EXHIBIT 10.27 CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES DEFERRED COMPENSATION PLAN
CAPSTEAD MORTGAGE CORPORATION DEFERRED COMPENSATION PLAN WHEREAS, Capstead Mortgage Corporation, a Maryland corporation having its headquarters at 2711 N. Haskell, Suite 900, Dallas, Texas 75204, desires to implement the Capstead Mortgage Corporation Deferred Compensation Plan; WHEREAS, the Company wishes to participate in Participant's capital accumulation and is establishing this Plan to do so; WHEREAS, the Company desires to establish a benefit restoration plan for the exclusive benefit of a select group of its management and highly compensated employees to restore retirement benefits on behalf of such employees decreased due to limitations imposed by the Internal Revenue Code of 1986; and WHEREAS, this Plan is intended to be an "employee pension benefit plan" under Title I of ERISA, and which is unfunded and maintained by the Company primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, and the terms of this Plan shall be interpreted accordingly. ARTICLE I PLAN DEFINITIONS 1.1 "Account Balance" means the accrued balance of all Participant deferrals, all Company contributions, and all interest credited to the Account of each Participant. 1.2 "Beneficiary" means the person or persons designated by the Participant under Article VIl of this Plan who may become entitled to receive benefits payable under Article Vl of this Plan. 1.3 "Board" means the Board of Directors of the Company. 1.4 "Company" means Capstead Mortgage Corporation, a Maryland corporation, any subsidiary and any successor corporation or entity. 1.5 "Compensation Committee" means the Compensation Committee of the Board. A function exercisable by such Committee may also be exercised by the Board. 1.6 "Disability Date" means the first day of the seventh calendar month following the date a Participant becomes totally and permanently disabled. A Participant in active Service shall be totally and permanently disabled for the purposes of the Plan if all of the following conditions are satisfied: (a) he qualifies for disability benefits under the Company's Long Term Disability Plan; and (b) in the opinion of the Compensation Committee, it is unlikely that the Participant will return to active Service.
1.7 "Earnings" means the base salary, any compensation paid pursuant to the Base Incentive Compensation Plan of the Company and any commissions paid by the Company during the Plan Year. 1.8 "Eligibility Age" means the age of a Participant calculated at the first day of the Plan Year.
CAPSTEAD MORTGAGE CORPORATION DEFERRED COMPENSATION PLAN WHEREAS, Capstead Mortgage Corporation, a Maryland corporation having its headquarters at 2711 N. Haskell, Suite 900, Dallas, Texas 75204, desires to implement the Capstead Mortgage Corporation Deferred Compensation Plan; WHEREAS, the Company wishes to participate in Participant's capital accumulation and is establishing this Plan to do so; WHEREAS, the Company desires to establish a benefit restoration plan for the exclusive benefit of a select group of its management and highly compensated employees to restore retirement benefits on behalf of such employees decreased due to limitations imposed by the Internal Revenue Code of 1986; and WHEREAS, this Plan is intended to be an "employee pension benefit plan" under Title I of ERISA, and which is unfunded and maintained by the Company primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, and the terms of this Plan shall be interpreted accordingly. ARTICLE I PLAN DEFINITIONS 1.1 "Account Balance" means the accrued balance of all Participant deferrals, all Company contributions, and all interest credited to the Account of each Participant. 1.2 "Beneficiary" means the person or persons designated by the Participant under Article VIl of this Plan who may become entitled to receive benefits payable under Article Vl of this Plan. 1.3 "Board" means the Board of Directors of the Company. 1.4 "Company" means Capstead Mortgage Corporation, a Maryland corporation, any subsidiary and any successor corporation or entity. 1.5 "Compensation Committee" means the Compensation Committee of the Board. A function exercisable by such Committee may also be exercised by the Board. 1.6 "Disability Date" means the first day of the seventh calendar month following the date a Participant becomes totally and permanently disabled. A Participant in active Service shall be totally and permanently disabled for the purposes of the Plan if all of the following conditions are satisfied: (a) he qualifies for disability benefits under the Company's Long Term Disability Plan; and (b) in the opinion of the Compensation Committee, it is unlikely that the Participant will return to active Service.
1.7 "Earnings" means the base salary, any compensation paid pursuant to the Base Incentive Compensation Plan of the Company and any commissions paid by the Company during the Plan Year. 1.8 "Eligibility Age" means the age of a Participant calculated at the first day of the Plan Year. 1.9 "Participant" means any executive of the Company who is receiving Earnings as an employee of the Company and who is designated as a Participant by the Compensation Committee as provided in Article III. A Participant shall also mean a retired or terminated Participant who continues to be entitled to benefits under this Plan after his Termination of Service. 1.10 "Plan" means the Capstead Mortgage Corporation Deferred Compensation Plan, and subject to Article Vll, any amendments thereto.
1.7 "Earnings" means the base salary, any compensation paid pursuant to the Base Incentive Compensation Plan of the Company and any commissions paid by the Company during the Plan Year. 1.8 "Eligibility Age" means the age of a Participant calculated at the first day of the Plan Year. 1.9 "Participant" means any executive of the Company who is receiving Earnings as an employee of the Company and who is designated as a Participant by the Compensation Committee as provided in Article III. A Participant shall also mean a retired or terminated Participant who continues to be entitled to benefits under this Plan after his Termination of Service. 1.10 "Plan" means the Capstead Mortgage Corporation Deferred Compensation Plan, and subject to Article Vll, any amendments thereto. 1.11 "Plan Year" means the twelve (12) month period which commences January 1 and ends on December 31, or under the first Plan Year, the six (6) month period from the effective date of the Plan until December 31 of the same year. 1.12 "Retirement Date" means the date on which a Participant separates from Service with the Company after the attainment of age 60 or completion of 30 years of Service. 1.13 "Service" means the period of full time employment of a Participant with the Company as defined in the Company's applicable policies and procedures. 1.14 "Subsidiary" means any corporation, at least fifty percent of the outstanding voting stock of which is beneficially owned directly or indirectly by the Company. 1.15 "Termination of Service" means the date of termination of a Participant's Service whether by voluntary or involuntary separation. 1.16 "Trust" means the Grantor Trust under the Capstead Mortgage Corporation Deferred Compensation Plan. 1.17 "Vested" means the annual vesting of all Company contributions under Article IV of the Plan. A Participant shall be credited with vesting service and shall be vested in Company contributions under this Plan in accordance with the vesting schedule set forth in the Company's qualified profit sharing plan (CapSave). ARTICLE II EFFECTIVE DATE 2.1 This Plan shall be effective on July 1, 1994.
ARTICLE III ELIGIBILITY AND PARTICIPATION 3.1 Designation of Participants. Participation in the Plan shall be made available to a select group of individuals designated by the Compensation Committee who provide services to the Company in key positions of management and responsibility and who are eligible to make contributions to CapSave, the amount of which is reduced by reason of the application of the limitations set forth in Sections 401(a)(17) or 402(g)(1) of the Code. ARTICLE IV DEFERRALS 4.1 Deferred Payment. Before the first day of any Plan Year (or, with respect to individuals who first become Participants during a Plan Year, on or before the date on which they become Participants) each Participant may elect to have the payment of all or a portion of his Earnings for the Plan Year (or, if later, so much of the Plan Year as commences on the day following the date on which the individual becomes a Participant) deferred until the earliest to occur of his retirement, death, Disability Date, or Termination of Service with the Company. The
ARTICLE III ELIGIBILITY AND PARTICIPATION 3.1 Designation of Participants. Participation in the Plan shall be made available to a select group of individuals designated by the Compensation Committee who provide services to the Company in key positions of management and responsibility and who are eligible to make contributions to CapSave, the amount of which is reduced by reason of the application of the limitations set forth in Sections 401(a)(17) or 402(g)(1) of the Code. ARTICLE IV DEFERRALS 4.1 Deferred Payment. Before the first day of any Plan Year (or, with respect to individuals who first become Participants during a Plan Year, on or before the date on which they become Participants) each Participant may elect to have the payment of all or a portion of his Earnings for the Plan Year (or, if later, so much of the Plan Year as commences on the day following the date on which the individual becomes a Participant) deferred until the earliest to occur of his retirement, death, Disability Date, or Termination of Service with the Company. The election shall be irrevocable and shall be made on a form prescribed by the Compensation Committee. The election shall apply only to that Plan Year or partial Plan Year. 4.2 Company Match. The Company will match ail or a portion of Participant deferrals during the Plan Year at an amount based upon the amount a Participant elects to defer under the Plan. Only Participants that have deferred the maximum pretax deferral amount under the Company's qualified profit sharing plan ("CapSave") for the twelve (12) month period preceding the end of a Plan Year will be eligible for the Company match. The Company match will be credited to a Participant's Account on the last day of the corresponding Plan Year. The Company Match will be a portion of the contribution made by a Participant into the Plan during the Plan Year based upon the Participant's Eligibility Age; the Company Match will also be limited to a percentage of Earnings based upon the Participant's Eligibility Age, in accordance with the schedule below:
MATCH RATE PER DOLLAR MAXIMUM AS A ELIGIBILITY AGE CONTRIBUTED BY PARTICIPANT PERCENTAGE OF ELIGIBLE PAY - ------------------------- -------------------------- --------------------------Ages Ages Ages Ages Ages 35 36 46 51 61 or younger to 45 to 50 to 60 and older $0.10 $0.15 $0.50 $0.75 $1.00 1% 3% 6% 9% 12%
4.3 Supplemental Contributions. The Company shall make a contribution to the Participants Account on the last day of the Plan Year equal to three percent (3%) of Earnings in excess of the maximum amount of compensation which may be recognized by a qualified plan pursuant to Section 401(a)(17) of the Internal Revenue Code for such Plan Year. The Company contribution pursuant to Section 4.3 of the Plan will be made
regardless of a Participant's amount or level of participation in any Company sponsored qualified or nonqualified plan. ARTICLE V ACCOUNT EARNINGS 5.1 Interest. At the end of each calendar year, the amount of interest to be added to the balance of the Participant's account shall equal the sum of: (a) the Company's Return on Stockholders' Equity for such calendar year multiplied by the Participant's account balance, if any, on the first day of such calendar year; and (b) the Company's Return On Stockholder's Equity (ROE) for such calendar year multiplied by the Participant's weighted average contributions (as defined below) made during such calendar year.
regardless of a Participant's amount or level of participation in any Company sponsored qualified or nonqualified plan. ARTICLE V ACCOUNT EARNINGS 5.1 Interest. At the end of each calendar year, the amount of interest to be added to the balance of the Participant's account shall equal the sum of: (a) the Company's Return on Stockholders' Equity for such calendar year multiplied by the Participant's account balance, if any, on the first day of such calendar year; and (b) the Company's Return On Stockholder's Equity (ROE) for such calendar year multiplied by the Participant's weighted average contributions (as defined below) made during such calendar year. "Weighted average contributions" is determined by (i) multiplying the contribution made in a particular month by the number of months remaining in the calendar year, (ii) adding the results, and (iii) dividing the sum by twelve. 5.2 Interest Rate. The rate of interest credited to all Participant deferrals and Company contributions pursuant to Article IV of the Plan and subsequent earnings credited to the Account shall be credited with an interest rate equal to the Company's annual ROE. ROE shall be calculated by the Company and certified by the Compensation Committee for the Plan Year within thirty (30) days following the end of a Plan Year. ARTICLE VL ACCOUNT PAYOUT 6.1 Retirement Distribution. Within sixty (60) days following the end of the Plan Year in which occurs the Retirement Date of a Participant, the Company shall pay any and all outstanding Account Balance to a Participant in either: (a) a lump sum cash payment, or (b) equal annual cash installments over a period of two (2) to fifteen (15) years with a six percent (6%) annual interest crediting rate on any Account Balance remaining each year of the remaining years. A Participant must elect the form of Retirement Distribution under Section 6.1(a) or 6.1(b) no later than twenty four (24) months preceding retirement, otherwise the Account Balance will be distributed pursuant to Section 6.1 (a). If a Participant dies while receiving a Retirement Distribution under Section 6.1(b) but before the entire Account Balance has been paid to the Participant by the Company, the Company shall pay the remaining Account Balance within sixty (60) days of the Participant's death in a lump sum to the beneficiary designated by the Participant. 6.2 Other Distributions. Within sixty (60) days following the end of the Plan Year in which Termination of Service or the Disability Date of a Participant occurs, the Company shall pay any and all outstanding Account Balance to a Participant in a lump sum cash
payment or annual installments from two to fifteen years. If no election is made prior to the Termination of Service or the Disability Date of a Participant, the Company shall pay any and all outstanding Account Balance in a lump sum cash payment. Within sixty (60) days following the death of a Participant in active Service, the Company shall pay any and all outstanding Account Balance in a lump sum cash payment or annual installments from two to fifteen years to the Beneficiary designated by the Participant pursuant to Section 7.3, and shall pay any Company contributions and interest to which the Participant would have been entitled for the Plan Year in which his death occurs within sixty (60) days following the end of such Plan Year. 6.3 Vesting. In no event shall any distribution made under Sections 6.1 or 6.2 of the Plan include Company contributions pursuant to Article IV that are not Vested.
payment or annual installments from two to fifteen years. If no election is made prior to the Termination of Service or the Disability Date of a Participant, the Company shall pay any and all outstanding Account Balance in a lump sum cash payment. Within sixty (60) days following the death of a Participant in active Service, the Company shall pay any and all outstanding Account Balance in a lump sum cash payment or annual installments from two to fifteen years to the Beneficiary designated by the Participant pursuant to Section 7.3, and shall pay any Company contributions and interest to which the Participant would have been entitled for the Plan Year in which his death occurs within sixty (60) days following the end of such Plan Year. 6.3 Vesting. In no event shall any distribution made under Sections 6.1 or 6.2 of the Plan include Company contributions pursuant to Article IV that are not Vested. ARTICLE VLL GENERAL PROVISIONS 7.1 Unfunded Obligation. The deferred amounts to be paid to Participants pursuant to this Plan are unfunded obligations of the Company. The Company is not required to segregate any monies from its general funds, to create any trusts, or to make any special deposits with respect to this obligation. Title to and beneficial ownership of any investments including trust investments which the Company may make to fulfill this obligation shall at all times remain in the Company. Any investments and the creation or maintenance of any trust or memorandum accounts shall not create or constitute a trust or a fiduciary relationship between the Compensation Committee or the Company and a Participant, or otherwise create any vested or beneficial interest in any Participant or his Beneficiary of his creditors in any assets of the Company whatsoever, 7.2 Binding Effect. This Plan shall be binding upon and inure to the benefit of the parties hereto and upon the successors and assigns of the Company, and upon the heirs and legal representatives of the Participant. 7.3 Beneficiary Designation. While covered under this Plan, the Participant may from time to time designate, in writing, any person or entity, contingently or successively to whom the Company shall pay the Account Balance pursuant to Article Vl in the event of the Participant's death. If the Participant fails to designate a Beneficiary or if the Beneficiary predeceases the Participant, then benefits shall be payable to the Participant's estate. 7.4 Assignment of Rights. None of the rights to the benefits under this Plan are assignable by the Participant or any Beneficiary or designee of the Participant, and any attempt to anticipate, sell, transfer, assign, pledge, encumber, or change the Participant's right to receive any benefits of this plan shall be void. 7.5 Plan Administration. The Compensation Committee, or its named Administrator, shall have administration authority to control and manage the operation and administration of this Plan. The Administrator shall make all determinations as to rights to benefits under this Plan. Any decision by the Administrator denying a claim made the Participant or by a
Beneficiary for benefits under this Plan shall be stated in writing and delivered or mailed to the Participant or such Beneficiary. Such statement shall set forth the specific reasons for the denial, written to the best of the Administrator's ability in a manner that may be understood without legal or actuarial counsel. In addition, the Administrator shall afford a reasonable opportunity to the Participant or such Beneficiary for a full and fair review of the decision denying such claim. Subject to the foregoing, the Compensation Committee shall have full power and authority to interpret, construe, administer and, if necessary, to modify in limited circumstances, this Plan. No member of the Board shall, in any event, be liable to any person for any action taken or omitted in connection with the interpretation, construction or administration of this Plan, so long as such action or omission to act be made in good faith. 7.6 Incapacity of Participant or Beneficiary. If the Compensation Committee finds that any Participant or Beneficiary to whom a payment is payable under the Plan is unable to care for his or her affairs because of illness or accident or is under a legal disability, any payment due (unless a prior claim therefor shall have been made by a duly appointed legal representative) at the discretion of the Committee, may be paid to the spouse, child, parent
Beneficiary for benefits under this Plan shall be stated in writing and delivered or mailed to the Participant or such Beneficiary. Such statement shall set forth the specific reasons for the denial, written to the best of the Administrator's ability in a manner that may be understood without legal or actuarial counsel. In addition, the Administrator shall afford a reasonable opportunity to the Participant or such Beneficiary for a full and fair review of the decision denying such claim. Subject to the foregoing, the Compensation Committee shall have full power and authority to interpret, construe, administer and, if necessary, to modify in limited circumstances, this Plan. No member of the Board shall, in any event, be liable to any person for any action taken or omitted in connection with the interpretation, construction or administration of this Plan, so long as such action or omission to act be made in good faith. 7.6 Incapacity of Participant or Beneficiary. If the Compensation Committee finds that any Participant or Beneficiary to whom a payment is payable under the Plan is unable to care for his or her affairs because of illness or accident or is under a legal disability, any payment due (unless a prior claim therefor shall have been made by a duly appointed legal representative) at the discretion of the Committee, may be paid to the spouse, child, parent or brother or sister of such Participant or Beneficiary or to any person whom the committee has determined has incurred expense for such Participant or Beneficiary. Any such payment shall be a complete discharge of the obligations of the Company under the provisions of the Plan. 7.7 Funding. The Company's obligations under this Plan shall be an unfunded and unsecured promise to pay. The Company shall not be obligated under any circumstances to fund or otherwise secure its obligations under this Plan. Under no circumstances will the Company, without the consent of the Participant, cause this Plan to be directly funded in whole or part through escrow, trust, or otherwise such as to create a taxable event to the Participant or the Participant's Beneficiary. 7.8 Amendment and Termination. The Board may at any time, or from time to time, amend this Plan in any respect or terminate this Plan without restriction and without consent of any Participant or beneficiary, provided that any such amendment or termination shall not impair the right of any Participant or any Beneficiary of any then deceased Participant to receive benefits earned and vested hereunder prior to such amendment or termination without the consent of such Participant or such Beneficiary. 7.9 Gender and Number. The masculine pronoun wherever used shall include the feminine. Wherever any words are used herein in the singular, they shall be construed as though they were also used in the plural in all cases where they shall so apply. 7.10 Law Governing. This Plan shall be governed by the laws of the State of Texas.
EXHIBIT 10.28 SUMMARY OF EMPLOYMENT AGREEMENT DATED DECEMBER 9, 1993 BETWEEN CAPSTEAD MORTGAGE CORPORATION AND CHRISTOPHER T. GILSON
EXHIBIT 10.28 SUMMARY OF EMPLOYMENT AGREEMENT DATED DECEMBER 9, 1993 BETWEEN CAPSTEAD MORTGAGE CORPORATION
EXHIBIT 10.28 SUMMARY OF EMPLOYMENT AGREEMENT DATED DECEMBER 9, 1993 BETWEEN CAPSTEAD MORTGAGE CORPORATION AND CHRISTOPHER T. GILSON
EXHIBIT 10.28 SUMMARY OF EMPLOYMENT AGREEMENT DATED DECEMBER 9, 1993 BETWEEN CAPSTEAD MORTGAGE CORPORATION AND CHRISTOPHER T. GILSON Mr. Gilson has an employment agreement for the duration of his employment with the Company. Mr. Gilson is entitled to receive the agreed to base salary (plus any merit increases) and incentive compensation as approved by the Compensation Committee. In the event of involuntary termination of employment, Mr. Gilson will be entitled to lump-sum severance pay equal to his base salary at the time of termination plus the average of his last two year's incentive compensation.
EXHIBIT 11 CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS
EXHIBIT 11 CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS
1994 ------------Primary: Average number of common shares outstanding Incremental shares calculated using the Treasury Stock method 1993 ------------1992 ------------
15,251,000 27,000 -----------15,278,000 ============
15,053,000 93,000 -----------15,146,000 ============ $ 94,256,000
14,333,000 61,000 ----------14,394,000 =========== $53,191,000
Net income Less cash dividends paid on convertible preferred stock: Series A ($1.60 paid per share) Series B ($1.26 paid per share in 1994 and 1993; $0.10 paid per share in 1992)
$ 85,579,000
(1,042,000)
(1,274,000)
(1,823,000)
(37,834,000) ------------
(37,318,000) ------------
(2,884,000) -----------
EXHIBIT 10.28 SUMMARY OF EMPLOYMENT AGREEMENT DATED DECEMBER 9, 1993 BETWEEN CAPSTEAD MORTGAGE CORPORATION AND CHRISTOPHER T. GILSON Mr. Gilson has an employment agreement for the duration of his employment with the Company. Mr. Gilson is entitled to receive the agreed to base salary (plus any merit increases) and incentive compensation as approved by the Compensation Committee. In the event of involuntary termination of employment, Mr. Gilson will be entitled to lump-sum severance pay equal to his base salary at the time of termination plus the average of his last two year's incentive compensation.
EXHIBIT 11 CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS
EXHIBIT 11 CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS
1994 ------------Primary: Average number of common shares outstanding Incremental shares calculated using the Treasury Stock method 1993 ------------1992 ------------
15,251,000 27,000 -----------15,278,000 ============
15,053,000 93,000 -----------15,146,000 ============ $ 94,256,000
14,333,000 61,000 ----------14,394,000 =========== $53,191,000
Net income Less cash dividends paid on convertible preferred stock: Series A ($1.60 paid per share) Series B ($1.26 paid per share in 1994 and 1993; $0.10 paid per share in 1992) Net income available to common stockholders
$ 85,579,000
(1,042,000)
(1,274,000)
(1,823,000)
(37,834,000) -----------$ 46,703,000 ============ $3.06
(37,318,000) -----------$ 55,664,000 ============ $3.68
(2,884,000) ----------$48,484,000 =========== $3.37
Primary net income per share* Fully diluted: Average number of common shares outstanding Assumed conversion of convertible preferred stock: Series A Series B Incremental shares calculated
15,251,000
15,053,000
14,333,000
597,000 **
741,000 **
1,157,000 **
EXHIBIT 11 CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS
EXHIBIT 11 CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS
1994 ------------Primary: Average number of common shares outstanding Incremental shares calculated using the Treasury Stock method 1993 ------------1992 ------------
15,251,000 27,000 -----------15,278,000 ============
15,053,000 93,000 -----------15,146,000 ============ $ 94,256,000
14,333,000 61,000 ----------14,394,000 =========== $53,191,000
Net income Less cash dividends paid on convertible preferred stock: Series A ($1.60 paid per share) Series B ($1.26 paid per share in 1994 and 1993; $0.10 paid per share in 1992) Net income available to common stockholders
$ 85,579,000
(1,042,000)
(1,274,000)
(1,823,000)
(37,834,000) -----------$ 46,703,000 ============ $3.06
(37,318,000) -----------$ 55,664,000 ============ $3.68
(2,884,000) ----------$48,484,000 =========== $3.37
Primary net income per share* Fully diluted: Average number of common shares outstanding Assumed conversion of convertible preferred stock: Series A Series B Incremental shares calculated using the Treasury Stock method
15,251,000
15,053,000
14,333,000
597,000 ** 27,000 -----------15,875,000 ============
741,000 ** 136,000 -----------15,930,000 ============ $ 94,256,000 (37,318,000) -----------$ 56,938,000 ============ $3.57
1,157,000 ** 101,000 ----------15,591,000 =========== $53,191,000 (2,884,000) ----------$50,307,000 =========== $3.23
Net income Less cash dividends paid on Series B Preferred Stock
$ 85,579,000 (37,834,000) -----------$ 47,745,000 ============ $3.01
Net income
Fully diluted net income per share
* During the year ended December 31, 1992, 1,382,551 shares of the Series A Preferred Stock was converted into 1,244,261 shares of common stock. If this conversion had occurred at the beginning of the 1992, primary net income per share would have been $3.32 per share for the year ended December 31, 1992. ** The Series B
EXHIBIT 11 CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS
1994 ------------Primary: Average number of common shares outstanding Incremental shares calculated using the Treasury Stock method 1993 ------------1992 ------------
15,251,000 27,000 -----------15,278,000 ============
15,053,000 93,000 -----------15,146,000 ============ $ 94,256,000
14,333,000 61,000 ----------14,394,000 =========== $53,191,000
Net income Less cash dividends paid on convertible preferred stock: Series A ($1.60 paid per share) Series B ($1.26 paid per share in 1994 and 1993; $0.10 paid per share in 1992) Net income available to common stockholders
$ 85,579,000
(1,042,000)
(1,274,000)
(1,823,000)
(37,834,000) -----------$ 46,703,000 ============ $3.06
(37,318,000) -----------$ 55,664,000 ============ $3.68
(2,884,000) ----------$48,484,000 =========== $3.37
Primary net income per share* Fully diluted: Average number of common shares outstanding Assumed conversion of convertible preferred stock: Series A Series B Incremental shares calculated using the Treasury Stock method
15,251,000
15,053,000
14,333,000
597,000 ** 27,000 -----------15,875,000 ============
741,000 ** 136,000 -----------15,930,000 ============ $ 94,256,000 (37,318,000) -----------$ 56,938,000 ============ $3.57
1,157,000 ** 101,000 ----------15,591,000 =========== $53,191,000 (2,884,000) ----------$50,307,000 =========== $3.23
Net income Less cash dividends paid on Series B Preferred Stock
$ 85,579,000 (37,834,000) -----------$ 47,745,000 ============ $3.01
Net income
Fully diluted net income per share
* During the year ended December 31, 1992, 1,382,551 shares of the Series A Preferred Stock was converted into 1,244,261 shares of common stock. If this conversion had occurred at the beginning of the 1992, primary net income per share would have been $3.32 per share for the year ended December 31, 1992. ** The Series B Preferred Stock is not considered convertible for purposes of calculating fully diluted net income per share as it is currently antidilutive.
EXHIBIT 12
EXHIBIT 12 CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
EXHIBIT 12 CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (IN THOUSANDS, EXCEPT RATIOS) (UNAUDITED) (a) Computation of ratio of earnings to combined fixed charges and preferred stock dividends (including CMO debt):
YEAR ENDED DECEMBER 31 -----------------------------------------------1994 1993 1992 1991 1990 -------- -------- -------- -------- -------Fixed charges Preferred stock dividends Combined fixed charges and preferred stock dividends Net income Total Ratio of earnings to combined fixed charges and preferred stock dividends $474,748 38,876 -------513,624 85,579 -------$599,203 ======== $491,076 38,592 -------529,668 94,256 -------$623,924 ======== $415,433 4,707 -------420,140 53,191 -------$473,331 ======== $189,840 7,499 -------197,339 33,717 -------$231,056 ======== $144,478 8,746 -------153,224 29,082 -------$182,306 ========
1.17:1 ========
1.18:1 ========
1.13:1 ========
1.17:1 ========
1.19:1 ========
(b) Computation of ratio of earnings to combined fixed charges and preferred stock dividends (excluding CMO debt):
YEAR ENDED DECEMBER 31 -----------------------------------------------1994 1993 1992 1991 1990 -------- -------- -------- -------- -------Fixed charges Preferred stock dividends Combined fixed charges and preferred stock dividends Net income Total Ratio of earnings to combined fixed charges and preferred stock dividends $139,092 38,876 -------177,968 85,579 -------$263,547 ======== $ 80,923 38,592 -------119,515 94,256 -------$213,771 ======== $ 62,077 4,707 -------66,784 53,191 -------$119,975 ======== $31,474 7,499 ------38,973 33,717 ------$72,690 ======= $ 8,519 8,746 ------17,265 29,082 ------$46,347 =======
1.48:1 ========
1.79:1 ========
1.80:1 ========
1.87:1 =======
2.68:1 =======
EXHIBIT 12 CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (IN THOUSANDS, EXCEPT RATIOS) (UNAUDITED) (a) Computation of ratio of earnings to combined fixed charges and preferred stock dividends (including CMO debt):
YEAR ENDED DECEMBER 31 -----------------------------------------------1994 1993 1992 1991 1990 -------- -------- -------- -------- -------Fixed charges Preferred stock dividends Combined fixed charges and preferred stock dividends Net income Total Ratio of earnings to combined fixed charges and preferred stock dividends $474,748 38,876 -------513,624 85,579 -------$599,203 ======== $491,076 38,592 -------529,668 94,256 -------$623,924 ======== $415,433 4,707 -------420,140 53,191 -------$473,331 ======== $189,840 7,499 -------197,339 33,717 -------$231,056 ======== $144,478 8,746 -------153,224 29,082 -------$182,306 ========
1.17:1 ========
1.18:1 ========
1.13:1 ========
1.17:1 ========
1.19:1 ========
(b) Computation of ratio of earnings to combined fixed charges and preferred stock dividends (excluding CMO debt):
YEAR ENDED DECEMBER 31 -----------------------------------------------1994 1993 1992 1991 1990 -------- -------- -------- -------- -------Fixed charges Preferred stock dividends Combined fixed charges and preferred stock dividends Net income Total Ratio of earnings to combined fixed charges and preferred stock dividends $139,092 38,876 -------177,968 85,579 -------$263,547 ======== $ 80,923 38,592 -------119,515 94,256 -------$213,771 ======== $ 62,077 4,707 -------66,784 53,191 -------$119,975 ======== $31,474 7,499 ------38,973 33,717 ------$72,690 ======= $ 8,519 8,746 ------17,265 29,082 ------$46,347 =======
1.48:1 ========
1.79:1 ========
1.80:1 ========
1.87:1 =======
2.68:1 =======
EXHIBIT 13 CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1994
EXHIBIT 13 CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1994
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS Stockholders and Board of Directors Capstead Mortgage Corporation We have audited the accompanying consolidated balance sheet of Capstead Mortgage Corporation and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31,1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the finacial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Capstead Mortgage Corporation and subsidiaries at December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Ernst & Young LLP Dallas, Texas January 23, 1995 1
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31 --------------------------------1994 1993 1992 ---------------------Interest income: Mortgage securities collateral Mortgage investments Total interest income Interest and related expenses: Collateralized mortgage securities Short term borrowings Mortgage insurance and other $354,603 202,398 -------557,001 -------335,656 139,092 13,476 $390,690 184,136 -------574,826 -------410,153 80,923 20,084 $383,060 117,527 -------500,587 -------353,356 62,077 13,821
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS Stockholders and Board of Directors Capstead Mortgage Corporation We have audited the accompanying consolidated balance sheet of Capstead Mortgage Corporation and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31,1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the finacial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Capstead Mortgage Corporation and subsidiaries at December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Ernst & Young LLP Dallas, Texas January 23, 1995 1
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31 --------------------------------1994 1993 1992 ---------------------Interest income: Mortgage securities collateral Mortgage investments Total interest income Interest and related expenses: Collateralized mortgage securities Short term borrowings Mortgage insurance and other Provision for possible losses Total interest and related expenses Net margin on mortgage assets Mortgage servicing revenues: Servicing fees Other $354,603 202,398 -------557,001 -------335,656 139,092 13,476 3,500 -------491,724 -------65,277 -------28,973 3,913 -------$390,690 184,136 -------574,826 -------410,153 80,923 20,084 2,800 -------513,960 -------60,866 -------1,539 (132) -------$383,060 117,527 -------500,587 -------353,356 62,077 13,821 7,750 -------437,004 -------63,583 ---------------
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31 --------------------------------1994 1993 1992 ---------------------Interest income: Mortgage securities collateral Mortgage investments Total interest income Interest and related expenses: Collateralized mortgage securities Short term borrowings Mortgage insurance and other Provision for possible losses Total interest and related expenses Net margin on mortgage assets Mortgage servicing revenues: Servicing fees Other Total mortgage servicing revenues Mortgage servicing expenses: Salaries and related costs General and administrative Amortization of purchased mortgage servicing rights Total mortgage servicing expenses Net margin on mortgage servicing operations Other revenues: Gain on sales CMO administration Other Total other revenues Other expenses: Salaries and related costs General and administrative Management fees and termination costs Total other expenses Net income $354,603 202,398 -------557,001 -------335,656 139,092 13,476 3,500 -------491,724 -------65,277 -------28,973 3,913 -------32,886 -------2,867 3,002 5,998 -------11,867 -------21,019 -------9,161 4,067 950 -------14,178 -------8,263 6,632 -------14,895 -------$ 85,579 ======== $ 85,579 (38,876) -------$ 46,703 ======== $390,690 184,136 -------574,826 -------410,153 80,923 20,084 2,800 -------513,960 -------60,866 -------1,539 (132) -------1,407 -------648 492 1,323 -------2,463 -------(1,056) -------61,216 1,482 1,875 -------64,573 -------7,456 6,505 16,166 -------30,127 -------$ 94,256 ======== $ 94,256 (38,592) -------$ 55,664 ======== $383,060 117,527 -------500,587 -------353,356 62,077 13,821 7,750 -------437,004 -------63,583 ------------------------------------------2,910 952 -------3,862 -------4,124 4,221 5,909 -------14,254 -------$ 53,191 ======== $ 53,191 (4,707) -------$ 48,484 ========
Net income Less cash dividends on preferred stock Net income available to common stockholders
Net income per share: Primary
$
3.06
$
3.68
$
3.37
Fully diluted Average number of shares outstanding: Primary Fully diluted
3.01 15,278 15,875
3.57 15,146 15,930
3.23 14,394 15,591
See accompanying notes to consolidated financial statements. 2
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS)
DECEMBER 31 -----------------------1994 1993 ------------------Assets Mortgage securities collateral Mortgage investments $5,270,103 3,305,984 ---------8,576,087 (7,354) ---------8,568,733 21,741 70,415 282,969 ---------$8,943,858 ========== $5,102,145 3,190,582 11,568 75,888 ---------8,380,183 ---------$3,995,956 2,842,151 ---------6,838,107 (6,927) ---------6,831,180 87,760 36,238 25,146 ---------$6,980,324 ========== $3,891,134 2,443,807 7,193 ----------6,342,134 ----------
Less allowance for possible losses
Cash and cash equivalents Prepaids, receivables and other Purchased mortgage servicing rights
Liabilities Collateralized mortgage securities Short term borrowings Accounts payable and accrued expenses Mortgage servicing rights acquisitions payable
Stockholders' Equity Preferred stock - $0.10 par value; 100,000 shares authorized: $1.60 Cumulative Preferred Stock, Series A, 623 and 735 shares issued and outstanding ($10,217 aggregate liquidation preference) $1.26 Cumulative Convertible Preferred Stock, Series B, 30,277 shares and 29,797 shares issued and outstanding ($344,552 aggregate liquidation preference) Common stock - $0.01 par value; 100,000 shares authorized; 15,304 and 15,154 shares issued and outstanding Paid-in capital Undistributed income (deficit) Unrealized loss on debt and equity securities
8,720
10,295
324,779
319,543
153 310,766 (2,228) (78,515) ---------563,675 ---------$8,943,858 ==========
152 308,140 60 __ ---------638,190 ---------$6,980,324 ==========
See accompanying notes to consolidated financial statements. 3
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS)
DECEMBER 31 -----------------------1994 1993 ------------------Assets Mortgage securities collateral Mortgage investments $5,270,103 3,305,984 ---------8,576,087 (7,354) ---------8,568,733 21,741 70,415 282,969 ---------$8,943,858 ========== $5,102,145 3,190,582 11,568 75,888 ---------8,380,183 ---------$3,995,956 2,842,151 ---------6,838,107 (6,927) ---------6,831,180 87,760 36,238 25,146 ---------$6,980,324 ========== $3,891,134 2,443,807 7,193 ----------6,342,134 ----------
Less allowance for possible losses
Cash and cash equivalents Prepaids, receivables and other Purchased mortgage servicing rights
Liabilities Collateralized mortgage securities Short term borrowings Accounts payable and accrued expenses Mortgage servicing rights acquisitions payable
Stockholders' Equity Preferred stock - $0.10 par value; 100,000 shares authorized: $1.60 Cumulative Preferred Stock, Series A, 623 and 735 shares issued and outstanding ($10,217 aggregate liquidation preference) $1.26 Cumulative Convertible Preferred Stock, Series B, 30,277 shares and 29,797 shares issued and outstanding ($344,552 aggregate liquidation preference) Common stock - $0.01 par value; 100,000 shares authorized; 15,304 and 15,154 shares issued and outstanding Paid-in capital Undistributed income (deficit) Unrealized loss on debt and equity securities
8,720
10,295
324,779
319,543
153 310,766 (2,228) (78,515) ---------563,675 ---------$8,943,858 ==========
152 308,140 60 __ ---------638,190 ---------$6,980,324 ==========
See accompanying notes to consolidated financial statements. 3
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
THREE YEARS ENDED DECEMBER 31, 1994
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
THREE YEARS ENDED DECEMBER 31, 1994 ---------------------------------------------------------------
PREFERRED STOCK ---------------------SERIES A SERIES B ---------- ---------Balance at January 1, 1992 Stock issuance Net income Cash dividends: Common ($3.26 per share) Preferred: Series A ($1.60 per share) Series B ($0.10 per share) Conversion of preferred stock Other Balance at December 31, 1992 Net income Cash dividends: Common ($3.66 per share) Preferred: Series A ($1.60 per share) Series B ($1.26 per share) Conversion of preferred stock Other Balance at December 31, 1993 Adjustment to beginning balance for change in accounting method Net income Cash dividends: Common ($3.21 per share) Preferred: Series A ($1.60 per share) Series B ($1.26 per share) Conversion of preferred stock Other Change in unrealized gain (loss) on debt and equity securities Balance at December 31, 1994 $ 32,616 (19,411) -------13,205 $ 315,025 -------315,025 (144) 4,662 -------319,543 (18) 5,254 -------$324,779 ========
COMMON STOCK ------$116 20 12 1 ---149 2 1 ---152 1 ---$153 ====
PAID-IN CAPITAL -------$221,522 61,623 19,399 959 -------303,503 3,052 1,585 -------308,140 1,592 1,034 -------$310,776 ========
UNDISTRIBUTED INCOME (DEFICIT) ------------- -$ (915) 53,191 (47,952) (1,823) (2,884) -------(383) 94,256 (55,221) (1,274) (37,318) -------60 85,579 (48,991) (1,042) (37,834) -------$ (2,228) ========
(2,910) -------10,295 (1,575) -------$ 8,720 ========
See accompanying notes to consolidated financial statements. 4
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
Year Ended December 31 ---------------------------------------1994 1993 1992
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
Year Ended December 31 ---------------------------------------1994 1993 1992 -----------------------------Operating activities: Net income Noncash items: Amortization of discount and premium Amortization of purchased mortgage servicing rights Depreciation and other amortization Provision for possible losses Net change in prepaids, receivables, other assets and accounts payable Net gain from investing activities Net cash provided by operating activities Investing activities: Mortgage securities collateral: Principal collections on collateral Decrease (increase) in accrued interest receivable Decrease (increase) in short term investments Purchases of mortgage loans Purchases of agency securities Purchases of mortgage servicing rights Purchase of equity securities Principal collections on mortgage investments Proceeds from sales of mortgage assets and equity securities Net cash from acquisition Net cash provided (used) by investing activities Financing activities: Collateralized mortgage securities: Issuance of securities Principal payments on securities Increase (decrease) in accrued interest payable Capital stock transactions Dividends paid Mortgage servicing rights acquisitions payable Increase in short term borrowings Net cash provided (used) by financing activities $ 85,579 6,265 5,998 1,932 3,500 (46,330) (9,161) ----------47,783 ----------$ 94,256 47,988 1,323 819 2,800 (2,273) (62,216) ----------83,697 ----------$ 53,19 7,39 14 7,75 (19,82 (2,91 ---------45,74 ----------
1,157,248 9,065 166,150 (1,935,136) (1,631,294) (263,821) (17,808) 349,806 105,288 -----------(2,060,502) -----------
2,437,768 11,302 (25,361) (4,410,950) (1,747,931) (26,469) -266,347 3,859,993 -----------364,699 -----------
1,270,68 (13,94 (98,24 (5,489,45 99,44 1,160,92 8,23 ---------(3,062,36 ----------
2,565,540 (1,352,288) (7,636) 6,288 (87,867) 75,888 746,775 ----------1,946,700 ---------(66,019) 87,760 ----------$ 21,741 ===========
1,185,482 (2,469,026) (14,427) 6,248 (93,813) -994,598 ----------(390,938) -----------57,458 30,302 ----------$ 87,760 ===========
3,564,78 (1,168,58 21,39 62,60 (52,65 593,63 ---------3,021,17 --------4,56 25,73 ---------$ 30,30 ==========
Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year
See accompanying notes to consolidated financial statements. 5
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1994 NOTE A - BUSINESS Capstead Mortgage Corporation, together with certain affiliated entities, operates as a mortgage conduit which
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1994 NOTE A - BUSINESS Capstead Mortgage Corporation, together with certain affiliated entities, operates as a mortgage conduit which purchases, securitizes and invests in various types of single-family residential mortgage loans. In addition, the Company has formed a mortgage servicing unit to function as the primary mortgage servicer for loans and mortgage servicing rights acquired by the Company. Note B - ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Capstead Mortgage Corporation ("Capstead"), its mortgage servicing subsidiary ("Capstead Inc."), its special-purpose finance subsidiaries and certain other entities (collectively, the "Company"). Intercompany balances and transactions have been eliminated. Substantially all of the assets of the special-purpose finance subsidiaries are pledged to secure collateralized mortgage securities and are not available for the satisfaction of general claims of Capstead. Capstead has no obligation for the collateralized mortgage securities beyond the assets pledged as collateral. Securities Held-to-Maturity and Available-for-Sale Management determines the appropriate classification of debt securities at the time of purchase or securitization and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Marketable equity securities and debt securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are stated at fair value, with unrealized gains and losses, net of tax, reported in a separate component of stockholders' equity. The amortized cost of debt securities classified as held-to-maturity or available-for-sale is adjusted for amortization of premiums and discounts over the estimated life of the security. Such amortization is included in interest income. Interest and dividends are included in interest income and other revenues, respectively. Realized gains and losses are included in other revenues. The cost of securities sold is based on the specific identification method. Mortgage Assets Mortgage investments and mortgage securities collateral held in the form of mortgage-backed securities are debt securities and classified as either held-to- maturity or available-for-sale. Mortgage investments held in the form of mortgage loans are carried at their unpaid principal balance, net of unamortized discount or premium and adjusted for deferred hedging gains or losses, if any. The Company may, from time to time, hold mortgage loans for sale. Mortgage loans held for sale are carried at the lower of cost or market on an aggregate basis. The cost of these mortgage loans is adjusted for gains or losses generated from corresponding hedging transactions, if any, prior to the lower of cost or market valuation. Transfers from loans held for sale to loans held for investment are recorded at the lower of cost or market. Interest 6
income, net of servicing fees, is recorded as income when earned. Any discount or premium is recognized as an adjustment to interest income by the interest method over the life of the related mortgage loan. Mortgage assets are subject to changes in value because of changes in interest rates and rates of prepayment as well as failure of the mortgagor to perform under the mortgage agreement. The Company manages its exposure to these risks by the issuance of collateralized mortgage securities, the acquisition of mortgage pool and special
income, net of servicing fees, is recorded as income when earned. Any discount or premium is recognized as an adjustment to interest income by the interest method over the life of the related mortgage loan. Mortgage assets are subject to changes in value because of changes in interest rates and rates of prepayment as well as failure of the mortgagor to perform under the mortgage agreement. The Company manages its exposure to these risks by the issuance of collateralized mortgage securities, the acquisition of mortgage pool and special hazard insurance, forward sale agreements and other strategies. Hedging Activities The Company may enter into forward sales of Federal National Mortgage Association ("FNMA") mortgagebacked securities to reduce exposure to interest rate risk primarily on fixed-rate mortgage loans which it has purchased or has committed to purchase prior to either the placement of permanent financing or sale of such loans. These forward sale agreements generally have terms of not more than 90 days. Gains and losses on these hedging transactions are deferred as an adjustment to the carrying value of the related mortgage loans and amortized into interest income using the effective yield method over the expected remaining life of the mortgage loans or taken into income on the date of sale. Allowance for Possible Losses The Company provides for possible losses due to (i) mortgagor default on mortgage loans not covered by mortgage pool insurance, (ii) fraud in the origination of mortgage loans, (iii) special hazards on mortgage loans not covered by special hazard insurance, and (iv) higher than anticipated prepayments on other mortgage securities. Cash and Cash Equivalents Cash and cash equivalents include cash on hand and highly liquid investments with original maturities of three months or less. Purchased Mortgage Servicing Rights The cost of acquiring mortgage servicing rights is capitalized and then amortized in proportion to and over the period of estimated net servicing income. Estimated net servicing income is evaluated periodically and adjustments are made to the rate of amortization. Borrowings Collateralized mortgage securities and short term borrowings are carried at their unpaid principal balances, net of unamortized discount or premium. Any discount or premium is recognized as an adjustment to interest expense by the interest method over the expected term of the related borrowings. Mortgage Servicing Revenues Mortgage servicing revenues represent fees received for servicing mortgage loans. Servicing fees are calculated on the basis of the outstanding monthly principal balance of mortgage loans serviced and are recognized as income when collected. 7
Income Taxes Capstead and its qualified real estate investment trust ("REIT") subsidiaries ("qualified REIT subsidiaries") have elected to be taxed as a REIT and intend to continue to do so. As a result of this election, Capstead is not taxed on taxable income distributed to stockholders, provided that certain REIT qualification tests are met. Currently, it is Capstead's policy to distribute 100 percent of taxable income of the REIT within the time limits prescribed by the Internal Revenue Code (the "Code"), which may extend into the subsequent taxable year. Accordingly, no provision has been made for income taxes for Capstead and its qualified REIT subsidiaries.
Income Taxes Capstead and its qualified real estate investment trust ("REIT") subsidiaries ("qualified REIT subsidiaries") have elected to be taxed as a REIT and intend to continue to do so. As a result of this election, Capstead is not taxed on taxable income distributed to stockholders, provided that certain REIT qualification tests are met. Currently, it is Capstead's policy to distribute 100 percent of taxable income of the REIT within the time limits prescribed by the Internal Revenue Code (the "Code"), which may extend into the subsequent taxable year. Accordingly, no provision has been made for income taxes for Capstead and its qualified REIT subsidiaries. Capstead's non-REIT subsidiaries, principally Capstead Inc. and subsidiaries, file a separate federal income tax return. The January 1, 1993 adoption of the liability method of accounting for income taxes had no cumulative effect on the consolidated financial statements. Net Income Per Share Primary net income per share is computed by dividing net income, after deduction of preferred stock dividends, by the weighted average number of common shares and common stock equivalents outstanding during the year. Fully diluted net income per share is computed by dividing net income, after deducting dividends on the $1.26 Cumulative Convertible Preferred Stock, Series B ("Series B Preferred Stock"), by the weighted average number of common shares and common stock equivalents outstanding during the year, assuming conversion of the $1.60 Cumulative Preferred Stock, Series A ("Series A Preferred Stock"). The Series B Preferred Stock is not considered convertible for purposes of calculating fully diluted net income per share as it is currently antidilutive. Reclassification Certain amounts for prior years have been reclassified to conform to the 1994 presentation. NOTE C - MORTGAGE INVESTMENTS Mortgage investments and the related average effective interest rates (calculated excluding unrealized gains and losses) were as follows (dollars in thousands):
As of December 31 ------------------------1994 1993 ------------------Mortgage loan portfolio: Fixed-rate mortgage loans Medium-term mortgage loans Adjustable-rate mortgage loans AAA-rated private mortgage pass-through securities portfolio: Fixed-rate mortgage securities Medium-term mortgage securities Adjustable-rate mortgage securities Agency securities portfolio: Fixed-rate mortgage securities Adjustable-rate mortgage securities Callable notes $ 55,055 21,760 132,692 $1,427,031 55,280 109,230 Year Ended December 31 --------------------1994 1993 ---------6.95% 7.01 5.22 7.40% 6.92 5.33
409 459,874 755,623 504,023 1,042,861 333,687 ---------$3,305,984 ==========
425,301 422,528 402,781 ---------$2,842,151 ==========
6.69 6.92 5.48 6.44 4.74 6.96
7.14 5.17 6.80 -
8
The Company classifies its mortgage investments by term and interest rate characteristics of the underlying mortgage loans. Fixed-rate mortgage investments (i) have fixed rates of interest for their entire terms or (ii) have an initial fixed-rate period of ten years after origination and then adjust annually based on a specified margin over 1-year United States Treasury Securities ("1-year Treasuries"). Medium-term mortgage investments (i) have an
The Company classifies its mortgage investments by term and interest rate characteristics of the underlying mortgage loans. Fixed-rate mortgage investments (i) have fixed rates of interest for their entire terms or (ii) have an initial fixed-rate period of ten years after origination and then adjust annually based on a specified margin over 1-year United States Treasury Securities ("1-year Treasuries"). Medium-term mortgage investments (i) have an initial fixed-rate period of three or five years after origination and then adjust annually based on a specified margin over 1-year Treasuries or (ii) have initial interest rates that adjust one time, approximately five years following origination of the mortgage loan, based on a specified margin over the FNMA yields for 30-year, fixed-rate commitments at the time of adjustment. Adjustable-rate mortgage investments either (i) adjust semi-annually based on a specified margin over the 6-month London Interbank Offered Rate ("LIBOR") or (ii) adjust annually based on a specified margin over 1-year Treasuries. Fixed- rate and adjustable-rate mortgage agency securities consist of mortgage-backed securities issued by government-sponsored entities, either the Federal Home Loan Mortgage Corporation ("FHLMC"), FNMA or the Government National Mortgage Association ("GNMA"). Callable agency notes are unsecured, 3-year, fixed-rate notes issued by FHLMC, FNMA, or the Federal Home Loan Bank Board ("FHLBB") and mature in 1997, unless redeemed earlier by FHLMC, FNMA or FHLBB. At December 31, 1994 the AAA-rated private mortgage pass-through securities ("Mortgage Pass-Throughs") portfolio, the agency securities portfolio, and substantially all of the mortgage loan portfolio were pledged to secure short term borrowings. As of December 31, 1994, outstanding commitments to purchase mortgage loans were approximately $37 million. All mortgage loans were held for investment at December 31, 1994. For hedging purposes the Company had outstanding forward sales agreements with an aggregate gross contract amount of $65 million at December 31, 1994. These hedge positions were terminated in January 1995 at a loss of $202,000, which was deferred as an adjustment of the carrying value of the related mortgage loans. Included in mortgage securities collateral at December 31, 1994 was approximately $5.6 million of net realized gains that have been deferred related to hedging activities. NOTE D - MORTGAGE SECURITIES COLLATERAL Mortgage securities collateral consists primarily of collateral pledged to secure borrowings through collateralized mortgage securities. All principal and interest on the collateral is remitted directly to a collection account maintained by a trustee. The trustee is responsible for reinvesting those funds in short term investments. All collections on the collateral and the reinvestment income earned thereon are available for the payment of principal and interest on the collateralized mortgage securities. 9
The components of mortgage securities collateral are summarized as follows (in thousands):
December 31 ----------------------------1994 1993 ------------------$5,201,886 $3,754,533 29,308 195,458 33,221 26,953 ------------------5,264,415 3,976,944 (7,962) 6,341 ------------------5,256,453 3,983,285 13,650 12,671 ------------------$5,270,103 $3,995,956 ========== ==========
Mortgage collateral Short term investments Accrued interest receivable Total collateral Unamortized premium (discount) Net collateral Other mortgage securities
Mortgage collateral consists of fixed-rate, medium-term and adjustable-rate mortgage securities and fixed-rate agency securities. The weighted average effective interest rate for mortgage collateral was 7.63 percent and 8.38 percent during the years ended December 31, 1994 and 1993, respectively.
The components of mortgage securities collateral are summarized as follows (in thousands):
December 31 ----------------------------1994 1993 ------------------$5,201,886 $3,754,533 29,308 195,458 33,221 26,953 ------------------5,264,415 3,976,944 (7,962) 6,341 ------------------5,256,453 3,983,285 13,650 12,671 ------------------$5,270,103 $3,995,956 ========== ==========
Mortgage collateral Short term investments Accrued interest receivable Total collateral Unamortized premium (discount) Net collateral Other mortgage securities
Mortgage collateral consists of fixed-rate, medium-term and adjustable-rate mortgage securities and fixed-rate agency securities. The weighted average effective interest rate for mortgage collateral was 7.63 percent and 8.38 percent during the years ended December 31, 1994 and 1993, respectively. NOTE E - MORTGAGE SERVICING The following table provides information regarding the mortgage servicing portfolio and the related investment in purchased mortgage servicing rights (in thousands, except number of loans):
Unpaid Principal Balance -----------$ 2,393,267 12,524,522 (525,607) ----------14,392,182 5,145,421 ----------$19,537,603 =========== Purchased Mortgage Servicing Rights ---------------$ 25,146 170,268 (5,998) --------189,416 93,553 --------$ 282,969 =========
Loans serviced at December 31, 1993 Additions Runoff/amortizatio Loans serviced at December 31, 1994 Purchases pending transfer Total portfolio at December 31, 1994
Number of Loans -------7,746 110,078 (2,215) ------115,609 52,775 ------168,384 =======
The Company services mortgage loans in all 50 states and the District of Columbia. As of December 31, 1994, 22 percent of loans serviced and loans pending transfer were located in California (based on the unpaid principal balances). In connection with mortgage servicing activities, the Company maintains segregated escrow deposits which are held in bank trust accounts. At December 31, 1994 and 1993, escrow and fiduciary funds for loans being serviced approximated $163 million and $41 million, respectively, and are excluded from the accompanying balance sheet. NOTE F - COLLATERALIZED MORTGAGE SECURITIES Each series of collateralized mortgage securities issued consists of various classes of bonds, most of which have fixed rates of interest. Interest is payable monthly or quarterly at specified rates for all classes. Typically, principal payments on each series are made to each class in the order of their stated maturities so that no payment of principal will be made on any class of bonds until all classes having an earlier stated maturity have been paid in full. 10
The components of collateralized mortgage securities along with certain other information are summarized as follows (dollars in thousands):
December 31 ------------------------------------1994 1993 --------------------------$5,177,445 $3,857,303 51,277 45,362 --------------------------5,228,722 3,902,665 (126,577) (11,531) --------------------------$5,102,145 $3,891,134 --------------------------5.87% to 10.00% 4.78% to 10.00% 2007 to 2025 2007 to 2023 45 43
Collateralized mortgage securities Accrued interest payable Total obligation Less unamortized discount Net obligation Range of average interest rates Range of stated maturities Number of series
The maturity of each series of securities is directly affected by the rate of principal prepayments on the related mortgage securities collateral. Each series of securities is also subject to redemption at the Company's option provided that certain requirements specified in the related indenture have been met (referred to as "clean-up calls"). As a result, the actual maturity of any series of securities is likely to occur earlier than its stated maturity. The average effective interest rate for all collateralized mortgage securities was 7.49 percent and 9.05 percent during the years ended December 31, 1994 and 1993, respectively. NOTE G - SHORT TERM BORROWINGS Short term borrowings are primarily made under repurchase arrangements. At December 31, 1994 the Company had uncommitted repurchase facilities with investment banking firms of approximately $5.5 billion to finance the mortgage loan and Mortgage Pass-Through portfolios, subject to certain conditions. Interest rates on borrowings under these facilities are based on overnight to 30-day LIBOR rates. The Company also enters into repurchase and dollar repurchase arrangements with investment banking firms pursuant to which the Company pledges agency securities and other mortgage assets. The terms and conditions of these arrangements, including interest rates, are negotiated on a transaction-by-transaction basis. Other arrangements the Company may use include repurchase transactions prior to the issuance of collateralized mortgage securities ("CMOs") or publicly-offered, multi-class mortgage pass-through certificates ("MPCs") whereby the Company may pledge the mortgage loans that are expected to secure the issuance as collateral for a repurchase transaction with the managing underwriter of the related issuance. Repurchase and dollar repurchase arrangements, which had maturities of less than 31 days, and the related average effective interest rates are classified by type of collateral as follows (dollars in thousands):
December 31, 1994 --------------------Borrowings Average Outstanding Rate ----------- -------$ 190,060 6.45% 1,161,894 6.24 1,783,996 5.67 44,632 6.47 ---------$3,180,582 ========== December 31, 1993 -------------------Borrowings Average Outstanding Rate ----------------$1,220,094 4.07% 824,682 3.62 399,031 3.38 ---------$2,443,807 ==========
Mortgage loan portfolio Mortgage Pass-Through portfolio Agency securities portfolio Other mortgage assets
11
At December 31, 1994 the Company had a $120 million committed line of credit with an investment banking firm secured by purchased mortgage servicing rights. Advances have separate maturities and rates of interest with
At December 31, 1994 the Company had a $120 million committed line of credit with an investment banking firm secured by purchased mortgage servicing rights. Advances have separate maturities and rates of interest with interest due monthly. Interest rates on advances under this facility are based on LIBOR rates related to the term of the advance. As of December 31, 1994, the Company had drawn $10 million on this line of credit at an interest rate of 7.24 percent. Accrued interest on short term borrowings totaled $4,934,000 at December 31, 1994. The weighted average effective interest rate on all short term borrowings was 4.64 percent and 3.40 percent during 1994 and 1993, respectively. NOTE H - DISCLOSURES REGARDING FAIR VALUES OF FINANCIAL INSTRUMENTS The estimated fair values of financial instruments have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop these estimates. In addition, fair values fluctuate on a daily basis. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair values. The carrying amount of cash and cash equivalents, receivables and accounts payable approximates fair value. The fair value of equity securities is based on quoted market prices. The fair value of mortgage assets was estimated using either (i) quoted market prices when available, including quotes made by lenders in connection with designating collateral for repurchase arrangements, (ii) offer prices by the Company for similar mortgage assets, or (iii) expected securitization results. The fair value of collateralized mortgage securities is dependent upon the characteristics of the mortgage securities collateral pledged to secure the issuance. Therefore, fair value was based on the same method used for determining fair value for the underlying mortgage securities collateral adjusted for credit enhancements. The carrying amount of short term borrowings approximates fair value. The following table summarizes fair values of financial instruments (in thousands):
December 31, 1994 -----------------------Carrying Fair Amount Value ------------------Assets: Cash and cash equivalents Receivables and equity securities Mortgage securities collateral Mortgage investments Liabilities: Accounts payable Collateralized mortgage securities Short term borrowings Off-balance sheet financial instruments: Forward sales agreements Commitments to acquire mortgage loans $ 21,741 50,558 5,270,103 3,305,984 87,456 5,102,145 3,190,582 $ 21,741 51,545 4,850,391 3,220,486 87,456 4,736,974 3,190,582 December 31, 1993 --------------------Carrying Fair Amount Value ---------- ---------$ 87,760 $ 87,760 19,044 19,044 3,995,956 4,094,088 2,842,151 3,246,114 7,193 3,891,134 2,443,807 7,193 4,021,004 2,443,807
-
433 (14)
-
(1,850) (890)
12
The Company adopted the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115") as of January 1, 1994. In accordance with SFAS 115, prior period financial statements have not been restated to reflect the change in accounting principle. There was no cumulative effect as of January 1, 1994 of adopting SFAS 115 on net income. The opening balance of stockholders' equity was increased by $7,512,000 to reflect net unrealized holding gains on securities classified as available-for-sale that were previously carried at amortized cost. The following tables summarize available-for-sale and held-to-maturity securities as of December 31, 1994 (in
The Company adopted the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115") as of January 1, 1994. In accordance with SFAS 115, prior period financial statements have not been restated to reflect the change in accounting principle. There was no cumulative effect as of January 1, 1994 of adopting SFAS 115 on net income. The opening balance of stockholders' equity was increased by $7,512,000 to reflect net unrealized holding gains on securities classified as available-for-sale that were previously carried at amortized cost. The following tables summarize available-for-sale and held-to-maturity securities as of December 31, 1994 (in thousands):
Available-for-Sale Securities ----------------------------------------------Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value -------------------- ------------------Debt securities: Mortgage Pass-Throughs: Fixed-rate mortgage securities $ 427 Medium-term mortgage securities (1) 9,054 Adjustable-rate mortgage securities 780,224 Adjustable-rate mortgage agency securities 1,088,252 Other mortgage securities 10,369 ---------Total debt securities 1,888,326 Equity securities 1,113 ---------$1,889,439 ==========
$
-
$
18 9,054 24,601
$
409 755,623
45,391 1,734 810 ----------- ---------1,734 79,874 375 ----------- ---------$1,734 $ 80,249 =========== ==========
1,042,861 11,293 ---------1,810,186 738 ---------$1,810,924 ==========
Medium-term Mortgage Pass-Throughs (1) Agency securities: Fixed-rate mortgage securities Callable notes Mortgage securities collateral (2)
Held-to-Maturity Securities ----------------------------------------------Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value -------------------- -------------------$ 459,874 $ $ 12,342 $ 447,532 504,023 333,687 5,258,810 ---------$6,556,394 ========== 62,586 9,690 7,159 61,700 ----------- ---------$7,159 $146,318 =========== ========== 441,437 323,997 5,204,269 ----------$6,417,235 ===========
(1) The investment in medium-term Mortgage Pass-Throughs was transferred to the held-to-maturity classification during the third quarter. As a result, the unrealized loss at the transfer date remains as a component of the recorded mark-to-market for available-for-sale securities at December 31, 1994, which is being amortized over the remaining life of these investments. (2) All mortgage securities collateral has been permanently financed through the issuance of collateralized mortgage securities and, as a result, the exposure to changes in the fair value of the underlying assets (and liabilities) is limited. For this reason, the table above presents the fair value of the projected net cash flows of the mortgage securities collateral after payments on the related collateralized mortgage securities discounted at market rates and prepayment assumptions. The maturity of mortgage assets is directly affected by the rate of principal prepayments by mortgagors and clean-up calls by issuers of remaining debt securities outstanding. Included in mortgage securities collateral is $4,646,000 and $33,277,000 of collateral released from the related indentures at December 31, 1994 and 1993, respectively. During 1994, $77,087,000 of mortgage securities collateral previously released from the related indentures pursuant to clean-up calls was sold at gross realized gains aggregating $2,938,000. During
1994 available-for-sale securities totaling $16,695,000 (cost basis) were sold at gross realized gains aggregating $6,223,000. 13
NOTE I - ALLOWANCE FOR POSSIBLE LOSSES The Company has limited exposure to losses on mortgage loans. Losses due to typical mortgagor default may be reduced by the acquisition of mortgage pool insurance from AAA-rated mortgage pool insurers, which supplements primary mortgage insurance, if any, and homeowner equity, if any. The amount of coverage under mortgage pool insurance policies is the amount (typically 7 to 15 percent of the aggregate amount in such pool of mortgage loans) determined by one or more national statistical rating agencies necessary to allow the related securities to be rated AAA when combined with homeowner equity or other insurance coverage. Certain other risks, however, are not covered by mortgage pool insurance and may subject the Company to losses. These risks include fraud or misrepresentation during origination of a mortgage loan and special hazards that are not covered by standard hazard insurance policies (e.g., earthquakes). In cases of fraud, the Company generally will not be able to recover its losses from the mortgage insurance company, but will generally have recourse to the prior owner of a loan based on representations and warranties made at the time the loan was purchased. However, to the extent the prior owner does not perform its repurchase obligation, the Company may incur a loss. Special hazards are typically catastrophic events that are unable to be predicted. The Company limits its exposure to special hazard losses by acquiring special hazard insurance coverage from a AAA-rated insurer. As of December 31, 1994, 50 percent of the Company's mortgage assets (excluding agency securities) were covered by a special hazard insurance policy. Management does not believe that fraud or special hazard risks pose a material exposure to the Company; however, underwriting guidelines, correspondents selling mortgage loans to the Company, as well as the geographic concentration of its mortgage assets are continually monitored for possible changes in risk levels. In late 1993 the Company began issuing CMOs in a senior/subordinate structure (in lieu of purchasing mortgage pool insurance and special hazard insurance) where the investor in the subordinate classes assumes credit and special hazard risks. The Company has retained an aggregate of approximately $2.2 million of credit and special hazard risk on certain of these issuances. Actual losses to the Company due to this risk are dependent upon the timing and magnitude of related collateral defaults. The Company does not currently anticipate a need to increase its provision for possible losses for this risk. Activity in the allowance for possible losses was as follows (in thousands):
Year Ended December 31 ---------------------1994 1993 ------------$ 6,927 $ 8,228 3,500 2,800 (572) (2,294) (207) ------$ 7,354 ======= (433) (1,567) (33) (2,068) -------$ 6,927 ========
Beginning balance Provision for losses Charge-offs due to: Mortgagor default Fraud/misrepresentation Special hazard losses Impairment of other mortgage securities
14
As of December 31, 1994, approximately 49 percent of mortgage assets (excluding agency securities) were secured by properties located in California. Exposure arising from this geographic concentration is reduced by either the acquisition of mortgage pool insurance and special hazard insurance or the use of the senior/subordinate structure for securitizations.
NOTE I - ALLOWANCE FOR POSSIBLE LOSSES The Company has limited exposure to losses on mortgage loans. Losses due to typical mortgagor default may be reduced by the acquisition of mortgage pool insurance from AAA-rated mortgage pool insurers, which supplements primary mortgage insurance, if any, and homeowner equity, if any. The amount of coverage under mortgage pool insurance policies is the amount (typically 7 to 15 percent of the aggregate amount in such pool of mortgage loans) determined by one or more national statistical rating agencies necessary to allow the related securities to be rated AAA when combined with homeowner equity or other insurance coverage. Certain other risks, however, are not covered by mortgage pool insurance and may subject the Company to losses. These risks include fraud or misrepresentation during origination of a mortgage loan and special hazards that are not covered by standard hazard insurance policies (e.g., earthquakes). In cases of fraud, the Company generally will not be able to recover its losses from the mortgage insurance company, but will generally have recourse to the prior owner of a loan based on representations and warranties made at the time the loan was purchased. However, to the extent the prior owner does not perform its repurchase obligation, the Company may incur a loss. Special hazards are typically catastrophic events that are unable to be predicted. The Company limits its exposure to special hazard losses by acquiring special hazard insurance coverage from a AAA-rated insurer. As of December 31, 1994, 50 percent of the Company's mortgage assets (excluding agency securities) were covered by a special hazard insurance policy. Management does not believe that fraud or special hazard risks pose a material exposure to the Company; however, underwriting guidelines, correspondents selling mortgage loans to the Company, as well as the geographic concentration of its mortgage assets are continually monitored for possible changes in risk levels. In late 1993 the Company began issuing CMOs in a senior/subordinate structure (in lieu of purchasing mortgage pool insurance and special hazard insurance) where the investor in the subordinate classes assumes credit and special hazard risks. The Company has retained an aggregate of approximately $2.2 million of credit and special hazard risk on certain of these issuances. Actual losses to the Company due to this risk are dependent upon the timing and magnitude of related collateral defaults. The Company does not currently anticipate a need to increase its provision for possible losses for this risk. Activity in the allowance for possible losses was as follows (in thousands):
Year Ended December 31 ---------------------1994 1993 ------------$ 6,927 $ 8,228 3,500 2,800 (572) (2,294) (207) ------$ 7,354 ======= (433) (1,567) (33) (2,068) -------$ 6,927 ========
Beginning balance Provision for losses Charge-offs due to: Mortgagor default Fraud/misrepresentation Special hazard losses Impairment of other mortgage securities
14
As of December 31, 1994, approximately 49 percent of mortgage assets (excluding agency securities) were secured by properties located in California. Exposure arising from this geographic concentration is reduced by either the acquisition of mortgage pool insurance and special hazard insurance or the use of the senior/subordinate structure for securitizations. NOTE J - ACQUISITION On December 2, 1992 the Company acquired the net assets of Tyler Cabot Mortgage Securities Fund, Inc. ("Tyler Cabot"), a diversified, closed-end management investment company, in exchange for 29,429,815 shares
As of December 31, 1994, approximately 49 percent of mortgage assets (excluding agency securities) were secured by properties located in California. Exposure arising from this geographic concentration is reduced by either the acquisition of mortgage pool insurance and special hazard insurance or the use of the senior/subordinate structure for securitizations. NOTE J - ACQUISITION On December 2, 1992 the Company acquired the net assets of Tyler Cabot Mortgage Securities Fund, Inc. ("Tyler Cabot"), a diversified, closed-end management investment company, in exchange for 29,429,815 shares of the Company's Series B Preferred Stock. The acquisition has been accounted for as a purchase and, accordingly, the assets and liabilities have been recorded based on their fair value at the date of acquisition. The net income earned on the assets and liabilities acquired have been included in the consolidated statement of income from the date of the acquisition. NOTE K - INCOME TAXES Capstead and its qualified REIT subsidiaries file a separate federal income tax return which does not include the operations of the non-REIT subsidiaries. Provided all taxable income of Capstead and its qualified REIT subsidiaries is distributed to stockholders within time limits prescribed by the Code, no income taxes are due on this income. Taxable income of the non-REIT subsidiaries is fully taxable. The Company's effective tax rate will, therefore, differ substantially from statutory federal income tax rates as depicted in the following reconciliation (in thousands):
Year Ended December 31 ----------------------------------1994 1993 1992 ------------------------$ 29,097 $ 32,047 $ 18,085 (27,289) (32,422) (17,700) --------------------1,808 (1,261) (547) ------$ ======= (375) 375 -------$ ======== 385 (385) -------$ ========
Net income at the statutory rate Income not subject to income tax due to REIT status Net income (loss) of non-REIT subsidiaries at the statutory rate Losses not benefited for income tax purposes Benefit of previously unrecognized deferred income tax asset Other
Significant components of deferred income tax assets and liabilities are as follows (in thousands):
December 31 ---------------1994 1993 -----------Deferred tax assets: Net operating loss carryforwards Capital loss carryforwards Securitization timing differences $26,504 1,949 370 ------28,823 ------15,429 2,185 ------17,614 ------$11,209 ======= $11,209 ======= $260 185 230 ---675 ---300 ---300 ---$375 ==== $375 ====
Deferred tax liabilities: Securitization timing differences Other
Net deferred tax assets Valuation allowance
15
The increase in net deferred tax assets during 1994 (before the valuation allowance) is primarily the result of the transfer of the mortgage servicing operation from Capstead to Capstead Inc. and the corresponding reorganization of the non-REIT subsidiaries. At December 31, 1994 the non-REIT subsidiaries had net operating loss carryforwards for tax purposes of approximately $78 million, which expire beginning in the year 2006. In addition to net operating loss carryforwards, the non-REIT subsidiaries have capital loss carryforwards of approximately $6 million, which expire in 1996 . NOTE L - STOCKHOLDERS' EQUITY The Series A Preferred Stock issued in connection with a 1989 acquisition is nonvoting. Each share is entitled to a cumulative fixed dividend at an annual rate of $1.60 and is eligible for conversion into 9/10 of one share of common stock. The Series A Preferred Stock has a liquidation preference of $16.40 per share and is currently redeemable at the Company's option, in whole or in part, at a redemption price equal to the liquidation preference. During 1994, 112,205 shares of the Series A Preferred Stock were converted into 100,983 shares of common stock. The Series B Preferred Stock issued in connection with the acquisition of Tyler Cabot is nonvoting. Each share is entitled to a cumulative fixed dividend at an annual rate of $1.26 and is eligible for conversion into 0.3196 of one share of common stock. The Series B Preferred Stock has a liquidation preference of $11.38 per share and is redeemable at the Company's option, in whole or in part, at a redemption price of $12.50 after December 2, 1997. During 1994, 1,762 shares of the Series B Preferred Stock were converted into 563 shares of common stock. In February 1992 the Company received $61,643,000 in net proceeds from the offering of 2,046,000 shares of common stock. Proceeds from the offering were used to acquire mortgage assets. On July 31, 1992 the Company issued a six-year option to Lomas Financial Corporation ("LFC"), an affiliate of the former manager, for the purchase of 750,000 shares of common stock at a price of $32.63 per share. The option became 100 percent exercisable in 1994. During 1994, 1993 and 1992, the Company issued 20,746, 10,362, and 17,408 shares of common stock through its dividend reinvestment plan on which net proceeds of $534,000, $395,000 and $526,000 were received, respectively. During 1994 and 1993 the Company also issued 481,384 and 381,473 shares of Series B Preferred Stock through its dividend reinvestment plan for Series B stockholders on which net proceeds were received of $5,254,000 and $4,662,000, respectively. The Company's Charter provides that if the Board of Directors determines in good faith that the direct or indirect ownership of stock of Capstead has become concentrated to an extent which would cause Capstead to fail to qualify as a REIT, the Company may redeem or repurchase, at fair market value, any number of shares of common stock and/or preferred stock sufficient to maintain or bring such ownership into conformity with the Code and may refuse to transfer or issue shares of common stock and/or preferred stock to any person whose acquisition would result in Capstead being unable to comply with the requirements of the Code. In addition, the 16
Charter provides that the Company may redeem or refuse to transfer any shares of capital stock of Capstead necessary to prevent the imposition of a penalty tax as a result of ownership of such shares by certain disqualified organizations, including governmental bodies and tax-exempt entities that are not subject to tax on unrelated business taxable income. NOTE M - EMPLOYEE BENEFIT PLANS The Company sponsors two stock option plans, the 1990 Directors' Stock Option Plan (the "Directors' Plan") and the 1990 Employee Stock Option Plan. The Company also sponsors the 1994 Flexible Long Term Incentive
The increase in net deferred tax assets during 1994 (before the valuation allowance) is primarily the result of the transfer of the mortgage servicing operation from Capstead to Capstead Inc. and the corresponding reorganization of the non-REIT subsidiaries. At December 31, 1994 the non-REIT subsidiaries had net operating loss carryforwards for tax purposes of approximately $78 million, which expire beginning in the year 2006. In addition to net operating loss carryforwards, the non-REIT subsidiaries have capital loss carryforwards of approximately $6 million, which expire in 1996 . NOTE L - STOCKHOLDERS' EQUITY The Series A Preferred Stock issued in connection with a 1989 acquisition is nonvoting. Each share is entitled to a cumulative fixed dividend at an annual rate of $1.60 and is eligible for conversion into 9/10 of one share of common stock. The Series A Preferred Stock has a liquidation preference of $16.40 per share and is currently redeemable at the Company's option, in whole or in part, at a redemption price equal to the liquidation preference. During 1994, 112,205 shares of the Series A Preferred Stock were converted into 100,983 shares of common stock. The Series B Preferred Stock issued in connection with the acquisition of Tyler Cabot is nonvoting. Each share is entitled to a cumulative fixed dividend at an annual rate of $1.26 and is eligible for conversion into 0.3196 of one share of common stock. The Series B Preferred Stock has a liquidation preference of $11.38 per share and is redeemable at the Company's option, in whole or in part, at a redemption price of $12.50 after December 2, 1997. During 1994, 1,762 shares of the Series B Preferred Stock were converted into 563 shares of common stock. In February 1992 the Company received $61,643,000 in net proceeds from the offering of 2,046,000 shares of common stock. Proceeds from the offering were used to acquire mortgage assets. On July 31, 1992 the Company issued a six-year option to Lomas Financial Corporation ("LFC"), an affiliate of the former manager, for the purchase of 750,000 shares of common stock at a price of $32.63 per share. The option became 100 percent exercisable in 1994. During 1994, 1993 and 1992, the Company issued 20,746, 10,362, and 17,408 shares of common stock through its dividend reinvestment plan on which net proceeds of $534,000, $395,000 and $526,000 were received, respectively. During 1994 and 1993 the Company also issued 481,384 and 381,473 shares of Series B Preferred Stock through its dividend reinvestment plan for Series B stockholders on which net proceeds were received of $5,254,000 and $4,662,000, respectively. The Company's Charter provides that if the Board of Directors determines in good faith that the direct or indirect ownership of stock of Capstead has become concentrated to an extent which would cause Capstead to fail to qualify as a REIT, the Company may redeem or repurchase, at fair market value, any number of shares of common stock and/or preferred stock sufficient to maintain or bring such ownership into conformity with the Code and may refuse to transfer or issue shares of common stock and/or preferred stock to any person whose acquisition would result in Capstead being unable to comply with the requirements of the Code. In addition, the 16
Charter provides that the Company may redeem or refuse to transfer any shares of capital stock of Capstead necessary to prevent the imposition of a penalty tax as a result of ownership of such shares by certain disqualified organizations, including governmental bodies and tax-exempt entities that are not subject to tax on unrelated business taxable income. NOTE M - EMPLOYEE BENEFIT PLANS The Company sponsors two stock option plans, the 1990 Directors' Stock Option Plan (the "Directors' Plan") and the 1990 Employee Stock Option Plan. The Company also sponsors the 1994 Flexible Long Term Incentive Plan, which provides for the issuance of stock options and other incentive-based stock awards. These plans provide for the issuance of up to 160,000, 240,000 and 1,250,000 shares, respectively, of common stock.
Charter provides that the Company may redeem or refuse to transfer any shares of capital stock of Capstead necessary to prevent the imposition of a penalty tax as a result of ownership of such shares by certain disqualified organizations, including governmental bodies and tax-exempt entities that are not subject to tax on unrelated business taxable income. NOTE M - EMPLOYEE BENEFIT PLANS The Company sponsors two stock option plans, the 1990 Directors' Stock Option Plan (the "Directors' Plan") and the 1990 Employee Stock Option Plan. The Company also sponsors the 1994 Flexible Long Term Incentive Plan, which provides for the issuance of stock options and other incentive-based stock awards. These plans provide for the issuance of up to 160,000, 240,000 and 1,250,000 shares, respectively, of common stock. During 1994 the Company granted to employees 567,000 stock options pursuant to the 1994 Flexible Long Term Incentive Plan. This grant, as well as options granted pursuant to the two stock option plans, provide for the annual granting of dividend equivalent rights which permit the option holder to obtain additional shares of common stock based upon formulas set forth in the plans. Activity in the plans is summarized as follows:
DIRECTORS' PLAN -----------------------NUMBER OF PRICE SHARES RANGE -------------------35,000 $13.00 6,000 29.38 (5,114) 13.00 802 -----36,688 13.00 - 29.38 22,000 39.13 - 39.25 (11,663) 13.00 - 29.38 1,494 ------48,519 13.00 - 39.25 18,000 24.88 - 41.00 (18,891) 13.00 - 39.25 (25,418) 13.00 - 41.00 2,314 ------24,524 $16.75 -$41.00 ======= EMPLOYEE PLANS* ---------------------------NUMBER OF PRICE SHARES RANGE --------------------91,500 $13.00 - $25.50 39,000 34.50 (27,619) 13.00 1,205 ------104,086 13.00 - 34.50 44,000 38.88 (46,637) 13.00 - 34.50 2,646 ------104,095 13.00 - 38.88 567,000 28.88 (8,733) 13.00 - 25.50 2,857 ------665,219 $13.00-$38.88 =======
Balance at January 1, 1992 Options granted Options exercised Dividend equivalent rights earned Balance at December 31, 1992 Options granted Options exercised Dividend equivalent rights earned Balance at December 31, 1993 Options granted Options exercised Options canceled Dividend equivalent rights earned Balance at December 31, 1994
* Includes stock options issued pursuant to the 1990 Employee Stock Option Plan and the 1994 Flexible Long Term Incentive Plan (together, the "Employee Plans"). As of December 31, 1994, options were exercisable for 287,219 shares. In accordance with the terms of the plans, on January 1, 1995 the Company granted dividend equivalent rights for the issuance of an additional 1,922 and 22,754 shares under the Directors' Plan and Employee Plans, respectively. The Company also sponsors a qualified defined contribution retirement plan created in late 1993 for all employees. The Company matches up to 50 percent of a participant's voluntary contribution up to a maximum of 6 percent of a participant's compensation. The Company also may make additional contributions of up to another 3 percent of a participant's compensation. All Company contributions are subject to certain vesting requirements. Contribution expense was $369,624 and $16,092 in 1994 and 1993, respectively. 17
NOTE N - MANAGEMENT AND NON-COMPETITION AGREEMENTS Since its inception in 1985 and through September 30, 1993, the Company operated under a management agreement with a subsidiary (the "Manager") of Lomas Mortgage USA, Inc. ("LMUSA"). The agreement
NOTE N - MANAGEMENT AND NON-COMPETITION AGREEMENTS Since its inception in 1985 and through September 30, 1993, the Company operated under a management agreement with a subsidiary (the "Manager") of Lomas Mortgage USA, Inc. ("LMUSA"). The agreement provided that the Manager advise the Company with respect to all facets of its business and administer its dayto-day operations under the supervision of the Board of Directors. The Manager paid, among other things, salaries and benefits of its personnel, accounting fees and expenses, other office expenses and expenses incurred in supervising and monitoring the Company's investments. During the period from inception through July 31, 1992, the Manager received management and incentive fees based on average invested assets and return on common stockholders' equity. Effective August 1, 1992 the Company entered into a 65-month management agreement with the Manager. Under the agreement, the management fee was limited to an amount equal to the Manager's cost plus a fixed profit aggregating $14,500,000 over the term of the agreement. Capstead also entered into a 65- month noncompetition agreement with LFC, the parent company of LMUSA, in return for payments aggregating $7 million. In March, and again in September of 1993, the Company negotiated amendments to these agreements to shorten their terms and lower the required payments by $1,972,000. Consequently, on October 1, 1993 the Company became fully self-administered. Termination costs incurred in 1993 under the terms of the amended management agreement totaled $7,528,000. Also included in 1993 management fees and termination costs is $4,363,000 of unamortized amounts paid under the non-competition agreement. NOTE O - SUPPLEMENTAL CASH FLOW INFORMATION The following table provides supplemental cash and noncash information (in thousands):
Year Ended December 31 -----------------------------------1994 1993 1992 -----------------------Interest paid: Short term borrowings $ 136,442 Collateralized mortgage securities 324,229 Noncash investing and financing activities: Transfers from mortgage investments to mortgage securities collateral 2,688,361 Charges to allowance for possible losses 3,073 Acquisition of Tyler Cabot: Net assets acquired Net liabilities assumed Preferred stock issued $ 81,722 375,948 $ 62,247 323,346
1,197,947 4,101 -
3,603,844 3,027 307,077 288 315,025
18
NOTE P - NET INTEREST INCOME ANALYSIS (Unaudited) The following tables summarize the amount of interest income and interest expense and the average effective interest rate (dollars in thousands):
1994 ------------------AVERAGE AMOUNT RATE --------------Interest income: Mortgage securities collateral Mortgage investments Total interest income Interest expense: Collateralized mortgage securities $354,603 202,398 --------557,001 --------335,656 7.63% 6.07 1993 ------------------AVERAGE AMOUNT RATE --------------$390,690 184,136 --------574,826 --------410,153 8.38% 6.56 1992 ------------------AVERAGE AMOUNT RATE --------- --------$383,060 117,527 --------500,587 --------353,356 9.32% 7.49
7.49
9.05
8.80
NOTE P - NET INTEREST INCOME ANALYSIS (Unaudited) The following tables summarize the amount of interest income and interest expense and the average effective interest rate (dollars in thousands):
1994 ------------------AVERAGE AMOUNT RATE --------------Interest income: Mortgage securities collateral Mortgage investments Total interest income Interest expense: Collateralized mortgage securities Short term borrowings Total interest expense Net interest $354,603 202,398 --------557,001 --------335,656 139,092 --------474,748 --------$ 82,253 ========= 7.63% 6.07 1993 ------------------AVERAGE AMOUNT RATE --------------$390,690 184,136 --------574,826 --------410,153 80,923 --------491,076 --------$ 83,750 ========= 8.38% 6.56 1992 ------------------AVERAGE AMOUNT RATE --------- --------$383,060 117,527 --------500,587 --------353,356 62,077 --------415,433 --------$ 85,154 ========= 9.32% 7.49
7.49 4.64
9.05 3.40
8.80 4.43
The following tables summarize the amount of change in interest income and interest expense due to changes in interest rates versus changes in volume (in thousands):
1994/1993* ---------------------------------Rate Volume Total ----------------------Interest income: Mortgage securities collateral Mortgage investments $(34,775) (14,544) -------(49,319) -------$ (1,312) 32,806 ------31,494 ------(4,638) 24,729 ------20,091 ------$11,403 ======= $ (36,087) 18,262 -------(17,825) -------(74,497) 58,169 -------(16,328) -------$ (1,497) ======== 1993/1992* --------------------------Rate Volume Tot -----------------$(40,878) (16,008) -------(56,886) -------10,057 (16,887) -------(6,830) -------$(50,056) ======== $ 48,508 82,617 -------131,125 -------46,740 35,733 -------82,473 -------$ 48,652 ======== $ 7 66 --74 --56 18 --75 --$(1 ===
Interest expense: Collateralized mortgage securities (69,859) Short term borrowings 33,440 -------(36,419) -------$(12,900) ========
* The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. 19
NOTE Q - QUARTERLY RESULTS (Unaudited) The following is a summary of the quarterly results of operations (in thousands, except per share amounts):
Year Ended December 31, 1994 -----------------------------------------------First Second Third Fourth Quarter Quarter Quarter Quarter ----------------------------$125,734 $135,819 $144,891 $150,557 102,666 118,227 131,208 139,623 23,068 17,592 13,683 10,934
Interest income Interest and related expenses Net margin on mortgage assets Net margin on mortgage servicing
NOTE Q - QUARTERLY RESULTS (Unaudited) The following is a summary of the quarterly results of operations (in thousands, except per share amounts):
Year Ended December 31, 1994 -----------------------------------------------First Second Third Fourth Quarter Quarter Quarter Quarter ----------------------------$125,734 $135,819 $144,891 $150,557 102,666 118,227 131,208 139,623 23,068 17,592 13,683 10,934 1,182 3,060 23,469 0.90 0.88 4,315 1,724 20,030 0.68 0.67 6,494 6,140 22,267 0.82 0.81 9,028 3,254 19,813 0.66 0.65
Interest income Interest and related expenses Net margin on mortgage assets Net margin on mortgage servicing operations Other revenues Net income Net income per share: Primary Fully diluted
Interest income Interest and related expenses Net margin on mortgage assets Net margin on mortgage servicing operations Other revenues Net income Net income per share: Primary Fully diluted
Year Ended December 31, 1993 -----------------------------------------------First Second Third Fourth Quarter Quarter Quarter Quarter ----------------------------$149,566 $153,129 $149,683 $122,448 127,756 130,861 125,466 129,877* 21,810 22,268 24,217 (7,429) 9,611 22,904 0.88 0.86 (168) 6,230 23,255 0.90 0.88 (301) 12,530 23,640 0.92 0.90 (587) 36,202 24,457 0.97 0.95
* Because of high prepayments on mortgage securities collateral during the fourth quarter of 1993, the Company accelerated amortization of bond discount on existing collateralized mortgage securities resulting in the recognition of an additional $28 million in interest expense. NOTE R - MARKET AND DIVIDEND INFORMATION (UNAUDITED) The New York Stock Exchange trading symbol for the Company's common stock is CMO. There were 2,825 holders of record of the Company's common stock at December 31, 1994. In addition, depository companies held stock for 20,575 beneficial owners. During the last two years, the high and low stock sales prices and dividends declared on common stock were:
Year Ended December 31, 1994 --------------------------------Stock Prices --------------------Dividends High Low Declared --------------------$42 1/8 $27 1/8 $0.83 29 3/4 23 0.83 28 3/4 22 5/8 0.83 24 3/8 16 3/4 0.72 Year Ended December 31, 1993 -----------------------------Stock Prices ------------------ Dividends High Low Declared ------------ --------$42 7/8 $36 1/2 $0.88 42 7/8 35 3/4 0.90 40 37 1/2 0.92 42 3/8 35 7/8 0.96
First quarter Second quarter Third quarter Fourth quarter
20
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES SELECTED FINANCIAL DATA (in thousands, except per share amounts)
YEAR ENDED DECEMBER 31 ----------------------------------------------------------------1994 1993 1992 1991 1990 --------------------------------------Selected consolidated statement of income data:(1) Interest income Interest and related expenses Net margin on mortgage assets Net margin on mortgage servicing operations Other revenues Net income Net income per share: Primary(2) Fully diluted Return on average total stockholders' equity Cash dividends paid per share: Common Series A Preferred Series B Preferred Average number of shares outstanding: Primary Fully diluted Selected consolidated balance sheet data (at year-end): Mortgage investments Mortgage securities collateral Total assets Short term borrowings Collateralized mortgage securities Stockholders' equity Other data: Mortgage loans acquired during the year Outstanding commitments to acquire mortgage investments (at year-end) Mortgage servicing portfolio (at year-end)(3)
$557,001 491,724 65,277 21,019 14,178 85,579 3.06 3.01 13.27% $ 3.21 1.60 1.26
$574,826 513,960 60,866 (1,056) 64,573 94,256 3.68 3.57 14.65% $ 3.66 1.60 1.26
$500,587 437,004 63,583 3,862 53,191 3.37 3.23 16.08% $ 3.26 1.60 0.10
$235,567 194,665 40,902 2,682 33,717 2.92 2.46 13.25% $ 2.56 1.60 -
$179,702 147,658 32,044 2,213 29,082 2.34 2.14 11.50% $ 2.27 1.60 -
15,278 15,875
15,146 15,930
14,394 15,591
8,964 13,683
8,700 13,619
$3,305,984 5,270,103 8,943,858 3,190,582 5,102,145 563,675
$2,842,151 3,995,956 6,980,324 2,443,807 3,891,134 638,190
$1,904,600 5,269,600 7,229,608 1,449,209 5,143,157 631,499
$ 983,024 2,806,616 3,824,546 855,572 2,708,630 253,339
$ 257,537 1,570,427 1,829,376 108,248 1,446,508 251,023
1,944,507
4,393,273
5,483,602
2,171,362
279,724
36,751 14,392,182
472,662 2,393,267
573,831 -
478,909 -
111,400 -
(1) On December 2, 1992 the Company acquired the common stock of Tyler Cabot Mortgage Securities Fund, Inc. in exchange for 29,429,815 shares of the Series B Preferred Stock. The acquisition has been accounted for as a purchase and the net income earned on the assets and liabilities acquired have been included in the Consolidated Statement of Income from the date of the acquisition. (2) During the years ended December 31, 1992 and 1991, 1,382,551 and 3,140,304 shares of the Series A Preferred Stock were converted into 1,244,261 and 2,826,256 shares of common stock, respectively. If these conversions had occurred at the beginning of the respective years, primary net income per share would have been $3.32 and $2.60 per share for the years ended December 31, 1992 and 1991, respectively. (3) Excludes $5.1 billion of mortgage servicing rights acquired in 1994 that will be transferred into the mortgage servicing portfolio by the end of the first quarter of 1995. 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION During the year ended December 31, 1994, the Company purchased 6,888 mortgage loans totaling $1.9 billion compared to purchases of 14,089 mortgage loans totaling $4.4 billion during 1993. Purchase and commitment volumes have fallen significantly due to increases in mortgage interest rates and corresponding declines in mortgage loan originations. Improvement in the overall United States economy and resulting inflation fears have caused interest rates on 30-year single-family jumbo mortgage loans to rise almost three percentage points during 1994. This increase in interest rates has had the effect of substantially reducing single-family mortgage originations nationally by as much as 60 percent from the fourth quarter of 1993. The Company formed $909 million of AAA-rated private mortgage pass-through securities ("Mortgage PassThroughs") during 1994, $460 million of which were backed by adjustable-rate mortgage ("ARM") loans. In addition to reducing exposure to fraud and credit risk, a primary benefit of pooling mortgage loans into Mortgage Pass-Throughs is the improved liquidity of AAA-rated securities over that of individual loans. As a result, when securing short term borrowings, the Company is able to negotiate more favorable terms. In order to lower interest rate risk on the Mortgage Pass-Through portfolio, the Company pledged over $300 million of fixed-rate Mortgage Pass-Throughs as partial collateral for the December 1994 issuance of approximately $351 million of collateralized mortgage securities ("CMOs"). The Company plans to continue to retain a large portfolio of primarily ARM Mortgage Pass-Throughs. In order to expedite growth of the Company's ARM investments, early in 1994 the Company acquired $1.1 billion of ARM agency securities. The Company also added $334 million of 3-year, fixed-rate unsecured callable agency notes to its existing portfolio of fixed rate agency securities. During the year ended December 31, 1994, the Company issued nine CMOs totaling $2.7 billion through special-purpose finance subsidiaries secured by fixed-rate mortgage loans. The net investment in these financings at issuance totaled $122 million. CMO issuances in 1994 were negatively impacted by the general rise in interest rates. During periods of rising interest rates, CMO issuances have relatively high interest rates compared to the related collateral which was committed for purchase when long term interest rates were lower (see "Effects of Interest Rate Changes"). The CMO investment portfolio at December 31, 1994 was approximately $168 million compared to a portfolio of approximately $105 million at December 31, 1993. The December 31, 1994 portfolio includes $4.6 million of collateral released from related indentures through redemption or pay off of the related bonds compared to $33.3 million at December 31, 1993. The mortgage servicing portfolio (excluding pending transfers) increased substantially during the year to $14.4 billion with a weighted average interest rate of only 7.16 percent and earning an 22
average annual service fee excluding ancillary revenue and earnings on escrows (the "Average Service Fee") of 29.59 basis points. The December 31, 1994 balance of purchased mortgage servicing rights related to this portfolio was approximately $189 million (132 basis points, or a 4.4 multiple of the Average Service Fee). Portfolio run off, consisting of prepayments and scheduled payments on mortgage loans serviced, was 7.22 percent for the year, due to the low weighted average interest rate of the mortgage servicing portfolio compared to prevailing mortgage interest rates. In addition, pending transfers as of year-end totaled another $5.1 billion of mortgage servicing with a weighted average interest rate of 7.30 percent and earning an Average Service Fee of 34.0 basis points. At an average cost of 182 basis points, these mortgage servicing rights are being acquired at a 5.4 multiple of the Average Service Fee. Pending transfers, together with normal jumbo servicing acquisitions, should allow the Company to end the first quarter of 1995 with a mortgage servicing portfolio of more than $19 billion. The Company currently plans to grow the mortgage servicing portfolio to more than $25 billion by the end of 1995. The following table summarizes the Company's utilization of capital as of December 31, 1994 (in thousands):
average annual service fee excluding ancillary revenue and earnings on escrows (the "Average Service Fee") of 29.59 basis points. The December 31, 1994 balance of purchased mortgage servicing rights related to this portfolio was approximately $189 million (132 basis points, or a 4.4 multiple of the Average Service Fee). Portfolio run off, consisting of prepayments and scheduled payments on mortgage loans serviced, was 7.22 percent for the year, due to the low weighted average interest rate of the mortgage servicing portfolio compared to prevailing mortgage interest rates. In addition, pending transfers as of year-end totaled another $5.1 billion of mortgage servicing with a weighted average interest rate of 7.30 percent and earning an Average Service Fee of 34.0 basis points. At an average cost of 182 basis points, these mortgage servicing rights are being acquired at a 5.4 multiple of the Average Service Fee. Pending transfers, together with normal jumbo servicing acquisitions, should allow the Company to end the first quarter of 1995 with a mortgage servicing portfolio of more than $19 billion. The Company currently plans to grow the mortgage servicing portfolio to more than $25 billion by the end of 1995. The following table summarizes the Company's utilization of capital as of December 31, 1994 (in thousands):
CAPITAL EMPLOYED -------$ 8,518 2,086 8,843
ASSETS ---------Mortgage loan portfolio: Fixed-rate mortgage loans Medium-term mortgage loans Adjustable-rate mortgage loans Mortgage Pass-Through portfolio: Fixed-rate mortgage securities Medium-term mortgage securities Adjustable-rate mortgage securities Agency securities portfolio: Fixed-rate mortgage securities Adjustable-rate mortgage securities Callable notes CMO investment portfolio Purchased mortgage servicing rights $ 55,055 21,760 132,692
BORROWINGS ---------$ 46,537 19,674 123,849
409 459,874 755,623
396 430,164 731,334
13 29,710 24,289
504,023 1,042,861 333,687 5,270,103 282,969 ---------$8,859,056 ==========
439,635 1,016,148 328,213 5,146,777(1) 85,888(2) ---------$8,368,615 ==========
64,388 26,713 5,474 123,326 197,081 -------490,441
Other assets, net of other liabilities Total stockholders' equity
73,234 -------$563,675 ========
(1) Includes approximately $45 million of related short term borrowings. (2) Includes approximately $76 million owed under contracts for bulk purchases of mortgage servicing rights and $10 million drawn on a $120 million line of credit secured by existing mortgage servicing rights. As of December 31, 1994, the mortgage loan portfolio and commitments to acquire mortgage loans ("Pipeline") approximated $243 million. Market value risk associated with holding or acquiring these loans was reduced by entering into forward sale agreements totaling $65 million for hedging purposes. In addition, approximately $143 million was invested or committed for investment in ARM loans, which are not generally as sensitive to changes in market value as are fixed-rate investments. The remaining mortgage loan portfolio and Pipeline that was subject to market value risk as of December 31, 1994 was approximately $30 million (adjusted for expected Pipeline fallout of 20 percent on -best efforts- commitments). 23
A significant impact of the rise in mortgage interest rates in 1994 has been a corresponding decline in the value of
A significant impact of the rise in mortgage interest rates in 1994 has been a corresponding decline in the value of most mortgage assets. As of December 31, 1994, the Company's $1.9 billion of mortgage assets held availablefor-sale had a $78.5 million net unrealized loss. This net unrealized loss has been reflected as a separate component of stockholders' equity in accordance with Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities," ("SFAS 115") which the Company adopted January 1, 1994. These losses will only be realized if the securities are sold. The Company does not intend to sell these securities under current market conditions. In time, as interest rates stabilize or decline, the Company believes these unrealized losses will be recovered through improvement in the market values or repayment of the underlying securities. Declines in value and ongoing market value risk associated with the remaining mortgage assets will not have a direct impact on earnings as these assets are classified as held-to-maturity and can only be sold under very limited circumstances. RESULTS OF OPERATIONS Comparative net operating results (interest income or fee revenues, net of interest and related expenses or direct operating costs) by source were as follows (in thousands, except percentages and per share amounts):
Year Ended December 31 -----------------------------------1994 1993 1992 ---------------------$ 26,467 $ 49,368 $ 35,038 17,341 30,389 16,466 15,933 18,355 1,409 9,036 (34,446) 18,420 21,019 (1,056) 4,067 1,482 9,161 61,216 2,910 950 1,875 952 ---------------------103,974 127,183 75,195 (3,500) (2,800) (7,750) (14,895) (30,127) (14,254) ---------------------$ 85,579 $ 94,256 $ 53,191 ======== ======== ======== $ 3.06 3.01 13.27% $ 3.68 3.57 14.65% $ 3.37 3.23 16.08%
Mortgage loan portfolio Mortgage Pass-Through portfolio Agency securities portfolio CMO investment portfolio Mortgage servicing CMO administration Gains from sales Other income Contribution to income Provision for possible losses General and administrative expenses Net income Net income per share: Primary Fully diluted Return on average total stockholders' equity
1994 Compared to 1993 Operating results in 1994 declined over nine percent from those achieved in 1993 primarily because of rising interest rates. Higher mortgage loan interest rates have had the effect of substantially curtailing purchase and commitment volumes and shifting the product mix from fixed-rate mortgage loans to relatively lower rate ARM and medium-term mortgage products. During this period, steadily rising yields on ARM mortgage investments have not kept pace with increases in borrowing costs, and net interest spreads on the mortgage loan, Mortgage Pass- Through and agency securities portfolios have declined markedly. On a more positive note, the CMO investment portfolio and the mortgage servicing operation have performed well in this environment. 24
The mortgage loan portfolio contributed significantly less to current year net operating results than in 1993 due to (i) a lower average mortgage loan portfolio outstanding: $799 million in 1994 compared to $1.06 billion in 1993, (ii) lower weighted average yields on mortgage loans: 6.68 percent in 1994 compared to 7.07 percent in 1993, (iii) higher average short term borrowing costs: 4.50 percent in 1994 compared to 3.93 percent in 1993, and (iv) greater use of leverage: the average ratio of short term borrowings to capital employed increased to 2.8:1 in 1994 compared to 1.6:1 in 1993. Lower mortgage loan purchase volume, particularly in the last three quarters of 1994, is the primary reason for the decline in size of the mortgage loan portfolio. Average yields have declined
The mortgage loan portfolio contributed significantly less to current year net operating results than in 1993 due to (i) a lower average mortgage loan portfolio outstanding: $799 million in 1994 compared to $1.06 billion in 1993, (ii) lower weighted average yields on mortgage loans: 6.68 percent in 1994 compared to 7.07 percent in 1993, (iii) higher average short term borrowing costs: 4.50 percent in 1994 compared to 3.93 percent in 1993, and (iv) greater use of leverage: the average ratio of short term borrowings to capital employed increased to 2.8:1 in 1994 compared to 1.6:1 in 1993. Lower mortgage loan purchase volume, particularly in the last three quarters of 1994, is the primary reason for the decline in size of the mortgage loan portfolio. Average yields have declined despite higher prevailing mortgage interest rates because of a shift in the portfolio product mix from predominantly fixed-rate loans in 1993 to lower yielding ARM loans in 1994. Borrowing costs on the mortgage loan portfolio have risen 238 basis points in 1994. The Company has increased the leverage of this portfolio in order to employ more capital in the mortgage servicing portfolio. The Mortgage Pass-Through portfolio contributed less to net operating results in 1994 than in 1993 primarily due to higher borrowing costs offset by somewhat higher yields. Borrowing costs for this portfolio rose 262 basis points during 1994, averaging 4.68 percent compared to an average of 3.46 percent in 1993. Mortgage PassThrough yields rose 39 basis points during 1994 and averaged 6.17 percent compared to an average of 6.07 percent in 1993. The increase in yields during 1994 was due primarily to periodic rate adjustments on underlying ARM loans (see "Effects of Interest Rate Changes") and the formation mid-year of $310 million of fixed-rate Mortgage Pass-Throughs. The average portfolio outstanding remained fairly constant at $1.27 billion in 1994 compared to $1.32 billion in 1993. Despite a sizable increase in the average agency securities portfolio outstanding to $1.27 billion in 1994 compared to $426 million in 1993, this portfolio contributed less in 1994 to net operating results than in 1993 due to lower average agency securities yields: 5.58 percent in 1994 compared to 6.80 percent in 1993, and higher average short term borrowing costs: 4.12 percent in 1994 compared to 2.43 percent in 1993. Lower average yields reflect the decision in early 1994 to invest in ARM agency securities that have not yet reset to a fully-indexed rate (i.e. "teaser-rate ARM securities"). These teaser-rate ARM securities produced an average yield of 4.71 percent in 1994, four basis points less than related borrowing costs. This reflects the recent period of rapidly rising short term interest rates which increased borrowing costs more than periodic rate adjustments on underlying ARM loans. Although yields on teaser- rate ARM securities had improved to 5.12 percent by December of 1994, related borrowing costs had increased to 5.77 percent (see "Effects of Interest Rate Changes"). Additionally, 1994 borrowing rates in the dollar repurchase agreement market have risen considerably over those experienced in 1993. The CMO investment portfolio contributed more to net operating results in 1994 than in 1993 primarily due to the impact of the rise in mortgage interest rates experienced in 1994 on current and expected future prepayments. In the first quarter of 1994, prepayments began to slow considerably. As a result, estimates of expected future prepayments were revised, which 25
had the effect of lowering amortization of bond discounts and improving operating results. During 1994 principal collections on mortgage securities collateral totaled $1.4 billion compared to $2.4 billion in 1993. Mortgage service revenues increased significantly during 1994 as a result of the addition of mortgage servicing rights on $12.5 billion of mortgage loans for an average servicing portfolio of $7.8 billion compared to the addition of $2.5 billion in 1993 for an average servicing portfolio of $864 million (operations commenced March 1993). Direct operating costs for mortgage servicing operations also increased, but not to the same extent as revenues, which is reflective of efficiencies being gained in the servicing process as the servicing portfolio continues to grow. Amortization of purchased mortgage servicing rights amounted to $6.0 million during 1994, representing an annual rate of 6.2 percent of the average mortgage servicing rights, compared to amortization of $1.3 million during 1993, representing an annual rate of 15.1 percent of the average mortgage servicing rights. The reduction in the amortization rate from 1993 to 1994 was attributable to the decrease in mortgage refinancing activity during 1994 caused by increased mortgage interest rates. In 1994 the Company acquired 800,000 shares of the common stock of North American Mortgage Corporation, a mortgage banking company, for $17.8 million. Consolidation trends in the mortgage banking
had the effect of lowering amortization of bond discounts and improving operating results. During 1994 principal collections on mortgage securities collateral totaled $1.4 billion compared to $2.4 billion in 1993. Mortgage service revenues increased significantly during 1994 as a result of the addition of mortgage servicing rights on $12.5 billion of mortgage loans for an average servicing portfolio of $7.8 billion compared to the addition of $2.5 billion in 1993 for an average servicing portfolio of $864 million (operations commenced March 1993). Direct operating costs for mortgage servicing operations also increased, but not to the same extent as revenues, which is reflective of efficiencies being gained in the servicing process as the servicing portfolio continues to grow. Amortization of purchased mortgage servicing rights amounted to $6.0 million during 1994, representing an annual rate of 6.2 percent of the average mortgage servicing rights, compared to amortization of $1.3 million during 1993, representing an annual rate of 15.1 percent of the average mortgage servicing rights. The reduction in the amortization rate from 1993 to 1994 was attributable to the decrease in mortgage refinancing activity during 1994 caused by increased mortgage interest rates. In 1994 the Company acquired 800,000 shares of the common stock of North American Mortgage Corporation, a mortgage banking company, for $17.8 million. Consolidation trends in the mortgage banking industry during 1994 allowed the Company to realize gains aggregating $6.2 million from the sale of 750,000 of these shares. Due to rising interest rates in 1994, the Company has not sold mortgage assets other than sales of mortgage securities collateral released from CMOs pursuant to clean-up calls. In 1994, $77 million of released mortgage securities collateral was sold for gains aggregating $2.9 million. During 1993, $3.9 billion of mortgage assets were sold for gains aggregating $61.2 million. CMO administration revenues were higher in 1994 than in 1993 due to increased master servicing of collateral placed into securitizations and administering of related bonds or pass-through securities. The Company began master servicing securitized collateral in February 1993 and receiving fees for administering securitizations in October 1993. The Company provided $3.5 million for possible losses during 1994 compared to $2.8 million in 1993. The increase is primarily due to recent experience with fraud/misrepresentation in the third-party origination of mortgage loans. After excluding $16.2 million of non-competition and management agreement expenses and termination costs incurred in 1993, salaries, general and administrative expenses increased in 1994 primarily due to costs associated with establishing the infrastructure necessary to take advantage of opportunities in the mortgage banking industry. 1993 Compared to 1992 The Company's 1993 operating results were heavily influenced by the relatively steady decline in long term interest rates throughout much of the year. The most significant positive influence of the decline in long term rates on operating results was on securitization 26
activity. Gains from the securitization or sale of mortgage assets totaled $61.2 million in 1993 compared to $2.9 million in 1992. These gains more than offset losses sustained by the CMO investment portfolio. The CMO investment portfolio experienced a net loss of $34.5 million in 1993 compared to net income of $18.4 million in 1992 primarily because of high prepayments on the related collateral also brought on by the decline in rates. Another important factor in producing higher operating results in 1993 was the issuance of $315 million of Series B Preferred Stock in December 1992, which doubled stockholders' equity and greatly enhanced earnings potential. Throughout most of 1993 larger mortgage investment portfolios were maintained as the Company sought to deploy this additional capital. Lower short term borrowing rates further increased these portfolios' contributions to net income. The Company provided $2.8 million for possible losses during the year ended December 31, 1993 compared to
activity. Gains from the securitization or sale of mortgage assets totaled $61.2 million in 1993 compared to $2.9 million in 1992. These gains more than offset losses sustained by the CMO investment portfolio. The CMO investment portfolio experienced a net loss of $34.5 million in 1993 compared to net income of $18.4 million in 1992 primarily because of high prepayments on the related collateral also brought on by the decline in rates. Another important factor in producing higher operating results in 1993 was the issuance of $315 million of Series B Preferred Stock in December 1992, which doubled stockholders' equity and greatly enhanced earnings potential. Throughout most of 1993 larger mortgage investment portfolios were maintained as the Company sought to deploy this additional capital. Lower short term borrowing rates further increased these portfolios' contributions to net income. The Company provided $2.8 million for possible losses during the year ended December 31, 1993 compared to $7.8 million in 1992. A 20 percent reduction in mortgage loan purchase volume from 1992 to 1993 along with more stringent underwriting guidelines contributed to lower provision requirements. Included in general and administrative expenses in 1993 were $11.9 million of costs associated with terminating the Company's relationship with its former manager. Effective October 1, 1993 the Company became fully selfadministered. Other increases in general and administrative expenses over 1992 were due primarily to the formation of the mortgage servicing operation. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of funds include monthly principal and interest payments on mortgage loans and mortgage securities, short term borrowings, excess cash flows on issued CMOs, proceeds from securitizations, servicing fees and other revenue from its mortgage servicing portfolio, and equity offerings when available. The Company currently believes that these funds are sufficient for the acquisition of additional mortgage loans and other mortgage assets, repayments on short term borrowings, growth of the mortgage servicing portfolio and the payment of cash dividends as required for Capstead's continued qualification as a Real Estate Investment Trust ("REIT"). It is the Company's policy to remain strongly capitalized and conservatively leveraged. The Company may, from time to time, sell a portion of its fixed-rate mortgage loans and its investments in other mortgage assets classified as available-for- sale. Such sales may be accomplished by issuing publicly-offered, multi-class Mortgage Pass-Through certificates ("MPCs") and may increase quarterly income volatility because of the recognition of transactional gains or losses. No such sales were recorded in 1994 other than sales of collateral released from CMOs pursuant to clean-up calls. Short term borrowings are primarily made under repurchase arrangements. At December 31, 1994 the Company had uncommitted repurchase facilities with investment banking firms of approximately $5.5 billion to finance the mortgage loan and Mortgage Pass-Through portfolios, subject to certain conditions. Interest rates on borrowings under these facilities are based on overnight to 30-day London Interbank Offered Rate ("LIBOR") rates. The Company also 27
enters into repurchase and dollar repurchase arrangements with investment banking firms to whom the Company pledges agency securities and other mortgage assets as collateral. The terms and conditions of these arrangements, including interest rates, are negotiated on a transaction-by-transaction basis. Other short term financing arrangements that the Company may use include entering into repurchase transactions prior to the issuance of CMOs or MPCs whereby the Company may pledge the mortgage assets that are expected to secure the issuance as collateral for a repurchase transaction with the managing underwriter of the related issuance. At December 31, 1994 the Company had a $120 million committed line of credit with an investment banking firm secured by purchased mortgage servicing rights. Advances have separate maturities and rates of interest with interest due monthly. Interest rates on advances under this facility are based on LIBOR rates related to the term of the advance. EFFECTS OF INTEREST RATE CHANGES
enters into repurchase and dollar repurchase arrangements with investment banking firms to whom the Company pledges agency securities and other mortgage assets as collateral. The terms and conditions of these arrangements, including interest rates, are negotiated on a transaction-by-transaction basis. Other short term financing arrangements that the Company may use include entering into repurchase transactions prior to the issuance of CMOs or MPCs whereby the Company may pledge the mortgage assets that are expected to secure the issuance as collateral for a repurchase transaction with the managing underwriter of the related issuance. At December 31, 1994 the Company had a $120 million committed line of credit with an investment banking firm secured by purchased mortgage servicing rights. Advances have separate maturities and rates of interest with interest due monthly. Interest rates on advances under this facility are based on LIBOR rates related to the term of the advance. EFFECTS OF INTEREST RATE CHANGES Changes in interest rates may impact the Company's earnings in various ways. The Company's earnings depend, in part, on the difference between the interest received on mortgage investments and the interest paid on related short term borrowings (primarily repurchase arrangements). The resulting spread may be reduced in a rising interest rate environment. For ARM loans the risk of rising short term interest rates is offset to some extent by increases in the rates of interest earned on these loans. Since ARM loans generally limit the amount of such increase during any single interest rate adjustment period and over the life of the loan, the interest rates on the repurchase arrangements can rise to levels that may exceed the interest rates on the underlying ARM loans resulting in a negative interest spread. This occurred in late 1994 on many of the Company's ARM investments. The Company expects that once interest rates stabilize or decline these spreads will recover. Rising interest rates may not only reduce interest spreads, but also the volume of mortgage loan purchases through our conduit operations as mortgage loan origination activity slows, which may result in lower average mortgage loan portfolios outstanding during these periods. In addition, earnings are impacted if long term interest rates change during the period after the Company has committed to purchase fixed-rate mortgage loans but before these loans have been pledged to secure CMOs and MPCs or otherwise committed for sale. If long term interest rates increase during this period, the interest payable on the CMOs issued will increase while the yield on the underlying mortgage loans pledged to collateralize the CMOs will not change; as a consequence, the interest spread on the CMO will be lower. Conversely, if long term interest rates decrease during this period, the interest payable on the CMO issued will decrease, while the yield on the underlying mortgage loans pledged to collateralize the CMO will not change; as a consequence, the interest spread on the CMO will be higher. Similarly, proceeds received on the issuance of MPCs and other sales, and related gains or losses, will be negatively impacted by an increase in long term interest rates during this period due to the resulting decline in market value of the related collateral. Conversely, 28
these transactional gains or losses will be favorably impacted by a decrease in long term interest rates during this period. The Company attempts to manage its exposure to long term interest rate changes in part by pricing CMO and MPC issuances prior to the purchase of, but subsequent to the commitment to purchase, all of the mortgage loans that will collateralize the issuances and may from time to time elect to enter into forward sale agreements for hedging purposes. In 1995 the Company expects to hold mortgage loan acquisitions in its mortgage portfolio for very brief periods, usually about a week, in an effort to eliminate the market risk associated with aggregating and securitizing mortgage loans. Changes in interest rates also impact earnings recognized from the CMO investment portfolio, which consists primarily of fixed-rate CMO residuals. The amount of income that may be generated from the typical CMO residual is dependent upon the rate of principal prepayments on the underlying collateral. If mortgage interest rates fall significantly below the interest rate on the collateral, principal prepayments will increase, reducing or even eliminating the overall return on the investment in the CMO residual. This is due primarily to the acceleration of the amortization of bond discounts, a noncash item, as bond classes are repaid more rapidly than originally anticipated. During 1993 the Company experienced such a period of declining rates and high prepayments. Another effect of changes in interest rates is that when interest rates decrease, the rate of prepayment of
these transactional gains or losses will be favorably impacted by a decrease in long term interest rates during this period. The Company attempts to manage its exposure to long term interest rate changes in part by pricing CMO and MPC issuances prior to the purchase of, but subsequent to the commitment to purchase, all of the mortgage loans that will collateralize the issuances and may from time to time elect to enter into forward sale agreements for hedging purposes. In 1995 the Company expects to hold mortgage loan acquisitions in its mortgage portfolio for very brief periods, usually about a week, in an effort to eliminate the market risk associated with aggregating and securitizing mortgage loans. Changes in interest rates also impact earnings recognized from the CMO investment portfolio, which consists primarily of fixed-rate CMO residuals. The amount of income that may be generated from the typical CMO residual is dependent upon the rate of principal prepayments on the underlying collateral. If mortgage interest rates fall significantly below the interest rate on the collateral, principal prepayments will increase, reducing or even eliminating the overall return on the investment in the CMO residual. This is due primarily to the acceleration of the amortization of bond discounts, a noncash item, as bond classes are repaid more rapidly than originally anticipated. During 1993 the Company experienced such a period of declining rates and high prepayments. Another effect of changes in interest rates is that when interest rates decrease, the rate of prepayment of mortgage loans generally increases. To the extent the proceeds of prepayments on the mortgage investment portfolios cannot be reinvested at a rate of interest at least equal to the rate previously earned on such investments, earnings may be adversely affected. In addition, the rates of interest earned on ARM loans generally will decline during periods of falling interest rates. The above discussion regarding how changes in interest rates impact investments in mortgage assets also applies to the Company's growing investment in purchased mortgage servicing rights. When interest rates rise, mortgage servicing rights become more valuable since the average lives of the related mortgage loans will tend to be longer and earnings from large, temporarily held cash balances will be greater. Conversely, lower interest rates will spur prepayments thus reducing the period of time the Company can service the related loans. Because the Company began mortgage servicing in 1993, exposure to lower interest rates is less than for other servicers that acquired servicing portfolios in previous years when interest rates were substantially higher. 29
EXHIBIT 21 LIST OF SUBSIDIARIES OF CAPSTEAD MORTGAGE CORPORATION
EXHIBIT 21 At December 31, 1994 the subsidiaries of Capstead Mortgage Corporation were as follows: STATE OF DOMICILE PARENT COMPANY SUBSIDIARY
Capstead Mortgage Corporation ("CMC")................. Capstead Advisers, Inc............................... Capstead Capital Corporation......................... Capstead Select Corporation.......................... Capstead Securities Corporation I.................... Capstead Securities Corporation II................... Capstead Securities Corporation III.................. Capstead Securities Corporation IV................... CMC Securities Corporation I......................... CMC Securities Corporation III....................... Maryland Nevada Delaware Delaware Delaware Delaware Delaware Delaware Nevada Delaware
EXHIBIT 21 LIST OF SUBSIDIARIES OF CAPSTEAD MORTGAGE CORPORATION
EXHIBIT 21 At December 31, 1994 the subsidiaries of Capstead Mortgage Corporation were as follows: STATE OF DOMICILE PARENT COMPANY SUBSIDIARY
Capstead Mortgage Corporation ("CMC")................. Capstead Advisers, Inc............................... Capstead Capital Corporation......................... Capstead Select Corporation.......................... Capstead Securities Corporation I.................... Capstead Securities Corporation II................... Capstead Securities Corporation III.................. Capstead Securities Corporation IV................... CMC Securities Corporation I......................... CMC Securities Corporation III....................... CMC ARM Securities Corporation....................... Capstead Inc.(1)..................................... CMC Securities Corporation II(2).................... CMC Securities Corporation IV(2).................... CMC Investment Partnership(3)........................ Maryland Nevada Delaware Delaware Delaware Delaware Delaware Delaware Nevada Delaware Delaware Delaware Delaware Delaware Texas
(1) CMC owns all of the issued and outstanding preferred stock. (2) Capstead Inc. owns all of the issued and outstanding common stock. (3) CMC Investment Partnership is a general partnership owned by CMC and Capstead Inc.
EXHIBIT 23 CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Capstead Mortgage Corporation of our report dated January 23, 1995, included in the 1994 Annual Report to Stockholders of
EXHIBIT 21 At December 31, 1994 the subsidiaries of Capstead Mortgage Corporation were as follows: STATE OF DOMICILE PARENT COMPANY SUBSIDIARY
Capstead Mortgage Corporation ("CMC")................. Capstead Advisers, Inc............................... Capstead Capital Corporation......................... Capstead Select Corporation.......................... Capstead Securities Corporation I.................... Capstead Securities Corporation II................... Capstead Securities Corporation III.................. Capstead Securities Corporation IV................... CMC Securities Corporation I......................... CMC Securities Corporation III....................... CMC ARM Securities Corporation....................... Capstead Inc.(1)..................................... CMC Securities Corporation II(2).................... CMC Securities Corporation IV(2).................... CMC Investment Partnership(3)........................ Maryland Nevada Delaware Delaware Delaware Delaware Delaware Delaware Nevada Delaware Delaware Delaware Delaware Delaware Texas
(1) CMC owns all of the issued and outstanding preferred stock. (2) Capstead Inc. owns all of the issued and outstanding common stock. (3) CMC Investment Partnership is a general partnership owned by CMC and Capstead Inc.
EXHIBIT 23 CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Capstead Mortgage Corporation of our report dated January 23, 1995, included in the 1994 Annual Report to Stockholders of Capstead Mortgage Corporation. Our audit also included the financial statement schedules of Capstead Mortgage Corporation listed in Item 14(a). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
EXHIBIT 23 CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Capstead Mortgage Corporation of our report dated January 23, 1995, included in the 1994 Annual Report to Stockholders of Capstead Mortgage Corporation. Our audit also included the financial statement schedules of Capstead Mortgage Corporation listed in Item 14(a). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-40116) pertaining to the 1990 Employee Stock Option Plan, the Registration Statement (Form S-8 No. 33-40117) pertaining to the 1990 Directors' Stock Option Plan, the Registration Statement (Form S-3 No. 33-62212) pertaining to the Universal Shelf, the Registration Statement (Form S-3 No. 33-52415) pertaining to the registration of 1,000,000 shares of common stock, the Registration Statement (Form S-8 No. 33-53555) pertaining to the 1994 Flexible Long Term Incentive Plan and in the related prospectuses of our report dated January 23, 1995, with respect to the consolidated financial statements incorporated herein by reference and our report included in the preceding paragraph with respect to the financial statement schedules included in the Annual Report (Form 10-K) of Capstead Mortgage Corporation. ERNST & YOUNG LLP Dallas, Texas March 22, 1995
ARTICLE 5 This schedule contains summary financial information extracted from Capstead Mortgage Corporation Annual Report on Form 10-K for the period ended December 31, 1994 and is qualified in its entirety by reference to such financial statements. MULTIPLIER: 1,000 CURRENCY: U.S. DOLLAR
PERIOD TYPE FISCAL YEAR END PERIOD START PERIOD END EXCHANGE RATE CASH SECURITIES RECEIVABLES ALLOWANCES INVENTORY CURRENT ASSETS PP&E DEPRECIATION
12 MOS DEC 31 1994 JAN 01 1994 DEC 31 1994 1 27,741 0 0 0 0 0 0 0
EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Capstead Mortgage Corporation of our report dated January 23, 1995, included in the 1994 Annual Report to Stockholders of Capstead Mortgage Corporation. Our audit also included the financial statement schedules of Capstead Mortgage Corporation listed in Item 14(a). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-40116) pertaining to the 1990 Employee Stock Option Plan, the Registration Statement (Form S-8 No. 33-40117) pertaining to the 1990 Directors' Stock Option Plan, the Registration Statement (Form S-3 No. 33-62212) pertaining to the Universal Shelf, the Registration Statement (Form S-3 No. 33-52415) pertaining to the registration of 1,000,000 shares of common stock, the Registration Statement (Form S-8 No. 33-53555) pertaining to the 1994 Flexible Long Term Incentive Plan and in the related prospectuses of our report dated January 23, 1995, with respect to the consolidated financial statements incorporated herein by reference and our report included in the preceding paragraph with respect to the financial statement schedules included in the Annual Report (Form 10-K) of Capstead Mortgage Corporation. ERNST & YOUNG LLP Dallas, Texas March 22, 1995
ARTICLE 5 This schedule contains summary financial information extracted from Capstead Mortgage Corporation Annual Report on Form 10-K for the period ended December 31, 1994 and is qualified in its entirety by reference to such financial statements. MULTIPLIER: 1,000 CURRENCY: U.S. DOLLAR
PERIOD TYPE FISCAL YEAR END PERIOD START PERIOD END EXCHANGE RATE CASH SECURITIES RECEIVABLES ALLOWANCES INVENTORY CURRENT ASSETS PP&E DEPRECIATION TOTAL ASSETS CURRENT LIABILITIES BONDS COMMON PREFERRED MANDATORY PREFERRED OTHER SE TOTAL LIABILITY AND EQUITY SALES TOTAL REVENUES CGS
12 MOS DEC 31 1994 JAN 01 1994 DEC 31 1994 1 27,741 0 0 0 0 0 0 0 8,943,858 3,278,038 5,102,145 153 0 333,499 230,023 563,675 0 604,065 0
ARTICLE 5 This schedule contains summary financial information extracted from Capstead Mortgage Corporation Annual Report on Form 10-K for the period ended December 31, 1994 and is qualified in its entirety by reference to such financial statements. MULTIPLIER: 1,000 CURRENCY: U.S. DOLLAR
PERIOD TYPE FISCAL YEAR END PERIOD START PERIOD END EXCHANGE RATE CASH SECURITIES RECEIVABLES ALLOWANCES INVENTORY CURRENT ASSETS PP&E DEPRECIATION TOTAL ASSETS CURRENT LIABILITIES BONDS COMMON PREFERRED MANDATORY PREFERRED OTHER SE TOTAL LIABILITY AND EQUITY SALES TOTAL REVENUES CGS TOTAL COSTS OTHER EXPENSES LOSS PROVISION INTEREST EXPENSE INCOME PRETAX INCOME TAX INCOME CONTINUING DISCONTINUED EXTRAORDINARY CHANGES NET INCOME EPS PRIMARY EPS DILUTED
12 MOS DEC 31 1994 JAN 01 1994 DEC 31 1994 1 27,741 0 0 0 0 0 0 0 8,943,858 3,278,038 5,102,145 153 0 333,499 230,023 563,675 0 604,065 0 0 40,238 3,500 474,748 85,579 0 85,579 0 0 0 85,579 3.06 3.01