Lower Financing Spreads Hurt Capstead's 2004 Earnings

Capstead Mortgage Corporation reported net income of $8,149,000, or $0.17 per diluted common share, for the quarter ended Dec. 31, 2004, compared to $13,096,000 or $0.56 per diluted common share, for the same period in 2003.

Operating income was $0.22 per common share for the fourth quarter of 2004, compared to $0.32 for the third quarter of 2004 and $0.63 for the fourth quarter of 2003.

The Company reported net income of $41,805,000, or $1.33 per diluted common share, for the year ended Dec. 31, 2004 compared to $60,659,000, or $2.60 per diluted common share reported in 2003.

Capstead, once one of the nation's biggest mortgage servicers, now operates as a real estate investment trust earning income from investing in real estate-related assets on a leveraged basis and from other investment strategies.

These investments primarily consist of residential adjustable-rate mortgage securities issued and guaranteed by government-sponsored entities, either Fannie Mae or Freddie Mac, or by Ginnie Mae.

Capstead has also made limited investments in credit-sensitive commercial real estate-related assets, including the direct ownership of real estate.

Fourth quarter 2004 operating income declined from the third quarter of 2004 as the benefits of portfolio growth and higher investment yields were offset by higher borrowing costs. Acquisitions of ARM securities totaled $604 million during the fourth quarter, more than offsetting portfolio runoff of $264 million and contributing to an increase in average portfolio outstanding for the quarter by over $500 million to $3.2 billion. Acquisitions totaled over $2.0 billion year-to-date, surpassing runoff of $881 million and resulting in an increase in the mortgage investments portfolio of over 50% for the year.

Financing spreads (the difference between yields earned on mortgage investments and rates charged on related borrowings) declined 34 basis points during the fourth quarter of 2004 to 1.08%, as higher investment yields were more than offset by increases in borrowing rates.

The overall yield earned on the portfolio averaged 3.16% during the fourth quarter, a 16 basis point improvement over the prior quarter reflecting the benefit of higher interest rates on that portion of the portfolio's underlying loans resetting during the period.

Coupon interest rate resets are expected to continue trending higher in the aggregate, contributing to improving portfolio yields in the coming quarters. For example, if one-year interest rates remain at current levels, the average yield on the existing portfolio could increase approximately 87 basis points by the fourth quarter of 2005.

Average rates on borrowings secured by mortgage investments increased 50 basis points to 2.08% during the fourth quarter of 2004 compared to the prior quarter and are expected to increase further in 2005.

The Federal Reserve's Federal Open Market Committee has acted to increase short-term interest rates by raising the federal funds rate 25 basis points at each of its last five meetings and is expected to continue to increase rates in response to current growth expectations for the United States economy. In light of these market conditions, during 2004 the Company extended maturities for up to two years on a portion of its borrowings. By doing so the Company effectively locked in attractive financing spreads on the Company's modest position in fixed-rate securities and longer-to-reset ARM securities over the average expected fixed-rate terms of these investments. Interest rates on the rest of the Company's short-term borrowings remain largely dependent on actions by the Federal Reserve to change short-term interest rates, market expectations of future changes in short-term interest rates and the extent of changes in financial market liquidity.

Commenting on Capstead's recent investing activity and future direction, Andrew F. Jacobs, President and Chief Executive Officer, said in a company release, "We are pleased with our success during 2004 in more fully deploying existing capital, as well as new common equity capital raised this past year, into attractively priced ARM securities."

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