Attached files

file filename
EX-32.2 - EX-32.2 - CAPSTEAD MORTGAGE CORPcmo-ex322_12.htm
EX-32.1 - EX-32.1 - CAPSTEAD MORTGAGE CORPcmo-ex321_6.htm
EX-31.2 - EX-31.2 - CAPSTEAD MORTGAGE CORPcmo-ex312_11.htm
EX-31.1 - EX-31.1 - CAPSTEAD MORTGAGE CORPcmo-ex311_7.htm
EX-12 - EX-12 - CAPSTEAD MORTGAGE CORPcmo-ex12_8.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

  

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

For the quarterly period ended:  March 31, 2018

OR

        

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

For the transition period from ____________ to ______________

Commission File Number:  001-08896

CAPSTEAD MORTGAGE CORPORATION

(Exact name of Registrant as specified in its Charter)

 

Maryland

 

75-2027937

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

8401 North Central Expressway, Suite 800, Dallas, TX

 

75225-4404

(Address of principal executive offices)

 

(Zip Code)

(214) 874-2323

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     YES      NO          

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

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

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

Emerging growth company    

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES              NO       

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common Stock ($0.01 par value)

 

92,445,903 as of April 30, 2018

 


 

 

CAPSTEAD MORTGAGE CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2018

 

 

INDEX

 

 

PART I. FINANCIAL INFORMATION

 

 

 

Page

ITEM 1.

Financial Statements (unaudited)

 

 

 

 

Consolidated Balance Sheets March 31, 2018 and December 31, 2017

3

 

 

 

Consolidated Statements of Income Quarter Ended March 31, 2018 and 2017

4

 

 

 

Consolidated Statements of Comprehensive Income Quarter Ended March 31, 2018 and 2017

5

 

 

 

Consolidated Statements of Cash Flows Quarter Ended March 31, 2018 and 2017

6

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

ITEM 2.

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

21

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosure of Market Risk

36

 

 

 

ITEM 4.

Controls and Procedures

36

 

 

 

PART II. OTHER INFORMATION

 

 

ITEM 1A.

Risk Factors

37

 

ITEM 6.

Exhibits

37

 

 

SIGNATURES

39

 

 

 

-2-


 

ITEM 1.    FINANCIAL STATEMENTS

PART I. FINANCIAL INFORMATION

CAPSTEAD MORTGAGE CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except 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

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

-3-


 

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

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

-4-


 

CAPSTEAD MORTGAGE CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands, unaudited)

 

 

 

Quarter Ended

 

 

 

March 31

 

 

 

2018

 

 

2017

 

Net income

 

$

19,420

 

 

$

22,701

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

Amounts related to available-for-sale securities:

 

 

 

 

 

 

 

 

Change in net unrealized gains (losses)

 

 

(44,053

)

 

 

3,996

 

Amounts related to cash flow hedges:

 

 

 

 

 

 

 

 

Change in net unrealized gains (losses)

 

 

30,933

 

 

 

8,096

 

Reclassification adjustment for amounts

   included in net income

 

 

(4,644

)

 

 

1,661

 

 

 

 

(17,764

)

 

 

13,753

 

Comprehensive income

 

$

1,656

 

 

$

36,454

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

-5-


 

CAPSTEAD MORTGAGE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

 

 

 

Quarter Ended March 31

 

 

 

2018

 

 

2017

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

19,420

 

 

$

22,701

 

Noncash items:

 

 

 

 

 

 

 

 

Amortization of investment premiums

 

 

25,620

 

 

 

30,385

 

Amortization of equity-based awards

 

 

415

 

 

 

637

 

Other depreciation and amortization

 

 

26

 

 

 

29

 

Change in recorded measureable hedge ineffectiveness on

   interest rate swap agreements designated as cash flow hedges

 

 

 

 

 

182

 

Net change in receivables, other assets, accounts payable and

   accrued expenses

 

 

1,290

 

 

 

(2,453

)

Net cash provided by operating activities

 

 

46,771

 

 

 

51,481

 

Investing activities:

 

 

 

 

 

 

 

 

Purchases of residential mortgage investments

 

 

(461,381

)

 

 

(1,036,560

)

Interest receivable acquired with the purchase of residential

   mortgage investments

 

 

(798

)

 

 

(1,722

)

Principal collections on residential mortgage investments,

   including changes in mortgage securities principal remittance

   receivable

 

 

812,524

 

 

 

933,699

 

Net cash provided by (used in) investing activities

 

 

350,345

 

 

 

(104,583

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from repurchase arrangements and similar

   borrowings

 

 

48,138,234

 

 

 

36,205,044

 

Principal payments on repurchase arrangements and similar

   borrowings

 

 

(48,524,450

)

 

 

(36,062,662

)

Decrease (increase) in cash collateral receivable from interest rate

   swap counterparties

 

 

5,920

 

 

 

(15,265

)

Net proceeds from interest rate swap settlements

 

 

21,324

 

 

 

20,070

 

Proceeds from issuance of preferred shares

 

 

 

 

 

299

 

Common stock repurchases

 

 

(29,062

)

 

 

 

Other capital stock transactions

 

 

(72

)

 

 

(261

)

Dividends paid

 

 

(23,002

)

 

 

(26,217

)

Net cash (used in) provided by financing activities

 

 

(411,108

)

 

 

121,008

 

Net change in cash and cash equivalents

 

 

(13,992

)

 

 

67,906

 

Cash and cash equivalents at beginning of period

 

 

103,907

 

 

 

56,732

 

Cash and cash equivalents at end of period

 

$

89,915

 

 

$

124,638

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

-6-


 

CAPSTEAD MORTGAGE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2018

(unaudited)

 

NOTE 1 BUSINESS

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

NOTE 2 BASIS OF PRESENTATION

Interim Financial Reporting

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the quarter ended March 31, 2018 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2018.  For further information refer to the audited consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2017.

Recent Accounting Pronouncements

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

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

-7-


 

NOTE 3 NET INCOME PER COMMON SHARE

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

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

 

 

 

Quarter Ended

 

 

 

March 31

 

 

 

2018

 

 

2017

 

Basic net income per common share

 

 

 

 

 

 

 

 

Numerator for basic net income per common share:

 

 

 

 

 

 

 

 

Net income

 

$

19,420

 

 

$

22,701

 

Preferred stock dividends

 

 

(4,842

)

 

 

(3,864

)

Earnings participation of unvested equity awards

 

 

(32

)

 

 

(40

)

 

 

$

14,546

 

 

$

18,797

 

Denominator for basic net income per common share:

 

 

 

 

 

 

 

 

Average number of shares of common stock outstanding

 

 

93,867

 

 

 

96,061

 

Average unvested stock awards outstanding

 

 

(442

)

 

 

(306

)

 

 

 

93,425

 

 

 

95,755

 

 

 

$

0.16

 

 

$

0.20

 

Diluted net income per common share

 

 

 

 

 

 

 

 

Numerator for diluted net income per common share:

 

 

 

 

 

 

 

 

Numerator for basic net income per common share

 

$

14,546

 

 

$

18,797

 

Denominator for diluted net income per common share:

 

 

 

 

 

 

 

 

Denominator for basic net income per common share

 

 

93,425

 

 

 

95,755

 

Net effect of dilutive equity awards

 

 

81

 

 

 

120

 

 

 

 

93,506

 

 

 

95,875

 

 

 

$

0.16

 

 

$

0.20

 

 

-8-


 

NOTE 4 RESIDENTIAL mortgage investments

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

 

 

 

Unpaid

Principal

Balance

 

 

Investment Premiums

 

 

Amortized Cost Basis

 

 

Carrying

Amount (a)

 

 

Net

WAC (b)

 

 

Average

Yield (b)

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae/Freddie Mac:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate

 

$

209

 

 

$

1

 

 

$

210

 

 

$

210

 

 

 

6.50

%

 

 

5.94

%

ARMs

 

 

9,904,243

 

 

 

303,393

 

 

 

10,207,636

 

 

 

10,218,600

 

 

 

3.02

 

 

 

2.10

 

Ginnie Mae ARMs

 

 

2,759,328

 

 

 

80,738

 

 

 

2,840,066

 

 

 

2,830,293

 

 

 

2.88

 

 

 

2.00

 

 

 

 

12,663,780

 

 

 

384,132

 

 

 

13,047,912

 

 

 

13,049,103

 

 

 

2.99

 

 

 

2.08

 

Residential mortgage loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate

 

 

623

 

 

 

1

 

 

 

624

 

 

 

624

 

 

 

6.76

 

 

 

4.96

 

ARMs

 

 

1,155

 

 

 

7

 

 

 

1,162

 

 

 

1,162

 

 

 

4.04

 

 

 

3.04

 

 

 

 

1,778

 

 

 

8

 

 

 

1,786

 

 

 

1,786

 

 

 

4.99

 

 

 

3.70

 

Collateral for structured

   financings

 

 

1,163

 

 

 

19

 

 

 

1,182

 

 

 

1,182

 

 

 

8.17

 

 

 

9.72

 

 

 

$

12,666,721

 

 

$

384,159

 

 

$

13,050,880

 

 

$

13,052,071

 

 

 

2.99

 

 

 

2.08

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae/Freddie Mac:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate

 

$

265

 

 

$

1

 

 

$

266

 

 

$

266

 

 

 

6.51

%

 

 

6.22

%

ARMs

 

 

10,216,099

 

 

 

313,547

 

 

 

10,529,646

 

 

 

10,578,364

 

 

 

2.97

 

 

 

1.93

 

Ginnie Mae ARMs

 

 

2,791,340

 

 

 

84,297

 

 

 

2,875,637

 

 

 

2,872,163

 

 

 

2.78

 

 

 

1.83

 

 

 

 

13,007,704

 

 

 

397,845

 

 

 

13,405,549

 

 

 

13,450,793

 

 

 

2.93

 

 

 

1.91

 

Residential mortgage loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate

 

 

645

 

 

 

1

 

 

 

646

 

 

 

646

 

 

 

6.74

 

 

 

5.32

 

ARMs

 

 

1,211

 

 

 

7

 

 

 

1,218

 

 

 

1,218

 

 

 

4.04

 

 

 

3.19

 

 

 

 

1,856

 

 

 

8

 

 

 

1,864

 

 

 

1,864

 

 

 

4.98

 

 

 

3.91

 

Collateral for structured

   financings

 

 

1,418

 

 

 

23

 

 

 

1,441

 

 

 

1,441

 

 

 

7.94

 

 

 

7.67

 

 

 

$

13,010,978

 

 

$

397,876

 

 

$

13,408,854

 

 

$

13,454,098

 

 

 

2.93

 

 

 

1.91

 

 

(a)

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

(b)

Net WAC, or weighted average coupon, is the weighted average interest rate of the mortgage loans underlying the indicated investments net of servicing and other fees as of the indicated balance sheet date.  Net WAC is expressed as a percentage calculated on an annualized basis on the unpaid principal balances of the mortgage loans underlying these investments.  Average yield is presented for the quarter then ended, and is based on the cash component of interest income expressed as a percentage calculated on an annualized basis on average amortized cost basis (the “cash yield”) less the effects of amortizing investment premiums.  Investment premium amortization is determined using the interest method and incorporates actual and anticipated future mortgage prepayments.

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

-9-


 

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

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

Capstead classifies its ARM investments based on average number of months until coupon reset (“months to roll”).  Months to roll is an indicator of asset duration which is a measure of market price sensitivity to interest rate movements.  A shorter duration generally indicates less interest rate risk.  Current-reset ARM investments have months to roll of less than 18 months while longer-to-reset ARM investments have months to roll of 18 months or greater.  As of March 31, 2018, the average months to roll for the Company’s $6.84 billion (amortized cost basis) in current-reset ARM investments was 6.3 months while the average months to roll for the Company’s $6.20 billion (amortized cost basis) in longer-to-reset ARM investments was 42.0 months.

NOTE 5 SECURED borrowings

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

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

-10-


 

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

 

Collateral Type

 

Collateral

Carrying

Amount

 

 

Accrued

Interest

Receivable

 

 

Borrowings

Outstanding

 

 

Average

Borrowing

Rates

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings under repurchase arrangements with

   maturities of 30 days or less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Securities

 

$

12,559,176

 

 

$

31,369

 

 

$

11,913,651

 

 

 

1.88

%

Borrowings under repurchase arrangements with

   maturities greater than 30 days:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Securities (31 to 90 days)

 

 

32,595

 

 

 

72

 

 

 

30,008

 

 

 

1.78

 

Similar borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateral for structured financings

 

 

1,182

 

 

 

 

 

 

1,182

 

 

 

8.17

 

 

 

$

12,592,953

 

 

$

31,441

 

 

$

11,944,841

 

 

 

1.88

 

Quarter-end borrowing rates adjusted for effects

   of related derivative financial instruments

   (Derivatives) held as cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings under repurchase arrangements with

   maturities of 30 days or less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Securities

 

$

12,943,193

 

 

$

30,646

 

 

$

12,296,546

 

 

 

1.60

%

Borrowings under repurchase arrangements with

   maturities greater than 30 days:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Securities (31 to 90 days)

 

 

35,568

 

 

 

75

 

 

 

33,073

 

 

 

1.53

 

Similar borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateral for structured financings

 

 

1,441

 

 

 

 

 

1,441

 

 

 

7.94

 

 

 

$

12,980,202

 

 

$

30,721

 

 

$

12,331,060

 

 

 

1.60

 

Year-end borrowing rates adjusted for effects of

   related Derivatives held as cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.46

 

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

 

 

 

Quarter Ended

 

 

 

March 31, 2018

 

 

December 31, 2017

 

 

 

Average

Borrowings

 

 

Average

Rate

 

 

Average

Borrowings

 

 

Average

Rate

 

Average borrowings and rates adjusted for the

   effects of related Derivatives held as cash flow

   hedges for the indicated periods

 

$

12,235,554

 

 

 

1.47

%

 

$

12,408,550

 

 

 

1.29

%


-11-


 

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

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

During the quarter ended March 31, 2018, Capstead entered into swap agreements with notional amounts of $500 million requiring fixed-rate interest payments each averaging 2.44% for two and three-year periods commencing on various dates between February and April 2018. Also during the quarter ended March 31, 2018, $1.70 billion notional amount of swaps requiring fixed-rate interest payments averaging 0.76% matured.  At March 31, 2018, the Company’s portfolio financing-related swap positions had the following characteristics (dollars in thousands):

 

Period of

Contract Expiration

 

Notional

Amount

 

 

Average Fixed-Rate

Payment Requirement

 

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