Investor Presentation Information as of September 30, 2015

Transcription

1 ABCDE Investor Presentation Information as of September 30, 2015

2 Safe Harbor Statement - Private Securities Litigation Reform Act of 1995 Cautionary Statement Concerning Forward-looking Statements This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 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: changes in general economic conditions; fluctuations in interest rates and levels of mortgage prepayments; the effectiveness of risk management strategies; the impact of differing levels of leverage employed; liquidity of secondary markets and credit markets; the availability of financing at reasonable levels and terms to support investing on a leveraged basis; the availability of new investment capital; the availability of suitable qualifying investments from both an investment return and regulatory perspective; changes in legislation or regulation affecting Fannie Mae, Freddie Mac, Ginnie Mae, the Federal Home Loan Bank system and similar federal government agencies and related guarantees; other changes in legislation or regulation affecting the mortgage and banking industries; changes in market conditions as a result of Federal Reserve monetary policy or federal government fiscal challenges; deterioration in credit quality and ratings of existing or future issuances of Fannie Mae, Freddie Mac or Ginnie Mae securities; changes in legislation or regulation affecting exemptions for mortgage REITs from regulation under the Investment Company Act of 1940; and increases in costs and other general competitive factors. 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. 2

3 Overview of Capstead Mortgage Corporation Company Summary Proven Strategy of Efficiently Managing a Leveraged Portfolio of Short-Duration Agency-Guaranteed ARM Securities Experienced Management Team Aligned with Stockholders Straight-forward Investment Strategy and Transparent Reporting Founded in 1985, Capstead is the oldest publicly-traded residential mortgage REIT. Our sole focus is on managing a leveraged portfolio of short-duration* agency-guaranteed (i.e. Fannie Mae, Freddie Mac and Ginnie Mae) residential ARM securities that is appropriately hedged and can earn attractive risk-adjusted returns over the long term, with little, if any, credit risk. At September 30, 2015, our agency-guaranteed ARM securities portfolio stood at $13.96 billion, supported by $1.45 billion in long-term investment capital levered 8.80 times. Our short-duration strategy differentiates us from our peers because the adjustable-rate mortgages underlying our portfolio reset to more current interest rates within a relatively short period of time: allowing us to benefit from a potential recovery in financing spreads that typically contract during periods of rising interest rates, and resulting in smaller fluctuations in portfolio values from changes in interest rates compared to portfolios containing a significant amount of longer-duration ARM or fixed-rate mortgage securities. By virtue of being internally-managed and with our sole focus on agency-guaranteed securities, we are the most efficient mortgage REIT in the industry. Our top four executive officers have over 100 years of combined mortgage finance industry experience. We are internally-managed with low operating costs and a strong focus on performance-based compensation for our executive officers. This structure greatly enhances the alignment of management interests with those of our stockholders. This singular and straight-forward investment strategy, together with our use of cash flow hedge accounting allows for easily understood, transparent financial reporting, with limited use of non-gaap financial measures. Additional transparency is evident by virtue of our internally-managed structure our compensation-related decisions and costs are fully disclosed and subject to annual say-on-pay approvals. We make every effort to provide additional analysis in our earnings reports, SEC filings and analyst presentations that tells our story in a complete and straight-forward fashion. * Duration is a measure of market price sensitivity to interest rate movements. A shorter duration generally indicates less interest rate risk. 3

4 Capstead s Economic Returns As in 2013, we have outperformed most of our peers thus far in 2015 largely due to the relatively low interest rate risk inherent in our short-duration agency-guaranteed ARM portfolio. This has led to outperformance over both trailing 2 ¾ year and 3 ¾ year time periods relative to other mortgage REITs. (a) Excludes $(0.28) per share one-time effect of preferred capital redemption and issuance transactions on book value in Including this nonportfolio-related charge, our economic returns were 1.0% in 2013, and 5.4% and 9.4% for the 2.75 and 3.75 year averages, respectively. (b) See our proxy statement for a list of our mortgage REIT peers. 4

5 Quarterly Earnings, Dividends and Change in Book Value In 2013 we moved from declaring common dividends pegged to each quarter s expected earnings to establishing a more stable dividend policy. To this end, we paid a $0.31 dividend over the course of 2013, a $0.34 dividend during 2014, and a $0.31 dividend for the 1 st and 2 nd quarters of With higher than anticipated levels of mortgage prepayments during the 2 nd and 3 rd quarters, our current earnings did not keep pace with a $0.31 dividend run rate. As a result, our board reduced the common dividend to $0.26 for the 3 rd quarter. Declines in our book value were relatively modest in Q2 and Q and during the 2013 bond market taper tantrum compared to other mortgage REITs with longer-duration portfolios. * For presentation purposes, we adjusted our diluted EPS and related change in book value for Q to exclude certain one-time effects of preferred capital redemption and issuance transactions totaling $(0.23) and $(0.28), respectively. These transactions, along with subsequent issuances of our 7.50% Series E preferred stock through a continuous offering program, replaced higher-cost preferred equity to the benefit of future earnings. See page 18 for further information and a reconciliation of diluted EPS to this presentation. 5

6 Market Snapshot (dollars in thousands, except per share amounts) (a) In 2005 and 2006 we issued our 10-year fixed, 20-year variable-rate, unsecured borrowings through trust preferred vehicles. Utilizing forward-starting 20-year swaps, we have hedged the average cost of this capital down to 7.56% by the fall of 2016, an annual interest savings of $930,000, or $0.01 per common share. (b) As of September 30,

7 Capstead s Prudent Use of Leverage Portfolio leverage (secured borrowings divided by long-term investment capital) increased to 8.80 to one at quarter-end from 8.59 to one at December 31, 2014 primarily due to book value declines during the 2 nd and 3 rd quarter. In our view, borrowing at current levels represents an appropriate and prudent use of leverage for a short-duration, agency-guaranteed ARM securities portfolio in today s market conditions. Long-term Investment Capital Portfolio and Portfolio Leverage 7

8 Capstead s Proven Short-Duration Investment Strategy At September 30, 2015 we financed our agency-guaranteed residential ARM securities with a combination of day and longer-dated secured borrowings augmented with relatively low-cost two-year interest rate swap agreements for hedging purposes. Secured borrowings consist of repo borrowings and advances from the Federal Home Loan Bank ( FHLB ) of Cincinnati. As of September 30, 2015 As of September 30, 2015 Residential ARM Securities Portfolio Current-Reset ARMs $8.01 Billion (cost basis) Longer-Maturity Secured Borrowings $3.25 Billion 58% 25% 9% 42% Total: $13.72 Billion (cost basis) Secured Borrowings 61% 5% Remaining Borrowings $1.10 Billion Total: $12.75 Billion Longer-to-Reset ARMs $5.71 Billion (cost basis) Borrowings with rates effectively fixed by Currently-Paying Interest Rate Swaps $7.80 Billion Forward-starting Interest Rate Swap Positions $600 Million Our portfolio of agency-guaranteed ARM securities have little, if any, credit risk and are either currently resetting to more current rates at least annually or will begin doing so in five years or less. With an asset duration* of approximately 11¼ months at quarter-end, the value of our portfolio is naturally less exposed to changes in interest rates than portfolios containing longer duration ARM or fixed-rate securities. This relative stability affords us more flexibility in managing through periods of market stress. For instance, during 2013 our longer-duration peers were forced to sell assets to reduce leverage or otherwise reposition their portfolios in response to sharply higher rates, and suffered significant declines in book value. We actually increased our leverage during this period and did not sell any assets, strongly outperforming our peers. We have long-term relationships with a variety of domestic and foreign lending counterparties and at quarter-end had repo borrowings outstanding with 22 of these counterparties, in addition to $2.30 billion in advances with the FHLB of Cincinnati. We view the FHLB of Cincinnati as a significant new funding source that offers competitive lending opportunities on both a short-term and long-term basis that we began utilizing in August We routinely borrow for 30 to 90 days and extend the duration of our borrowings using relatively low-cost two-year pay interest rate swap agreements. When available at attractive levels, we also enter into longer-maturity secured borrowings. Together with portfolio-related swaps, our secured borrowings had a duration of 8¾ months at quarterend, resulting in a net duration gap of approximately 2½ months. * Duration is a common measure of market price sensitivity to interest rate movements. A shorter duration generally indicates less interest rate risk. 8

9 Financing Spread Analysis As of September 30, 2015 (unaudited) Cash yields on our portfolio of residential mortgage securities have remained relatively stable in 2015 (after years of declines) primarily due to increases in the underlying indexes (principally one-year LIBOR) in anticipation of Federal Reserve action to increase short-term interest rates. See page 10 for additional information. Mortgage prepayment levels directly impact our financing spreads because purchased investment premiums are amortized to earnings as portfolio yield adjustments. Mortgage prepayments are impacted by housing market conditions, including prevailing mortgage interest rates, as well as seasonal factors, in particular the summer home selling season. See page 11 for additional information. Unhedged repo borrowing rates increased four basis points during the 3 rd quarter, largely attributable to market conditions, including expectations during the quarter for Federal Reserve action to raise short-term interest rates in the near term and a greater use of higher-rate, longer-maturity secured borrowings. Fixed swap rates continue trending higher as older, lower-rate swaps are replaced at higher rates Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Yields on residential mortgage investments: (a) Cash yields 2.42% 2.41% 2.42% 2.43% 2.44% 2.46% 2.46% 2.48% Investment premium amortization (0.99) (0.95) (0.72) (0.77) (0.84) (0.75) (0.67) (0.74) Adjusted yields Secured borrowing rates: (b) Unhedged borrowing rates Fixed swap rates Adjusted borrowing rates Financing spreads on residential mortgage Investments CPR Investment premium amortization (in millions) $34.32 $33.06 $25.08 $26.16 $28.28 $25.14 $22.29 $24.80 (a) (b) Cash yields are based on the cash component of interest income. Investment premium amortization is determined using the interest method which incorporates actual and anticipated future mortgage prepayments. Both are expressed as a percentage calculated on average amortized cost basis for the indicated periods. Unhedged borrowing rates represent average rates on secured borrowings, before consideration of related currently-paying interest rate swap agreements. Fixed swap rates represent the average fixed-rate payments made on currently-paying interest rate swap agreements held for portfolio hedging purposes and exclude differences between LIBOR-based variable-rate payments received on these swaps and unhedged borrowing rates, as well as the effects of any hedge ineffectiveness. These factors equated to 27, 22 and 22 basis points on average currently-paying swap notional amounts outstanding for the third, second and first quarters of 2015, respectively. Adjusted borrowing rates reflect unhedged borrowing rates, fixed swap rates and the above mentioned factors, calculated on average secured borrowings outstanding for the indicated periods. 9

10 Key Elements of Capstead s ARM Portfolio As of September 30, 2015 (dollars in thousands, unaudited) The quarter-end Net WAC* on our current-reset ARMs increased six basis points since year-end while the related quarter-end Fully Indexed WAC* has increased 23 basis points, primarily reflecting increases in the underlying six and 12 month indexes during this period. These underlying indexes have increased further since quarter-end. As overall interest rates increase, ARM loans underlying the portfolio can be expected to increase in coupon reflecting higher prevailing six and 12 month interest rates. Fully Average Months Principal Investment Amortized Cost Basis Fair Market Net Indexed Net to Balance Premiums ($) % Value WAC* WAC* Margins Roll Current-reset ARMs: Fannie Mae Agency Securities $ 4,198,562 $ 114,006 $ 4,312, $ 4,444, % 2.37% 1.71% 6.0 Freddie Mac Agency Securities 1,695,360 52,047 1,747, ,801, Ginnie Mae Agency Securities 1,885,763 66,480 1,952, ,961, Residential Mortgage Loans 2, , , (58% of total) 7,782, ,544 8,014, ,210, Year-end Longer-to-reset ARMs: Fannie Mae Agency Securities 2,293,323 86,083 2,379, ,397, Freddie Mac Agency Securities 1,838,968 67,171 1,906, ,919, Ginnie Mae Agency Securities 1,379,481 45,709 1,425, ,427, (42% of total) 5,511, ,963 5,710, ,743, Year-end $ 13,294,186 $ 431,507 $ 13,725, $ 13,954, Year-end Gross WAC (rate paid by borrowers)* 3.15 * 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 September 30, Net WAC is expressed as a percentage calculated on an annualized basis on the unpaid principal balances of the mortgage loans underlying these investments. Fully indexed WAC represents the weighted average coupon upon one or more resets using interest rate indexes and net margins in effect, as of September 30, 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 September 30, NOTE: Excludes $4 million legacy portfolio of fixed-rate investments. 10

11 Agency Mortgage Prepayment Speeds versus Capstead Prepayment Speeds Quarterly mortgage prepayment levels are influenced by the availability of mortgage financing with attractive terms and the overall health of the housing markets, as well as routine seasonal factors. Generic agency ARM speeds increased from March through July before beginning to recede in August, reflecting low mortgage interest rates available earlier in the year. Higher prevailing interest rates in recent months and seasonal factors are allowing for significantly lower prepayment speeds in the fourth quarter. Published Agency Prepayment Speeds vs. CMO Prepayment Speeds (in CPR) 11

12 Capstead s Stockholder Friendly Structure Capstead is a clear leader among our mortgage REIT peers in terms of operating efficiency. We are internally-managed with lower operating costs than our mortgage REIT peers. Our board of directors and our senior executives are required to hold a significant amount of Capstead stock. Our executives pay structure is variable through compensation elements that focus on pay for performance as opposed to fees paid to an external manager that are based solely on capital under management. As a result, our executives are incented to grow the Company by raising capital only when it is accretive to book value and earnings rather than for the purpose of increasing compensation or external management fees. Quarter Nine Months Ended Ended Sept. 30, 2015* Sept. 30, 2015 * Compensation-related expenses: Fixed: Salaries and related deferred compensation match, payroll taxes, insurance and other benefits 0.26% 0.26% Variable: Short-term incentive compensation: Performance-based cash compensation program Dividend equivalent rights Long-term incentive compensation, principally performance-based equity awards Related deferred compensation match and payroll taxes Other platform expenses % 1.00% The majority of compensation-related expenses are performance-based. * Expressed on an annualized basis as a percentage of average long-term investment capital. 12

13 CAPSTEAD CAPSTEAD Appendix 13

14 Capstead s Third Quarter 2015 Highlights Generated earnings of $21.1 million or $0.18 per diluted common share Paid common dividend of $0.26 per common share Book value decreased 2.8%, or $0.34 to $11.96 per common share Financing spreads on residential mortgage investments decreased 10 basis points to 0.74% reflecting higher mortgage prepayment levels and borrowing rates Agency-guaranteed ARM portfolio and leverage ended the quarter at $13.96 billion and 8.80 times long-term investment capital, respectively Select comments from our October 28, 2015 earnings press release: Mortgage prepayment levels have been elevated in recent quarters primarily as a result of lower mortgage rates available earlier in the year as well as seasonal factors. This has contributed to higher investment premium amortization and lower yields in the second and third quarters. Mortgage prepayment rates peaked at 23.93% CPR in July before beginning to subside, with October reported at 21.14% CPR. We anticipate mortgage prepayments to decline further over the winter months in part due to seasonal factors. This is expected to lead to lower investment premium amortization in the coming quarters and better financial results for the Company, provided mortgage interest rates do not decline considerably from current levels. Current borrowing conditions are healthy with opportunities to secure additional longer-maturity, committed financing at attractive rates. In August, we began supplementing our borrowings under repurchase arrangements with advances from the FHLB of Cincinnati and as of September 30, 2015 these advances totaled $2.30 billion. Our future borrowing rates will be dependent on market conditions, including the availability of longer-maturity borrowings and interest rate swap agreements at attractive rates. During the current quarter portfolio leverage increased marginally to 8.80 to one at quarter-end from 8.76 to one at June 30, We are comfortable with this level of leverage given the current health and breadth of the financing market for agency-guaranteed mortgage securities and the composition of our portfolio. Interest rates across the yield curve continued to be volatile in the third quarter. Uncertainty regarding the timing of the first increase in the federal funds rate in almost a decade contributed to this volatility and negatively affected our borrowing costs. Although many in the financial markets expected the initial rate hike to be in September, the Federal Open Market Committee ( FOMC ) left rates unchanged at their September and October meetings. In remarks made after the September meeting, FOMC Chair Janet Yellen indicated that in spite of improvements in labor market conditions, inflation rates continued below target due to declines in energy and import prices. She also noted that heightened concerns about growth in China and other emerging markets had led to increased volatility in financial markets. In reaction to this decision and weakness in recent economic releases, market expectations of FOMC action to increase short-term interest rates by year-end have declined, with many market participants now predicting the initial rate increase to be implemented late in the first quarter of Even with the interest rate volatility experienced thus far in 2015, for the twelve months ended September 30, 2015 we produced an economic return of 4.6% (consisting of cumulative common dividends of $1.22 per share offset by a $0.64 per share decline in book value per common share). While below our expectations, we believe this result compares favorably with economic returns produced by other mortgage REITs and speaks to the resiliency inherent in our short-duration ARM investment strategy. In conclusion, we remain confident in and focused on our investment strategy of managing a leveraged portfolio of agencyguaranteed residential ARM securities that can produce attractive risk-adjusted returns over the long term while reducing, but not eliminating, sensitivity to changes in interest rates. 14

15 Capstead s Condensed Quarterly Income Statements (dollars in thousands, except per share amounts, unaudited) Quarter Ended September June March December September Interest income, before investment premium amortization $ 83,808 $ 83,398 $ 83,723 $ 82,509 $ 82,146 Investment premium amortization (34,323) (33,057) (25,078) (26,159) (28,284) Related Interest expense (22,272) (20,098) (19,214) (18,107) (16,099) 27,213 30,243 39,431 38,243 37,763 Other interest income (expense) (a) (2,034) (2,023) (2,029) (2,023) (2,044) 25,179 28,220 37,402 36,220 35,719 Salaries and benefits (1,104) (1,103) (1,049) (996) (999) Short-term incentive compensation (1,424) (830) (692) (565) (613) Long-term incentive compensation (536) (227) (608) (201) (624) Other general and administrative expense (1,309) (1,170) (1,149) (929) (1,058) Miscellaneous other revenue (expense) (55) (34) (4,112) (3,276) (3,445) (2,746) (3,328) Net income $ 21,067 $ 24,944 $ 33,957 $ 33,474 $ 32,391 Net income available to common stockholders: Net income $ 21,067 $ 24,944 $ 33,957 $ 33,474 $ 32,391 Less preferred stock dividends (3,809) (3,788) (3,742) (3,565) (3,529) $ 17,258 $ 21,156 $ 30,215 $ 29,909 $ 28,862 Net income per diluted common share $0.18 $0.22 $0.32 $0.31 $0.30 Average long-term investment capital $ 1,477,383 $ 1,503,817 $ 1,501,951 $ 1,508,013 $ 1,509,792 Average balance of mortgage assets 13,884,830 13,853,972 13,833,613 13,597,381 13,457,029 Average constant prepayment rate, or CPR 23.2% 22.0% 16.7% 17.6% Average financing spreads on residential mortgage investments (b) % 1.09 (a) (b) Consists principally of interest on unsecured borrowings. See page 18 for further information regarding this non-gaap financial measure. 15

16 Capstead s Annual Income Statements Five Years Ended 2014 (dollars in thousands, except per share amounts, unaudited) Year Ended December December December December December Interest income: Residential mortgage investments $ 226,749 $ 215,137 $ 255,931 $ 243,077 $ 198,488 Other , , , , , ,778 Interest expense: Repurchase arrangements and similar borrowings (65,155) (66,368) (69,101) (57,328) (47,502) Unsecured borrowings (8,488) (8,736) (8,747) (8,747) (8,747) Other (5) (2) (73,643) (75,104) (77,848) (66,080) (56,251) 153, , , , ,527 Other revenue (expense): Salaries and benefits (4,112) (3,962) (4,055) (4,181) (3,987) Short-term incentive compensation (2,115) (3,565) (5,043) (6,657) (5,774) Long-term incentive compensation (2,075) (1,814) (1,874) (1,560) (1,391) Other general and administrative expense (4,157) (4,476) (4,271) (3,932) (4,834) Miscellaneous other revenue (expense) (142) (300) (171) (1,023) (904) (12,601) (14,117) (15,414) (17,353) (16,890) Income before equity in earnings of unconsolidated affiliates 140, , , , ,637 Equity in earnings of unconsolidated affiliates Net income $ 140,820 $ 126,487 $ 163,626 $ 160,204 $ 126,896 Net income per diluted common share $1.33 $0.93 $1.50 $1.75 $1.52 Core earnings per diluted common share (a) $1.16 Average long-term investment capital $ 1,500,332 $ 1,547,615 $ 1,567,232 $ 1,284,057 $ 1,120,647 Average balance of mortgage assets 13,424,149 13,550,511 13,190,380 10,839,749 7,665,796 Investment premium amortization 101, ,872 96,677 68,077 57,581 Average constant prepayment rate, or CPR (represents only prepayments) 17.3% 21.5% 17.6% 16.6% 29.5% Average financing spreads on residential mortgage investments (a) (a) See page 18 for further information regarding these non-gaap financial measures. 16

17 Capstead s Comparative Balance Sheets (dollars in thousands, except per share amounts, unaudited) September 30, December 31, December 31, December 31, December 31, Assets Residential mortgage investments $ 13,958,707 $ 13,908,104 $ 13,475,874 $ 13,860,158 $ 12,264,906 Cash collateral receivable from interest rate swap counterparties 65,868 53,139 25,502 49,972 48,505 Interest rate swap agreements at fair value - 1,657 5, Cash and cash equivalents 100, , , , ,717 Receivables and other assets 177, ,643 96, , ,760 Investments in unconsolidated affiliates ,117 3,117 $ 14,302,115 $ 14,389,069 $ 14,015,968 $ 14,469,263 $ 12,844,622 Liabilities Secured borrowings $ 12,752,523 $ 12,806,843 $ 12,482,900 $ 12,784,238 $ 11,352,444 Interest rate swap agreements at fair value 41,240 27,034 11,304 32,868 31,348 Unsecured borrowings 100, , , , ,095 Common stock dividend payable 26,048 34,054 30,872 29,512 38,184 Accounts payable and accrued expenses 32,874 30,367 25,109 22,425 26,844 12,952,685 12,998,298 12,650,185 12,972,138 11,551,915 Stockholders' Equity Perpetual preferred stock 196, , , , ,514 Common stock 964, , ,884 1,014, ,653 Accumulated other comprehensive income 187, , , , ,540 1,349,430 1,390,771 1,365,783 1,497,125 1,292,707 $ 14,302,115 $ 14,389,069 $ 14,015,968 $ 14,469,263 $ 12,844,622 Book value per common share (based on common shares outstanding and calculated assuming liquidation preferences for preferred stock) (unaudited) $11.96 $12.52 $12.47 $13.58 $12.52 Long-term investment capital (stockholders' equity and unsecured borrowings, net of investments in related unconsolidated affiliates prior their dissolution in December 2013) (unaudited) $1,449,430 $1,490,771 $1,465,783 $1,597,103 $1,392,685 Portfolio leverage (secured borrowings divided by long-term investment capital) (unaudited) 8.80:1 8.59:1 8.52:1 8.00:1 8.15:1 17

18 Non-GAAP Financial Measures As of September 30, 2015 (unaudited) Financing spreads on residential mortgage investments, a non-gaap financial measure, differs from total financing spreads, an all-inclusive GAAP measure, that is based on all interest-earning assets and all interest-paying liabilities. We believe presenting financing spreads on residential mortgage investments provides useful information for evaluating the performance of the Company s portfolio. Core earnings per diluted common share is a non-gaap financial measure that differs from the related GAAP measure of net income per diluted common share by excluding certain one-time effects of second quarter 2013 transactions to redeem then-outstanding high-cost convertible preferred capital and issue our 7.50% Series E preferred shares. We believe presenting this metric on a core earnings basis provides useful, comparative information for evaluating the Company s performance Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Financing spreads on residential mortgage investments 0.74% 0.84% 1.11% 1.10% 1.09% 1.22% 1.30% 1.25% Impact of lower yields on other interest-earning assets* (0.03) (0.04) (0.04) (0.05) (0.04) (0.05) (0.04) (0.03) Impact of borrowing rates on unsecured borrowings and other interest-paying liabilities* (0.05) (0.06) (0.06) (0.07) (0.06) (0.07) (0.07) (0.07) Total financing spreads Core earnings available to common stockholders and core earnings per diluted common share: Quarter Ended Year Ended June 30, 2013 December 31, 2013 Net income available to common stockholders $ 4,103 $0.04 $ 89,027 $0.93 Redemption preference premiums paid 19, , Convertible preferred dividends accruing from the Series E preferred stock issue date to the convertible preferred redemption date 1, , Core earnings available to common stockholders $ 25,768 $0.27 $110,692 $1.16 Other interest-earning assets consist of overnight investments and cash collateral receivable from interest rate swap counterparties. Other interest-paying liabilities consist of long-term unsecured borrowings (at an average borrowing rate of 8.49%) that the Company considers a component of its long-term investment capital and cash collateral payable to interest rate swap counterparties. 18

19 Experienced Management Team Over 100 years of combined mortgage finance industry experience. Andrew F. Jacobs President and Chief Executive Officer, Director Has served as president and chief executive officer since 2003 and has held various executive positions at Capstead since 1988 Previously served as a member of the Executive Board of the National Association of Real Estate Investment Trusts ( NAREIT ) and as chairman of NAREIT s Council of Mortgage REITs; is a member of the Executive Committee of the Chancellor s Council of the University of Texas System; and is a member of the Advisory Council of the McCombs School of Business, the Advisory Council to the Department of Accounting at the McCombs School of Business, and the Executive Council of the Real Estate Finance and Investment Center, each at the University of Texas at Austin. Mr. Jacobs is a Certified Public Accountant ( CPA ). Phillip A. Reinsch Executive Vice President and Chief Financial Officer, Treasurer and Secretary Has held various financial accounting and reporting positions at Capstead since 1993 Formerly employed by Ernst & Young LLP as an audit senior manager focusing on mortgage banking and asset securitization CPA, Member AICPA, FEI, NACD Robert A. Spears Executive Vice President, Chief Investment Officer Has served in asset and liability management positions at Capstead since 1994 Formerly Vice President of secondary marketing with NationsBanc Mortgage Corporation Roy S. Kim Senior Vice President, Asset and Liability Management Joined Capstead in April 2015 augmenting our asset and liability management capabilities with primary responsibility for liability management Has over 20 years experience in the mortgage finance industry, primarily in trading capacities with JP Morgan and Bank of America 19