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Capstead Mortgage Corporation Announces Second Quarter 2018 Results

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Capstead Mortgage Corporation ("Capstead" or the "Company") (NYSE: CMO)
today announced financial results for the quarter ended June 30, 2018.

Second Quarter 2018 Summary

  • Generated earnings of $13.0 million or $0.09 per diluted common
    share
  • Paid common dividend of $0.14 per common share
  • Book value per common share declined 2.5% or $0.25, ending the
    quarter at $9.85 per common share, which together with the common
    dividend generated an economic return of -1.09% (-0.98% year-to-date)
  • Net interest margins declined $7.3 million to $15.4 million as
    higher mortgage prepayment rates, higher borrowing rates and lower
    portfolio balances outstripped higher cash yields
  • Agency-guaranteed residential adjustable-rate mortgage (ARM)
    portfolio and leverage ended the quarter at $13.02 billion and 9.42
    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.

Second Quarter Earnings and Related Discussion

Capstead reported net income of $13.0 million or $0.09 per diluted
common share for the quarter ended June 30, 2018. This compares to net
income of $19.4 million or $0.16 per diluted common share for the
quarter ended March 31, 2018. The Company paid a second quarter 2018
dividend of $0.14 per common share on July 20, 2018.

Cash yields (yields on the portfolio before investment premium
amortization) increased eight basis points to average 2.93% during the
second 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 June 30, 2018, 53% of the Company's ARM securities
portfolio will reset in rate on average in approximately six months,
allowing the Company's cash yields to continue benefiting from higher
prevailing interest rates in future quarters. Yield adjustments for
investment premium amortization increased 16 basis points to average a
negative 0.93% for the second quarter as mortgage prepayment activity
increased. Portfolio yields averaged 2.00% during the second quarter of
2018, a decrease of eight basis points from the 2.08% reported for the
first quarter.

Mortgage prepayment rates averaged an annualized constant prepayment
rate, or CPR, of 23.82%, an increase of 4.18% CPR from an average of
19.64% CPR the previous quarter. This increase is driven largely by
seasonal factors, including the summer home buying season and available
processing days as well as refinance opportunities for eligible
homeowners with currently resetting mortgages.

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

         
        Quarter Ended

June 30, 2018

Six Months Ended

June 30, 2018

Residential mortgage investments, beginning of period $ 13,052,071 $ 13,454,098
Portfolio acquisitions (principal amount) 933,920 1,383,396
Investment premiums on acquisitions* 20,279 32,183
Portfolio runoff (principal amount) (942,332 ) (1,736,066 )
Investment premium amortization* (30,319 ) (55,939 )

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

  (16,512 )   (60,565 )
Residential mortgage investments, end of period $ 13,017,107   $ 13,017,107  

Decrease in residential mortgage investments during the indicated
periods

$ (34,964 ) $ (436,991 )
 

* 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 15 basis points higher at
1.62% during the second quarter of 2018, compared to 1.47% for the prior
quarter. Average unhedged secured borrowing rates increased 33 basis
points during the second quarter to 1.97%. This increase is largely
attributable to the funding market's response to 25 basis point
increases in the Federal Funds Rate in March 2018 and, to a lesser
extent, June 2018. Related hedged borrowing rates increased one basis
point to 1.36% even as $600 million of lower fixed-rate swaps matured
while $700 million in new swaps were added at higher prevailing rates.
This small impact on hedged borrowing rates in part reflects greater
reliance on three-month LIBOR-linked variable rate receipts. 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 $6.95 billion notional amount of portfolio
financing-related swap agreements with contract expirations occurring at
various dates through the second quarter of 2021, and a weighted average
expiration of 14 months.

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.
Operating costs expressed as an annualized percentage of long-term
investment capital averaged 0.77% for the second quarter of 2018 and
0.89% year-to-date. As an annualized percentage of total assets,
operating costs averaged 0.07% and 0.09% during these periods.

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 $23.3 million during the second quarter of 2018
to $1.27 billion primarily as a result of declines in portfolio
valuations as well as decreases in swap gains and dividend distributions
in excess of earnings. Portfolio leverage (secured borrowings divided by
long-term investment capital) increased to 9.42 to one at June 30, 2018
from 9.26 to one at March 31, 2018.

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 and six months ended June 30, 2018:

         
        Quarter Ended

June 30, 2018

    Six Months Ended

June 30, 2018

Book value per common share, beginning of period $ 10.10       $ 10.25      

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

(0.18 ) (0.66 )

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

 

Secured borrowings (0.04 ) 0.18
Unsecured borrowings   0.02     0.08  
  (0.20 ) (2.0 )%   (0.40 ) (3.9 )%
Capital transactions:
Accretion from common stock repurchases 0.06
Dividend distributions in excess of earnings (0.05 ) (0.05 )
Stock compensation-related activity       (0.01 )
  (0.05 ) (0.5 )%     %
Book value per common share, end of period $ 9.85   $ 9.85  

Decrease in book value per common share during the indicated
periods

$ (0.25 ) (2.5 )% $ (0.40 ) (3.9 )%
 

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, "We anticipated
that earnings for the second and third quarters would be affected by
increased mortgage prepayment activity associated with seasonal factors
and higher borrowing costs resulting from recent Federal Reserve actions
to increase short-term interest rates. Unfortunately, increases in
longer term rates have not kept pace with increasing short-term rates
resulting in a flatter yield curve. This is further hampering our
operating results, as eligible homeowners with currently resetting
mortgages take advantage of opportunities to refinance. Further, with
the Federal Reserve likely to raise rates in 25 basis point increments
one or two more times this year, earnings pressure from higher borrowing
costs is likely to continue, even as prepayments recede in the fall with
the end of the summer home buying season.

"Despite these headwinds, we posted only a modestly negative
year-to-date economic return (change in book value plus dividends) of
-0.98%. We expect this performance will compare favorably to the results
of peers investing primarily in longer duration mortgage securities.

"We recorded $4.7 million more in investment premium amortization this
quarter compared to the first quarter resulting in approximately five
cents in lower earnings. Cash yields increased eight basis points,
partially offsetting 15 basis points in higher borrowing rates, which
together resulted in lower earnings of approximately three cents.
Operating costs were lower primarily due to lower compensation-related
accruals, benefiting results by nearly one cent.

"Average portfolio balances were lower this quarter primarily reflecting
the effects of funding first quarter stock repurchases with a portion of
our capital made available from portfolio runoff as well as lower
portfolio values. We were not active buying back our stock this quarter,
other than some trades initiated last quarter that settled in early
April. Future buyback activity will depend on market conditions.

"Cash yields are expected to continue improving with over 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 since the beginning of the year. 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.

"Our near-term results will continue to be driven by mortgage prepayment
levels, coupon resets and the pace of future increases in short-term
rates. We remain committed to our strategy of operating a
cost-effective, internally managed REIT investing in a leveraged
portfolio of short duration agency-guaranteed residential ARM securities
with the goal of generating attractive risk-adjusted returns over the
long-term."

Earnings Conference Call Details

An earnings conference call and live audio webcast will be hosted
Thursday, July 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 October 26,
2018. An audio replay can be accessed one hour after the end of the
conference call, also through October 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 10122272.

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)

 
 
        June 30, 2018   December 31, 2017
(unaudited)
Assets

Residential mortgage investments ($12.58 and $12.98 billion
pledged at June 30, 2018 and December 31, 2017, respectively)

$ 13,017,107 $ 13,454,098
Cash collateral receivable from interest rate swap counterparties 33,630 42,506
Cash and cash equivalents 57,403 103,907
Receivables and other assets   148,215   132,938  
$ 13,256,355 $ 13,733,449  
Liabilities
Secured borrowings $ 11,936,869 $ 12,331,060
Interest rate swap agreements at fair value 16,161 23,772
Unsecured borrowings 98,241 98,191
Common stock dividend payable 13,232 18,487
Accounts payable and accrued expenses   22,996   23,063  
  12,087,499   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 June 30, 2018 and December 31, 2017

250,946 250,946

Common stock - $0.01 par value; 250,000 shares authorized: 92,446
and 95,698 shares issued and outstanding at June 30, 2018 and
December 31, 2017, respectively

924 957
Paid-in capital 1,237,812 1,271,425
Accumulated deficit (346,570 ) (346,570 )
Accumulated other comprehensive income   25,744   62,118  
  1,168,856   1,238,876  
$ 13,256,355 $ 13,733,449  
 
Long-term investment capital (consists of stockholders'
equity and unsecured borrowings) (unaudited)
$ 1,267,097 $ 1,337,067
Portfolio leverage (secured borrowings divided by
long-term investment capital) (unaudited)
9.42:1 9.22:1
Book value per common share (based on common shares
outstanding and calculated assuming liquidation preferences for
preferred stock) (unaudited)
$ 9.85 $ 10.25
 
         
CAPSTEAD MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(unaudited)

 
Quarter Ended

June 30

Six Months Ended

June 30

2018     2017 2018     2017
Interest income:
Residential mortgage investments $ 65,202 $ 56,103 $ 134,340 $ 110,944
Other   305     238     713     391  
  65,507     56,341     135,053     111,335  
Interest expense:
Secured borrowings (48,241 ) (33,850 ) (93,262 ) (62,090 )
Unsecured borrowings   (1,900 )   (1,900 )   (3,791 )   (3,791 )
  (50,141 )   (35,750 )   (97,053 )   (65,881 )
  15,366     20,591     38,000     45,454  
Other revenue (expense):
Compensation-related expense (1,560 ) (1,833 ) (3,608 ) (2,948 )
Other general and administrative expense (899 ) (1,276 ) (2,136 ) (2,338 )
Miscellaneous other revenue   81     67     152     82  
  (2,378 )   (3,042 )   (5,592 )   (5,204 )
Net income $ 12,988   $ 17,549   $ 32,408   $ 40,250  
Net income available to common stockholders:
Net income $ 12,988 $ 17,549 $ 32,408 $ 40,250
Less preferred stock dividends   (4,842 )   (4,018 )   (9,684 )   (7,882 )
$ 8,146   $ 13,531   $ 22,724   $ 32,368  
 
Net income per common share:
Basic and diluted $ 0.09 $ 0.14 $ 0.24 $ 0.34
 
Weighted average common shares outstanding:
Basic 92,001 95,756 92,709 95,755
Diluted 92,121 95,916 92,810 95,895
 
Cash dividends declared per share:
Common $ 0.14 $ 0.21 $ 0.30 $ 0.42
Series E preferred 0.47 0.47 0.94 0.94
 
       
CAPSTEAD MORTGAGE CORPORATION
QUARTERLY STATEMENTS OF INCOME AND SELECT OPERATING STATISTICS

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

 
2018   2017
Q2     Q1 Q4     Q3     Q2     Q1
Quarterly Statements of Income:
Interest income:
Residential mortgage investments $ 65,202 $ 69,138 $ 64,418 $ 57,073 $ 56,103 $ 54,841
Other   305     408     207     366     238     153  
  65,507     69,546     64,625     57,439     56,341     54,994  
Interest expense:
Secured borrowings (48,241 ) (45,021 ) (40,012 ) (36,655 ) (33,850 ) (28,240 )
Unsecured borrowings   (1,900 )   (1,891 )   (1,909 )   (1,910 )   (1,900 )   (1,891 )
  (50,141 )   (46,912 )   (41,921 )   (38,565 )   (35,750 )   (30,131 )
  15,366     22,634     22,704     18,874     20,591     24,863  
Other revenue (expense):
Compensation-related expense (1,560 ) (2,048 ) (894 ) (1,073 ) (1,833 ) (1,115 )
Other general and administrative expense (899 ) (1,237 ) (1,254 ) (1,097 ) (1,276 ) (1,062 )
Miscellaneous other revenue   81     71     2,031     48     67     15  
  (2,378 )   (3,214 )   (117 )   (2,122 )   (3,042 )   (2,162 )
Net income $ 12,988   $ 19,420   $ 22,587   $ 16,752   $ 17,549   $ 22,701  
Net income per diluted common share $ 0.09 $ 0.16 $ 0.19 $ 0.13 $ 0.14 $ 0.20
Average diluted common shares outstanding 92,121 93,506 95,658 95,923 95,916 95,875
 
Select Operating Statistics:
Average portfolio outstanding (cost basis) $ 13,025,353 $ 13,303,044 $ 13,502,798 $ 13,513,833 $ 13,501,791 $ 13,102,455
Average long-term investment capital

("LTIC")

1,280,231 1,314,537 1,362,700 1,353,859 1,358,646 1,361,102
Investment premium amortization 30,319 25,620 29,773 34,950 33,661 30,385
Constant prepayment rate ("CPR") 23.82 % 19.64 % 22.50 % 25.77 % 24.69 % 22.93 %
Total financing spreads 0.33 0.55 0.56 0.46 0.52 0.68

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

0.38 0.61 0.62 0.52 0.58 0.74
Operating costs as a percentage of LTIC 0.77 1.01 0.62 0.64 0.92 0.74
Return on common equity capital 3.51 6.12 6.95 4.61 5.13 7.18
 
             
CAPSTEAD MORTGAGE CORPORATION
QUARTERLY FINANCING SPREADS AND CPR

(annualized, unaudited)

 
2018 2017 2016
Q2     Q1 Q4     Q3     Q2     Q1 Q4     Q3
Total financing spreads: (a)
Yields on all interest-earning assets 2.00 % 2.07 % 1.90 % 1.68 % 1.65 % 1.67 % 1.49 % 1.45 %
Borrowing rates on all interest-paying liabilities 1.67 1.52 1.34 1.22 1.13 0.99 0.94 0.89
Total financing spreads 0.33 0.55 0.56 0.46 0.52 0.68 0.55 0.56

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

Cash yields on residential mortgage investments (b)

2.93 2.85 2.79 2.72 2.66 2.60 2.55 2.52
Investment premium amortization (b) (0.93 ) (0.77 ) (0.88 ) (1.03 ) (1.00 ) (0.93 ) (1.05 ) (1.06 )
Yields on residential mortgage investments 2.00 2.08 1.91 1.69 1.66 1.67 1.50 1.46
Unhedged secured borrowing rates (c) 1.97 1.64 1.39 1.33 1.09 0.89 0.79 0.69
Hedged secured borrowing rates (c) 1.36 1.35 1.23 1.10 1.08 0.96 0.95 0.93
Secured borrowing rates 1.62 1.47 1.29 1.17 1.08 0.93 0.89 0.84

Financing spreads on residential mortgage investments

0.38 0.61 0.62 0.52 0.58 0.74 0.61 0.62
CPR 23.82 19.64 22.50 25.77 24.69 22.93 25.59 25.80
 

(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 1.53% and 1.34% for the
second and first quarters of 2018, while variable-rate receipt
adjustments and clearing fees averaged (0.17)% and 0.01% for the
same periods. 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
Q2     Q1 Q4     Q3     Q2     Q1 Q4     Q3
Total financing spreads 0.33 % 0.55 % 0.56 % 0.46 % 0.52 % 0.68 % 0.55 % 0.56 %

Impact of yields on other interest-earning assets*

- 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 0.05 0.06 0.05 0.05

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

0.38 % 0.61 0.62 0.52 0.58 0.74 0.61 0.62
 

* 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)

 
June 30, 2018 December 31, 2017
Unpaid

Principal

Balance

    Investment

Premiums

    Basis or

Notional

Amount

    Fair

Value

    Unrealized Gains

(Losses)

Unrealized Gains

(Losses)

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

Fannie Mae/Freddie Mac securities:
Current-reset ARMs $ 5,328,124 $ 179,101 $ 5,507,225 $ 5,577,451 $ 70,226 $ 83,877
Longer-to-reset ARMs 4,434,652 115,909 4,550,561 4,476,223 (74,338 ) (35,159 )
Ginnie Mae securities:
Current-reset ARMs 1,357,806 44,593 1,402,399 1,409,066 6,667 3,202
Longer-to-reset ARMs   1,534,739   34,489   1,569,228   1,551,352     (17,876 )   (6,676 )
$ 12,655,321 $ 374,092 $ 13,029,413 $ 13,014,092   $ (15,321 ) $ 45,244  
Interest rate swap agreements: (b)
Secured borrowings-related $ 6,950,000 $ 57,225 $ 57,225 $ 40,646
Unsecured borrowings-related 100,000 (16,161 ) (16,161 ) (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 $1.3 million and unsecuritized investments in
residential mortgage loans with a cost basis of $1.7 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.

 
         
Period of Contract Expiration       Swap Notional

Amounts

  Average

Fixed Rates

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 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
$6,950,000
 

After consideration of portfolio financing-related swap positions,
Capstead's residential mortgage investments and related secured
borrowings had durations as of
June 30, 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 June 30, 2018)

(dollars in thousands, unaudited)

 
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 (c)

Current-reset ARMs:
Fannie Mae Agency Securities $ 3,872,392 3.44 % 4.28 % 1.68 % 2.86 % 9.24 % 6.1
Freddie Mac Agency Securities 1,634,833 3.42 4.48 1.79 2.34 9.08 7.4
Ginnie Mae Agency Securities 1,402,399 2.93 3.85 1.51 1.06 8.35 6.1
Residential mortgage loans   1,108 4.04 4.49 2.11 1.72 11.17 5.1
(53% of total)   6,910,732 3.33 4.24 1.67 2.37 9.02 6.4
Longer-to-reset ARMs:
Fannie Mae Agency Securities 3,029,563 2.84 4.35 1.59 3.10 7.84 41.4
Freddie Mac Agency Securities 1,520,998 2.76 4.40 1.64 2.74 7.83 38.7
Ginnie Mae Agency Securities   1,569,228 3.10 3.83 1.50 1.01 8.11 48.5
(47% of total)   6,119,789 2.88 4.23 1.58 2.16 7.92 42.6
$ 13,030,521 3.12 4.24 1.63 2.29 8.58 23.5
Gross WAC (rate paid by borrowers)(d) 3.71
 

(a)

 

Amortized cost basis represents the Company's investment
(unpaid principal balance plus unamortized investment premiums)
before unrealized gains and losses. At June 30, 2018, the ratio of
amortized cost basis to unpaid principal balance for the Company's
ARM holdings was 102.96. 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, 73% of current-reset ARMs were subject to periodic
caps averaging 1.76%; 20% were subject to initial caps averaging
3.10%; and 7% were subject to lifetime caps averaging 6.87%. All
longer-to-reset ARM securities at June 30, 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 June 30, 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 80% 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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