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Capstead Mortgage Corporation Announces First Quarter 2018 Results
[April 25, 2018]

Capstead Mortgage Corporation Announces First Quarter 2018 Results


Capstead Mortgage Corporation ("Capstead" or the "Company") (NYSE: CMO) today announced financial results for the quarter ended March 31, 2018.

First Quarter 2018 Highlights

  • Generated earnings of $19.4 million or $0.16 per diluted common share
  • Paid common dividend of $0.16 per common share
  • Repurchased 3.4 million shares of common stock for $29.1 million, generating book value accretion of $0.06 per share
  • Book value per common share declined 1.5% or $0.15, ending the quarter at $10.10 per common share, which together with the first quarter dividend, generated a positive economic return
  • Generated a total stockholder return of 1.85% (7.71% annualized)
  • Net interest margins were largely unchanged at $22.6 million as benefits of higher cash yields and lower mortgage prepayment rates largely offset higher borrowing rates and lower portfolio balances compared to the fourth quarter of 2017
  • Agency-guaranteed residential adjustable-rate mortgage (ARM) portfolio and leverage ended the quarter at $13.05 billion and 9.26 times long-term investment capital, respectively

About Capstead

Capstead is a self-managed real estate investment trust, or REIT, for federal income tax purposes. The Company earns income from investing in a leveraged portfolio of residential adjustable-rate mortgage pass-through securities, referred to as ARM securities, issued and guaranteed by government-sponsored enterprises, either Fannie Mae or Freddie Mac, or by an agency of the federal government, Ginnie Mae.

First Quarter Earnings and Related Discussion

Capstead reported net income of $19.4 million or $0.16 per diluted common share for the quarter ended March 31, 2018. This compares to net income of $22.6 million or $0.19 per diluted common share for the quarter ended December 31, 2017, which included a $1.9 million benefit from the enactment of tax reform legislation. The Company paid a first quarter 2018 dividend of $0.16 per common share on April 20, 2018.

Portfolio yields averaged 2.08% during the first quarter of 2018, an increase of 17 basis points over the 1.91% reported for the fourth quarter. Cash yields (yields on the portfolio before investment premium amortization) increased six basis points to average 2.85% during the first quarter, benefiting from mortgage loans underlying the portfolio resetting to higher rates based on higher prevailing six- and 12-month interest rate indices and higher coupon interest rates on recent acquisitions. As of March 31, 2018, 52% of the Company's ARM securities portfolio will reset in rate in approximately 6.3 months on average, allowing the Company's cash yields to continue benefiting from higher prevailing interest rates in future quarters. Yield adjustments for investment premium amortization decreased 11 basis points to average a negative 0.77% for the first quarter as mortgage prepayment activity declined. Mortgage prepayment rates averaged an annualized constant prepayment rate, or CPR, of 19.64%, a decrease of 2.86% CPR from an average of 22.50% CPR the previous quarter.

The following table illustrates the progression of Capstead's portfolio of residential mortgage investments for the quarter ended March 31, 2018 (dollars in thousands):



Residential mortgage investments, beginning of quarter       $ 13,454,098
Portfolio acquisitions (principal amount) 449,476
Investment premiums on acquisitions* 11,905
Portfolio runoff (principal amount) (793,735 )
Investment premium amortization (25,620 )

Decrease in net unrealized gains on securities classified as available-for-sale

  (44,053 )
Residential mortgage investments, end of period $ 13,052,071  
Decrease in residential mortgage investments

during the quarter

$ (402,027 )

* 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.

Rates on Capstead's $11.94 billion in secured borrowings, after adjusting for hedging activities, averaged 18 basis points higher at 1.47% during the first quarter of 2018, compared to 1.29% for the prior quarter. Average unhedged secured borrowing rates increased 25 basis points during the first quarter to 1.64%. This increase is largely attributable to the funding market's response to 25 basis point increases in the Federal Funds Rate in December 2017 and, to a lesser extent, March 2018. Related hedged borrowing rates increased 12 basis points to 1.35% as $1.70 billion of lower fixed-rate swaps matured while $500 million in new swaps were added at higher prevailing rates. The Company typically uses two- and three-year term interest rate swap agreements with variable rate receipts based primarily on three-month LIBOR to help mitigate exposure to rising short-term interest rates. At quarter-end the Company held $6.85 billion notional amount of portfolio financing-related swap agreements with contract expirations occurring at various dates through the first quarter of 2021, and a weighted average expiration of 14 months.

Operating costs expressed as an annualized percentage of long-term investment capital averaged 1.01% for the first quarter of 2018. As an annualized percentage of total assets, operating costs averaged 0.10% during this period. Capstead operates a highly efficient investment platform, particularly compared to other mortgage REITs, and has a competitive cost structure relative to a wide variety of high yielding investment vehicles.

Common Stock Repurchases

Pursuant to its $100 million stock repurchase program reactivated last November, the Company repurchased 3.4 million shares of its common stock in the open market for $29.1 million during the first quarter of 2018. At an average repurchase price, including underwriting fees, of $8.60, these repurchases resulted in book value accretion of $0.06 per share. An additional 48,000 share repurchases settled subsequent to quarter-end, leaving a remaining repurchase program authorization of approximately $67 million. Future levels of stock repurchases will largely be dependent upon market conditions, including alternative capital investment opportunities.

Long-Term Investment Capital, Portfolio Leverage and Book Value per Common Share

Capstead's long-term investment capital, which consists of common and perpetual preferred stockholders' equity and long-term unsecured borrowings, decreased by $46.6 million during the first quarter of 2018 to $1.29 billion primarily as a result of common stock repurchases and declines in portfolio valuations that outstripped increases in swap gains. Portfolio leverage (secured borrowings divided by long-term investment capital) increased to 9.26 to one at March 31, 2018 from 9.22 to one at December 31, 2017.

The following table illustrates the progression of the Company's book value per common share (total stockholders' equity, less preferred share liquidation preferences, divided by shares of common stock outstanding) as well as changes in book value expressed as percentages of beginning book value for the quarter ended March 31, 2018:

Book value per common share, beginning of quarter       $ 10.25      

Change in net unrealized gains (losses) on mortgage securities classified as available-for-sale

(0.48 )

Change in net unrealized gains and losses on interest rate swap agreements designated as cash flow hedges of:

Secured borrowings 0.23
Unsecured borrowings   0.06  
  (0.19 ) (1.9 )%
Capital transactions:
Accretion from common stock repurchases 0.06
Other, principally stock compensation-related activity   (0.02 )
  0.04   0.4 %
Book value per common share, end of period $ 10.10  

Decrease in book value per common share during the quarter

$ (0.15 ) (1.5 )%
 

Nearly all of Capstead 's residential mortgage investments and all interest rate swap agreements are reflected at fair value on the Company's balance sheet and related unrealized gains and losses are included in the calculation of book value per common share. The Company's borrowings, however, are not reflected at fair value on the balance sheet. 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-guaranteed residential mortgage pass-through 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 expected to be 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-guaranteed securities or agency-guaranteed securities backed by longer-duration ARM or fixed-rate loans. Duration is a common measure of market price sensitivity to interest rate movements. A shorter duration generally indicates less interest rate risk.

Management Remarks

Commenting on current operating and market conditions, Phillip A. Reinsch, President and Chief Executive Officer, said, "During what has proved to be a challenging quarter for the residential mortgage sector, Capstead has posted a positive economic return of 0.10% and a total stockholder return ("TSR") of 1.85% (7.71% annualized). We anticipate that these results will compare favorably to other residential mortgage REIT industry participants, many of which are expected to report significant book value declines due largely to higher prevailing interest rates and pressure on pricing for fixed-rate agency-guaranteed mortgage securities as the Federal Reserve continues to reduce its participation in the marketplace.

"Our first quarter 2018 earnings benefited from higher cash yields and lower mortgage prepayment rates, which offset most of the effects of higher borrowing rates and lower portfolio balances. We increased leverage slightly to 9.26 to one as a portion of our capital made available from portfolio runoff was used to buy back approximately 3.5% of our outstanding common stock at a meaningful discount to our book value. These buybacks contributed $0.06 in book value accretion for the quarter. Future buyback activity will depend on market conditions.

"Cash yields are expected to continue improving in 2018 with roughly half of our portfolio of agency-guaranteed ARM securities scheduled to reset in rate within 18 months primarily based on six- and 12-month indices that have increased considerably during the first quarter. For instance, the coupon interest rates on many of the mortgages underlying our portfolio reset based on a margin over one-year LIBOR and this index increased 55 basis points during the first quarter and is higher still today. This key feature of our short duration ARM strategy affords us the opportunity over time to recover financing spreads diminished by rising borrowing rates. For more information regarding coupon resets see the last page of this release.

"Continued declines in mortgage prepayment activity this quarter were largely a function of seasonality and higher prevailing mortgage interest rates. Second and third quarter 2018 prepayment activity will likely be driven higher by seasonal considerations such as the summer home buying season and available processing days, with refinancing activity primarily centered on homeowners whose mortgages are resetting higher that may have opportunities to refinance.

"First quarter borrowing rates absorbed the brunt of the December Federal Funds Rate increase while much of the March increase is being absorbed in the second quarter. Hedging costs have increased as we entered into new swap agreements at higher prevailing rates and as older, lower-rate swaps matured.

"Our investment strategy of cost-effectively managing a leveraged portfolio of short duration agency-guaranteed residential ARM securities seeks to generate attractive risk-adjusted returns over the long term. Our near-term results will continue to be driven by mortgage prepayment levels, and the pace of future increases in short-term interest rates."

Earnings Conference Call Details

An earnings conference call and live audio webcast will be hosted Thursday, April 26, 2018 at 9:00 a.m. ET. The conference call may be accessed by dialing toll free (877) 505-6547 in the U.S., (855) 669-9657 for Canada, or (412) 902-6660 for international callers. A live webcast of the conference call can be accessed via the investor relations section of the Company's website at www.capstead.com and an archive of the webcast will be available through July 26, 2018. An audio replay can be accessed one hour after the end of the conference call, also through July 26, 2018, by dialing toll free (877) 344-7529 in the U.S., (855) 669-9658 for Canada, or (412) 317-0088 for international callers and entering conference number 10119268.

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. Actual results could differ materially from those projected in these forward-looking statements due to a variety of factors, without limitation, fluctuations in interest rates, the availability of suitable qualifying investments, changes in mortgage prepayments, the availability and terms of financing, changes in market conditions as a result of federal corporate and individual tax reform, changes in legislation or regulation affecting the mortgage and banking industries or Fannie Mae, Freddie Mac or Ginnie Mae securities, the availability of new investment capital, the liquidity of secondary markets and credit markets, and other changes in general economic conditions. These and other applicable uncertainties, factors and risks are described more fully in the Company's filings with the U.S. Securities and Exchange Commission. 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.

 
 
CAPSTEAD MORTGAGE CORPORATION
CONSOLIDATED BALANCE SHEETS

(in thousands, except ratios, pledged and per share amounts)

 
      March 31, 2018     December 31, 2017
    (unaudited)
Assets

Residential mortgage investments ($12.59 and $12.98 billion pledged at March 31, 2018 and December 31, 2017, respectively)

$ 13,052,071 $ 13,454,098
Cash collateral receivable from interest rate swap counterparties 36,586 42,506
Interest rate swap agreements at fair value 387 -
Cash and cash equivalents 89,915 103,907
Receivables and other assets   113,565     132,938  
$ 13,292,524   $ 13,733,449  
Liabilities
Secured borrowings $ 11,944,841 $ 12,331,060
Interest rate swap agreements at fair value 18,265 23,772
Unsecured borrowings 98,216 98,191
Common stock dividend payable 15,069 18,487
Accounts payable and accrued expenses   23,905     23,063  
  12,100,296     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 March 31, 2018 and December 31, 2017

250,946 250,946

Common stock - $0.01 par value; 250,000 shares authorized: 92,494 and 95,698 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively

925 957
Paid-in capital 1,242,573 1,271,425
Accumulated deficit (346,570 ) (346,570 )
Accumulated other comprehensive income   44,354     62,118  
  1,192,228     1,238,876  
$ 13,292,524   $ 13,733,449  
 
Long-term investment capital (consists of stockholders' equity and unsecured borrowings) (unaudited) $ 1,290,444 $ 1,337,067
Portfolio leverage (secured borrowings divided by long-term investment capital) (unaudited) 9.26:1 9.22:1
Book value per common share (based on common shares outstanding and calculated assuming liquidation preferences for preferred stock) (unaudited) $ 10.10 $ 10.25
 
 
CAPSTEAD MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(unaudited)

 
   

Quarter Ended

March 31

  2018         2017  
Interest income:
Residential mortgage investments $ 69,138 $ 54,841
Other   408     153  
  69,546     54,994  
Interest expense:
Secured borrowings (45,021 ) (28,240 )
Unsecured borrowings   (1,891 )   (1,891 )
  (46,912 )   (30,131 )
  22,634     24,863  
Other revenue (expense):
Compensation-related expense (2,048 ) (1,115 )
Other general and administrative expense (1,237 ) (1,062 )
Miscellaneous other revenue   71     15  
  (3,214 )   (2,162 )
Net income $ 19,420   $ 22,701  
Net income available to common stockholders:
Net income $ 19,420 $ 22,701
Less preferred stock dividends   (4,842 )   (3,864 )
$ 14,578   $ 18,837  
 
Net income per common share:
Basic and diluted $ 0.16 $ 0.20
 
Weighted average common shares outstanding:
Basic 93,425 95,755
Diluted 93,506 95,875
 
Cash dividends declared per share:
Common $ 0.16 $ 0.21
Series E preferred 0.47 0.47
 
 
CAPSTEAD MORTGAGE CORPORATION
QUARTERLY STATEMENTS OF INCOME AND SELECT OPERATING STATISTICS

(unaudited, in thousands, except per share amounts, percentages annualized)

 
      2018       2017       2016  
Q1 Q4     Q3     Q2     Q1 Q4
Quarterly Statements of Income:
Interest income:
Residential mortgage investments $ 69,138 $ 64,418 $ 57,073 $ 56,103 $ 54,841 $ 50,040
Other   408     207     366     238     153     143  
  69,546     64,625     57,439     56,341     54,994     50,183  
Interest expense:
Secured borrowings (45,021 ) (40,012 ) (36,655 ) (33,850 ) (28,240 ) (27,421 )
Unsecured borrowings   (1,891 )   (1,909 )   (1,910 )   (1,900 )   (1,891 )   (1,910 )
  (46,912 )   (41,921 )   (38,565 )   (35,750 )   (30,131 )   (29,331 )
  22,634     22,704     18,874     20,591     24,863     20,852  
Other revenue (expense):
Compensation-related expense (2,048 ) (894 ) (1,073 ) (1,833 ) (1,115 ) (2,444 )
Other general and administrative expense (1,237 ) (1,254 ) (1,097 ) (1,276 ) (1,062 ) (1,117 )
Miscellaneous other revenue   71     2,031     48     67     15     159  
  (3,214 )   (117 )   (2,122 )   (3,042 )   (2,162 )   (3,402 )
Net income $ 19,420   $ 22,587   $ 16,752   $ 17,549   $ 22,701   $ 17,450  
Net income per diluted common share $ 0.16 $ 0.19 $ 0.13 $ 0.14 $ 0.20 $ 0.14
Average diluted common shares outstanding 93,506 95,658 95,923 95,916 95,875 95,877
 
Select Operating Statistics:
Average portfolio outstanding (cost basis) $ 13,303,044 $ 13,502,798 $ 13,513,833 $ 13,501,791 $ 13,102,455 $ 13,320,407

Average long-term investment capital ("LTIC")

1,314,537 1,362,700 1,353,859 1,358,646 1,361,102 1,369,928
Investment premium amortization 25,620 29,773 34,950 33,661 30,385 34,945
Constant prepayment rate ("CPR") 19.64 % 22.50 % 25.77 % 24.69 % 22.93 % 25.59 %
Total financing spreads 0.55 0.56 0.46 0.52 0.68 0.55

Financing spreads on residential mortgage investments, a non-GAAP financial measure

0.61 0.62 0.52 0.58 0.74 0.61
Operating costs as a percentage of LTIC* 1.01 0.62 0.64 0.92 0.93 0.97
Return on common equity capital 6.12 6.95 4.61 5.13 7.18 5.04

* Excludes the effects of a first quarter 2017 adjustment to reduce 2016 annual incentive compensation by $938,000.

 
 
CAPSTEAD MORTGAGE CORPORATION
QUARTERLY FINANCING SPREADS AND CPR

(annualized, unaudited)

 
    2018     2017     2016
Q1 Q4     Q3     Q2     Q1 Q4     Q3     Q2
Total financing spreads: (a)
Yields on all interest-earning assets 2.07 % 1.90 % 1.68 % 1.65 % 1.67 % 1.49 % 1.45 % 1.53 %
Borrowing rates on all interest-paying liabilities 1.52 1.34 1.22 1.13 0.99 0.94 0.89 0.89
Total financing spreads 0.55 0.56 0.46 0.52 0.68 0.55 0.56 0.64

Financing spreads on residential mortgage investments, a non-GAAP financial measure:

Cash yields on residential mortgage investments (b)

2.85 2.79

2.72

2.66 2.60 2.55 2.52 2.50
Investment premium amortization (b) (0.77 ) (0.88 ) (1.03 ) (1.00 ) (0.93 ) (1.05 ) (1.06 ) (0.96 )
Yields on residential mortgage investments 2.08 1.91 1.69 1.66 1.67 1.50 1.46 1.54
Unhedged secured borrowing rates (c) 1.64 1.39 1.33 1.09 0.89 0.79 0.69 0.67
Hedged secured borrowing rates (c) 1.35 1.23 1.10 1.08 0.96 0.95 0.93 0.96
Secured borrowing rates 1.47 1.29 1.17 1.08 0.93 0.89 0.84 0.84

Financing spreads on residential mortgage investments

0.61 0.62 0.52 0.58 0.74 0.61 0.62 0.70
CPR 19.64 22.50 25.77 24.69 22.93 25.59 25.80 23.19

(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 interest rate swap agreements. Hedged borrowing rates represent average fixed-rate payments made on interest rate swap agreements held for portfolio hedging purposes adjusted for differences between LIBOR-based variable-rate receipts on these swaps and unhedged borrowing rates, as well as the effects of any hedge ineffectiveness. Average fixed-rate swap payments were 1.34% for the first quarter of 2018, while variable-rate receipt adjustments and clearing fees averaged 0.01% for the same period. During 2017, fixed-rate swap payments averaged 1.04% while variable-rate receipt adjustments averaged 0.05%.

 

Financing spreads on residential mortgage investments, a non-GAAP financial measure, differ from total financing spreads, an all-inclusive GAAP measure, that is based on all interest-earning assets and all interest-paying liabilities. Management believes that presenting financing spreads on residential mortgage investments provides useful information for evaluating the performance of the Company's portfolio. The following reconciles these two measures:

    2018     2017     2016
Q1 Q4     Q3     Q2     Q1 Q4     Q3     Q2
Total financing spreads 0.55 % 0.56 % 0.46 % 0.52 % 0.68 % 0.55 % 0.56 % 0.64 %
Impact of yields on other interest-earning assets* 0.01 0.01 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 0.06 0.05 0.05 0.05

Financing spreads on residential mortgage investments, a non-GAAP financial measure

0.61 0.62 0.52 0.58 0.74 0.61 0.62 0.70

*

 

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 and, at times, cash collateral payable to interest rate swap counterparties.

 
 
CAPSTEAD MORTGAGE CORPORATION
FAIR VALUE AND SWAP MATURITY DISCLOSURES

(dollars in thousands, unaudited)

 
       

December 31,

March 31, 2018

2017

Unpaid

       

Basis or

       

Unrealized

Unrealized

Principal

Investment

Notional

Fair

Gains

Gains

Balance

Premiums

Amount

Value

(Losses)

(Losses)

Residential mortgage investments classified as available-for-sale: (a)

Fannie Mae/Freddie Mac securities:
Current-reset ARMs $ 5,228,741 $ 174,270 $ 5,403,011 $ 5,480,692 $ 77,681 $ 83,877
Longer-to-reset ARMs 4,675,502 129,123 4,804,625 4,737,908 (66,717 ) (35,159 )
Ginnie Mae securities:
Current-reset ARMs 1,394,813 45,577 1,440,390 1,446,649 6,259 3,202
Longer-to-reset ARMs   1,364,515   35,161   1,399,676   1,383,644     (16,032 )   (6,676 )
$ 12,663,571 $ 384,131 $ 13,047,702 $ 13,048,893   $ 1,191   $ 45,244  
Interest rate swap agreements: (b)
Secured borrowings-related $ 6,850,000 $ 61,428 $ 61,428 $ 40,646
Unsecured borrowings-related 100,000 (18,265 ) (18,265 ) (23,772 )

(a)

 

Unrealized gains and losses on residential mortgage securities classified as available-for-sale are recorded as a component of Accumulated other comprehensive income in Stockholders' equity. Gains or losses are generally recognized in earnings only if sold. Residential mortgage securities classified as held-to-maturity with a cost basis of $1.4 million and unsecuritized investments in residential mortgage loans with a cost basis of $1.8 million are not subject to fair value accounting and therefore have been excluded from this analysis. Capstead segregates its residential ARM securities based on the average length of time until the loans underlying each security reset to more current rates.

 

(b)

To help mitigate exposure to higher interest rates, Capstead uses one- and three-month LIBOR-indexed, pay-fixed, receive-variable interest rate swap agreements supplemented with longer-maturity secured borrowings when available at attractive rates and terms. The Company has also entered into $100 million notional amount of swap agreements with terms coinciding with the 20-year variable-rate terms of the Company's unsecured borrowings. Swap positions are designated as cash flow hedges for accounting purposes and carried on the balance sheet at fair value with related unrealized gains or losses reflected as a component of Accumulated other comprehensive income in Stockholders' equity. Above amounts exclude variation margin and accrued interest.

 

The following reflects Capstead's portfolio financing-related swap positions, sorted by quarter of swap contract expiration. Average fixed rates reflect related swap fixed-rate payment requirements.

   

Swap Notional

   

Average

Period of Contract Expiration

   

Amounts

Fixed Rates

Second quarter 2018 $ 600,000 0.79 %
Third quarter 2018 400,000 0.88
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 100,000 2.56
Third quarter 2020 200,000 1.64
Fourth quarter 2020 200,000 2.04
First quarter 2021   100,000 2.67
$ 6,850,000

After consideration of portfolio financing-related swap positions, Capstead's residential mortgage investments and related secured borrowings had durations as of March 31, 2018 of approximately 12 and 8 months, respectively, for a net duration gap of approximately 4 months. Duration is a measure of market price sensitivity to changes in interest rates. A shorter duration generally indicates less interest rate risk.

 
 
CAPSTEAD MORTGAGE CORPORATION
RESIDENTIAL ARM SECURITIES PORTFOLIO STATISTICS

(as of March 31, 2018)

(dollars in thousands, unaudited)

 
           

Fully

   

Average

   

Average

   

Average

   

Months

Amortized

Net

Indexed

Net

Periodic

Lifetime

To

ARM Type

Cost Basis (a)

WAC (b)

WAC (b)

Margins (b)

Caps (b)

Caps (b)

Roll (c)

Current-reset ARMs:
Fannie Mae Agency Securities $3,819,650 3.25% 4.16% 1.69% 2.91% 9.36% 5.9
Freddie Mac Agency Securities 1,583,361 3.31 4.37 1.80 2.40 9.19 7.3
Ginnie Mae Agency Securities 1,440,390 2.73 3.61 1.51 1.06 8.27 6.3
Residential mortgage loans 1,162 4.04 4.30 2.11 1.71 11.17 5.1
(52% of total) 6,844,563 3.15 4.09 1.68 2.40 9.09 6.3
Longer-to-reset ARMs:
Fannie Mae Agency Securities 3,124,835 2.77 4.24 1.59 3.08 7.77 41.6
Freddie Mac Agency Securities 1,679,790 2.73 4.29 1.64 2.70 7.80 38.8
Ginnie Mae Agency Securities 1,399,676 3.03 3.59 1.50 1.01 8.03 46.4
(48% of total) 6,204,301 2.82 4.11 1.58 2.11 7.88 42.0
$13,048,864 2.99 4.10 1.63 2.28 8.59 23.3
Gross WAC (rate paid by borrowers)(d) 3.59

(a)

 

Amortized cost basis represents the Company's investment (unpaid principal balance plus unamortized investment premiums) before unrealized gains and losses. At March 31, 2018, the ratio of amortized cost basis to unpaid principal balance for the Company's ARM holdings was 103.03. 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 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, 76% of current-reset ARMs were subject to periodic caps averaging 1.75%; 17% were subject to initial caps averaging 3.37%; and 7% were subject to lifetime caps averaging 7.07%. All longer-to-reset ARM securities at March 31, 2018 were subject to initial caps.

 

(c)

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). After consideration of any applicable initial fixed-rate periods, at March 31, 2018 approximately 90%, 5% 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 83% 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.

 

(d)

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.

 


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