##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: March 31, 2009
 OR
 o
    
    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
  Maryland
    
    75-2027937(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 8401 North Central Expressway, Suite 800, Dallas, TX
    
    75225(Address of principal executive offices)
    
    (Zip Code)
 (214) 874-2323
 þ o
 o o
  Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company o o þ
 APPLICABLE ONLY TO CORPORATE ISSUERS:
  Common Stock ($0.01 par value)
    
    63,493,132 as of May 8, 2009




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##### 



CAPSTEAD MORTGAGE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2009
 INDEX
 PagePART I.  FINANCIAL INFORMATIONITEM 1. Financial Statements (unaudited)Consolidated Balance Sheets  March 31, 2009 and December 31, 2008
    
    
    3Consolidated Statements of Income  Quarter Ended March 31, 2009 and 2008
    
    
    4Consolidated Statements of Cash Flows  Quarter Ended March 31, 2009 and 2008
    
    
    5Notes to Consolidated Financial Statements
    
    
    6ITEM 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    17ITEM 3. Qualitative and Quantitative Disclosure of Market Risk
    
    
    36ITEM 4. Controls and Procedures
    
    
    36PART II.  OTHER INFORMATIONITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    37ITEM 6. Exhibits and Reports on Form 8-K
    
    
    38SIGNATURES
    
    
    39Computation of Ratio of Income from Continuing OperationsCertification Pursuant to Section 302(a)Certification Pursuant to Section 302(a)Certification Pursuant to Section 906EX-12EX-31.1EX-31.2EX-32
  -2-




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##### Table of Contents



ITEM 1. FINANCIAL STATEMENTS
 
 PART I.  FINANCIAL INFORMATION
 
 CAPSTEAD MORTGAGE CORPORATION
CONSOLIDATED BALANCE SHEETS  (in thousands, except per share amounts)
 March 31, 2009
    
    
    December 31, 2008(unaudited)Assets:Mortgage securities and similar investments
($7.3 billion pledged under repurchase arrangements)
    
    $
    7,640,072
    
    
    $
    7,499,530Cash collateral receivable from interest rate swap counterparties
    
    
    48,182
    
    
    
    53,676Cash and cash equivalents
    
    
    116,852
    
    
    
    96,839Receivables and other assets
    
    
    85,928
    
    
    
    76,200Investments in unconsolidated affiliates
    
    
    3,117
    
    
    
    3,117$
    7,894,151
    
    
    $
    7,729,362Liabilities:Repurchase arrangements and similar borrowings
    
    $
    6,849,684
    
    
    $
    6,751,500Unsecured borrowings
    
    
    103,095
    
    
    
    103,095Interest rate swap agreements at fair value
    
    
    38,344
    
    
    
    46,679Common stock dividend payable
    
    
    35,501
    
    
    
    22,728Accounts payable and accrued expenses
    
    
    28,640
    
    
    
    44,9107,055,264
    
    
    
    6,968,912Stockholders equity:Preferred stock  $0.10 par value; 100,000 shares authorized:$1.60 Cumulative Preferred Stock, Series A,
195 and 197 shares issued and outstanding at
March 31, 2009 and December 31, 2008, respectively
($3,191 aggregate liquidation preference)
    
    
    2,720
    
    
    
    2,755$1.26 Cumulative Convertible Preferred Stock, Series B,
15,819 shares issued and outstanding at
March 31, 2009 and December 31, 2008
($180,025 aggregate liquidation preference)
    
    
    176,705
    
    
    
    176,705Common stock  $0.01 par value; 250,000 shares authorized:63,395 and 63,135 shares issued and outstanding at
March 31, 2009 and December 31, 2008, respectively
    
    
    634
    
    
    
    631Paid-in capital
    
    
    979,016
    
    
    
    975,893Accumulated deficit
    
    
    (356,641
    )
    
    
    (358,155
    )Accumulated other comprehensive income (loss)
    
    
    36,453
    
    
    
    (37,379
    )838,887
    
    
    
    760,450$
    7,894,151
    
    
    $
    7,729,362
 See accompanying notes to consolidated financial statements.
 -3-




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##### Table of Contents



CAPSTEAD MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME  (in thousands, except per share amounts)
(unaudited)
 Quarter Ended March 312009
    
    
    2008Interest income:Mortgage securities and similar investments
    
    $
    87,884
    
    
    $
    106,351Other
    
    
    217
    
    
    
    80488,101
    
    
    
    107,155Interest expense:Repurchase arrangements and similar borrowings
    
    
    (39,957
    )
    
    
    (69,306
    )Unsecured borrowings
    
    
    (2,187
    )
    
    
    (2,187
    )(42,144
    )
    
    
    (71,493
    )45,957
    
    
    
    35,662Other revenue (expense):Loss from portfolio restructurings
    
    
    
    
    
    
    (1,408
    )Miscellaneous other revenue (expense)
    
    
    (105
    )
    
    
    39Incentive compensation expense
    
    
    (1,134
    )
    
    
    (2,250
    )General and administrative expense
    
    
    (2,707
    )
    
    
    (1,961
    )(3,946
    )
    
    
    (5,580
    )Income before equity in earnings of unconsolidated
affiliates
    
    
    42,011
    
    
    
    30,082Equity in earnings of unconsolidated affiliates
    
    
    65
    
    
    
    65Net income
    
    $
    42,076
    
    
    $
    30,147Net income available to common stockholders:Net income
    
    $
    42,076
    
    
    $
    30,147Less cash dividends paid on preferred shares
    
    
    (5,061
    )
    
    
    (5,064
    )$
    37,015
    
    
    $
    25,083Net income per common share:Basic
    
    $
    0.59
    
    
    $
    0.54Diluted
    
    $
    0.58
    
    
    $
    0.53Cash dividends declared per share:Common
    
    $
    0.560
    
    
    $
    0.520Series A Preferred
    
    
    0.400
    
    
    
    0.400Series B Preferred
    
    
    0.315
    
    
    
    0.315
 See accompanying notes to consolidated financial statements.
 -4-




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CAPSTEAD MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS  (in thousands, unaudited)
 Quarter Ended March 312009
    
    
    2008Operating activities:Net income
    
    $
    42,076
    
    
    $
    30,147Noncash items:Amortization of investment premiums
    
    
    5,523
    
    
    
    7,127Depreciation and other amortization
    
    
    70
    
    
    
    53Equity-based compensation costs
    
    
    328
    
    
    
    320Amounts related to interest rate swap agreements
    
    
    (67
    )
    
    
    186Loss from portfolio restructurings
    
    
    
    
    
    
    1,408Net change in receivables, other assets, accounts payable and
accrued expenses
    
    
    (25,542
    )
    
    
    3,352Net cash provided by operating activities
    
    
    22,388
    
    
    
    42,593Investing activities:Purchases of mortgage securities and similar investments
    
    
    (367,080
    )
    
    
    (1,461,893
    )Proceeds from sales of mortgage securities and similar investments
    
    
    
    
    
    
    766,800Principal collections on mortgage securities and similar investments
    
    
    286,047
    
    
    
    384,104Net cash used in investing activities
    
    
    (81,033
    )
    
    
    (310,989
    )Financing activities:Proceeds from repurchase arrangements and similar borrowings
    
    
    16,263,193
    
    
    
    17,531,660Principal payments on repurchase arrangements and similar borrowings
    
    
    (16,165,006
    )
    
    
    (17,235,730
    )Payment on early termination of interest rate swap agreement
    
    
    
    
    
    
    (2,275
    )Proceeds (remittances) related to cash collateral receivable from interest
rate swap counterparties
    
    
    5,494
    
    
    
    (46,895
    )Capital stock transactions
    
    
    2,767
    
    
    
    131,189Dividends paid
    
    
    (27,790
    )
    
    
    (14,851
    )Net cash provided by financing activities
    
    
    78,658
    
    
    
    363,098Net change in cash and cash equivalents
    
    
    20,013
    
    
    
    94,702Cash and cash equivalents at beginning of period
    
    
    96,839
    
    
    
    6,653Cash and cash equivalents at end of period
    
    $
    116,852
    
    
    $
    101,355
 See accompanying notes to consolidated financial statements.
 -5-




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CAPSTEAD MORTGAGE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009  (unaudited)
 NOTE 1  BUSINESS
  NOTE 2  BASIS OF PRESENTATION
 Interim Financial Reporting and Reclassifications
  Accounting for Seller-financed Acquisitions of Mortgage Securities
 Accounting for Transfers of Financial Assets and Repurchase Financing Transactions
 NOTE 3  EARNINGS PER COMMON SHARE
  -6-




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Quarter Ended March 312009
    
    
    2008Numerators for basic earnings per common share:Net income
    
    $
    42,076
    
    
    $
    30,147Less Series A and B preferred share dividends
    
    
    (5,061
    )
    
    
    (5,064
    )Income available to common stockholders
    
    $
    37,015
    
    
    $
    25,083Weighted average common shares outstanding
    
    
    62,752
    
    
    
    46,154Basic earnings per common share
    
    $
    0.59
    
    
    $
    0.54Numerator for diluted earnings per common share:Income available to common stockholders
    
    $
    42,076
    
    
    $
    30,147Denominator for diluted earnings per common share:Weighted average common shares outstanding
    
    
    62,752
    
    
    
    46,154Net effect of dilutive equity awards (a)
    
    
    192
    
    
    
    441Net effect of dilutive convertible preferred shares
    
    
    9,929
    
    
    
    9,81872,873
    
    
    
    56,413Diluted earnings per common share
    
    $
    0.58
    
    
    $
    0.53
 
 (a)
    
    Excludes 40,000 potentially dilutive option award shares that were antidilutive for the
quarter ended March 31, 2009. NOTE 4  MORTGAGE SECURITIES AND SIMILAR INVESTMENTS
 Mortgage securities and similar investments
 Principal
    
    
    Investment
    
    
    
    
    
    
    Carrying
    
    
    Net
    
    
    AverageBalance
    
    
    Premiums
    
    
    Basis
    
    
    Amount (a)
    
    
    WAC (b)
    
    
    Yield (b)March 31, 2009Agency Securities:Fannie Mae/Freddie Mac:Fixed-rate
    
    $
    9,358
    
    
    $
    29
    
    
    $
    9,387
    
    
    $
    9,406
    
    
    
    6.65
    %
    
    
    6.43
    %ARMs
    
    
    7,020,705
    
    
    
    90,752
    
    
    
    7,111,457
    
    
    
    7,183,323
    
    
    
    5.02
    
    
    
    4.70Ginnie Mae ARMs
    
    
    379,434
    
    
    
    2,004
    
    
    
    381,438
    
    
    
    385,290
    
    
    
    4.70
    
    
    
    4.587,409,497
    
    
    
    92,785
    
    
    
    7,502,282
    
    
    
    7,578,019
    
    
    
    5.01
    
    
    
    4.70Residential mortgage loans:Fixed-rate
    
    
    5,175
    
    
    
    7
    
    
    
    5,182
    
    
    
    5,182
    
    
    
    7.21
    
    
    
    8.10ARMs
    
    
    8,734
    
    
    
    78
    
    
    
    8,812
    
    
    
    8,812
    
    
    
    5.11
    
    
    
    5.3813,909
    
    
    
    85
    
    
    
    13,994
    
    
    
    13,994
    
    
    
    5.89
    
    
    
    6.43Commercial real estate
loans
    
    
    43,874
    
    
    
    
    
    
    
    43,874
    
    
    
    43,874
    
    
    
    
    
    
    
    Collateral for structured
financings
    
    
    4,117
    
    
    
    68
    
    
    
    4,185
    
    
    
    4,185
    
    
    
    8.10
    
    
    
    7.74$
    7,471,397
    
    
    $
    92,938
    
    
    $
    7,564,335
    
    
    $
    7,640,072
    
    
    
    4.98
    
    
    
    4.68
 -7-




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Principal
    
    
    Investment Premiums
    
    
    
    
    
    
    Carrying
    
    
    Net
    
    
    AverageBalance
    
    
    (Discounts)
    
    
    Basis
    
    
    Amount (a)
    
    
    WAC (b)
    
    
    Yield (b)December 31, 2008Agency Securities:Fannie Mae/Freddie Mac:Fixed-rate
    
    $
    9,991
    
    
    $
    31
    
    
    $
    10,022
    
    
    $
    10,041
    
    
    
    6.64
    %
    
    
    6.56
    %ARMs
    
    
    6,928,385
    
    
    
    90,942
    
    
    
    7,019,327
    
    
    
    7,029,002
    
    
    
    5.29
    
    
    
    4.90Ginnie Mae ARMs
    
    
    394,909
    
    
    
    2,056
    
    
    
    396,965
    
    
    
    397,443
    
    
    
    4.94
    
    
    
    4.817,333,285
    
    
    
    93,029
    
    
    
    7,426,314
    
    
    
    7,436,486
    
    
    
    5.27
    
    
    
    4.90Residential mortgage loans:Fixed-rate
    
    
    5,880
    
    
    
    (8
    )
    
    
    5,872
    
    
    
    5,872
    
    
    
    7.16
    
    
    
    7.09ARMs
    
    
    9,053
    
    
    
    79
    
    
    
    9,132
    
    
    
    9,132
    
    
    
    5.58
    
    
    
    5.9014,933
    
    
    
    71
    
    
    
    15,004
    
    
    
    15,004
    
    
    
    6.20
    
    
    
    6.36Commercial real estate
loans
    
    
    43,444
    
    
    
    
    
    
    
    43,444
    
    
    
    43,444
    
    
    
    7.03
    
    
    
    8.48Collateral for structured
financings
    
    
    4,523
    
    
    
    73
    
    
    
    4,596
    
    
    
    4,596
    
    
    
    8.09
    
    
    
    7.79$
    7,396,185
    
    
    $
    93,173
    
    
    $
    7,489,358
    
    
    $
    7,499,530
    
    
    
    5.29
    
    
    
    4.92
 
 (a)
    
    Includes unrealized gains and losses for securities classified as available-for-sale, if
applicable (see NOTE 9).(b)
    
    Net WAC, or weighted average coupon, is presented net of servicing and other fees as of the
indicated balance sheet date and is calculated excluding nonperforming investments. Average
yield is presented for the quarter then ended, calculated including the amortization of
investment premiums (discounts) and excluding unrealized gains and losses.    -8-




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Receivables and other assets
 NOTE 5  INVESTMENTS IN UNCONSOLIDATED AFFILIATES
 Unsecured borrowings Unsecured borrowings
 NOTE 6  REPURCHASE ARRANGEMENTS AND SIMILAR
BORROWINGS, INCLUDING RELATED HEDGING ACTIVITY
 Mortgage securities and similar investments Repurchase arrangements and similar borrowings
 March 31, 2009
    
    
    December 31, 2008Borrowings
    
    
    Average
    
    
    Borrowings
    
    
    AverageCollateral Type
    
    Outstanding
    
    
    Rate *
    
    
    Outstanding
    
    
    Rate *Borrowings with maturities of 30 days or less:Agency Securities
    
    $
    6,003,234
    
    
    
    0.86
    %
    
    $
    5,179,137
    
    
    
    2.74
    %Borrowings with maturities greater than 30 days:Agency Securities (31 to 90 days)
    
    
    285,285
    
    
    
    2.01
    
    
    
    835,628
    
    
    
    2.87Agency Securities (91 to 360 days)
    
    
    556,980
    
    
    
    5.17
    
    
    
    732,139
    
    
    
    5.13842,265
    
    
    
    4.10
    
    
    
    1,567,767
    
    
    
    3.93Similar borrowings:Collateral for structured financings
    
    
    4,185
    
    
    
    8.10
    
    
    
    4,596
    
    
    
    8.09$
    6,849,684
    
    
    
    1.26
    
    
    $
    6,751,500
    
    
    
    3.02
 
 *
    
    Average rate is presented as of the indicated balance sheet date and does not include the
effects of interest rate swap agreements held as cash flow hedges on a designated portion of
30- to 90-day borrowings (see below). After giving effect to these cash flow hedges, the
average rate was 2.02% and 3.55% as of March 31, 2009 and December 31, 2008, respectively. -9-




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Balance Sheet
    
    
    March 31,
    
    
    December 31,Location
    
    
    2009
    
    
    2008Balance sheet-relatedDerivatives designated as cash flow hedging instruments:Interest rate swap agreements at fair value  assets
    
    
    (a)
    
    
    $
    
    
    
    $
    Interest rate swap agreements at fair value 
(liabilities) (c)
    
    
    (a)
    
    
    
    (38,344
    )
    
    
    (46,679
    )Related net interest payable
    
    
    (b)
    
    
    
    (16,192
    )
    
    
    (12,909
    )$
    (54,536
    )
    
    $
    (59,588
    )
 Location ofGain or (Loss)Recognized in
    
    
    Quarter Ended March 31Net Income
    
    
    2009
    
    
    2008Income statement-relatedComponents of effect on interest expense:
    
    
    (a)Amount of gain (loss) reclassified from AOCI:Effective portion of active positions
    
    
    
    
    
    $
    (12,025
    )
    
    $
    (228
    )Effective portion of terminated positions (d)
    
    
    
    
    
    
    (256
    )
    
    
    (61
    )(12,281
    )
    
    
    (289
    )Amount of gain (loss) recognized (ineffective portion)
    
    
    
    
    
    
    235
    
    
    
    663(Increase) decrease in interest expense
    
    
    
    
    
    
    (12,046
    )
    
    
    374Holding gains on interest rate swap agreements realized
prior to designation as cash flow hedges
    
    
    (e)
    
    
    
    
    
    
    
    81(Decrease) increase in Net incomeas a result of the
use of interest rate swap agreements
    
    
    
    
    
    $
    (12,046
    )
    
    $
    455Other comprehensive income-related:Amount of gain (loss) recognized in other
comprehensive income (loss) (effective portion)
    
    
    
    
    
    $
    (4,014
    )
    
    $
    (30,046
    )
 
 (a)
    
    Included under this caption on the face of the balance sheet or statement of income.(b)
    
    Included in Accounts payable and accrued expenses on the face of the balance sheet.(c)
    
    The estimated amount of unrealized losses that will be recognized in the statement of income
over the next twelve months in the form of fixed and variable rate swap payments in excess of
current market rates totaled $38.9 million as of March 31, 2009 based on market conditions in
effect on that date.(d)
    
    In March 2008 a swap agreement with a $100 million notional amount was terminated for a
realized loss of $2.3 million which is being amortized to earnings over the original
two-year term of the derivative (through January 2010).(e)
    
    Included in Miscellaneous other revenue (expense) on the face of the statement of income. -10-




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##### Table of Contents



Fair Value Measurements
 NOTE 7  UNSECURED BORROWINGS
 Unsecured borrowings Receivables and other
assets
 Borrowings
    
    
    AverageOutstanding
    
    
    RateJunior subordinated notes:Capstead Mortgage Trust I
    
    $
    36,083
    
    
    
    8.31
    %Capstead Mortgage Trust II
    
    
    41,238
    
    
    
    8.46Capstead Mortgage Trust III
    
    
    25,774
    
    
    
    8.78$
    103,095
    
    
    
    8.49
 Unsecured
borrowings
 NOTE 8  COMPREHENSIVE INCOME (LOSS)
 Accumulated other comprehensive income (loss) Stockholders equity
 -11-




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Quarter Ended March 312009
    
    
    2008Net income
    
    $
    42,076
    
    
    $
    30,147Other comprehensive income (loss):Amounts related to available-for-sale securities:Reclassification adjustments for amounts
included in net income
    
    
    
    
    
    
    1,408Change in net unrealized gains
    
    
    65,565
    
    
    
    (10,465
    )Amounts related to cash flow hedges:Change in net unrealized losses
    
    
    (4,014
    )
    
    
    (27,771
    )Early termination of interest rate swap agreement
    
    
    
    
    
    
    (2,275
    )Reclassification adjustment for amounts
included in net income
    
    
    12,281
    
    
    
    289Other comprehensive income (loss)
    
    
    73,832
    
    
    
    (38,814
    )Comprehensive income (loss)
    
    $
    115,908
    
    
    $
    (8,667
    )
 NOTE 9  DISCLOSURES REGARDING FAIR VALUES OF MORTGAGE SECURITIES
  Gross UnrealizedBasis
    
    Gains
    
    Losses
    
    Fair ValueAs of March 31, 2009Agency Securities classified as available-for-sale
    
    $
    7,493,117
    
    
    $
    94,065
    
    
    $
    18,328
    
    
    $
    7,568,854Mortgage securities classified as held-to-maturity
    
    
    13,350
    
    
    
    422
    
    
    
    
    
    
    
    13,772As of December 31, 2008Agency Securities classified as available-for-sale
    
    $
    7,416,520
    
    
    $
    49,904
    
    
    $
    39,732
    
    
    $
    7,426,692Mortgage securities classified as held-to-maturity
    
    
    14,390
    
    
    
    332
    
    
    
    
    
    
    
    14,722
  March 31, 2009
    
    
    December 31, 2008Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    Value
    
    
    LossSecurities in an unrealized loss position:One year or greater
    
    $
    478,496
    
    
    $
    5,645
    
    
    $
    157,675
    
    
    $
    2,454Less than one year
    
    
    1,264,460
    
    
    
    12,683
    
    
    
    2,762,619
    
    
    
    37,278$
    1,742,956
    
    
    $
    18,328
    
    
    $
    2,920,294
    
    
    $
    39,732
 -12-




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##### Table of Contents



NOTE 10  COMPENSATION PROGRAMS
  General and
administrative expense
  -13-




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##### Table of Contents



Net income Incentive
compensation expense Unsecured
borrowings, Investments in unconsolidated affiliates Unsecured borrowings Stockholders equity, ccumulated other comprehensive
income (loss) Unsecured borrowings,
   TotalYear of
    
    Grant Date
    
    Original
    
    Remaining Shares Vesting In:Grant
    
    Fair Value
    
    Grants
    
    2009*
    
    2010
    
    2011
    
    2012
    
    2013
    
    20142005
    
    $
    7.86
    
    
    
    172,600
    
    
    
    35,100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2006
    
    
    8.06
    
    
    
    218,957
    
    
    
    53,126
    
    
    
    48,124
    
    
    
    48,124
    
    
    
    
    
    
    
    
    
    
    
    2007
    
    
    12.93
    
    
    
    156,000
    
    
    
    24,672
    
    
    
    24,672
    
    
    
    24,665
    
    
    
    24,665
    
    
    
    24,663
    
    
    
    24,6632008
    
    
    12.87
    
    
    
    6,000
    
    
    
    6,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 *
    
    Includes 72,798 shares that vested during the quarter ended March 31, 2009.   Weighted AverageNumber of
    
    Grant DateShares
    
    Fair ValueStock awards outstanding at December 31, 2008
    
    
    479,132
    
    
    $
    10.30Vested
    
    
    (72,798
    )
    
    
    9.84Stock awards outstanding at March 31, 2009
    
    
    406,334
    
    
    
    10.38
 -14-




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##### Table of Contents



Year of
    
    Grant Date
    
    Strike
    
    Total
    
    Remaining Shares Vesting In:Grant
    
    Fair Value *
    
    Price
    
    Original Grants
    
    2009
    
    2010
    
    20112005
    
    $0.61
    
    $7.85
    
    430,000
    
    71,875
    
    
    
    2006
    
    0.78
    
    7.43
    
    258,000
    
    48,500
    
    48,500
    
    2007
    
    0.89
    
    10.46
    
    220,500
    
    47,000
    
    47,000
    
    47,0002008
    
    2.08
    
    12.87
    
    30,000
    
    30,000
    
    
    
    
 
 *
    
    Based on volatility factors of 27%, 31%, 27% and 50% for years 2005, 2006, 2007 and
2008, respectively; dividend yields of 10% for years 2005 through 2007 and 12% for
2008; risk-free rates of 3.76%, 4.91%, 4.60% and 2.91% for years 2005, 2006, 2007 and
2008, respectively; and four year expected terms.  Number of
    
    Weighted AverageShares
    
    Exercise PriceOption awards outstanding at December 31, 2008
    
    
    555,750
    
    
    $
    9.12Exercises
    
    
    (50,000
    )
    
    
    7.51Option awards outstanding at March 31, 2009
    
    
    505,750
    
    
    
    9.28
  General and
administrative expense
 -15-




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##### Table of Contents



NOTE 11  NET INTEREST INCOME ANALYSIS
  Quarter Ended March 312009
    
    
    2008Average
    
    
    
    
    
    
    AverageAmount
    
    
    Rate
    
    
    Amount
    
    
    RateInterest income:Mortgage securities and
similar investments
    
    $
    87,884
    
    
    
    4.68
    %
    
    $
    106,351
    
    
    
    5.68
    %Other
    
    
    217
    
    
    
    0.70
    
    
    
    804
    
    
    
    3.8888,101
    
    
    
    4.61
    
    
    
    107,155
    
    
    
    5.66Interest expense:Repurchase arrangements and
similar borrowings
    
    
    (39,957
    )
    
    
    2.35
    
    
    
    (69,306
    )
    
    
    3.96Unsecured borrowings
    
    
    (2,187
    )
    
    
    8.49
    
    
    
    (2,187
    )
    
    
    8.49(42,144
    )
    
    
    2.45
    
    
    
    (71,493
    )
    
    
    4.03$
    45,957
    
    
    
    2.16
    
    
    $
    35,662
    
    
    
    1.63
 Rate*
    
    
    Volume*
    
    
    Total*Interest income:Mortgage securities and
similar investments
    
    $
    (18,792
    )
    
    $
    325
    
    
    $
    (18,467
    )Other
    
    
    (871
    )
    
    
    284
    
    
    
    (587
    )(19,663
    )
    
    
    609
    
    
    
    (19,054
    )Interest expense:Repurchase arrangements and
similar borrowings
    
    
    (27,351
    )
    
    
    (1,998
    )
    
    
    (29,349
    )Unsecured borrowings
    
    
    
    
    
    
    
    
    
    
    (27,351
    )
    
    
    (1,998
    )
    
    
    (29,349
    )$
    7,688
    
    
    $
    2,607
    
    
    $
    10,295
 
 *
    
    The change in interest income and interest expense due to both
volume and rate has been allocated to volume and rate changes in
proportion to the relationship of the absolute dollar amounts of the
change in each. -16-




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 FINANCIAL CONDITION
 Overview
     Risk Factors and Critical Accounting Policies
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Book Value per Common Share
  Per CommonShareBook value, beginning of quarter
    
    $
    9.14Accretion attributed to capital transactions
    
    
    0.01Earnings in excess of dividend distributions
    
    
    0.02Improvement in value of mortgage securities classified
as available-for-sale
    
    
    1.04Improvement in value of interest rate swap agreements
designated as cash flow hedges
    
    
    0.13Book value, end of quarter
    
    $
    10.34
 Residential Mortgage Investments
   -18-




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##### Table of Contents



Fully
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    MonthsNet
    
    
    Indexed
    
    
    Net
    
    
    Periodic
    
    
    Lifetime
    
    
    ToARM Type
    

Basis (a)
    
    

WAC (b)
    
    

WAC (b)
    
    
    Margins
    
    
    Caps
    
    
    Caps
    
    
    RollCurrent-reset ARMs:Agency Securities:Fannie
Mae/Freddie
Mac
    
    $
    4,419,893
    
    
    
    4.35
    %
    
    
    3.01
    %
    
    
    1.83
    %
    
    
    3.83
    %
    
    
    10.49
    %
    
    
    4.5Ginnie Mae
    
    
    381,438
    
    
    
    4.70
    
    
    
    2.16
    
    
    
    1.53
    
    
    
    1.00
    
    
    
    9.99
    
    
    
    5.5Residential
mortgage loans
    
    
    8,812
    
    
    
    5.11
    
    
    
    3.77
    
    
    
    2.05
    
    
    
    1.53
    
    
    
    11.14
    
    
    
    5.24,810,143
    
    
    
    4.38
    
    
    
    2.94
    
    
    
    1.81
    
    
    
    3.61
    
    
    
    10.45
    
    
    
    4.6Longer-to-reset ARMs:Agency Securities:Fannie
Mae/Freddie
Mac
    
    
    2,691,564
    
    
    
    6.13
    
    
    
    3.41
    
    
    
    1.68
    
    
    
    2.79
    
    
    
    11.61
    
    
    
    32.6$
    7,501,707
    
    
    
    5.00
    
    
    
    3.11
    
    
    
    1.76
    
    
    
    3.31
    
    
    
    10.87
    
    
    
    14.6
 
 (a)
    
    Basis represents the Companys investment (unpaid principal balance plus unamortized
investment premium) before unrealized gains and losses. As of March 31, 2009, the ratio of
basis to related unpaid principal balance for the Companys ARM securities was 101.25. This
table excludes $9 million in fixed-rate Agency Securities, $5 million in fixed-rate
residential mortgage loans and $4 million in private residential mortgage pass-through
securities held as collateral for structured financings.(b)
    
    Net WAC, or weighted average coupon, is presented net of servicing and other fees. Fully
indexed WAC represents the coupon upon one or more resets using interest rate indexes as of
March 31, 2009 and the applicable net margin.   -19-




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Commercial Real Estate-related Assets
   -20-




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##### Table of Contents



Utilization of Long-term Investment Capital and Potential Liquidity
  RepurchaseArrangementsand Similar
    
    
    Capital
    
    
    PotentialInvestments(a)
    
    
    Borrowings
    
    

Employed(a)
    
    

Liquidity(a)Residential mortgage securities
    
    $
    7,596,198
    
    
    $
    6,849,684
    
    
    $
    746,514
    
    
    $
    323,034Commercial real estate-related assets
    
    
    43,874
    
    
    
    
    
    
    
    43,874
    
    
    
    $
    7,640,072
    
    
    $
    6,849,684
    
    
    
    790,388
    
    
    
    323,034Other assets, net of other liabilities
    
    
    
    
    
    
    
    
    
    
    183,978
    
    
    
    116,852First quarter common dividend
    
    
    
    
    
    
    
    
    
    
    (35,501
    )
    
    
    (35,501
    ) (b)$
    938,865
    
    
    $
    404,385Balances as of December 31, 2008
    
    $
    7,499,530
    
    
    $
    6,751,500
    
    
    $
    860,428
    
    
    $
    302,931
 
 (a)
    
    Investments are stated at carrying amounts on the Companys balance sheet. Potential
liquidity is based on maximum amounts of borrowings available under existing uncommitted
repurchase arrangements considering managements estimate of the fair value of related
collateral as of the indicated dates adjusted for other sources (uses) of liquidity such as
cash and cash equivalents and dividends payable.(b)
    
    The first quarter 2009 common dividend was declared March 12, 2009 and paid April 20, 2009
to stockholders of record as of March 31, 2009.   -21-




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##### Table of Contents



Accounting for Seller-Financed Acquisitions of Mortgage Securities
 Accounting for Transfers of Financial Assets and Repurchase Financing Transactions
 -22-




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##### Table of Contents



RESULTS OF OPERATIONS
 Quarter Ended March 312009
    
    
    2008Income statement data(dollars in thousands, except per share data):Interest income:Mortgage securities and similar investments
    
    $
    87,884
    
    
    $
    106,351Other
    
    
    217
    
    
    
    80488,101
    
    
    
    107,155Interest expense:Repurchase arrangements and similar borrowings
    
    
    (39,957
    )
    
    
    (69,306
    )Unsecured borrowings
    
    
    (2,187
    )
    
    
    (2,187
    )(42,144
    )
    
    
    (71,493
    )45,957
    
    
    
    35,662Other revenue (expense):Loss from portfolio restructurings
    
    
    
    
    
    
    (1,408
    )Miscellaneous other revenue (expense)
    
    
    (105
    )
    
    
    39Incentive compensation expense
    
    
    (1,134
    )
    
    
    (2,250
    )General and administrative expense
    
    
    (2,707
    )
    
    
    (1,961
    )(3,946
    )
    
    
    (5,580
    )42,011
    
    
    
    30,082Equity in earnings of unconsolidated affiliates
    
    
    65
    
    
    
    65Net income
    
    $
    42,076
    
    
    $
    30,147Net income available to common stockholders, after
preferred share dividends
    
    $
    37,015
    
    
    $
    25,083Diluted earnings per common share
    
    $
    0.58
    
    
    $
    0.53Average diluted shares outstanding:
    
    
    72,873
    
    
    
    56,413Key portfolio statistics(dollars in millions):Average yields:Mortgage securities and similar investments
    
    
    4.68
    %
    
    
    5.68
    %Other
    
    
    0.70
    
    
    
    3.88Total average yields
    
    
    4.61
    
    
    
    5.66Average borrowing rates:Repurchase arrangements and similar borrowings
    
    
    2.35
    
    
    
    3.96Unsecured borrowings
    
    
    8.49
    
    
    
    8.49Total borrowing rates
    
    
    2.45
    
    
    
    4.03Financing spreads
    
    
    2.16
    
    
    
    1.63Net yield on total interest-earning assets
    
    
    2.44
    
    
    
    1.89Average portfolio runoff rate
    
    
    14.28
    
    
    
    18.98Average interest-earning assets and interest-bearing liabilities:Mortgage securities and similar investments
    
    $
    7,517
    
    
    $
    7,494Other interest-earning assets
    
    
    126
    
    
    
    83Repurchase arrangements and similar borrowings
    
    
    6,789
    
    
    
    6,923Unsecured borrowings
    
    
    103
    
    
    
    103Average long-term investment capital
    
    
    920
    
    
    
    734General and administrative and incentive compensation expense
as a percentage of average long-term investment capital
    
    
    1.69
    %
    
    
    2.31
    %Return on average long-term investment capital
    
    
    19.48
    
    
    
    17.67
 -23-




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-24-




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LIQUIDITY AND CAPITAL RESOURCES
    -25-




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##### Table of Contents



Interest Rate Sensitivity on Operating Results
    Federal
    
    10-year U.S.Funds
    
    TreasuryRate
    
    Rate
    
    Immediate Change In: *30-day to one-year rates
    
    
    
    
    
    
    
    
    
    Down 1.00%
    
    Down 1.00%
    
    Flat
    
    Up 1.00%
    
    Up 1.00%10-year U.S. Treasury rate
    
    
    
    
    
    
    
    
    
    Down 1.00%
    
    Flat
    
    Down 1.00%
    
    Flat
    
    Up 1.00%Projected 12-month
income change:March 31, 2009
    
    
    <0.25
    %
    
    
    2.71
    %
    
    
    n/a
    
    
    
    n/a
    
    
    $
    (11,300
    )
    
    $
    (14,600
    )
    
    $
    (8,900
    )December 31, 2008
    
    
    <0.25
    
    
    
    2.21
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    (9,400
    )
    
    
    (17,900
    )
    
    
    (13,300
    )
 
 *
    
    Sensitivity of earnings to changes in interest rates is determined relative to the actual
rates at the applicable date. Note that the projected 12-month earnings 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 or if
investments made will behave in the same fashion as assets currently held. -26-




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##### Table of Contents



RISK FACTORS
 An investment in securities issued by Capstead involves various risks. An investor should carefully
consider the following risk factors in conjunction with the other information contained in this
document before purchasing the Companys securities. The risks discussed herein can adversely
affect the Companys business, liquidity, operating results, financial condition and future
prospects, causing the market price of the Companys securities to decline, which could cause an
investor to lose all or part of his/her investment. The risk factors described below are not the
only risks that may affect the Company. Additional risks and uncertainties not presently known to
the Company also may adversely affect its business, liquidity, operating results, prospects and
financial condition.
 Risks Related to Capsteads Business
 Potential changes in the relationship between the federal government and the GSEs could negatively
affect Capsteads financial condition and earnings.
  Government-supported mortgagor relief programs and future legislative action could negatively
affect Capsteads financial condition and earnings.
 Periods of illiquidity in the mortgage markets may reduce the number of counterparties willing to
lend to the Company or the amounts individual counterparties are willing to lend via repurchase
arrangements.
 -27-




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##### Table of Contents



Periods of illiquidity in the mortgage markets may reduce amounts available to be borrowed under
Capsteads repurchase arrangements due to declines in the value of related collateral, which could
negatively impact the Companys financial condition and earnings.
 Periods of rising interest rates may reduce amounts available to be borrowed under Capsteads
repurchase arrangements due to declines in the value of related collateral, which could negatively
impact the Companys financial condition and earnings.
 If Capstead is unable to negotiate favorable terms and conditions on future repurchase arrangements
with one or more of the Companys counterparties, the Companys financial condition and earnings
could be negatively impacted.
 -28-




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##### Table of Contents



Capsteads use of repurchase arrangements to finance its investments may give the Companys lenders
greater rights in the event of bankruptcy.
 Capstead may sell assets for various reasons, including a change in the Companys investment focus,
which could increase earnings volatility.
 Changes in interest rates, whether increases or decreases, may adversely affect Capsteads
earnings.
  An increase in prepayments may adversely affect Capsteads earnings.
 -29-




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##### Table of Contents



The lack of availability of suitable investments at attractive pricing may adversely affect
Capsteads earnings.
 Capstead may invest in Derivatives such as interest rate swap agreements to mitigate or hedge the
Companys interest rate risk on its longer-to-reset ARM securities, which may negatively affect the
Companys liquidity, financial condition or earnings.
  Capstead is dependent on its executives and employees and the loss of one or more of its executive
officers could harm the Companys business and its prospects.
 Commercial real estate-related assets may expose investors to greater risks of loss than
residential mortgage investments.
 -30-




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##### Table of Contents



Risks Related to Capsteads Status as a REIT and Other Tax Matters
 If Capstead does not qualify as a REIT, the Company will be subject to tax as a regular corporation
and face substantial tax liability.
 
    
    The Company would be taxed as a regular domestic corporation, which, among other things,
means that the Company would be unable to deduct dividends paid to its stockholders in
computing taxable income and would be subject to federal income tax on its taxable income at
regular corporate rates.
    
    Any resulting tax liability could be substantial and would reduce the amount of cash
available for distribution to stockholders, and Capstead would not be required to make
distributions of the Companys income.
    
    Unless Capstead were entitled to relief under applicable statutory provisions, the Company
would be disqualified from treatment as a REIT for the subsequent four taxable years
following the year during which the Company lost its qualification, and, thus, the Companys
cash available for distribution to stockholders would be reduced for each of the years during
which the Company did not qualify as a REIT.
 Even if Capstead remains qualified as a REIT, the Company may face other tax liabilities that
reduce its earnings.
 
    
    will be required to pay tax on any undistributed REIT taxable income,
    
    may be required to pay the alternative minimum tax on any items of tax preference, and
    
    may operate taxable REIT subsidiaries that are required to pay taxes on any taxable income
earned.
 Complying with REIT requirements may cause Capstead to forego otherwise attractive opportunities.
 -31-




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##### Table of Contents



Complying with REIT requirements may limit Capsteads ability to hedge effectively.
 Complying with REIT requirements may force Capstead to liquidate otherwise attractive investments.
 Complying with REIT requirements may force Capstead to borrow to make distributions to
stockholders.
 Capstead may be subject to adverse legislative or regulatory tax changes that could reduce the
market price of the Companys securities.
 -32-




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##### Table of Contents



An investment in Capsteads securities has various federal, state and local income tax risks that
could affect the value of an investors investment.
 Risk Factors Related to Capsteads Corporate Structure
 There are no assurances of Capsteads ability to pay dividends in the future.
 Failure to maintain an exemption from the Investment Company Act of 1940 would adversely affect
Capsteads results of operations.
  Pursuant to Capsteads charter, its board of directors has the ability to limit ownership of the
Companys capital stock, to the extent necessary to preserve its REIT qualification.
 -33-




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##### Table of Contents



Because provisions contained in Maryland law and Capsteads charter may have an anti-takeover
effect, investors may be prevented from receiving a control premium for their shares.
 
    
    Repurchase Rights:The repurchase rights granted to Capsteads board in its charter limits
related investors, including, among other things, any voting group, from owning common stock
if the concentration owned would jeopardize the Companys REIT status.
    
    Classification of preferred stock:Capsteads charter authorizes the board to issue
preferred stock in one or more classes and to establish the preferences and rights of any
class of preferred stock issued. These actions can be taken without soliciting stockholder
approval. The issuance of preferred stock could have the effect of delaying or preventing
someone from taking control of the Company, even if a change in control were in its
stockholders best interests.
  Capstead may change its policies without stockholder approval.
 CRITICAL ACCOUNTING POLICIES
  -34-




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##### Table of Contents




    
    Amortization of Investment Premiums on Financial Assets Investment premiums on financial
assets are recognized in earnings as adjustments to interest income by the interest method
over the estimated lives of the related assets. For most of Capsteads financial assets,
estimates and judgments related to future levels of mortgage prepayments are critical to this
determination. Mortgage prepayment expectations can vary considerably from period to period
based on current and projected changes in interest rates and other factors such as portfolio
composition. Management estimates mortgage prepayments based on past experiences with
specific investments within the portfolio, and current market expectations for changes in
interest rates and the residential mortgage lending environment. Should actual runoff rates
differ materially from these estimates, investment premiums would be expensed at a different
pace.
    
    Fair Value and Impairment Accounting for Financial Assets Most of Capsteads investments
are financial assets 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 equityas a component of Accumulated other comprehensive
income (loss). As such, these unrealized gains and losses enter into the calculation of book
value per common share, a key financial metric used by investors in evaluating the Company.
Fair values fluctuate with current and projected changes in interest rates, prepayment
expectations and other factors such as market liquidity conditions. Considerable judgment is
required to interpret market data and develop estimated fair values, particularly in
circumstances of deteriorating credit quality and market liquidity. See NOTE 9 to the
accompanying consolidated financial statements for discussion of how Capstead values its
financial assets. Generally, gains or losses are recognized in earnings only if 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 included in Other revenue (expense)as an impairment charge. Similarly,
considerable judgment is required in determining whether an impairment charge should be
recognized on an investment in an unsecuritized loan. The amount of any such charge would be
determined by estimating expected future cash flows discounted at market rates.
    
    Derivatives Accounting The Company uses Derivatives from time to time for risk
management purposes. When held, Derivatives are recorded as assets or liabilities and
carried at fair value. 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 cash flow hedges 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 monitor ongoing effectiveness on at least a
quarterly basis. As long as the hedge relationship remains effective, the effective portion
of changes in fair value of the Derivative are recorded in Accumulated other comprehensive
income (loss)and the ineffective portion is recorded in earnings. 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, are recorded in earnings as a component of Other revenue
(expense).Late in 2007 the Company began using interest rate swap agreements in hedge relationships
accounted for as cash flow hedges in order to hedge variability in borrowing rates due to
changes in the underlying benchmark interest rate related to a designated portion of its
current and anticipated future 30- and 90-day borrowings. Variable-rate payments to be
received on the swap agreements and any measured hedge ineffectiveness are recorded in
interest expense as an offset to interest owed on the hedged borrowings that reset to market
rates generally on a monthly basis while fixed rate swap payments to be made are also recorded
in interest expense resulting in an effectively
 -35-




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##### Table of Contents



fixed borrowing rate on these borrowings, subject to certain adjustments. See NOTE 6 to the
accompanying consolidated financial statements and Financial ConditionsResidential Mortgage
Investments for additional information regarding the Companys use of Derivatives and its
related risk management policies.
 FORWARD LOOKING STATEMENTS
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS
  
 ITEM 4. CONTROLS AND PROCEDURES
  -36-




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PART II. OTHER INFORMATION
 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 (a)
    
    The annual meeting of stockholders was held on April 30, 2009.(b)
    
    The board members included in (c) below were elected to Capsteads board of directors
(constituting the entire board of directors).(c)
    
    The following items were voted on at the annual meeting:
 Withheld/
    
    BrokerFor
    
    Against
    
    Abstentions
    
    Non-votes   Election of board members:Jack Biegler
    
    
    58,365,031
    
    
    
    
    
    
    
    643,065
    
    
    
    Andrew F. Jacobs
    
    
    58,531,080
    
    
    
    
    
    
    
    477,016
    
    
    
    Gary Keiser
    
    
    58,362,271
    
    
    
    
    
    
    
    645,825
    
    
    
    Paul M. Low
    
    
    57,402,312
    
    
    
    
    
    
    
    1,605,784
    
    
    
    Christopher W. Mahowald
    
    
    58,517,421
    
    
    
    
    
    
    
    490,675
    
    
    
    Michael G. ONeil
    
    
    58,355,196
    
    
    
    
    
    
    
    652,900
    
    
    
    Mark S. Whiting
    
    
    58,506,920
    
    
    
    
    
    
    
    501,176
    
    
    
       Ratify Appointment of Ernst &
Young LLP as the Companys independent
registered public accounting firm for
2009
    
    
    57,785,276
    
    
    
    1,151,045
    
    
    
    71,775
    
    
    
       Other matters (no other
matters)
 -37-




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##### Table of Contents



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
 (a)
    
    Exhibits: The following Exhibits are presented herewith:Exhibit 12  Computation of Ratio of Income from Continuing Operations (before fixed charges)
to Combined Fixed Charges and Preferred Stock Dividends.Exhibit 31.1  Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002Exhibit 31.2  Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002Exhibit 32  Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(b)
    
    Reports on Form 8-K:Current Report on Form 8-K dated January 29, 2009 furnishing the press release announcing
fourth quarter 2008 results.Current Report on Form 8-K dated January 30, 2009 to file investor presentation materials
pertaining to the Companys fourth quarter earnings conference call.Current Report on Form 8-K dated February 12, 2009 to file under Item 8.01 the Recent
Developments section included in the Companys prospectus supplement to its registration
statement on Form S-3 (File No. 333-156073) for its continuous offering program.Current Report on Form 8-K dated March 27, 2009 to file under Item 5.02 the resignation of
Anthony R. Page, Senior Vice President, Director of Commercial Mortgage Investments and the
engagement of Mr. Page as an advisor.
 -38-




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##### Table of Contents



SIGNATURES
  CAPSTEAD MORTGAGE CORPORATION
RegistrantDate:  May 8, 2009
    By:
    /s/ ANDREW F. JACOBSAndrew F. JacobsPresident and Chief Executive Officer Date: May 8, 2009
    By:
    /s/ PHILLIP A. REINSCHPhillip A. ReinschExecutive Vice President and
Chief Financial Officer -39-