Capstead Mortgage Corp. (NYSE:CMO) Q3 2019 Earnings Conference Call - Final Transcript
Oct 24, 2019 • 09:00 am ET
Phillip A. Reinsch
book with new lower rate swaps, all while not dramatically altering our overall hedge position and effectively locking in market expectations at the time of these trades for more Fed rate cuts.
As a result of these efforts, at September 30tg, the fixed rate on our swap book stood at 2.04%, down considerably from an average fixed rate of 2.14% during this quarter, which will lead us to significantly lower hedging cost in the quarters to come. I want to emphasize that while the mortgage prepayment levels we experienced this quarter were higher, the rate of increase at under 15% quarter-over-quarter was significantly less than the overall 40% increase in agency fixed rates speeds. Further, ARM speeds actually declined for October versus continued increases in the fixed rate universe.
To wrap this up, we are increasingly optimistic about our earnings prospects, with mortgage prepayments moderating, short-term interest rates declining with no swap help from the Fed, hedging costs declining, attractive returns available on agency ARMs and dry powder, thanks to cautious leverage management and our timely equity raise.
With that, I'll turn the call over to Lance.
Lance J. Phillips
Thank you, Phil. We reported GAAP net income of $3.2 million this quarter, a net loss of $0.02 per diluted common share. Our core earnings were $14.8 million or $0.11 per diluted common share. The difference between our GAAP and core results this quarter primarily relates to the impact of lower prevailing interest rates on our interest rate swap agreements and other derivatives held for hedging purposes. We included a reconciliation of these differences on Page 9 of our press release.
Portfolio yields averaged 2.76% during the quarter, a decrease of 6 basis points from the 2.82% we reported in the second quarter. Yields declined primarily due to the effects of higher mortgage prepayment levels while cash yields were largely unchanged. Our portfolio-related borrowing cost, after adjusting for hedging activities, averaged 2.31% during the third quarter, 4 basis points lower than in the prior quarter. The benefits of a larger decline in unhedged rates and a lower fixed rate -- lower fixed rates on our swap book were partially offset by the continued decline in three-month LIBOR, which negatively impacted the receive leg of these derivatives. Book value decreased $0.33 per share during the third quarter, ending at $8.60 per common share, reflecting a $0.23 decline associated with our hedging activities, $0.06 in initial dilution related to our capital issuance in August and $0.03 in partially related pricing change or portfolio-related pricing change.
With that, we will open the call up to questions.