Capstead Mortgage Corporation Announces Second Quarter 2006 Results.DALLAS Dallas, city (1990 pop. 1,006,877), seat of Dallas co., N Tex., on the Trinity River near the junction of its three forks; inc. 1871. The second largest Texas city, after Houston, and the eighth largest U.S. -- Capstead Mortgage Corporation (NYSE NYSE See: New York Stock Exchange :CMO CMO See: Collateralized mortgage obligation CMO See collateralized mortgage obligation (CMO). ) today reported income from continuing operations continuing operations Parts of a business that are expected to be maintained as an ongoing segment of an overall business operation. Income and losses from continuing operations are reported separately if any segments have been discontinued during the of $275,000 for the quarter ended June June: see month. 30, 2006 compared to income from continuing operations of $2,711,000 for the first quarter of 2006. After considering the payment of preferred share dividends, the results for these two periods of 2006 produced losses from continuing operations attributable attributable emanating from or pertaining to attribute. attributable proportion see attributable risk (below). attributable risk to common stockholders of $0.25 and $0.12 per diluted di·lute tr.v. di·lut·ed, di·lut·ing, di·lutes 1. To make thinner or less concentrated by adding a liquid such as water. 2. To lessen the force, strength, purity, or brilliance of, especially by admixture. common share, respectively. Income from continuing operations for the second quarter of 2005 was $5,528,000, or $0.03 per diluted common share. Second Quarter Results and Related Discussion Income from continuing operations for the second quarter of 2006 declined over the first quarter of 2006 reflecting lower financing spreads (the difference between yields earned on the Company's portfolio of residential adjustable-rate mortgage Adjustable-rate mortgage (ARM) A mortgage that features predetermined adjustments of the loan interest rate at regular intervals based on an established index. The interest rate is adjusted at each interval to a rate equivalent to the index value plus a predetermined spread, or ("ARM") securities and rates charged on related borrowings) as a result of continued increases in borrowing rates. During the second quarter of 2006 Capstead maintained its mortgage securities portfolio at approximately ap·prox·i·mate adj. 1. Almost exact or correct: the approximate time of the accident. 2. $4.8 billion with acquisitions of ARM securities totaling $459 million offsetting $452 million of portfolio runoff Portfolio Runoff A decrease in the value and size of portfolios investing in mortgages and mortgage-backed securities. Notes: This decrease occurs because of homeowners capitalizing on lowering interest rates through refinancing. . This follows net portfolio additions of over $400 million during the first quarter of 2006 and $700 million during the fourth quarter of 2005 as the Company deployed $128 million in investment capital made available late last year through the issuance of long-term Long-term Three or more years. In the context of accounting, more than 1 year. long-term 1. Of or relating to a gain or loss in the value of a security that has been held over a specific length of time. Compare short-term. unsecured Unsecured A loan or equity interest that is given without any guarantee of payment, performance, satisfaction or opportunity for return from the recipient. No property, interest or security is used as collateral in either a guarantee or a pledge. borrowings and the sale of the Company's portfolio of senior living facilities. Overall mortgage securities portfolio yields averaged 4.77% during the second quarter of 2006, a 25 basis point improvement over the first quarter of 2006, reflecting the benefit of higher coupon A certificate evidencing the obligation to pay an installment of interest or a dividend that must be cut and presented to its issuer for payment when it is due. Coupons are usually attached to a document, such as a promissory note, bond, share of stock, or a bearer interest rates on the underlying mortgage loans that reset during the period. Mortgage prepayments Prepayments Payments made in excess of scheduled mortgage principal repayments. increased during the second quarter to an annualized annualized Of or relating to a variable that has been mathematically converted to a yearly rate. Inflation and interest rates are generally annualized since it is on this basis that these two variables are ordinarily stated and compared. runoff Runoff The procedure of printing the end-of-day prices for every stock on an exchange onto ticker tape. Notes: If the "tape is late" then it can take a long time to print off all the closing prices. rate of 32% from 30% during the first quarter due primarily to seasonal factors and changes in portfolio composition. The level of mortgage prepayments impacts how quickly purchase premiums are written off against earnings as portfolio yield adjustments. Yields on ARM securities fluctuate as coupon interest rates on the underlying mortgage loans reset periodically. Coupon interest rate resets are expected to continue trending higher, contributing to improving portfolio yields in the coming quarters. For example, given current expectations for stabilizing stabilizing, v to hold a limb motionless in order to ground its energy; a standard isometric resistance technique, it releases tension and lengthens muscle fibers. short-term interest rates Short-term interest rates Interest rates on loan contracts-or debt instruments such as Treasury bills, bank certificates of deposit or commerical paper-having maturities of less than one year. Often called money market rates. , overall portfolio yields are expected to improve 29 basis points to average 5.06% during the third quarter of 2006 and the average yield on the existing portfolio (adjusted for expected portfolio acquisitions through September September: see month. 30, 2006) should exceed 5.70% by the second quarter of 2007. Actual yields will depend on portfolio composition as well as fluctuations in interest rates and mortgage prepayment Prepayment 1. The payment of a debt obligation prior to its due date. 2. The excess payment over a scheduled debt repayment amount. Notes: 1. Examples include deferred expenses such as rent and early loan repayments. 2. rates. Interest rates on borrowings secured by the mortgage securities portfolio averaged 4.83% during the second quarter of 2006, an increase of 45 basis points over the first quarter of 2006. Interest rates on most of these borrowings reset monthly based on the one-month London Interbank Offered Rate London Interbank Offered Rate A short-term interest rate often quoted as a 1,3,6-month rate for U.S.dollars. ("LIBOR LIBOR See: London Interbank Offered Rate LIBOR See London interbank offered rate (LIBOR). ") and are expected to increase further during the third quarter of 2006, given the increase in the federal funds rate Federal Funds Rate The interest rate at which a depository institution lends immediately available funds (balances at the Federal Reserve) to another depository institution overnight. to 5.25% in late June. Borrowings supporting longer-to-reset ARM securities generally have longer-term maturities effectively locking-in financing spreads during a significant portion of the fixed-rate terms of these investments. As of quarter-end, these borrowings totaled $845 million at a rate of 4.61% and an average maturity of 24 months, $30 million of which will mature during the remainder of 2006. Commenting on current market conditions and earnings prospects, Andrew F. Jacobs, President and Chief Executive Officer, said, "The current interest rate environment remains challenging to earnings and dividends in the near-term near-term adj. Of, for, or involving a short period of time in the near future. ; however, market indications that short-term interest rates should begin to stabilize stabilize See peg. in the coming months are encouraging. Overall, our mortgage securities portfolio performed as expected in the second quarter as coupon interest rates on our ARM securities continued resetting higher, while prepayments, although higher, were largely at anticipated levels. As forecast, our financing spreads declined to a negative six basis points during the second quarter because of the effects of higher short-term interest rates on our one-month LIBOR-based borrowings and the maturity of some of our lower-cost longer-term borrowings, which more than offset yield improvements on our ARM securities portfolio. With the latest increase in the federal funds rate in late June, interest rates on our borrowings are expected to increase further and financing spreads will again be negative in the third quarter, despite higher ARM security yields. Beyond the third quarter, we should see continued yield improvements from coupon resets on our ARM securities and with market indications that short-term interest rates will soon begin to stabilize, we should see improving financing spreads by year-end year-end also year·end n. The end of a year. adj. Occurring or done at the end of the year: a year-end audit. Noun 1. and throughout 2007. We also anticipate making further investments in credit-sensitive real estate-related assets, such as subordinate commercial real estate loans, that can earn attractive returns with less sensitivity to changes in interest rates than investments in ARM securities. "We are not satisfied with our current earnings or dividends. We are, however, confident that our core investment strategy of maintaining a large portfolio of ARM securities, along with actions taken in 2005 to improve our capital structure and enhance our other investment opportunities, has put us in an excellent position to generate attractive returns for our stockholders over the longer term. We continue to be optimistic op·ti·mist n. 1. One who usually expects a favorable outcome. 2. A believer in philosophical optimism. op about Capstead's future and we look forward to meeting the challenges ahead." Book Value per Common Share Book Value Per Common Share A measure used by owners of common shares in a firm to determine the level of safety associated with each individual share after all debts are paid accordingly. Formula: As of June 30, 2006, Capstead's book value per common share was $7.24, a decline of $1.24 from December December: see month. 31, 2005. This decline was caused primarily by changes in valuation of the Company's mortgage securities portfolio because of continued increases in shorter-term interest rates and dividend payments in excess of earnings. Declines in fair value of the Company's mortgage investments (most of which are carried at fair value with changes reflected in stockholders' equity Stockholders' Equity The portion of the balance sheet that includes capital received from investors in exchange for stock (paid-in capital), donated capital, and retained earnings. This is equal to total assets minus liabilities, preferred stock and intangible assets. ) lowered book value by $0.84 per share since year-end while preferred and common dividend payments in excess of earnings lowered book value by $0.42 per share. The fair value of the Company's mortgage investments can be expected to fluctuate with changes in portfolio size and composition as well as changes in interest rates and market liquidity, and such changes will largely be reflected in book value per common share. Because most of the Company's investments adjust to more current rates at least annually, declines in fair value caused by increases in interest rates can be largely recovered in a relatively short period of time. Book value will also be affected by other factors, including capital stock transactions and the level of dividend distributions relative to quarterly net income; however, temporary changes in fair value of investments not held in the form of securities, such as commercial real estate loans, generally will not affect book value. Additionally, changes in fair value of the Company's liabilities, such as its longer-term borrowings supporting investments in longer-to-reset ARM securities, are not reflected in book value. As of June 30, 2006, unrealized gains Unrealized Gain A profit that results from holding on to an asset rather than cashing it in and using the funds. Notes: Let's say you own a stock that has doubled, but you haven't sold it yet. This is said to be an unrealized gain. on these longer-term borrowings totaled $14.1 million, or $0.74 per share. About Capstead Capstead Mortgage Corporation is a real estate investment trust headquartered in Dallas, Texas “Dallas” redirects here. For other uses, see Dallas (disambiguation). The City of Dallas (pronounced [ˈdæl.əs] or [ˈdæl. . Capstead earns income primarily from investing in real estate-related assets on a leveraged basis. These investments currently consist primarily of residential ARM securities issued and guaranteed by government-sponsored entities, either Fannie Mae Fannie Mae: see Federal National Mortgage Association. or Freddie Mac Freddie Mac: see Federal Home Loan Mortgage Corporation. , or by an agency of the federal government, Ginnie Mae Ginnie Mae: see Federal National Mortgage Association. . Capstead also seeks to opportunistically invest a portion of its investment capital in credit-sensitive commercial real estate-related assets, including subordinate commercial real estate loans. Forward-Looking Statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. This document contains "forward-looking statements" (within the meaning of the Private Securities Litigation Reform Act The Private Securities Litigation Reform Act of 1995 (PSLRA) implemented several significant substantive changes affecting certain cases brought under the federal securities laws, including changes related to pleading, discovery, liability, class representation and awards fees and of 1995) that inherently involve risks and uncertainties. Capstead's actual results and liquidity can differ materially from those anticipated in these forward-looking statements because of changes in the level and composition of the Company's investments and unforeseen factors. As discussed in the Company's filings with the Securities and Exchange Commission, these factors may include, but are not limited to, changes in general economic conditions, the availability of suitable qualifying investments from both an investment return and regulatory reg·u·late tr.v. reg·u·lat·ed, reg·u·lat·ing, reg·u·lates 1. To control or direct according to rule, principle, or law. 2. perspective, the availability of new investment capital, fluctuations in interest rates and levels of mortgage prepayments, deterioration de·te·ri·o·ra·tion n. The process or condition of becoming worse. in credit quality and ratings, the effectiveness of risk management strategies, the impact of leverage, liquidity of secondary markets and credit markets, increases in costs and other general competitive factors. In addition to the above considerations, actual results and liquidity related to investments in loans secured by commercial real estate are affected by lessee One who rents real property or Personal Property from another. A lessee of land is a tenant. Cross-references Landlord and Tenant. lessee n. the person renting property under a written lease from the owner (lessor). performance under lease agreements, changes in general as well as local economic conditions and real estate markets, increases in competition and inflationary in·fla·tion·ar·y adj. Of, associated with, or tending to cause inflation: inflationary prices; inflationary policies. Adj. 1. pressures, changes in the tax and regulatory environment including zoning and environmental laws, uninsured losses or losses in excess of insurance limits and the availability of adequate insurance coverage at reasonable costs, among other factors.
CAPSTEAD MORTGAGE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
June 30, December 31,
2006 2005
------------ ------------
(unaudited)
Assets
Mortgage securities and similar investments
($4.6 billion pledged under repurchase
arrangements) $4,787,645 $4,368,025
Investments in unconsolidated affiliates 18,645 9,246
Receivables and other assets 67,331 86,977
------------ ------------
$4,873,621 $4,464,248
============ ============
Liabilities
Repurchase arrangements and similar
borrowings $4,462,835 $4,023,686
Unsecured borrowings 77,321 77,321
Liabilities of discontinued operation -- 2,884
Common stock dividend payable 381 381
Accounts payable and accrued expenses 11,906 15,127
------------ ------------
4,552,443 4,119,399
------------ ------------
Stockholders' equity
Preferred stock - $0.10 par value; 100,000
shares authorized:
$1.60 Cumulative Preferred Stock, Series
A, 202 shares issued and outstanding at
June 30, 2006 and December 31, 2005
($3,317 aggregate liquidation preference) 2,828 2,828
$1.26 Cumulative Convertible Preferred
Stock, Series B, 15,819 shares issued and
outstanding at June 30, 2006 and December
31, 2005 ($180,025 aggregate liquidation
preference) 176,705 176,705
Common stock - $0.01 par value; 100,000
shares authorized: 19,028 and 19,043 shares
issued and outstanding at June 30, 2006 and
December 31, 2005, respectively 190 190
Paid-in capital 505,266 512,933
Accumulated deficit (352,803) (352,803)
Accumulated other comprehensive income
(loss) (11,008) 4,996
------------ ------------
321,178 344,849
------------ ------------
$4,873,621 $4,464,248
============ ============
Book value per common share $7.24 $8.48
CAPSTEAD MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Quarter Ended Six Months Ended
June 30 June 30
----------------- ------------------
2006 2005 2006 2005
-------- -------- --------- --------
Mortgage securities and similar
investments:
Interest income $57,349 $30,589 $110,275 $59,112
Interest expense (54,685) (23,794) (102,228) (43,827)
-------- -------- --------- --------
2,664 6,795 8,047 15,285
-------- -------- --------- --------
Other revenue (expense):
Other revenue 200 215 366 411
Interest expense on unsecured
borrowings (1,621) -- (3,208) --
Other operating expense (1,576) (1,482) (3,249) (3,012)
-------- -------- --------- --------
(2,997) (1,267) (6,091) (2,601)
-------- -------- --------- --------
Income (loss) before equity in
earnings of unconsolidated
affiliates and discontinued
operation (333) 5,528 1,956 12,684
Equity in earnings of
unconsolidated affiliates 608 -- 1,030 --
-------- -------- --------- --------
Income from continuing operations 275 5,528 2,986 12,684
Income from discontinued operation -- 462 -- 908
-------- -------- --------- --------
Net income $275 $5,990 $2,986 $13,592
======== ======== ========= ========
Net income available (loss
attributable) to
common stockholders:
Net income $275 $5,990 $2,986 $13,592
Less cash dividends paid on
preferred stock (5,064) (5,064) (10,128) (10,128)
-------- -------- --------- --------
$(4,789) $926 $(7,142) $3,464
======== ======== ========= ========
Basic and diluted earnings (loss)
per common share:
Income (loss) from continuing
operations $(0.25) $0.03 $(0.38) $0.13
Income from discontinued
operation -- 0.02 -- 0.05
-------- -------- --------- --------
$(0.25) $0.05 $(0.38) $0.18
======== ======== ========= ========
Cash dividends declared per share:
Common $0.020 $0.100 $0.040 $0.280
Series A Preferred 0.400 0.400 0.800 0.800
Series B Preferred 0.315 0.315 0.630 0.630
CAPSTEAD MORTGAGE CORPORATION
MARKET VALUE ANALYSIS
(in thousands)
(unaudited)
June 30, 2006
---------------------------------------------
Principal
Balance Premiums Basis
--------------- -------------- --------------
Mortgage securities held
available-for-sale: (a)
Agency securities:
Fannie Mae/Freddie Mac:
Fixed-rate $384 $2 $386
Current-reset ARMs (b) 2,680,347 39,999 2,720,346
Longer-to-reset ARMs
(b) 1,104,388 16,513 1,120,901
Ginnie Mae:
Current-reset ARMs 870,031 2,853 872,884
--------------- -------------- --------------
4,655,150 59,367 4,714,517
--------------- -------------- --------------
Non-agency Securities:
Fixed-rate 1,682 21 1,703
Current-reset ARMs 27,700 274 27,974
--------------- -------------- --------------
29,382 295 29,677
--------------- -------------- --------------
$4,684,532 $59,662 $4,744,194
=============== ============== ==============
Mortgage securities held-
to-maturity: (c)
Collateral released from
structured
financings:
Agency securities:
Fixed-rate $19,647 $66 $19,713
Non-agency
securities:
Fixed-rate 19,657 52 19,709
Current-reset ARMs 8,532 84 8,616
--------------- -------------- --------------
47,836 202 48,038
Collateral for
structured financings 6,502 101 6,603
--------------- -------------- --------------
$54,338 $303 $54,641
=============== ============== ==============
December 31,
June 30, 2006 2005
------------------------------ --------------
Unrealized Unrealized
Market Gains Gains
Value (Losses) (Losses)
--------------- -------------- --------------
Mortgage securities held
available-
for-sale: (a)
Agency securities:
Fannie Mae/Freddie Mac:
Fixed-rate $415 $29 $36
Current-reset ARMs (b) 2,722,018 1,672 8,135
Longer-to-reset ARMs
(b) 1,108,646 (12,255) (7,183)
Ginnie Mae:
Current-reset ARMs 871,943 (941) 3,423
--------------- -------------- --------------
4,703,022 (11,495) 4,411
--------------- -------------- --------------
Non-agency Securities:
Fixed-rate 1,747 44 82
Current-reset ARMs 28,235 261 291
--------------- -------------- --------------
29,982 305 373
--------------- -------------- --------------
$4,733,004 $(11,190) $4,784
=============== ============== ==============
Mortgage securities held-
to-maturity: (c)
Collateral released from
structured
financings:
Agency securities:
Fixed-rate $19,911 $198 $635
Non-agency
securities:
Fixed-rate 19,824 115 463
Current-reset ARMs 8,722 106 118
--------------- -------------- --------------
48,457 419 1,216
Collateral for
structured financings 6,603 -- --
--------------- -------------- --------------
$55,060 $419 $1,216
=============== ============== ==============
(a) Unrealized gains and losses on investments in mortgage securities
classified as available-for-sale are recorded in stockholders'
equity as a component of "Accumulated other comprehensive income
(loss)." Gains or losses are generally recognized in earnings only
if sold. Investments in unsecuritized loans either owned outright
or by an unconsolidated affiliate are not subject to
mark-to-market accounting and therefore have been excluded from
this analysis. Similarly, unrealized gains or losses on the
Company's liabilities, such as its longer-term borrowings
supporting investments in longer-to-reset ARM securities, are
excluded from this analysis. As of June 30, 2006 unrealized gains
on these longer-term borrowings totaled $14.1 million.
(b) 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") (18 months or less for
"current-reset" ARM securities, and greater than 18 months for
"longer-to-reset" ARM securities). As of June 30, 2006, average
months-to-roll was six months and 41 months for current- and
longer-to-reset ARM securities, respectively. Once an ARM loan
reaches its initial reset date, it will typically reset once or
twice a year to a margin over a corresponding interest rate index,
subject to periodic and lifetime limits or caps.
(c) Investments in mortgage securities classified as held-to-maturity
are carried on the balance sheet at amortized cost.
CAPSTEAD MORTGAGE CORPORATION
MORTGAGE SECURITIES AND SIMILAR INVESTMENTS
YIELD/COST ANALYSIS
(dollars in thousands)
(unaudited)
2nd Quarter Average (a)
---------------------------------------------
Basis Yield/Cost Runoff
---------------- ------------- --------------
Agency securities:
Fannie Mae/Freddie Mac:
Fixed-rate $21,195 6.26% 30%
ARMs 3,826,930 4.75 32
Ginnie Mae ARMs 887,618 4.75 32
----------------
4,735,743 4.75 32
----------------
Non-agency securities:
Fixed-rate 22,726 6.55 36
ARMs 38,183 5.79 25
----------------
60,909 6.07 30
Collateral for structured
financings 7,196 6.87 45
----------------
4,803,848 4.77 32
----------------
Related borrowings:
30-day LIBOR 3,494,207 4.97
greater than 30-day
LIBOR 970,906 4.34
Structured financings 7,196 6.87
----------------
4,472,309 4.83
----------------
Capital employed/
financing spread $331,539 (0.06)
================
Return on assets (c) 0.22
As of June 30, 2006 Projected
---------------------- 3rd
Quarter Lifetime
Yield/Cost Runoff
Premiums Basis (a) (b) Assumptions
----------- ---------- ---------- -----------
Agency securities:
Fannie Mae/Freddie Mac:
Fixed-rate $68 $20,099 6.40% 38%
ARMs 56,512 3,841,247 5.10 32
Ginnie Mae ARMs 2,853 872,884 4.79 29
----------- ----------
59,433 4,734,230 5.05 31
----------- ----------
Non-agency securities:
Fixed-rate 73 21,412 6.85 37
ARMs 358 36,590 6.29 38
----------- ----------
431 58,002 6.50 38
Collateral for structured
financings 101 6,603 7.24 30
----------- ----------
$59,965 4,798,835 5.06 31
=========== ----------
Related borrowings:
30-day LIBOR 3,611,445 5.30
greater than 30-day
LIBOR 844,787 4.65
Structured financings 6,603 7.24
----------
4,462,835 5.17
----------
Capital employed/
financing spread $336,000 (0.11)
==========
Return on assets (c) 0.13
(a) Basis represents the Company's investment before unrealized gains
and losses. Asset yields, runoff rates, borrowing rates and
resulting financing spread are presented on an annualized basis.
(b) Projected annualized yields reflect ARM coupon resets and lifetime
runoff assumptions as adjusted for expected portfolio acquisitions
over the next three months and runoff expectations over the next
twelve months, as of the date of this press release. Actual yields
realized in future periods largely depend upon (i) changes in
portfolio composition, (ii) actual ARM coupon resets, (iii) actual
runoff and (iv) any changes in lifetime runoff assumptions.
Interest rates on borrowings that reset every 30 days based on
30-day London Interbank offered Rate ("LIBOR") reflect the 25
basis point increase in the federal funds to 5.25% at the June 29,
2006 Federal Reserve meeting with no additional increases during
the forecast period. Projected average portfolio yields, borrowing
rates, financing spreads and runoff rates over the next four
quarters for Capstead's existing portfolio, (adjusted for expected
portfolio acquisitions through September 30, 2006 only), are as
follows:
Portfolio Averages
-------------------------------------
Ending Financing
Federal Borrowing Spreads Runoff
Funds Rate Yields Rates (i) Rates
----------- -------- ---------- --------- -------
Third Quarter 2006 5.25% 5.06% 5.17% (0.11)% 31%
Fourth Quarter 2006 5.25 5.37 5.20 0.17 29
First Quarter 2007 5.25 5.60 5.20 0.40 27
Second Quarter 2007 5.25 5.72 5.24 0.48 31
(i) Financing spreads do not take into account earnings on capital
supporting this portfolio.
(c) The Company generally uses its liquidity to pay down borrowings.
Return on assets is calculated on an annualized basis assuming the
use of this liquidity to reduce borrowing costs.
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