Capstead Sees Net Decline
Third-quarter operating income declined for Capstead Mortgage Corp. here from the second quarter this year as lower financing spreads offset the benefits of portfolio growth from acquisitions of adjustable-rate mortgage securities.
The company, which operates as a real estate investment trust, reported net income of $9.5 million, or $0.27 per diluted common share, for the quarter ended Sept. 30, compared to $14.8 million, or $0.63 per diluted common share, for the same period in 2003.
Operating income was $0.32 per common share for the third quarter of 2004, compared to $0.50 for the second quarter of 2004 and $0.65 for the third quarter of 2003.
Acquisitions of ARM securities totaled $672 million during the third quarter of 2004 and $1.4 billion year-to-date. Portfolio runoff totaled $267 million during the third quarter and $617 million year-to-date. Runoff was higher during the third quarter of 2004 reflecting persistently high mortgage prepayment rates and the increased size of the company's portfolio. Given the current relatively low mortgage interest rate environment, the company said mortgage prepayment rates are expected to remain at elevated levels during the fourth quarter.
Because the majority of the portfolio currently consists of ARM securities backed by mortgage loans with coupon interest rates that reset at least annually, Capstead is positioned to withstand the anticipated higher interest rate environment, even at lower earnings level than what the company has achieved during the last several years when short-term interest rates were declining, said Andrew F. Jacobs, president and chief executive officer.
"We are pleased with our continued success in acquiring attractively priced ARM securities. With these acquisitions, we have increased the size of the mortgage investments portfolio for five straight quarters to over $3 billion for the first time since the spring of 2002," Mr. Andrews said.
Financing spreads declined 48 basis points during the third quarter of 2004 to 1.42%, attributable to lower mortgage investment yields and higher borrowing costs. The overall yield earned on the portfolio averaged 3.00% during the third quarter, compared to an average yield of 3.10% earned during the prior quarter. Current quarter yields reflect the effects of relatively high mortgage prepayment rates, and to a lesser extent, lower yielding additions to the portfolio, the company said. These factors, according to Capstead, more than offset the benefit to yields from higher coupon interest rates on a portion of the portfolio's underlying mortgage loans that reset during the current quarter.
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