UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: September 30, 2019
OR
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to ______________
Commission File Number: 001-08896
CAPSTEAD MORTGAGE CORPORATION
(Exact name of Registrant as specified in its Charter)
Maryland |
|
75-2027937 |
(State or other jurisdiction of |
|
(I.R.S. Employer |
incorporation or organization) |
|
Identification No.) |
8401 North Central Expressway, Suite 800, Dallas, TX |
|
75225-4404 |
(Address of principal executive offices) |
|
(Zip Code) |
(214) 874-2323
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbols |
Name of each exchange on which registered |
Common Stock ($0.01 par value) |
CMO |
New York Stock Exchange |
7.50% Series E Cumulative Redeemable Preferred Stock ($0.10 par value) |
CMOPRE |
New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☑ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☑ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☑ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☑
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock ($0.01par value) |
|
94,606,455 as of October 28, 2019 |
CAPSTEAD MORTGAGE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2019
INDEX
|
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Page |
ITEM 1. |
|
|
|
|
|
Consolidated Balance Sheets — September 30, 2019 and December 31, 2018 |
3 |
|
|
|
|
Consolidated Statements of Operations — Quarter and Nine Months Ended September 30, 2019 and 2018 |
4 |
|
|
|
|
5 |
||
|
|
|
6 |
||
|
|
|
Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2019 and 2018 |
7 |
|
|
|
|
8 |
||
|
|
|
ITEM 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
21 |
|
|
|
ITEM 3. |
35 |
|
|
|
|
ITEM 4. |
35 |
|
|
|
|
|
|
|
ITEM 1A. |
36
|
|
ITEM 5A. |
Other Information |
36 |
|
|
|
ITEM 6. |
36 |
|
|
|
|
38 |
-2-
ITEM 1. FINANCIAL STATEMENTS
PART I. — FINANCIAL INFORMATION
CAPSTEAD MORTGAGE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except pledged and per share amounts)
|
|
September 30, 2019 |
|
December 31, 2018 |
|
||||
|
|
(unaudited) |
|
|
|
|
|
||
Assets |
|
|
|
|
|
|
|
|
|
Residential mortgage investments ($10.84 and $11.57 billion pledged at September 30, 2019 and December 31, 2018, respectively) |
|
$ |
11,235,803 |
|
|
$ |
11,965,381 |
|
|
Cash collateral receivable from derivative counterparties |
|
|
83,511 |
|
|
|
31,797 |
|
|
Derivatives at fair value |
|
|
1,267 |
|
|
|
– |
|
|
Cash and cash equivalents |
|
|
68,204 |
|
|
|
60,289 |
|
|
Receivables and other assets |
|
|
145,902 |
|
|
|
129,058 |
|
|
|
|
$ |
11,534,687 |
|
|
$ |
12,186,525 |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
Secured borrowings |
|
$ |
10,292,924 |
|
|
$ |
10,979,362 |
|
|
Derivatives at fair value |
|
|
35,515 |
|
|
|
17,834 |
|
|
Unsecured borrowings |
|
|
98,367 |
|
|
|
98,292 |
|
|
Common stock dividend payable |
|
|
11,702 |
|
|
|
7,132 |
|
|
Accounts payable and accrued expenses |
|
|
24,423 |
|
|
|
24,842 |
|
|
|
|
|
10,462,931 |
|
|
|
11,127,462 |
|
|
Stockholders’ equity |
|
|
|
|
|
|
|
|
|
Preferred stock - $0.10 par value; 100,000 shares authorized: |
|
|
|
|
|
|
|
|
|
7.50% Cumulative Redeemable Preferred Stock, Series E, 10,329 shares issued and outstanding ($258,226 aggregate liquidation preference) at September 30, 2019 and December 31, 2018 |
|
|
250,946 |
|
|
|
250,946 |
|
|
Common stock - $0.01 par value; 250,000 shares authorized: |
|
|
|
|
|
|
|
|
|
94,606 and 85,277 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively |
|
|
946 |
|
|
|
853 |
|
|
Paid-in capital |
|
|
1,251,807 |
|
|
|
1,174,880 |
|
|
Accumulated deficit |
|
|
(457,662 |
) |
|
|
(346,570 |
) |
|
Accumulated other comprehensive income (loss) |
|
|
25,719 |
|
|
|
(21,046 |
) |
|
|
|
|
1,071,756 |
|
|
|
1,059,063 |
|
|
|
|
$ |
11,534,687 |
|
|
$ |
12,186,525 |
|
See accompanying notes to consolidated financial statements.
-3-
CAPSTEAD MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
|
|
Quarter Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30 |
|
|
September 30 |
|
||||||||||
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage investments |
|
$ |
77,693 |
|
|
$ |
67,649 |
|
|
$ |
246,600 |
|
|
$ |
201,989 |
|
Other |
|
|
1,065 |
|
|
|
350 |
|
|
|
2,087 |
|
|
|
1,063 |
|
|
|
|
78,758 |
|
|
|
67,999 |
|
|
|
248,687 |
|
|
|
203,052 |
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured borrowings |
|
|
(62,800 |
) |
|
|
(54,393 |
) |
|
|
(194,524 |
) |
|
|
(147,655 |
) |
Unsecured borrowings |
|
|
(1,910 |
) |
|
|
(1,910 |
) |
|
|
(5,701 |
) |
|
|
(5,701 |
) |
|
|
|
(64,710 |
) |
|
|
(56,303 |
) |
|
|
(200,225 |
) |
|
|
(153,356 |
) |
|
|
|
14,048 |
|
|
|
11,696 |
|
|
|
48,462 |
|
|
|
49,696 |
|
Other (expense) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on derivative instruments (net) |
|
|
(9,221 |
) |
|
|
– |
|
|
|
(105,720 |
) |
|
|
– |
|
Loss on sale of investments (net) |
|
|
– |
|
|
|
– |
|
|
|
(1,365 |
) |
|
|
– |
|
Compensation-related expense |
|
|
(566 |
) |
|
|
(1,913 |
) |
|
|
(6,147 |
) |
|
|
(5,521 |
) |
Other general and administrative expense |
|
|
(1,123 |
) |
|
|
(1,184 |
) |
|
|
(3,389 |
) |
|
|
(3,320 |
) |
Miscellaneous other revenue |
|
|
58 |
|
|
|
81 |
|
|
|
149 |
|
|
|
233 |
|
|
|
|
(10,852 |
) |
|
|
(3,016 |
) |
|
|
(116,472 |
) |
|
|
(8,608 |
) |
Net income (loss) |
|
|
3,196 |
|
|
|
8,680 |
|
|
|
(68,010 |
) |
|
|
41,088 |
|
Less preferred stock dividends |
|
|
(4,842 |
) |
|
|
(4,842 |
) |
|
|
(14,526 |
) |
|
|
(14,526 |
) |
Net (loss) income to common stockholders |
|
$ |
(1,646 |
) |
|
$ |
3,838 |
|
|
$ |
(82,536 |
) |
|
$ |
26,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.02 |
) |
|
$ |
0.04 |
|
|
$ |
(0.95 |
) |
|
$ |
0.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
90,945 |
|
|
|
91,206 |
|
|
|
86,946 |
|
|
|
92,202 |
|
Diluted |
|
|
90,945 |
|
|
|
91,346 |
|
|
|
86,946 |
|
|
|
92,317 |
|
See accompanying notes to consolidated financial statements.
-4-
CAPSTEAD MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, unaudited)
|
|
Quarter Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30 |
|
|
September 30 |
|
||||||||||
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Net income (loss) |
|
$ |
3,196 |
|
|
$ |
8,680 |
|
|
$ |
(68,010 |
) |
|
$ |
41,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gains (losses) related to available-for-sale securities |
|
|
(2,692 |
) |
|
|
(26,771 |
) |
|
|
89,334 |
|
|
|
(87,336 |
) |
Amounts related to cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized (losses) gains |
|
|
(7,648 |
) |
|
|
7,580 |
|
|
|
(22,945 |
) |
|
|
46,385 |
|
Reclassification adjustment for amounts included in net income (loss) |
|
|
(2,702 |
) |
|
|
(11,162 |
) |
|
|
(19,624 |
) |
|
|
(25,776 |
) |
|
|
|
(13,042 |
) |
|
|
(30,353 |
) |
|
|
46,765 |
|
|
|
(66,727 |
) |
Comprehensive loss |
|
$ |
(9,846 |
) |
|
$ |
(21,673 |
) |
|
$ |
(21,245 |
) |
|
$ |
(25,639 |
) |
See accompanying notes to consolidated financial statements.
-5-
CAPSTEAD MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, unaudited)
|
|
Preferred Stock |
|
|
Common Stock |
|
|
Paid-in Capital |
|
|
Accumulated Deficit |
|
|
Accumulated Other Comprehensive Income (Loss) |
|
|
Total Stockholders’ Equity |
|
||||||
Balance at June 30, 2019 |
|
$ |
250,946 |
|
|
$ |
855 |
|
|
$ |
1,176,529 |
|
|
$ |
(444,703 |
) |
|
$ |
38,761 |
|
|
$ |
1,022,388 |
|
Net income |
|
– |
|
|
– |
|
|
– |
|
|
|
3,196 |
|
|
– |
|
|
|
3,196 |
|
||||
Change in unrealized gain on mortgage securities, net |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
|
(2,692 |
) |
|
|
(2,692 |
) |
||||
Amounts related to cash flow hedges, net |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
|
(10,350 |
) |
|
|
(10,350 |
) |
||||
Cash dividends: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common – $0.12 per share |
|
– |
|
|
– |
|
|
– |
|
|
|
(11,313 |
) |
|
– |
|
|
|
(11,313 |
) |
||||
Preferred – $0.47 per share |
|
– |
|
|
– |
|
|
– |
|
|
|
(4,842 |
) |
|
– |
|
|
|
(4,842 |
) |
||||
Issuance of common stock |
|
– |
|
|
|
90 |
|
|
|
75,012 |
|
|
– |
|
|
– |
|
|
|
75,102 |
|
|||
Other additions to capital |
|
– |
|
|
|
1 |
|
|
|
266 |
|
|
– |
|
|
– |
|
|
|
267 |
|
|||
Balance at September 30, 2019 |
|
$ |
250,946 |
|
|
$ |
946 |
|
|
$ |
1,251,807 |
|
|
$ |
(457,662 |
) |
|
$ |
25,719 |
|
|
$ |
1,071,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2018 |
|
$ |
250,946 |
|
|
$ |
924 |
|
|
$ |
1,237,812 |
|
|
$ |
(346,570 |
) |
|
$ |
25,744 |
|
|
$ |
1,168,856 |
|
Net income |
|
– |
|
|
– |
|
|
– |
|
|
|
8,680 |
|
|
– |
|
|
|
8,680 |
|
||||
Change in unrealized gain on mortgage securities, net |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
|
(26,771 |
) |
|
|
(26,771 |
) |
||||
Amounts related to cash flow hedges, net |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
|
(3,582 |
) |
|
|
(3,582 |
) |
||||
Cash dividends: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common – $0.11 per share |
|
– |
|
|
– |
|
|
|
(6,203 |
) |
|
|
(3,838 |
) |
|
– |
|
|
|
(10,041 |
) |
|||
Preferred – $0.47 per share |
|
– |
|
|
– |
|
|
– |
|
|
|
(4,842 |
) |
|
– |
|
|
|
(4,842 |
) |
||||
Common stock repurchases |
|
– |
|
|
|
(14 |
) |
|
|
(11,827 |
) |
|
– |
|
|
– |
|
|
|
(11,841 |
) |
|||
Other additions to capital |
|
– |
|
|
|
1 |
|
|
|
633 |
|
|
– |
|
|
– |
|
|
|
634 |
|
|||
Balance at September 30, 2018 |
|
$ |
250,946 |
|
|
$ |
911 |
|
|
$ |
1,220,415 |
|
|
$ |
(346,570 |
) |
|
$ |
(4,609 |
) |
|
$ |
1,121,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018 |
|
$ |
250,946 |
|
|
$ |
853 |
|
|
$ |
1,174,880 |
|
|
$ |
(346,570 |
) |
|
$ |
(21,046 |
) |
|
$ |
1,059,063 |
|
Net loss |
|
– |
|
|
– |
|
|
– |
|
|
|
(68,010 |
) |
|
– |
|
|
|
(68,010 |
) |
||||
Change in unrealized gain on mortgage securities, net |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
|
89,334 |
|
|
|
89,334 |
|
||||
Amounts related to cash flow hedges, net |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
|
(42,569 |
) |
|
|
(42,569 |
) |
||||
Cash dividends: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common – $0.32 per share |
|
– |
|
|
– |
|
|
– |
|
|
|
(28,557 |
) |
|
– |
|
|
|
(28,557 |
) |
||||
Preferred – $1.41 per share |
|
– |
|
|
– |
|
|
– |
|
|
|
(14,525 |
) |
|
– |
|
|
|
(14,525 |
) |
||||
Issuance of common stock |
|
– |
|
|
|
90 |
|
|
|
75,012 |
|
|
– |
|
|
– |
|
|
|
75,102 |
|
|||
Other additions to capital |
|
– |
|
|
|
3 |
|
|
|
1,915 |
|
|
– |
|
|
– |
|
|
|
1,918 |
|
|||
Balance at September 30, 2019 |
|
$ |
250,946 |
|
|
$ |
946 |
|
|
$ |
1,251,807 |
|
|
$ |
(457,662 |
) |
|
$ |
25,719 |
|
|
$ |
1,071,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017 |
|
$ |
250,946 |
|
|
$ |
957 |
|
|
$ |
1,271,425 |
|
|
$ |
(346,570 |
) |
|
$ |
62,118 |
|
|
$ |
1,238,876 |
|
Net income |
|
– |
|
|
– |
|
|
– |
|
|
|
41,088 |
|
|
– |
|
|
|
41,088 |
|
||||
Change in unrealized gain on mortgage securities, net |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
|
(87,336 |
) |
|
|
(87,336 |
) |
||||
Amounts related to cash flow hedges, net |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
|
20,609 |
|
|
|
20,609 |
|
||||
Cash dividends: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common – $0.41 per share |
|
– |
|
|
– |
|
|
|
(11,143 |
) |
|
|
(26,563 |
) |
|
– |
|
|
|
(37,706 |
) |
|||
Preferred – $1.41 per share |
|
– |
|
|
– |
|
|
– |
|
|
|
(14,525 |
) |
|
– |
|
|
|
(14,525 |
) |
||||
Common stock repurchases |
|
– |
|
|
|
(48 |
) |
|
|
(41,265 |
) |
|
– |
|
|
– |
|
|
|
(41,313 |
) |
|||
Other additions to capital |
|
– |
|
|
|
2 |
|
|
|
1,398 |
|
|
– |
|
|
– |
|
|
|
1,400 |
|
|||
Balance at September 30, 2018 |
|
$ |
250,946 |
|
|
$ |
911 |
|
|
$ |
1,220,415 |
|
|
$ |
(346,570 |
) |
|
$ |
(4,609 |
) |
|
$ |
1,121,093 |
|
See accompanying notes to consolidated financial statements.
-6-
CAPSTEAD MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
|
|
Nine Months Ended September 30 |
|
|||||
|
|
2019 |
|
|
2018 |
|
||
Operating activities: |
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(68,010 |
) |
|
$ |
41,088 |
|
Adjustments to reconcile net (loss) income to cash provided by operating activities: |
|
|
|
|
|
|
|
|
Amortization of investment premiums |
|
|
55,210 |
|
|
|
88,293 |
|
Amortization of equity-based awards |
|
|
2,048 |
|
|
|
1,477 |
|
Amortization of unrealized gain on de-designated hedges |
|
|
(12,854 |
) |
|
|
– |
|
Loss on sale of mortgage investments |
|
|
1,365 |
|
|
|
– |
|
Loss on derivative instruments (net) |
|
|
124,539 |
|
|
|
– |
|
Other depreciation and amortization |
|
|
81 |
|
|
|
79 |
|
Net change in receivables, other assets, accounts payable and accrued expenses |
|
|
12,193 |
|
|
|
6,461 |
|
Net cash provided by operating activities |
|
|
114,572 |
|
|
|
137,398 |
|
Investing activities: |
|
|
|
|
|
|
|
|
Purchases of residential mortgage investments |
|
|
(2,306,131 |
) |
|
|
(2,158,970 |
) |
Proceeds from sales of residential mortgage investments |
|
|
303,991 |
|
|
|
– |
|
Interest receivable acquired with the purchase of residential mortgage investments |
|
|
(4,695 |
) |
|
|
(4,167 |
) |
Principal collections on residential mortgage investments, including changes in mortgage securities principal remittance receivable |
|
|
2,744,563 |
|
|
|
2,739,267 |
|
Redemption of lending counterparty investments |
|
|
5,000 |
|
|
|
– |
|
Net cash provided by investing activities |
|
|
742,728 |
|
|
|
576,130 |
|
Financing activities: |
|
|
|
|
|
|
|
|
Proceeds from repurchase arrangements and similar borrowings |
|
|
104,814,630 |
|
|
|
137,810,441 |
|
Principal payments on repurchase arrangements and similar borrowings |
|
|
(105,501,068 |
) |
|
|
(138,521,532 |
) |
(Increase) decrease in cash collateral receivable from derivative counterparties |
|
|
(51,714 |
) |
|
|
16,213 |
|
Net (payments on) proceeds from derivative settlements |
|
|
(147,791 |
) |
|
|
10,906 |
|
Common stock repurchases |
|
|
– |
|
|
|
(41,313 |
) |
Issuance of common stock |
|
|
75,195 |
|
|
|
– |
|
Other capital stock transactions |
|
|
(106 |
) |
|
|
(72 |
) |
Dividends paid |
|
|
(38,531 |
) |
|
|
(60,353 |
) |
Net cash used in financing activities |
|
|
(849,385 |
) |
|
|
(785,710 |
) |
Net change in cash and cash equivalents |
|
|
7,915 |
|
|
|
(72,182 |
) |
Cash and cash equivalents at beginning of period |
|
|
60,289 |
|
|
|
103,907 |
|
Cash and cash equivalents at end of period |
|
$ |
68,204 |
|
|
$ |
31,725 |
|
See accompanying notes to consolidated financial statements.
-7-
CAPSTEAD MORTGAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(unaudited)
NOTE 1 — BUSINESS
Capstead Mortgage Corporation operates as a self-managed real estate investment trust for federal income tax purposes (a “REIT”) and is based in Dallas, Texas. Unless the context otherwise indicates, Capstead Mortgage Corporation, together with its subsidiaries, is referred to as “Capstead” or the “Company.” Capstead earns income from investing in a leveraged portfolio of residential mortgage pass-through securities consisting almost exclusively of adjustable-rate mortgage (“ARM”) securities issued and guaranteed by government-sponsored enterprises, either Fannie Mae, Freddie Mac, or by an agency of the federal government, Ginnie Mae. Residential mortgage pass-through securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae are referred to as “Agency Securities” and are considered to have limited, if any, credit risk.
NOTE 2 — BASIS OF PRESENTATION
Interim Financial Reporting
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2019. For further information refer to the audited consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2018.
Change in Use of Hedge Accounting
On March 1, 2019 the Company discontinued its use of hedge accounting on its interest rate swaps related to Secured borrowings, while retaining hedge accounting for swaps related to Unsecured borrowings. See NOTE 6 for additional information regarding how the Company accounts for its use of derivative instruments (“Derivatives”) and its related risk management policies.
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-02, Leases (“ASU 2016-02”) which requires entities who are lessees to recognize a right-of-use asset and a lease liability arising from those leases on the balance sheet. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The Company adopted ASU 2016-02 on January 1, 2019, which had no material effect on the Company’s results of operations, financial condition and cash flows.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (“ASU 2016-13”) which replaces the incurred loss impairment methodology in current GAAP to a methodology that better reflects expected credit losses. For financial instruments carried at amortized cost, impairment will be measured as a current estimate of expected lifetime credit losses. For available-for-sale debt securities in which changes in fair value are recorded in accumulated other
-8-
comprehensive income, the FASB made targeted improvements eliminating the write-down of available-for-sale securities under the “other-than-temporarily” impaired model with an allowance for credit losses model. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company plans to adopt ASU 2016-13 on January 1, 2020, and expects it to have no material effect on the Company’s results of operations, financial condition and cash flows.
NOTE 3 — NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is computed by dividing net income, after deducting dividends paid or accrued on preferred stock and allocating earnings to equity awards deemed to be participating securities pursuant to the two-class method, by the average number of shares of common stock outstanding, calculated excluding unvested stock awards. Participating securities include unvested equity awards that contain non-forfeitable rights to dividends prior to vesting.
Diluted net income (loss) per common share is computed by dividing the numerator used to compute basic net income (loss) per common share by the denominator used to compute basic net income (loss) per common share, further adjusted for the dilutive effect, if any, of equity awards and shares of preferred stock when and if convertible into shares of common stock. Shares of the Company’s 7.50% Series E Cumulative Redeemable Preferred Stock are contingently convertible into shares of common stock only upon the occurrence of a change in control and therefore are not considered dilutive securities absent such an occurrence. Any unvested equity awards that are deemed participating securities are included in the calculation of diluted net income (loss) per common share, if dilutive, under either the two-class method or the treasury stock method, depending upon which method produces the more dilutive result. Components of the computation of basic and diluted net income (loss) per common share were as follows for the indicated periods (dollars in thousands, except per share amounts):
|
|
Quarter Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30 |
|
|
September 30 |
|
||||||||||
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Basic net income (loss) per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
3,196 |
|
|
$ |
8,680 |
|
|
$ |
(68,010 |
) |
|
$ |
41,088 |
|
Preferred stock dividends |
|
|
(4,842 |
) |
|
|
(4,842 |
) |
|
|
(14,526 |
) |
|
|
(14,526 |
) |
Earnings participation of unvested equity awards |
|
|
(25 |
) |
|
|
(24 |
) |
|
|
(69 |
) |
|
|
(84 |
) |
|
|
$ |
(1,671 |
) |
|
$ |
3,814 |
|
|
$ |
(82,605 |
) |
|
$ |
26,478 |
|
Denominator for basic net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of shares of common stock outstanding |
|
|
91,560 |
|
|
|
91,659 |
|
|
|
87,578 |
|
|
|
92,649 |
|
Average unvested stock awards outstanding |
|
|
(615 |
) |
|
|
(453 |
) |
|
|
(632 |
) |
|
|
(447 |
) |
|
|
|
90,945 |
|
|
|
91,206 |
|
|
|
86,946 |
|
|
|
92,202 |
|
|
|
$ |
(0.02 |
) |
|
$ |
0.04 |
|
|
$ |
(0.95 |
) |
|
$ |
0.29 |
|
Diluted net income (loss) per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted net income (loss) per common share |
|
$ |
(1,671 |
) |
|
$ |
3,814 |
|
|
$ |
(82,605 |
) |
|
$ |
26,478 |
|
Denominator for diluted net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income (loss) per common share |
|
|
90,945 |
|
|
|
91,206 |
|
|
|
86,946 |
|
|
|
92,202 |
|
Net effect of dilutive equity awards |
|
|
– |
|
|
|
140 |
|
|
|
– |
|
|
|
115 |
|
|
|
|
90,945 |
|
|
|
91,346 |
|
|
|
86,946 |
|
|
|
92,317 |
|
|
|
$ |
(0.02 |
) |
|
$ |
0.04 |
|
|
$ |
(0.95 |
) |
|
$ |
0.29 |
|
-9-
Anti-dilutive securities that could be potentially dilutive in the future that were not included in the computation of diluted net income (loss) per common share include 947,000 equity awards excludable under the treasury stock method for the quarter and nine months ended September 30, 2019. There were no potentially dilutive securities excluded from the computation of diluted net income (loss) per common share for the quarter and nine months ended September 30, 2018.
NOTE 4 — RESIDENTIAL mortgage investments
Residential mortgage investments classified by collateral type and interest rate characteristics as of the indicated dates were as follows (dollars in thousands):
|
|
Unpaid Principal Balance |
|
|
Investment Premiums |
|
|
Amortized Cost Basis |
|
|
Carrying Amount (a) |
|
|
Net WAC (b) |
|
|
Average Yield (c) |
|
||||||
September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae/Freddie Mac: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate |
|
$ |
91 |
|
|
$ |
– |
|
|
$ |
91 |
|
|
$ |
91 |
|
|
|
6.50 |
% |
|
|
6.35 |
% |
ARMs |
|
|
8,388,517 |
|
|
|
256,961 |
|
|
|
8,645,478 |
|
|
|
8,699,076 |
|
|
|
3.58 |
|
|
|
2.74 |
|
Ginnie Mae ARMs |
|
|
2,452,955 |
|
|
|
73,413 |
|
|
|
2,526,368 |
|
|
|
2,534,858 |
|
|
|
3.59 |
|
|
|
2.81 |
|
|
|
|
10,841,563 |
|
|
|
330,374 |
|
|
|
11,171,937 |
|
|
|
11,234,025 |
|
|
|
3.58 |
|
|
|
2.76 |
|
Residential mortgage loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate |
|
|
123 |
|
|
– |
|
|
|
123 |
|
|
|
123 |
|
|
|
4.99 |
|
|
|
1.84 |
|
|
ARMs |
|
|
714 |
|
|
|
3 |
|
|
|
717 |
|
|
|
717 |
|
|
|
3.89 |
|
|
|
4.45 |
|
|
|
|
837 |
|
|
|
3 |
|
|
|
840 |
|
|
|
840 |
|
|
|
4.05 |
|
|
|
4.03 |
|
Collateral for structured financings |
|
|
923 |
|
|
|
15 |
|
|
|
938 |
|
|
|
938 |
|
|
|
7.99 |
|
|
|
7.56 |
|
|
|
$ |
10,843,323 |
|
|
$ |
330,392 |
|
|
$ |
11,173,715 |
|
|
$ |
11,235,803 |
|
|
|
3.58 |
|
|
|
2.76 |
|
December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae/Freddie Mac: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate |
|
$ |
126 |
|
|
$ |
– |
|
|
$ |
126 |
|
|
$ |
126 |
|
|
|
6.50 |
% |
|
|
6.23 |
% |
ARMs |
|
|
8,691,794 |
|
|
|
257,999 |
|
|
|
8,949,793 |
|
|
|
8,931,558 |
|
|
|
3.42 |
|
|
|
2.28 |
|
Ginnie Mae ARMs |
|
|
2,964,531 |
|
|
|
75,744 |
|
|
|
3,040,275 |
|
|
|
3,031,264 |
|
|
|
3.30 |
|
|
|
2.54 |
|
|
|
|
11,656,451 |
|
|
|
333,743 |
|
|
|
11,990,194 |
|
|
|
11,962,948 |
|
|
|
3.39 |
|
|
|
2.34 |
|
Residential mortgage loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate |
|
|
552 |
|
|
|
1 |
|
|
|
553 |
|
|
|
553 |
|
|
|
6.80 |
|
|
|
2.44 |
|
ARMs |
|
|
868 |
|
|
|
4 |
|
|
|
872 |
|
|
|
872 |
|
|
|
3.91 |
|
|
|
3.24 |
|
|
|
|
1,420 |
|
|
|
5 |
|
|
|
1,425 |
|
|
|
1,425 |
|
|
|
5.03 |
|
|
|
2.95 |
|
Collateral for structured financings |
|
|
991 |
|
|
|
17 |
|
|
|
1,008 |
|
|
|
1,008 |
|
|
|
7.99 |
|
|
|
7.43 |
|
|
|
$ |
11,658,862 |
|
|
$ |
333,765 |
|
|
$ |
11,992,627 |
|
|
$ |
11,965,381 |
|
|
|
3.39 |
|
|
|
2.34 |
|
(a) |
Includes unrealized gains and losses for residential mortgage investments classified as available-for-sale. |
(b) |
Net WAC, or weighted average coupon, is the weighted average interest rate of the mortgage loans underlying the indicated investments net of servicing and other fees as of the indicated balance sheet date. Net WAC is expressed as a percentage calculated on an annualized basis on the unpaid principal balances of the mortgage loans underlying these investments. |
(c) |
Average yield is presented for the quarter then ended and is based on the cash component of interest income expressed as a percentage calculated on an annualized basis on average amortized cost basis (the “cash yield”) less the effects of amortizing investment premiums. Investment premium amortization is determined using the interest method and incorporates actual and anticipated future mortgage prepayments. |
-10-
Agency Securities are considered to have limited, if any, credit risk because the timely payment of principal and interest is guaranteed by Fannie Mae and Freddie Mac, which are federally chartered corporations, or Ginnie Mae, which is an agency of the federal government. Residential mortgage loans held by Capstead were originated prior to 1995 when the Company operated a mortgage conduit and the related credit risk is borne by the Company. Collateral for structured financings consists of private residential mortgage securities that are backed by loans obtained through this mortgage conduit and are pledged to secure repayment of related structured financings. Credit risk for these securities is borne by the related bondholders. The maturity of Residential mortgage investments is directly affected by prepayments of principal on the underlying mortgage loans. Consequently, actual maturities will be significantly shorter than the portfolio’s weighted average contractual maturity of 287 months.
Fixed-rate investments consist of residential mortgage loans and Agency Securities backed by residential mortgage loans with fixed rates of interest. ARMs are adjustable-rate Agency Securities backed by residential mortgage loans that have coupon interest rates that adjust at least annually to more current interest rates or begin doing so after an initial fixed-rate period. After the initial fixed-rate period, if applicable, mortgage loans underlying ARM securities typically either (i) adjust annually based on specified margins over the one-year London interbank offered rate (“LIBOR”) or the one-year Constant Maturity U.S. Treasury Note Rate (“CMT”), (ii) adjust semiannually based on specified margins over six-month LIBOR, or (iii) adjust monthly based on specified margins over indices such as one-month LIBOR, the Eleventh District Federal Reserve Bank Cost of Funds Index, or over a rolling twelve month average of the one-year CMT index, usually subject to periodic and lifetime limits, or caps, on the amount of such adjustments during any single interest rate adjustment period and over the contractual term of the underlying loans.
Capstead classifies its ARM investments based on average number of months until coupon reset (“months to roll”). Months to roll is an indicator of asset duration which is a measure of market price sensitivity to interest rate movements. A shorter duration generally indicates less interest rate risk. Current-reset ARM investments have months to roll of less than 18 months while longer-to-reset ARM investments have months to roll of 18 months or greater. As of September 30, 2019, the average months to roll for the Company’s $5.48 billion (amortized cost basis) in current-reset ARM investments was approximately seven months while the average months to roll for the Company’s $5.69 billion (amortized cost basis) in longer-to-reset ARM investments was approximately 46 months.
During the nine months ended September 30, 2019, the Company sold available-for-sale securities using the specific identification method for proceeds totaling $304.7 million with recognized gross realized gains of $405,000 and gross realized losses of $1.8 million in earnings as a result of those sales. The Company did not sell any securities during the quarter ended September 30, 2019 or during the quarter and nine months ended September 30, 2018.
NOTE 5 — SECURED borrowings
Capstead pledges its Residential mortgage investments as collateral for secured borrowings primarily in the form of repurchase arrangements with commercial banks and other financial institutions (collectively referred to as “counterparties” or “lending counterparties”). Repurchase arrangements entered into by the Company involve the sale and a simultaneous agreement to repurchase the transferred assets at a future date and are accounted for as financings. The Company maintains the beneficial interest in the specific securities pledged during the term of each repurchase arrangement and receives the related principal and interest payments.
The terms and conditions of secured borrowings are negotiated on a transaction-by-transaction basis when each such borrowing is initiated or renewed. The amount borrowed is generally equal to the fair value of the securities pledged, as determined by the lending counterparty, less an agreed-upon discount, referred to as a “haircut.” Interest rates are generally fixed based on prevailing rates corresponding to the terms of
-11-
the borrowings. Interest may be paid monthly or at the termination of a borrowing at which time the
Company may enter into a new borrowing at prevailing haircuts and rates with the same lending counterparty or repay that counterparty and negotiate financing with a different lending counterparty. None of the Company’s lending counterparties are obligated to renew or otherwise enter into new borrowings at the conclusion of existing borrowings. In response to declines in fair value of pledged securities due to changes in market conditions or the publishing of monthly security pay-down factors, lending counterparties typically require the Company to post additional securities as collateral, pay down borrowings or fund cash margin accounts with the counterparties in order to re-establish the agreed-upon collateral requirements. These actions are referred to as margin calls. Conversely, in response to increases in fair value of pledged securities, the Company routinely margin calls its lending counterparties in order to have previously pledged collateral returned.
Secured borrowings (and related pledged collateral, including accrued interest receivable), classified by collateral type and remaining maturities, and related weighted average borrowing rates as of the indicated dates were as follows (dollars in thousands):
Collateral Type |
|
Collateral Carrying Amount |
|
|
Accrued Interest Receivable |
|
|
Borrowings Outstanding |
|
|
Average Borrowing Rates |
|
||||
September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under repurchase arrangements secured by Agency Securities with maturities of 30 days or less |
|
$ |
10,836,662 |
|
|
$ |
31,348 |
|
|
$ |
10,291,986 |
|
|
|
2.31 |
% |
Similar borrowings secured by collateral for structured financings |
|
|
938 |
|
|
– |
|
|
|
938 |
|
|
|
7.99 |
|
|
|
|
$ |
10,837,600 |
|
|
$ |
31,348 |
|
|
$ |
10,292,924 |
|
|
|
2.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under repurchase arrangements secured by Agency Securities with maturities of 30 days or less: |
|
$ |
4,424,311 |
|
|
$ |
12,287 |
|
|
$ |
4,204,988 |
|
|
|
2.73 |
% |
Borrowings under repurchase arrangements secured by Agency Securities with maturities of 31 to 90 days |
|
|
7,143,129 |
|
|
|
19,621 |
|
|
|
6,773,366 |
|
|
|
2.68 |
|
Similar borrowings secured by collateral for structured financings |
|
|
1,008 |
|
|
– |
|
|
|
1,008 |
|
|
|
7.99 |
|
|
|
|
$ |
11,568,448 |
|
|
$ |
31,908 |
|
|
$ |
10,979,362 |
|
|
|
2.70 |
|
Average secured borrowings outstanding during the indicated periods differed from respective ending balances primarily due to changes in portfolio levels and differences in the timing of portfolio acquisitions relative to portfolio runoff as illustrated below (dollars in thousands):
|
|
Quarter Ended |
|
|||||||||||||
|
|
September 30, 2019 |
|
|
December 31, 2018 |
|
||||||||||
|
|
Average Borrowings |
|
|
Average Rate |
|
|
Average Borrowings |
|
|
Average Rate |
|
||||
Average borrowings and rates adjusted for the effects of related derivative financial instruments (“Derivatives”) |
|
$ |
10,481,080 |
|
|
|
2.40 |
% |
|
$ |
11,439,646 |
|
|
|
2.07 |
% |
-12-
NOTE 6 — USE OF DERIVATIVES, OFFSETTING DISCLOSURES AND CHANGES IN OTHER COMPREHENSIVE INCOME BY COMPONENT
Capstead’s portfolio of derivative instruments hedge the variability of the underlying benchmark interest rate of current and forecasted 30- to 90-day secured borrowings. The Company attempts to mitigate exposure to higher interest rates primarily by entering into one- and three-month LIBOR-indexed, pay-fixed, receive-variable, interest rate swap agreements for terms of two and three years. From an economic perspective, this hedge relationship establishes a relatively stable fixed rate on related borrowings because the variable-rate payments received on the swap agreements offset a significant portion of the interest accruing on the borrowings, leaving the fixed-rate swap payments as the Company’s effective borrowing rate, subject to certain adjustments. Additionally, changes in fair value of these Derivatives tend to partially offset opposing changes in fair value of the Company’s residential mortgage investments that can occur in response to changes in market interest rates.
Historically, the Company designated its interest rate swaps related to secured borrowings as hedges for accounting purposes, whereby changes in the swaps’ fair values were recorded in Accumulated other comprehensive income (loss). The Company discontinued hedge accounting on March 1, 2019 for these swaps and, for GAAP purposes, related changes in the fair value are recorded in the Company’s consolidated statements of operations beginning on that date. Also, for GAAP purposes, related net unrealized gains recorded in Accumulated other comprehensive income (loss) through February 28, 2019 are being recognized as a component of interest expense in the Company’s consolidated statements of operations over the remaining lives of these swaps.
During the quarter and nine months ended September 30, 2019, Capstead entered into swap agreements with notional amounts of $1.70 billion and $6.40 billion, respectively, requiring fixed-rate interest payments averaging 1.60% and 2.17%. During the quarter and nine months ended September 30, 2019, $550 million and $3.15 billion, respectively, notional amount of swaps requiring fixed-rate interest payments averaging 1.40% and 1.42% matured. The Company also terminated $1.5 billion and $2.60 billion notional amount of swaps requiring fixed-rate interest payments averaging 2.64% and 2.72% during the quarter and nine months ended September 30, 2019. At September 30, 2019 the Company’s swap positions related to secured borrowings had the following characteristics (dollars in thousands):
Period of Contract Expiration |
|
Notional Amount |
|
|
Average Fixed-Rate Payment Requirement |
|
||
Fourth quarter 2019 |
|
$ |
700,000 |
|
|
|
1.72 |
% |
First quarter 2020 |
|
|
600,000 |
|
|
|
2.07 |
|
Second quarter 2020 |
|
|
200,000 |
|
|
|
2.56 |
|
Third quarter 2020 |
|
|
200,000 |
|
|
|
1.64 |
|
Fourth quarter 2020 |
|
|
200,000 |
|
|
|
2.04 |
|
Second quarter 2021 |
|
|
800,000 |
|
|
|
1.95 |
|
Third quarter 2021 |
|
|
1,700,000 |
|
|
|
1.60 |
|
First quarter 2022 |
|
|
1,500,000 |
|
|
|
2.50 |
|
Second quarter 2022 |
|
|
1,300,000 |
|
|
|
2.30 |
|
|
|
$ |
7,200,000 |
|
|
|
|
|
During the quarter and nine months ended September 30, 2019, the Company entered into a series of $500 million notional amount three-month Eurodollar futures contracts with a weighted average rate of 1.62% with maturities through June 2020.
-13-
The Company has three-month LIBOR-indexed, pay-fixed, receive-variable, interest rate swap agreements with notional amounts totaling $100 million and average fixed rates of 4.09% with 20-year payment terms coinciding with the floating-rate terms of the Company’s Unsecured borrowings. These Derivatives, which are designated as cash flow hedges for accounting purposes, hedge the variability of the underlying contractual rate associated with the floating-rate terms of these long-term borrowings which began on various dates between October 2015 and September 2016.
Interest rate swap agreements are measured at fair value on a recurring basis primarily using Level 2 Inputs in accordance with ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820). Fair value estimates for these Derivatives are calculated using the net discounted future fixed cash payments and the discounted future variable cash receipts which are based on expected future interest rates derived from observable market interest rate curves. The Company also incorporates both its own nonperformance risk and its counterparties’ nonperformance risk in determining fair value. In considering the effect of nonperformance risk, the Company considered the impact of netting and credit enhancements, such as collateral postings and guarantees, and has concluded that counterparty risk is not significant to the overall valuation.
The fair value of exchange-traded swap agreements hedging Secured borrowings is calculated including accrued interest and net of variation margin amounts received or paid through the exchange, resulting in separately presenting on the balance sheet a significantly reduced fair value amount representing the unsettled fair value of these Derivatives. Non-exchange traded swap agreements held as cash flow hedges of Unsecured borrowings are reported at fair value calculated excluding accrued interest. At September 30, 2019, Cash collateral receivable from derivative counterparties includes initial margin for all swap agreements and variation margin for non-exchange traded swap agreements. Accrued interest for non-exchange traded swap agreements is included in Accounts payable and accrued expenses.
Eurodollar futures are measured at fair value using Level 1 inputs based on quoted exchange prices on these contracts.
The following tables include fair value and other related disclosures regarding all Derivatives held as of and for the indicated periods (in thousands):
|
|
Balance Sheet |
|
September 30 |
|
|
December 31 |
|
||
|
|
Location |
|
2019 |
|
|
2018 |
|
||
Balance sheet-related |
|
|
|
|
|
|
|
|
|
|
Swap agreements in a gain position (an asset) related to secured borrowings |
|
(a) |
|
$ |
492 |
|
|
$ |
– |
|
Eurodollar futures contracts in a gain position |
|
(a) |
|
|
775 |
|
|
– |
|
|
Swap agreements in a loss position (a liability) related to |
|
|
|
|
|
|
|
|
|
|
unsecured borrowings |
|
(a) |
|
|
(35,515 |
) |
|
|
(17,834 |
) |
Related net interest payable |
|
(b) |
|
|
(916 |
) |
|
|
(372 |
) |
|
|
|
|
$ |
(35,164 |
) |
|
$ |
(18,206 |
) |
(a) |
The fair value of Derivatives with unrealized gains are aggregated and recorded as an asset on the face of the Balance Sheets separately from the fair value of Derivatives with unrealized losses that are recorded as a liability. The amount of unrealized losses, net of unrealized gains, included in Accumulated other comprehensive income (loss) and scheduled to be recognized in the Statements of Operations over the next twelve months primarily in the form of a fixed-rate swap payments in excess of current market rates on swaps related to unsecured borrowings and amortization of net unrealized losses on de-designated interest rate swaps totaled $(409,000) at September 30, 2019. |
(b) |
Included in “Accounts payable and accrued expenses” on the face of the Balance Sheets. |
-14-
|
Location of Gain or (Loss) Recognized in |
|
Quarter Ended September 30 |
|
|
Nine Months Ended September 30 |
|
||||||||||
|
Net Income |
|
|
2019 |
|
|
|
2018 |
|
|
|
2019 |
|
|
|
2018 |
|
Income statement-related |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Secured borrowings-related effects on interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain reclassified from Accumulated other comprehensive income (loss) |
|
|
$ |
– |
|
|
$ |
11,585 |
|
|
$ |
7,891 |
|
|
$ |
27,277 |
|
Amortization of unrealized gain, net of unrealized losses on de-designated Derivatives |
|
|
|
3,120 |
|
|
– |
|
|
$ |
12,854 |
|
|
– |
|
||
|
(a) |
|
|
3,120 |
|
|
|
11,585 |
|
|
|
20,745 |
|
|
|
27,277 |
|
Component of Unsecured borrowings-related effects on interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of loss reclassified from Accumulated other comprehensive income (loss) |
(b) |
|
|
(418 |
) |
|
|
(423 |
) |
|
|
(1,121 |
) |
|
|
(1,501 |
) |
Decrease in interest expense as a result of the use of Derivatives |
|
|
$ |
2,702 |
|
|
$ |
11,162 |
|
|
$ |
19,624 |
|
|
$ |
25,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized and unrealized (loss) gain on non-designated Derivatives (net) related to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements |
|
|
$ |
(10,262 |
) |
|
$ |
– |
|
|
$ |
(106,761 |
) |
|
$ |
– |
|
Eurodollar futures |
|
|
|
1,041 |
|
|
– |
|
|
|
1,041 |
|
|
– |
|
||
|
(c) |
|
$ |
(9,221 |
) |
|
$ |
– |
|
|
$ |
(105,720 |
) |
|
$ |
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income-related |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (loss) gain recognized in Other comprehensive income |
|
|
$ |
(7,648 |
) |
|
$ |
7,580 |
|
|
$ |
(22,945 |
) |
|
$ |
46,385 |
|
(a) |
Included in “Interest expense: Secured borrowings” on the face of the Statements of Operations. |
(b) |
Included in “Interest expense: Unsecured borrowings” on the face of the Statements of Operations. |
(c) |
Included in “Loss on derivative instruments (net)” on the face of the Statement of Operations. |
Capstead’s swap agreements and borrowings under repurchase arrangements are subject to master netting arrangements in the event of default on, or termination of, any one contract. See NOTE 5 for more information on the Company’s use of secured borrowings. The following tables provide disclosures concerning offsetting of financial liabilities and Derivatives as of the indicated dates (in thousands):
|
|
Offsetting of Derivative Assets |
|
|||||||||||||||||||||
|
|
|
|
|
|
Gross |
|
|
Net Amounts |
|
|
Gross Amounts Not Offset |
|
|
|
|
|
|||||||
|
|
Gross |
|
|
Amounts |
|
|
of Assets |
|
|
in the Balance Sheet (b) |
|
|
|
|
|
||||||||
|
|
Amounts of |
|
|
Offset in |
|
|
Presented in |
|
|
|
|
|
|
Cash |
|
|
|
|
|
||||
|
|
Recognized |
|
|
the Balance |
|
|
the Balance |
|
|
Financial |
|
|
Collateral |
|
|
Net |
|
||||||
|
|
Assets (a) |
|
|
Sheet (a) |
|
|
Sheet |
|
|
Instruments |
|
|
Received |
|
|
Amount |
|
||||||
September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty 4 |
|
$ |
5,726 |
|
|
$ |
(4,459 |
) |
|
$ |
1,267 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
1,267 |
|
December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty 4 |
|
$ |
26,787 |
|
|
$ |
(26,787 |
) |
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
-15-
(a) |
Included in gross amounts of recognized assets at September 30, 2019 are the fair value of exchange-traded swap agreements, calculated including accrued interest, and the fair value of Eurodollar futures contracts. Included in gross amounts offset in the balance sheet are variation margin amounts associated with exchange-traded swaps at September 30, 2019. |
(b) |
Amounts presented are limited to recognized liabilities and cash collateral received associated with the indicated counterparty sufficient to reduce the related Net Amount to zero in accordance with ASU No. 2011-11, as amended by ASU No. 2013-01. |
|
|
Offsetting of Financial Liabilities and Derivative Liabilities |
|
|||||||||||||||||||||
|
|
|
|
|
|
Gross |
|
|
Net Amounts |
|
|
Gross Amounts Not Offset |
|
|
|
|
|
|||||||
|
|
Gross |
|
|
Amounts |
|
|
of Liabilities |
|
|
in the Balance Sheet (c) |
|
|
|
|
|
||||||||
|
|
Amounts of |
|
|
Offset in |
|
|
Presented in |
|
|
|
|
|
|
Cash |
|
|
|
|
|
||||
|
|
Recognized |
|
|
the Balance |
|
|
the Balance |
|
|
Financial |
|
|
Collateral |
|
|
Net |
|
||||||
|
|
Liabilities (a) |
|
|
Sheet (a) |
|
|
Sheet (b) |
|
|
Instruments |
|
|
Pledged |
|
|
Amount |
|
||||||
September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives by counterparty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty 1 |
|
$ |
36,431 |
|
|
$ |
– |
|
|
$ |
36,431 |
|
|
$ |
– |
|
|
$ |
(36,431 |
) |
|
$ |
– |
|
Counterparty 4 |
|
|
77,317 |
|
|
|
(77,317 |
) |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
||||
|
|
|
113,748 |
|
|
|
(77,317 |
) |
|
|
36,431 |
|
|
– |
|
|
|
(36,431 |
) |
|
– |
|
||
Borrowings under repurchase arrangements (d) |
|
|
10,299,497 |
|
|
– |
|
|
|
10,299,497 |
|
|
|
(10,299,497 |
) |
|
– |
|
|
– |
|
|||
|
|
$ |
10,413,245 |
|
|
$ |
(77,317 |
) |
|
$ |
10,335,928 |
|
|
$ |
(10,299,497 |
) |
|
$ |
(36,431 |
) |
|
$ |
– |
|
December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives by counterparty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty 1 |
|
$ |
18,205 |
|
|
$ |
– |
|
|
$ |
18,205 |
|
|
$ |
– |
|
|
$ |
(18,205 |
) |
|
$ |
– |
|
Counterparty 4 |
|
|
9,718 |
|
|
|
(9,718 |
) |
|
|
– |
|
|
|
– |
|
|
– |
|
|
– |
|
||
|
|
|
27,923 |
|
|
|
(9,718 |
) |
|
|
18,205 |
|
|
|
– |
|
|
|
(18,205 |
) |
|
– |
|
|
Borrowings under repurchase arrangements (d) |
|
|
10,987,329 |
|
|
– |
|
|
|
10,987,329 |
|
|
|
(10,987,329 |
) |
|
– |
|
|
– |
|
|||
|
|
$ |
11,015,252 |
|
|
$ |
(9,718 |
) |
|
$ |
11,005,534 |
|
|
$ |
(10,987,329 |
) |
|
$ |
(18,205 |
) |
|
$ |
– |
|
(a) |
Included in gross amounts of recognized liabilities at September 30, 2019 is the fair value of non-exchange traded swap agreements (Counterparty 1) and exchange-traded swap agreements (Counterparty 4), calculated including accrued interest. Included in gross amounts offset in the balance sheet are variation margin amounts associated with exchange-traded swap agreements at September 30, 2019. |
(b) |
Amounts presented are limited to recognized liabilities and cash collateral received associated with the indicated counterparty sufficient to reduce the related Net Amount to zero in accordance with ASU No. 2011-11, as amended by ASU No. 2013-01. |
(c) |
Amounts presented are limited to recognized assets and collateral pledged associated with the indicated counterparty sufficient to reduce the related Net Amount to zero in accordance with ASU No. 2011-11, as amended by ASU No. 2013-01. |
(d) |
Amounts include accrued interest payable of $7.5 million and $9.0 million on borrowings under repurchase arrangements as of September 30, 2019 and December 31, 2018, respectively. |
-16-
Changes in Accumulated other comprehensive income (loss) by component for the quarter and nine months ended September 30, 2019 were as follows (in thousands):
|
|
Unrealized Gains and Losses on Cash Flow Hedges |
|
|
Unrealized Gains and Losses on Available-for-Sale Securities |
|
|
Total |
|
|||
Balance at June 30, 2019 |
|
$ |
(26,019 |
) |
|
$ |
64,780 |
|
|
$ |
38,761 |
|
Activity for the quarter ended September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss before reclassifications |
|
|
(7,648 |
) |
|
|
(2,692 |
) |
|
|
(10,340 |
) |
Amounts reclassified from accumulated other comprehensive income |
|
|
(2,702 |
) |
|
– |
|
|
|
(2,702 |
) |
|
Other comprehensive loss |
|
|
(10,350 |
) |
|
|
(2,692 |
) |
|
|
(13,042 |
) |
Balance at September 30, 2019 |
|
$ |
(36,369 |
) |
|
$ |
62,088 |
|
|
$ |
25,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018 |
|
$ |
6,200 |
|
|
$ |
(27,246 |
) |
|
$ |
(21,046 |
) |
Activity for the nine months ended September 30, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss before reclassifications |
|
|
(22,945 |
) |
|
|
89,334 |
|
|
|
66,389 |
|
Amounts reclassified from accumulated other comprehensive income |
|
|
(19,624 |
) |
|
– |
|
|
|
(19,624 |
) |
|
Other comprehensive loss |
|
|
(42,569 |
) |
|
|
89,334 |
|
|
|
46,765 |
|
Balance at September 30, 2019 |
|
$ |
(36,369 |
) |
|
$ |
62,088 |
|
|
$ |
25,719 |
|
NOTE 7 — unsecured BORROWINGS
Unsecured borrowings consist of 30-year junior subordinated notes issued in 2005 and 2006 and maturing in 2035 and 2036, for a total face amount of $100 million. Note balances net of deferred issuance costs, and related weighted average interest rates as of the indicated dates (calculated including issuance cost amortization and adjusted for effects of related Derivatives held as cash flow hedges) were as follows (dollars in thousands):
|
|
September 30, 2019 |
|
|
December 31, 2018 |
|
||||||||||
|
|
Borrowings Outstanding |
|
|
Average Rate |
|
|
Borrowings Outstanding |
|
|
Average Rate |
|
||||
Junior subordinated notes maturing in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2035 ($35,000 face amount) |
|
$ |
34,383 |
|
|
|
7.88 |
% |
|
$ |
34,354 |
|
|
|
7.89 |
% |
December 2035 ($40,000 face amount) |
|
|
39,387 |
|
|
|
7.64 |
|
|
|
39,359 |
|
|
|
7.65 |
|
September 2036 ($25,000 face amount) |
|
|
24,597 |
|
|
|
7.68 |
|
|
|
24,579 |
|
|
|
7.69 |
|
|
|
$ |
98,367 |
|
|
|
7.74 |
|
|
$ |
98,292 |
|
|
|
7.74 |
|
NOTE 8 — CAPITAL TRANSACTIONS
On August 1, 2019 the Company completed a public offering for nine million shares of common stock raising $75 million for a net price of $8.34 after underwriting discounts and offering expenses. The proceeds were deployed into additional agency-guaranteed residential ARM securities and used for general corporate purposes.
-17-
NOTE 9 — FAIR VALUE
The fair value of Capstead’s financial assets and liabilities are influenced by changes in, and market expectations for changes in, interest rates and market liquidity conditions, as well as other factors beyond the control of management. With the exception of the fair value of Eurodollar futures and lending counterparty investments, all fair values were determined using Level 2 Inputs in accordance with ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820). Eurodollar futures are derivative contracts for which Level 1 inputs are used to determine fair value. Lending counterparty investments are nonmarketable securities classified as assets for which Level 3 Inputs are used to determine fair value.
Residential mortgage investments, nearly all of which are mortgage securities classified as available-for-sale, are measured at fair value on a recurring basis. In determining fair value estimates the Company considers recent trading activity for similar investments and pricing levels indicated by lenders in connection with designating collateral for secured borrowings, provided such pricing levels are considered indicative of actual market clearing transactions. The Company currently bases fair value for Unsecured borrowings on discounted cash flows using Company estimates for market yields. Excluded from these disclosures are financial instruments for which cost basis is deemed to approximate fair value due primarily to the short duration of these instruments, which are valued using primarily Level 1 measurements, including Cash and cash equivalents, Cash collateral receivable from, or payable to, derivative counterparties, receivables, payables and secured borrowings with initial terms of 120 days or less. See NOTE 6 for information relative to the valuation of interest rate swap agreements.
Fair value-related disclosures for financial instruments other than debt securities were as follows as of the indicated dates (in thousands):
|
|
|
September 30, 2019 |
|
|
December 31, 2018 |
|
||||||||||
|
Fair Value Hierarchy |
|
Carrying Amount |
|
|
Fair Value |
|
|
Carrying Amount |
|
|
Fair Value |
|
||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans |
Level 2 |
|
$ |
840 |
|
|
$ |
900 |
|
|
$ |
1,425 |
|
|
$ |
1,400 |
|
Lending counterparty investments |
Level 3 |
|
|
– |
|
|
|
– |
|
|
|
5,002 |
|
|
|
5,002 |
|
Secured borrowings-related interest rate swap agreements |
Level 2 |
|
|
492 |
|
|
|
492 |
|
|
|
– |
|
|
|
– |
|
Eurodollar futures |
Level 1 |
|
|
775 |
|
|
|
775 |
|
|
|
– |
|
|
|
– |
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured borrowings |
Level 2 |
|
|
98,367 |
|
|
|
61,600 |
|
|
|
98,292 |
|
|
|
76,600 |
|
Unsecured borrowings-related interest rate swap agreements |
Level 2 |
|
|
35,515 |
|
|
|
35,515 |
|
|
|
17,834 |
|
|
|
17,834 |
|
-18-
Fair value-related disclosures for debt securities were as follows as of the indicated dates (in thousands):
|
|
Amortized |
|
|
Gross Unrealized |
|
|
|
|
|
||||||
|
|
Cost Basis |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
||||
September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency Securities classified as available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae/Freddie Mac |
|
$ |
8,645,478 |
|
|
$ |
75,160 |
|
|
$ |
21,562 |
|
|
$ |
8,699,076 |
|
Ginnie Mae |
|
|
2,526,368 |
|
|
|
15,039 |
|
|
|
6,549 |
|
|
|
2,534,858 |
|
Residential mortgage securities classified as held-to-maturity |
|
|
1,028 |
|
|
|
3 |
|
|
– |
|
|
|
1,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency Securities classified as available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae/Freddie Mac |
|
|
8,949,793 |
|
|
|
56,041 |
|
|
|
74,276 |
|
|
|
8,931,558 |
|
Ginnie Mae |
|
|
3,040,275 |
|
|
|
8,681 |
|
|
|
17,692 |
|
|
|
3,031,264 |
|
Residential mortgage securities classified as held-to-maturity |
|
|
1,134 |
|
|
|
3 |
|
|
– |
|
|
|
1,137 |
|
|
|
September 30, 2019 |
|
|
December 31, 2018 |
|
||||||||||
|
|
Fair Value |
|
|
Unrealized Loss |
|
|
Fair Value |
|
|
Unrealized Loss |
|
||||
Securities in an unrealized loss position: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or greater |
|
$ |
2,788,414 |
|
|
$ |
21,568 |
|
|
$ |
4,736,171 |
|
|
$ |
83,407 |
|
Less than one year |
|
|
1,417,713 |
|
|
|
6,543 |
|
|
|
1,475,120 |
|
|
|
8,561 |
|
|
|
$ |
4,206,127 |
|
|
$ |
28,111 |
|
|
$ |
6,211,291 |
|
|
$ |
91,968 |
|
Declines in fair value caused by increases in interest rates are typically modest for investments in short-duration ARM Agency Securities compared to investments in longer-duration ARM or fixed-rate assets. These declines are generally recoverable in a relatively short period of time as coupon interest rates on the underlying mortgage loans reset to rates more reflective of the then-current interest rate environment.
From a credit risk perspective, federal government support for Fannie Mae and Freddie Mac helps ensure that fluctuations in value due to credit risk associated with these securities will be limited. Given that (a) any existing unrealized losses on mortgage securities held by the Company are not attributable to credit risk and declines in fair value of ARM securities due to changes in interest rates are generally recoverable in a relatively short period of time, (b) the Company typically holds its investments to maturity, and (c) it is more likely than not that the Company will not be required to sell any of its investments, none of these investments were considered other-than-temporarily impaired at September 30, 2019.
NOTE 10 — EQUITY INCENTIVE PLAN
All equity-based awards and other long-term incentive awards are made pursuant to the Company’s Amended and Restated 2014 Flexible Incentive Plan that was approved by stockholders in May 2014. At September 30, 2019, this plan had 2,861,645 shares of common stock remaining available for future issuances.
-19-
Long-term Equity-based Awards – Performance-based Restricted Stock Units (“RSUs”)
RSU activity and related information for the nine months ended September 30, 2019 is summarized below:
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Average |
|
|
|
|
Number of |
|
|
Grant Date |
|
||
|
|
Shares |
|
|
Fair Value |
|
||
Unvested RSU awards outstanding at December 31, 2018 |
|
|
501,858 |
|
|
$ |
9.02 |
|
Grants |
|
|
206,914 |
|
|
|
6.87 |
|
Vestings |
|
|
(34,135 |
) |
|
|
8.03 |
|
Forfeitures |
|
|
(135,692 |
) |
|
|
8.03 |
|
Unvested RSU awards outstanding at September 30, 2019 |
|
|
538,945 |
|
|
|
8.50 |
|
During the quarter and nine months ended September 30, 2019, the Company recognized in Compensation-related expense $(236,000) and $602,000, respectively, related to this program. Unrecognized estimated compensation expense for these awards totaled $1.1 million at September 30, 2019, to be expensed over a weighted average period of 1.4 years (assumes estimated attainment levels for the related performance metrics will be met).
Dividends accrue from the date of grant and will be paid in cash to the extent the units convert into shares of common stock following completion of the related performance periods. If these shares do not vest, the related dividends will be forfeited. Included in Common stock dividends payable at September 30, 2019 are estimated dividends payable pertaining to these awards of $109,000.
Long-term Equity-based Awards – Restricted Stock Awards
Restricted stock award activity for the nine months ended September 30, 2019 is summarized below:
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Average |
|
|
|
|
Number of |
|
|
Grant Date |
|
||
|
|
Shares |
|
|
Fair Value |
|
||
Unvested stock awards outstanding at December 31, 2018 |
|
|
461,091 |
|
|
$ |
9.01 |
|
Grants |
|
|
342,097 |
|
|
|
7.16 |
|
Vestings |
|
|
(157,030 |
) |
|
|
8.52 |
|
Forfeitures |
|
|
(31,113 |
) |
|
|
8.29 |
|
Unvested stock awards outstanding at September 30, 2019 |
|
|
615,045 |
|
|
|
8.14 |
|
During the quarter and nine months ended September 30, 2019, the Company recognized in Compensation-related expense $376,000 and $1.1 million, respectively, related to amortization of the grant date fair value of employee stock awards. In addition, during the quarter and nine months ended September 30, 2019, the Company recognized in Other general and administrative expense $129,000 and $374,000, respectively, related to amortization of the grant date fair value of director stock awards. Unrecognized compensation expense for unvested stock awards for employees and directors totaled $2.6 million as of September 30, 2019, to be expensed over a weighted average period of 1.3 years.
Service-based stock awards issued to non-executive employees and to directors receive dividends on a current basis without risk of forfeiture if the related awards do not vest. Stock awards issued to executives defer the payment of dividends accruing between the grant dates and the end of related service periods. If these awards do not vest, the related accrued dividends will be forfeited. Included in Common stock dividend payable at September 30, 2019 are estimated dividends payable pertaining to these awards totaling $288,000.
-20-
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Overview
Capstead operates as a self-managed REIT earning income from investing in a leveraged portfolio of residential mortgage pass-through securities consisting almost exclusively of short-duration ARM Agency Securities, which reset to more current interest rates within a relatively short period of time and are considered to have limited, if any, credit risk. See NOTE 1 to the consolidated financial statements (included under Item 1 of this report) for defined terms used in this discussion and analysis. By investing in short-duration ARM Agency Securities, the Company is positioned to benefit from future recoveries in financing spreads that typically contract during periods of rising interest rates and experience smaller fluctuations in portfolio values compared to leveraged portfolios containing a significant amount of longer-duration ARM or fixed-rate mortgage securities. Duration is a common measure of market price sensitivity to interest rate movements. A shorter duration generally indicates less interest rate risk.
Capstead reported for GAAP purposes net income of $3 million and net loss of $68 million, representing losses per diluted common share of $(0.02) and $(0.95) for the quarter and nine months ended September 30, 2019, respectively. The Company reported core earnings of $15 million and $45 million, respectively, or $0.11 and $0.35 per diluted common share for the quarter and nine months ended September 30, 2019. See “Reconciliation of GAAP and non-GAAP Financial Measures” for more information on core earnings. Earnings in 2019 benefited from higher cash yields and lower investment premium amortization while being negatively impacted by higher borrowing costs and lower average outstanding portfolio balances. Book value per common share declined to $8.60 per share during the nine months ended September 30, 2019 primarily due to decreases in swap valuations and the initial dilution effects of issuing nine million shares of common stock, partially offset by increases in portfolio valuations.
Capstead finances its residential mortgage investments by leveraging its long-term investment capital with secured borrowings consisting primarily of borrowings under repurchase arrangements with commercial banks and other financial institutions. Long-term investment capital totaled $1.17 billion at September 30, 2019, consisting of $821 million of common and $251 million of preferred stockholders’ equity (recorded amounts), together with $98 million of unsecured borrowings maturing in 2035 and 2036.
Capstead’s residential mortgage portfolio decreased $730 million during the first nine months of 2019 to $11.24 billion at September 30, 2019 as the Company did not replace all of its portfolio runoff and sold $305 million (recorded amount) in ARM securities in order to reduce leverage. Secured borrowings decreased $686 million to $10.29 billion. Portfolio leverage (secured borrowings divided by long-term investment capital) decreased to 8.80 to one at September 30, 2019 from 9.49 to one at December 31, 2018. Management continuously evaluates portfolio leverage levels in light of changes in market conditions.
Common Equity Issuance
On August 1, 2019 the Company completed a public offering for nine million shares of common stock raising $75 million for a net price of $8.34 after underwriting discounts and offering expenses. The proceeds were deployed into additional agency-guaranteed residential ARM securities and used for general corporate purposes.
-21-
Book Value per Common Share
Book value per share (total stockholders’ equity, less liquidation preferences for outstanding shares of preferred stock, divided by outstanding shares of common stock) as of September 30, 2019 was $8.60, a decrease of $0.33 or 3.7% from June 30, 2019 book value of $8.93, primarily reflecting $0.23 in derivative-related declines in value, $0.06 in initial dilution related to the issuance of additional common equity and $0.03 in portfolio-related declines in unrealized gains. Book value declined $0.79 or 8.4% from December 31, 2018 book value of $9.39 primarily due to $1.63 in derivative-related declines in value and $0.10 in initial dilution related to the issuance of additional common equity, partially offset by $0.93 in portfolio-related valuation increases.
All but $2 million of Capstead’s residential mortgage investments portfolio and all of its derivatives are recorded at fair value on the Company’s balance sheet and are therefore included in the calculation of book value per common share. None of the Company’s borrowings are recorded at fair value. See NOTE 8 to the consolidated financial statements (included under Item 1 of this report) for additional disclosures regarding fair values of financial instruments held or issued by the Company.
Fair value is impacted by market conditions, including changes in interest rates, and the availability of financing at reasonable rates and leverage levels, among other factors. The Company’s investment strategy attempts to mitigate these risks by focusing on investments in Agency Securities, which are considered to have little, if any, credit risk and are collateralized by ARM loans with interest rates that reset periodically to more current levels, generally within five years. Because of these characteristics, the fair value of the Company’s portfolio is considerably less vulnerable to significant pricing declines caused by credit concerns or rising interest rates compared to leveraged portfolios containing a significant amount of non-agency securities or longer-duration ARM and/or fixed-rate Agency Securities.
Residential Mortgage Investments
The following table illustrates Capstead’s portfolio of residential mortgage investments for the quarter and nine months ended September 30, 2019 (dollars in thousands):
|
|
Quarter Ended |
|
|
Nine Months Ended |
|
||
|
|
September 30, 2019 |
|
|
September 30, 2019 |
|
||
Residential mortgage investments, beginning of period |
|
$ |
11,531,219 |
|
|
$ |
11,965,381 |
|
Portfolio acquisitions (principal amount) |
|
|
747,670 |
|
|
|
2,249,681 |
|
Investment premiums on acquisitions |
|
|
19,827 |
|
|
|
56,452 |
|
Portfolio runoff (principal amount) |
|
|
(1,041,410 |
) |
|
|
(2,764,479 |
) |
Sales of investments (basis) |
|
– |
|
|
|
(305,356 |
) |
|
Investment premium amortization |
|
|
(18,811 |
) |
|
|
(55,210 |
) |
(Decrease) increase in net unrealized gains on securities classified as available-for-sale |
|
|
(2,692 |
) |
|
|
89,334 |
|
Residential mortgage investments, end of period |
|
$ |
11,235,803 |
|
|
$ |
11,235,803 |
|
Decrease in residential mortgage investments during the indicated periods |
|
$ |
(295,416 |
) |
|
$ |
(729,578 |
) |
Capstead’s investment strategy focuses on managing a portfolio of residential mortgage investments consisting almost exclusively of ARM Agency Securities. Agency Securities are considered to have limited, if any, credit risk because the timely payment of principal and interest is guaranteed by Fannie Mae and Freddie Mac, which are federally chartered corporations, or Ginnie Mae, which is an agency of the federal government. Federal government support for Fannie Mae and Freddie Mac has largely alleviated market concerns regarding the ability of Fannie Mae and Freddie Mac to fulfill their guarantee obligations.
-22-
By focusing on investing in short-duration ARM Agency Securities, changes in fair value caused by changes in interest rates are typically relatively modest compared to changes in fair value of longer-duration ARM or fixed-rate assets. Declines in fair value caused by increases in interest rates are generally recoverable in a relatively short period of time as coupon interest rates on the underlying mortgage loans reset to rates more reflective of the then-current interest rate environment. This investment strategy positions the Company to benefit from potential recoveries in financing spreads that typically contract during periods of rising interest rates.
ARM securities are backed by mortgage loans that generally have coupon interest rates that adjust at least annually to more current interest rates or begin doing so after an initial fixed-rate period. These coupon adjustments are usually subject to periodic and lifetime limits, or caps, on the amount of such adjustments during any single interest rate adjustment period and over the contractual term of the underlying loans. After the initial fixed-rate period, if applicable, the coupon interest rates of mortgage loans underlying the Company’s ARM securities typically adjust either (a) annually based on specified margins over the one-year London interbank offered rate (“LIBOR”) or the one-year Constant Maturity U.S. Treasury Note Rate (“CMT”), (b) semiannually based on specified margins over six-month LIBOR, or (c) monthly based on specified margins over indices such as one-month LIBOR, the Eleventh District Federal Reserve Bank Cost of Funds Index, or over a rolling twelve month average of the one-year CMT index.
Capstead classifies its ARM securities based on the average length of time until the loans underlying each security reset to more current rates (“months-to-roll”) (less than 18 months for “current-reset” ARM securities, and 18 months or greater for “longer-to-reset” ARM securities). The Company’s ARM holdings featured the following characteristics at September 30, 2019 (dollars in thousands):
ARM Type |
|
Amortized Cost Basis (a) |
|
Net WAC (b) |
|
Fully Indexed WAC (b) |
|
Average Net Margins (b) |
|
Average Periodic Caps (b) |
|
Average Lifetime Caps (b) |
|
Months To Roll |
Current-reset ARMs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae Agency Securities |
$ |
2,939,659 |
|
4.07 |
% |
3.65 |
% |
1.68 |
% |
2.61 |
% |
5.09 |
% |
6.2 |
Freddie Mac Agency Securities |
|
1,420,163 |
|
4.03 |
|
3.73 |
|
1.76 |
|
2.04 |
|
4.89 |
|
7.6 |
Ginnie Mae Agency Securities |
|
1,117,919 |
|
3.71 |
|
3.26 |
|
1.51 |
|
1.05 |
|
4.55 |
|
6.2 |
Residential mortgage loans |
|
717 |
|
3.89 |
|
4.66 |
|
2.06 |
|
1.76 |
|
11.09 |
|
5.4 |
(49% of total) |
|
5,478,458 |
|
3.99 |
|
3.59 |
|
1.66 |
|
2.15 |
|
4.93 |
|
6.6 |
Longer-to-reset ARMs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae Agency Securities |
|
2,909,176 |
|
3.10 |
|
3.55 |
|
1.60 |
|
3.51 |
|
5.00 |
|
44.5 |
Freddie Mac Agency Securities |
|
1,376,480 |
|
3.10 |
|
3.63 |
|
1.66 |
|
3.71 |
|
5.06 |
|
49.7 |
Ginnie Mae Agency Securities |
|
1,408,449 |
|
3.49 |
|
3.25 |
|
1.50 |
|
1.00 |
|
5.00 |
|
45.7 |
(51% of total) |
|
5,694,105 |
|
3.19 |
|
3.49 |
|
1.59 |
|
2.94 |
|
5.01 |
|
46.0 |
|
$ |
11,172,563 |
|
3.58 |
|
3.54 |
|
1.62 |
|
2.55 |
|
4.97 |
|
26.8 |
Gross WAC (rate paid by borrowers) (c) |
|
|
|
4.18 |
|
|
|
|
|
|
|
|
|
|
(a) |
Amortized cost basis represents the Company’s investment (unpaid principal balance plus unamortized investment premiums) before unrealized gains and losses. At September 30, 2019, the ratio of amortized cost basis to unpaid principal balance for the Company’s ARM holdings was 103.05. This table excludes $1 million in fixed-rate agency-guaranteed mortgage pass-through securities, residential mortgage loans and private residential mortgage pass-through securities held as collateral for structured financings. |
(b) |
Net WAC, or weighted average coupon, is the weighted average interest rate of the mortgage loans underlying the indicated investments, net of servicing and other fees as of the indicated date. Net WAC is expressed as a percentage calculated on an annualized basis on the unpaid principal balances of the mortgage loans underlying these investments. As such, it is similar to the cash yield on the portfolio which is calculated using amortized cost basis. Fully indexed WAC represents the weighted average coupon upon one or more resets using interest rate indexes and net margins as of the indicated date. Average net margins represent the weighted average levels over the underlying indexes that the portfolio can adjust to upon reset, usually subject to initial, periodic and/or lifetime caps on the amount of such adjustments during any single interest rate adjustment period and over the contractual term of the underlying loans. ARM securities with initial fixed-rate periods of five years or longer typically have either 200 or 500 basis point initial caps with 200 basis point periodic caps. Additionally, certain ARM securities held by the Company are subject only to lifetime caps or are not subject to a cap. For presentation purposes, average periodic caps in the table above reflect initial caps until after an ARM security has reached its initial reset date and lifetime caps, less the current net WAC, for ARM securities subject only to lifetime caps. At quarter-end, 76% of current-reset ARMs were |
-23-
subject to periodic caps averaging 1.78%; 18% were subject to initial caps averaging 2.33%; 6% were subject to lifetime caps averaging 6.24%; and less than 1% were uncapped. All longer-to-reset ARM securities at September 30, 2019 were subject to initial caps. |
(c) |
Gross WAC is the weighted average interest rate of the mortgage loans underlying the indicated investments, including servicing and other fees paid by borrowers, as of the indicated balance sheet date. |
Approximately 18%, or $926 million of the Company’s current-reset ARM securities with average net WACs of 2.79% and fully-indexed WACs of 3.52% will reset in rate for the first time in less than 18 months based on indices in effect at September 30, 2019. After consideration of any applicable initial fixed-rate periods, at September 30, 2019 approximately 92%, 4% and 3% of the Company’s ARM securities were backed by mortgage loans that reset annually, semi-annually and monthly, respectively, while approximately 1% reset every five years. Approximately 4% of the Company’s ARM securities were backed by interest-only loans, with remaining interest-only payment periods averaging 17 months at September 30, 2019. All percentages are based on averages of the characteristics of mortgage loans underlying each security and calculated using unpaid principal balances as of the indicated date.
Secured Borrowings and Related Derivatives Held for Hedging Purposes
Capstead has traditionally financed its residential mortgage investments by leveraging its long-term investment capital with secured borrowings consisting primarily of borrowings under repurchase arrangements with commercial banks and other financial institutions that involve the sale and a simultaneous agreement to repurchase the transferred assets at a future date and are accounted for as financings. The Company maintains the beneficial interest in the specific securities pledged during the term of each repurchase arrangement and receives the related principal and interest payments.
The terms and conditions of secured borrowings are negotiated on a transaction-by-transaction basis when each such borrowing is initiated or renewed. None of the Company’s counterparties are obligated to renew or otherwise enter into new borrowings at the conclusion of existing borrowings. Collateral requirements in excess of amounts borrowed (referred to as “haircuts”) averaged 4.5 percent of the fair value of pledged residential mortgage pass-through securities at September 30, 2019. After considering haircuts and related interest receivable on the collateral, as well as interest payable on these borrowings, the Company had $569 million of capital at risk with its lending counterparties at September 30, 2019. The Company did not have capital at risk with any single counterparty exceeding 7% of total stockholders’ equity at September 30, 2019.
Secured borrowing rates are generally fixed based on prevailing rates corresponding to the terms of the borrowings. Interest may be paid monthly or at the termination of a borrowing at which time the Company may enter into a new borrowing at prevailing haircuts and rates with the same counterparty or repay that counterparty and negotiate financing with a different counterparty. When the fair value of pledged securities declines due to changes in market conditions or the publishing of monthly security pay-down factors, lenders typically require the Company to post additional securities as collateral, pay down borrowings or fund cash margin accounts with the counterparties in order to re-establish the agreed-upon collateral requirements, referred to as margin calls. Conversely, if collateral fair values increase, lenders are required to release collateral back to the Company pursuant to Company-issued margin calls.
As of September 30, 2019, the Company’s secured borrowings totaled $10.29 billion with 20 counterparties at average rates of 2.31%, before the effects of currently-paying interest rate swap agreements. The Company typically uses two- and three-year term interest rate swap agreements with variable rate receipts primarily based on three-month LIBOR to help mitigate exposure to rising short-term interest rates. In June and August, the Company took advantage of declining market interest rates to replace $2.6 billion of longer-term swaps with new two-year contracts at significantly lower rates to the benefit of future earnings. At quarter-end the Company held $7.20 billion notional amount of these derivatives with contract expirations occurring at various dates through the second quarter of 2022 and a weighted average expiration of 23 months. In addition, at quarter-end the Company held a series of $500
-24-
million notional amount three-month Eurodollar futures contracts with a weighted average rate of 1.62% with maturities through June 2020.
Including the effects of these derivatives, the Company’s residential mortgage investments and secured borrowings had estimated durations at September 30, 2019 of 14½ months for a net duration gap of approximately zero months – see “Interest Rate Risk” for further information about the Company’s sensitivity to changes in market interest rates. The Company intends to continue to manage interest rate risk associated with holding and financing its residential mortgage investments by utilizing suitable derivatives such as interest rate swap agreements, Eurodollar futures and longer-maturity secured borrowings, if available at attractive rates and terms.
Utilization of Long-term Investment Capital and Potential Liquidity
Capstead’s investment strategy involves managing an appropriately leveraged portfolio of ARM Agency Securities that management believes can produce attractive risk-adjusted returns over the long term, while reducing, but not eliminating, sensitivity to changes in interest rates. The potential liquidity inherent in the Company’s unencumbered residential mortgage investments is as important as the actual level of cash and cash equivalents carried on the balance sheet because secured borrowings generally can be increased or decreased on a daily basis to meet cash flow requirements and otherwise manage capital resources efficiently. Potential liquidity is affected by, among other factors:
|
• |
current portfolio leverage levels, |
|
• |
changes in market value of assets pledged and derivatives held for hedging purposes as determined by lending and swap counterparties, |
|
• |
mortgage prepayment levels, |
|
• |
collateral requirements of lending and derivative counterparties, and |
|
• |
general conditions in the commercial banking and mortgage finance industries. |
Capstead’s utilization of its long-term investment capital and its estimated potential liquidity were as follows as of September 30, 2019 in comparison with December 31, 2018 (dollars in thousands):
|
|
Investments (a) |
|
|
Secured Borrowings |
|
|
Capital Employed |
|
|
Potential Liquidity (b) |
|
|
Portfolio Leverage |
||||
Residential mortgage investments |
|
$ |
11,235,803 |
|
|
$ |
10,292,924 |
|
|
$ |
942,879 |
|
|
$ |
435,700 |
|
|
|
Cash collateral receivable from derivative counterparties, net (c) |
|
|
|
|
|
|
|
|
|
|
49,263 |
|
|
– |
|
|
|
|
Other assets, net of other liabilities |
|
|
|
|
|
|
|
|
|
|
177,981 |
|
|
|
68,204 |
|
|
|
Balances as of September 30, 2019: |
|
$ |
11,235,803 |
|
|
$ |
10,292,924 |
|
|
$ |
1,170,123 |
|
|
$ |
503,904 |
|
|
8.80:1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2018 |
|
$ |
11,965,381 |
|
|
$ |
10,979,362 |
|
|
$ |
1,157,355 |
|
|
$ |
501,854 |
|
|
9.49:1 |
(a) |
Investments are stated at balance sheet carrying amounts, which generally reflect estimated fair value as of the indicated dates. |
(b) |
Potential liquidity is based on maximum amounts of borrowings available under existing uncommitted financing arrangements considering management’s estimate of the fair value of residential mortgage investments held as of the indicated dates adjusted for other sources of liquidity such as cash and cash equivalents. |
(c) |
Cash collateral receivable from derivative counterparties is presented net of cash collateral payable to derivative counterparties, if applicable, and the fair value of interest rate swap positions as of the indicated date. |
In order to efficiently manage its liquidity and capital resources, Capstead attempts to maintain sufficient liquidity reserves to fund borrowing and derivative margin calls under stressed market conditions, including margin calls resulting from monthly principal payments (remitted to the Company 20 to 45 days after any given month-end), as well as reasonably possible declines in the market value of pledged assets and derivative positions. Should market conditions deteriorate, management may reduce portfolio
-25-
leverage and increase liquidity by raising new equity capital, selling mortgage securities and/or curtailing the replacement of portfolio runoff. Additionally, the Company routinely does business with a large number of lending counterparties, which bolsters financial flexibility to address challenging market conditions and limits exposure to any individual counterparty.
In response to significant declines in longer-term interest rates experienced during the year, the Company reduced portfolio leverage by only replacing a portion of portfolio runoff, limited asset sales and by taking a measured approach to deploying new common equity capital raised during the third quarter. Future levels of portfolio leverage will be dependent on many factors, including the size and composition of the Company’s investment portfolio (see “Liquidity and Capital Resources”). Management continuously evaluates portfolio leverage levels in light of changes in market conditions.
Reconciliation of GAAP and non-GAAP Financial Measures
Management believes the presentation of core earnings and core earnings per diluted common share, non-GAAP financial measures, when analyzed in conjunction with the Company’s GAAP operating results, allows investors to more effectively evaluate the Company’s performance and compare its performance to that of its peers. Prior to March 2019, the Company designated its secured borrowings-related interest rate swap agreements as cash flow hedges for accounting purposes, whereby changes in these derivatives’ fair values were recorded in Accumulated other comprehensive income (loss). The Company discontinued cash flow hedge accounting on March 1, 2019 for these derivatives and, for GAAP purposes, related changes in fair value are recorded in the Company’s consolidated statements of operations. Also, for GAAP purposes, related net unrealized gains recorded in Accumulated other comprehensive income (loss) through February 28, 2019 are being recognized as a component of interest expense in the Company’s consolidated statements of operations over the remaining contractual lives of these derivatives. Core earnings excludes these GAAP adjustments. The following reconciles GAAP net (loss) income to core earnings and core earnings per common share (dollars in thousands, except per share amounts):
|
|
Quarter Ended September 30 |
|
|
Nine Months Ended September 30 |
|
|
||||||||||||||||||||||
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
|
||||||||||||||||
|
|
Amount |
|
Per Share |
|
|
Amount |
|
Per Share |
|
|
Amount |
|
Per Share |
|
|
Amount |
|
Per Share |
|
|
||||||||
Net income (loss) |
|
$ |
3,196 |
|
$ |
(0.02 |
) |
|
$ |
8,680 |
|
$ |
0.04 |
|
|
$ |
(68,010 |
) |
$ |
(0.95 |
) |
|
$ |
41,088 |
|
$ |
0.29 |
|
|
Unrealized (gain) loss on non-designated derivative instruments |
|
|
(16,952 |
) |
|
(0.19 |
) |
|
|
– |
|
|
– |
|
|
|
68,673 |
|
|
0.79 |
|
|
|
– |
|
|
– |
|
|
Realized loss (net) on termination of derivative instruments |
|
|
31,673 |
|
|
0.35 |
|
|
|
– |
|
|
– |
|
|
|
55,875 |
|
|
0.64 |
|
|
|
– |
|
|
– |
|
|
Amortization of unrealized gain, net of unrealized losses on de-designated derivative instruments |
|
|
(3,119 |
) |
|
(0.03 |
) |
|
|
– |
|
|
– |
|
|
|
(12,854 |
) |
|
(0.15 |
) |
|
|
– |
|
|
– |
|
|
Realized loss on sale of investments |
|
|
– |
|
|
– |
|
|
|
– |
|
|
– |
|
|
|
1,365 |
|
|
0.02 |
|
|
|
– |
|
|
– |
|
|
Core earnings |
|
$ |
14,798 |
|
$ |
0.11 |
|
|
$ |
8,680 |
|
$ |
0.04 |
|
|
$ |
45,049 |
|
$ |
0.35 |
|
|
$ |
41,088 |
|
$ |
0.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-26-
Management believes that presenting financing spreads on residential mortgage investments, a non-GAAP financial measure, provides useful information for evaluating the performance of the Company’s portfolio as opposed to total financing spreads because the non-GAAP measure speaks specifically to the performance of the Company’s investment portfolio. The following reconciles these measures for the indicated periods:
|
|
Quarter Ended September 30 |
|
|
Nine Months Ended September 30 |
|
||||||||||||
|
|
2019 |
|
|
|
2018 |
|
|
2019 |
|
|
|
2018 |
|
||||
Total financing spreads |
|
|
0.31 |
% |
|
|
|
0.21 |
% |
|
|
0.35 |
% |
|
|
|
0.37 |
% |
Impact of yields on other interest-earning assets (a) |
|
|
– |
|
|
|
|
– |
|
|
|
0.01 |
|
|
|
|
– |
|
Impact of borrowing rates on other interest-paying liabilities (a) |
|
|
0.05 |
|
|
|
|
0.05 |
|
|
|
0.05 |
|
|
|
|
0.05 |
|
Impact of amortization of unrealized gain, net of unrealized losses on de-designated swap agreements |
|
|
(0.12 |
) |
|
|
|
– |
|
|
|
(0.16 |
) |
|
|
|
– |
|
Impact of net interest cash flows on non-designated swap agreements |
|
|
0.21 |
|
|
|
|
– |
|
|
|
0.23 |
|
|
|
|
– |
|
Financing spreads on residential mortgage investments |
|
|
0.45 |
|
|
|
|
0.26 |
|
|
|
0.48 |
|
|
|
|
0.42 |
|
(a) |
Other interest-earning assets consist of overnight investments and cash collateral receivable from derivative counterparties. Other interest-paying liabilities consist of unsecured borrowings and, at times, cash collateral payable to interest rate swap counterparties. |
-27-
RESULTS OF OPERATIONS
|
|
Quarter Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30 |
|
|
September 30 |
|
||||||||||
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Income statement data: (in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on residential mortgage investments |
|
$ |
77,693 |
|
|
$ |
67,649 |
|
|
$ |
246,600 |
|
|
$ |
201,989 |
|
Related interest expense |
|
|
(62,800 |
) |
|
|
(54,393 |
) |
|
|
(194,524 |
) |
|
|
(147,655 |
) |
|
|
|
14,893 |
|
|
|
13,256 |
|
|
|
52,076 |
|
|
|
54,334 |
|
Other interest income (expense) |
|
|
(845 |
) |
|
|
(1,560 |
) |
|
|
(3,614 |
) |
|
|
(4,638 |
) |
|
|
|
14,048 |
|
|
|
11,696 |
|
|
|
48,462 |
|
|
|
49,696 |
|
Other (expense) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on derivative instruments (net) |
|
|
(9,221 |
) |
|
|
– |
|
|
|
(105,720 |
) |
|
|
– |
|
Loss on sale of investments (net) |
|
|
– |
|
|
|
– |
|
|
|
(1,365 |
) |
|
|
– |
|
Compensation-related expense |
|
|
(566 |
) |
|
|
(1,913 |
) |
|
|
(6,147 |
) |
|
|
(5,521 |
) |
Other general and administrative expense |
|
|
(1,123 |
) |
|
|
(1,184 |
) |
|
|
(3,389 |
) |
|
|
(3,320 |
) |
Miscellaneous other revenue |
|
|
58 |
|
|
|
81 |
|
|
|
149 |
|
|
|
233 |
|
|
|
|
(10,852 |
) |
|
|
(3,016 |
) |
|
|
(116,472 |
) |
|
|
(8,608 |
) |
Net (loss) income |
|
$ |
3,196 |
|
|
$ |
8,680 |
|
|
$ |
(68,010 |
) |
|
$ |
41,088 |
|
Net (loss) income per diluted common share |
|
$ |
(0.02 |
) |
|
$ |
0.04 |
|
|
$ |
(0.95 |
) |
|
$ |
0.29 |
|
Average diluted shares outstanding |
|
|
90,945 |
|
|
|
91,346 |
|
|
|
86,946 |
|
|
|
92,317 |
|
Core earnings (a) |
|
$ |
14,798 |
|
|
$ |
8,680 |
|
|
$ |
45,049 |
|
|
$ |
41,088 |
|
Core earnings per diluted common share (a) |
|
|
0.11 |
|
|
|
0.04 |
|
|
|
0.35 |
|
|
|
0.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key operating statistics: (dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average yields: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage investments |
|
|
2.76 |
% |
|
|
2.08 |
% |
|
|
2.78 |
% |
|
|
2.05 |
% |
Other interest-earning assets |
|
|
2.36 |
|
|
|
1.91 |
|
|
|
2.02 |
|
|
|
1.59 |
|
Total average yields |
|
|
2.75 |
|
|
|
2.08 |
|
|
|
2.77 |
|
|
|
2.05 |
|
Average borrowing rates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured borrowings (a)(b) |
|
|
2.31 |
|
|
|
1.82 |
|
|
|
2.30 |
|
|
|
1.63 |
|
Unsecured borrowings |
|
|
7.77 |
|
|
|
7.77 |
|
|
|
7.69 |
|
|
|
7.74 |
|
Total average borrowing rates |
|
|
2.36 |
|
|
|
1.87 |
|
|
|
2.35 |
|
|
|
1.68 |
|
Average total financing spreads |
|
|
0.31 |
|
|
|
0.21 |
|
|
|
0.35 |
|
|
|
0.37 |
|
Average financing spreads on residential mortgage investments (a) |
|
|
0.45 |
|
|
|
0.26 |
|
|
|
0.48 |
|
|
|
0.42 |
|
Average CPR |
|
|
30.18 |
|
|
|
25.71 |
|
|
|
25.69 |
|
|
|
23.06 |
|
Average balance information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage investments (cost basis) |
|
$ |
11,267 |
|
|
$ |
13,027 |
|
|
$ |
11,830 |
|
|
$ |
13,117 |
|
Other interest-earning assets |
|
|
180 |
|
|
|
74 |
|
|
|
113 |
|
|
|
89 |
|
Secured borrowings |
|
|
10,481 |
|
|
|
11,958 |
|
|
|
10,941 |
|
|
|
12,035 |
|
Unsecured borrowings (included in long-term investment capital) |
|
|
98 |
|
|
|
98 |
|
|
|
98 |
|
|
|
98 |
|
Long-term investment capital (“LTIC”) |
|
|
1,147 |
|
|
|
1,258 |
|
|
|
1,153 |
|
|
|
1,287 |
|
Operating costs as a percentage of average LTIC |
|
|
0.58 |
% |
|
|
0.98 |
% |
|
|
1.11 |
% |
|
|
0.92 |
% |
Return on average common equity capital (c) |
|
|
4.95 |
|
|
|
1.69 |
|
|
|
5.08 |
|
|
|
3.81 |
|
(a) |
See “Reconciliation of GAAP and non-GAAP Financing Measures” for a reconciliation of these financial measures and the Company’s rationale for using these non-GAAP financial measures. |
(b) |
Secured borrowing rates exclude the effects of amortization of the net unrealized gains and losses included in Accumulated other comprehensive income (loss) upon de-designation on March 1, 2019 of related derivatives held for hedging purposes of (0.12)% and (0.16)% and include net interest cash flows from that date on non-designated derivatives of 0.21% and 0.23% for the quarter and year to date, respectively, to better compare the components of financing spreads on residential mortgage investments with prior periods. |
(c) |
Calculated using core earnings less preferred dividends on an annualized basis over average common equity for the period. |
|
-28-
Capstead reported for GAAP purposes net income of $3 million and net loss of $68 million, representing losses per diluted common share of $(0.02) and $(0.95) for the quarter and nine months ended September 30, 2019, respectively. This compares to net income of $9 million and $41 million or $0.04 and $0.29 per diluted common share for the same periods in 2018. GAAP net income was negatively impacted during these periods primarily by losses on derivatives of $9 million and $106 million during the quarter and nine months ended September 30, 2019, respectively, due largely to lower prevailing interest rates. Valuation adjustments for secured borrowings-related derivatives were recorded in Accumulated other comprehensive income (loss) prior to discontinuing hedge accounting on March 1, 2019.
Capstead’s core earnings, a non-GAAP financial measure, totaled $15 million and $45 million or $0.11 and $0.35 per diluted common share for the quarter and nine months ended September 30, 2019, respectively, compared to core earnings of $9 million and $41 million or $0.04 and $0.29 per diluted common share for the same periods in 2018. Core earnings in 2019 were negatively impacted by higher borrowing rates while benefiting from higher cash yields and lower investment premium amortization.
Interest income on residential mortgage investments was higher by $10.0 million and $44.6 million, respectively, for the quarter and nine months ended September 30, 2019 compared to the same periods in 2018. This increase is attributable to $20.1 million and $66.0 million, respectively, in increases related to higher average yields, net of $10.0 million and $21.4 million in decreases related to lower average portfolio balances.
Yields on residential mortgage investments for the quarter and nine months ended September 30, 2019 increased 68 and 72 basis points compared to the same periods in 2018, averaging 2.76% and 2.78%, respectively, primarily due to higher cash yields. This was largely due to ARM loan coupon interest rates resetting higher to more current rates and higher coupon interest rates on acquisitions. Yields also benefited from smaller adjustments for investment premium amortization in the first nine months of 2019 compared to the same period in 2018 as a result of a lower portfolio basis, lower premiums on acquisitions and changes in prepayment estimates.
Interest expense on secured borrowings was higher by $8.4 million and $46.9 million, respectively, for the quarter and nine months ended September 30, 2019 compared to the same periods in 2018. This increase is attributable to $15.7 million and $61.3 million, respectively, in increases related to higher average borrowing rates, net of $7.3 million and $14.4 million in decreases related to lower average borrowings.
Secured borrowing rates, after adjusting for hedging activities, increased 49 and 67 basis points for the quarter and nine months ended September 30, 2019 compared to the same periods in 2018 to average 2.31% and 2.30%, respectively. Market conditions contributed to higher borrowing rates, including four 25 basis point increases in the Federal Funds Rate in 2018 that were partially offset by the effects of a 25 basis point decrease in late July 2019 and, to a lesser extent, another 25 basis point decrease in mid-September 2019. Hedging costs were impacted by the expiration of older, lower-rate interest rate swaps and the addition of new higher-rate swaps. Resulting higher rates were partially offset by higher variable rate swap receipts as a result of higher short-term LIBOR rates and the use of more 3-month LIBOR-receive swap agreements. Average fixed-rate swap payment rates were 214 and 212 basis points, respectively, for the quarter and nine months ended September 30, 2019 compared to 166 and 151 basis points for the same periods in 2018. Currently-paying swap balances were higher, averaging $7.29 billion and $7.56 billion, respectively, for the quarter and nine months ended September 30, 2019, compared to $6.79 billion and $6.93 billion for the same periods in 2018. Future secured borrowing rates will be dependent on market conditions, including overall levels of market interest rates as well as the availability of longer-maturity borrowings and interest rate swap agreements at attractive rates.
Total operating costs, which include Compensation-related expense and Other general and administrative expense, during the quarter and nine months ended September 30, 2019 were lower by $1 million and
-29-
higher by $695,000, respectively, compared to the same periods in 2018. The variance during the third quarter of 2019 was primarily related to adjustments to lower short- and long-term compensation accruals. The variance during the nine months was primarily related to $949,000 recorded in March 2019 associated with finalizing program results for 2018.
liquidity and capital resources
Capstead’s primary sources of funds are secured borrowings and monthly principal and interest payments on its investments. Other sources of funds may include proceeds from debt and equity offerings and asset sales. The timing, manner, price and amount of any future common and preferred issuances and any common stock repurchases will be made in the open market at the Company’s discretion, subject to economic and market conditions, stock price, compliance with federal securities laws and tax regulations as well as blackout periods associated with the dissemination of important Company-specific news.
The Company generally uses its liquidity to pay down secured borrowings to reduce borrowing costs and otherwise efficiently manage its long-term investment capital. Because the level of these borrowings can generally be adjusted on a daily basis, the Company’s potential liquidity inherent in its unencumbered residential mortgage investments is as important as the level of cash and cash equivalents carried on the balance sheet. The table included under “Utilization of Long-term Investment Capital and Potential Liquidity” illustrates management’s estimate of additional funds potentially available to the Company at September 30, 2019 and the accompanying discussion provides insight into the Company’s perspective on what level of portfolio leverage to employ under current market conditions. The Company currently believes that it has sufficient liquidity and capital resources available for the acquisition of additional investments, repayments on borrowings and the payment of cash dividends as required for the Company’s continued qualification as a REIT.
Capstead finances its residential mortgage investments primarily by borrowing under repurchase arrangements, the terms and conditions of which are negotiated on a transaction-by-transaction basis, when each such borrowing is initiated or renewed.
Future borrowings are dependent upon the willingness of lenders to participate in the financing of Agency Securities, lender collateral requirements and the lenders’ determination of the fair value of the securities pledged as collateral, which fluctuates with changes in interest rates and liquidity conditions within the commercial banking and mortgage finance industries. None of the Company’s borrowing counterparties are obligated to renew or otherwise enter into new borrowings at the conclusion of existing borrowings. Secured borrowings totaled $10.29 billion at September 30, 2019, all maturing within 30 days. Secured borrowings began the year at $10.98 billion and averaged $10.48 billion and $10.94 billion during the quarter and nine months ended September 30, 2019, respectively. Average secured borrowings can differ from period-end balances for a number of reasons including portfolio growth or contraction, as well as differences in the timing of portfolio acquisitions relative to portfolio runoff.
To help mitigate exposure to rising short-term interest rates, the Company uses derivatives supplemented with longer-maturity secured borrowings when available at attractive rates and terms. At quarter-end the Company held $7.20 billion notional amount of portfolio financing-related interest rate swap agreements with contract expirations occurring at various dates through the second quarter of 2022 and a weighted average expiration of 23 months. In addition, at quarter-end the Company held a series of $500 million notional amount three-month Eurodollar futures contracts with a weighted average rate of 1.62% with maturities through June 2020. Additionally, the Company entered into swap agreements effectively locking in lower fixed rates of interest during the 20-year floating rate terms of the Company’s $100 million face amount of unsecured borrowings that mature in 2035 and 2036. The Company intends to continue to utilize suitable derivatives such as interest rate swap agreements or other derivatives and longer-maturity secured borrowings to manage interest rate risk when available at attractive rates and terms.
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On August 1, 2019 the Company completed a public offering for nine million shares of common stock raising $75 million for a net price of $8.34 after underwriting discounts and offering expenses. The proceeds were deployed into additional agency-guaranteed residential ARM securities and used for general corporate purposes.
Interest Rate Risk
Because Capstead’s residential mortgage investments consist almost entirely of Agency Securities, which are considered to have limited, if any, credit risk, interest rate risk is the primary market risk faced by the Company. Interest rate risk is highly sensitive to a number of factors, including economic conditions, government fiscal policy, central bank monetary policy and banking regulation. By focusing on investing in relatively short-duration ARM Agency Securities, declines in fair value caused by increases in interest rates are typically relatively modest compared to investments in longer-duration ARM or fixed-rate assets. These declines can be recovered in a relatively short period of time as coupon interest rates on the underlying mortgage loans reset to rates more reflective of the then-current interest rate environment. This strategy also positions the Company to benefit from future recoveries in financing spreads that typically contract during periods of rising interest rates.
Derivatives and longer-maturity secured borrowings transactions lengthen the effective duration of the Company’s secured borrowings to more closely match the duration of its portfolio of residential mortgage investments. Including the effects of derivatives held to hedge changes in secured borrowing rates, at September 30, 2019 the Company’s residential mortgage investments and secured borrowings had estimated durations of approximately 14½ months for a net duration gap of approximately zero months. The Company intends to continue to manage interest rate risk associated with holding and financing its residential mortgage investments by utilizing suitable interest rate swap agreements or other derivatives and longer-maturity secured borrowings, if available at attractive rates and terms.
Capstead performs sensitivity analyses to estimate the effects that specific interest rate changes can reasonably be expected to have on net interest margins and portfolio values. All investments, secured borrowings and related derivatives held are included in these analyses. For net interest margin modeling purposes, the model incorporates management’s assumptions for mortgage prepayment levels for a given interest rate change using market-based estimates of prepayment speeds for the purpose of amortizing investment premiums and reinvesting portfolio runoff. These assumptions are developed through a combination of historical analysis and expectations for future pricing behavior under normal market conditions unaffected by changes in market liquidity. For portfolio valuation modeling purposes, a static portfolio is assumed.
This model is the primary tool used by management to assess the direction and magnitude of changes in net interest margins and portfolio values resulting solely from changes in interest rates. Key modeling assumptions include mortgage prepayment speeds, adequate levels of market liquidity, current market conditions, and portfolio leverage levels. These assumptions are inherently uncertain and, as a result, modeling cannot precisely estimate the impact of higher or lower interest rates. Actual results will differ from simulated results due to the timing, magnitude and frequency of interest rate changes, other changes in market conditions, changes in management strategies and other factors.
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The table below reflects the estimated impact of instantaneous parallel shifts in the yield curve on net interest margins and the fair value of Capstead’s portfolio of residential mortgage investments and related derivatives at September 30, 2019 and December 31, 2018, subject to the modeling parameters described above.
|
|
Federal Funds Rate |
|
10-year U.S. Treasury Rate |
|
|
Down 1.00% |
|
|
Down 0.50% |
|
|
Up 0.50% |
|
|
Up 1.00% |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected 12-month percentage change in net interest margins: (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019 |
|
1.75-2.00 |
% |
|
1.67 |
% |
|
|
8.4 |
% |
|
|
4.1 |
% |
|
|
(5.0 |
)% |
|
|
(12.4 |
)% |
December 31, 2018 |
|
2.25-2.50 |
|
|
2.69 |
|
|
|
20.9 |
|
|
|
11.4 |
|
|
|
(12.7 |
) |
|
|
(34.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected percentage change in portfolio and related derivative values: (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019 |
|
1.75-2.00 |
|
|
1.67 |
|
|
|
(0.2 |
) |
|
|
(0.1 |
) |
|
|
(0.2 |
) |
|
|
(0.4 |
) |
December 31, 2018 |
|
2.25-2.50 |
|
|
2.69 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
(0.3 |
) |
|
|
(0.7 |
) |
(a) |
Sensitivity of net interest margins as well as portfolio and related derivative values to changes in interest rates is determined relative to the actual rates at the applicable date. Note that the projected 12-month net interest margin change is predicated on acquisitions of similar assets sufficient to replace runoff. There can be no assurance that suitable investments will be available for purchase at attractive prices, if investments made will behave in the same fashion as assets currently held or if management will choose to replace runoff with such assets. |
CRITICAL ACCOUNTING POLICIES
Management’s discussion and analysis of financial condition and results of operations is based upon Capstead’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates and judgments that can affect the reported amounts of assets, liabilities (including contingencies), revenues and expenses, as well as related disclosures. These estimates are based on available internal and market information and appropriate valuation methodologies believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the expected useful lives and carrying values of assets and liabilities which can materially affect the determination of net income and book value per common share. Actual results may differ from these estimates under different assumptions or conditions.
Management believes the following are critical accounting policies in the preparation of Capstead’s consolidated financial statements that involve the use of estimates requiring considerable judgment:
• |
Amortization of investment premiums on residential mortgage investments – Investment premiums on residential mortgage investments are recognized in earnings as adjustments to interest income by the interest method over the estimated lives of the related assets. Amortization is affected by actual portfolio runoff (scheduled and unscheduled principal paydowns) and by estimates and judgments related to future levels of mortgage prepayments that may be necessary to achieve the required effective yield over the estimated life of the related investment. |
Mortgage prepayment expectations can change based on how current and projected changes in interest rates impact the economic attractiveness of mortgage refinance opportunities, if available, and other factors such as lending industry underwriting practices and capacity constraints, regulatory changes, borrower credit profiles and the health of the economy and housing markets. Management estimates future mortgage prepayments based on these factors and past experiences with specific
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investments within the portfolio. Should actual prepayment rates differ materially from these estimates, investment premiums would be expensed at a different pace.
• |
Fair value and impairment accounting for residential mortgage investments – Nearly all of Capstead’s residential mortgage investments are held in the form of mortgage securities that are classified as available-for-sale and recorded at fair value on the balance sheet with unrealized gains and losses recorded in Stockholders’ equity as a component of Accumulated other comprehensive income (loss). Fair values fluctuate with current and projected changes in interest rates, prepayment expectations and other factors such as market liquidity conditions and the perceived credit quality of Agency Securities. Judgment is required to interpret market data and develop estimated fair values, particularly in circumstances of deteriorating credit quality and market liquidity. See NOTE 8 to the consolidated financial statements (included under Item 1 of this report) for discussion of how Capstead values its residential mortgage investments. |
Generally, gains or losses are recognized in earnings only if securities are sold; however, if a decline in fair value of a mortgage security below its amortized cost occurs that is determined to be other-than-temporary, the difference between amortized cost and fair value would be recognized in earnings as a component of Other revenue (expense) if the decline was credit-related or it was determined to be more likely than not that the Company will incur a loss via an asset sale. Other-than-temporary impairment of a mortgage security due to other factors would be recognized in Accumulated other comprehensive income (loss).
• |
Accounting for derivative instruments – Derivatives are recorded as assets or liabilities and carried at fair value. Fair values fluctuate with current and projected changes in interest rates and other factors such as the Company’s and its counterparties’ nonperformance risk. Judgment is required to develop estimated fair values. |
The accounting for changes in fair value of each derivative held depends on whether it has been designated as an accounting hedge, as well as the type of hedging relationship identified. To qualify as a cash flow hedge for accounting purposes, at the inception of the hedge relationship the Company must anticipate and document that the hedge relationship will be highly effective and must monitor ongoing effectiveness on at least a quarterly basis. As long as the hedge relationship remains highly effective, changes in fair value of the derivative are recorded in Accumulated other comprehensive income (loss). Changes in fair value of derivatives not held as accounting hedges, or for which the hedge relationship is deemed to no longer be highly effective and as a result hedge accounting is terminated, are recorded in earnings as a component of Other (expense) income.
The Company uses derivatives primarily in the form of interest rate swap agreements to hedge the variability in borrowing rates on its secured and unsecured borrowings. For derivatives designated as accounting hedges, fixed interest payments and variable interest receipts are recorded as an adjustment to interest expense on the related designated borrowings. For derivatives not designated as accounting hedges, fixed interest payments and variable interest receipts are recorded as a component of Other (expense) income. For derivatives initially designated as an accounting hedge and subsequently de-designated, any unrealized gain or loss included in Accumulated other comprehensive income (loss) at the time of de-designation is amortized as an adjustment to interest expense on the related borrowings over the remaining term of the derivatives. See NOTE 6 to the consolidated financial statements (included under Item 1 of this report) and “Financial Condition – Secured Borrowings” for additional information regarding the Company’s current use of derivatives and its related risk management policies.
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STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “intend,” “will be,” “will likely continue,” “will likely result,” or words or phrases of similar meaning. Forward-looking statements are based largely on the expectations of management and are subject to a number of risks and uncertainties including, but not limited to, the following:
• |
fluctuations in interest rates and levels of mortgage prepayments; |
• |
changes in market conditions as a result of federal corporate and individual income tax reform, federal government fiscal challenges and Federal Reserve monetary policy, including policy regarding its holdings of Agency and U.S. Treasury Securities; |
• |
liquidity of secondary markets and credit markets, including the availability of financing at reasonable levels and terms to support investing on a leveraged basis; |
• |
the impact of differing levels of leverage employed; |
• |
changes in legislation or regulation affecting Agency Securities and similar federal government agencies and related guarantees; |
• |
deterioration in credit quality and ratings of existing or future issuances of Agency Securities; |
• |
the effectiveness of risk management strategies; |
• |
the availability of suitable qualifying investments from both an investment return and regulatory perspective; |
• |
the availability of new investment capital; |
• |
the ability to maintain real estate investment trust (“REIT”) status; |
• |
changes in legislation or regulation affecting exemptions for mortgage REITs from regulation under the Investment Company Act of 1940; |
• |
other changes in legislation or regulation affecting the mortgage and banking industries; and |
• |
changes in general economic conditions, increases in costs and other general competitive factors. |
In addition to the above considerations, actual results and liquidity are affected by other risks and uncertainties which could cause actual results to be significantly different from those expressed or implied by any forward-looking statements included herein. It is not possible to identify all of the risks, uncertainties and other factors that may affect future results. In light of these risks and uncertainties, the forward-looking events and circumstances discussed herein may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements. Forward-looking statements speak only as of the date the statement is made and the Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, readers of this document are cautioned not to place undue reliance on any forward-looking statements included herein.
For a further discussion of these and other factors that could impact our future results and performance, see “Risk Factors” under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the U.S. Securities and Exchange Commission on February 22, 2019.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS
The information required by this Item is incorporated by reference to the information included in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Item 4. Controls and Procedures
As of September 30, 2019, an evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of September 30, 2019. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to September 30, 2019.
-35-
PART II. — OTHER INFORMATION
ITEM 1A. RISK FACTORS
There have been no material changes in our risk factors during the nine months ended September 30, 2019 from those previously disclosed in “Risk Factors” under Part I, Item 1A of our 2018 Form 10-K.
ITEM 5A. OTHER INFORMATION
On December 6, 2017, the Company entered into a Sales Agreement (the “Original Agreement”) with IFS Securities, Inc. (doing business as Brinson Patrick, a division of IFS Securities, Inc.) (the “Sales Manager”), in connection with the issuance and sale of shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), and shares of the Company’s Series E preferred stock, par value $0.10 per share (the “Series E Preferred Stock”), from time to time through the Sales Manager. In order to reflect a reorganization in the Sales Manager’s corporate structure, on October 23, 2019, the Company entered into a new Sales Agreement (the “New Agreement”) with San Blas Securities LLC (doing business as Brinson Patrick, a division of San Blas Securities LLC). The New Agreement reflects the same terms and provisions of the Original Agreement in all material respects.
The foregoing summary is qualified in its entirety by reference to the New Agreement attached hereto as Exhibit 10.18 and incorporated herein by reference.
ITEM 6. EXHIBITS
Exhibit Number |
|
DESCRIPTION |
|
|
|
3.1 |
|
|
3.2 |
|
|
3.3 |
|
|
4.1 |
|
|
4.2 |
|
|
4.3 |
|
|
4.4 |
|
|
4.5 |
|
|
10.01 |
|
|
10.02 |
|
|
10.03 |
|
Amendment No. 1 to the Amended and Restated 2014 Flexible Incentive Plan.(8) |
10.04 |
|
|
10.05 |
|
Form of nonqualified stock option and stock award agreements for non-employee directors.(5) |
10.06 |
|
Form of restricted stock agreement for executive employees. (9) |
10.07 |
|
|
10.08 |
|
Form of performance unit agreement for executive employees. (9) |
10.09 |
|
Form of restricted stock agreement for executive employees. (10) |
10.10 |
|
-36-
|
(1) |
Incorporated by reference to the Registrant’s Annual Report on Form 10-K/A (No. 001-08896) for the year ended December 31, 2012. |
|
(2) |
Incorporated by reference to the Registrant’s Registration of Certain Classes of Securities on Form 8-A (No. 001-08896) dated May 13, 2013. |
|
(3) |
Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on February 3, 2014, for the event dated January 29, 2014. |
|
(4) |
Incorporated by reference to the Registrant’s Registration Statement on Form S-3 (No. 333-63358) dated June 19, 2001. |
|
(5) |
Incorporated by reference to the Registrant’s Annual Report on Form 10-K (No. 001-08896) for the year ended December 31, 2011. |
|
(6) |
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (No. 001-08896) for the quarter ended June 30, 2019 |
|
(7) |
Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on May 30, 2014, for the event dated May 28, 2014. |
|
(8) |
Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on February 20, 2015, for the event dated February 20, 2015. |
|
(9) |
Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on January 5, 2017, for the event dated January 3, 2017. |
|
(10) |
Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on January 4, 2018, for the event dated January 3, 2018. |
|
(11) |
Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on January 7, 2019, for the event dated January 3, 2019. |
|
(12) |
Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on December 11, 2017, for the event dated December 6, 2017. |
|
(13) |
Incorporated by reference to the Registrant’s Annual Report on Form 10-K (No. 001-08896) for the year ended December 31, 2017. |
|
* |
Filed herewith |
|
** |
Furnished herewith |
-37-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
CAPSTEAD MORTGAGE CORPORATION Registrant |
|
|
|
|
Date: October 28, 2019 |
By: |
/s/ PHILLIP A. REINSCH |
|
|
Phillip A. Reinsch |
|
|
President and Chief Executive Officer |
|
|
|
|
Date: October 28, 2019 |
|
By: |
/s/ LANCE J. PHILLIPS |
|
|
|
Lance J. Phillips |
|
|
|
Senior Vice President, Chief Financial Officer |
|
|
|
and Secretary (Principal Financial and |
|
|
|
Accounting Officer) |
-38-
Capstead Mortgage Corporation
DOCS financing facility
SALES AGREEMENT
October 23, 2019
THIS SALES AGREEMENT (this “Agreement”) dated as of October 23, 2019, between San Blas Securities LLC (doing business as Brinson Patrick, a division of San Blas Securities LLC) (the “Sales Manager”), having its principal office at 3340 Peachtree Road NE, Suite 1800, Atlanta, Georgia 30326, and Capstead Mortgage Corporation, a corporation organized and existing under the laws of the State of Maryland (the “Company”).
WHEREAS, the Company desires to issue and sell through the Sales Manager shares of its common stock, par value $0.01 per share (the “Common Stock”) and shares of it Series E Preferred Stock, par value $0.10 per share (the “Series E Preferred Stock” and together with the Common Stock, the “Company Equity Securities”) on the terms set forth in herein; and
IN CONSIDERATION of the mutual covenants contained in this Agreement, the Company and the Sales Manager agree as follows:
ARTICLE I
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
1.1For purposes of this Agreement, unless the context requires the contrary, the term “Company” shall also include all significant subsidiaries (as defined by Section 1-02 of Regulation S-X) of the Company. The Company represents and warrants to, and agrees with, the Sales Manager that:
(a)The Company meets the requirements for use of Form S-3 under the Securities Act of 1933, as amended (the “Act”), and the rules and regulations thereunder (“Rules and Regulations”), and the Company is eligible to use Form S-3ASR for the transactions contemplated by this Agreement. A registration statement on Form S-3ASR (Registration No. 333-[•]) with respect to, among other securities, the Company Equity Securities, including a form of prospectus, has been prepared by the Company in conformity with the requirements of the Act and the Rules and Regulations, has been filed with the Securities and Exchange Commission (the “Commission”) and has been declared effective by the Commission. No stop order suspending the effectiveness of such registration statement has been issued, and no proceeding for that purpose has been instituted or, to the knowledge of the Company, threatened by the Commission. Additionally, the Company is eligible to file, and on or about the date hereof, will file, a new registration statement on Form S-3 with respect to the Company Equity Securities that will become effective upon filing with the Commission pursuant to Rule 462(e) under the Act. Each such registration statement, as it may have heretofore been or may hereafter be filed, as amended, is referred to herein as the “Registration Statement,” and the final form of prospectus included in the Registration Statement, as amended or supplemented from time to time, is referred to herein as the “Prospectus.” Any reference herein to the Registration Statement, the Prospectus, or any amendment or supplement thereto shall be deemed to refer to and include the documents incorporated (or deemed to be incorporated) by reference therein, and any reference herein to the terms “amend,” “amendment” or “supplement” with respect to the Registration Statement or Prospectus shall be deemed to refer to and include the filing after the execution hereof of any document with the Commission deemed to be incorporated by reference therein.
(b)Each part of the Registration Statement, when such part became or becomes effective, and the Prospectus and any amendment or supplement thereto, on the date of filing thereof with the Commission and at each Settlement Date (as hereinafter defined), conformed or will conform in all material respects with the requirements of the Act and the Rules and Regulations; each part of the Registration Statement, when such part became or becomes effective, did not or will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and the Prospectus and any amendment or supplement thereto, on the date of filing thereof with the Commission and at each Settlement Date, did not or will not include an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; except that the foregoing shall not apply to statements in or omissions from any such document in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of the Sales Manager, specifically for use in the Registration Statement, the Prospectus or any amendment or supplement thereto.
(c)The documents incorporated by reference in the Registration Statement or the Prospectus, or any amendment or supplement thereto, when they became or become effective under the Act or were or are filed with the Commission under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as the case may be, conformed or will conform in all material respects with the requirements of the Act or the Exchange Act, as applicable, and the rules and regulations of the Commission thereunder.
(d)The financial statements of the Company, together with the related schedules and notes thereto, set forth or included or incorporated by reference in the Registration Statement and Prospectus, fairly present the financial condition of the Company as of the dates indicated and the results of operations, changes in financial position, stockholders’ equity, and cash flows for the periods therein specified, in conformity with generally accepted accounting principles consistently applied throughout the periods involved (except as otherwise stated therein). The summary and selected financial and statistical data included or incorporated by reference in the Registration Statement and the Prospectus present fairly the information shown therein and, to the extent based upon or derived from the financial statements, have been compiled on a basis consistent with the financial statements presented therein.
(e)The accountants who certified the financial statements and the supporting schedules included in the Registration Statement are and, during the periods covered by their reports, were qualified and independent public accountants as required by Rule 2-01 of Regulation S-X.
(f)The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Maryland. Other than as disclosed in the Registration Statement, the Company has no subsidiaries and does not control, directly or indirectly, any corporation, partnership, limited liability company, joint venture, association or other business organization. The Company is duly qualified and in good standing as a foreign corporation in each jurisdiction in which the character or location of its assets or properties (owned, leased or licensed) or the nature of its business makes such qualification necessary (including every jurisdiction in which it owns or leases property), except for such jurisdictions where the failure to
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so qualify would not have a Material Adverse Effect on the Company. For purposes of this Agreement, “Material Adverse Effect” means any adverse effect on the business, operations, properties or financial condition of the Company that is (either alone or together with all other adverse effects) material to the Company, and any material adverse effect on the transactions contemplated under this Agreement or any other agreement or document contemplated hereby or thereby. Each of the Company’s significant subsidiaries is validly existing as a corporation, limited liability company or partnership, as applicable, in its respective jurisdiction of formation. Schedule 1.1(f) hereto identifies each of the Company’s subsidiaries that is a significant subsidiary (as defined in Section 1-02 of Regulation S-X) of the Company. All of the issued and outstanding capital stock, limited liability company interests or partnership interests, as applicable, of each significant subsidiary has been duly authorized and validly issued, is fully paid and nonassessable and (except as otherwise disclosed or incorporated by reference in the Registration Statement and the Prospectus) is owned by the Company, directly or indirectly, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity. Except as disclosed or incorporated by reference in the Registration Statement and the Prospectus, the Company does not own, lease or license any asset or property or conduct any business outside the United States of America. The Company has all requisite corporate or limited liability company power and authority, as applicable, and all necessary authorizations, approvals, consents, orders, licenses, certificates and permits of and from all governmental orders or regulatory bodies or any other person or entity, to own, lease, license and operate its assets and properties and conduct its business as now being conducted and as described or incorporated by reference in the Registration Statement and the Prospectus; except for such authorizations, approvals, consents, orders, licenses, certificates and permits the absence of which would not have a Material Adverse Effect; and no such authorization, approval, consent, order, license, certificate or permit contains a materially burdensome restriction other than as disclosed or incorporated by reference in the Registration Statement and the Prospectus.
(g)The Company has good title to each of the items of personal property which are reflected in the financial statements referred to in Section 1.1(d) or are referred to in the Registration Statement and the Prospectus or any document incorporated by reference therein as being owned by the Company and valid and enforceable leasehold interests in each of the items of real and personal property which are referred to in the Registration Statement and the Prospectus or any document incorporated by reference therein as being leased by the Company, in each case free and clear of all liens, encumbrances, claims, security interests and defects, other than those described in the Registration Statement and the Prospectus and those which do not and will not have a Material Adverse Effect.
(h)The Company has been subject to the requirements of Section 12 of the Exchange Act during the period commencing 12 months preceding the filing of the Registration Statement and ending on the date hereof (the “Reporting Period”) and during such Reporting Period the Company has timely filed all material and reports required under Sections 13(a), 14 and/or 15(d) of the Exchange Act. All such materials and reports conformed in form and substance to the requirements of the Exchange Act and the rules and regulations thereunder. As of the date of filing of the Registration Statement, and as of the date hereof, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Company was and is at least $150 million.
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(i)The Company has good and marketable title to, or leasehold interests in, all properties and assets (including, without limitation, mortgaged assets) as described in the Registration Statement and the Prospectus or any document incorporated by reference therein, owned by the Company, free and clear of all liens, charges, encumbrances or restrictions, except such as are described in the Registration Statement and the Prospectus or any document incorporated by reference therein, and except such as would not have a Material Adverse Effect on the Company.
(j)The debt financing employed by the Company to acquire its portfolio of mortgage assets is not convertible into shares of Company Equity Securities.
(k)There is no litigation or governmental or other proceeding or investigation before any court or before or by any public body or board pending or, to the knowledge of the Company, threatened (and the Company does not know of any basis therefor) against, or involving the assets, properties or businesses of the Company which would materially adversely affect the value or the operation of any such assets or otherwise have a Material Adverse Effect on the Company except as described or incorporated by reference in the Registration Statement.
(l)The Company maintains insurance (issued by insurers of recognized financial responsibility) of the types and in the amounts generally deemed adequate for its businesses and, to the knowledge of the Company, consistent with insurance coverage maintained by similar companies in similar businesses, including, but not limited to, insurance covering real and personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect.
(m)Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, except as described therein, (i) there has not been any material adverse change in the assets or properties, business, results of operations or condition (financial or otherwise) of the Company, whether or not arising from transactions in the ordinary course of business; (ii) the Company has not sustained any material loss or interference with its assets, businesses or properties (whether owned or leased) from fire, explosion, earthquake, flood or other calamity, whether or not covered by insurance, or from any labor dispute or any court or legislative or other governmental action, order or decree; (iii) since the date of the latest balance sheet, included or incorporated by reference in the Registration Statement and the Prospectus, except as reflected therein, the Company has not undertaken any liability or obligation, direct or contingent, except such liabilities or obligations undertaken in the ordinary course of business; and (iv) there has not been any transaction that is material to the Company, except transactions in the ordinary course of business or as otherwise disclosed in the Registration Statement and the Prospectus.
(n)There is no document or contract of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement that is not described or filed as required. Each document, instrument, contract and agreement of the Company described in the Registration Statement or the Prospectus or incorporated by reference therein or listed as exhibits to the Registration Statement is in full force and effect and is valid and enforceable by and against the Company in accordance with their terms,
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assuming the due authorization, execution and delivery thereof by each of the other parties thereto except as otherwise disclosed in the Registration Statement or Prospectus. The Company is not, nor to the knowledge of the Company is any other party, in default in the observance or performance of any term or obligation to be performed by it under any such agreement, and no event has occurred which with notice or lapse of time or both would constitute such a default, which default or event would have a Material Adverse Effect. No default exists, and no event has occurred which with notice or lapse of time or both would constitute a default, in the due performance and observance of any term, covenant or condition, by the Company of any other agreement or instrument to which the Company is a party or by which it or its properties or business may be bound or affected, which default or event would have a Material Adverse Effect.
(o)The Company is not in violation of any term or provision of its charter, by-laws or operating agreement, as applicable. The Company is not in violation of any franchise, license, permit, judgment, decree, order, statute, rule or regulation, where the consequences of such violation would have a Material Adverse Effect.
(p)Neither the execution, delivery and performance of this Agreement by the Company nor the consummation of any of the transactions contemplated hereby (including, without limitation, the issuance and sale by the Company of the Company Equity Securities) will give rise to a right to terminate or accelerate the due date of any payment due under, or conflict with or result in the breach of any term or provision of, or constitute a default (or an event which with notice or lapse of time or both would constitute a default) under, or require any consent or waiver under, or result in the execution or imposition of any lien, charge, encumbrance, claim, security interest, restriction or defect upon any properties or assets of the Company pursuant to the terms of, any indenture, mortgage, deed of trust or other agreement or instrument to which the Company is a party or by which the Company is bound, or any of its properties or businesses are bound, or any franchise, license, permit, judgment, decree, order, statute, rule or regulation applicable to the Company or violate any provision of the charter or by-laws of the Company, except for such consents or waivers which have already been obtained and are in full force and effect.
(q)All of the outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable and none of the shares were issued in violation of any preemptive or other similar right. The Company Equity Securities, when issued and sold pursuant to this Agreement, will be duly authorized and validly issued, fully paid and nonassessable and will not be issued in violation of any preemptive or other similar right. Except as disclosed in the Registration Statement and the Prospectus, there is no outstanding option, warrant or other right calling for the issuance of, and there is no commitment, plan or arrangement to issue, any capital stock of the Company or any security convertible into or exercisable or exchangeable for such capital stock, except for standard dividend reinvestment plans. The Company Equity Securities conform in all material respects to all statements relating thereto contained in the Registration Statement and the Prospectus. Any stock options issued by the Company have been issued in compliance with law, and the terms and provisions of such stock options were established in compliance with law.
(r)Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, except as (x) described or referred to therein, or (y) are
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not material (as to clauses (i) and (ii) only), are consistent with past practice (as to clauses (i) and (ii) only), and are publicly disclosed, the Company has not (i) issued any securities or incurred any liability or obligation, direct or contingent, except such liabilities or obligations incurred in the ordinary course of business including, without limitation, debt financing to acquire and develop properties, (ii) entered into any transaction not in the ordinary course of business or (iii) declared or paid any dividend or made any distribution on any shares of its capital stock or redeemed, purchased or otherwise acquired or agreed to redeem, purchase or otherwise acquire any shares of its capital stock.
(s)Except as disclosed in the Registration Statement and Prospectus, no holder of any security of the Company has the right, which has not been waived, to have any security owned by such holder included in the Registration Statement or any right to demand registration of any security owned by such holder.
(t)All necessary corporate or limited liability company action, as applicable, has been duly and validly taken by the Company to authorize the execution, delivery and performance of this Agreement and the issuance and sale of the Company Equity Securities by the Company. This Agreement has been duly and validly authorized, executed and delivered by the Company and constitutes and will constitute the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. Except for any “blue sky” filings or Trading Market listing applications to be filed pursuant hereto, each approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions contemplated hereby and the issuance and sale of the Company Equity Securities by the Company has been obtained or made and is in full force and effect. The Company will use its best reasonable efforts to cause the Company Equity Securities to be listed for trading on the Trading Market. For purposes of this Agreement, the “Trading Market” is (i) the New York Stock Exchange, Inc., and (ii) each other nationally recognized securities exchange on which any of the Company Equity Securities is admitted for trading.
(u)The Company has not incurred any liability for a fee, commission or other compensation on account of the employment of a broker or finder in connection with the transactions contemplated by this Agreement other than as contemplated hereby or as described in the Registration Statement.
(v)The Company is conducting its business in compliance with all applicable laws, rules and regulations of the jurisdictions in which it is conducting business, except where the failure to be so in compliance would not have a Material Adverse Effect.
(w)No transaction has occurred between or among the Company and any of its officers or directors or any affiliate or affiliates of any such officer or director that is required to be described in and is not described in the Registration Statement and the Prospectus.
(x)The Company has not taken, nor will it take, directly or indirectly, any action designed to or which might reasonably be expected to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation
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of the price of the Company Equity Securities to facilitate the sale or resale of any of the Company Equity Securities.
(y)The Company has filed all federal, state, local and foreign tax returns which are required to be filed through the date hereof (and will file all such tax returns when and as required to be filed after the date hereof), or has received extensions thereof, and has paid all taxes shown on such returns to be due on or prior to the date hereof (and will pay all taxes shown on such returns to be due after the date hereof) and all assessments received by it to the extent that the same are material and have become due, except where the failure to file such a return or pay such amount would not have a Material Adverse Effect.
(z)The Company has met the qualification requirements for a “real estate investment trust” during its taxable years ending on or after December 31, 1999 and its proposed method of operations will enable it to continue to meet the requirements for qualification and taxation as a “real estate investment trust” under the Internal Revenue Code of 1986, as amended (the “Code”), assuming no change in the applicable underlying law. The Company does not know of any event that would cause or is likely to cause the Company to fail to qualify as a “real estate investment trust” at any time.
(aa)The Company is not an “investment company” within the meaning of the Investment Company Act of 1940, as amended.
(bb)The Company’s systems of internal accounting controls taken as a whole are sufficient to meet the broad objectives of internal accounting control insofar as those objectives pertain to the prevention or detection of errors or irregularities in amounts that would be material in relation to the Company’s financial statements; and, to the best of the Company’s knowledge, neither the Company nor any employee or agent thereof has made any payment of funds of the Company or received or retained any funds, and no funds of the Company have been set aside to be used for any payment, in each case in violation of any law, rule or regulation.
(cc)There is and has been no failure on the part of the Company or any of the Company’s directors or officers, in their capacities as such, to comply with any provision of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated in connection therewith, including without limitation Section 402 related to loans and Sections 302 and 906 related to certificates.
ARTICLE II
SALE AND DELIVERY OF SECURITIES
2.1(a)On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to issue and sell through the Sales Manager, as agent, and the Sales Manager agrees to sell, as agent for the Company, on a best efforts basis at prevailing market prices, shares of Company Equity Securities during the term of this Agreement on the terms set forth herein. Company Equity Securities will be sold from time to time as described in the Registration Statement and Prospectus, in amounts and, subject to price limitations, as directed by the Company and as agreed to by the
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Sales Manager; provided that nothing in this Agreement shall be construed to require the Company to sell any shares of Company Equity Securities through the Sales Manager.
(b)The Company or the Sales Manager may, upon notice to the other party hereto by telephone (confirmed promptly by telecopy or e-mail), at any time and from time to time suspend the offering of Company Equity Securities; provided, however, that such suspension shall not affect or impair the parties’ respective obligations with respect to the Company Equity Securities sold hereunder prior to the giving of such notice.
(c)The compensation to the Sales Manager for sales of Company Equity Securities sold under this Agreement shall be at the rate of up to: 3.0% of the gross sales price per share (“Sales Proceeds”) as agreed to in writing by the Sales Manager and the Company. The remaining proceeds, after further deduction for any transaction fees imposed by any governmental or self-regulatory organization in respect to such sale shall constitute the net proceeds to the Company for such Company Equity Securities (the “Net Proceeds”). For purposes of the first sentence of this section 2.1(c), Sales Proceeds include sales proceeds from sales of Company Equity Securities by the Sales Manager for the account of the Company, whether under this Agreement, or otherwise.
(d)The Company shall open and maintain a trading account or accounts (the “Trading Accounts”) at a clearing agent designated by the Sales Manager to facilitate the transactions contemplated by this Agreement. The Net Proceeds from the sale of any Company Equity Securities shall be available in the Trading Accounts on the third business day (or such other day as is industry practice for regular-way trading) following each sale of any Company Equity Securities (each, a “Settlement Date”). The Company shall effect the delivery of the applicable number of shares of Company Equity Securities to an account or accounts designated by the Sales Manager at The Depository Trust Company on or before the Settlement Date of each sale hereunder. The Sales Manager’s compensation shall be withheld from the Sales Proceeds on each Settlement Date and shall be paid to the Sales Manager.
(e)At each Settlement Date, the Company shall be deemed to have affirmed each representation, warranty, covenant and other agreement contained in this Agreement. Any obligation of the Sales Manager under this Agreement shall be subject to the continuing accuracy of the representations and warranties of the Company herein, to the performance by the Company of its obligations hereunder and to the continuing satisfaction of the additional conditions specified in Article IV of this Agreement.
(f)If the Company shall default on its obligation to deliver Company Equity Securities on any Settlement Date, the Company shall (i) hold the Sales Manager harmless against any loss, claim or damage arising from or as a result of such default by the Company and (ii) pay the Sales Manager any commission to which it would otherwise be entitled absent such default.
ARTICLE III
COVENANTS OF THE COMPANY
3.1The Company covenants and agrees with the Sales Manager that:
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(a)As promptly as practicable after the date of this Agreement, the Company will (if not previously filed) file the Registration Statement to permit sales of the Company Equity Securities under the Act. The Company will use its best reasonable efforts to cause the Registration Statement to become effective as promptly as possible thereafter.
(b)During the period in which the Sales Manager has been requested to offer and sell Company Equity Securities, the Company will notify the Sales Manager promptly of the time when any subsequent amendment to the Registration Statement has become effective or any subsequent supplement to the Prospectus has been filed and of any request by the Commission for any amendment or supplement to the Registration Statement or the Prospectus or for additional information. The Company will prepare and file with the Commission, promptly upon the Sales Manager’s reasonable request, any amendments or supplements to the Registration Statement or Prospectus that, in the Sales Manager’s reasonable opinion, may be necessary or advisable in connection with the sale of the Company Equity Securities pursuant to this Agreement. The Company will not file any amendment or supplement to the Registration Statement or Prospectus (other than a supplement to the Prospectus that (i) does not materially change the information about the Company or its business, operations, properties or financial condition previously disclosed in the Registration Statement or Prospectus, (ii) relates to a “follow-on” offering of Company Equity Securities by the Company, or (iii) relates to an offering of securities other than the Company Equity Securities (each, an “Excluded Supplement”)) unless a copy thereof has been submitted to the Sales Manager a reasonable period of time before the filing and the Sales Manager has not reasonably objected thereto; and it will notify the Sales Manager at the time of filing thereof of any document that upon filing is deemed to be incorporated by reference in the Registration Statement or Prospectus, which will then be available on the Company’s website at www.capstead.com (and will furnish to the Sales Manager any such document that is not available on the Company’s website). The Company will cause each amendment to the Registration Statement or supplement to the Prospectus and each filing or report incorporated therein, to be prepared in form and substance as required by the Act, the Rules and Regulations, the Exchange Act and the rules and regulations thereunder, and to be timely filed with the Commission.
(c)The Company will advise the Sales Manager, promptly after it shall receive notice or obtain knowledge thereof, of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement, of the suspension of the qualification of any Company Equity Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceeding for any such purpose; and it will promptly use its best reasonable efforts to prevent the issuance of any stop order or to obtain its withdrawal if such a stop order should be issued.
(d)Within the time during which a prospectus relating to any Company Equity Securities is required to be delivered under the Act, the Company will comply with all requirements imposed upon it by the Act and by the Rules and Regulations, as from time to time in force, so far as necessary to permit the continuance of sales of or dealings in the Company Equity Securities as contemplated by the provisions hereof and the Prospectus. If during such period any event occurs as a result of which the Prospectus, as then amended or supplemented, would include an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances then existing, not misleading, or if during such period it is necessary to amend or supplement the Registration Statement or Prospectus
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to comply with the Act, the Company will promptly notify the Sales Manager to suspend the offering of Company Equity Securities during such period and the Company will amend or supplement the Registration Statement or Prospectus (at the expense of the Company) so as to correct such statement or omission or effect such compliance and will use its best reasonable efforts to have any amendment or supplement to the Registration Statement or Prospectus declared effective as soon as possible, unless the Company has reasonable business reasons to defer public disclosure of the relevant information.
(e)The Company will use its best reasonable efforts to qualify any Company Equity Securities for sale under the securities laws of such jurisdictions as the Sales Manager designates and to continue such qualifications in effect so long as required for the sale of any Company Equity Securities, except that the Company shall not be required in connection therewith to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction.
(f)The Company will furnish to the Sales Manager and its legal counsel (at the expense of the Company) copies of the Registration Statement, the Prospectus (including all documents incorporated by reference therein) and all amendments and supplements to the Registration Statement or Prospectus that are filed with the Commission during the period in which a prospectus relating to any Company Equity Securities is required to be delivered under the Act (including all documents filed with the Commission during such period that are deemed to be incorporated by reference therein), in each case as soon as available and in such quantities as the Sales Manager may from time to time reasonably request. The Company will take such action as to enable the conditions set forth in Rule 153(b) of the Rules and Regulations to be satisfied at all times that the Sales Manager is selling any Company Equity Securities.
(g)The Company will make generally available to its security holders as soon as practicable, but in any event not later than 15 months after the end of the Company’s current fiscal quarter, an earnings statement (which need not be audited) covering a 12-month period that satisfies the provisions of Section 11(a) of the Act and Rule 158 of the Rules and Regulations.
(h)The Company, whether or not the transactions contemplated hereunder are consummated or this Agreement is terminated, will pay all of its expenses incident to the performance of its obligations hereunder (including, but not limited to, any transaction fees imposed by any governmental or self-regulatory organization with respect to transactions contemplated by this Agreement and any blue sky fees) and will pay the expenses of printing all documents relating to the offering. The Company will reimburse the Sales Manager for its reasonable out-of-pocket costs and expenses incurred in connection with entering into this Agreement, including, without limitation, reasonable travel, reproduction, printing and similar expenses, as well as the reasonable fees and disbursements of its legal counsel.
(i)The Company shall use its best reasonable efforts to list, subject to notice of issuance, the Company Equity Securities on the applicable Trading Market.
(j)The Company will apply the Net Proceeds from the sale of the Company Equity Securities as set forth in the Prospectus.
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(k)The Company will not, directly or indirectly, offer or sell any shares of equity securities (other than the Company Equity Securities) or securities convertible into or exchangeable for, or any rights to purchase or acquire, equity securities (other than the Company Equity Securities) during the period from the date of this Agreement through the final Settlement Date for the sale of any Company Equity Securities hereunder without (i) giving the Sales Manager at least one business day prior written notice specifying the nature of the proposed sale and the date of such proposed sale and (ii) suspending activity under this program for such period of time as may reasonably be determined by agreement of the Company and the Sales Manager; provided, however, that no such notice and suspension shall be required in connection with the Company’s issuance or sale of (i) shares of equity securities pursuant to any employee or director stock option or benefits plan, stock ownership plan, dividend reinvestment plan, as such plans may be amended from time to time, and (ii) equity securities issuable upon conversion of securities or the exercise of warrants, options or other rights in effect or outstanding on the date hereof. Notwithstanding the foregoing, this paragraph (k) shall not apply during periods that the Company is neither selling Company Equity Securities through the Sales Manager nor has requested the Sales Manager to sell Company Equity Securities.
(l)The Company will, at any time during the term of this Agreement, as supplemented from time to time, advise the Sales Manager immediately after it shall have received notice or obtain knowledge thereof, of any information or fact that would alter or affect any opinion, certificate, letter and other document provided to the Sales Manager pursuant to Article IV herein.
(m)Each time that the Registration Statement or the Prospectus shall be amended or supplemented (other than an Excluded Supplement) and on the dates specified in Section 4.1(f) below, the Company shall (unless the Company is not then selling Company Equity Securities through the Sales Manager and has not requested the Sales Manager to sell Company Equity Securities) furnish or cause to be furnished to the Sales Manager forthwith a certificate, in form and substance satisfactory to the Sales Manager to the effect that the statements contained in the certificates referred to in Section 4.1(f) below that were last furnished to the Sales Manager are true and correct at the time of such amendment or supplement, as the case may be, as though made at and as of such time (except that such statements shall be deemed to relate to the Registration Statement and the Prospectus as amended and supplemented to such time) or, in lieu of such certificates, certificates of the same tenor as the certificates referred to in said Section 4.1(f) below, modified as necessary to relate to the Registration Statement and the Prospectus as amended and supplemented to the time of delivery of such certificate.
(n)Each time that a post-effective amendment to the Registration Statement is declared effective or the Company files an Annual Report on Form 10-K, and at such other times as may be reasonably requested by the Sales Manager, the Company shall (unless the Company is not then selling Company Equity Securities through the Sales Manager and has not requested the Sales Manager to sell Company Equity Securities) furnish or cause to be furnished forthwith to the Sales Manager and to its legal counsel, a written opinion of Hunton Andrews Kurth LLP, counsel to the Company (“Company Counsel”), or other counsel reasonably satisfactory to the Sales Manager, dated the date of effectiveness of such amendment or the date of filing with the Commission of such document, as the case may be, in form and substance satisfactory to the Sales Manager, of the same tenor as the opinion referred to in Section 4.1(d) below, but modified as
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necessary to relate to the Registration Statement and the Prospectus as amended and supplemented to the time of delivery of such opinion; provided , however that in lieu of such opinion, the Company may furnish the Sales Manager with a letter from Company Counsel to the effect that the Sales Manager may rely on the prior opinion delivered pursuant to Section 4.1(d) below to the same extent as if it were dated the date of such letter (except that statements in such prior opinion shall be deemed to relate to the Registration Statement and the Prospectus as amended or supplemented to the time of delivery of such letter).
(o)Each time that a post-effective amendment to the Registration Statement is declared effective or the Company files an Annual Report on Form 10-K, and at such other times as may be reasonably requested by the Sales Manager, the Company shall (unless the Company is not then selling Company Equity Securities through the Sales Manager and has not requested the Sales Manager to sell Company Equity Securities) cause Ernst & Young LLP, or other independent accountants then retained by the Company, forthwith to furnish to the Sales Manager a letter, dated the date of effectiveness of such amendment, or the date of filing of such supplement or other document with the Commission, as the case may be, in form and substance satisfactory to the Sales Manager, of the same tenor as the letter referred to in Section 4.1(e) below but modified to relate to the Registration Statement and the Prospectus, as amended and supplemented to the date of such letter.
(p)The Company represents and agrees that, unless it obtains the prior consent of the Sales Manager, and the Sales Manager represents and agrees that, unless it obtains the prior consent of the Company, it has not made and will not make any offer relating to any Company Equity Securities that would constitute an Issuer Free Writing Prospectus, or that would otherwise constitute a “free writing prospectus” as defined in Rule 405, required to be filed with the Commission. Any such free writing prospectus consented to by the Company and the Sales Manager is hereinafter referred to as a “Permitted Free Writing Prospectus.” The Company represents that it has treated and agrees that it will treat each Permitted Free Writing Prospectus as an “issuer free writing prospectus,” as defined in Rule 433 of the Act, and has complied and will comply with the requirements of Rules 164 and 433 of the Act, as applicable to any Permitted Free Writing Prospectus, including timely Commission filings where required, legending and record keeping.
For the purposes of this Section, “Issuer Free Writing Prospectus” means any “issuer free writing prospectus,” as defined in Rule 433 of the Act, relating to any Company Equity Securities in the form filed or required to be filed with the Commission or, if not required to be filed, in the form retained in the Company’s records pursuant to Rule 433(g) of the Act.
Notwithstanding the foregoing, the Company shall not be required to obtain the consent of the Sales Manager with respect to the offering of any securities other than Company Equity Securities or any “follow-on” offering of Company Equity Securities pursuant to an Issuer Free Writing Prospectus.
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ARTICLE IV
CONDITIONS OF THE SALES MANAGER’S OBLIGATIONS
4.1The obligations of the Sales Manager to sell the Company Equity Securities as provided herein shall be subject to the accuracy, as of the date hereof, and as of each Settlement Date contemplated under this Agreement, of the representations and warranties of the Company herein, to the performance by the Company of its obligations hereunder and to the following additional conditions:
(a)The Registration Statement has been declared effective. No stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceeding for that purpose shall have been instituted or, to the knowledge of the Company or the Sales Manager, threatened by the Commission, and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the Sales Manager’s reasonable satisfaction. The Company Equity Securities shall have been listed for trading on the Trading Market.
(b)The Sales Manager shall not have advised the Company that the disclosures in the Registration Statement or the Prospectus, or any amendment or supplement thereto, are not reasonably acceptable to the Sales Manager.
(c)Except as contemplated in the Prospectus, subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, there shall not have been any material adverse change in the capital stock of the Company, or any material adverse change, or any development that may reasonably be expected to cause a material adverse change, in the condition (financial or other), business, net worth or results of operations of the Company, or any adverse change in the rating assigned to any securities of the Company.
(d)(i)The Sales Manager shall have received at the date of the first sale of Company Equity Securities hereunder (the “Commencement Date”) and at every other date specified in Section 3.1(n) hereof, opinions of Company Counsel, dated as of the Commencement Date and dated as of such other date, in a form reasonably acceptable to the Sales Manager.
(ii)The Sales Manager shall have received a letter from Company Counsel authorizing the Sales Manager to rely on the opinion on tax matters delivered by Company Counsel as Exhibit 8.1 to the Registration Statement.
(e)At the Commencement Date and at such other dates specified in Section 3.1(o) hereof, the Sales Manager shall have received a “comfort letter” from Ernst & Young LLP, independent public accountants for the Company, or other independent accountants then retained by the Company, dated the date of delivery thereof, in form and substance satisfactory to the Sales Manager.
(f)The Sales Manager shall have received from the Company a certificate, or certificates, signed by the Chief Financial Officer and Senior Vice President of the Company, dated as of the Commencement Date and (unless the Company is not then selling Company Equity
13
Securities through the Sales Manager and has not requested the Sales Manager to sell Company Equity Securities) dated as of the first business day of each calendar quarter thereafter and such other times as the Sales Manager shall request (each, a “Certificate Date”), to the effect that, to the best of their knowledge based upon reasonable investigation:
(i)The representations and warranties of the Company in this Agreement are true and correct, as if made at and as of the Commencement Date or the Certificate Date (as the case may be), and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the Commencement Date and each such Certificate Date (as the case may be);
(ii)No stop order suspending the effectiveness of the Registration Statement has been issued, and no proceeding for that purpose has been instituted or, to the knowledge of such officer after due inquiry, is threatened, by the Commission;
(iii)Since the date of this Agreement there has occurred no event required to be set forth in an amendment or supplement to the Registration Statement or Prospectus that has not been so set forth and there has been no document required to be filed under the Exchange Act and the rules and regulations of the Commission thereunder that upon such filing would be deemed to be incorporated by reference in the Prospectus that has not been so filed; and
(iv)Since the date of this Agreement, there has not been any material adverse change in the assets or properties, business, results of operations or condition (financial or otherwise) of the Company, which has not been described in an amendment or supplement to the Registration Statement or Prospectus (directly or by incorporation).
(g)At the Commencement Date and on each Settlement Date, the Company shall have furnished to the Sales Manager such appropriate further information, certificates and documents as the Sales Manager may reasonably request.
(h)At the Commencement Date and on each Settlement Date, the Company shall have listed for quotation the Company Equity Securities on the Trading Market.
All such opinions, certificates, letters and other documents will be in compliance with the provisions hereof only if they are satisfactory in form and substance to the Sales Manager. The Company will furnish the Sales Manager with such conformed copies of such opinions, certificates, letters and other documents as the Sales Manager shall reasonably request.
ARTICLE V
INDEMNIFICATION AND CONTRIBUTION
5.1(a)The Company agrees to indemnify and hold harmless the Sales Manager and each person, if any, who controls the Sales Manager within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, as follows:
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(i)against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the representations in this Agreement or contained in the Registration Statement (or any amendment thereto), or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading;
(ii)against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, if such settlement is effected with the written consent of the Company; and
(iii)against any and all expense whatsoever, as incurred (including, subject to Section 5(c) hereof, the reasonable fees and disbursements of legal counsel chosen by the Sales Manager), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by the Sales Manager expressly for use in the Registration Statement (or any amendment thereto) or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto).
(b)The Sales Manager agrees to indemnify and hold harmless the Company and its directors and each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in Section 5.1(a), as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendments thereto) or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by the Sales Manager expressly for use in the Registration Statement (or any amendment thereto) or such preliminary prospectus or the Prospectus (or any amendment or supplement thereto). The total liability of the Sales Manager under this Section 5.1(b) shall not exceed the total actual sales price of Company Equity Securities sold by the Sales Manager that is the subject of the dispute.
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(c)Any indemnified party that proposes to assert the right to be indemnified under this Article V will, promptly after receipt of notice of commencement of any action against such party in respect of which a claim is to be made against an indemnifying party or parties under this Article V, notify each such indemnifying party of the commencement of such action, enclosing a copy of all papers served, but the omission so to notify such indemnifying party will not relieve the indemnifying party from any liability that it might have to any indemnified party to the extent it is not materially prejudiced as a result thereof. If any such action is brought against any indemnified party and it notifies the indemnifying party of its commencement, the indemnifying party will be entitled to participate in and, to the extent that it elects by delivering written notice to the indemnified party promptly after receiving notice of the commencement of the action from the indemnified party, jointly with any other indemnifying party similarly notified, to assume the defense of the action, with legal counsel reasonably satisfactory to the indemnified party, and after notice from the indemnifying party to the indemnified party of its election to assume the defense, the indemnifying party will not be liable to the indemnified party for any legal or other expenses except as provided below and except for the reasonable costs of investigation subsequently incurred by the indemnified party in connection with the defense. The indemnified party will have the right to employ its own legal counsel in any such action, but the fees, expenses and other charges of such legal counsel will be at the expense of such indemnified party unless (1) the employment of legal counsel by the indemnified party has been authorized in writing by the indemnifying party, (2) the indemnified party has reasonably concluded (based on written advice of legal counsel) that there may be legal defenses available to it or other indemnified parties that are different from or in addition to those available to the indemnifying party, (3) a conflict or potential conflict exists (based on written advice of legal counsel to the indemnified party) between the indemnified party and the indemnifying party (in which case the indemnifying party will not have the right to direct the defense of such action on behalf of the indemnified party) or (4) the indemnifying party has not in fact employed legal counsel to assume the defense of such action within a reasonable time after receiving notice of the commencement of the action, in each of which cases the reasonable fees, disbursements and other charges of legal counsel will be at the expense of the indemnifying party or parties. It is understood that the indemnifying party or parties shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees, disbursements and other charges of more than one separate firm admitted to practice in such jurisdiction at any one time for all such indemnified party or parties. All such fees, disbursements and other charges will be reimbursed by the indemnifying party promptly as they are incurred. An indemnifying party will not be liable for any settlement of any action or claim effected without its written consent (which consent will not be unreasonably withheld).
(d)In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in the foregoing paragraphs of this Article V is applicable in accordance with its terms but for any reason is held to be unavailable from the Company or the Sales Manager, the Company and the Sales Manager will contribute to the total losses, claims, liabilities, expenses and damages (including any investigative, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted, but after deducting any contribution received by the Company from persons other than the Sales Manager, such as persons who control the Company within the meaning of the Act, officers of the Company who signed the Registration Statement and directors of the Company, who also may be liable for contribution) to which the Company and the Sales Manager
16
may be subject in such proportion as shall be appropriate to reflect the relative benefits received by the Company on the one hand and the Sales Manager on the other. The relative benefits received by the Company on the one hand and the Sales Manager on the other hand shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total compensation (before deducting expenses) received by the Sales Manager from the sale of Company Equity Securities on behalf of the Company. If, but only if, the allocation provided by the foregoing sentence is not permitted by applicable law, the allocation of contribution shall be made in such proportion as is appropriate to reflect not only the relative benefits referred to in the foregoing sentence but also the relative fault of the Company, on the one hand, and the Sales Manager, on the other, with respect to the statements or omission which resulted in such loss, claim, liability, expense or damage, or action in respect thereof, as well as any other relevant equitable considerations with respect to such offering. Such relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Sales Manager, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Sales Manager agree that it would not be just and equitable if contributions pursuant to this Section 5.1(d) were to be determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, liability, expense or damage, or action in respect thereof, referred to above in this Section 5.1(d) shall be deemed to include, for the purpose of this Section 5.1(d), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the foregoing provisions of this Section 5.1(d), the Sales Manager shall not be required to contribute any amount in excess of the amount by which the total actual sales price at which Company Equity Securities sold by the Sales Manager exceeds the amount of any damages that the Sales Manager has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission and no person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) will be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 5.1(d), any person who controls a party to this Agreement within the meaning of the Act will have the same rights to contribution as that party, and each officer and director of the Company who signed the Registration Statement will have the same rights to contribution as the Company, subject in each case to the provisions hereof. Any party entitled to contribution, promptly after receipt of notice of commencement of any action against such party in respect of which a claim for contribution may be made under this Section 5.1(d), will notify any such party or parties from whom contribution may be sought, but the omission so to notify will not relieve that party or parties from whom contribution may be sought from any other obligation it or they may have under this Section 5.1(d). No party will be liable for contribution with respect to any action or claim settled without its written consent (which consent will not be unreasonably withheld).
(e)The indemnity and contribution provided by this Article V shall not relieve the Company and the Sales Manager from any liability the Company and the Sales Manager may otherwise have (including, without limitation, any liability the Sales Manager may have for a breach of its obligations under Article II hereof).
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ARTICLE VI
REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY
6.1All representations, warranties and agreements of the Company herein or in certificates delivered pursuant hereto, and the agreements of the Sales Manager contained in Article V hereof, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Sales Manager or any controlling persons, or the Company (or any of their officers, directors or controlling persons), and shall survive delivery of and payment for any Company Equity Securities.
ARTICLE VII
TERMINATION
7.1The Company shall have the right, by giving notice as hereinafter specified, to terminate this Agreement in its sole discretion at any time. Any such termination shall be without liability of any party to any other party except that the provisions of Section 3.1(h), Article V and Article VI hereof shall remain in full force and effect notwithstanding such termination.
7.2The Sales Manager shall have the right, by giving notice as hereinafter specified, to terminate this Agreement in its sole discretion at any time. Any such termination shall be without liability of any party to any other party except that the provisions of Article 3.1(h), Article V and Article VI hereof shall remain in full force and effect notwithstanding such termination.
7.3This Agreement shall remain in full force and effect unless terminated pursuant to Section 7.1 or 7.2 above or otherwise by mutual agreement of the parties; provided that any such termination by mutual agreement shall in all cases be deemed to provide that Section 3.1(h), Article V and Article VI shall remain in full force and effect.
7.4Any termination of this Agreement shall be effective on the date specified in such notice of termination; provided that such termination shall not be effective until the close of business on the date of receipt of such notice by the Sales Manager or the Company, as the case may be. If such termination shall occur during a period when sales of Company Equity Securities are being made pursuant to this Agreement, any sales of Company Equity Securities made prior to the termination of this Agreement shall settle in accordance with the provisions of this Agreement.
ARTICLE VIII
NOTICES
8.1All notices or communications hereunder shall be in writing and if sent to the Sales Manager shall be mailed, delivered or telecopied and confirmed to the Sales Manager at Brinson Patrick, a division of San Blas Securities LLC, 3340 Peachtree Road NE, Suite 1800, Atlanta, Georgia 30326, (email OR facsimile number (404) [FAX NUMBER]), Attention: Corporate Finance, or if sent to the Company, shall be mailed, delivered, emailed or telecopied and confirmed to the Company at Capstead Mortgage Corporation, 8401 N. Central Expressway, Suite 800, Dallas, Texas 75225, email preinsch@capstead.com, Attention: Mr. Phillip A. Reinsch. Each
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party to this Agreement may change such address for notices by sending to the parties to this Agreement written notice of a new address for such purpose.
ARTICLE IX
MISCELLANEOUS
9.1This Agreement shall inure to the benefit of and be binding upon the Company and the Sales Manager and their respective successors and the controlling persons, officers and directors referred to in Article V hereof, and no other person will have any right or obligation hereunder.
9.2This Agreement constitutes the entire agreement and supersedes all other prior and contemporaneous agreements and undertakings, both written and oral, between the parties hereto with regard to the subject matter hereof.
9.3THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS.
9.4This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. The parties agree that this Agreement will be considered signed when the signature of a party is delivered by facsimile transmission. Such facsimile transmission shall be treated in all respects as having the same effect as an original signature.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date hereof.
CAPSTEAD MORTGAGE CORPORATION
By: /s/ Phillip A. Reinsch
Name: Phillip A. Reinsch 10/25/2019
Title: President and CEO
SAN BLAS SECURITIES LLC (doing business as Brinson Patrick, a division of San Blas Securities LLC)
By: /s/ Daniel Padilla
Name: Daniel Padilla 10/23/19
Title: CEO
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SCHEDULE 1.1(f)
List of Significant Subsidiaries
None.
Exhibit 31.1
CAPSTEAD MORTGAGE CORPORATION
Certification Pursuant to Section 302(a)
of the Sarbanes-Oxley Act of 2002
I, Phillip A. Reinsch, certify that:
1. |
I have reviewed this Quarterly Report on Form 10-Q of Capstead Mortgage Corporation; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and |
|
d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
|
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: October 28, 2019 |
By: |
/s/ PHILLIP A. REINSCH |
|
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Phillip A. Reinsch |
|
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President and Chief Executive Officer |
|
|
|
EXHIBIT 31.2
CAPSTEAD MORTGAGE CORPORATION
CERTIFICATION PURSUANT TO SECTION 302(a)
OF THE SARBANES-OXLEY ACT OF 2002
I, Lance J. Phillips, certify that:
1. |
I have reviewed this Quarterly Report on Form 10-Q of Capstead Mortgage Corporation; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: October 28, 2019 |
By: |
/s/ LANCE J. PHILLIPS |
|
|
Lance J. Phillips |
|
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Senior Vice President, Chief |
|
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Financial Officer and Secretary |
EXHIBIT 32.1
CAPSTEAD MORTGAGE CORPORATION
Certifications Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of Capstead Mortgage Corporation (the “Company”) for the period ended September 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Phillip A. Reinsch, President and Chief Executive Officer of the Company, certify to my knowledge and in my capacity as an officer of the Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
2. |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: October 28, 2019 |
By: |
/s/ PHILLIP A. REINSCH |
|
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Phillip A. Reinsch |
|
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President and Chief Executive Officer |
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|
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EXHIBIT 32.2
CAPSTEAD MORTGAGE CORPORATION
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Capstead Mortgage Corporation (the “Company”) for the period ended September 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lance J. Phillips, Senior Vice President, Chief Financial Officer and Secretary of the Company, certify to my knowledge and in my capacity as an officer of the Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
2. |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: October 28, 2019 |
By: |
/s/ LANCE J. PHILLIPS |
|
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Lance J. Phillips |
|
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Senior Vice President, Chief |
|
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Financial Officer and Secretary |