CAPSTEAD MORTGAGE CORP (Form: 10-Q, Received: 07/26/2019 16:47:05)

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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, 2019

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)		85,606,455 as of July 26, 2019

CAPSTEAD MORTGAGE CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED June 30, 2019

INDEX


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

Consolidated Balance Sheets — June 30, 2019 and December 31, 2018		3

Consolidated Statements of Operations — Quarter and Six Months Ended June 30, 2019 and 2018		4

Consolidated Statements of Comprehensive Income (Loss) — Quarter and Six Months Ended June 30, 2019 and 2018		5

Consolidated Statements of Stockholders’ Equity — Quarter and Six Months Ended June 30, 2019 and 2018		6

Consolidated Statements of Cash Flows — Six Months Ended June 30, 2019 and 2018		7

Notes to Consolidated Financial Statements		8

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

ITEM 3.	Quantitative and Qualitative Disclosure of Market Risk	35

ITEM 4.	Controls and Procedures	35

PART II. — OTHER INFORMATION
ITEM 1A.	Risk Factors	36
ITEM 5A.	Other Information	36

ITEM 6.	Exhibits	36

SIGNATURES		38

-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, 2019			December 31, 2018
	(unaudited)
Assets
Residential mortgage investments ($11.30 and $11.57 billion pledged at June 30, 2019 and December 31, 2018, respectively)	$	11,531,219			$	11,965,381
Cash collateral receivable from interest rate swap counterparties		70,873				31,797
Interest rate swap agreements at fair value		2,128				–
Cash and cash equivalents		179,478				60,289
Receivables and other assets		143,405				129,058
	$	11,927,103			$	12,186,525
Liabilities
Secured borrowings	$	10,742,574			$	10,979,362
Interest rate swap agreements at fair value		28,284				17,834
Unsecured borrowings		98,342				98,292
Common stock dividend payable		10,605				7,132
Accounts payable and accrued expenses		24,910				24,842
		10,904,715				11,127,462
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, 2019 and December 31, 2018		250,946				250,946
Common stock - $0.01 par value; 250,000 shares authorized:
85,549 and 85,277 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively		855				853
Paid-in capital		1,176,529				1,174,880
Accumulated deficit		(444,703	)			(346,570	)
Accumulated other comprehensive income (loss)		38,761				(21,046	)
		1,022,388				1,059,063
	$	11,927,103			$	12,186,525

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
	2019			2018			2019			2018
Interest income:
Residential mortgage investments	$	85,100		$	65,202		$	168,907		$	134,340
Other		600			305			1,022			713
		85,700			65,507			169,929			135,053
Interest expense:
Secured borrowings		(67,945	)		(48,241	)		(131,724	)		(93,262	)
Unsecured borrowings		(1,900	)		(1,900	)		(3,791	)		(3,791	)
		(69,845	)		(50,141	)		(135,515	)		(97,053	)
		15,855			15,366			34,414			38,000
Other (expense) income:
Loss on derivative instruments (net)		(74,842	)		–			(96,499	)		–
Loss on sale of investments (net)		(1,365	)		–			(1,365	)		–
Compensation-related expense		(1,972	)		(1,560	)		(5,581	)		(3,608	)
Other general and administrative expense		(1,138	)		(899	)		(2,266	)		(2,136	)
Miscellaneous other revenue		2			81			91			152
		(79,315	)		(2,378	)		(105,620	)		(5,592	)
Net (loss) income		(63,460	)		12,988			(71,206	)		32,408
Less preferred stock dividends		(4,842	)		(4,842	)		(9,684	)		(9,684	)
Net (loss) income to common stockholders:	$	(68,302	)	$	8,146		$	(80,890	)	$	22,724

Net (loss) income per common share:
Basic and diluted	$	(0.80	)	$	0.09		$	(0.95	)	$	0.24

Weighted average common shares outstanding:
Basic		84,934			92,001			84,914			92,709
Diluted		84,934			92,121			84,914			92,810

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
	2019			2018			2019			2018
Net (loss) income	$	(63,460	)	$	12,988		$	(71,206	)	$	32,408

Other comprehensive income
Amounts related to available-for-sale securities:
Change in net unrealized gains (losses)		48,550			(16,512	)		92,026			(60,565	)
Amounts related to cash flow hedges:
Change in net unrealized (losses) gains		(6,746	)		7,873			(15,297	)		38,805
Reclassification adjustment for amounts included in net income		(6,351	)		(9,971	)		(16,922	)		(14,614	)
		35,453			(18,610	)		59,807			(36,374	)
Comprehensive loss	$	(28,007	)	$	(5,622	)	$	(11,399	)	$	(3,966	)

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 (Loss)			Total Stockholders’ Equity
Balance at March 31, 2019	$	250,946	$	856		$	1,175,878		$	(366,110	)	$	3,308		$	1,064,878
Net loss	–		–			–				(63,460	)	–				(63,460	)
Change in unrealized gain on mortgage securities, net	–		–			–			–				48,550			48,550
Amounts related to cash flow hedges, net	–		–			–			–				(13,097	)		(13,097	)
Cash dividends:
Common – $0.12 per share	–		–			–				(10,291	)	–				(10,291	)
Preferred – $0.47 per share	–		–			–				(4,842	)	–				(4,842	)
Other additions to capital	–			(1	)		651		–			–				650
Balance at June 30, 2019	$	250,946	$	855		$	1,176,529		$	(444,703	)	$	38,761		$	1,022,388

Balance at March 31, 2018	$	250,946	$	925		$	1,242,573		$	(346,570	)	$	44,354		$	1,192,228
Net income	–		–			–				12,988		–				12,988
Change in unrealized gain on mortgage securities, net	–		–			–			–				(16,512	)		(16,512	)
Amounts related to cash flow hedges, net	–		–			–			–				(2,098	)		(2,098	)
Cash dividends:
Common – $0.14 per share	–		–				(4,776	)		(8,146	)	–				(12,922	)
Preferred – $0.47 per share	–		–			–				(4,842	)	–				(4,842	)
Common stock repurchases	–			(1	)		(410	)	–			–				(411	)
Other additions to capital	–		–				425		–			–				425
Balance at June 30, 2018	$	250,946	$	924		$	1,237,812		$	(346,570	)	$	25,744		$	1,168,856

Balance at December 31, 2018	$	250,946	$	853		$	1,174,880		$	(346,570	)	$	(21,046	)	$	1,059,063
Net loss	–		–			–				(71,206	)	–				(71,206	)
Change in unrealized gain on mortgage securities, net	–		–			–			–				92,026			92,026
Amounts related to cash flow hedges, net	–		–			–			–				(32,219	)		(32,219	)
Cash dividends:
Common – $0.20 per share	–		–			–				(17,243	)	–				(17,243	)
Preferred – $0.94 per share	–		–			–				(9,684	)	–				(9,684	)
Other additions to capital	–			2			1,649		–			–				1,651
Balance at June 30, 2019	$	250,946	$	855		$	1,176,529		$	(444,703	)	$	38,761		$	1,022,388

Balance at December 31, 2017	$	250,946	$	957		$	1,271,425		$	(346,570	)	$	62,118		$	1,238,876
Net income	–		–			–				32,408		–				32,408
Change in unrealized gain on mortgage securities, net	–		–			–			–				(60,565	)		(60,565	)
Amounts related to cash flow hedges, net	–		–			–			–				24,191			24,191
Cash dividends:
Common – $0.30 per share	–		–				(4,940	)		(22,724	)	–				(27,664	)
Preferred – $0.94 per share	–		–			–				(9,684	)	–				(9,684	)
Common stock repurchases	–			(35	)		(29,438	)	–			–				(29,473	)
Other additions to capital	–			2			765		–			–				767
Balance at June 30, 2018	$	250,946	$	924		$	1,237,812		$	(346,570	)	$	25,744		$	1,168,856

See accompanying notes to consolidated financial statements.

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CAPSTEAD MORTGAGE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

	Six Months Ended June 30
	2019			2018
Operating activities:
Net (loss) income	$	(71,206	)	$	32,408
Noncash items:
Amortization of investment premiums		36,399			55,939
Amortization of equity-based awards		1,779			842
Amortization of unrealized gain on de-designated hedges		(9,735	)		–
Realized loss on sale of mortgage investments		1,365			–
Unrealized loss on derivative instruments (net)		85,625			–
Other depreciation and amortization		54			53
Net change in receivables, other assets, accounts payable and accrued expenses		16,608			(6,082	)
Net cash provided by operating activities		60,889			83,160
Investing activities:
Purchases of residential mortgage investments		(1,538,636	)		(1,415,579	)
Proceeds from sales of residential mortgage investments		303,991			–
Interest receivable acquired with the purchase of residential mortgage investments		(3,293	)		(2,704	)
Principal collections on residential mortgage investments, including changes in mortgage securities principal remittance receivable		1,705,959			1,721,856
Redemption of lending counterparty investments		5,000			–
Net cash provided by investing activities		473,021			303,573
Financing activities:
Proceeds from repurchase arrangements and similar borrowings		71,904,683			96,246,580
Principal payments on repurchase arrangements and similar borrowings		(72,141,471	)		(96,640,768	)
(Decrease) increase in cash collateral receivable from interest rate swap counterparties		(39,076	)		8,876
Net (payments on) proceeds from interest rate swap settlements		(115,279	)		24,222
Common stock repurchases		–			(29,472	)
Other capital stock transactions		(106	)		(72	)
Dividends paid		(23,472	)		(42,603	)
Net cash used in financing activities		(414,721	)		(433,237	)
Net change in cash and cash equivalents		119,189			(46,504	)
Cash and cash equivalents at beginning of period		60,289			103,907
Cash and cash equivalents at end of period	$	179,478		$	57,403

See accompanying notes to consolidated financial statements.

-7-

CAPSTEAD MORTGAGE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(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 consisting almost exclusively 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. Residential mortgage pass-through securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae 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, 2019 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2019. 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, 2018.

Change in Use of Hedge Accounting

On March 1, 2019 the Company discontinued its use of hedge accounting on its interest rate swaps related to Secured borrowings, while retaining hedge accounting for swaps related to Unsecured borrowings. See NOTE 6 for additional information regarding how the Company accounts for its use of derivative instruments (“Derivatives”) and its related risk management policies.

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-02, Leases (“ASU 2016-02”) which requires entities who are lessees to recognize a right-of-use asset and a lease liability arising from those leases on the balance sheet. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The Company adopted ASU 2016-02 on January 1, 2019, which had no material effect on the Company’s results of operations, financial condition and cash flows.

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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 upon the occurrence of a change in control and therefore are not considered dilutive securities absent such an occurrence. 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. 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
	2019			2018			2019			2018
Basic net income (loss) per common share
Numerator for basic net income (loss) per common share:
Net income (loss)	$	(63,460	)	$	12,988		$	(71,206	)	$	32,408
Preferred stock dividends		(4,842	)		(4,842	)		(9,684	)		(9,684	)
Earnings participation of unvested equity awards		(25	)		(28	)		(44	)		(60	)
	$	(68,327	)	$	8,118		$	(80,934	)	$	22,664
Denominator for basic net income (loss) per common share:
Average number of shares of common stock outstanding		85,559			92,447			85,554			93,153
Average unvested stock awards outstanding		(625	)		(446	)		(640	)		(444	)
		84,934			92,001			84,914			92,709
	$	(0.80	)	$	0.09		$	(0.95	)	$	0.24
Diluted net income (loss) per common share
Numerator for diluted net income (loss) per common share	$	(68,327	)	$	8,118		$	(80,934	)	$	22,664
Denominator for diluted net income (loss) per common share:
Denominator for basic net income (loss) per common share		84,934			92,001			84,914			92,709
Net effect of dilutive equity awards		–			120			–			101
		84,934			92,121			84,914			92,810
	$	(0.80	)	$	0.09		$	(0.95	)	$	0.24

Securities that could be potentially dilutive in the future that were not included in the computation of diluted net income (loss) per common share include 947,000 anti-dilutive equity awards excludable under the treasury stock method for the quarter and six months ended June 30, 2019. 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, 2018.

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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, 2019
Agency Securities:
Fannie Mae/Freddie Mac:
Fixed-rate	$	99	$	–	$	99	$	99		6.50	%		6.28	%
ARMs		8,567,382		256,716		8,824,098		8,874,384		3.63			2.79
Ginnie Mae ARMs		2,567,649		72,642		2,640,291		2,654,785		3.55			2.90
		11,135,130		329,358		11,464,488		11,529,268		3.61			2.82
Residential mortgage loans:
Fixed-rate		226		1		227		227		7.17			3.23
ARMs		760		4		764		764		3.90			3.84
		986		5		991		991		4.65			3.70
Collateral for structured financings		945		15		960		960		7.99			7.69
	$	11,137,061	$	329,378	$	11,466,439	$	11,531,219		3.61			2.82
December 31, 2018
Agency Securities:
Fannie Mae/Freddie Mac:
Fixed-rate	$	126	$	–	$	126	$	126		6.50	%		6.23	%
ARMs		8,691,794		257,999		8,949,793		8,931,558		3.42			2.28
Ginnie Mae ARMs		2,964,531		75,744		3,040,275		3,031,264		3.30			2.54
		11,656,451		333,743		11,990,194		11,962,948		3.39			2.34
Residential mortgage loans:
Fixed-rate		552		1		553		553		6.80			2.44
ARMs		868		4		872		872		3.91			3.24
		1,420		5		1,425		1,425		5.03			2.95
Collateral for structured financings		991		17		1,008		1,008		7.99			7.43
	$	11,658,862	$	333,765	$	11,992,627	$	11,965,381		3.39			2.34

(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 by Fannie Mae and Freddie Mac, which are federally chartered corporations, or Ginnie Mae, which is an agency of the federal government. Residential mortgage loans held by Capstead were originated prior to 1995 when the Company operated a mortgage conduit and the related credit risk is borne by the Company. Collateral for structured financings consists of private residential mortgage securities that are backed by loans obtained through this mortgage conduit and are pledged to secure repayment of related structured financings. Credit risk for these securities is borne by

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the related bondholders. The maturity of Residential mortgage investments 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 286 months.

Fixed-rate investments consist of residential mortgage loans and Agency Securities backed by residential mortgage loans with fixed rates of interest. ARMs are adjustable-rate Agency Securities 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 (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. As of June 30, 2019, the average months to roll for the Company’s $5.87 billion (amortized cost basis) in current-reset ARM investments was approximately seven months while the average months to roll for the Company’s $5.59 billion (amortized cost basis) in longer-to-reset ARM investments was approximately 44 months.

During the quarter and six months ended June 30, 2019, the Company sold available-for-sale securities using the specific identification method for proceeds totaling $304.7 million with recognized gross realized gains of $405,000 and gross realized losses of $1.8 million in earnings as a result of those sales. The Company did not sell any securities during the quarter and six months ended June 30, 2018.

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 (collectively referred to as “counterparties” or “lending counterparties”). 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

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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.

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	Collateral Carrying Amount		Accrued Interest Receivable		Borrowings Outstanding		Average Borrowing Rates
June 30, 2019
Borrowings under repurchase arrangements secured by Agency Securities with maturities of 30 days or less	$	11,302,621	$	32,824	$	10,741,614		2.64	%
Similar borrowings secured by collateral for structured financings		960	–			960		7.99
	$	11,303,581	$	32,824	$	10,742,574		2.64
Borrowing rates adjusted for effects of related derivative financial instruments (Derivatives)								2.43

December 31, 2018
Borrowings under repurchase arrangements secured by Agency Securities with maturities of 30 days or less	$	4,424,311	$	12,287	$	4,204,988		2.73	%
Borrowings under repurchase arrangements secured by Agency Securities with maturities of 31 to 90 days		7,143,129		19,621		6,773,366		2.68
Similar borrowings secured by collateral for structured financings		1,008	–			1,008		7.99
	$	11,568,448	$	31,908	$	10,979,362		2.70
Borrowing rates adjusted for effects of related Derivatives								2.26

Average secured borrowings outstanding during the indicated periods differed from respective ending balances primarily due to changes in portfolio levels and differences in the timing of portfolio acquisitions relative to portfolio runoff as illustrated below (dollars in thousands):

	Quarter Ended
	June 30, 2019					December 31, 2018
	Average Borrowings		Average Rate			Average Borrowings		Average Rate
Average borrowings and rates adjusted for the effects of related Derivatives	$	11,193,335		2.43	%	$	11,439,646		2.07	%

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

Capstead attempts to mitigate exposure to higher interest rates by entering into one- and three-month LIBOR-indexed, pay-fixed, receive-variable, interest rate swap agreements for terms of two and three years. These Derivatives hedge the variability of the underlying benchmark interest rate of current and forecasted 30- to 90-day secured borrowings. 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 significant portion of the interest accruing on the borrowings, leaving the fixed-rate swap payments as the Company’s effective borrowing rate, subject to certain adjustments. 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.

Historically, the Company designated its interest rate swaps related to secured borrowings as hedges for accounting purposes, whereby changes in the swaps’ fair values were recorded in Accumulated other comprehensive income (loss). The Company discontinued hedge accounting on March 1, 2019 for these swaps and, for GAAP purposes, related changes in the fair value are recorded in the Company’s consolidated statements of operations beginning on that date. Also, for GAAP purposes, related net unrealized gains recorded in Accumulated other comprehensive income (loss) through February 28, 2019 are being recognized as a component of interest expense in the Company’s consolidated statements of operations over the remaining lives of these swaps.

During the quarter and six months ended June 30, 2019, Capstead entered into swap agreements with notional amounts of $2.10 billion and $4.70 billion, respectively, requiring fixed-rate interest payments averaging 2.16% and 2.38%. During the quarter and six months ended June 30, 2019, $1.65 billion and $2.60 billion, respectively, notional amount of swaps requiring fixed-rate interest payments averaging 1.33% and 1.43% matured. The Company also terminated $1.10 billion notional amount of swaps requiring fixed-rate interest payments averaging 2.84% during the quarter and six months ended June 30, 2019. At June 30, 2019 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
Third quarter 2019	$	550,000		1.40	%
Fourth quarter 2019		700,000		1.72
First quarter 2020		600,000		2.07
Second quarter 2020		600,000		2.68
Third quarter 2020		200,000		1.64
Fourth quarter 2020		200,000		2.04
First quarter 2021		100,000		2.67
Second quarter 2021		800,000		1.95
First quarter 2022		2,500,000		2.54
Second quarter 2022		1,300,000		2.30
	$	7,550,000

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. These Derivatives, which are designated as cash flow hedges for accounting purposes, hedge the variability of

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the underlying contractual rate associated with the floating-rate terms of these long-term borrowings which began on various dates between October 2015 and September 2016.

Interest rate swap agreements are measured at fair value on a recurring basis primarily using Level Two 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. At June 30, 2019, Cash collateral receivable from interest rate swap counterparties includes initial margin for all swap agreements and variation margin for non-exchange traded swap agreements. 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	2019			2018
Balance sheet-related
Swap agreements in a gain position (an asset) related to: Secured borrowings	(a)	$	2,128		$	–
Swap agreements in a loss position (a liability) related to
unsecured borrowings	(a)		(28,284	)		(17,834	)
Related net interest payable	(b)		(392	)		(372	)
		$	(26,548	)	$	(18,206	)

(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. The amount of unrealized gains, net of unrealized losses, included in Accumulated other comprehensive income (loss) and scheduled to be recognized in the Statements of Operations over the next twelve months primarily in the form of amortization of net unrealized gains on de-designated interest rate swaps and fixed-rate swap payments in excess of current market rates on swaps related to unsecured borrowings totaled $2.9 million at June 30, 2019.

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

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	Location of Gain or (Loss) Recognized in	Quarter Ended June 30						Six Months Ended June 30
	Net Income		2019			2018			2019			2018
Income statement-related
Components of Secured borrowings-related effects on interest expense:
Amount of gain reclassified from Accumulated other comprehensive income (loss)		$	–		$	10,445		$	7,891		$	15,692
Amortization of unrealized gain, net of unrealized losses on de-designated Derivatives			6,715		–			$	9,735		–
	(a)		6,715			10,445			17,626			15,692
Component of Unsecured borrowings-related effects on interest expense:
Amount of loss reclassified from Accumulated other comprehensive income (loss)	(b)		(364	)		(474	)		(704	)		(1,078	)
Decrease in interest expense and increase in Net (loss) income as a result of the use of Derivatives		$	6,351		$	9,971		$	16,922		$	14,614

Realized and unrealized loss on non-designated Derivatives (net)		$	(74,842	)	$	–		$	(96,499	)	$	–

Other comprehensive income-related
Amount of (loss) gain recognized in Other comprehensive income		$	(6,746	)	$	7,873		$	(15,297	)	$	38,805

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

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

(c)	Included in “Loss on derivative instruments (net)” on the face of the 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, 2019

Counterparty 4

2,602

(474

)

2,128

–

2,128

December 31, 2018

Counterparty 4

26,787

(26,787

)

–

(a)	Included in gross amounts of recognized assets at June 30, 2019 is the fair value of exchange-traded swap agreements, calculated including accrued interest. Included in gross amounts offset in the balance sheet are variation margin amounts associated with these swaps at June 30, 2019.

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(b)	Amounts presented are limited to recognized liabilities and cash collateral received associated with the indicated counterparty sufficient to reduce the related Net Amount to zero in accordance with ASU No. 2011-11, as amended by ASU No. 2013-01.

	Offsetting of Financial Liabilities and Derivative Liabilities
			Gross			Net Amounts		Gross Amounts Not Offset
	Gross		Amounts			of Liabilities		in the Balance Sheet ^(c)
	Amounts of		Offset in			Presented in					Cash
	Recognized		the Balance			the Balance		Financial			Collateral			Net
	Liabilities ^(a)		Sheet ^(a)			Sheet ^(b)		Instruments			Pledged			Amount
June 30, 2019
Derivatives by counterparty:
Counterparty 1	$	28,676	$	–		$	28,676	$	–		$	(28,676	)	$	–
Counterparty 4		96,694		(96,694	)	–		–			–			–
		125,370		(96,694	)		28,676	–				(28,676	)	–
Borrowings under repurchase arrangements ^(d)		10,749,696	–				10,749,696		(10,749,696	)	–			–
	$	10,875,066	$	(96,694	)	$	10,778,372	$	(10,749,696	)	$	(28,676	)	$	–
December 31, 2018
Derivatives by counterparty:
Counterparty 1	$	18,205	$	–		$	18,205	$	–		$	(18,205	)	$	–
Counterparty 4		9,718		(9,718	)		–		–		–			–
		27,923		(9,718	)		18,205		–			(18,205	)	–
Borrowings under repurchase arrangements ^(d)		10,987,329	–				10,987,329		(10,987,329	)	–			–
	$	11,015,252	$	(9,718	)	$	11,005,534	$	(10,987,329	)	$	(18,205	)	$	–

(a)

Included in gross amounts of recognized liabilities at June 30, 2019 is the fair value of non-exchange traded swap agreements (Counterparty 1) and exchange-traded swap agreements (Counterparty 4), calculated including accrued interest. Included in gross amounts offset in the balance sheet are variation margin amounts associated with exchange-traded swap agreements at June 30, 2019.

(b)	Amounts presented are limited to recognized liabilities and cash collateral received associated with the indicated counterparty sufficient to reduce the related Net Amount to zero in accordance with ASU No. 2011-11, as amended by ASU No. 2013-01.

(c)	Amounts presented are limited to recognized assets and collateral pledged associated with the indicated counterparty sufficient to reduce the related Net Amount to zero in accordance with ASU No. 2011-11, as amended by ASU No. 2013-01.

(d)	Amounts include accrued interest payable of $8.1 million and $9.0 million on borrowings under repurchase arrangements as of June 30, 2019 and December 31, 2018, respectively.

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Changes in Accumulated other comprehensive income (loss) by component for the quarter and six months ended June 30, 2019 were as follows (in thousands):

	Unrealized Gains and Losses on Cash Flow Hedges			Unrealized Gains and Losses on Available-for-Sale Securities			Total
Balance at March 31, 2019	$	(12,922	)	$	16,230		$	3,308
Activity for the quarter ended June 30, 2019:
Other comprehensive income (loss) before reclassifications		(6,746	)		48,550			41,804
Amounts reclassified from accumulated other comprehensive income		(6,351	)	–				(6,351	)
Other comprehensive income (loss)		(13,097	)		48,550			35,453
Balance at June 30, 2019	$	(26,019	)	$	64,780		$	38,761

Balance at December 31, 2018	$	6,200		$	(27,246	)	$	(21,046	)
Activity for the six months ended June 30, 2019:
Other comprehensive income (loss) before reclassifications		(15,297	)		92,026			76,729
Amounts reclassified from accumulated other comprehensive income		(16,922	)	–				(16,922	)
Other comprehensive income (loss)		(32,219	)		92,026			59,807
Balance at June 30, 2019	$	(26,019	)	$	64,780		$	38,761

NOTE 7 — unsecured BORROWINGS

Unsecured borrowings consist of 30-year junior subordinated notes issued in 2005 and 2006 and maturing in 2035 and 2036, for a total face amount of $100 million. Note balances net of deferred issuance costs, and related weighted average interest rates as of the indicated dates (calculated including issuance cost amortization and adjusted for effects of related Derivatives held as cash flow hedges) were as follows (dollars in thousands):

	June 30, 2019					December 31, 2018
	Borrowings Outstanding		Average Rate			Borrowings Outstanding		Average Rate
Junior subordinated notes maturing in:
October 2035 ($35,000 face amount)	$	34,373		7.88	%	$	34,354		7.89	%
December 2035 ($40,000 face amount)		39,378		7.65			39,359		7.65
September 2036 ($25,000 face amount)		24,591		7.69			24,579		7.69
	$	98,342		7.74		$	98,292		7.74

NOTE 8 — FAIR VALUE

The fair value of Capstead’s financial assets and liabilities are influenced by changes in, and market expectations for changes in, interest rates and market liquidity conditions, as well as other factors beyond the control of management. With the exception of the fair value of lending counterparty investments, all fair values were determined using Level 2 Inputs in accordance with ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820). Lending counterparty investments are nonmarketable securities classified as assets for which Level 3 Inputs are used to determine fair value.

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Residential mortgage investments, nearly all of which are mortgage securities classified as available-for-sale, are measured at fair value on a recurring basis. In determining fair value estimates the Company considers recent trading activity for similar investments and pricing levels indicated by lenders in connection with designating collateral for secured borrowings, provided such pricing levels are considered indicative of actual market clearing transactions. In determining fair value estimates for Secured borrowings with initial terms of greater than 120 days, the Company considers pricing levels indicated by lenders for entering into new transactions using similar pledged collateral with terms equal to the remaining terms of these borrowings. The Company currently bases fair value for Unsecured borrowings on discounted cash flows using Company estimates for market yields. Excluded from these disclosures are financial instruments for which cost basis is deemed to approximate fair value due primarily to the short duration of these instruments, which are valued using primarily Level 1 measurements, including Cash and cash equivalents, Cash collateral receivable from, or payable to, interest rate swap counterparties, receivables, payables and secured borrowings with initial terms of 120 days or less. See NOTE 6 for information relative to the valuation of interest rate swap agreements.

Fair value-related disclosures for financial instruments other than debt securities were as follows as of the indicated dates (in thousands):

		June 30, 2019				December 31, 2018
	Fair Value Hierarchy	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Residential mortgage loans	Level 2	$	991	$	1,000	$	1,425	$	1,400
Lending counterparty investments	Level 3		–		–		5,002		5,002
Secured borrowings-related interest rate swap agreements	Level 2		2,128		2,128		–		–
Financial liabilities:
Unsecured borrowings	Level 2		98,342		71,800		98,292		76,600
Unsecured borrowings-related interest rate swap agreements	Level 2		28,284		28,284		17,834		17,834

Fair value-related disclosures for debt securities were as follows as of the indicated dates (in thousands):

	Amortized		Gross Unrealized
	Cost Basis		Gains		Losses		Fair Value
June 30, 2019
Agency Securities classified as available-for-sale:
Fannie Mae/Freddie Mac	$	8,824,098	$	78,577	$	28,291	$	8,874,384
Ginnie Mae		2,640,291		20,499		6,005		2,654,785
Residential mortgage securities classified as held-to-maturity		1,059		3	–			1,062

December 31, 2018
Agency Securities classified as available-for-sale:
Fannie Mae/Freddie Mac		8,949,793		56,041		74,276		8,931,558
Ginnie Mae		3,040,275		8,681		17,692		3,031,264
Residential mortgage securities classified as held-to-maturity		1,134		3	–			1,137

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	June 30, 2019				December 31, 2018
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Securities in an unrealized loss position:
One year or greater	$	3,326,654	$	26,278	$	4,736,171	$	83,407
Less than one year		1,184,987		8,018		1,475,120		8,561
	$	4,511,641	$	34,296	$	6,211,291	$	91,968

Declines in fair value caused by increases in interest rates are typically modest for investments in short-duration ARM Agency Securities compared to investments in longer-duration ARM or fixed-rate assets. These declines 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.

From a credit risk perspective, federal government support for Fannie Mae and Freddie Mac helps ensure that fluctuations in value due to credit risk associated with these securities will be limited. Given that (a) any existing unrealized losses on mortgage securities held by the Company are not attributable to credit risk and declines in fair value of ARM securities due to changes in interest rates are generally recoverable in a relatively short period of time, (b) the Company typically holds its investments to maturity, and (c) it is more likely than not that the Company will not be required to sell any of its investments given the resiliency of the financing market for Agency Securities, none of these investments were considered other-than-temporarily impaired at June 30, 2019.

NOTE 9 — EQUITY INCENTIVE PLAN

All equity-based awards and other long-term incentive awards are made pursuant to the Company’s Amended and Restated 2014 Flexible Incentive Plan that was approved by stockholders in May 2014. At June 30, 2019, this plan had 2,919,087 shares of common stock remaining available for future issuances.

Long-term Equity-based Awards – Performance-based Restricted Stock Units (“RSUs”)

RSU activity and related information for the six months ended June 30, 2019 is summarized below:

				Weighted
				Average
	Number of			Grant Date
	Shares			Fair Value
Unvested RSU awards outstanding at December 31, 2018		501,858		$	9.02
Grants		206,914			6.87
Vestings		(34,135	)		8.03
Forfeitures		(135,692	)		8.03
Unvested RSU awards outstanding at June 30, 2019		538,945			8.50

During the quarter and six months ended June 30, 2019, the Company recognized in Compensation-related expense $260,000 and $838,000, respectively, related to this program. Unrecognized estimated compensation expense for these awards totaled $1.9 million at June 30, 2019, to be expensed over a weighted average period of 1.5 years (assumes estimated attainment levels for the related performance metrics will be met).

Dividends accrue from the date of grant and will be paid in cash to the extent the units convert into shares of common stock following completion of related performance periods. If these shares do not vest, the related dividends will be forfeited. Included in Common stock dividends payable at June 30, 2019 are estimated dividends payable pertaining to these awards of $149,000.

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Long-term Equity-based Awards – Restricted Stock Awards

Restricted stock award activity for the six months ended June 30, 2019 is summarized below:

				Weighted
				Average
	Number of			Grant Date
	Shares			Fair Value
Unvested stock awards outstanding at December 31, 2018		461,091		$	9.01
Grants		284,655			6.76
Vestings		(99,917	)		8.49
Forfeitures		(31,113	)		8.29
Unvested stock awards outstanding at June 30, 2019		614,716			8.09

During the quarter and six months ended June 30, 2019, the Company recognized in Compensation-related expense $287,000 and $695,000, respectively, related to amortization of the grant date fair value of employee stock awards. In addition, during the quarter and six months ended June 30, 2019, the Company recognized in Other general and administrative expense $123,000 and $245,000, respectively, related to amortization of the grant date fair value of director stock awards. Unrecognized compensation expense for unvested stock awards for employees and directors totaled $2.5 million as of June 30, 2019, to be expensed over a weighted average period of 1.4 years.

Service-based stock awards issued to non-executive employees and to directors receive dividends on a current basis without risk of forfeiture if the related awards do not vest. Stock awards issued to executives defer the payment of dividends accruing between the grant dates and the end of related service periods. If these awards do not vest, the related accrued dividends will be forfeited. Included in Common stock dividend payable at June 30, 2019 are estimated dividends payable pertaining to these awards totaling $240,000.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

FINANCIAL CONDITION

Overview

Capstead operates as a self-managed REIT earning income from investing in a leveraged portfolio of residential mortgage pass-through securities consisting almost exclusively of 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. See NOTE 1 to the consolidated financial statements (included under Item 1 of this report) for defined terms used in this discussion and analysis. By investing in short-duration 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 experience smaller fluctuations in portfolio values compared to leveraged portfolios containing a significant amount of longer-duration ARM or fixed-rate mortgage securities. Duration is a common measure of market price sensitivity to interest rate movements. A shorter duration generally indicates less interest rate risk.

GAAP net loss for the quarter and six months ended June 30, 2019 was reported at $64 million and $71 million, respectively, or $(0.80) and $(0.95) per diluted common share. The Company reported core earnings of $15 million and $30 million, respectively, or $0.12 and $0.24 per diluted common share for the quarter and six months ended June 30, 2019. See “Reconciliation of GAAP and non-GAAP Financial Measures” for more information on core earnings. Earnings in 2019 benefited from higher cash yields and lower investment premium amortization while being negatively impacted by higher borrowing costs and lower average outstanding portfolio balances.

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 $1.12 billion at June 30, 2019, consisting of $771 million of common and $251 million of preferred stockholders’ equity (recorded amounts), together with $98 million of unsecured borrowings maturing in 2035 and 2036. Long-term investment capital decreased $37 million during the first half of 2019 due largely to lower prevailing interest rates. Book value per common share declined to $8.93 per share during the second quarter as increases in portfolio valuations only partially offset decreases in swap valuations.

Capstead’s residential mortgage portfolio decreased $434 million during the first half of 2019 to $11.53 billion at June 30, 2019 as the Company did not replace all of its portfolio runoff and sold $305 million (recorded amount) in ARM securities in order to reduce leverage during the second quarter. Secured borrowings decreased $237 million to $10.74 billion. Portfolio leverage (secured borrowings divided by long-term investment capital) increased to 9.59 to one at June 30, 2019 from 9.49 to one at December 31, 2018. Management continuously evaluates portfolio leverage levels in light of changes in market conditions.

Book Value per Common Share

Book value per share (total stockholders’ equity, less liquidation preferences for outstanding shares of preferred stock, divided by outstanding shares of common stock) as of June 30, 2019 was $8.93, a decrease of $0.50 or 5.2% from March 31, 2019 book value of $9.43, reflecting $1.05 in swap-related market value declines, partially offset by $0.55 in portfolio-related market value increases.

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All but $2 million of Capstead’s residential mortgage investments portfolio and all of its Derivatives are recorded at fair value on the Company’s balance sheet and are therefore included in the calculation of book value per common share. See NOTE 8 to the consolidated financial statements (included under Item 1 of this report) for additional disclosures regarding fair values of financial instruments held or issued by the Company.

Fair value is impacted by market conditions, including changes in interest rates, and the availability of financing at reasonable rates and leverage levels, among other factors. The Company’s investment strategy attempts to mitigate these risks by focusing on investments in Agency Securities, which are considered to have little, if any, credit risk and are collateralized by ARM loans with interest rates that reset periodically to more current levels, generally within five years. Because of these characteristics, the fair value of the Company’s portfolio is considerably less vulnerable to significant pricing declines caused by credit concerns or rising interest rates compared to leveraged portfolios containing a significant amount of non-agency securities or longer-duration ARM and/or fixed-rate Agency Securities.

Residential Mortgage Investments

The following table illustrates Capstead’s portfolio of residential mortgage investments for the quarter and six months ended June 30, 2019 (dollars in thousands):

	Quarter Ended			Six Months Ended
	June 30, 2019			June 30, 2019
Residential mortgage investments, beginning of period	$	12,228,422		$	11,965,381
Portfolio acquisitions (principal amount)		531,305			1,502,011
Investment premiums on acquisitions		12,959			36,625
Portfolio runoff (principal amount)		(966,515	)		(1,723,069	)
Sales of investments (basis)		(305,356	)		(305,356	)
Investment premium amortization		(18,146	)		(36,399	)
Decrease in net unrealized gains on securities classified as available-for-sale		48,550			92,026
Residential mortgage investments, end of period	$	11,531,219		$	11,531,219
Decrease in residential mortgage investments during the indicated periods	$	(697,203	)	$	(434,162	)

Capstead’s investment strategy focuses on managing a portfolio of residential mortgage investments consisting almost exclusively 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 federally chartered corporations, 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 on investing in short-duration 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 ARM or 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.

ARM securities are backed by mortgage loans that generally 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

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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.

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 June 30, 2019 (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	$	3,215,686	4.16	%	3.79	%	1.66	%	2.54	%	5.00	%	6.2
Freddie Mac Agency Securities		1,497,116	4.09		3.92		1.76		1.99		4.87		7.7
Ginnie Mae Agency Securities		1,158,117	3.67		3.43		1.51		1.05		4.59		6.1
Residential mortgage loans		764	3.90		4.65		2.06		1.75		11.09		6.0
(51% of total)		5,871,683	4.05		3.75		1.66		2.10		4.89		6.6
Longer-to-reset ARMs:
Fannie Mae Agency Securities		2,865,389	3.06		3.78		1.61		3.46		5.00		43.7
Freddie Mac Agency Securities		1,245,907	3.03		3.81		1.64		3.33		5.07		43.5
Ginnie Mae Agency Securities		1,482,174	3.45		3.42		1.50		1.01		5.01		45.5
(49% of total)		5,593,470	3.16		3.69		1.59		2.78		5.02		44.1
	$	11,465,153	3.61		3.72		1.62		2.43		4.95		25.0
Gross WAC (rate paid by borrowers)^(c)			4.20

(a)

Amortized cost basis represents the Company’s investment (unpaid principal balance plus unamortized investment premiums) before unrealized gains and losses. At June 30, 2019, the ratio of amortized cost basis to unpaid principal balance for the Company’s ARM holdings was 102.96. This table excludes $1 million in fixed-rate agency-guaranteed mortgage pass-through securities, residential mortgage loans and private residential mortgage pass-through securities held as collateral for structured financings.

(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 quarter-end, 75% of current-reset ARMs were subject to periodic caps averaging 1.78%; 18% were subject to initial caps averaging 2.09%; 6% were subject to lifetime caps averaging 6.23%; and less than 1% were uncapped. All longer-to-reset ARM securities at June 30, 2019 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 balance sheet date.

Approximately 18%, or $1.04 billion of the Company’s current-reset ARM securities with average net WACs of 2.83% and fully-indexed WACs of 3.63% will reset in rate for the first time in less than 18 months based on indices in effect at June 30, 2019. After consideration of any applicable initial fixed-rate periods, at June 30, 2019 approximately 92%, 4% and 3% of the Company’s ARM securities were backed

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by mortgage loans that reset annually, semi-annually and monthly, respectively, while approximately 1% reset every five years. Approximately 5% of the Company’s ARM securities were backed by interest-only loans, with remaining interest-only payment periods averaging 17 months at June 30, 2019. 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 Held for Hedging Purposes

Capstead has traditionally financed 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 that 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. 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 4.5 percent of the fair value of pledged residential mortgage pass-through securities at June 30, 2019. After considering haircuts and related interest receivable on the collateral, as well as interest payable on these borrowings, the Company had $586 million of capital at risk with its lending counterparties at June 30, 2019. The Company did not have capital at risk with any single counterparty exceeding 6% of total stockholders’ equity at June 30, 2019.

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 June 30, 2019, the Company’s secured borrowings totaled $10.74 billion with 21 counterparties at average rates of 2.64%, before the effects of currently-paying interest rate swap agreements and 2.43% including the effects of these Derivatives. The Company typically uses two- and three-year term interest rate swap agreements with variable rate receipts primarily based on three-month LIBOR to help mitigate exposure to rising short-term interest rates. In June the Company took advantage of declining market interest rates to replace $800 million of longer-term swaps with new two-year contracts at significantly lower rates to the benefit of future earnings. At quarter-end the Company held $7.55 billion notional amount of these Derivatives with contract expirations occurring at various dates through the second quarter of 2022 and a weighted average expiration of 23 months.

Including the effects of these Derivatives, the Company’s residential mortgage investments and secured borrowings had estimated durations at June 30, 2019 of 13¾ months and 15¼ months for a net duration gap of approximately (1½) 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 interest rate risk associated with holding and financing its residential mortgage investments by utilizing suitable Derivatives such as interest rate swap agreements as well as longer-maturity secured borrowings, if available at attractive rates and terms.

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Utilization of Long-term Investment Capital and Potential Liquidity

Capstead’s investment strategy involves managing an appropriately leveraged portfolio of 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 swap counterparties,

•

mortgage prepayment levels,

•

collateral requirements of lending and Derivative counterparties, and

•

general conditions in the commercial banking and mortgage finance industries.

Capstead’s utilization of its long-term investment capital and its estimated potential liquidity were as follows as of June 30, 2019 in comparison with December 31, 2018 (in thousands):

	Investments ^(a)		Secured Borrowings		Capital Employed		Potential Liquidity ^(b)		Portfolio Leverage
Residential mortgage investments	$	11,531,219	$	10,742,574	$	788,645	$	266,341
Cash collateral receivable from interest rate swap counterparties, net ^(c)						44,717	–
Other assets, net of other liabilities						287,368		179,478
Balances as of June 30, 2019:	$	11,531,219	$	10,742,574	$	1,120,730	$	445,819	9.59:1

Balances as of December 31, 2018	$	11,965,381	$	10,979,362	$	1,157,355	$	501,854	9.49:1

(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 interest rate swap counterparties is presented net of cash collateral payable to interest rate swap 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 interest rate swap 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.

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”). Potential liquidity declined from year-end primarily as a result of marginally higher leverage employed at June 30, 2019. Management continuously evaluates portfolio leverage levels in light of changes in market conditions.

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Reconciliation of GAAP and non-GAAP Financial Measures

Management believes the presentation of core earnings and core earnings per diluted common share, 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 compare its performance to that of its peers. Prior to March 2019, the Company designated its secured borrowings-related interest rate swap agreements as cash flow hedges for accounting purposes, whereby changes in these Derivatives’ fair values were recorded in Accumulated other comprehensive income (loss). The Company discontinued cash flow hedge accounting on March 1, 2019 for these Derivatives and, for GAAP purposes, related changes in fair value are recorded in the Company’s consolidated statements of operations. Also, for GAAP purposes, related net unrealized gains recorded in Accumulated other comprehensive income (loss) through February 28, 2019 are being recognized as a component of interest expense in the Company’s consolidated statements of operations over the remaining two- to three-year contractual lives of these Derivatives. Core earnings excludes these GAAP adjustments. The following reconciles GAAP net (loss) income to core earnings and core earnings per common share (dollars in thousands, except per share amounts):

	Quarter Ended June 30										Six Months Ended June 30
	2019						2018				2019						2018
	Amount			Per Share			Amount		Per Share		Amount			Per Share			Amount		Per Share
Net (loss) income	$	(63,460	)	$	(0.80	)	$	12,988	$	0.09	$	(71,206	)	$	(0.95	)	$	32,408	$	0.24
Unrealized loss on non-designated Derivatives		59,388			0.70			–		–		85,625			1.01			–		–
Realized loss on termination of non-designated Derivatives		24,202			0.28			–		–		24,202			0.28			–		–
Amortization of unrealized gain, net of unrealized losses on de-designated Derivatives		(6,715	)		(0.08	)		–		–		(9,735	)		(0.12	)		–		–
Realized loss on sale of investments		1,365			0.02			–		–		1,365			0.02			–		–
Core earnings	$	14,780		$	0.12		$	12,988	$	0.09	$	30,251		$	0.24		$	32,408	$	0.24

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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:

	Quarter Ended June 30						Six Months Ended June 30
	2019			2018			2019			2018
Total financing spreads		0.34	%		0.33	%		0.38	%		0.44	%
Impact of yields on other interest-earning assets ^(a)		0.01			–			0.01			0.01
Impact of borrowing rates on other interest-paying liabilities ^(a)		0.05			0.05			0.05			0.05
Impact of amortization of unrealized gain, net of unrealized losses on de-designated Derivatives		(0.24	)		–			(0.18	)		–
Impact of net interest cash flows on non-designated Derivatives		0.31			–			0.24			–
Financing spreads on residential mortgage investments		0.47			0.38			0.50			0.50

(a)	Other interest-earning assets consist of overnight investments and cash collateral receivable from interest rate swap counterparties. Other interest-paying liabilities consist of unsecured borrowings and, at times, cash collateral payable to interest rate swap counterparties.

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RESULTS OF OPERATIONS

	Quarter Ended						Six Months Ended
	June 30						June 30
	2019			2018			2019			2018
Income statement data: (in thousands, except per share data)
Interest income on residential mortgage investments	$	85,100		$	65,202		$	168,907		$	134,340
Related interest expense		(67,945	)		(48,241	)		(131,724	)		(93,262	)
		17,155			16,961			37,183			41,078
Other interest income (expense)		(1,300	)		(1,595	)		(2,769	)		(3,078	)
		15,855			15,366			34,414			38,000
Other (expense) income:
Loss on derivative instruments (net)		(74,842	)		–			(96,499	)		–
Loss on sale of investments (net)		(1,365	)		–			(1,365	)		–
Compensation-related expense		(1,972	)		(1,560	)		(5,581	)		(3,608	)
Other general and administrative expense		(1,138	)		(899	)		(2,266	)		(2,136	)
Miscellaneous other revenue		2			81			91			152
		(79,315	)		(2,378	)		(105,620	)		(5,592	)
Net (loss) income	$	(63,460	)	$	12,988		$	(71,206	)	$	32,408
Net (loss) income per diluted common share	$	(0.80	)	$	0.09		$	(0.95	)	$	0.24
Average diluted shares outstanding		84,934			92,121			84,914			92,810
Core earnings ^(a)	$	14,780		$	12,988		$	30,251		$	32,408
Core earnings per diluted common share^(a)		0.12			0.09			0.24			0.24

Key operating statistics: (dollars in millions)
Average yields:
Residential mortgage investments		2.82	%		2.00	%		2.79	%		2.04	%
Other interest-earning assets		2.00			1.69			2.12			1.46
Total average yields		2.81			2.00			2.78			2.03
Average borrowing rates:
Secured borrowings ^(a)(b)		2.35			1.62			2.29			1.54
Unsecured borrowings		7.73			7.74			7.71			7.72
Total average borrowing rates		2.40			1.67			2.34			1.59
Average total financing spreads		0.34			0.33			0.38			0.44
Average financing spreads on residential mortgage investments ^(a)		0.47			0.38			0.50			0.50
Average CPR		26.29			23.82			23.45			21.73
Average balance information:
Residential mortgage investments (cost basis)	$	12,065		$	13,025		$	12,117		$	13,163
Other interest-earning assets		120			72			96			97
Secured borrowings		11,193			11,915			11,175			12,074
Unsecured borrowings (included in long-term investment capital)		98			98			98			98
Long-term investment capital (“LTIC”)		1,149			1,280			1,156			1,297
Operating costs as a percentage of average LTIC^(c)		1.09	%		0.77	%		1.20	%		0.89	%
Return on average common equity capital ^(d)		4.98			3.51			5.14			4.83

(a)	See “Reconciliation of GAAP and non-GAAP Financing Measures” for a reconciliation of these financial measures and the Company’s rationale for using these non-GAAP financial measures.

(b)

Secured borrowing rates exclude the effects of amortization of the net unrealized gains and losses included in Accumulated other comprehensive income (loss) upon de-designation on March 1, 2019 of related Derivatives held for hedging purposes of (0.24)% and (0.18)% and include net interest cash flows from that date on non-designated Derivatives of 0.31% and 0.24% for the quarter and year to date, respectively, to better compare the components of financing spreads on residential mortgage investments with prior periods.

(c)	Excludes the effects of first quarter 2019 adjustments to 2018 incentive compensation accruals totaling $(949,000) due to the Company’s 2018 outperformance relative to its peers.

(d)

Calculated using core earnings less preferred dividends on an annualized basis over average common equity for the period.

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Capstead reported a GAAP net loss of $64 million and $71 million or $(0.80) and $(0.95) per diluted common share for the quarter and six months ended June 30, 2019, respectively, compared to net income of $13 million and $32 million or $0.09 and $0.24 per diluted common share for the same periods in 2018. GAAP net income was negatively impacted during these periods primarily by losses on Derivatives of $75 million and $96 million during the quarter and six months ended June 30, 2019, respectively, due largely to lower prevailing interest rates. Valuation adjustments for secured borrowings-related Derivatives were recorded in Accumulated other comprehensive income (loss) prior to discontinuing hedge accounting on March 1, 2019.

Capstead’s core earnings, a non-GAAP financial measure, totaled $15 million and $30 million or $0.12 and $0.24 per diluted common share for the quarter and six months ended June 30, 2019, respectively, compared to core earnings of $13 million and $32 million or $0.09 and $0.24 per diluted common share for the same periods in 2018. Core earnings in 2019 were negatively impacted by higher borrowing costs while benefiting from higher cash yields and lower investment premium amortization.

Interest income on residential mortgage investments was higher by $19.9 million and $34.6 million, respectively, for the quarter and six months ended June 30, 2019 compared to the same periods in 2018. This increase is attributable to $25.0 million and $45.9 million, respectively, in increases related to higher average yields, net of $5.1 million and $11.3 million in decreases related to lower average portfolio balances.

Yields on residential mortgage investments for the quarter and six months ended June 30, 2019 increased 82 and 75 basis points compared to the same periods in 2018, averaging 2.82% and 2.79%, respectively, primarily due to higher cash yields. This was largely due to ARM loan coupon interest rates resetting higher to more current rates and higher coupon interest rates on acquisitions. Yields also benefited from smaller adjustments for investment premium amortization in the first half of 2019 compared to the same period in 2018 as a result of a lower portfolio basis, lower premiums on acquisitions and changes in prepayment estimates.

Interest expense on secured borrowings was higher by $19.7 million and $38.5 million, respectively, for the quarter and six months ended June 30, 2019 compared to the same periods in 2018. This increase is attributable to $22.8 million and $45.8 million, respectively, in increases related to higher average borrowing rates, net of $3.1 million and $7.3 million in decreases related to lower average borrowings.

Secured borrowing rates adjusted for currently-paying secured borrowings-related Derivatives increased 73 and 75 basis points for the quarter and six months ended June 30, 2019 compared to the same periods in 2018 to average 2.35% and 2.29%, respectively. Market conditions, including four 25 basis point increases in the Federal Funds Rate in 2018, contributed to higher borrowing rates. Hedging costs were impacted by the expiration of older, lower-rate interest rate swaps and the addition of new higher-rate swaps. Resulting higher rates were partially offset by higher variable rate swap receipts as a result of higher short-term LIBOR rates and the use of more 3-month LIBOR-receive swap agreements. Average fixed-rate swap payment rates were 220 and 211 basis points, respectively, for the quarter and six months ended June 30, 2019 compared to 153 and 143 basis points for the same periods in 2018. Currently-paying swap balances were higher, averaging $8.05 billion and $7.69 billion, respectively, for the quarter and six months ended June 30, 2019, compared to $6.85 billion and $7.01 billion for the same periods in 2018. Future secured borrowing rates will be dependent on market conditions, including overall levels of market interest rates as well as the availability of longer-maturity borrowings and interest rate swap agreements at attractive rates.

Total operating costs, which include Compensation-related expense and Other general and administrative expense, were higher during the quarter and six months ended June 30, 2019 by $651,000 and $2 million compared to the same periods in 2018. Increases were primarily related to compensation accruals, including $949,000 recorded in March 2019 associated with finalizing program results for 2018.

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Excluding the effects of 2018-related accruals, operating costs expressed as an annualized percentage of long-term investment capital averaged 1.09% and 1.20% for the quarter and six months ended June 30, 2019, respectively.

liquidity and capital resources

Capstead’s primary sources of funds are secured borrowings and monthly principal and interest payments on its investments. Other sources of funds may include proceeds from debt and equity offerings and asset sales. 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.

The Company generally uses its liquidity to pay down secured borrowings to reduce borrowing costs and otherwise efficiently manage its long-term investment capital. Because the level of these borrowings can generally be adjusted on a daily basis, the Company’s potential liquidity inherent in its unencumbered residential mortgage investments is as important as the level of cash and cash equivalents carried on the balance sheet. The table included under “Utilization of Long-term Investment Capital and Potential Liquidity” illustrates management’s estimate of additional funds potentially available to the Company at June 30, 2019 and the accompanying discussion provides insight into the Company’s perspective on what level of portfolio leverage to employ under current market conditions. The Company currently believes that it has sufficient liquidity and capital resources available for the acquisition of additional investments, repayments on borrowings and the payment of cash dividends as required for the Company’s continued qualification as a REIT.

Capstead finances its residential mortgage investments primarily by borrowing under repurchase arrangements, the terms and conditions of which are negotiated on a transaction-by-transaction basis, when each such borrowing is initiated or renewed.

Future borrowings are dependent upon the willingness of lenders to participate in the financing of Agency Securities, lender collateral requirements and the lenders’ determination of the fair value of the securities pledged as collateral, which fluctuates with changes in interest rates and liquidity conditions within the commercial banking and mortgage finance industries. None of the Company’s borrowing counterparties are obligated to renew or otherwise enter into new borrowings at the conclusion of existing borrowings. Secured borrowings totaled $10.74 billion at June 30, 2019, all maturing within 30 days. Secured borrowings began the year at $10.98 billion and averaged $11.19 billion and $11.18 billion during the quarter and six months ended June 30, 2019, respectively. Average secured borrowings can differ from period-end balances for a number of reasons including portfolio growth or contraction, as well as differences in the timing of portfolio acquisitions relative to portfolio runoff.

To help mitigate exposure to rising short-term interest rates, the Company uses Derivatives supplemented with longer-maturity secured borrowings when available at attractive rates and terms. At quarter-end the Company held $7.55 billion notional amount of portfolio financing-related interest rate swap agreements with contract expirations occurring at various dates through the second quarter of 2022 and a weighted average expiration of 23 months. Additionally, the Company entered into swap agreements effectively locking in lower fixed rates of interest during the 20-year floating rate terms of the Company’s $100 million face amount of unsecured borrowings that mature in 2035 and 2036. The Company intends to continue to utilize suitable Derivatives such as interest rate swap agreements or other derivatives and longer-maturity secured borrowings to manage interest rate risk when available at attractive rates and terms.

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Interest Rate Risk

Because Capstead’s residential mortgage investments consist almost entirely of Agency Securities, which are considered to have limited, if any, credit risk, interest rate risk is the primary market risk faced by the Company. Interest rate risk is highly sensitive to a number of factors, including economic conditions, government fiscal policy, central bank monetary policy and banking regulation. By focusing on investing in relatively short-duration ARM Agency Securities, declines in fair value caused by increases in interest rates are typically relatively modest compared to investments in longer-duration ARM or fixed-rate assets. These declines can be recovered 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 strategy also positions the Company to benefit from future recoveries in financing spreads that typically contract during periods of rising interest rates.

Derivatives and longer-maturity secured borrowings transactions lengthen the effective duration of the Company’s secured borrowings to more closely match the duration of its portfolio of residential mortgage investments. Including the effects of Derivatives held to hedge changes in secured borrowing rates, at June 30, 2019 the Company’s residential mortgage investments and secured borrowings had estimated durations of approximately 13¾ months and 15¼ months for a net duration gap of approximately (1½) months. The Company intends to continue to manage interest rate risk associated with holding and financing its residential mortgage investments by utilizing suitable interest rate swap agreements or other derivatives and longer-maturity secured borrowings, if available at attractive rates and terms.

Capstead performs sensitivity analyses using a model to estimate the effects that specific interest rate changes can reasonably be expected to have on net interest margins and portfolio values. All investments, secured borrowings and related Derivatives held are included in these analyses. For net interest margin modeling purposes, the model incorporates management’s assumptions for mortgage prepayment levels for a given interest rate change using market-based estimates of prepayment speeds for the purpose of amortizing investment premiums and reinvesting portfolio runoff. These assumptions are developed through a combination of historical analysis and expectations for future pricing behavior under normal market conditions unaffected by changes in market liquidity. For portfolio valuation modeling purposes, a static portfolio is assumed.

This model is the primary tool used by management to assess the direction and magnitude of changes in net interest margins and portfolio values resulting solely from changes in interest rates. Key modeling assumptions include mortgage prepayment speeds, adequate levels of market liquidity, current market conditions, and portfolio leverage levels. These assumptions are inherently uncertain and, as a result, modeling cannot precisely estimate the impact of higher or lower interest rates. Actual results will differ from simulated results due to the timing, magnitude and frequency of interest rate changes, other changes in market conditions, changes in management strategies and other factors.

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The table below reflects the estimated impact of instantaneous parallel shifts in the yield curve on net interest margins and the fair value of Capstead’s portfolio of residential mortgage investments and related Derivatives at June 30, 2019 and December 31, 2018, subject to the modeling parameters described above.

	Federal Funds Rate		10-year U.S. Treasury Rate			Down 1.00%			Down 0.50%			Up 0.50%			Up 1.00%

Projected 12-month percentage change in net interest margins: ^(a)
June 30, 2019	2.25-2.50	%		2.01	%		17.5	%		9.0	%		(10.4	)%		(22.6	)%
December 31, 2018	2.25-2.50			2.69			20.9			11.4			(12.7	)		(34.4	)

Projected percentage change in portfolio and related derivative values: ^(a)
June 30, 2019	2.25-2.50			2.01			(0.3	)		(0.1	)		(0.1	)		(0.2	)
December 31, 2018	2.25-2.50			2.69			0.1			0.1			(0.3	)		(0.7	)

(a)

Sensitivity of net interest margins as well as portfolio and related derivative values to changes in interest rates is determined relative to the actual rates at the applicable date. Note that the projected 12-month net interest margin change is predicated on acquisitions of similar assets sufficient to replace runoff. There can be no assurance that suitable investments will be available for purchase at attractive prices, if investments made will behave in the same fashion as assets currently held or if management will choose to replace runoff with such assets.

CRITICAL ACCOUNTING POLICIES

Management’s discussion and analysis of financial condition and results of operations is based upon Capstead’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates and judgments that can affect the reported amounts of assets, liabilities (including contingencies), revenues and expenses, as well as related disclosures. These estimates are based on available internal and market information and appropriate valuation methodologies believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the expected useful lives and carrying values of assets and liabilities which can materially affect the determination of net income and book value per common share. Actual results may differ from these estimates under different assumptions or conditions.

Management believes the following are critical accounting policies in the preparation of Capstead’s consolidated financial statements that involve the use of estimates requiring considerable judgment:

•

Amortization of investment premiums on residential mortgage investments – Investment premiums on residential mortgage investments are recognized in earnings as adjustments to interest income by the interest method over the estimated lives of the related assets. Amortization is affected by actual portfolio runoff (scheduled and unscheduled principal paydowns) and by estimates and judgments related to future levels of mortgage prepayments that may be necessary to achieve the required effective yield over the estimated life of the related investment.

Mortgage prepayment expectations can change based on how current and projected changes in interest rates impact the economic attractiveness of mortgage refinance opportunities, if available, and other factors such as lending industry underwriting practices and capacity constraints, regulatory changes, borrower credit profiles and the health of the economy and housing markets. Management estimates future mortgage prepayments based on these factors and past experiences with specific

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investments within the portfolio. Should actual prepayment rates differ materially from these estimates, investment premiums would be expensed at a different pace.

•

Fair value and impairment accounting for residential mortgage investments – Nearly all of Capstead’s residential mortgage investments are held in the form of mortgage securities that are classified as available-for-sale and recorded at fair value on the balance sheet with unrealized gains and losses recorded in Stockholders’ equity as a component of Accumulated other comprehensive income (loss). Fair values fluctuate with current and projected changes in interest rates, prepayment expectations and other factors such as market liquidity conditions and the perceived credit quality of Agency Securities. Judgment is required to interpret market data and develop estimated fair values, particularly in circumstances of deteriorating credit quality and market liquidity. See NOTE 8 to the consolidated financial statements (included under Item 1 of this report) for discussion of how Capstead values its residential mortgage investments.

Generally, gains or losses are recognized in earnings only if securities are sold; however, if a decline in fair value of a mortgage security below its amortized cost occurs that is determined to be other-than-temporary, the difference between amortized cost and fair value would be recognized in earnings as a component of Other revenue (expense) if the decline was credit-related or it was determined to be more likely than not that the Company will incur a loss via an asset sale. Other-than-temporary impairment of a mortgage security due to other factors would be recognized in Accumulated other comprehensive income (loss).

•

Accounting for derivative instruments – Derivatives are recorded as assets or liabilities and carried at fair value. Fair values fluctuate with current and projected changes in interest rates and other factors such as the Company’s and its counterparties’ nonperformance risk. Judgment is required to develop estimated fair values.

The accounting for changes in fair value of each Derivative held depends on whether it has been designated as an accounting hedge, as well as the type of hedging relationship identified. To qualify as a cash flow hedge for accounting purposes, at the inception of the hedge relationship the Company must anticipate and document that the hedge relationship will be highly effective and must monitor ongoing effectiveness on at least a quarterly basis. As long as the hedge relationship remains highly effective, changes in fair value of the Derivative are recorded in Accumulated other comprehensive income (loss). Changes in fair value of Derivatives not held as accounting hedges, or for which the hedge relationship is deemed to no longer be highly effective and as a result hedge accounting is terminated, are recorded in earnings as a component of Other (expense) income.

The Company uses Derivatives in the form of interest rate swap agreements to hedge the variability in borrowing rates on its secured and unsecured borrowings. For Derivatives designated as accounting hedges, fixed interest payments and variable interest receipts are recorded as an adjustment to interest expense on the related designated borrowings. For Derivatives not designated as accounting hedges, fixed interest payments and variable interest receipts are recorded as a component of Other (expense) income. For Derivatives initially designated as an accounting hedge and subsequently de-designated, any unrealized gain or loss included in Accumulated other comprehensive income (loss) at the time of de-designation is amortized as an adjustment to interest expense on the related borrowings over the remaining term of the Derivatives. See NOTE 6 to the consolidated financial statements (included under Item 1 of this report) and “Financial Condition – Secured Borrowings” for additional information regarding the Company’s current use of Derivatives and its related risk management policies.

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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;

•	the ability to maintain real estate investment trust (“REIT”) status;

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

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

•	changes in general economic conditions, 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.

For a further discussion of these and other factors that could impact our future results and performance, see “Risk Factors” under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the U.S. Securities and Exchange Commission on February 22, 2019.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS

The information required by this Item is incorporated by reference to the information included in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Item 4. Controls and Procedures

As of June 30, 2019, an evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of June 30, 2019. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to June 30, 2019.

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PART II. — OTHER INFORMATION

ITEM 1A. RISK FACTORS

There have been no material changes in our risk factors during the six months ended June 30, 2019 from those previously disclosed in “Risk Factors” under Part I, Item 1A of our 2018 Form 10-K.

ITEM 5A. OTHER INFORMATION

On July 24, 2019 the Company’s board of directors, at the recommendation of the compensation committee, approved a new change in control (“CIC”)/severance agreement with Roy S. Kim, Senior Vice President – Asset and Liability Management. Mr. Kim’s new agreement is identical to his prior agreement other than increasing his CIC and severance payment multiples of base salary, annual incentive compensation and dividend equivalent rights from one and one-half times to two times as those amounts are calculated in the agreement. A form of this agreement was filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 and is herein incorporated by reference.

ITEM 6. EXHIBITS

Exhibit

Number

DESCRIPTION

3.1		Charter, including Articles of Incorporation, Articles Supplementary for each series of preferred shares no longer outstanding and all other amendments to such Articles of Incorporation.⁽¹⁾
3.2		Articles Supplementary classifying and designating the Registrant’s 7.50% Series E Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share, par value $0.10 per share.⁽²⁾
3.3		Amended and Restated Bylaws.⁽³⁾
4.1		Specimen of Common Stock Certificate.⁽⁴⁾
4.2		Specimen of stock certificate evidencing the 7.50% Series E Cumulative Redeemable Preferred Stock of the Registrant, liquidation preference $25.00 per share, par value $0.10 per share.⁽²⁾
4.3		Junior Subordinated Indenture dated September 26, 2005.⁽⁵⁾
4.4		Indenture dated December 15, 2005.⁽⁵⁾
4.5		Indenture dated September 11, 2006.⁽⁵⁾
10.01		Amended and Restated Deferred Compensation Plan.*
10.02		Amended and Restated 2014 Flexible Incentive Plan.⁽⁶⁾
10.03		Amendment No. 1 to the Amended and Restated 2014 Flexible Incentive Plan.⁽⁷⁾
10.04		Third Amended and Restated Incentive Bonus Plan.*
10.05		Form of nonqualified stock option and stock award agreements for non-employee directors.⁽⁵⁾
10.06		Form of restricted stock agreement for executive employees. ⁽⁸⁾
10.07		2017 Long-Term Performance Unit Award Criteria. ⁽⁸⁾
10.08		Form of performance unit agreement for executive employees. ⁽⁸⁾
10.09		Form of restricted stock agreement for executive employees. ⁽⁹⁾
10.10		2018 Long-Term Performance Unit Award Criteria. ⁽⁹⁾
10.11		Form of performance unit agreement for executive employees. ⁽⁹⁾
10.12		2019 Annual Incentive Compensation Program. ⁽¹⁰⁾
10.13		Form of restricted stock agreement for executive employees. ⁽¹⁰⁾
10.14		2019 Long-Term Performance Unit Award Criteria. ⁽¹⁰⁾

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Exhibit Number		DESCRIPTION
10.15		Form of performance unit agreement for executive employees. ⁽¹⁰⁾
10.16		Sales Agreement, dated December 6, 2017, by and between the Company and the Sales Manager. ⁽¹¹⁾
10.17		Form of Change in Control/Severance Agreement for executive officers. ⁽¹²⁾
31.1		Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002*
31.2		Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002*
32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
32.2		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
101.INS		XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.*
101.SCH		XBRL Taxonomy Extension Schema*
101.CAL		XBRL Taxonomy Extension Calculation Linkbase*
101.DEF		XBRL Additional Taxonomy Extension Definition Linkbase*
101.LAB		XBRL Taxonomy Extension Label Linkbase*
101.PRE		XBRL Taxonomy Extension Presentation Linkbase*

(1)

Incorporated by reference to the Registrant’s Annual Report on Form 10-K/A (No. 001-08896) for the year ended December 31, 2012.

(2)

Incorporated by reference to the Registrant’s Registration of Certain Classes of Securities on Form 8-A (No. 001-08896) dated May 13, 2013.

(3)

Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on February 3, 2014, for the event dated January 29, 2014.

(4)

Incorporated by reference to the Registrant’s Registration Statement on Form S-3 (No. 333-63358) dated June 19, 2001.

(5)

Incorporated by reference to the Registrant’s Annual Report on Form 10-K (No. 001-08896) for the year ended December 31, 2011.

(6)

Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on May 30, 2014, for the event dated May 28, 2014.

(7)

Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on February 20, 2015, for the event dated February 20, 2015.

(8)

Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on January 5, 2017, for the event dated January 3, 2017.

(9)

Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on January 4, 2018, for the event dated January 3, 2018.

(10)

Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on January 7, 2019, for the event dated January 3, 2019.

(11)

Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on December 11, 2017, for the event dated December 6, 2017.

(12)

Incorporated by reference to the Registrant’s Annual Report on Form 10-K (No. 001-08896) for the year ended December 31, 2017.

Filed herewith

Furnished herewith

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	CAPSTEAD MORTGAGE CORPORATION Registrant

Date: July 26, 2019	By:	/s/ PHILLIP A. REINSCH
		Phillip A. Reinsch
		President and Chief Executive Officer


Date: July 26, 2019	By:	/s/ LANCE J. PHILLIPS
		Lance J. Phillips
		Senior Vice President, Chief Financial Officer
		and Secretary (Principal Financial and
		Accounting Officer)

-38-

Exhibit 10.01

CAPSTEAD MORTGAGE CORPORATION

DEFERRED COMPENSATION PLAN

As Amended and Restated

Effective January 1, 2009*

*Per IRS Notice 2010-6, Section XI. (A.)(1)

Solely for purposes of applying this notice, if a plan fails to satisfy the requirements of Section 409A(a) in a manner that is eligible for correction under this notice, and the plan is corrected in accordance with this notice on or before December 31, 2010, the plan may be treated as having been corrected on January 1, 2009, ….

CAPSTEAD MORTGAGE CORPORATION

DEFERRED COMPENSATION PLAN

Table of Contents

Page

ARTICLE IDEFINITIONS1

ARTICLE IIPARTICIPATION4

ARTICLE IIIDEFERRALS AND CREDITS TO ACCOUNT5

ARTICLE IVIN-SERVICE HARDSHIP WITHDRAWALS7

ARTICLE VPAYMENT OF BENEFIT7

ARTICLE VIFORM OF DISTRIBUTION9

ARTICLE VIIADMINISTRATION OF THE PLAN10

ARTICLE VIIICLAIM REVIEW PROCEDURE11

ARTICLE IXLIMITATION OF RIGHTS12

ARTICLE XLIMITATION OF ASSIGNMENT AND PAYMENTS TO LEGALLY
INCOMPETENT DISTRIBUTEE12

ARTICLE XIAMENDMENT TO OR TERMINATION OF THE PLAN13

ARTICLE XIISTATUS OF PARTICIPANT AS UNSECURED CREDITOR14

ARTICLE XIIIGENERAL AND MISCELLANEOUS15

CAPSTEAD MORTGAGE CORPORATION

DEFERRED COMPENSATION PLAN

PREAMBLE

Capstead Mortgage Corporation (the "Company") previously established the Capstead Mortgage Corporation Deferred Compensation Plan, effective July 1, 1994, as subsequently amended and restated effective January 1, 1998 (the "Prior Plan"), as a fundamental strategy to encourage and reward the continued service of certain key executives who are essential to overall corporate profitability. The Prior Plan was frozen with respect to the Accounts of all Vested Recipients, effective January 1, 2005, and the maintenance and distribution of the Accounts of all Vested Recipients shall be governed by the terms of the Prior Plan. With respect to the Accounts of all Participants, other than Vested Recipients, the Prior Plan was amended and restated, effective January 1, 2005, for compliance with Section 409A of the Internal Revenue Code and was thereafter referred to as the "Plan". The Plan is hereby amended and restated for compliance with subsequent guidance under Section 409A, effective January 1, 2009.

The Company intends that this Plan will be maintained for the exclusive benefit of Participants, who shall constitute a select group of executives of the Company, and that any Participant or Beneficiary of the Plan shall have the status of an unsecured general creditor with respect to this Plan and the Trust Fund, if any, established in connection with the Plan.

The terms of the Plan are as follows:

ARTICLE I
DEFINITIONS

1.1"Account" shall mean the record maintained by the Administrator showing the monetary value of the individual interest of each Participant or Beneficiary, with respect to amounts deferred and credited pursuant to Article III hereof. The term "Account" shall refer only to a bookkeeping entry and shall not be construed to require the segregation of assets on behalf of any Participant or Beneficiary.

1.2"Administrator" shall mean the Compensation Committee or, if applicable, its delegate.

1.3"Annual Compensation" shall mean the total amounts payable by the Company to a Participant as remuneration for personal services rendered during each Plan Year, including bonuses and any other type of incentive compensation, as reported on the Participant's federal income tax withholding statement or statements (IRS Form W‑2 or its subsequent equivalent), unreduced by any amounts not includable in such Participant's gross income pursuant to Sections 125 or 402(g) of the Code and any amounts deferred by such Participant pursuant to Section 3.1 hereof, but Annual Compensation shall not include (i) amounts, if any, realized from the exercise of a nonqualified stock option or when restricted stock (or property) held by a Participant either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (ii) amounts payable to a Participant that do not represent salary, i.e., expense reimbursements; and (iii) dividends payable with respect to nonvested shares of restricted stock.

1.4"Beneficiary" shall mean the person or persons designated by each Participant under the CapSave Plan; provided, however, that a Participant may designate a different Beneficiary hereunder by delivering to the Administrator a written beneficiary designation in the form provided by the Administrator and executed specifically with respect to this Plan. If a Participant fails to name a Beneficiary, or if the Beneficiary named by a Participant predeceases him or dies before distribution of the Participant's Account, then the entire value of the Participant's Account shall be paid to the Participant's estate.

1.5"Board" shall mean the Board of Directors of the Company.

1.6"CapSave Plan" shall mean the qualified 401(k) and profit sharing plan maintained by the Company, as amended from time to time, or any successor qualified plan thereto.

1.7"Code" shall mean the Internal Revenue Code of 1986, as it may be amended from time to time, and the rules and regulations promulgated thereunder.

1.8"Company" shall mean Capstead Mortgage Corporation, a company formed under the laws of the State of Maryland, or its successor or successors.

1.9"Compensation Committee" shall mean the Compensation Committee of the Board.

1.10"Disability" shall mean a medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, and with respect to which a Participant has been receiving income replacement benefits for a period of not less than 3 months under a long-term disability plan of the Company.

1.11"Distribution Schedule" shall mean the form of payment and the date or date(s) elected by a Participant, at the time and in the manner described in Section 2.2 hereof, for the distribution of amounts credited to the Participant's Account.

1.12"Effective Date" shall mean January 1, 2009.

1.13"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended.

1.14"Insolvent" shall mean (a) the Company is unable to pay its debts as they become due or (ii) the Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code.

1.15"Participant" shall mean an individual who has been selected for participation in the Plan, as set forth in Article II hereof.

1.16"Performance-Based Compensation" shall mean the total amounts payable to the Participant as remuneration based upon the Participant's performance of services for the Company over a period of not less than twelve (12) months, the payment of which or the amount of which is contingent on the satisfaction of established organizational or individual performance criteria, and that otherwise meets the definition of "performance-based compensation", as that term is

defined in Section 1.409A-1(e) of the Treasury Regulations. For these purposes, Performance-Based Compensation shall be based upon criteria established no later than ninety (90) days following commencement of the applicable performance period.

1.17"Plan" shall mean the Capstead Mortgage Corporation Deferred Compensation Plan, as amended and restated herein, effective January 1, 2009, and as further amended from time to time.

1.18"Plan Year" shall mean the twelve (12) month period commencing on each January 1 and ending on the following December 31.

1.19"Prior Plan" shall mean the Capstead Mortgage Corporation Deferred Compensation Plan, as amended and restated effective January 1, 1998.

1.20"Normal Retirement Age" shall mean the date on which the Participant attains age sixty (60) or completes thirty (30) years of service with the Company.

1.21"Separation from Service" shall mean the date on which the Participant's employment with the Company is terminated, whether voluntary or involuntary, or due to the Participant's death. The determination of whether a Participant's employment has terminated shall be made in accordance with Code Section 409A and the regulations prescribed thereunder.

1.22"Specified Employee" shall mean, for any Plan Year in which the Company is publicly traded on an established securities market or otherwise, a Participant who is a "key employee" as defined under Code Section 416(i)(1)(A)(i), (ii), or (iii)(applied in accordance with the Treasury Regulations thereunder and disregarding subparagraph (5) thereof). For purposes of this Plan, the identification of Specified Employees will be made by the Administrator on December 31^st of each Plan Year, based upon the twelve (12) month period ending on such date. Each Participant identified by the Company as a "key employee" under the applicable provisions of Code Section 416(i) shall be a Specified Employee under this Plan for the twelve (12) month period commencing on the immediately succeeding April 1.

1.23"Trust Agreement" shall mean the agreement, if any, including any amendments thereto entered into between the Company and the Trustee for the accumulation of deferrals and credits made pursuant to Article III of the Plan, and any investment income, gains or losses thereto.

1.24"Trust Fund" shall mean the cash and other properties held and administered by the Trustee pursuant to a Trust Agreement.

1.25"Trustee" shall mean the designated trustee acting at any time under a Trust Agreement.

1.26"Valuation Date" shall mean each day on which the financial markets are open for trading activity, except to the extent otherwise prescribed by an authorized deemed investment option designated by the Administrator.

1.27"Vested Interest" shall mean that portion of the Participant's Account in which he has a nonforfeitable right. Each Participant shall have a 100% Vested Interest in the value of the

amounts credited to his Account which are attributable to deferrals made by such Participant pursuant to the provisions of Section 3.1 hereof and shall have a Vested Interest equal to a percentage of all amounts credited to his Account which are attributable to matching contributions and supplemental contributions credited on his behalf pursuant to the provisions of Sections 3.2 and 3.3 hereof, respectively, such percentage to be determined in accordance with the vesting schedule provided under the CapSave Plan. Notwithstanding the foregoing, each Participant shall have a 100% Vested Interest in the value of his entire Account upon such Participant's death or Disability, or upon attainment of Normal Retirement Age.

1.28"Vested Recipient" shall mean any Participant whose employment with the Company terminated prior to December 31, 2004, who had a 100% Vested Interest in the value of the amounts credited to his Account on December 31, 2004 and who commenced distribution of amounts credited to his Account prior to January 1, 2005.

ARTICLE II
PARTICIPATION

2.1Eligibility to Participate. Participation in the Plan shall be made available to a select group of individuals, as determined by the Board, who are providing services to the Company in key positions of management and responsibility. The determination as to the eligibility of any individual to participate in the Plan shall be in the sole and absolute discretion of the Board, consistent with the policies of the Company in place from time to time, and the decision of the Board in that regard shall be conclusive and binding for all purposes hereunder. The Administrator shall notify each individual selected by the Board of his eligibility to participate.

2.2Participation Agreements.

(a)Elections Upon Commencement of Participation. Within thirty (30) days of the date on which an individual is notified by the Administrator of his eligibility to participate hereunder, such individual shall submit an executed participation agreement to the Administrator, in such form as the Administrator shall require, to irrevocably elect to defer a portion of his Annual Compensation pursuant to Section 3.1 hereunder, provided, however, such election shall not become effective earlier than the first day of the first full payroll period immediately following the Administrator's receipt of such deferral election, or such later payroll period specified by the Participant. A Participant's failure to elect to defer a portion of his Annual Compensation in accordance with this paragraph (a) shall be deemed an election by the Participant to defer zero percent (0%) of his Annual Compensation. The Participant may, at such time, also irrevocably elect the Distribution Schedule under which benefits hereunder will be paid. A Participant's failure to elect a Distribution Schedule in accordance with this paragraph (a) shall be deemed an election by the Participant to receive his benefits hereunder in a single, lump sum payment on the fifteenth day of the third month of the Plan Year immediately following such Participant's Separation from Service.

(b)Annual Deferral Election. Except as otherwise provided in Article IV hereof, a Participant's election (or deemed election) to defer Annual Compensation shall

remain effective for each subsequent calendar year, unless and until modified or revoked by the Participant in accordance with this paragraph (b). A Participant may modify or revoke an election to defer Annual Compensation with respect to amounts to be earned in a subsequent calendar year by submitting an executed participation agreement to the Administrator, in such form as the Administrator shall require, no later than December 31 of the calendar year immediately preceding the calendar year in which such Annual Compensation will be earned.

(c)Performance-Based Compensation. Notwithstanding any provision of paragraphs (a) and (b) above to the contrary, a Participant may elect to defer or specify a Distribution Schedule with respect to all or a portion of his Annual Compensation which constitutes Performance-Based Compensation by submitting an executed participation agreement to the Administrator, in such form as the Administrator shall require, no later than six (6) months prior to the end of the applicable performance period.

(d)Subsequent Elections Regarding Time and Form of Benefit. A Participant may elect to delay one or more payment dates under a Distribution Schedule or change the form of benefit to be received hereunder, provided that (i) such election shall not be effective for at least twelve (12) months following the date on which such election is made, (ii) with respect to a payment which the Participant is entitled to receive following his Separation from Service or pursuant to a Distribution Schedule, the first payment with respect to which such election is made is deferred at least five (5) years from the date on which such payment would otherwise have been made, and (iii) with respect to the payment of benefits hereunder pursuant to a Distribution Schedule, such election is made no less than twelve (12) months prior to the date of the first scheduled payment.

ARTICLE III
DEFERRALS AND CREDITS TO ACCOUNT

3.1Deferral Elections. For any Plan Year, a Participant may elect, pursuant to Section 2.2 hereof, to defer a portion of the Annual Compensation otherwise payable to him. The amount a Participant may elect to defer under this Plan for any Plan Year may in no event exceed sixty percent (60%) of such Participant's Annual Compensation earned during such Plan Year, provided, however, that notwithstanding the foregoing, such Participant may elect to defer up to one hundred percent (100%) of that portion of such Participant's Annual Compensation that constitutes a bonus or other type of incentive compensation (including, but not limited to, Performance-Based Compensation) earned during such Plan Year, even though such amounts may be payable during a subsequent Plan Year. Any amounts withheld pursuant to this Section 3.1 from the Annual Compensation otherwise payable to a Participant shall be credited to his Account as of the date on which such amounts would otherwise have been paid.

3.2Matching Contributions. For each Plan Year, the Company shall credit an amount to the Account of each Participant hereunder who has deferred amounts under the Plan during such Plan Year, as provided in Section 3.1 above, but only as such deferrals relate to that portion, if any, of such Participant's Annual Compensation that exceeds the amount set forth in Section 401(a)(17) of the Code for such Plan Year ("Excess Compensation"). The amount of such

matching contribution shall equal fifty percent (50%) of the Participant's Excess Compensation deferred hereunder by the Participant during such Plan Year, but only taking into account up to six percent (6%) of such Excess Compensation. Any amounts credited pursuant to this Section 3.2 shall be credited to the Participant's Account as soon as practicable following the date on which the applicable deferral is credited to the Participant's Account pursuant to Section 3.1 above, but not later than the last day of the second calendar month following the calendar month to which the applicable deferral relates.

3.3Supplemental Matching Contributions. The Company may credit to the Account of a Participant hereunder who has deferred amounts under the Plan, as provided in Section 3.1 above, such amount, if any, as is determined by the Board in its sole and absolute discretion, which amount may, but is not required to be, equal to a uniform percentage of such Participant's Excess Compensation deferred hereunder. Any amounts credited pursuant to this Section 3.3 shall be credited to the Participant's Account as soon as practicable following the date on which the applicable deferral is credited to the Participant's Account pursuant to Section 3.1 above, but not later than the last day of the second calendar month following the calendar month to which the applicable deferral relates.

3.4Valuation of Accounts. As of each Valuation Date, the Administrator shall credit to each Participant's Account the deemed income, gains or losses attributable thereto, determined pursuant to the provisions of Section 3.5 below, as well as any other credits to or charges against such Account. All payments from an Account between Valuation Dates shall be charged against the Account as of the immediately preceding Valuation Date.

3.5Participant-Directed Investments. Each Participant, upon becoming a Participant in the Plan, may, in the manner prescribed by the Administrator, designate the manner in which he wishes his Account to be deemed invested among the various options designated by the Administrator for this purpose. The investment designation will continue until changed by the timely submission of a new investment designation. In the absence of any such investment designation, a Participant's Account shall be deemed to be invested in such property as the Administrator, in its sole and absolute discretion, shall determine. In no event may a Participant designate the deemed investment of his Account in stock or other securities of the Company or any Affiliate. The Administrator may, but shall not be obligated to, invest amounts credited to a Participant's Account in accordance with the investment designations of such Participant; nevertheless, the Account of such Participant shall be credited with the amount of income, gains and losses attributable thereto, as if the amounts credited to such Account had been so invested. The Administrator shall be authorized at any time and from time to time to modify, alter, delete or add to the deemed investment options hereunder. In the event a modification occurs, the Administrator shall notify those Participants whom the Administrator, in its sole and absolute discretion, determines are affected by the change, and shall give such persons such additional time as is determined necessary by the Administrator to designate the manner in which amounts thereby affected shall be deemed invested. The Administrator shall not be obligated to substitute deemed investment options with similar investment criteria for existing options, nor shall it be obligated to continue the types of deemed investment options presently available to the Participants. Notwithstanding any of the foregoing provisions, in no event shall the Administrator or the Company be responsible for implementing the deemed investment designation of a Participant

unless proper notice of such designation is given to the Administrator in the manner prescribed by the Administrator.

ARTICLE IV
IN-SERVICE HARDSHIP WITHDRAWALS

4.1Request for Withdrawal. In the event of an unforeseeable emergency, a Participant may make a written request to the Administrator for a withdrawal from his Account. For purposes of this Section, the term "unforeseeable emergency" shall mean a severe financial hardship to the Participant resulting from an illness or accident of the Participant, Participant's spouse or of a Participant’s dependent (as defined in Section 152 of the Code without regard to Section 152(b)(1), (b)(2), and (d)(1)(B)), loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. Any determination of the existence of an unforeseeable emergency and the amount to be withdrawn on account thereof shall be made by the Administrator in its sole and absolute discretion. However, notwithstanding the foregoing, a withdrawal will not be permitted to the extent that the financial hardship is or may be relieved: (i) through reimbursement or compensation by insurance or otherwise or (ii) by liquidation of the Participant's assets, to the extent that liquidation of such assets would not itself cause severe financial hardship. In no event shall the need to send a Participant's child to college or the desire to purchase a home be deemed to constitute an unforeseeable emergency. No person serving as Administrator shall vote or decide upon any matter relating to the determination of the existence of his own financial hardship or the amount to be withdrawn by him on account thereof. A request for a hardship withdrawal must be made in writing on a form provided by the Administrator, and must be expressed as a specific dollar amount. The amount of a hardship withdrawal may not exceed the amount necessary to meet the severe financial hardship, plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution. All hardship withdrawals shall be paid in a lump sum in cash.

4.2Termination of Deferral Election. Upon a Participant's receipt of an in-service withdrawal pursuant to Section 4.1 of this Plan for an unforeseeable emergency, or to the extent required for a Participant to receive a hardship withdrawal under the CapSave Plan, such Participant's deferral election shall thereupon be automatically terminated. Except to the extent otherwise required with respect to a hardship withdrawal under the CapSave Plan, a Participant may elect to resume deferrals under this Plan as of the first day of the first full payroll period of the immediately succeeding calendar year, or such later payroll period specified by the Participant, by submitting a new deferral election to the Administrator no later than the last day of the immediately preceding calendar year.

ARTICLE V
PAYMENT OF BENEFIT

5.1General. Distribution of a Participant's Vested Interest shall commence in accordance with such Participant's Distribution Schedule or, if the Participant has failed to elect a Distribution Schedule, then within ninety (90) days following such Participant's Separation from Service, provided, however that a distribution to which a Specified Employee is entitled shall not

commence prior to the first day of the seventh (7^th) month following the date of such Participant's Separation from Service or, if earlier, the date of the Participant’s death. The amount credited to the Participant's Account for purposes of such distribution shall be determined as of the Valuation Date coincident with or next preceding the date of distribution, increased by the amount of Participant deferrals and Company contributions, if any, to be credited after such Valuation Date.

5.2Death of Participant. Notwithstanding any provision of this Plan to the contrary, in the case of the death of a Participant, distribution of such Participant's entire Account shall be made to the Beneficiary of such Participant within ninety (90) days following the date of such Participant’s death. The amount credited to the Participant's Account for purposes of such distribution shall be determined as of the Valuation Date coincident with or next preceding the date of distribution, increased by the amount of Participant deferrals and Company contributions, if any, to be credited after such Valuation Date.

5.3Effect of Tax Laws. Notwithstanding any provision of this Plan to the contrary, if, in any Plan Year, the Plan fails to meet the requirements of Code Section 409A, benefits may be paid to an affected Participant hereunder before they would otherwise be payable, provided, however, that the amount paid shall not exceed the lesser of: (a) the amount in such Participant's Account or (b) the amount to be reported pursuant to Code Section 409A on the applicable Form W-2 (or Form 1099) as taxable income to the Participant.

5.4Delay for Compelling Business Reasons. Notwithstanding any provision of this Plan to the contrary, the benefits payable hereunder may, to the extent expressly provided in this Section 5.4, be paid later than the date on which they would otherwise be paid to the Participant.

(a)Going Concern. In the event the Board determines that the making of any payment on the date specified hereunder would jeopardize the ability of the Company to continue as a going concern, the Administrator may delay the payment of benefits under this Plan until the first calendar year in which the Board notifies the Administrator that the payment of benefits would not have such effect.

(b)Loss of Deduction. In the event the Board determines that the Company’s Federal income tax deduction for benefits hereunder would not be permitted due to the application of Code Section 162(m), the Administrator may delay the date on which payment of such benefits would otherwise be made or commence, provided that the payment is made either (i) in the first taxable year of the Participant in which the Company reasonably anticipates (or should reasonably anticipate) that the Federal income tax deduction of such payment would not be barred by application of Code Section 162(m) or (ii) during the period beginning with the date of the Participant's Separation from Service and ending on the later of the last day of the taxable year of the Company in which the Participant's Separation from Service occurred or, if later the 15^th day of the third month following the Participant's Separation from Service. In the case of a Specified Employee, however, the period described in clause (ii) of the immediately preceding sentence shall instead be measured from the first day of the seventh (7^th) month following such Participant's Separation from Service to the last day of the taxable year of the Company in which such date occurred or, if later, the 15^th day of the third month following such date.

(c)Violation of Securities Laws. In the event the Board reasonably anticipates that the payment or commencement of benefits hereunder will violate Federal securities laws or other applicable law (other than Code Section 409A), the date on which payment of such benefits would otherwise be made or commence may be delayed until the earliest date on which the Board reasonably anticipates that the making or commencement of such payment would not cause such violation.

5.5Administrative Delay in Payment. The payment of benefits under this Article V shall begin at the date specified in accordance with the provisions of the foregoing paragraphs of this Article V; provided that, in the case of administrative necessity, the payment of such benefits may be delayed up to the later of the last day of the calendar year in which payment would otherwise be made or the 15^th day of the third calendar month following the date on which payment would otherwise be made. Further, if, as a result of events beyond the control of the Participant (or following the Participant's death, the Participant's Beneficiary), it is not administratively practicable for the Administrator to calculate the amount of benefits due to the Participant as of the date on which payment would otherwise be made, the payment may be delayed until the first calendar year in which calculation of the amount is administratively practicable.

5.6No Participant Election. Notwithstanding the foregoing provisions of this Plan, if the period during which payment of benefits hereunder will be made occurs, or will occur, in two calendar years, the Participant shall not be permitted to elect the calendar year in which the payment shall be made.

ARTICLE VI
FORM OF DISTRIBUTION

6.1Payment of Benefits. Except to the extent otherwise provided herein, distribution of a Participant's Vested Interest shall be made either in a single, lump sum cash payment, or in the form of periodic cash installments over a period not to exceed five (5) years, such method of payment to be irrevocably elected by the Participant at the time and in the manner described under Section 2.2 above; provided, however, that payment will be made in a lump sum in any event if, at the time distribution is to commence, the value of the benefit in which such Participant has a vested interest is less than $10,000. Furthermore, notwithstanding the commencement of installment payments under this Section 6.1, the entire value of all remaining amounts to which a Participant is entitled hereunder shall be distributed to him in a lump sum, in cash, at such time as the value of such remaining amounts is less than $10,000. If installment payments are made, such payments shall be charged pro rata to the individual investment options in which amounts credited to the Participant's Account are deemed to be invested, pursuant to the provisions of Section 3.5 hereof. Furthermore, the Administrator shall continue to credit the unpaid balance of the Participant's Account with the deemed income and losses attributable thereto, determined pursuant to the provisions of Section 3.5 hereof, as well as with any other credits to or charges against the unpaid balance of such Account, during the period for which installment payments are made.

6.2Payment of Benefits On Account of Death. Notwithstanding any provision herein to the contrary, payment of a Participant's benefit (or the remainder thereof) on account of the Participant's death shall be made in a single, lump sum payment to the Beneficiary within ninety (90) days following the date of such Participant's death.

6.3Payments to Specified Employees. Notwithstanding any other provision of this Plan or a participation agreement to the contrary, to the extent applicable, a Participant who is a Specified Employee, the distribution of whose benefit hereunder is therefore deferred, as described in Section 5.1 hereof, shall, upon the commencement of such distribution, receive a single, lump sum payment equal to the aggregate amount of payments that would otherwise have been made during the first six months following the date of such Participant's Separation from Service.

ARTICLE VII
ADMINISTRATION OF THE PLAN

7.1Designation of Administrator. The Plan shall be administered by the Administrator. No person serving as Administrator, or a member of a committee serving as such, shall receive compensation with respect to his services for the performance of his duties hereunder. The Administrator shall serve without bond or security for the performance of its duties hereunder unless applicable law makes the furnishing of such bond or security mandatory or unless required by the Company. Any Administrator or member of a committee serving as such may resign by delivering his written resignation to the Board.

7.2Actions of Administrator. If a committee shall be serving as Administrator at any time, the Administrator shall perform any act that the Plan authorizes expressed by a vote at a meeting or in a writing signed by a majority of such individuals without a meeting. Neither the Administrator not any member of a committee serving as such shall vote or decide upon any matter relating solely to himself or vote in any case in which his individual right or claim to any benefit under the Plan is particularly involved. If, in any matter or case in which a person is so disqualified to act, the remaining persons serving as Administrator cannot resolve such matter or case, the Board will resolve such matter or case, or will appoint a temporary substitute to exercise all the powers of the disqualified person concerning the matter or case in which he is disqualified.

7.3Delegation, Expenses and Indemnification. The Administrator may designate in writing other persons to carry out its responsibilities under the Plan, and may remove any person designated to carry out its responsibilities under the Plan by notice in writing to that person. The Administrator may employ persons to render advice with regard to any of its responsibilities. All usual and reasonable expenses of the Administrator shall be paid by the Company. The Company shall indemnify and hold harmless each Administrator and member of a committee serving as such from and against any and all claims and expenses (including, without limitation, attorney's fees and related costs), in connection with the performance by such person of his duties in that capacity, other than any of the foregoing arising in connection with the willful neglect or willful misconduct of the person so acting.

7.4Administrative Duties. The Administrator may establish rules, not contrary to the provisions of the Plan, for the administration of the Plan and the transaction of its business, and shall interpret the Plan and determine all questions arising in the administration, interpretation and application of the Plan in its sole and absolute discretion. All determinations of the Administrator shall be conclusive and binding on all employees, Participants and Beneficiaries, subject to the provisions of this Plan and applicable law.

7.5Actions of Company. Any action to be taken hereunder by the Company shall be taken by resolution adopted by the Board or an executive committee thereof; provided, however, that by resolution, the Board or an executive committee thereof may delegate to any officer of the Company the authority to take any actions hereunder, other than the power to amend or terminate the Plan.

ARTICLE VIII
CLAIM REVIEW PROCEDURE

8.1Denial of Benefits. A Participant or Beneficiary (the "Claimant") who believes he is entitled to benefits hereunder that have not been paid may file a written claim for benefits with the Administrator. Within a reasonable period of time thereafter, but not later than ninety (90) days (unless the Administrator determines that special circumstances require an extension of time) following receipt of the written claim, the Administrator will determine the Claimant's entitlement to the benefits requested. If the Administrator determines that an extension of time is required, the Administrator will, prior to expiration of the initial 90-day period, notify the Claimant, in writing, of the extension, along with an explanation of the special circumstances requiring an extension of time and the date by which the Administrator expects to reach its decision, which shall not be later than one hundred eighty (180) days from the Administrator's receipt of the claim. If the claim is denied, the Administrator will furnish the Claimant a written notice stating: (a) the specific reason or reasons for denial of the claim, (b) a specific reference to pertinent Plan provisions on which the denial is based, (c) a description of any additional material or information necessary for the Claimant to perfect the claim and an explanation of why such material or information is necessary, and (d) an explanation of the Plan's claim review procedure and the time limits applicable to such procedures, including a statement of the Claimant's right to bring a civil action under Section 502(a) of ERISA following an adverse determination on review.

8.2Appeal of Denial of Benefits. A Claimant may appeal to the Administrator any claim that is denied by submitting a written request for review within sixty (60) days after notice of the claim denial. The written appeal must (i) request a review of the claim under the Plan, (ii) set forth all grounds under which the request for review is based and any facts in support thereof, and (iii) set forth any issues or comments that the Claimant deems pertinent to the appeal. The Claimant may also submit documents, records and other information relating to the claim for benefits. In preparing the request for review, the Claimant will be entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the claim for benefits. The Administrator's review will take into account all comments, documents, records, and other information submitted by the Claimant and relating to the claim, without regard to whether such information was submitted or considered in the Administrator's initial benefit determination. The Administrator will notify the Claimant in writing of its decision within sixty (60) days (unless the Administrator determines that special circumstances require an extension of time) after receipt of the request for review. If the Administrator determines that an extension of time is required, it will, prior to expiration of the initial 60-day period, notify the Claimant, in writing, of the extension, along with an explanation of the special circumstances requiring an extension of time and the date by which the Administrator expects to reach its decision, which shall not be later than one hundred twenty (120) days from the Administrator's receipt of the Claimant's request for review. If the Claimant's appeal is denied, the written notification of the Administrator will contain specific reasons for the decision and will

refer to the specific Plan provisions on which the decision is based, and will contain a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to and copies of all documents, records, and other information relevant to the claim for benefits and a statement of the Claimant's right to bring an action under Section 502(a) of ERISA. The decision of the Administrator will be final and conclusive as to any claim filed hereunder.

ARTICLE IX
LIMITATION OF RIGHTS

The establishment of this Plan shall not be construed as giving to any Participant or Beneficiary, any employee of the Company or any person whomsoever, any legal, equitable or other rights against the Company, or its officers, directors, agents or shareholders, or as giving to any Participant or Beneficiary any equity or other interest in the assets or business of the Company or shares of Company stock or as giving any employee the right to be retained in the employment of the Company. All employees shall be subject to discharge to the same extent they would have been if this Plan had never been adopted. The rights of a Participant hereunder shall be solely those of an unsecured general creditor of the Company.

ARTICLE X
LIMITATION OF ASSIGNMENT AND PAYMENTS TO
LEGALLY INCOMPETENT DISTRIBUTEE

10.1Non-Alienation. No benefits payable under the Plan to any person shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge or otherwise dispose of the same shall be void. No benefit shall in any manner be subject to the debts, contracts, liabilities, engagements or torts of any person, nor shall it be subject to attachment or legal process for or against any person, except to the extent required by law.

10.2Incapacitated Distributee. In the event any benefit payable under the Plan is to be paid to or for the benefit of any person who is then a minor or determined by the Administrator, on the basis of qualified medical advice, to be incompetent, the Administrator need not require the appointment of a guardian or custodian, but shall be authorized to cause the same to be paid over to the person having custody of the minor or incompetent, or to cause the same to be paid to the minor or incompetent without the intervention of a guardian or custodian, or to cause the same to be paid to a legal guardian or custodian of the minor or incompetent, if one has been appointed, or to cause the same to be used for the benefit of the minor or incompetent.

ARTICLE XI
AMENDMENT TO OR TERMINATION OF THE PLAN

11.1Amendment and Termination. The Company reserves the right at any time to amend or terminate the Plan in whole or in part by resolution of the Board. No amendment shall have the effect of retroactively changing or depriving Participants or Beneficiaries of rights already accrued under the Plan. In the event that the Company shall change its name, the Plan shall be

deemed to be amended to reflect the name change without further action of the Company, and the language of the Plan shall be changed accordingly.

11.2Distribution Upon Termination. Upon termination of the Plan, benefits hereunder shall be paid at the time and in the manner as otherwise provided herein; provided, however, that, notwithstanding the foregoing, the Company, in its sole and absolute discretion, may accelerate the payment of benefits hereunder in the event that termination of the Plan occurs in accordance with one of the following:

(a)Termination and liquidation of the Plan within twelve (12) months of a corporate dissolution taxed under section 331, or with the approval of a bankruptcy court pursuant to 11 U.S.C. §503(b)(1)(A), provided that the amounts deferred under the Plan are included in the Participants' gross income in the latest of the following years (or, if earlier, the taxable year in which the amount is actually or constructively received):

(i)The calendar year in which the Plan termination and liquidation occurs;

(ii)The first calendar year in which the amount is no longer subject to a substantial risk of forfeiture; or

(iii)The first calendar year in which the payment is administratively practicable.

(b)Termination and liquidation of the Plan pursuant to an irrevocable action taken by the Board within the thirty (30) days preceding, or the twelve (12) months following, a "change in control" event (as defined in Treasury Regulations §1.409A-3(i)(5)), provided that all agreements, methods, programs and other arrangements sponsored by the Company immediately after the time of the change in control event with respect to which deferrals of compensation are treated as having been deferred under a single plan under Treasury Regulations §1.409A-1(c)(2) are terminated and liquidated with respect to each Participant that experienced the change in control event, so that under the terms of the termination and liquidation of the Plan all such Participants are required to receive all amounts of compensation deferred under the terminated agreements, methods, programs and arrangements within twelve (12) months of the date the Board irrevocably takes all necessary actions to terminate and liquidate the agreements, methods, programs and arrangements.

(c)Termination and liquidation of the Plan upon satisfaction of the following conditions:

(i)The termination and liquidation of the Plan does not occur proximate to a downturn in the financial health of the Company;

(ii)The Company terminates and liquidates all agreements, methods, programs and arrangements sponsored by the Company that would be aggregated with the Plan under Treasury Regulations §1.409A-1(c) if the same Participant had

deferrals of compensation under all of the agreements, methods, programs and arrangements that are terminated and liquidated;

(iii)No payments in liquidation of the Plan are made within twelve (12) months of the date the Board takes all necessary action to irrevocably terminate and liquidate the Plan other than payments that would be payable under the Plan if the action to terminate and liquidate the Plan had not occurred;

(iv)All payments are made within twenty-four (24) months of the date the Board takes all necessary action to irrevocably terminate and liquidate the Plan; and

(v)The Company does not adopt a new plan that would be aggregated within any terminated and liquidated plan under Treasury Regulations §1.409A-1(c), if the same Participant participated in both plans, at any time within three (3) years following the date the Board takes all necessary action to irrevocably terminate and liquidate the Plan.

(d)Such other events and conditions as may be prescribed by the Commissioner of Internal Revenue in generally applicable guidance published in the Internal Revenue Bulletin.

ARTICLE XII
STATUS OF PARTICIPANT AS UNSECURED CREDITOR

All benefits under the Plan shall be the unsecured obligations of the Company and, except for those assets that may be placed in a Trust Fund established in connection with this Plan, no assets will be placed in trust or otherwise segregated from the general assets of the Company for the payment of obligations hereunder. If assets are placed in a Trust Fund, the Trust Agreement, to the extent required by the Code, shall conform in all material respects to the model trust set forth in Internal Revenue Service Revenue Procedure 92‑64. To the extent that any person acquires a right to receive payments hereunder, such right shall be no greater than the right of any unsecured general creditor of the Company.

ARTICLE XIII
GENERAL AND MISCELLANEOUS

13.1Prohibited Acceleration. Notwithstanding any provision herein to the contrary, except as provided in Sections 5.3 and 11.2 hereof, the time or schedule of any payment hereunder shall not be accelerated, except to the extent otherwise permitted under Code Section 409A and the regulations promulgated thereunder.

13.2Trust Fund. The Company may establish a Trust Fund for the purpose of retaining assets set aside by the Company pursuant to the Trust Agreement for payment of all or a portion of the benefits payable pursuant to Article V of the Plan. Any such benefits not paid from a Trust Fund shall be paid from the Company's general assets. The Trust Fund, if such shall be established,

shall be subject to the claims of general creditors of the Company in the event the Company is Insolvent.

13.3Severability. In the event that any provision of this Plan shall be declared illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining provisions of this Plan but shall be fully severable and this Plan shall be construed and enforced as if said illegal or invalid provision had never been inserted herein.

13.4Construction. The section headings and numbers are included only for convenience of reference and are not to be taken as limiting or extending the meaning of any of the terms and provisions of this Plan. Whenever appropriate, words used in the singular shall include the plural or the plural may be read as the singular. When used herein, the masculine gender includes the feminine gender.

13.5Governing Law. The validity and effect of this Plan and the rights and obligations of all persons affected hereby shall be construed and determined in accordance with the laws of the State of Texas unless superseded by federal law.

13.6No Requirement to Fund. The Company is not required to set aside any assets for payment of the benefits provided under this Plan; however, it may do so as provided in the Trust Agreement, if any. A Participant shall have no security interest in any such amounts. It is the Company's intention that this Plan be construed as a plan that is unfunded and maintained primarily for the purpose of providing benefits for a select group of management and highly compensated employees of the Company.

13.7Taxes. All amounts payable hereunder shall be reduced by any and all federal, state and local taxes imposed upon the Participant or his Beneficiary that are required to be paid or withheld by the Company.

IN WITNESS WHEREOF, Capstead Mortgage Corporation has caused these presents to be duly executed in its name and behalf by its proper officers thereunto duly authorized this _____ day of December, 2010.

CAPSTEAD MORTGAGE CORPORATION

By:

Title:

ATTEST:

(Title)

Dallas_1\5290890\2

2376-2 12/13/2010

12/13/2010

Exhibit 10.04

CAPSTEAD MORTGAGE CORPORATION

THIRD AMENDED AND RESTATED INCENTIVE BONUS PLAN

1. Purposes.

The purposes of the Company’s Third Amended and Restated Incentive Bonus Plan (the “Plan”) are to attract and retain highly-qualified employees by providing appropriate performance-based incentive awards and to align employee and stockholder interests by creating a direct link between employee compensation and the success of the Company. An additional purpose of the Plan is to serve as a qualified performance-based compensation program under Section 162(m) of the Code, in order to maximize the Company’s tax deduction for compensation paid under the Plan to Covered Employees (defined below).

2. Definitions.

The following terms, as used herein, shall have the following meanings:

(a) “Affiliate” shall mean (i) any corporation, partnership or other entity that, directly or indirectly, is controlled by the Company, (ii) any entity in which the Company has a significant equity interest, and (iii) any entity that provides substantial management advisory services for the Company, in each case as determined by the Committee.

(b) “Annual Base Salary” shall mean the annual rate of base salary of a Participant in effect on the first day of the Plan Year, without regard to any optional or mandatory deferral of base salary pursuant to a salary deferral arrangement.

(d) “Bonus” shall mean any annual incentive bonus award granted pursuant to the Plan; the payment of any such award shall be contingent upon the attainment of Performance Goals with respect to a Plan Year.

(e) “Change in Control” shall mean the occurrence of an event described in Section 5(e) hereof.

(f) “Code” shall mean the Internal Revenue Code of 1986, as amended.

(g) “Committee” shall mean the Compensation Committee of the Board.

(h) “Company” shall mean Capstead Mortgage Corporation, a Maryland corporation.

(i) “Covered Employee” shall have the meaning set forth in Section 162(m) of the Code (or any successor provision).

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(j) “Participant” shall mean an employee of the Company or one of its Affiliates who is eligible to participate herein pursuant to Section 3 of the Plan and for whom a target Bonus is established with respect to the relevant Plan Year.

(k) “Performance Goal(s)” shall mean the criteria and objectives which must be met during the Plan Year as a condition of the Participant’s receipt of payment with respect to a Bonus, as described in Section 4 hereof.

(l) “Plan” shall mean this Second Amended and Restated Incentive Bonus Plan of Capstead Mortgage Corporation.

(m)“Plan Year” shall mean each fiscal year of the Company, commencing with the Company’s fiscal year beginning on January 1, 1996.

3. Eligibility.

Certain key employees of the Company and its Affiliates, as determined by Committee, shall be eligible to participate in the Plan.

4. Performance Goals.

The Committee shall establish Performance Goals expressed in terms of the achievement of any of one or more of the following performance measures:

•

earnings,

•

earnings per share,

•

earnings from operations,

•

return on stockholders’ equity,

•

total return (change in stock price plus dividends),

•

modified total return (change in net asset or book value plus dividends),

•

return on assets,

•

operating efficiency,

•

the extent of increase of any one or more of the foregoing over a specified period,

•

or the Company’s ranking against a peer group of companies with respect to any one or more of the foregoing.

To the extent applicable, such Performance Goals shall be determined in accordance with generally accepted accounting principles and reported upon by the Company’s independent accountants. Performance Goals shall include a threshold level of performance below which no Bonus payment shall be made, and may include levels of performance at which specified percentages of the target Bonus shall be paid and a maximum level of performance above which no additional Bonus shall be paid. The performance measure or measures and the Performance Goals established by the Committee with respect thereto may be (but need not be) different each Plan Year and different goals may be applicable to different Participants.

5. Bonuses.

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(a) In General. For each Plan Year, the Committee shall specify the Performance Goals applicable to each Participant for such Plan Year and the amount of, or the formula for determining, the target Bonus for each Participant with respect to such Plan Year. A Participant’s target Bonus for each Plan Year shall be expressed as a percentage of the Participant’s Annual Base Salary. Except as set forth in Section 5(e) hereof, payment of a Bonus for a particular Plan Year shall be made only if and to the extent the Performance Goals with respect to such Plan Year are attained and only if the Participant is employed by the Company on the last day of the Plan Year. The actual amount of Bonus payable under the Plan shall be determined as a percentage of the Participant’s target Bonus, which percentage shall vary depending upon the extent to which the Performance Goals have been attained. The Committee may, in its discretion, reduce or eliminate the amount payable to any Participant (including a Covered Employee), in each case based upon such factors as the Committee may deem relevant, but shall not increase the amount payable to any Covered Employee.

(b) Special Limitation on Certain Bonuses. Notwithstanding anything to the contrary contained in this Section 5, the Bonus for each Covered Employee under the Plan in any Plan Year may not exceed $2,000,000.

(c) Time of Payment. Unless otherwise determined by the Committee at the time of grant, or except as provided herein, all payments in respect of Bonuses granted under this Section 5 shall be made within a reasonable period after the end of the Plan Year. In the case of Participants who are Covered Employees, except as provided in Section 5(e) hereof, such payments shall be made only after achievement of the Performance Goals has been certified by the Committee.

(d) Form of Payment. Payment of a Participant’s Bonus for any Plan Year shall be made in cash.

(e) Change in Control. Notwithstanding any other provision of the Plan to the contrary, (i) if a “Change in Control” of the Company (as defined in this Section 5(e)) shall occur following a Plan Year as to which the Committee has determined the actual Bonuses to be paid (but such Bonuses have not yet been paid), such Bonuses shall be paid immediately in cash, (ii) if a Change in Control shall occur following a Plan Year as to which the Committee has not yet determined the actual Bonuses to be paid, such Bonuses shall be immediately determined and paid in cash, and (iii) if a Change in Control shall occur during a Plan Year as to which target Bonuses have been established (but the actual Bonuses to be paid have not yet been determined), such Plan Year shall be deemed to have been completed, the target levels of performance set forth under the respective Performance Goals shall be deemed to have been attained and a pro rata portion of the Bonus so determined for each Participant for such partial Plan Year (based on the number of full and partial months which have elapsed with respect to such Plan Year) shall be paid immediately in cash to each Participant for whom a target Bonus for such Plan Year was established.

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For the purposes of this Section 5, a Change in Control of the Company shall occur upon the first to occur of the following:

(i) the occurrence of an event of a nature that would be required to be reported in response to Item 1 or Item 2 of a Form 8-K Current Report of the Company promulgated pursuant to Sections 13 and 15(d) of the Securities Exchange Act of 1934, as amended; provided that, without limitation, such a Change in Control shall be deemed to have occurred if (a) any “person,” as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company, any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company’s then outstanding securities or (b) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election by the Board or the nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved;

(ii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than eighty percent (80%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a reorganization or recapitalization of the Company, or a similar transaction (collectively, a “Reorganization”), in which no “person” acquires more than twenty percent (20%) of the combined voting power of the Company’s then outstanding securities shall not constitute a Change in Control of the Company; or

(iii) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets.

6. Administration.

The Plan shall be administered by the Committee. The Committee shall have the authority in its sole discretion, subject to and not inconsistent with the express provisions of the Plan, to administer the Plan and to exercise all the powers and authorities either specifically granted

DAL:284785.7

to it under the Plan or necessary or advisable in the administration of the Plan, including without limitation, the authority to grant Bonuses; to determine the persons to whom and the time or times at which Bonuses shall be granted; to determine the terms, conditions, restrictions and performance criteria relating to any Bonus; to make adjustments in the Performance Goals in response to changes in applicable law, regulations, or accounting principles, except as otherwise provided herein; to reduce or eliminate compensation payable upon attainment of Performance Goals; to construe and interpret the Plan and any Bonus; to prescribe, amend and rescind rules and regulations relating to the Plan; and to make all other determinations deemed necessary or advisable for the administration of the Plan.

The Committee shall consist of two or more persons each of whom is an “outside director” within the meaning of Section 162(m) of the Code. The Committee may appoint a chairperson and a secretary and may make such rules and regulations for the conduct of its business as it shall deem advisable, and shall keep minutes of its meetings. All determinations of the Committee shall be made by a majority of its members either present in person or participating by conference telephone at a meeting or by unanimous written consent. The Committee may delegate to one or more of its members or to one or more agents such ministerial duties as it may deem advisable, and the Committee or any person to whom it has delegated duties as aforesaid may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the Plan. All decisions, determinations and interpretations of the Committee shall be final and binding on all persons, including the Company, the Participant (or any person claiming any rights under the Plan from or through any Participant) and any stockholder.

No member of the Board or the Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any Bonus granted hereunder.

7. General Provisions.

(a) Compliance with Legal Requirements. The Plan and the granting of Bonuses, and the other obligations of the Company under the Plan shall be subject to all applicable federal and state laws, rules and regulations, and to such approvals by any regulatory or governmental agency as may be required.

(b) No Right To Continued Employment. Nothing in the Plan or in any Bonus granted shall confer upon any Participant the right to continue in the employ of the Company or an Affiliate or to be entitled to any remuneration or benefits not set forth in the Plan or to interfere with or limit in any way the right of the Company or an Affiliate to terminate such Participant’s employment.

(c) Withholding Taxes. The Company or its Affiliate shall deduct from all payments and distributions under the Plan any taxes required to be withheld by federal, state or local governments.

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(d) Amendment and Termination of the Plan. The Board may at any time and from time to time alter, amend, suspend, or terminate the Plan in whole or in part; provided, however, that no amendment which requires stockholder approval in order for the Plan to continue to comply with Section 162(m) of the Code shall be effective unless the same shall be approved by the requisite vote of the stockholders of the Company. Additionally, the Committee may make such amendments as it deems necessary to comply with other applicable laws, rules and regulations. Notwithstanding the foregoing, no amendment shall affect adversely any of the rights of any Participant, without such Participant’s consent, under any Bonus theretofore granted under the Plan.

(e) Participant Rights. No Participant shall have any claim to be granted any Bonus under the Plan, and there is no obligation for uniformity of treatment for Participants.

(f) Unfunded Status of Bonuses. The Plan is intended to constitute an “unfunded” plan for incentive compensation. With respect to any payments which at any time are not yet made to a Participant pursuant to a Bonus, nothing contained in the Plan or any Bonus shall give any such Participant any rights that are greater than those of a general unsecured creditor of the Company or an Affiliate.

(g) Governing Law. The Plan and the rights of all persons claiming hereunder shall be construed and determined in accordance with the laws of the State of Maryland without giving effect to the choice of law principles thereof, except to the extent that such law is preempted by federal law.

(h) Effective Date. The original Incentive Bonus Plan became effective upon its adoption by the Board on February 27, 1996 and was approved by the Company’s stockholders on April 19, 1996. Pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended, to remain effective, the Plan must be submitted to the Company’s stockholders for approval every five years. Accordingly, for so long as the Company submits the Plan to its shareholders for approval every five years for approval and the Company’s stockholders approve such submission, the Plan shall remain effective.

(i) Interpretation. The Plan is designed and intended to comply with Section 162(m) of the Code, to the extent applicable, and all provisions hereof shall be construed in a manner to so comply.

DAL:284785.7

Exhibit 31.1

CAPSTEAD MORTGAGE CORPORATION

Certification Pursuant to Section 302(a)

of the Sarbanes-Oxley Act of 2002

I, Phillip A. Reinsch, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Capstead Mortgage Corporation;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 26, 2019	By:	/s/ PHILLIP A. REINSCH
		Phillip A. Reinsch
		President and Chief Executive Officer

EXHIBIT 31.2

CAPSTEAD MORTGAGE CORPORATION

CERTIFICATION PURSUANT TO SECTION 302(a)

OF THE SARBANES-OXLEY ACT OF 2002

I, Lance J. Phillips, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Capstead Mortgage Corporation;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 26, 2019	By:	/s/ LANCE J. PHILLIPS
		Lance J. Phillips
		Senior Vice President, Chief
		Financial Officer and Secretary

EXHIBIT 32.1

CAPSTEAD MORTGAGE CORPORATION

Certifications Pursuant to

18 U.S.C. Section 1350,

As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Capstead Mortgage Corporation (the “Company”) for the period ended June 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Phillip A. Reinsch, President and Chief Executive Officer of the Company, certify to my knowledge and in my capacity as an officer of the Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: July 26, 2019	By:	/s/ PHILLIP A. REINSCH
		Phillip A. Reinsch
		President and Chief Executive Officer

EXHIBIT 32.2

CAPSTEAD MORTGAGE CORPORATION

CERTIFICATIONS PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Capstead Mortgage Corporation (the “Company”) for the period ended June 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lance J. Phillips, Senior Vice President, Chief Financial Officer and Secretary of the Company, certify to my knowledge and in my capacity as an officer of the Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Date: July 26, 2019	By:	/s/ LANCE J. PHILLIPS
		Lance J. Phillips
		Senior Vice President, Chief
		Financial Officer and Secretary