CMO
#Good morning.
Welcome everyone.
Before we get started, I wanted to express on behalf of management and our employees our gratitude to the many contributions made by Andy Jacobs, our former President and CEO over his past 28 years with Capstead.
As you may know Andy resigned on July 14 and pursuant to a consulting arrangement has made himself available to us through year-end to help ensure a smooth transition.
Respecting Andy's privacy, we do not intend to discuss his departure further on this call or otherwise other than to note that this leadership change in no way foreshadows any significant change in Capstead's short duration agency ARM investment strategy.
I refer you to the Company's press release also dated the 14th and our subsequent Form 8-K filing for all public information available on this subject.
Now, if I may, a few quick comments on market conditions and our second quarter earnings.
The markets that we deal in have been fairly volatile thus far in 2016.
Most critically our earnings ---+ most critical to our earnings this year's 80 basis point decline in the 10-year US treasury rate to 1.47% at quarter-end has led to yet another mortgage refinancing wave.
And our second quarter earnings were negatively impacted by higher investment premium amortization charges caused by higher mortgage prepayment levels.
While mortgage prepayment levels are heavily influenced by the available mortgage financing at attractive terms, prepayments are also influenced by the overall health of the housing market and seasonal factors, not the least of which is the summer selling season.
Given currently available mortgage rates, a healthy housing market and seasonality, we are anticipating that mortgage prepayment levels will increase further during the third quarter before declining in the fourth quarter.
In the meantime, we continue to enjoy incrementally higher cash yields on mortgage loans underlying our portfolio as they continue resetting higher rate based on higher prevailing six and 12-month interest rate indices and borrowing conditions also remain constructive, particularly with the Fed appearing to be on hold for the time being.
Given current market fundamentals, we remain comfortable replacing portfolio run-off with additional agency ARM securities and anticipate maintaining portfolio leverage near present levels.
With that, I will open the call up to questions.
Sure, our runoff is running around $250 million to $300 million a month.
So a $1 billion or so a quarter right in this area of the year.
We look at how the ---+ redeploying the capital in the portfolio whether that makes sense, these are other options for the capital and we do have a $100 million buyback authorization from our Board and that we would certainly use that buyback authorization, if that was a better use of capital than redeploying into the portfolio.
We continue to believe that the ARM market is a great way to play the residential mortgage finance business and being a levered player in this space and see the long-term advantages to running a large short duration ARM portfolio and don't anticipate expanding our purview beyond the short duration space.
Well, generically [back to security to] ARM security similar to ours, I would say speeds were up 8% to 9% which equates to couple of CPR something like that.
Yes, <UNK>, I will take that.
We're not seeing any pressure on repo rate.
I think a lot of the movement up in LIBOR has to do with European funding cost pots Brexit, whether it'd be commercial paper or what European banks are having to take their money.
At the same time, you get this money market reform that should make once it's implemented agency repo a very attractive alternative for those domestic money market mutual funds.
And so what we're seeing which is ---+ this is kind of helping to offset some of the negatives on the prepayments side, we're seeing LIBOR go up which helps our indexes and it also helps us receiving on the SLOB stock, but we're not (technical difficulty) if the rates go up.
And so we're still repaying around 65 basis points which is where we were before with [the life along] one month where we're receiving, if that's 49 basis points.
And so that spread only about 16 where it has been running closer to 20.
So that helps us.
And also to your point about reset just since June 30th, if you look at one year and six months LIBOR, they're up 17 basis points and then when you're seeing [fees up 10].
And so net just looking at our Fannie, Freddie short resets that's a bulk of 15 basis points.
And so if you look at on page 82, we show our fully indexed WAC that's now going to be about 15 basis points higher, if rates stay where they are right now.
So that helps to offset some of the prepayment pressure.
Now on the other hand, (inaudible) resetting higher and so they might have a little more incentive to refinance, so that's going to be somewhat offset by prepayments, but net of net LIBOR going up is a good for us.
It's dislocated a little bit on LIBOR recently.
Yes, sure we really do, the first quarter had an adjustment of prior year accruals.
And we would certainly (technical difficulty) one of the top two or three in terms of operating efficiency going forward except one point.
Yes, we're going to put a new CFO in place within the next few months I imagine and so we won't have a gigantic change.
Andy's elements will drop off and we will be adding that.
ARM pricing and book values quarter to-date; is that what you're asking.
I am sorry, are you asking since what ---+ since quarter end.
Yes, I would say generically seasoned post resets are more or less unchanged in price and longer resets kind of in the (inaudible) so not a lot of movement.
No, I don't see that.
Replacing ARM securities with treasury securities.
No, that's probably not going to happen.
I mean if you look at prepays there a little higher than they were on the ARM's segment than they were in 2015 where we were at similar fixed rate levels.
On the curve, we were flat, so probably going to see the peak and speed a little higher this year than it was last year, but we're not expecting that to be materially higher.
