Capstead Mortgage 4th Quarter 2011 Conference Call Transcript


Greetings. Welcome to Capstead Mortgage Corporation (CMO) Fourth Quarter 2011 earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kelly Sargent, manager, Investor Relations. Thank you, Ms. Sargent. You may begin.

Kelly Sargent, Investor Relations, Capstead Mortgage

Thank you Rob. Good morning. Thank you for attending Capstead's fourth quarter 2011 earnings conference call. The fourth quarter 2011 earnings press release was issued yesterday afternoon, February 1. The press release is posted on the website at The link to this webcast is in the investor relations section of our website and an archive of the call will be available for 60 days. A telephonic replay of this call will be available through March 2. Details for the replay are included in yesterday's earnings release.

Starting off today's call is Andy Jacobs, our President and CEO. But before we get started, I want to remind you that some of today's comments could be considered forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and are based on certain assumptions and expectations of management. For a detailed list of all the risk factors associated with our business, please refer to our 2010 Annual Report on Form 10-K and our 2011 quarterly reports on Form 10-Q, which are available on our website under the investor relations section, SEC filings. The information contained in this call is current only as of today's date, February 2, 2012. The company assumes no obligation to update any statements, including any forward-looking statements made during today's call. With that, I will turn the call over to Andy.

Andy Jacobs, President & CEO of Capstead Mortgage

Well, good morning, and also I'll give my welcoming for the fourth quarter 2011 earnings call. As usual I'm joined by Robert Spears, our portfolio manager, and Phil Reinsch, our CFO, both of whom will be available for questions after my opening remarks.

For the operating results for the fourth quarter, net income totaled $42 million, or 43 cents per diluted common share, and we paid a common dividend of 43 cents on January 20, 2012. Net interest margins for the quarter increased slightly to $46 million, while our total financing spread declined one basis point to 1.46%. Yields on the company's interest-earning assets averaged 2.07%, representing a five basis point decline over the previous quarter. If you look at that decline relative to what this decline was from the second quarter to the third quarter; in the third quarter this yield declined 22 basis points, so it's a 22 in the third quarter versus a five basis point decline in the fourth. So, this smaller decline in yields reflects the smaller declines in the coupon interest rates in the mortgage loans that reset during the quarter, and this is primarily the result of higher prevailing indexes on the six-month and twelve-month LIBOR, which is the basis for coupon resets on much of our portfolio.

Yields also benefited from lower levels of mortgage prepayments during the quarter, which declined to an annualized CPR of 15.6% in the fourth quarter, from 16.9% in the previous quarter. In our previous earnings releases, we discussed how prepayment on our more seasoned securities continued to be suppressed by low housing prices and credit problems being experienced by many of these borrowers, while prepayment on newer originations remained somewhat elevated. Both of these factors continue to be correct, proved to be correct in the fourth quarter and are continuing.

Interest rates on the company's interest-bearing liabilities averaged 51 basis points for the fourth quarter, representing a four basis point decline from the previous quarter. This reflects the expiration of that $1.3 billion in the last six months of some higher rate swap agreements. Those were replaced primarily with much lower levels than what we previously had. The benefits to that, however, were a bit muted by higher borrowing rates on our repos in the fourth quarter, largely due to the European sovereign debt issues.

Regarding the portfolio, I would like to discuss what we believe is a fundamental difference between our investment portfolio and those of our peers, which is our focus on investing entirely in ARM [adjustable-rate mortgage] securities. At year end, 72% of our portfolio was invested in ARM securities backed by loans that will reset in less than 18 months, typically to a lower level in today's environment.

Looking at the portfolio as a whole, the average borrower underlying our securities has an average mortgage coupon rate of a relatively low 3.53%. Basically, you can arrive at this number if you take the weighted average coupon we disclosed on page 11 in our press release and add about 60-70 basis points for servicing fees and guarantee fees so that you get to what the homeowner rate is. As a result, most of the borrowers in our portfolio lack the ability to meaningfully lower their monthly mortgage payments even if they can overcome the other impediments that we mentioned earlier. For these reasons we expect prepays to remain largely in check in 2012.

Portfolio acquisitions during the quarter were $612 million, which offset portfolio runoff of $580 million, increasing our investment portfolio to $12.26 billion at year end. Also at year end the duration of our investment portfolio stood at 9 ¾ months, while the duration of our liabilities was six months, resulting in a duration gap of 3 ¾ months, and during the period our leverage at year end declined slightly to 8.1 times our long term investment capital. During the fourth quarter we were able to raise $42 million through our previous capital raises and we ended the quarter with total long term investment capital of $1.39 billion, and book value ticked up slightly from $12.50 to $12.52.

Read the rest of this transcript for free on