Capstead Mortgage Corporation Announces Third Quarter 2009 Earnings.DALLAS -- Capstead Mortgage Corporation (NYSE NYSE See: New York Stock Exchange : CMO CMO See: Collateralized mortgage obligation CMO See collateralized mortgage obligation (CMO). ): Third Quarter 2009 Highlights * Earnings of over $42 million or $0.56 per diluted common share * Book value increased to $12.21 per common share * Portfolio increased to $7.92 billion * Raised $71 million in new common equity capital * Portfolio leverage declined modestly to 6.21 times long-term investment capital * Total financing spreads averaged 2.25% Capstead Mortgage Corporation (NYSE: CMO) ("Capstead" or the "Company") today reported net income of $42,085,000 for the quarter ended September 30, 2009 compared to $42,507,000 for the second quarter of 2009. After considering preferred share dividends, the Company earned $0.56 per diluted common share for the third quarter of 2009, compared to $0.58 per diluted common share reported for the second quarter of 2009. The Company paid a third quarter dividend of $0.56 per common share on October 20, 2009. Third Quarter Earnings and Related Discussion Net income for the third quarter of 2009 was modestly lower than results for the second quarter primarily because of lower net interest margins on Capstead's interest-earning assets. Interest-earning assets consist principally of a core 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 , or 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. . Total financing spreads averaged 2.25% during the current quarter, a decline of 6 basis points from spreads achieved during the second quarter. In addition, the $0.02 decline in earnings per common share reflects additional shares outstanding as a result of raising $71 million in new common equity capital during the third quarter. Yields on the Company's total interest-earning assets averaged 3.90% during the third quarter of 2009, a decline of 37 basis points from an average of 4.27% achieved during the second quarter of 2009, reflecting lower coupon interest rates on ARM loans underlying the portfolio that reset to more current interest rates, lower yielding portfolio acquisitions, and higher levels of mortgage prepayments Prepayments Payments made in excess of scheduled mortgage principal repayments. . Mortgage prepayments remained at favorable levels, with 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. averaging 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 21.6%, or a 19.9% constant 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. rate, despite increasing during the current quarter from near-record low levels experienced earlier in the year. Prepayment levels continued to be restrained by the pronounced contraction seen in residential mortgage lending, largely because of declining home values and more stringent mortgage loan underwriting Underwriting 1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt). 2. The process of issuing insurance policies. standards. Yields on ARM securities fluctuate with changes in mortgage prepayments and adjust over time to more current interest rates as coupon interest rates on the underlying mortgage loans reset. Interest rates on all interest-bearing liabilities, including the Company's unsecured borrowings, averaged 1.65% during the third quarter of 2009, a decline of 31 basis points from an average of 1.96% during the second quarter of 2009. This decline reflects the current low short-term interest rate environment and the maturity in August of the remaining $557 million of the Company's relatively high-rate, longer-dated repurchase arrangements. The Company's borrowings under repurchase arrangements as of September 30, 2009 consisted of $6.99 billion of primarily 30-day borrowings with 16 counterparties at average rates of 0.37%. Under the terms of interest rate swap Interest Rate Swap A deal between banks or companies where borrowers switch floating-rate loans for fixed rate loans in another country. These can be either the same or different currencies. agreements entered into with four large commercial bank counterparties, the Company pays fixed rates of interest averaging 2.76% on notional amounts The notional amount (or notional principal amount or notional value) on a financial instrument is the nominal or face amount that is used to calculate payments made on that instrument. This amount generally does not change hands and is thus referred to as notional. totaling $2.80 billion with an average maturity of nine months as of September 30, 2009. Variable payments based on one- and three-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). ) received by the Company under these agreements tend to offset a significant portion of the interest owed on a like amount of the Company's borrowings. In addition to replacing portfolio runoff, the Company deployed a significant amount of the new common equity capital raised year-to-date primarily into acquisitions of current-resetting agency-guaranteed ARM securities. With the federal government continuing to support the residential mortgage market, demand has been very strong for seasoned ARM securities, leading to higher pricing levels. The resulting improvement in the fair value of the Company's portfolio, along with improved swap valuations and accretion from capital raises, has resulted in a 31% increase in the Company's long-term investment capital since year-end and a decline in portfolio leverage to 6.21 to one at September 30, 2009. The following table progresses the Company's portfolio of mortgage securities and similar investments: [TABLE OMITTED] Third Quarter Common Equity Issuances In financial markets, an Equity Issuance is the sale of new equity or "stocks" by a firm to investors. Equity Issuance can involve a private sale, in which the transaction between investors and the firm takes place directly, or publicly, in which case the firm has to During the third quarter of 2009 Capstead raised $71 million in new common equity capital, after underwriting discounts and offering expenses, by issuing 5,147,000 common shares at an average price of $13.85 per share, net of expenses, under the Company's continuous offering program. Year-to-date the Company has raised $80 million under this program through the issuance of 5,835,000 common shares at an average price of $13.66 per share, net of expenses. The Company may raise more capital in future periods subject to market conditions and blackout periods Blackout Period 1. A term that refers to a temporary period in which access is limited or denied. 2. A period of around 60 days during which employees of a company with a retirement or investment plan cannot modify their plans. associated with the dissemination dissemination Medtalk The spread of a pernicious process–eg, CA, acute infection Oncology Metastasis, see there of earnings and dividend announcements and other important company-specific news. 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: Substantially all of the Company's mortgage investments and all of its interest rate swap agreements are reflected at fair value on the Company's balance sheet and are therefore included in the calculation of book value per common share. The fair value of these positions is impacted by market conditions, including changes in interest rates and the availability of financing at reasonable rates and leverage levels. The Company's investment strategy attempts to mitigate these risks by focusing almost exclusively on investments in agency-guaranteed residential mortgage securities, which are considered to have little, if any, credit risk and are collateralized by ARM loans that have interest rates that reset periodically to more current levels. Because of these characteristics, the fair value of Capstead's portfolio is considerably less vulnerable to significant pricing declines caused by credit concerns or rising interest rates compared to portfolios that contain a significant amount of non-agency and/or fixed-rate mortgage securities. This generally results in a more stable book value per common share over time. The following table progresses book value per common share outstanding (calculated assuming liquidation The collection of assets belonging to a debtor to be applied to the discharge of his or her outstanding debts. A type of proceeding pursuant to federal Bankruptcy preferences for the Series A and B preferred stock Stock shares that have preferential rights to dividends or to amounts distributable on liquidation, or to both, ahead of common shareholders. Preferred stock is given preference over common stock. Holders of preferred stock receive dividends at a fixed annual rate. ): [TABLE OMITTED] Management Remarks Commenting on current operating and market conditions, Andrew F. Jacobs, President and Chief Executive Officer, said, "Conditions have improved considerably during 2009 for investors in agency-guaranteed residential securities. We have experienced significant pricing gains in our ARM portfolio and the availability of financing at attractive interest rates has dramatically improved. For the quarter, our investment portfolio grew to $7.92 billion as a result of portfolio acquisitions in excess of runoff and the aforementioned pricing gains. Additionally, during the third quarter we were successful in raising $71 million in new common equity under our continuous offering program, all of which was accretive to our book value, while contributing to a modest decline in leverage at the end of the quarter. Even as yields on our current-reset ARM securities continued resetting to more current interest rates this quarter, the effects on our financing spreads were largely offset by declining interest rates on our short-term borrowings. Overall, the impact of lower financing spreads and lower leverage on net interest margins was substantially offset by the growth of the portfolio primarily attributable to the deployment of a significant amount of the capital raised during the quarter. "Recent statements by the Federal Open Market Committee have reiterated its view 'that economic conditions were likely to warrant an exceptionally low level of 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. for an extended period.' Should this prove to be the case, we anticipate that yields on our portfolio will continue declining throughout much of 2010, with these declines offset to a large degree by lower interest rates on our borrowings as we continue to benefit from the low overall rate environment and from the termination of our higher-rate swap positions. These terminating swap positions include $900 million that terminate late in the fourth quarter and an additional $800 million that terminate during the first quarter of 2010. "As market conditions evolve over the remainder of 2009 and into 2010, we intend to continue opportunistically growing our investment portfolio, but will remain mindful of the market's recent history in determining the appropriate amount of leverage and liquidity required to prudently manage our portfolio. We remain confident our core investment strategy of managing a conservatively leveraged portfolio of agency-guaranteed residential ARM securities can produce attractive risk-adjusted returns Risk-Adjusted Return A measure of how much risk a fund or portfolio takes on to earn its returns, usually expressed as a number or a rating. Notes: This is often represented by the Sharpe Ratio. The more return per unit of risk, the better. over the long term while reducing, but not eliminating, sensitivity to changes in interest rates." Earnings Conference Call Details An earnings conference call and live audio webcast will be hosted Thursday, October 29, 2009 at 9:00 a.m. ET. The conference call may be accessed by dialing toll free (877) 407-8033 in the U.S. and Canada or (201) 689-8033 for international callers. A live audio webcast of the conference call can be accessed in the investor relations Investor relations The process by which the corporation communicates with its investors. section of the Company's website at www.capstead.com, and an audio archive of the webcast will be available for approximately 60 days. A replay of the call will be available through November 12, 2009 by dialing toll free (877) 660-6853 in the U.S. and Canada or (201) 612-7415 for international callers and entering account number 286 and conference ID 334458. About Capstead Capstead Mortgage Corporation, formed in 1985 and based in Dallas, Texas “Dallas” redirects here. For other uses, see Dallas (disambiguation). The City of Dallas (pronounced [ˈdæl.əs] or [ˈdæl. , is a self-managed real estate investment trust for federal income tax purposes. Capstead's core investment strategy is managing a leveraged portfolio of residential mortgage pass-through securities Mortgage pass-through security Also called a passthrough, a security created when one or more mortgage holders form a collection (pool) of mortgages and sells shares or participation certificates in the pool. consisting almost exclusively of ARM securities issued and guaranteed by government-sponsored entities, either Fannie Mae or Freddie Mac, or by an agency of the federal government, Ginnie Mae. Agency-guaranteed residential mortgage securities carry an implied AAA AAA: see American Automobile Association. (Triple A) A common single-cell battery used in a myriad of electronic devices of all variety. Like its double A (AA) cousin, it provides 1.5 volts of DC power. When used in series, the voltage is multiplied. credit rating with limited, if any, credit risk. 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 other 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 perspective, the availability of new investment capital, the availability of financing at reasonable levels and terms to support investing on a leveraged basis, fluctuations in interest rates and levels of mortgage prepayments, deterioration in credit quality and ratings, the effectiveness of risk management strategies, the impact of differing levels of leverage employed, 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 borrower performance, changes in general as well as local economic conditions and real estate markets, increases in competition and inflationary 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. [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] (a) 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. and losses on mortgage securities classified as available-for-sale are recorded as a component of Accumulated other comprehensive income In 1997 the Financial Accounting Standards Board issued a Statement on Financial Accounting Standards entitled “Comprehensive Income”. This statement required all income statement items to be reported either as a regular item in the income statement and or a special item as (loss) 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. . Gains or losses are generally recognized in earnings only if sold. Mortgage securities classified as held-to-maturity with a cost basis of $10.9 million, unsecuritized investments in residential mortgage loans with a cost basis of $12.3 million and commercial loans with a carrying amount of $53.4 million (after consideration of an allowance for possible loan losses totaling $1.0 million) are not subject to mark-to-market accounting and therefore have been excluded from this analysis. (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 September 30, 2009 average months-to-roll for current-reset and longer-to-reset ARM securities were five months and 29 months, respectively. Once an ARM loan reaches its initial reset date, it will reset at least once a year to a margin over a corresponding interest rate index, subject to periodic and lifetime limits or caps. (c) The Company uses two-year term, one- and three-month LIBOR-indexed, pay-fixed, receive-variable, interest rate swap agreements or longer-term committed borrowings, if available at attractive rates and terms, help mitigate exposure to higher 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. . Swap positions are carried on the balance sheet at fair value with related unrealized gains or losses arising while designated as cash flow hedges A cash flow hedge is a hedge of the exposure to the variability of cash flow that
[TABLE OMITTED] (a) Basis represents the Company's average investment before unrealized gains and losses and allowance for possible loan losses. Average asset yields, runoff rates, borrowing rates and resulting financing spread are presented on an annualized basis. (b) Effective January 1, 2009 the Company curtailed interest accruals Accruals Accounts on a balance sheet that represent liabilities and non-cash-based assets used in accrual-based accounting. These accounts include, among many others, accounts payable, accounts receivable, goodwill, future tax liability and future interest expense. on its investments in commercial real estate loans in light of deteriorating commercial real estate market conditions and the past due status of these loans. During the third quarter of 2009, the Company acquired as a strategic investment $10.0 million in AAA-rated senior notes issued by one of its lending counterparties. (c) Other interest-earning assets consist of overnight investments and cash collateral receivable from interest rate swap agreements. (d) Unsecured borrowings consist of junior subordinated notes with original terms of 30-years that were issued in 2005 and 2006 by Capstead to statutory trusts formed to issue $3.1 million of the trusts' common securities to Capstead and to privately place $100.0 million of preferred securities to unrelated third party investors. Capstead reflects its investment in the trusts as unconsolidated affiliates and considers the unsecured borrowings, net of these affiliates, a component of its long-term investment capital. [TABLE OMITTED] (a) Basis represents the Company's investment (unpaid principal balance plus unamortized investment premium) before unrealized gains and losses. As of September 30, 2009, the ratio of basis to related unpaid principal balance for the Company's ARM securities was 101.33. This table excludes commercial loan investments, fixed-rate residential investments, and collateral for structured financings. (b) Net WAC WAC (Women's Army Corps), U.S. army organization created (1942) during World War II to enlist women as auxiliaries for noncombatant duty in the U.S. army. Before 1943 it was known as the Women's Auxiliary Army Corps (WAAC). Its first director was Oveta Culp Hobby. , or weighted average coupon Weighted average Coupon The weighted average of the gross interest rates of mortgages underlying a pool as of the pool issue date; the balance of each mortgage is used as the weighting factor. , is presented net of servicing and other fees. Fully indexed WAC represents the coupon upon one or more resets using interest rate indexes and the applicable net margin as of September 30, 2009. |
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