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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: June 30, 2021

☐	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		(I.R.S. Employer
incorporation or organization)		Identification No.)
8401 North Central Expressway, Suite 800, Dallas, TX		75225-4404
(Address of principal executive offices)		(Zip Code)

(214) 874-2323

(Registrant’s telephone number, including area code)

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 whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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 the 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, a 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☑

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Common Stock ($0.01par value)		96,875,560 as of August 3, 2021

CAPSTEAD MORTGAGE CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2021

INDEX


PART I. — FINANCIAL INFORMATION
		Page
ITEM 1.	Financial Statements (unaudited)

Consolidated Balance Sheets — June 30, 2021 and December 31, 2020		3

Consolidated Statements of Operations — Quarter and Six Months Ended June 30, 2021 and 2020		4

Consolidated Statements of Comprehensive Income — Quarter and Six Months Ended June 30, 2021 and 2020		5

Consolidated Statements of Stockholders’ Equity — Quarter and Six Months Ended June 30, 2021 and 2020		6

Consolidated Statements of Cash Flows — Six Months Ended June 30, 2021 and 2020		7

Notes to Consolidated Financial Statements		8

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

ITEM 3.	Quantitative and Qualitative Disclosure of Market Risk	38

ITEM 4.	Controls and Procedures	38

PART II. — OTHER INFORMATION
ITEM 1A.	Risk Factors	39
ITEM 6.	Exhibits	40

SIGNATURES		42

-2-

ITEM 1. FINANCIAL STATEMENTS

PART I. — FINANCIAL INFORMATION

CAPSTEAD MORTGAGE CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except pledged and per share amounts)

	June 30, 2021			December 31, 2020
	(unaudited)
Assets
Residential mortgage investments ($7.14 and $7.71 billion pledged at June 30, 2021 and December 31, 2020, respectively)	$	7,429,792			$	7,937,552
Cash collateral receivable from derivative counterparties		78,161				74,411
Cash and cash equivalents		207,392				257,180
Receivables and other assets		134,316				136,107
	$	7,849,661			$	8,405,250
Liabilities
Secured borrowings	$	6,809,883			$	7,319,083
Derivatives at fair value		33,335				41,484
Unsecured borrowings		98,544				98,493
Common stock dividend payable		15,289				15,281
Accounts payable and accrued expenses		19,597				20,746
		6,976,648				7,495,087
Stockholders’ equity
Preferred stock - $0.10 par value; 100,000 shares authorized:
7.50% Cumulative Redeemable Preferred Stock, Series E, 10,329 shares issued and outstanding ($258,226 aggregate liquidation preference) at June 30, 2021 and December 31, 2020		250,946				250,946
Common stock - $0.01 par value; 250,000 shares authorized:
96,848 and 96,481 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively		968				965
Paid-in capital		1,269,599				1,268,439
Accumulated deficit		(655,406	)			(651,071	)
Accumulated other comprehensive income		6,906				40,884
		873,013				910,163
	$	7,849,661			$	8,405,250

See accompanying notes to consolidated financial statements.

-3-

CAPSTEAD MORTGAGE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

	Quarter Ended						Six Months Ended
	June 30						June 30
	2021			2020			2021			2020
Interest income
Residential mortgage investments	$	20,776		$	48,111		$	46,941		$	117,318
Other		12			28			25			431
		20,788			48,139			46,966			117,749
Interest expense
Secured borrowings		(2,826	)		(13,039	)		(6,998	)		(58,295	)
Unsecured borrowings		(1,900	)		(1,900	)		(3,791	)		(3,800	)
		(4,726	)		(14,939	)		(10,789	)		(62,095	)
		16,062			33,200			36,177			55,654
Other (expense) income
Gain (loss) on derivative instruments (net)		2,100			(6,948	)		4,482			(162,687	)
Loss on sale of investments (net)		–			–			–			(67,820	)
Compensation-related expense		(1,861	)		(2,330	)		(3,953	)		(4,534	)
Other general and administrative expense		(772	)		(1,219	)		(2,237	)		(2,421	)
Miscellaneous other revenue (expense)		–			1			2			(141	)
		(533	)		(10,496	)		(1,706	)		(237,603	)
Net income (loss)		15,529			22,704			34,471			(181,949	)
Less preferred stock dividends		(4,842	)		(4,842	)		(9,684	)		(9,684	)
Net income (loss) to common stockholders	$	10,687		$	17,862		$	24,787		$	(191,633	)

Net income (loss) per common share
Basic and diluted	$	0.11		$	0.19		$	0.26		$	(2.01	)

Weighted average common shares outstanding:
Basic		95,995			95,655			95,945			95,276
Diluted		96,454			95,887			96,342			95,276

See accompanying notes to consolidated financial statements.

-4-

CAPSTEAD MORTGAGE CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands, unaudited)

	Quarter Ended						Six Months Ended
	June 30						June 30
	2021			2020			2021			2020
Net income (loss)	$	15,529		$	22,704		$	34,471		$	(181,949	)

Other comprehensive (loss) income
Amounts related to available for sale securities:
Change in net unrealized gain or loss		(21,881	)		64,659			(43,364	)		(1,111	)
Reclassification adjustment for amounts included in net income (loss)		–			–			–			66,864
Amounts related to cash flow hedges:
Change in net unrealized gain or loss		(7,088	)		(567	)		6,204			(21,818	)
Reclassification adjustment for amounts included in net income (loss)		1,566			938			3,182			1,418
		(27,403	)		65,030			(33,978	)		45,353
Comprehensive (loss) income	$	(11,874	)	$	87,734		$	493		$	(136,596	)

See accompanying notes to consolidated financial statements.

-5-

CAPSTEAD MORTGAGE CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, unaudited)

	Preferred Stock		Common Stock		Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income			Total Stockholders’ Equity
Balance at March 31, 2021	$	250,946	$	968	$	1,269,021	$	(651,551	)	$	34,309		$	903,693
Net income	–		–		–			15,529		–				15,529
Change in unrealized gain on mortgage securities, net	–		–		–		–				(21,881	)		(21,881	)
Amounts related to cash flow hedges, net	–		–		–		–				(5,522	)		(5,522	)
Cash dividends:
Common – $0.15 per share	–		–		–			(14,542	)	–				(14,542	)
Preferred – $0.47 per share	–		–		–			(4,842	)	–				(4,842	)
Other additions to capital	–		–			578	–			–				578
Balance at June 30, 2021	$	250,946	$	968	$	1,269,599	$	(655,406	)	$	6,906		$	873,013

Balance at March 31, 2020	$	250,946	$	964	$	1,266,045	$	(668,053	)	$	(6,278	)	$	843,624
Net income	–		–		–			22,704		–				22,704
Change in unrealized gain on mortgage securities, net	–		–		–		–				64,659			64,659
Amounts related to cash flow hedges, net	–		–		–		–				371			371
Cash dividends:
Common – $0.15 per share	–		–		–			(14,558	)	–				(14,558	)
Preferred – $0.47 per share	–		–		–			(4,842	)	–				(4,842	)
Other additions to capital	–		–			931	–			–				931
Balance at June 30, 2020	$	250,946	$	964	$	1,266,976	$	(664,749	)	$	58,752		$	912,889

Balance at December 31, 2020	$	250,946	$	965	$	1,268,439	$	(651,071	)	$	40,884		$	910,163
Net income	–		–		–			34,471		–				34,471
Change in unrealized gain on mortgage securities, net	–		–		–		–				(43,364	)		(43,364	)
Amounts related to cash flow hedges, net	–		–		–		–				9,386			9,386
Cash dividends:
Common – $0.30 per share	–		–		–			(29,122	)	–				(29,122	)
Preferred – $0.94 per share	–		–		–			(9,684	)	–				(9,684	)
Other additions to capital	–			3		1,160	–			–				1,163
Balance at June 30, 2021	$	250,946	$	968	$	1,269,599	$	(655,406	)	$	6,906		$	873,013

Balance at December 31, 2019	$	250,946	$	946	$	1,252,481	$	(444,039	)	$	13,399		$	1,073,733
Net loss	–		–		–			(181,949	)	–				(181,949	)
Change in unrealized gain on mortgage securities, net	–		–		–		–				65,753			65,753
Amounts related to cash flow hedges, net	–		–		–		–				(20,400	)		(20,400	)
Cash dividends:
Common – $0.30 per share	–		–		–			(29,077	)	–				(29,077	)
Preferred – $0.94 per share	–		–		–			(9,684	)	–				(9,684	)
Issuance of common stock	–			16		12,841	–			–				12,857
Other additions to capital	–			2		1,654	–			–				1,656
Balance at June 30, 2020	$	250,946	$	964	$	1,266,976	$	(664,749	)	$	58,752		$	912,889

See accompanying notes to consolidated financial statements.

-6-

CAPSTEAD MORTGAGE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

	Six Months Ended June 30
	2021			2020
Operating activities:
Net income (loss)	$	34,471		$	(181,949	)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Amortization of investment premiums		43,298			36,079
Amortization of equity-based awards		1,285			1,767
Amortization of unrealized loss (net) on de-designated hedges		1,237			19
Loss on sale of mortgage investments		–			67,820
(Gain) loss on derivative instruments (net)		(4,514	)		155,835
Other depreciation and amortization		66			59
Net change in receivables, other assets, accounts payable and accrued expenses		3,971			1,479
Net cash provided by operating activities		79,814			81,109
Investing activities:
Purchases of residential mortgage investments		(1,411,055	)		(1,453,161	)
Proceeds from sales of residential mortgage investments		–			2,558,871
Interest receivable acquired with the purchase of residential mortgage investments		(1,815	)		(2,519	)
Principal collections on residential mortgage investments, including changes in mortgage securities principal remittance receivable		1,830,673			1,753,877
Net cash provided by investing activities		417,803			2,857,068
Financing activities:
Proceeds from repurchase arrangements and similar borrowings		31,565,784			47,502,427
Principal payments on repurchase arrangements and similar borrowings		(32,074,984	)		(50,202,545	)
Increase in cash collateral receivable from derivative counterparties		(3,750	)		(38,141	)
Net receipts from (payments on) derivative settlements		4,461			(157,773	)
Issuance of common stock		–			12,882
Other capital stock transactions		(104	)		(108	)
Dividends paid		(38,812	)		(38,325	)
Net cash used in financing activities		(547,405	)		(2,921,583	)
Net change in cash and cash equivalents		(49,788	)		16,594
Cash and cash equivalents at beginning of period		257,180			105,397
Cash and cash equivalents at end of period	$	207,392		$	121,991

See accompanying notes to consolidated financial statements.

-7-

CAPSTEAD MORTGAGE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

(unaudited)

NOTE 1 — BUSINESS

Capstead Mortgage Corporation operates as a self-managed real estate investment trust for federal income tax purposes (a “REIT”) 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 earns income from investing in 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, 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.

NOTE 2 — BASIS OF PRESENTATION

Interim Financial Reporting

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2021. For further information refer to the audited consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2020.

NOTE 3 — NET INCOME (LOSS) PER COMMON SHARE

Basic net income (loss) per common share is computed by dividing net income, after deducting dividends paid or accrued on preferred stock and allocating earnings to equity awards deemed to be participating securities pursuant to the two-class method, by the average number of shares of common stock outstanding, calculated excluding unvested stock awards. Participating securities include unvested equity awards that contain non-forfeitable rights to dividends prior to vesting.

Diluted net income (loss) per common share is computed by dividing the numerator used to compute basic net income (loss) per common share by the denominator used to compute basic net income (loss) per common share, further adjusted for the dilutive effect, if any, of equity awards and shares of preferred stock when and if convertible into shares of common stock. Shares of the Company’s 7.50% Series E Cumulative Redeemable Preferred Stock are contingently convertible into shares of common stock only under certain circumstances associated with the occurrence of a change in control and therefore are not considered dilutive securities absent such circumstances. Any unvested equity awards that are deemed participating securities are included in the calculation of diluted net income (loss) per common share, if dilutive, under either the two-class method or the treasury stock method, depending upon which method produces the more dilutive result.

-8-

Components of the computation of basic and diluted net income (loss) per common share were as follows for the indicated periods (dollars in thousands, except per share amounts):

	Quarter Ended						Six Months Ended
	June 30						June 30
	2021			2020			2021			2020
Basic net income (loss) per common share
Numerator for basic net income (loss) per common share:
Net income (loss)	$	15,529		$	22,704		$	34,471		$	(181,949	)
Preferred stock dividends		(4,842	)		(4,842	)		(9,684	)		(9,684	)
Earnings participation of unvested equity awards		(24	)		(40	)		(60	)		(64	)
	$	10,663		$	17,822		$	24,727		$	(191,697	)
Denominator for basic net income (loss) per common share:
Average number of shares of common stock outstanding		96,848			96,395			96,821			96,015
Average unvested stock awards outstanding		(853	)		(740	)		(876	)		(739	)
		95,995			95,655			95,945			95,276
	$	0.11		$	0.19		$	0.26		$	(2.01	)
Diluted net income (loss) per common share
Numerator for diluted net income (loss) per common share	$	10,663		$	17,822		$	24,727		$	(191,697	)

Denominator for diluted net income (loss) per common share:
Denominator for basic net income (loss) per common share		95,995			95,655			95,945			95,276
Net effect of dilutive equity awards		459			232			397			–
		96,454			95,887			96,342			95,276
	$	0.11		$	0.19		$	0.26		$	(2.01	)

There were no potentially dilutive securities excluded from the computation of diluted net income (loss) per common share for the quarter and six months ended June 30, 2021. There were 383,000 and 952,000 potentially dilutive securities excluded from the computation of diluted net income (loss) per common share for the quarter and six months ended June 30, 2020, respectively.

-9-

NOTE 4 — RESIDENTIAL mortgage investments

Residential mortgage investments classified by collateral type and interest rate characteristics as of the indicated dates were as follows (dollars in thousands):

	Unpaid Principal Balance		Investment Premiums		Amortized Cost Basis		Carrying Amount (a)		Net WAC ^(b)			Average Yield (c)
June 30, 2021
Agency Securities:
Fannie Mae/Freddie Mac ARMs	$	6,663,751	$	262,349	$	6,926,100	$	6,961,924		2.42	%		1.12	%
Ginnie Mae ARMs		448,420		14,085		462,505		467,868		3.19			1.40
	$	7,112,171	$	276,434	$	7,388,605	$	7,429,792		2.47			1.14

December 31, 2020
Agency Securities:
Fannie Mae/Freddie Mac ARMs	$	6,982,650	$	252,921	$	7,235,571	$	7,310,089		2.67	%		1.51	%
Ginnie Mae ARMs		599,726		17,704		617,430		627,463		3.39			2.05
	$	7,582,376	$	270,625	$	7,853,001	$	7,937,552		2.73			1.55

(a)	Includes unrealized gains and losses for residential mortgage investments classified as available-for-sale.

(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 balance sheet 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.

(c)

Average yield is presented for the quarter then ended and is based on the cash component of interest income expressed as a percentage calculated on an annualized basis on average amortized cost basis (the “cash yield”) less the effects of amortizing investment premiums. Investment premium amortization is determined using the interest method and incorporates actual and anticipated future mortgage prepayments.

Agency Securities are considered to have limited, if any, credit risk because the timely payment of principal and interest is guaranteed. The maturity of Agency Securities is directly affected by prepayments of principal on the underlying mortgage loans. Consequently, actual maturities will be significantly shorter than the portfolio’s weighted average contractual maturity of 291 months.

Capstead’s ARM Agency Securities are backed by residential 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. After the initial fixed-rate period, if applicable, mortgage loans underlying ARM securities typically either (i) adjust 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”), (ii) adjust semiannually based on specified margins over six-month LIBOR or the six-month Secured Overnight Financing Rate (“SOFR”), or (iii) adjust 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, 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.

Capstead classifies its ARM investments based on average number of months until coupon reset (“months to roll”). Months to roll is an indicator of asset duration which is a measure of market price sensitivity to interest rate movements. A shorter duration generally indicates less interest rate risk. Current-reset ARM investments have months to roll of less than 18 months while longer-to-reset ARM investments have months to roll of 18 months or greater.

-10-

As of June 30, 2021, the average months to roll for the Company’s $2.94 billion (amortized cost basis) in current-reset ARM investments was approximately seven months while the average months to roll for the Company’s $4.45 billion (amortized cost basis) in longer-to-reset ARM investments was approximately 62 months.

The Company did not sell any securities during the quarter and six months ended June 30, 2021. In March 2020, the Company sold available-for-sale securities using the specific identification method for proceeds totaling $2.56 billion recognizing no gross realized gains and gross realized losses totaling $67.8 million.

NOTE 5 — SECURED borrowings

Capstead pledges its Residential mortgage investments as collateral for secured borrowings primarily in the form of repurchase arrangements with commercial banks and other financial institutions. Repurchase arrangements entered into by the Company involve the sale and a simultaneous agreement to repurchase the transferred assets at a future date and are accounted for as financings. 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. The amount borrowed is generally equal to the fair value of the securities pledged, as determined by the lending counterparty, less an agreed-upon discount, referred to as a “haircut.” Interest 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 lending counterparty or repay that counterparty and negotiate financing with a different lending counterparty. None of the Company’s lending counterparties are obligated to renew or otherwise enter into new borrowings at the conclusion of existing borrowings. In response to declines in fair value of pledged securities due to changes in market conditions or the publishing of monthly security pay-down factors, lending counterparties 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. These actions are referred to as margin calls. Conversely, in response to increases in fair value of pledged securities, the Company routinely margin calls its lending counterparties in order to have previously pledged collateral returned.

-11-

Secured borrowings (and related pledged collateral, including accrued interest receivable), classified by collateral type and remaining maturities, and related weighted average borrowing rates as of the indicated dates were as follows (dollars in thousands):

Collateral Type	Agency Securities Pledged		Accrued Interest Receivable		Borrowings Outstanding		Average Borrowing Rates
June 30, 2021
Borrowings under repurchase arrangements with maturities of 30 days or less	$	6,616,872	$	13,407	$	6,309,883		0.10	%
Borrowings under repurchase arrangements with maturities of 31 to 90 days		519,707		1,022		500,000		0.29
	$	7,136,579	$	14,429	$	6,809,883		0.12

December 31, 2020
Borrowings under repurchase arrangements with maturities of 30 days or less	$	5,249,989	$	12,597	$	4,972,181		0.21	%
Borrowings under repurchase arrangements with maturities of 31 to 90 days		1,939,034		4,225		1,846,902		0.20
Borrowings under repurchase arrangements with maturities of greater than 90 days		522,969		1,167		500,000		0.29
	$	7,711,992	$	17,989	$	7,319,083		0.21

Average secured borrowings outstanding were $6.6 billion and $7.4 billion during the quarters ended June 30, 2021 and December 31, 2020, respectively. Average secured borrowings outstanding during the indicated periods differed from respective ending balances due to changes in portfolio levels and differences in the timing of portfolio acquisitions relative to portfolio runoff.

-12-

NOTE 6 — USE OF DERIVATIVES, OFFSETTING DISCLOSURES AND CHANGES IN OTHER COMPREHENSIVE INCOME BY COMPONENT

Capstead’s portfolio of derivative financial instruments (“Derivatives”) hedge the variability of the underlying benchmark interest rate of current and forecasted 30- to 90-day secured borrowings. The Company attempts to mitigate exposure to higher interest rates primarily by entering into Overnight Index Swap (“OIS”)- and SOFR-indexed, pay-fixed, receive-variable, interest rate swap agreements for terms between eighteen months and three years. From an economic perspective, this hedge relationship establishes a relatively stable fixed rate on related borrowings because the variable-rate payments received on the swap agreements offset a portion of the interest accruing on the borrowings, leaving primarily the fixed-rate swap payments as the Company’s effective borrowing rate. Additionally, changes in fair value of these Derivatives tend to partially offset opposing changes in fair value of the Company’s residential mortgage investments that can occur in response to changes in market interest rates.

During the quarter and six months ended June 30, 2021, Capstead entered into swap agreements with notional amounts totaling $1.03 billion and $1.28 billion, respectively, requiring fixed-rate interest payments averaging 0.29%. No swap agreements matured during the quarter and six months ended June 30, 2021. At June 30, 2021 the Company’s swap positions related to secured borrowings had the following characteristics (dollars in thousands):

Period of Contract Expiration	Notional Amount		Average Fixed-Rate Payment Requirement
Second quarter 2022	$	400,000		0.02	%
Third quarter 2022		1,200,000		0.01
Fourth quarter 2022		900,000		0.07
First quarter 2023		50,000		0.13
Second quarter 2023		350,000		0.20
Third quarter 2023		100,000		0.03
Fourth quarter 2023		374,500		0.09
First quarter 2024		150,000		0.28
Second quarter 2024		725,000		0.34
	$	4,249,500

The Company has three-month LIBOR-indexed, pay-fixed, receive-variable, interest rate swap agreements with notional amounts totaling $100 million and average fixed rates of 4.09% with 20-year payment terms coinciding with the floating-rate terms of the Company’s Unsecured borrowings that mature in 2035 and 2036. These Derivatives, which are designated as cash flow hedges for accounting purposes, hedge the variability of the underlying benchmark interest rate associated with the floating-rate terms of these long-term borrowings. These Derivatives’ LIBOR-indexed receive rates match the underlying floating-rate terms of the Company’s Unsecured borrowings and therefore the eventual replacement of the LIBOR index on these Derivatives is not expected to have any financial impact.

-13-

Interest rate swap agreements are measured at fair value on a recurring basis primarily using Level 2 Inputs in accordance with ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820). Fair value estimates for these Derivatives are calculated using the net discounted future fixed cash payments and the discounted future variable cash receipts which are based on expected future interest rates derived from observable market interest rate curves. The Company also incorporates both its own nonperformance risk and its counterparties’ nonperformance risk in determining fair value. In considering the effect of nonperformance risk, the Company considered the impact of netting and credit enhancements, such as collateral postings and guarantees, and has concluded that counterparty risk is not significant to the overall valuation.

The fair value of exchange-traded swap agreements hedging Secured borrowings is calculated including accrued interest and net of variation margin amounts received or paid through the exchange, resulting in separately presenting on the balance sheet a significantly reduced fair value amount representing the unsettled fair value of these Derivatives. Non-exchange traded swap agreements held as cash flow hedges of Unsecured borrowings are reported at fair value calculated excluding accrued interest. Cash collateral receivable from derivative counterparties includes initial margin for all Derivatives and variation margin for non-exchange traded Derivatives. Accrued interest for non-exchange traded swap agreements is included in Accounts payable and accrued expenses.

The following tables include fair value and other related disclosures regarding all Derivatives held as of and for the indicated periods (in thousands):

	Balance Sheet	June 30			December 31
	Location	2021			2020
Balance sheet-related
Swap agreements in a loss position (a liability) related to
unsecured borrowings	(a)	$	(33,335	)	$	(41,484	)
Related net interest payable	(b)		(603	)		(597	)
		$	(33,938	)	$	(42,081	)

(a)	The fair value of Derivatives with unrealized gains are aggregated and recorded as an asset on the face of the Balance Sheets separately from the fair value of Derivatives with unrealized losses that are recorded as a liability.

(b)	Included in “Accounts payable and accrued expenses” on the face of the Balance Sheets.

-14-

	Location of Gain or (Loss) Recognized in	Quarter Ended June 30						Six Months Ended June 30
	Net Income		2021			2020			2021			2020
Income statement-related
Component of Secured borrowings-related effects on interest expense:
Amortization of unrealized gain, net of unrealized losses on de-designated Derivatives		$	(591	)	$	(122	)	$	(1,237	)	$	(19	)
	(a)		(591	)		(122	)		(1,237	)		(19	)
Component of Unsecured borrowings-related effects on interest expense:
Amount of loss reclassified from Accumulated other comprehensive income	(b)		(975	)		(816	)		(1,945	)		(1,399	)
Decrease in interest expense as a result of the use of Derivatives		$	(1,566	)	$	(938	)	$	(3,182	)	$	(1,418	)

Realized and unrealized gain (loss) on non-designated Derivatives (net) related to:
Interest rate swap agreements		$	2,100		$	(6,664	)	$	4,482		$	(159,888	)
Eurodollar futures		–				(284	)	–				(2,799	)
	(c)	$	2,100		$	(6,948	)	$	4,482		$	(162,687	)

Other comprehensive income-related
Amount of gain (loss) recognized in Other comprehensive (loss) income		$	(7,088	)	$	(567	)	$	6,204		$	(21,818	)

(a)	Included in “Interest expense: Secured borrowings” on the face of the Consolidated Statements of Operations.

(b)	Included in “Interest expense: Unsecured borrowings” on the face of the Consolidated Statements of Operations.

(c)	Included in “Loss on derivative instruments (net)” on the face of the Consolidated Statement of Operations.

Capstead’s swap agreements and borrowings under repurchase arrangements are subject to master netting arrangements in the event of default on, or termination of, any one contract. See NOTE 5 for more information on the Company’s use of secured borrowings. The following tables provide disclosures concerning offsetting of financial liabilities and Derivatives as of the indicated dates (in thousands):

Offsetting of Derivative Assets

Gross

Net Amounts

Gross Amounts Not Offset

Gross

Amounts

of Assets

in the Balance Sheet ^(b)

Amounts of

Offset in

Presented in

Cash

Recognized

the Balance

Financial

Collateral

Net

Assets ^(a)

Sheet ^(a)

Sheet

Instruments

Received

Amount

June 30, 2021

CAPSTEAD MORTGAGE CORP 10-Q