaction basis, when each such borrowing is initiated or renewed.

None of the Company’s borrowing counterparties are obligated to renew or otherwise enter into new borrowings at the conclusion of existing borrowings.  Future borrowings are dependent upon the willingness of lenders to participate in the financing of Agency Securities, lender collateral requirements and the lenders’ determination of the fair value of the securities pledged as collateral, which fluctuates with changes in interest rates and liquidity conditions within the commercial banking and mortgage finance industries.  Secured borrowings totaled $11.62 billion at September 30, 2018, all maturing within 90 days.  Secured borrowings began the year at $12.33 billion and averaged $11.96 billion and $12.04 billion during the quarter and nine months ended September 30, 2018, respectively.  Average secured borrowings can differ from period-end balances for a number of reasons including portfolio growth or contraction, as well as differences in the timing of portfolio acquisitions relative to portfolio runoff.  

The Company typically uses two- and three-year term interest rate swap agreements with variable rate receipts based on either one-month or three-month LIBOR to help mitigate exposure to rising short-term interest rates.  At quarter-end the Company held $6.55 billion notional amount of portfolio financing-related interest rate swap agreements with contract expirations occurring at various dates through the second quarter of 2021 and a weighted average expiration of 11 months. Relative to the 20-year floating rate terms of the Company’s $100 million face amount of unsecured borrowings, the Company entered into swap agreements to effectively lock in fixed rates of interest on these borrowings.  The Company intends to continue to utilize suitable derivative financial instruments such as interest rate swap agreements and longer-maturity secured borrowings to manage interest rate risk when available at attractive rates and terms.

 

Pursuant to its $100 million stock repurchase program reactivated last November, during the first nine months of 2018 the Company repurchased 4.9 million shares of common stock in the open market for approximately $41 million. An additional 140,000 share repurchases settled subsequent to quarter-end for $1 million, leaving a remaining repurchase program authorization of approximately $54 million. Future levels of stock repurchases will largely be dependent upon market conditions including alternative investment opportunities.

 

The timing, manner, price and amount of any future common and preferred issuances and any common stock repurchases pursuant to these programs will be made in the open market at the Company’s discretion, subject to economic and market conditions, stock price, compliance with federal securities

-32-


 

laws and tax regulations as well as blackout periods associated with the dissemination of important Company-specific news.  

Interest Rate Risk

Because Capstead’s residential mortgage investments consist almost entirely of Agency Securities, which are considered to have limited, if any, credit risk, interest rate risk is the primary market risk faced by the Company.  Interest rate risk is highly sensitive to a number of factors, including economic conditions, government fiscal policy, central bank monetary policy and banking regulation.  By focusing on investing in relatively short-duration ARM Agency Securities, declines in fair value caused by increases in interest rates are typically relatively modest compared to investments in longer-duration ARM or fixed-rate assets.  These declines can be recovered in a relatively short period of time as coupon interest rates on the underlying mortgage loans reset to rates more reflective of the then-current interest rate environment.  This strategy also positions the Company to benefit from future recoveries in financing spreads that typically contract during periods of rising interest rates.  

To further reduce exposure to higher short-term interest rates, the Company uses interest rate swap agreements that typically require interest payments for two-year terms, as well as longer-maturity secured borrowings, if available at attractive rates and terms.  These transactions lengthen the effective duration of the Company’s secured borrowings to more closely match the duration of its portfolio of residential mortgage investments.  After consideration of portfolio financing-related swap positions held to hedge changes in short-term interest rates, at September 30, 2018 the Company’s residential mortgage investments and secured borrowings had estimated durations of 12¼ and 6½ months, respectively, for a net duration gap of approximately 5¾ months.  The Company intends to continue to manage interest rate risk associated with holding and financing its residential mortgage investments by utilizing suitable derivative financial instruments such as interest rate swap agreements and longer-maturity secured borrowings, if available at attractive rates and terms.

Capstead performs sensitivity analyses using a model to estimate the effects that specific interest rate changes can reasonably be expected to have on net interest margins and portfolio values.  All investments, secured borrowings and related derivative financial instruments held are included in these analyses.  For net interest margin modeling purposes, the model incorporates management’s assumptions for mortgage prepayment levels for a given interest rate change using market-based estimates of prepayment speeds for the purpose of amortizing investment premiums and reinvesting portfolio runoff.  These assumptions are developed through a combination of historical analysis and expectations for future pricing behavior under normal market conditions unaffected by changes in market liquidity.  For portfolio valuation modeling purposes, a static portfolio is assumed.

This model is the primary tool used by management to assess the direction and magnitude of changes in net interest margins and portfolio values resulting solely from changes in interest rates.  Key modeling assumptions include mortgage prepayment speeds, adequate levels of market liquidity, current market conditions, and portfolio leverage levels.  It is assumed that borrowing rates cannot decline beyond a floor of 0.15%.  These assumptions are inherently uncertain and, as a result, modeling cannot precisely estimate the impact of higher or lower interest rates.  Actual results will differ from simulated results due to the timing, magnitude and frequency of interest rate changes, other changes in market conditions, changes in management strategies and other factors.

-33-


 

The table below reflects the estimated impact of instantaneous parallel shifts in the yield curve on net interest margins and the fair value of Capstead’s portfolio of residential mortgage investments and related derivative financial instruments as of the indicated dates, subject to the modeling parameters described above.

 

 

 

Federal

Funds

Rate

 

10-year U.S.

Treasury

Rate

 

 

Down

1.00%

 

 

Down

0.50%

 

 

Up

0.50%

 

 

Up

1.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Projected 12-month percentage

   change in net interest margins: (a)(b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

2.00-2.25

%

 

3.06

%

 

 

29.5

%

 

 

15.8

%

 

 

(18.2

)%

 

 

(45.8

)%

December 31, 2017

 

1.25-1.50

 

 

2.41

 

 

 

3.1

 

 

 

(2.1

)

 

 

(8.2

)

 

 

(22.0

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Projected percentage change in

   portfolio and related derivative

   values: (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

2.00-2.25

 

 

3.06

 

 

 

0.2

 

 

 

0.2

 

 

 

(0.4

)

 

 

(0.8

)

December 31, 2017

 

1.25-1.50

 

 

2.41

 

 

 

0.1

 

 

 

0.1

 

 

 

(0.3

)

 

 

(0.6

)

 

(a)

Sensitivity of net interest margins as well as portfolio and related derivative values to changes in interest rates is determined relative to the actual rates at the applicable date. The Company’s borrowings are predominantly short-term repurchase agreements which reset in rate typically within 30 days whereas the portfolio resets in rate over a longer time horizon. Note that the projected 12-month net interest margin change is predicated on acquisitions of similar assets sufficient to replace runoff.  There can be no assurance that suitable investments will be available for purchase at attractive prices, if investments made will behave in the same fashion as assets currently held or if management will choose to replace runoff with such assets.

 

(b)

The variance in sensitivity at September 30, 2018 compared to December 31, 2017 is a function of lower projected net interest margins in the base scenario, changes in the composition of the portfolio (primarily lower swap balances), and an increase in interest rate levels since year-end. In the Up 1.00% scenario a greater portion of the portfolio would reach periodic caps limiting increases in cash yields. The Company has also increased its leverage and duration gap from year-end increasing sensitivity to changes in rates.  See “Residential Mortgage Investments” for further discussion of the characteristics of the Company’s residential ARM portfolio.

 

CRITICAL ACCOUNTING POLICIES

Management’s discussion and analysis of financial condition and results of operations is based upon Capstead’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires the use of estimates and judgments that can affect the reported amounts of assets, liabilities (including contingencies), revenues and expenses, as well as related disclosures.  These estimates are based on available internal and market information and appropriate valuation methodologies believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the expected useful lives and carrying values of assets and liabilities which can materially affect the determination of net income and book value per common share.  Actual results may differ from these estimates under different assumptions or conditions.

Management believes the following are critical accounting policies in the preparation of Capstead’s consolidated financial statements that involve the use of estimates requiring considerable judgment:

Amortization of investment premiums on residential mortgage investmentsInvestment premiums on residential mortgage investments are recognized in earnings as adjustments to interest income by the interest method over the estimated lives of the related assets.  The single largest determinant in amortizing investment premiums is actual portfolio runoff (scheduled and unscheduled principal paydowns) for a given accounting period.  This is because the investment premium associated with actual runoff is amortized when the runoff occurs pursuant to the interest method.  Amortization is

-34-


 

also affected by estimates and judgments related to future levels of mortgage prepayments used in determining additional amortization that may be necessary to achieve the required effective yield over the estimated life of the related investment.

Mortgage prepayment expectations can change based on how current and projected changes in interest rates impact the economic attractiveness of mortgage refinance opportunities, if available, and other factors such as lending industry underwriting practices and capacity constraints, regulatory changes, borrower credit profiles and the health of the economy and housing markets.  Management estimates future mortgage prepayments based on these factors and past experiences with specific investments within the portfolio.  Should actual prepayment rates differ materially from these estimates, investment premiums would be expensed at a different pace.

Fair value and impairment accounting for residential mortgage investments – Nearly all of Capstead’s residential mortgage investments are held in the form of mortgage securities that are classified as available-for-sale and recorded at fair value on the balance sheet with unrealized gains and losses recorded in Stockholders’ equity as a component of Accumulated other comprehensive income.  As such, these unrealized gains and losses enter into the calculation of book value per common share, a key financial metric used by investors in evaluating the Company.  Fair values fluctuate with current and projected changes in interest rates, prepayment expectations and other factors such as market liquidity conditions and the perceived credit quality of Agency Securities.  Judgment is required to interpret market data and develop estimated fair values, particularly in circumstances of deteriorating credit quality and market liquidity.  See NOTE 9 to the consolidated financial statements (included under Item 1 of this report) for discussion of how Capstead values its residential mortgage investments.

Generally, gains or losses are recognized in earnings only if securities are sold; however, if a decline in fair value of a mortgage security below its amortized cost occurs that is determined to be other-than-temporary, the difference between amortized cost and fair value would be recognized in earnings as a component of Other revenue (expense) if the decline was credit-related or it was determined to be more likely than not that the Company will incur a loss via an asset sale.  Other-than-temporary impairment of a mortgage security due to other factors would be recognized in Accumulated other comprehensive income.

Accounting for derivative financial instruments – Capstead uses derivatives for risk management purposes.  Derivatives are recorded as assets or liabilities and carried at fair value and consequently, changes in value of these instruments enter into the calculation of book value per common share.  Fair values fluctuate with current and projected changes in interest rates and other factors such as the Company’s and its counterparties’ nonperformance risk.  Judgment is required to develop estimated fair values.

The accounting for changes in fair value of each derivative held depends on whether it has been designated as an accounting hedge, as well as the type of hedging relationship identified.  To qualify as a cash flow hedge for accounting purposes, at the inception of the hedge relationship the Company must anticipate and document that the hedge relationship will be highly effective and must monitor ongoing effectiveness on at least a quarterly basis.  As long as the hedge relationship remains highly effective, changes in fair value of the derivative are recorded in Accumulated other comprehensive income.  Changes in fair value of derivatives not held as accounting hedges, or for which the hedge relationship is deemed to no longer be highly effective and as a result hedge accounting is terminated, are recorded in earnings as a component of Other revenue (expense).  

The Company currently uses interest rate swap agreements in hedge relationships accounted for as cash flow hedges in order to hedge variability in borrowing rates due to changes in the underlying benchmark interest rate related to a designated portion of current and anticipated future 30- and 90-day secured borrowings and the 20-year floating-rate periods of unsecured borrowings.  Variable-rate payments to be received on swap agreements are recorded in interest expense as an offset to interest owed on related designated borrowings while fixed-rate swap payments to be made are also recorded

-35-


 

in interest expense resulting in an effectively fixed borrowing rate on these borrowings, subject to certain adjustments.  See NOTE 6 to the consolidated financial statements (included under Item 1 of this report) and “Financial Condition – Secured Borrowings” for additional information regarding the Company’s current use of derivatives and its related risk management policies.

STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “intend,” “will be,” “will likely continue,” “will likely result,” or words or phrases of similar meaning.  Forward-looking statements are based largely on the expectations of management and are subject to a number of risks and uncertainties including, but not limited to, the following:

fluctuations in interest rates and levels of mortgage prepayments;

changes in market conditions as a result of federal corporate and individual income tax reform, federal government fiscal challenges and Federal Reserve monetary policy, including policy regarding its holdings of Agency and U.S. Treasury Securities;

liquidity of secondary markets and credit markets, including the availability of financing at reasonable levels and terms to support investing on a leveraged basis;

the impact of differing levels of leverage employed;

changes in legislation or regulation affecting Agency Securities and similar federal government agencies and related guarantees;

deterioration in credit quality and ratings of existing or future issuances of Agency Securities;

the effectiveness of risk management strategies;

the availability of suitable qualifying investments from both an investment return and regulatory perspective;

the availability of new investment capital;

the ability to maintain real estate investment trust (“REIT”) status;

changes in legislation or regulation affecting exemptions for mortgage REITs from regulation under the Investment Company Act of 1940;

other changes in legislation or regulation affecting the mortgage and banking industries; and

changes in general economic conditions, increases in costs and other general competitive factors.

In addition to the above considerations, actual results and liquidity are affected by other risks and uncertainties which could cause actual results to be significantly different from those expressed or implied by any forward-looking statements included herein.  It is not possible to identify all of the risks, uncertainties and other factors that may affect future results.  In light of these risks and uncertainties, the forward-looking events and circumstances discussed herein may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements.  Forward-looking statements speak only as of the date the statement is made and the Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  Accordingly, readers of this document are cautioned not to place undue reliance on any forward-looking statements included herein.

For a further discussion of these and other factors that could impact our future results and performance, see “Risk Factors” under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the U.S. Securities and Exchange Commission on February 20, 2018.  

-36-


 

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS

The information required by this Item is incorporated by reference to the information included in Item 2.  “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Item 4.    Controls and Procedures

As of September 30, 2018, an evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company's disclosure controls and procedures.  Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of September 30, 2018.  There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to September 30, 2018.

 

-37-


 

PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

There have been no material changes in our risk factors during the nine months ended September 30, 2018 from those previously disclosed in “Risk Factors” under Part I, Item 1A of our 2017 Form 10-K.

ITEM 6.    EXHIBITS

 

Exhibit

Number

 

DESCRIPTION

 

 

 

3.1

 

Charter, including Articles of Incorporation, Articles Supplementary for each series of preferred shares no longer outstanding and all other amendments to such Articles of Incorporation.(1)

3.2

 

Articles Supplementary classifying and designating the Registrant’s 7.50% Series E Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share, par value $0.10 per share.(2)

3.3

 

Amended and Restated Bylaws.(3)

4.1

 

Specimen of Common Stock Certificate.(4)

4.2

 

Specimen of stock certificate evidencing the 7.50% Series E Cumulative Redeemable Preferred Stock of the Registrant, liquidation preference $25.00 per share, par value $0.10 per share.(2)

4.3

 

Junior Subordinated Indenture dated September 26, 2005.(5)

4.4

 

Indenture dated December 15, 2005.(5)

4.5

 

Indenture dated September 11, 2006.(5)

10.01

 

Amended and Restated Deferred Compensation Plan.(5)

10.02

 

Amended and Restated 2014 Flexible Incentive Plan.(6)

10.03

 

Amendment No. 1 to the Amended and Restated 2014 Flexible Incentive Plan.(7)

10.04

 

Second Amended and Restated Incentive Bonus Plan.(8)

10.05

 

Form of nonqualified stock option and stock award agreements for non-employee directors.(5)

10.06

 

2016 Annual Incentive Compensation Program.(9)

10.07

 

Form of restricted stock agreement for employees. (9)

10.08

 

2016 Long-Term Performance Unit Award Criteria. (9)

10.09

 

Form of performance unit agreement for employees. (9)

10.10

 

2017 Annual Incentive Compensation Program.(10)

10.11

 

Form of restricted stock agreement for employees. (10)

10.12

 

2017 Long-Term Performance Unit Award Criteria. (10)

10.13

 

Form of performance unit agreement for employees. (10)

10.14

 

2018 Annual Incentive Compensation Program.(11)

10.15

 

Form of restricted stock agreement for employees. (11)

10.16

 

2018 Long-Term Performance Unit Award Criteria. (11)

10.17

 

Form of performance unit agreement for employees. (11)

10.18

 

Consulting Agreement, dated July 14, 2016, by and between the Company and Andrew F. Jacobs. (12)

10.19

 

Sales Agreement, dated December 6, 2017, by and between the Company and the Sales Manager. (13)

10.20

 

Form of Change in Control/Severance Agreement for executive officers(14)

12

 

Computation of ratio of net income to fixed charges and ratio of net income to combined fixed charges and preferred stock dividends.*

31.1

 

Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002*

-38-


 

 

Exhibit

Number

 

DESCRIPTION

 

31.2

 

Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002*

32.1

 

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**

32.2

 

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**

101.INS

 

XBRL Instance Document*

101.SCH

 

XBRL Taxonomy Extension Schema*

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase*

101.DEF

 

XBRL Additional Taxonomy Extension Definition Linkbase*

101.LAB

 

XBRL Taxonomy Extension Label Linkbase*

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase*

 

 

(1)

Incorporated by reference to the Registrant’s Annual Report on Form 10-K/A (No. 001-08896) for the year ended December 31, 2012.

 

(2)

Incorporated by reference to the Registrant’s Registration of Certain Classes of Securities on Form 8-A (No. 001-08896) dated May 13, 2013.

 

(3)

Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on February 3, 2014, for the event dated January 29, 2014.

 

(4)

Incorporated by reference to the Registrant’s Registration Statement on Form S-3 (No. 333-63358) dated June 19, 2001.

 

(5)

Incorporated by reference to the Registrant’s Annual Report on Form 10-K (No. 001-08896) for the year ended December 31, 2011.

 

(6)

Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on May 30, 2014, for the event dated May 28, 2014.

 

(7)

Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on February 20, 2015, for the event dated February 20, 2015.

 

(8)

Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on May 5, 2011, for the event dated May 4, 2011.

 

(9)

Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on February 4, 2016, for the event dated February 1, 2016.

 

(10)

Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on January 5, 2017, for the event dated January 3, 2017.

 

(11)

Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on January 4, 2018, for the event dated January 3, 2018.

 

(12)

Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on July 15, 2016, for the event dated July 14, 2016.

 

(13)

Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on December 11, 2017, for the event dated December 6, 2017.

 

(14)

Incorporated by reference to the Registrant’s Annual Report on Form 10-K (No. 001-08896) for the year ended December 31, 2017.

 

*

Filed herewith

 

**

Furnished herewith

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

CAPSTEAD MORTGAGE CORPORATION

Registrant

 

 

Date: October 30, 2018

By:

/s/ PHILLIP A. REINSCH

 

 

Phillip A. Reinsch

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

Date: October 30, 2018

 

By:

/s/ LANCE J. PHILLIPS

 

 

 

Lance J. Phillips

 

 

 

Senior Vice President, Chief Financial Officer

 

 

 

and Secretary (Principal Financial and

 

 

 

Accounting Officer)

 

 

 

 

 

 

 

 

 

-40-