Company Quick10K Filing
Capstead Mortgage
Price7.64 EPS-1
Shares95 P/E-11
MCap723 P/FCF6
Net Debt-68 EBIT132
TEV655 TEV/EBIT5
TTM 2019-09-30, in MM, except price, ratios
10-K 2020-12-31 Filed 2021-02-19
10-Q 2020-09-30 Filed 2020-11-03
10-Q 2020-06-30 Filed 2020-08-04
10-Q 2020-03-31 Filed 2020-05-05
10-K 2019-12-31 Filed 2020-02-21
10-Q 2019-09-30 Filed 2019-10-28
10-Q 2019-06-30 Filed 2019-07-26
10-Q 2019-03-31 Filed 2019-05-01
10-K 2018-12-31 Filed 2019-02-22
10-Q 2018-09-30 Filed 2018-10-30
10-Q 2018-06-30 Filed 2018-07-30
10-Q 2018-03-31 Filed 2018-04-30
10-K 2017-12-31 Filed 2018-02-20
10-Q 2017-09-30 Filed 2017-11-03
10-Q 2017-06-30 Filed 2017-08-04
10-Q 2017-03-31 Filed 2017-05-01
10-K 2016-12-31 Filed 2017-02-24
10-Q 2016-09-30 Filed 2016-11-04
10-Q 2016-06-30 Filed 2016-08-08
10-Q 2016-03-31 Filed 2016-05-06
10-K 2015-12-31 Filed 2016-02-26
10-Q 2015-09-30 Filed 2015-11-06
10-Q 2015-06-30 Filed 2015-08-07
10-Q 2015-03-31 Filed 2015-05-08
10-K 2014-12-31 Filed 2015-02-27
10-Q 2014-09-30 Filed 2014-11-05
10-Q 2014-06-30 Filed 2014-08-05
10-Q 2014-03-31 Filed 2014-05-09
10-K 2013-12-31 Filed 2014-02-28
10-Q 2013-09-30 Filed 2013-11-01
10-Q 2013-06-30 Filed 2013-08-05
10-K 2012-12-31 Filed 2013-02-25
10-Q 2012-09-30 Filed 2012-11-02
10-Q 2012-06-30 Filed 2012-08-03
10-Q 2012-03-31 Filed 2012-05-09
10-K 2011-12-31 Filed 2012-02-24
10-Q 2011-09-30 Filed 2011-11-04
10-Q 2011-06-30 Filed 2011-08-01
10-Q 2011-03-31 Filed 2011-05-06
10-K 2010-12-31 Filed 2011-03-01
10-Q 2010-09-30 Filed 2010-11-05
10-Q 2010-06-30 Filed 2010-08-03
10-Q 2010-03-31 Filed 2010-05-04
10-K 2009-12-31 Filed 2010-02-26
8-K 2021-01-27 Earnings, Exhibits
8-K 2021-01-12 Enter Agreement, Exhibits
8-K 2021-01-08 Exhibits
8-K 2020-11-09
8-K 2020-10-28
8-K 2020-08-18
8-K 2020-08-07
8-K 2020-07-29
8-K 2020-05-18
8-K 2020-05-12
8-K 2020-04-29
8-K 2020-03-18
8-K 2020-01-29
8-K 2020-01-02
8-K 2019-11-12
8-K 2019-10-23
8-K 2019-07-29
8-K 2019-07-26
8-K 2019-07-24
8-K 2019-05-15
8-K 2019-05-08
8-K 2019-04-24
8-K 2019-01-30
8-K 2019-01-03
8-K 2018-11-13
8-K 2018-10-24
8-K 2018-08-22
8-K 2018-07-25
8-K 2018-05-16
8-K 2018-05-08
8-K 2018-04-25
8-K 2018-02-07
8-K 2018-01-31
8-K 2018-01-03

CMO 10K Annual Report

Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mining Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosure About Market Risks
Item 8. Financial Statements and Supplementary Data
Note 1 - Business
Note 2 - Accounting Policies
Note 3 - Net Income (Loss) per Common Share
Note 4 - Residential Mortgage Investments
Note 5 - Secured Borrowings
Note 6 - Use of Derivatives, Offsetting Disclosures and Changes in Other Comprehensive Income By Component
Note 7 - Unsecured Borrowings
Note 8 - Fair Values of Financial Instruments
Note 9 - Income Taxes
Note 10 - Stockholders' Equity
Note 11 - Equity Incentive Plan
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers, and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Part IV
Item 15. Exhibits and Financial Statement Schedules
EX-23 cmo-ex23_10.htm
EX-31.1 cmo-ex311_6.htm
EX-31.2 cmo-ex312_7.htm
EX-32.1 cmo-ex321_11.htm
EX-32.2 cmo-ex322_8.htm

Capstead Mortgage Earnings 2020-12-31

Balance SheetIncome StatementCash Flow

cmo-10k_20201231.htm
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2020

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 incorporation or organization)

 

(I.R.S. Employer Identification No.)

8401 North Central Expressway, Suite 800, Dallas, TX

 

75225-4404

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code:  (214) 874-2323

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 if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES  NO 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  YES  NO 

Indicate by check mark whether the Registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or other 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 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, 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).  YES  NO 

At June 30, 2020 the aggregate market value of the common stock held by nonaffiliates, based on the closing sale price of those shares on the New York Stock Exchange reported on June 30, 2020, was $518,208,138

Number of shares of Common Stock outstanding at February 19, 2021:   96,782,617

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrant’s definitive Proxy Statement, to be issued in connection with the 2021 Annual Meeting of Stockholders of the Registrant, are incorporated by reference into Part III.

 

 

 

 

 


 

CAPSTEAD MORTGAGE CORPORATION

2020 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

 

PART I

 

 

 

Page

 

 

 

 

ITEM 1.

Business

 

2

 

 

 

 

ITEM 1A.

Risk Factors

 

5

 

 

 

 

ITEM 1B.

Unresolved Staff Comments

 

12

 

 

 

 

ITEM 2.

Properties

 

12

 

 

 

 

ITEM 3.

Legal Proceedings

 

12

 

 

 

 

ITEM 4.

Mining Safety Disclosures

 

12

 

PART II

 

 

 

 

ITEM 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

13

 

 

 

 

ITEM 6.

Selected Financial Data

 

14

 

 

 

 

ITEM 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

15

 

 

 

 

ITEM 7A.

Quantitative and Qualitative Disclosures About Market Risks

 

32

 

 

 

 

ITEM 8.

Financial Statements and Supplementary Data

 

32

 

 

 

 

ITEM 9.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

 

58

 

 

 

 

ITEM 9A.

Controls and Procedures

 

58

 

 

 

 

ITEM 9B.

Other Information

 

60

 

PART III

 

 

 

 

ITEM 10

Directors, Executive Officers, and Corporate Governance

 

60

 

 

 

 

ITEM 11.

Executive Compensation

 

60

 

 

 

 

ITEM 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

60

 

 

 

 

ITEM 13.

Certain Relationships and Related Transactions, and Director Independence

 

60

 

 

 

 

ITEM 14.

Principal Accountant Fees and Services

 

60

 

PART IV

 

 

 

 

ITEM 15.

Exhibits and Financial Statement Schedules

 

61

 

 

 

SIGNATURES

 

63

 

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PART I

ITEM 1.

BUSINESS

Capstead Mortgage Corporation operates as a self-managed real estate investment trust (“REIT”) for federal income tax purposes 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 was incorporated in the state of Maryland in 1985 and its common and Series E preferred stock are listed on the New York Stock Exchange under the symbols “CMO” and “CMOPRE,” respectively.

Capstead’s investment strategy involves managing and earning a financing spread on a leveraged portfolio of residential mortgage pass-through securities currently consisting primarily of adjustable-rate mortgage (“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.  Together, these securities are referred to as “Agency Securities,” and are considered to have limited, if any, credit risk.  This strategy differentiates Capstead from its peers because ARM loans underlying its investment portfolio can reset to more current interest rates within a relatively short period of time.  This positions the Company to benefit from a potential recovery in financing spreads that typically contract during periods of rising interest rates and can result in smaller fluctuations in portfolio values compared to portfolios containing a significant amount of fixed-rate mortgage securities.  

For further discussion of the Company’s business and financial condition, see Item 7 of this report, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is incorporated herein by reference.

Competition

As a residential mortgage REIT that focuses primarily on investing in ARM Agency Securities, Capstead competes for the acquisition of suitable investments with other mortgage REITs, commercial banks, insurance companies, and institutional investors such as private equity funds, mutual funds, pension funds and sovereign wealth funds.  Many of these entities have lower yield requirements as well as greater financial resources and access to capital than the Company.  Increased competition for the acquisition of Agency Securities can result in higher pricing levels for such assets.  In addition, the availability of ARM Agency Securities for purchase in the secondary markets varies substantially with changes in market conditions and ARM origination levels, which have not kept pace with related runoff in recent years.  Although higher pricing levels generally correspond to a higher book value per common share for the Company, higher prices paid for acquisitions can adversely affect portfolio yields and future profitability.

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Regulation and Related Matters

Operating as an internally-managed REIT investing in Agency Securities subjects Capstead to various federal tax and regulatory requirements.  For further discussion, see Item 1A of this report, “Risk Factors,” under the captions “Risks Related to Our Status as a REIT and Other Tax Matters” and “Risk Factors Related to Our Corporate Structure,” which is incorporated herein by reference.

Human Capital Resources

As of December 31, 2020, Capstead had 15 employees. The Company believes its employees are among its most important resources and are critical to its continued success. Employees are offered great flexibility to meet personal and family needs. The Company endeavors to maintain a workplace that is free from discrimination or harassment on the basis of color, race, sex, national origin, ethnicity, religion, age, disability, sexual orientation, gender identification or any other status protected by applicable law. The Company’s basis for hiring, development, training, compensation and advancement at the Company is qualifications, skills, performance and experience. The Company’s compensation program is designed to attract and retain talent and the Company continually assesses and strives to enhance employee satisfaction and engagement. The Company’s employees, many of whom have a long tenure with the Company, are offered regular opportunities to participate in professional development, continuing education, and tuition reimbursement programs.

Website Access to Company Reports and Other Company Information

Capstead makes available on its website at www.capstead.com, free of charge, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, investor presentations and press releases, including any amendments to such documents as soon as reasonably practicable after such materials are electronically filed or furnished to the Securities and Exchange Commission (“SEC”) or otherwise publicly released.

The Company makes available on its website charters for the committees of its Board of Directors, its Board of Directors’ Guidelines, its Amended and Restated Bylaws, its Code of Business Conduct and Ethics, its Financial Code of Professional Conduct and other information, including amendments to such documents and waivers, if any, to the codes.  Such information will also be furnished, free of charge, upon written request to Capstead Mortgage Corporation, Attention: Stockholder Relations, 8401 North Central Expressway, Suite 800, Dallas, Texas 75225-4404.

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Cautionary 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;

our ability to maintain REIT status for U.S. federal income tax purposes;

changes in legislation or regulation affecting exemptions for mortgage REITs from regulation under the Investment Company Act of 1940;

negative impacts from the ongoing novel coronavirus (“COVID-19”) pandemic including on the U.S. or global economy or on our liquidity, financial condition and earnings;

other changes in legislation or regulation affecting the mortgage and banking industries; and

changes in general economic conditions, increases in costs and certain other factors.

In light of the ongoing COVID-19 pandemic, several of the risks and uncertainties described above are more likely to occur and/or the potential impact therefrom is harder to estimate. In particular, the impact of COVID-19 on fluctuations in interest rates and levels of mortgage prepayments, liquidity of secondary markets and credit markets, including the availability of financing at reasonable levels and terms to support investing on a leveraged basis, and changes in general economic conditions, are especially unclear at this time. Given this unprecedented uncertainty, actual results could differ materially from those anticipated or implied in the forward-looking statements included herein. 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.

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ITEM 1A.

RISK FACTORS

An investment in securities issued by us involves various risks. You should carefully consider the following risk factors in conjunction with the other information contained in this document before purchasing our securities.  The risks discussed herein can adversely affect our business, liquidity, earnings, financial condition and future prospects, causing the market price of our securities to decline, which could cause you to lose all or part of an investment in our stock.  The risk factors described below are not the only risks that may affect us. Additional risks and uncertainties not presently known to us also may adversely affect our business, liquidity, earnings and financial condition.

Risks Related to Our Business

Changes in interest rates, whether increases or decreases, may adversely affect our liquidity, financial condition and earnings.  Our earnings depend primarily on the difference between the interest received on our residential mortgage investments and the interest paid on our secured borrowings, adjusted for the effects of derivative financial instruments held for hedging purposes.  Our mortgage investments primarily consist of ARM Agency Securities that generally earn interest at longer-term rates than our borrowings.  Only a portion of coupon interest rates on the ARM loans underlying our securities reset each month and the terms of these ARM loans generally limit the amount of any increases during any single interest rate adjustment period and over the life of a loan. Interest rates on our secured borrowings, which are heavily influenced by federal reserve actions to raise or lower the Fed Funds Rate, that are not effectively fixed through the use of interest rate swap agreements or similar derivatives can rise to levels that may exceed yields on our investments, including in a rising short-term interest rate environment or in an inverted yield curve environment.  This can contribute to lower, or in more extreme circumstances, negative financing spreads and, therefore, adversely affect earnings. During periods of relatively low short term interest rates, declines in the indices used to determine coupon interest rate resets for ARM loans may adversely affect yields on our ARM securities as the underlying ARM loans reset at lower rates. If declines in these indices exceed declines in our borrowing rates, earnings would be adversely affected.

An increase in prepayments may adversely affect our liquidity, financial condition and earnings.  Prepayment expectations are an essential part of pricing mortgage investments in the marketplace and the speed of prepayments can vary widely from month to month and across individual investments; however prolonged periods of high mortgage prepayments can significantly reduce the expected life of our portfolio.  Therefore, actual yields we realize can be lower due to faster amortization of investment premiums, which can adversely affect earnings.  High levels of mortgage prepayments can also lead to larger than anticipated demands on our liquidity from our lending counterparties.  Additionally, periods of high prepayments can adversely affect pricing for most mortgage investments and, as a result, book value per common share can be adversely affected due to declines in the fair value of our remaining portfolio.

The lack of availability of suitable investments at attractive pricing may adversely affect our earnings.  The pricing of investments is determined by a number of factors including interest rate levels and expectations, market liquidity conditions, and competition among investors for these investments, many of whom have greater financial resources and lower return requirements than us.  We cannot assure investors that we will be able to acquire suitable investments at attractive pricing and in a timely manner to replace portfolio runoff as it occurs or to deploy new capital as it is raised.  Neither can we assure investors that we will maintain the current composition of our investments, consisting primarily of ARM Agency Securities.

Monetary policy actions by the Federal Reserve could adversely affect our financial condition and earnings.  The Federal Open Market Committee (“FOMC”) assesses realized and expected economic conditions relative to its objectives in determining the timing and size of future adjustments to the target range of the Federal Funds Rate, to which our secured borrowings rates are closely related. We cannot

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predict with certainty when and to what extent the FOMC may adjust the Federal Funds Rate. These actions could adversely affect our earnings and book value per common share.

Our strategy involves significant leverage, which could adversely affect our liquidity, financial condition and earnings.  We expect our leverage to vary with market conditions and our assessment of the risk and return on our investments. This leverage creates significant risks to our liquidity, financial condition and earnings.

Periods of illiquidity in the mortgage markets may reduce amounts available under secured borrowing arrangements due to declines in the perceived value of related collateral and may reduce the number of counterparties willing to lend to us and/or the amounts individual counterparties are willing to lend, both of which could adversely impact our liquidity, financial condition and earnings.  We finance our portfolio by pledging individual securities as collateral under uncommitted secured borrowing arrangements.  If the perceived market value of the pledged collateral as determined by our lenders declines, we may be subject to margin calls wherein the lender requires us to pledge additional collateral to reestablish the agreed-upon margin percentage.  Because market illiquidity tends to put downward pressure on asset prices, we may be presented with substantial margin calls during such periods.  If we are unable or unwilling to pledge additional collateral, lenders can liquidate the collateral or seek other remedies, potentially under adverse market conditions, resulting in losses.  At such times we may determine that it is prudent to sell assets to improve our ability to pledge sufficient collateral to support our remaining secured borrowings, which could result in losses.  In addition, lower pricing levels for remaining investments will lead to declines in book value per common share.

Our ability to achieve our investment objectives depends on our ability to re-establish or roll maturing secured borrowings on a continuous basis and none of our counterparties are obligated to enter into new borrowing transactions at the conclusion of existing transactions.  During periods of market illiquidity or due to perceived credit deterioration of the collateral pledged or of us, a lender may require that less favorable asset pricing procedures be employed, margin requirements be increased and/or may choose to limit or completely curtail lending to us.  If a counterparty chooses not to roll a maturing borrowing, we must pay off the borrowing, generally with cash available from another secured borrowing arrangement entered into with another counterparty.  If we determine that we do not have sufficient borrowing capacity with our remaining counterparties, we could be forced to sell assets under potentially adverse market conditions, which could result in losses.  An industry-wide reduction in the availability of secured borrowings could adversely affect pricing levels for mortgage investments leading to declines in our liquidity and book value per common share.  Under these conditions, we may determine that it is prudent to sell assets to improve our ability to pledge sufficient collateral to support our remaining borrowings, which could result in losses.  In addition, lower pricing levels for remaining investments will lead to declines in book value per common share.

The COVID-19 pandemic and its economic impact may adversely affect our liquidity, financial condition and earnings. A novel coronavirus (“COVID-19”) pandemic continues to spread throughout the United States and the world. The pandemic has caused significant disruptions and pressure in financial markets. The Federal Reserve has taken a number of actions to support the financial system, including buying agency-guaranteed residential and commercial mortgage securities and reducing the Fed Funds rate by 150 basis points to zero to 25 basis points. These actions are broadly supportive to the mortgage markets, providing stability and lowering funding costs. However, there is no guarantee that the Federal Reserve’s attempts to mitigate the economic impact of COVID-19 will be successful in avoiding an adverse impact on our liquidity, financial condition and earnings.

The significant decrease in economic activity caused by the pandemic has had and may continue to have a significant adverse effect on the ability of mortgage borrowers to meet their obligations. These difficulties, along with the recent declines in interest rates, have led to higher rates of default, forbearance and refinancing resulting in higher prepayments, which have had an adverse impact on yields and could negatively affect the value of our assets. If these conditions continue or become worse, the negative effects on our liquidity, financial condition and earnings may become more severe.

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Legislative and additional regulatory actions could adversely affect the availability and/or terms and conditions of secured borrowings and consequently, our liquidity, financial condition and earnings.  The financial system is subject to changes in regulatory capital requirements and other leverage constraints. Any such changes may have a significant impact on the financial markets in general and on our strategy of holding a leveraged portfolio of mortgage investments.  As a result, the availability and/or terms and conditions of secured borrowings could be adversely affected which could adversely affect our liquidity, earnings and book value per common share.  

The replacement of LIBOR with an alternative reference rate may adversely affect our liquidity, financial condition and earnings. The Alternative Reference Rates Committee (“ARRC”) selected the Secured Overnight Financing Rate (“SOFR”), an index calculated by reference to short-term repurchase agreements backed by U.S. Treasury securities, as its preferred replacement for LIBOR. SOFR is an observed overnight rate, which differs from LIBOR, which is an estimated forward-looking rate and relies, to some degree, on the expert judgement of submitting panel members. Since SOFR is a secured rate backed by government securities, it does not take into account bank credit risk (as LIBOR does). ARRC has proposed a spread adjustment methodology to reflect and adjust for the historical differences between SOFR and LIBOR in order to make the spread-adjusted rates comparable in a fair and reasonable way. Most of our ARM portfolio, interest rate swap agreements and our unsecured borrowings use LIBOR as a benchmark interest rate and may need to transition to an alternative rate, likely based on SOFR. The transition from LIBOR to an alternative could result in financial market disruptions or significant changes in benchmark rates, adversely affecting our liquidity, financial condition and earnings.

We are highly dependent on information and communication systems. System failures, security breaches or cyber-attacks of networks or systems could significantly disrupt our business and adversely affect our financial condition and earnings.  Our business is highly dependent on communications and information systems. Any failure or interruption of our systems or cyber-attacks or security breaches of our networks or systems could cause delays or other problems in our securities trading activities, which could adversely affect our business, financial condition and earnings. In addition, we also face the risk of operational failure, termination or capacity constraints of any of the third parties with which we do business or that facilitate our business activities, including clearing agents or other financial intermediaries we use to facilitate our securities transactions, if their respective systems experience failure, interruption, cyber-attacks, or security breaches. Computer malware, viruses, and computer hacking and phishing attacks have become more prevalent in the financial services industry and may occur on our systems in the future. We rely heavily on our financial, accounting and other data processing systems. Although we have not detected a breach to date, financial services institutions have reported breaches of their systems, some of which have been significant. Even with all reasonable security efforts, not every breach can be prevented or even detected. It is possible that we have experienced an undetected breach, and it is likely that other financial institutions have experienced more breaches than have been detected and reported. There is no assurance that we, or the third parties that facilitate our business activities, have not or will not experience a breach. It is difficult to determine what, if any, negative impact may directly result from any specific interruption or cyber-attacks or security breaches of our networks or systems (or the networks or systems of third parties that facilitate our business activities) or any failure to maintain performance, reliability and security of our technical infrastructure. However, such computer malware, viruses, computer hacking and phishing attacks could have a materially adverse effect on our business, financial condition and earnings.

Our use of borrowings under repurchase arrangements may expose us to losses if a lending counterparty seeks bankruptcy protection, or otherwise defaults on its obligation to deliver pledged collateral back to us.  Repurchase arrangements involve the sale and transfer of pledged collateral to the lending counterparty and a simultaneous agreement to repurchase the transferred assets at a future date.  This may make it difficult for us to recover our pledged assets if a lender files for bankruptcy or otherwise fails to deliver pledged collateral back to us and subject us to losses to the extent of any margin amounts (pledged assets in excess of amounts borrowed) held by the lending counterparty.

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We invest in derivative financial instruments such as interest rate swap agreements to mitigate or hedge our interest rate risk, which may adversely affect our liquidity, financial condition and earnings.  We invest in such instruments with the goal of partially offsetting changes in value of our investments as a result of changes in interest rates and achieving more stable borrowing costs over an extended period.  However, these activities may not have the desired beneficial impact on our liquidity, financial condition or earnings.  In addition, counterparties could fail to honor their commitments under the terms of the derivatives or have their credit quality downgraded impairing the value of the derivatives.  In the event of any defaults by counterparties, the Company may have difficulty recovering its cash collateral receivable from its counterparties and may not receive payments provided for under the terms of the derivatives and as a result, the Company may incur losses.

We are dependent on our executives and employees and the loss of one or more of our executive officers could harm our business and prospects.  We are dependent on the efforts of our key officers and employees, most of whom have significant experience in the mortgage industry.  We have not acquired key man life insurance policies on any of these individuals.  The loss of any of their services could have an adverse effect on our operations.

Our securities are recorded at fair value and quoted prices or observable inputs may not be readily available to determine the fair value.  We measure fair value in accordance with generally accepted accounting standards. Ultimately, the value of any individual security depends to a large extent on economic and other conditions beyond our control. Our determination of the fair value of our investments includes inputs provided by third-party dealers and pricing services, which may be difficult to obtain or be unreliable. Fair value is an estimate based on good faith judgement of the price at which an investment can be sold. If we were to liquidate a particular investment, the realized value may be more than or less than the amount at which such is valued.

Any future offerings of preferred stock or debt securities, which would rank senior to our common stock upon liquidation, and future offerings of equity securities, which could dilute our existing stockholders and may be senior to our common stock for the purposes of dividend and liquidation distributions, may adversely affect the price of our common stock.  We may raise capital through the issuance of debt or equity securities. Upon liquidation, holders of our debt securities, preferred stock and lenders with respect to our other borrowings will be entitled to our available assets prior to the holders of our common stock. Our preferred stock has a preference on liquidating distributions and dividend payments that could limit our ability to pay dividends to the holders of our common stock. Sales of substantial amounts of our common stock could have a material adverse effect on the price of our common stock. Because our decision to issue debt or equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of any future offerings.

Risks Related to Our Status as a REIT and Other Tax Matters

We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our securities.  Federal income tax laws or the administrative interpretations of those laws can change at any time.  Any such changes in laws or interpretations thereof may apply retroactively and could adversely affect us or our stockholders.  We cannot predict any impact on the value of our securities from adverse legislative or regulatory tax changes.

If we do not qualify as a REIT, we will be subject to tax as a corporation and face substantial tax liability.  We have elected to be taxed as a REIT for federal income tax purposes and intend to continue to so qualify.  Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code (“IRC”) provisions for which only a limited number of judicial or administrative interpretations exist.  Even a technical or inadvertent mistake could jeopardize our REIT status.  Furthermore, new tax legislation, administrative guidance or court decisions, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to qualify as a REIT.

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If we fail to qualify as a REIT in any tax year, then:

 

we would be taxed as a regular domestic corporation, which, among other things, means that we would be unable to deduct dividends paid to our stockholders in computing taxable income and would be subject to federal income tax on our taxable income at corporate rates, reducing cash available for distribution;

 

we would not be required to make income distributions; and

 

unless we were entitled to relief under applicable statutory provisions, we would be disqualified from treatment as a REIT for the subsequent four taxable years.

Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our earnings.  We may be subject to certain federal, state and local taxes on our income and assets.  For example, we:

 

will be required to pay tax on any undistributed REIT taxable income; and

 

may operate taxable REIT subsidiaries subject to tax on any taxable income earned.

Complying with REIT requirements may limit our ability to hedge effectively.  The REIT provisions of the Code may limit our ability to hedge our investments and borrowings by limiting our income in each year from unqualified hedges, together with any other income not generated from qualified real estate assets, to no more than 25% of gross income.  In addition, we must limit our aggregate income from nonqualified hedging transactions, from providing certain services, and from other non-qualifying sources to not more than 5% of annual gross income. As a result, we may have to limit our use of advantageous hedging techniques.  This could result in greater risks associated with changes in interest rates than we would otherwise incur.  If we were to fail to satisfy the REIT gross income tests we could lose our REIT status for federal income tax purposes unless the failure was due to reasonable cause and not due to willful neglect, in which case we may have to pay a penalty tax.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities.  To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts that we distribute to our stockholders, and the ownership of our stock.  We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution.  As a result, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.

Complying with REIT requirements may force us to liquidate otherwise attractive investments.  To qualify as a REIT, we must also ensure that at the end of each calendar quarter at least 75% of the value of our assets consists of cash, cash items, United States government securities and qualified REIT real estate assets.  The remainder of our investments in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer.  In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 20% of the value of our total securities can be represented by securities of one or more taxable REIT subsidiaries.  If we fail to comply with these requirements at the end of any calendar quarter, we must correct such failure within 30 days after the end of the calendar quarter to avoid losing our REIT status and suffering adverse tax consequences.  As a result, we may be required to liquidate otherwise attractive investments.

Complying with REIT requirements may force us to borrow to make distributions to our stockholders.  As a REIT, we must distribute at least 90% of our annual taxable income (subject to certain adjustments) to our stockholders.  To the extent that we satisfy the distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed taxable income.  In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under the federal tax laws.  From time to time, we may generate taxable income greater than our net income for financial

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reporting purposes, our ability or the ability of our subsidiaries to deduct interest expense from borrowings may be limited under Section 163(j) of the Code or our taxable income may be greater than our cash flow available for distribution to stockholders.  If we do not have other funds available in these situations, we could be required to borrow funds, sell investments at disadvantageous prices or find another alternative source of funds to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the distribution requirement and to avoid corporate income tax or the 4% excise tax in a particular year.  These alternatives could increase our costs and reduce our long-term investment capital.

Distributions payable by us do not qualify for the reduced tax rates applicable to “qualified dividends.”  The maximum tax rate applicable to income from non-REIT corporate qualified dividends payable to domestic stockholders that are individuals, trusts or estates is currently 20%.  Distributions of ordinary income payable by REITs, however, generally are not eligible for the reduced rates.  For taxable years beginning before January 1, 2026, non-corporate taxpayers may deduct up to 20% of certain pass-through business income, including “qualified REIT dividends” (generally, dividends received by a REIT stockholder that are not designated as returns of capital, capital gain or qualified dividend income), subject to certain limitations, resulting in an effective maximum U.S. federal income tax rate of 29.6% on such income. The more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts or estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of REIT stocks.

We may in the future choose to pay dividends in our own stock, in which case stockholders may be required to pay tax in excess of the cash they receive.  A publicly traded REIT generally may treat a distribution of its own stock as fulfilling its REIT distribution requirement if each stockholder is permitted to elect to receive its distribution in either cash or stock of the REIT (even where there is a limitation on the percentage of the distribution payable in cash, provided that the limitation is at least 20%), subject to the satisfaction of certain guidelines. If the requirements are met, for U.S. federal income tax purposes, the amount of the distribution paid in stock generally will be a taxable distribution in an amount equal to the amount of cash that could have been received instead of stock. Taxable stockholders receiving such dividends would be required to include the full amount of the dividend as ordinary income (or as long-term capital gain to the extent such distribution is properly designated as a capital gain dividend) to the extent of our current and accumulated earnings and profits for federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends in excess of any cash received.  Furthermore, with respect to Non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including all or a portion of such dividend that is payable in stock. It is uncertain whether and to what extent we will pay dividends in cash and our stock.

Our ownership of and relationship with our TRS will be limited, and a failure to comply with the limits would jeopardize our REIT status and may result in the application of a 100% excise tax.  A REIT may own up to 100% of the stock of one or more TRSs. A TRS may earn income that would not be qualifying income if earned directly by the parent REIT. Overall, no more than 20% of the value of a REIT's total assets may consist of stock or securities of one or more TRSs. A domestic TRS will pay federal, state and local income tax at regular corporate rates on any income that it earns. In addition, the TRS rules limit the deductibility of interest paid or accrued by TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation, and in certain circumstances, the ability of our TRSs to deduct net business interest expenses generally may be limited. The rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm's-length basis.

Risk Factors Related to Our Corporate Structure

There are no assurances of our ability to pay dividends in the future.  We intend to continue paying quarterly dividends and to make distributions to our stockholders in amounts such that all or substantially all of our taxable income in each year, subject to certain adjustments, is distributed.  This, along with other factors, should enable us to qualify for the tax benefits accorded to a REIT under the IRC. However,

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our ability to pay dividends may be adversely affected by the risk factors described in this filing.  All distributions will be made at the discretion of our Board of Directors and will depend upon our earnings, financial condition, maintenance of our REIT status and such other factors as the board may deem relevant from time to time.  There are no assurances of our ability to pay dividends in the future.

Failure to maintain an exemption from the Investment Company Act of 1940 would adversely affect our results of operations.  The Investment Company Act of 1940 (the “40 Act”) exempts from regulation as an investment company any entity that is primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on, and interests in, real estate. For over 30 years, the staff of the SEC has interpreted the provisions of the 40 Act to require, among other things, a REIT to maintain at least 55% of its assets directly in qualifying real estate interests and at least 80% of its assets in real estate-related assets in order to be exempt from regulation as an investment company.  Critical to our exemption from regulation as an investment company is the long-standing SEC staff interpretation that so-called whole loan mortgage securities, in which an investor holds all issued certificates with respect to an underlying pool of mortgage loans, constitute qualifying real estate interests for purposes of the staff’s 55% qualifying real estate interest requirement.  Conversely, so-called partial pool mortgage securities presently do not qualify for purposes of meeting the 55% requirement, although they are considered by the staff to be real estate-related assets for purposes of meeting the staff’s 80% real estate-related asset requirement.

If the SEC or its staff adopts contrary interpretations of the 40 Act and we and other similar REITs become subject to regulation as investment companies, the industry’s use of leverage would be substantially reduced.  Absent a restructuring of our business operations to avoid such regulation, this could require the sale of most of our investments under potentially adverse market conditions resulting in losses and significantly reduce future net interest margins and earnings.

Pursuant to our charter, our Board of Directors has the ability to limit ownership of our capital stock, to the extent necessary to preserve our REIT qualification.  For the purpose of preserving our REIT qualification, our charter gives the board the ability to repurchase outstanding shares of capital stock from existing stockholders if the board determines in good faith that the concentration of ownership by such individuals, directly or indirectly, would cause us to fail to qualify as a REIT. Constructive ownership rules are complex and may cause the outstanding stock owned by a group of related individuals or entities to be deemed constructively owned by one individual or entity.  As a result, the acquisition of outstanding stock by an individual or entity could cause that individual or entity to own constructively a greater concentration of our outstanding stock than is acceptable for REIT purposes, thereby giving the board the ability to repurchase any excess shares.

Because provisions contained in Maryland law and our charter may have an anti-takeover effect, investors may be prevented from receiving a “control premium” for their shares.  Provisions contained in our charter and Maryland general corporation law can delay, defer or prevent a takeover attempt, which may prevent stockholders from receiving a “control premium” for their shares.  For example, these provisions may defer or prevent tender offers for our common stock or purchases of large blocks of our common stock, thereby limiting the opportunities for our stockholders to receive a premium over then-prevailing market prices.  These provisions include the following:

 

Repurchase rights – Repurchase rights granted to our board in our charter limit related investors, including, among other things, any voting group, from owning common stock if the concentration owned would jeopardize our REIT status.

 

Classification of preferred stock – Our charter authorizes the board to issue preferred stock and establish the preferences and rights of any class of preferred stock issued.  These actions can be taken without soliciting stockholder approval and could have the effect of delaying or preventing someone from taking control of us.

 

Statutory provisions – We are subject to provisions of Maryland statutory law that restrict business combinations with interested stockholders and restrict voting rights of certain shares

11


 

 

acquired in control share acquisitions.  The board has not taken any action to exempt us from these provisions.

 

Other Maryland law elections – A provision of Maryland law allows our board, without stockholder approval, to implement various provisions that may deter stockholder efforts to change the composition of our Board of Directors by, among other things, implementing a staggered board, providing that directors are removable only for cause, requiring that a majority of the outstanding shares request a special meeting of stockholders, and providing directors the exclusive right to fill vacancies on the board. Our board has not taken any action to limit its ability to implement any of these provisions in the future, other than to provide, through an unrelated provision of Maryland law, that imposes a majority requirement for the calling of a special meeting of stockholders.

Maryland statutory law provides that an act of a director relating to or affecting an acquisition or a potential acquisition of control of a corporation may not be subject to a higher duty or greater scrutiny than is applied to any other act of a director.  Hence, directors of Maryland corporations may not be required to act in takeover situations under the same standards as apply in Delaware and certain other corporate jurisdictions.

We may change our policies without stockholder approval.  Our board and management determine all of our policies, including our investment, financing and distribution policies and may amend or revise these policies at any time without a vote of our stockholders.  Policy changes could adversely affect our financial condition, results of operations, the market price of our common and preferred stock or our ability to pay dividends or distributions.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

Capstead’s headquarters are located in Dallas, Texas in office space leased by the Company.

ITEM 3.

None.

ITEM 4.

MINING SAFETY DISCLOSURES

Not applicable.

12


 

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The New York Stock Exchange trading symbol for Capstead’s common stock is CMO. As of February 11, 2021, the Company had 910 common stockholders of record and depository companies held shares of common stock for approximately 20,426 beneficial owners.

 

Set forth below is a graph comparing the yearly percentage change in the cumulative total return on Capstead’s common stock, with the yearly percentage change in the cumulative total return on the Russell 2000 Index and the NAREIT Mortgage REIT Index for the five years ended December 31, 2020 assuming the investment of $100 on December 31, 2015 and the reinvestment of dividends.  The stock price and dividend performance reflected in the graph is not necessarily indicative of future performance.

 

 

 

Year ended December 31

 

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

Capstead Mortgage Corporation

 

$

100.00

 

 

$

128.53

 

 

$

118.28

 

 

$

96.84

 

 

$

121.93

 

 

$

99.78

 

Russell 2000 Index

 

 

100.00

 

 

 

121.31

 

 

 

139.08

 

 

 

123.76

 

 

 

155.35

 

 

 

186.36

 

NAREIT Mortgage REIT Index

 

 

100.00

 

 

 

122.85

 

 

 

147.16

 

 

 

143.45

 

 

 

174.05

 

 

 

141.38

 

 

The Company did not repurchase any shares during the fourth quarter of 2020. 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.

See Item 12 of this report, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” for information regarding securities authorized for issuance under equity compensation plans which is incorporated herein by reference.  Capstead did not issue any unregistered securities during the past three fiscal years.

13


 

ITEM 6.

SELECTED FINANCIAL DATA

Not applicable.

14


 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section of this Annual Report on Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Annual Report can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Overview

Capstead operates as a self-managed REIT earning income from investing in a leveraged portfolio of residential mortgage pass-through securities primarily consisting of relatively 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.  By investing primarily in 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 to experience smaller fluctuations in portfolio values compared to leveraged portfolios containing a significant amount of fixed-rate mortgage securities.  

Capstead reported for GAAP purposes a net loss of $130 million or $(1.56) per diluted common share in 2020, compared to a 2019 net loss of $35 million or $(0.62) per diluted common share. The Company reported core earnings of $81 million or $0.64 per diluted common share for the year ended December 31, 2020, compared to 2019 core earnings of $64 million or $0.50 per diluted common share. See “Reconciliation of GAAP and non-GAAP Financial Measures” for more information on core earnings.

The GAAP net loss in 2020 includes $160 million in losses on hedging-related derivatives primarily related to declining interest rates and $68 million in losses on the sale of $2.62 billion (basis) in ARM securities late in the first quarter. These sales, together with not fully replacing portfolio runoff during the year helped ensure the Company had sufficient flexibility to meet projected liquidity requirements while maintaining portfolio leverage at comfortable levels given disruptions experienced in the fixed income markets brought on by the COVID-19 pandemic.

Both GAAP and core earnings in 2020 were positively impacted by lower secured borrowings rates primarily due to a total of 150 basis points in reductions in the Fed Funds rate in March and favorable terms on new interest rate swap agreements entered into throughout the year. However, historically low interest rates have led to exceedingly high prepayment speeds across all mortgage products which negatively impacted both GAAP and core earnings in 2020. The Company expects prepayment speeds will remain elevated in 2021.

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 $1.01 billion at December 31, 2020, consisting of $659 million of common and $251 million of preferred stockholders’ equity together with $98 million of unsecured borrowings maturing in 2035 and 2036.

Capstead’s residential mortgage investments decreased $3.28 billion to $7.94 billion at December 31, 2020. Secured borrowings decreased $2.96 billion to $7.32 billion as a result of lower portfolio balances. Portfolio leverage (secured borrowings divided by long-term investment capital) decreased to 7.26 to one at December 31, 2020 from 8.77 to one at December 31, 2019.  Management continuously evaluates portfolio leverage levels in light of changes to market conditions.

15


 

COVID-19 Pandemic

An unprecedented, near-total shutdown of the U.S. economy beginning in March due to the COVID-19 pandemic heightened fears of extremely high credit default levels and recession, leading to de-risking occurring at all levels of the fixed income markets. Credit asset pricing came under severe pressure destabilizing fixed income markets and leading to lender margin calls, feeding additional selling as levered and even unlevered investors across the spectrum were forced to sell their most liquid positions to raise cash to meet additional margin calls and/or fund redemptions. Investors were already coming under stress due to declining Treasury rates which led to losses on derivatives held for hedging purposes and variation (valuation-based) margin calls. As the crisis deepened this additional drain on liquidity became more pronounced and included increased initial (base haircut) margin requirements for derivatives due to heightened market volatility. The result was sharply falling asset prices even as market interest rates declined. During this period of extreme volatility, the Company sold a portion of its portfolio late in March and reduced its swap positions in order to ensure it had sufficient flexibility to meet future projected liquidity requirements while maintaining portfolio leverage at comfortable levels.

Intervention by the Federal Reserve beginning in late March in the form of the buying of fixed-rate Agency Securities helped stabilize this key market sector leading to improved pricing levels for fixed-rate Agency Securities. While the Federal Reserve has not purchased ARM Agency Securities specifically, these actions contributed to improved pricing levels for mortgage assets in general and a more stable operating environment for Capstead.

The Company met all of its funding requirements during the year. At December 31, 2020, the Company’s potential liquidity was $524 million and it believes it has ample access to necessary financing through its existing lending counterparties to meet its liquidity needs. See “Utilization of Long-term Investment Capital and Potential Liquidity” for further discussion.

The Company continues to operate portions of its business continuity plan in response to the pandemic and has not experienced any operational disruption due to its small number of employees who are all able to work remotely. Management will continue to closely monitor the situation and adapt its response as necessary to avoid any operational disruptions.

Common Equity Issuances

During February 2020, Capstead issued 1.6 million shares of common stock through an at-the-market continuous offering program at an average issue price of $8.21, net of fees and other costs, for net proceeds of $12.9 million. During 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. Additional amounts of equity capital may be raised in the future under continuous offering programs or by other means, subject to market conditions, compliance with federal securities laws and blackout periods.

Book Value per Common Share

Book value per common share (total stockholder’s equity, less liquidation preferences for outstanding shares of preferred stock, divided by outstanding shares of common stock) as of December 31, 2020 was $6.76, a decrease of $1.86 or 21.6% from December 31, 2019 book value of $8.62, primarily reflecting $1.60 in derivative-related declines in value along with $0.70 of declines related to the $2.62 billion of portfolio sales late in the first quarter. These declines were partially offset by $0.41 in portfolio valuation-related increases.

All of Capstead’s residential mortgage investments portfolio and its derivatives are recorded at fair value on the Company’s balance sheet and are therefore included in the calculation of book value per share of common stock. None of the Company’s borrowings are recorded at fair value. Fair value is impacted by

16


 

market conditions, including changes in interest rates, and the availability of financing at reasonable rates and leverage levels, among other factors. See NOTE 8 to the Consolidated Financial Statements for additional disclosures regarding fair values of financial instruments held or issued by the Company.

Residential Mortgage Investments

The following table illustrates the progression of Capstead’s portfolio of residential mortgage investments for the indicated periods (in thousands):

 

 

 

As of and for the year ended December 31

 

 

 

2020

 

 

2019

 

 

2018

 

Residential mortgage investments, beginning of year

 

$

11,220,630

 

 

$

11,962,948

 

 

$

13,450,793

 

Portfolio acquisitions (principal amount)

 

 

3,061,142

 

 

 

3,239,372

 

 

 

2,251,425

 

Investment premiums on acquisitions

 

 

112,200

 

 

 

76,788

 

 

 

51,231

 

Portfolio runoff (principal amount)

 

 

(3,797,847

)

 

 

(3,751,895

)

 

 

(3,602,678

)

Sales of investments (cost basis)

 

 

(2,620,297

)

 

 

(305,356

)

 

 

Investment premium amortization

 

 

(77,560

)

 

 

(73,740

)

 

 

(115,333

)

Change in net unrealized gains on securities classified

   as available-for-sale

 

 

39,284

 

 

 

72,513

 

 

 

(72,490

)

Residential mortgage investments, end of year

 

$

7,937,552

 

 

$

11,220,630

 

 

$

11,962,948

 

Decrease in residential mortgage investments

 

$

(3,283,078

)

 

$

(742,318

)

 

$

(1,487,845

)

 

Capstead’s investment strategy focuses on managing a portfolio of residential mortgage investments primarily consisting 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 government-sponsored enterprises, 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.  

By focusing primarily on investing in 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 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.

17


 

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 December 31, 2020 (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

 

$

2,034,759

 

 

 

2.48

%

 

 

1.98

%

 

 

1.65

%

 

 

2.84

%

 

 

6.92

%

 

 

5.9

 

Freddie Mac Agency Securities

 

 

653,411

 

 

 

2.72

 

 

 

2.07

 

 

 

1.77

 

 

 

2.22

 

 

 

6.08

 

 

 

7.6

 

Ginnie Mae Agency Securities

 

 

169,632

 

 

 

2.70

 

 

 

1.62

 

 

 

1.51

 

 

 

1.09

 

 

 

5.80

 

 

 

6.3

 

(36% of total)

 

 

2,857,802

 

 

 

2.55

 

 

 

1.98

 

 

 

1.67

 

 

 

2.59

 

 

 

6.66

 

 

 

6.3

 

Longer-to-reset ARMs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae Agency Securities

 

 

2,462,143

 

 

 

2.86

 

 

 

1.95

 

 

 

1.60

 

 

 

4.24

 

 

 

5.03

 

 

 

54.8

 

Freddie Mac Agency Securities

 

 

2,085,258

 

 

 

2.62

 

 

 

1.99

 

 

 

1.65

 

 

 

4.19

 

 

 

5.03

 

 

 

61.7

 

Ginnie Mae Agency Securities

 

 

447,798

 

 

 

3.65

 

 

 

1.60

 

 

 

1.50

 

 

 

1.00

 

 

 

5.00

 

 

 

38.6

 

(64% of total)

 

 

4,995,199

 

 

 

2.83

 

 

 

1.93

 

 

 

1.61

 

 

 

3.93

 

 

 

5.03

 

 

 

56.2

 

 

 

$

7,853,001

 

 

 

2.73

 

 

 

1.95

 

 

 

1.63

 

 

 

3.44

 

 

 

5.62

 

 

 

38.1

 

Gross WAC (rate paid by

   borrowers) (c)

 

 

 

 

 

 

3.36

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Amortized cost basis represents the Company’s investment (unpaid principal balance plus unamortized investment premiums) before unrealized gains and losses.  At December 31, 2020, the ratio of amortized cost basis to unpaid principal balance for the Company’s ARM holdings was 103.57.  

(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 year-end, 74% of current-reset ARM securities were subject to periodic caps averaging 1.90%; 18% were subject to initial caps averaging 3.04%; 8% were subject to lifetime caps averaging 7.67%.. All longer-to-reset ARM securities at December 31, 2020 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 date.

ARM securities held by Capstead are backed by 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.  These coupon interest rate 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. Fannie Mae and Freddie Mac began accepting ARM loans based on the Secured Overnight Financing Rate (“SOFR”) in August 2020 and stopped accepting LIBOR-based ARM loans after December 2020 due to the scheduled discontinuation of LIBOR in December 2021.  The Company expects to continue investing in Agency ARM Securities backed by a variety of indices including new SOFR-based ARM securities.

18


 

Approximately 22% of the Company’s current-reset ARM securities are scheduled to reset in rate within three months, 33% are scheduled to reset in rate between four and six months, and 40% are scheduled to reset in rate between seven and 12 months. Approximately 18%, or $490 million of the Company’s current-reset ARM securities with average net WACs of 2.72% and fully-indexed WACs of 1.97% will reset in rate for the first time in less than 18 months based on indices in effect at December 31, 2020. After consideration of any applicable initial fixed-rate periods, at December 31, 2020 approximately 90%, 5% and 3% of the Company’s ARM securities were backed by mortgage loans that reset annually, semi-annually and monthly, respectively, while approximately 2% reset every five years. At December 31, 2020 approximately 2% of the Company’s portfolio was backed by interest-only loans, with remaining interest-only payment periods averaging 11 months.  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

Capstead finances its residential mortgage investments by leveraging its long-term investment capital primarily with borrowings under repurchase arrangements with commercial banks and other financial institutions.  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 4.4 percent of the fair value of pledged residential mortgage pass-through securities at December 31, 2020.  After considering haircuts and related interest receivable on the collateral, as well as interest payable on these borrowings, the Company had $410 million of capital at risk with its lending counterparties at December 31, 2020.  The Company did not have capital at risk with any single counterparty exceeding 6% of total stockholders’ equity at December 31, 2020.

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 December 31, 2020, the Company’s secured borrowings totaled $7.32 billion with 19 counterparties at average rates of 0.21%, 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 SOFR (previously LIBOR) or Fed Funds to help mitigate exposure to rising short-term interest rates.  During 2020, the Company took advantage of declining market rates to replace $9.4 billion of longer-term swaps with new two- and three-year contracts at significantly lower rates to the benefit of future earnings. At year-end the Company held $2.97 billion notional amount of portfolio financing-related interest rate swap agreements at fixed rates averaging 0.04%, with contract expirations occurring at various dates through the fourth quarter of 2023 and a weighted average expiration of 22 months.

Including the effects of these derivatives, the Company’s residential mortgage investments and secured borrowings had estimated durations at December 31, 2020 of 14 and 10½ months, respectively, for a net duration gap of approximately 3½ 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

19


 

interest rate risk associated with holding and financing its residential mortgage investments by utilizing suitable derivative financial instruments 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 primarily 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 derivative counterparties,

mortgage prepayment levels,

availability of borrowings under repurchase arrangements with lending counterparties,

collateral requirements of lending and derivative counterparties, and

general conditions in the commercial banking and mortgage finance industries.

 

As of December 31, 2020, the Company’s utilization of its long-term investment capital and its estimated potential liquidity were as follows in comparison with December 31, 2019 (dollars in thousands):

 

 

 

Investments (a)

 

 

Secured

Borrowings

 

 

Capital

Employed

 

 

Potential

Liquidity (b)

 

 

Portfolio

Leverage

Residential mortgage investments

 

$

7,937,552

 

 

$

7,319,083

 

 

$

618,469

 

 

$

266,857

 

 

 

Cash collateral receivable from

   derivative counterparties, net (c)

 

 

 

 

 

 

 

 

 

 

32,927

 

 

 

 

 

Other assets, net of other liabilities

 

 

 

 

 

 

 

 

 

 

357,260

 

 

 

257,180

 

 

 

Balances as of December 31, 2020:

 

$

7,937,552

 

 

$

7,319,083

 

 

$

1,008,656

 

 

$

524,037

 

 

7.26:1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as of December 31, 2019

 

$

11,220,630

 

 

$

10,274,498

 

 

$

1,172,125

 

 

$

537,134

 

 

8.77:1

 

(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 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. As of December 31, 2020, Capstead did not have any off-balance sheet arrangements.

In response to significant declines in longer-term interest rates experienced earlier in 2020, the Company reduced portfolio leverage by only replacing a portion of portfolio runoff, selling assets and by taking a

20


 

measured approach to deploying new common equity capital raised in February. The Company expects in the near-term for leverage to remain at or near these levels given current market conditions. 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”).

Reconciliation of GAAP and non-GAAP Financial Measures

Management believes the presentation of core earnings and core earnings per common share, both 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 provides investors with management’s view of the Company’s economic performance. The Company defines core earnings as GAAP net income (loss) excluding (a) unrealized gains or losses on derivative instruments, (b) realized gains or losses on termination of derivative instruments, (c) amortization of unrealized gains or losses of derivative instruments held at the time of de-designation, and (d) realized gains or losses on securities. The Company’s presentation of core earnings may not be comparable to similarly-titled measures of other companies, who may use different calculations.

The following reconciles GAAP net (loss) income and net (loss) income per diluted common share to core earnings and core earnings per common share (dollars in thousands, except per share amounts):

 

 

2020

 

 

2019

 

 

2018

 

 

 

Amount

 

Per Share

 

 

Amount

 

Per Share

 

 

Amount

 

Per Share

 

Net (loss) income

 

$

(129,573

)

$

(1.56

)

 

$

(35,338

)

$

(0.62

)

 

$

50,072

 

$

0.34

 

Unrealized (gain) loss on

   non-designated derivative

   instruments

 

 

(7,455

)

 

(0.08

)

 

 

17,656

 

 

0.20

 

 

 

 

Realized loss on termination

   of non-designated

   derivative instruments

 

 

149,942

 

 

1.57

 

 

 

95,187

 

 

1.07

 

 

 

 

Amortization of unrealized

   gain, net of unrealized

   losses on de-designated

   derivative instruments

 

 

529

 

 

0.00

 

 

 

(14,712

)

 

(0.17

)

 

 

 

Realized loss on sale of

   investments

 

 

67,820

 

 

0.71

 

 

 

1,365

 

 

0.02

 

 

 

 

 

 

Core earnings

 

$

81,263

 

$

0.64

 

 

$

64,158

 

$

0.50

 

 

$

50,072

 

$

0.34

 

21


 

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:

 

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

Total financing spreads

 

 

1.16

%

 

 

0.41

%

 

 

0.33

%

 

 

0.55

%

 

 

0.64

%

Impact of yields on other interest-earning

   assets*

 

 

0.03

 

 

 

0.00

 

 

 

0.00

 

 

 

0.01

 

 

 

0.02

 

Impact of borrowing rates on other interest-

   paying liabilities*

 

 

0.08

 

 

 

0.05

 

 

 

0.05

 

 

 

0.05

 

 

 

0.06

 

Impact of amortization of unrealized gain,

   net of unrealized losses on de-designated

   derivative instruments

 

 

0.00

 

 

 

(0.14

)

 

 

 

 

 

 

Impact of net cash flows received on

   non-designated derivative instruments

 

 

(0.20

)

 

 

0.21

 

 

 

 

 

 

 

Financing spreads on residential mortgage

   investments

 

 

1.07

 

 

 

0.53

 

 

 

0.38

 

 

 

0.61

 

 

 

0.72

 

 

*

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 derivative counterparties.

Tax Considerations of Capstead Common and Preferred Stock Dividends

Capstead’s common and preferred dividend distributions are generally characterized as ordinary income or nontaxable return of capital based on the relative amounts of the Company’s earnings and profits (taxable income, after certain adjustments) to total distributions applicable for a given tax year.  Total distributions are determined in accordance with the spillover distribution provisions of IRC 857(b)(9).  

Under IRC 857(b)(9), REIT common dividends declared in the fourth quarter of a calendar year with a record date prior to year-end and a payable date in January of the following year will be included in total distributions in the year declared only to the extent of available earnings and profits.  As a result, such fourth quarter common dividends may be pro-rated between tax years or may not be taxable until the following year.  Capstead’s common dividend declared in the fourth quarter of 2020 will be treated entirely as a 2021 distribution.  Common dividends declared in the fourth quarters of 2019 and 2018 were treated entirely as 2020 and 2019 distributions, respectively. Characterization of common distributions allocable to 2020, 2019 and 2018 tax years were as follows:

 

 

2020

 

 

 

2019

 

 

 

2018

 

 

 

 

Amount

 

%

 

 

 

Amount

 

%

 

 

 

Amount

 

%

 

 

Ordinary income

 

$

-

 

 

-

 

%

 

$

-

 

 

-

 

%

 

$

0.38262

 

 

63.8

 

%

Return of capital

 

 

0.60000

 

 

100.0

 

 

 

 

0.40000

 

 

100.0

 

 

 

 

0.21738

 

 

36.2

 

 

Total

 

$

0.60000

 

 

100.0

 

 

 

$

0.40000

 

 

100.0

 

 

 

$

0.60000

 

 

100.0

 

 

Common distributions characterized as return on capital reduce the tax basis of related shares and are nontaxable to a recipient unless cumulative return of capital distributions received by a recipient exceed tax cost basis, in which case the excess is reportable as capital gain.

REIT preferred dividends are subject to the same spillover provisions under IRC 857(b)(9), although proration between tax years usually results in 100% of such dividends being included in total distributions in the year declared. All preferred dividends allocable to 2018 were characterized as ordinary income. However, Capstead did not have earnings and profits to distribute in 2019 and 2020. Accordingly, preferred dividends declared and paid in 2019 and 2020 are characterized as a nontaxable return of

22


 

capital. Further, preferred dividends declared in December of 2019 and 2020 and payable in January of 2020 and 2021 will be treated entirely as 2020 and 2021 distributions, respectively.

If in future years the Company realizes gains on sales of assets, a portion of its dividends may be characterized as long-term capital gains, provided such gains exceed available capital loss carryforwards. Any such capital gain distributions would be reported as long-term capital gains and would generally be taxed at lower rates than distributions of ordinary income. Unutilized capital loss carryforwards totaling $17.5 million expired in 2019. At December 31, 2020 the Company had remaining net capital loss carryforwards of $1.3 million that expire after 2024 and $66.9 million that expire after 2025.

At December 31, 2020, the Company had net operating loss (NOL) carryforwards totaling $13 million generated in 2019 and $77 million generated in 2020. Under the provisions of the Tax Cuts and Jobs Act of 2017 (“Tax Act”), NOLs no longer expire, but a taxpayer can only offset up to 80% of its income in any given year with an NOL. Under the provisions of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) of 2020, the 80% limitation is deferred to tax years starting after December 31, 2020. For tax years beginning before January 1, 2021, a taxpayer can offset 100% of its income in any given year with an NOL.

See the investor relations section of the Company’s website at www.capstead.com for additional dividend characterization information. Due to the complex nature of applicable tax rules, it is recommended that stockholders consult their tax advisors to ensure proper tax treatment of dividends received.     

 

23


 

RESULTS OF OPERATIONS

 

 

 

Year ended December 31

 

 

 

2020

 

 

2019

 

 

2018

 

Income statement data: (in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

Interest income on residential mortgage investments

 

$

186,261

 

 

$

320,109

 

 

$

274,733

 

Related interest expense

 

 

(67,891

)

 

 

(246,140

)

 

 

(206,881

)

 

 

 

118,370

 

 

 

73,969

 

 

 

67,852

 

Other interest income (expense)

 

 

(7,146

)

 

 

(4,822

)

 

 

(5,859

)

 

 

 

111,224

 

 

 

69,147

 

 

 

61,993

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

 

 

 

Loss on derivative instruments (net)

 

 

(159,547

)

 

 

(90,578

)

 

 

Loss on sale of investments (net)

 

 

(67,820

)

 

 

(1,365

)

 

 

Compensation-related expense

 

 

(8,278

)