Capstead Mortgage Corporation (NYSE: CMO) (“Capstead” or the “Company”) today reported net income of $40,037,000 or $0.35 per diluted common share for the quarter ended September 30, 2012. This compares to net income of $43,335,000 or $0.40 per diluted common share for the quarter ended June 30, 2012. The Company paid a third quarter 2012 dividend of $0.36 per common share on October 19, 2012.
Third Quarter Earnings and Related Discussion
Capstead Mortgage Corporation, formed in 1985 and based in Dallas, Texas, is a self-managed real estate investment trust for federal income tax purposes. Capstead earns income from investing in a leveraged portfolio of residential adjustable-rate mortgage pass-through securities, referred to as ARM securities, issued and guaranteed by government-sponsored enterprises, either Fannie Mae or Freddie Mac, or by an agency of the federal government, Ginnie Mae. For the quarter ended September 30, 2012, the Company reported net interest margins of $43,556,000 compared to $47,325,000 for the quarter ended June 30, 2012. Financing spreads on residential mortgage investments averaged 1.30% during the third quarter of 2012, a decline of 20 basis points from financing spreads earned during the second quarter of 2012. Financing spreads on residential mortgage investments is a non-GAAP financial measure based solely on yields on the Company’s residential mortgage investments, net of borrowing rates on repurchase arrangements and similar borrowings, adjusted for currently-paying interest rate swap agreements held for hedging purposes – see page 10 for further information.
Yields on Capstead’s residential mortgage investments averaged 1.86% during the third quarter of 2012, a decrease of 18 basis points from yields reported for the second quarter of 2012. Yields were negatively impacted primarily by higher investment premium amortization resulting from higher levels of mortgage prepayments. Yields also reflect declines in weighted average coupons on the Company’s holdings of currently resetting ARM securities in large part because of recent declines in underlying indices, even as an increasing number of mortgage loans underlying these securities approach fully-indexed levels. Mortgage prepayments expressed as a constant prepayment rate, or CPR, averaged 18.7% during the third quarter of 2012, compared to a CPR of 15.9% during the second quarter of 2012. The Company acquired $1.20 billion (principal amount) of agency-guaranteed ARM securities during the third quarter, most of which were longer-to-reset ARM securities, contributing to a $514 million increase in the portfolio to $14.31 billion at quarter-end.