##### 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, 2007
 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: 1-8996
 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 þ o
 o þ
 APPLICABLE ONLY TO CORPORATE ISSUERS:
  Common Stock ($0.01 par value)
    
    19,255,552 as of May 8, 2007




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##### 



CAPSTEAD MORTGAGE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2007
 INDEX
 PagePART I.  FINANCIAL INFORMATIONITEM 1. Financial StatementsConsolidated Balance Sheets  March 31, 2007 and December 31, 2006
    
    
    3Consolidated Statements of Operations  Quarter Ended March 31, 2007 and 2006
    
    
    4Consolidated Statements of Cash Flows  Quarter Ended March 31, 2007 and 2006
    
    
    5Notes to Consolidated Financial Statements
    
    
    6ITEM 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    15ITEM 3. Qualitative and Quantitative Disclosure of Market Risk
    
    
    29ITEM 4. Controls and Procedures
    
    
    30PART II.  OTHER INFORMATIONITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    30ITEM 6. Exhibits and Reports on Form 8-K
    
    
    31SIGNATURES
    
    
    31Amended and Restated 2004 Flexible Long-Term Incentive PlanComputation of Ratio of Earnings to Combined Fixed ChargesCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906
  -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, 2007
    
    
    December 31, 2006(unaudited)
    
    
    (NOTE 2)Assets:Mortgage securities and similar investments
($5.2 billion pledged under repurchase arrangements)
    
    $
    5,355,672
    
    
    $
    5,252,399Investments in unconsolidated affiliates
    
    
    20,047
    
    
    
    20,073Receivables and other assets
    
    
    67,022
    
    
    
    69,869Cash and cash equivalents
    
    
    5,602
    
    
    
    5,661$
    5,448,343
    
    
    $
    5,348,002Liabilities:Repurchase arrangements and similar borrowings
    
    $
    4,975,721
    
    
    $
    4,876,134Unsecured borrowings
    
    
    103,095
    
    
    
    103,095Common stock dividend payable
    
    
    385
    
    
    
    385Accounts payable and accrued expenses
    
    
    18,540
    
    
    
    28,4265,097,741
    
    
    
    5,008,040Stockholders equity:Preferred stock  $0.10 par value; 100,000 shares authorized:$1.60 Cumulative Preferred Stock, Series A,
202 shares issued and outstanding at
March 31, 2007 and December 31, 2006
($3,317 aggregate liquidation preference)
    
    
    2,828
    
    
    
    2,828$1.26 Cumulative Convertible Preferred Stock, Series B,
15,819 shares issued and outstanding at
March 31, 2007 and December 31, 2006
($180,025 aggregate liquidation preference)
    
    
    176,705
    
    
    
    176,705Common stock  $0.01 par value; 100,000 shares authorized:19,253 shares issued and outstanding at
March 31, 2007 and December 31, 2006
    
    
    192
    
    
    
    192Paid-in capital
    
    
    497,150
    
    
    
    497,418Accumulated deficit
    
    
    (353,163
    )
    
    
    (354,617
    )Accumulated other comprehensive income
    
    
    26,890
    
    
    
    17,436350,602
    
    
    
    339,962$
    5,448,343
    
    
    $
    5,348,002
 See accompanying notes to consolidated financial statements.
 -3-




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CAPSTEAD MORTGAGE CORPORATION
 
 CONSOLIDATED STATEMENTS OF INCOME
 (in thousands, except per share amounts)
 (unaudited)
 Quarter Ended March 312007
    
    
    2006Mortgage securities and similar investments:Interest income
    
    $
    72,142
    
    
    $
    52,926Interest expense
    
    
    (63,589
    )
    
    
    (47,543
    )8,553
    
    
    
    5,383Other revenue (expense):Other revenue
    
    
    871
    
    
    
    166Interest expense on unsecured borrowings
    
    
    (2,187
    )
    
    
    (1,587
    )Other operating expense
    
    
    (1,674
    )
    
    
    (1,673
    )(2,990
    )
    
    
    (3,094
    )Income before equity in earnings of unconsolidated affiliates
    
    
    5,563
    
    
    
    2,289Equity in earnings of unconsolidated affiliates
    
    
    664
    
    
    
    422Net income
    
    $
    6,227
    
    
    $
    2,711Net income available (loss attributable) to common
stockholders:Net income
    
    $
    6,227
    
    
    $
    2,711Less cash dividends paid on preferred stock
    
    
    (5,064
    )
    
    
    (5,064
    )$
    1,163
    
    
    $
    (2,353
    )Basic and diluted earnings (loss) per common share
    
    $
    0.06
    
    
    $
    (0.12
    )Cash dividends declared per share:Common
    
    $
    0.020
    
    
    $
    0.020Series 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 312007
    
    
    2006Operating activities:Net income
    
    $
    6,227
    
    
    $
    2,711Noncash items:Amortization of investment premiums
    
    
    5,671
    
    
    
    5,967Depreciation and other amortization
    
    
    63
    
    
    
    24Stock-based compensation
    
    
    214
    
    
    
    125Undistributed earnings of unconsolidated affiliates
    
    
    
    
    
    
    (228
    )Net change in receivables, other assets, accounts payable and
accrued expenses
    
    
    (5,172
    )
    
    
    (3,212
    )Net cash provided by operating activities
    
    
    7,003
    
    
    
    5,387Investing activities:Purchases of mortgage securities and similar investments
    
    
    (524,395
    )
    
    
    (842,261
    )Principal collections on mortgage securities and similar investments
    
    
    423,150
    
    
    
    402,797Investment in unconsolidated affiliates  commercial real estate loan
limited partnership
    
    
    26
    
    
    
    (9,218
    )Net cash used in investing activities of continuing operations
    
    
    (101,219
    )
    
    
    (448,682
    )Net cash used in investing activities of discontinued operation
    
    
    
    
    
    
    (2,884
    )Net cash used in investing activities
    
    
    (101,219
    )
    
    
    (451,566
    )Financing activities:Net increase in repurchase arrangements and similar borrowings
    
    
    99,587
    
    
    
    441,377Capital stock transactions
    
    
    19
    
    
    
    10Dividends paid
    
    
    (5,449
    )
    
    
    (5,445
    )Net cash provided by financing activities
    
    
    94,157
    
    
    
    435,942Net change in cash and cash equivalents
    
    
    (59
    )
    
    
    (10,237
    )Cash and cash equivalents at beginning of period
    
    
    5,661
    
    
    
    33,937Cash and cash equivalents at end of period
    
    $
    5,602
    
    
    $
    23,700
 See accompanying notes to consolidated financial statements.
 -5-




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CAPSTEAD MORTGAGE CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31, 2007
 (unaudited)
 NOTE 1  BUSINESS
  NOTE 2  BASIS OF PRESENTATION
 Interim Financial Reporting
  Reclassifications
  Accounting for Acquisitions of Mortgage Securities Seller-Financed using Repurchase Arrangements
 Other comprehensive income
  -6-




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Accounting for Uncertainty in Income Taxes
  NOTE 3  EARNINGS (LOSS) PER COMMON SHARE
  Quarter Ended March 312007
    
    
    2006Numerators for basic earnings (loss) per common share:Net income
    
    $
    6,227
    
    
    $
    2,711Less Series A and B preferred share dividends
    
    
    (5,064
    )
    
    
    (5,064
    )Income available (loss attributable) to common stockholders
    
    $
    1,163
    
    
    $
    (2,353
    )Weighted average common shares outstanding
    
    
    18,933
    
    
    
    18,872Basic earnings (loss) per common share
    
    $
    0.06
    
    
    $
    (0.12
    )Numerators for diluted earnings (loss) per common share:Net income
    
    $
    6,227
    
    
    $
    2,711Less dividends on antidilutive convertible preferred shares
    
    
    (5,064
    )
    
    
    (5,064
    )Income available (loss attributable)to common stockholders
    
    $
    1,163
    
    
    $
    (2,353
    )Denominator for diluted earnings (loss) per common share:Weighted average common shares outstanding
    
    
    18,933
    
    
    
    18,872Net effect of dilutive equity awards
    
    
    121
    
    
    
    19,054
    
    
    
    18,872Diluted earnings (loss) per common share
    
    $
    0.06
    
    
    $
    (0.12
    )
 -7-




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Quarter Ended March 312007
    
    2006Equity awards:Shares issuable under option awards
    
    
    205
    
    
    
    696Nonvested stock awards
    
    
    
    
    
    
    171Convertible preferred shares:Series A shares
    
    
    202
    
    
    
    202Series B shares
    
    
    15,819
    
    
    
    15,819
 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, 2007Agency Securities:Fannie Mae/Freddie Mac:Fixed-rate
    
    $
    15,725
    
    
    $
    48
    
    
    $
    15,773
    
    
    $
    15,795
    
    
    
    6.63
    %
    
    
    6.36
    %ARMs
    
    
    4,506,631
    
    
    
    63,443
    
    
    
    4,570,074
    
    
    
    4,590,682
    
    
    
    6.25
    
    
    
    5.49Ginnie Mae ARMs
    
    
    685,792
    
    
    
    2,820
    
    
    
    688,612
    
    
    
    694,416
    
    
    
    5.44
    
    
    
    5.345,208,148
    
    
    
    66,311
    
    
    
    5,274,459
    
    
    
    5,300,893
    
    
    
    6.14
    
    
    
    5.48Non-agency Securities:Fixed-rate
    
    
    16,565
    
    
    
    34
    
    
    
    16,599
    
    
    
    16,628
    
    
    
    7.19
    
    
    
    6.92ARMs
    
    
    29,073
    
    
    
    280
    
    
    
    29,353
    
    
    
    29,635
    
    
    
    7.15
    
    
    
    6.7645,638
    
    
    
    314
    
    
    
    45,952
    
    
    
    46,263
    
    
    
    7.17
    
    
    
    6.82Commercial loans
    
    
    2,754
    
    
    
    
    
    
    
    2,754
    
    
    
    2,754
    
    
    
    18.00
    
    
    
    18.00Collateral for structured
financings
    
    
    5,672
    
    
    
    90
    
    
    
    5,762
    
    
    
    5,762
    
    
    
    8.06
    
    
    
    7.96$
    5,262,212
    
    
    $
    66,715
    
    
    $
    5,328,927
    
    
    $
    5,355,672
    
    
    
    6.16
    
    
    
    5.50
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Principal
    
    
    Investment
    
    
    
    
    
    
    Carrying
    
    
    Net
    
    
    AverageBalance
    
    
    Premiums
    
    
    Basis
    
    
    Amount(a)
    
    
    WAC(b)
    
    
    Yield(b)December 31, 2006Agency Securities:Fannie Mae/Freddie Mac:Fixed-rate
    
    $
    16,819
    
    
    $
    52
    
    
    $
    16,871
    
    
    $
    16,895
    
    
    
    6.63
    %
    
    
    6.29
    %ARMs
    
    
    4,343,740
    
    
    
    61,381
    
    
    
    4,405,121
    
    
    
    4,418,446
    
    
    
    6.14
    
    
    
    5.36Ginnie Mae ARMs
    
    
    752,301
    
    
    
    2,757
    
    
    
    755,058
    
    
    
    758,660
    
    
    
    5.23
    
    
    
    5.205,112,860
    
    
    
    64,190
    
    
    
    5,177,050
    
    
    
    5,194,001
    
    
    
    6.01
    
    
    
    5.34Non-agency Securities:Fixed-rate
    
    
    17,734
    
    
    
    41
    
    
    
    17,775
    
    
    
    17,804
    
    
    
    7.19
    
    
    
    6.83ARMs
    
    
    31,562
    
    
    
    303
    
    
    
    31,865
    
    
    
    32,164
    
    
    
    6.99
    
    
    
    6.8149,296
    
    
    
    344
    
    
    
    49,640
    
    
    
    49,968
    
    
    
    7.06
    
    
    
    6.81Commercial loans
    
    
    2,635
    
    
    
    
    
    
    
    2,635
    
    
    
    2,635
    
    
    
    18.00
    
    
    
    18.00Collateral for structured
financings
    
    
    5,705
    
    
    
    90
    
    
    
    5,795
    
    
    
    5,795
    
    
    
    8.06
    
    
    
    7.58$
    5,170,496
    
    
    $
    64,624
    
    
    $
    5,235,120
    
    
    $
    5,252,399
    
    
    
    6.03
    
    
    
    5.36
 
 (a)
    
    Includes mark-to-market for securities classified as available-for-sale, if applicable
(see NOTE 8).(b)
    
    Net WAC, or weighted average coupon, is presented net of servicing and other fees as of the
indicated balance sheet date. Average Yield is presented for the quarter then ended,
calculated including the amortization of investment premiums, mortgage insurance costs on
Non-agency Securities and excluding unrealized gains and losses.  NOTE 5  INVESTMENTS IN UNCONSOLIDATED AFFILIATES
   -9-




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NOTE 6  REPURCHASE ARRANGEMENTS AND SIMILAR BORROWINGS
 Mortgage securities and similar investments Repurchase arrangements and similar borrowings
 March 31, 2007
    
    
    December 31, 2006Borrowings
    
    
    Average
    
    
    Borrowings
    
    
    AverageOutstanding
    
    
    Rate(a)
    
    
    Outstanding
    
    
    Rate(a)Borrowings with maturities of 30 days or less:Agency Securities
    
    $
    2,522,820
    
    
    
    5.29
    %
    
    $
    2,048,151
    
    
    
    5.30
    %Non-agency Securities
    
    
    42,623
    
    
    
    5.82
    
    
    
    45,764
    
    
    
    5.852,565,443
    
    
    
    5.30
    
    
    
    2,093,915
    
    
    
    5.32Borrowings with maturities greater than 30 days:Agency Securities (31 to 90 days)
    
    
    1,024,843
    
    
    
    5.29
    
    
    
    1,741,751
    
    
    
    5.16Agency Securities (91 to 360 days)
    
    
    25,025
    
    
    
    4.76
    
    
    
    
    
    
    
    Agency Securities (greater than 360 days)
    
    
    1,354,648
    
    
    
    4.99
    
    
    
    1,034,673
    
    
    
    4.982,404,516
    
    
    
    5.11
    
    
    
    2,776,424
    
    
    
    5.09Structured financings
    
    
    5,762
    
    
    
    7.96
    
    
    
    5,795
    
    
    
    7.58$
    4,975,721
    
    
    
    5.21
    
    
    $
    4,876,134
    
    
    
    5.19
 
 (a)
    
    Average rate is presented as of the indicated balance sheet date. Repurchase arrangements and similar borrowings
 -10-




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NOTE 7  UNSECURED BORROWINGS
 Unsecured borrowings
  March 31, 2007
    
    
    December 31, 2006Borrowings
    
    
    Average
    
    
    Borrowings
    
    
    AverageOutstanding
    
    
    Rate(a)
    
    
    Outstanding
    
    
    Rate(a)Junior subordinated notes:Capstead Mortgage Trust I
    
    $
    36,083
    
    
    
    8.31
    %
    
    $
    36,083
    
    
    
    8.31
    %Capstead Mortgage Trust II
    
    
    41,238
    
    
    
    8.46
    
    
    
    41,238
    
    
    
    8.46Capstead Mortgage Trust III
    
    
    25,774
    
    
    
    8.78
    
    
    
    25,774
    
    
    
    8.78$
    103,095
    
    
    
    8.49
    
    
    $
    103,095
    
    
    
    8.49
 
 (a) Average rate is presented as of the indicated balance sheet date.
 Receivables and other assets Unsecured borrowings
 NOTE 8  DISCLOSURES REGARDING FAIR VALUES OF FINANCIAL INSTRUMENTS
  -11-




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March 31, 2007
    
    
    December 31, 2006Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    Value
    
    
    LossSecurities in an unrealized loss position:One year or greater
    
    $
    805,041
    
    
    $
    4,071
    
    
    $
    837,123
    
    
    $
    6,392Less than one year
    
    
    179,673
    
    
    
    654
    
    
    
    487,144
    
    
    
    1,839$
    984,714
    
    
    $
    4,725
    
    
    $
    1,324,267
    
    
    $
    8,231
  Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    FairBasis
    
    
    Gains
    
    
    Losses
    
    
    ValueAs of March 31, 2007Agency Securities:Fixed-rate
    
    $
    291
    
    
    $
    22
    
    
    $
    
    
    
    $
    313ARMs
    
    
    5,258,686
    
    
    
    31,122
    
    
    
    4,710
    
    
    
    5,285,0985,258,977
    
    
    
    31,144
    
    
    
    4,710
    
    
    
    5,285,411Non-agency Securities
    
    
    23,296
    
    
    
    316
    
    
    
    5
    
    
    
    23,607$
    5,282,273
    
    
    $
    31,460
    
    
    $
    4,715
    
    
    $
    5,309,018As of December 31, 2006Agency Securities:Fixed-rate
    
    $
    329
    
    
    $
    24
    
    
    $
    
    
    
    $
    353ARMs
    
    
    5,160,179
    
    
    
    25,136
    
    
    
    8,209
    
    
    
    5,177,1065,160,508
    
    
    
    25,160
    
    
    
    8,209
    
    
    
    5,177,459Non-agency Securities
    
    
    25,292
    
    
    
    334
    
    
    
    6
    
    
    
    25,620$
    5,185,800
    
    
    $
    25,494
    
    
    $
    8,215
    
    
    $
    5,203,079
  Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    FairBasis
    
    
    Gains
    
    
    Losses
    
    
    ValueAs of March 31, 2007Collateral released from structured
financings:Agency Securities
    
    $
    15,482
    
    
    $
    297
    
    
    $
    
    
    
    $
    15,779Non-agency Securities
    
    
    22,656
    
    
    
    352
    
    
    
    10
    
    
    
    22,998Collateral for structured financings
    
    
    5,762
    
    
    
    
    
    
    
    
    
    
    
    5,762$
    43,900
    
    
    $
    649
    
    
    $
    10
    
    
    $
    44,539As of December 31, 2006Collateral released from structured
financings:Agency Securities
    
    $
    16,542
    
    
    $
    306
    
    
    $
    1
    
    
    $
    16,847Non-agency Securities
    
    
    24,348
    
    
    
    328
    
    
    
    15
    
    
    
    24,661Collateral for structured financings
    
    
    5,795
    
    
    
    
    
    
    
    
    
    
    
    5,795$
    46,685
    
    
    $
    634
    
    
    $
    16
    
    
    $
    47,303
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##### Table of Contents



NOTE 9  COMPREHENSIVE INCOME (LOSS)
  Quarter Ended March 312007
    
    
    2006Net income
    
    $
    6,227
    
    
    $
    2,711Other comprehensive income (loss):Amounts related to cash flow hedges:Reclassification adjustment for amounts included in net income
    
    
    (12
    )
    
    
    (16
    )Amounts related to securities held available-for-sale:Change in valuation of mortgage securities held available-for-sale
    
    
    9,466
    
    
    
    (7,518
    )Other comprehensive income (loss)
    
    
    9,454
    
    
    
    (7,534
    )Comprehensive income (loss)
    
    $
    15,681
    
    
    $
    (4,823
    )
 NOTE 10  LONG-TERM INCENTIVE AND OTHER PLANS
  Weighted AverageNumber of
    
    
    Grant DateShares
    
    
    Fair ValueStock awards outstanding as of December 31, 2006
    
    
    321,550
    
    

    $8.02Forfeitures
    
    
    (2,500
    )
    
    8.19Stock awards outstanding as of March 31, 2007
    
    
    319,050
    
    
    8.02
 
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##### Table of Contents



Number of
    
    
    Weighted AverageShares
    
    
    Exercise PriceOption awards outstanding as of December 31, 2006
    
    
    855,552
    
    
    $
    13.02Expirations
    
    
    (53,520
    )
    
    
    33.77Exercises
    
    
    (2,500
    )
    
    
    7.82Option awards outstanding as of March 31, 2007
    
    
    799,532
    
    
    $
    11.65
   NOTE 11  NET INTEREST INCOME ANALYSIS
 Mortgage securities and similar investments
 Quarter Ended March 312007
    
    
    2006Average
    
    
    
    
    
    
    AverageAmount
    
    
    Rate
    
    
    Amount
    
    
    RateInterest income
    
    $
    72,142
    
    
    
    5.50
    %
    
    $
    52,926
    
    
    
    4.52
    %Interest expense
    
    
    (63,589
    )
    
    
    5.19
    
    
    
    (47,543
    )
    
    
    4.38$
    8,553
    
    
    
    0.31
    
    
    $
    5,383
    
    
    
    0.14
 Quarter Ended March 31, 2007Rate *
    
    
    Volume *
    
    
    Total *Total interest income
    
    $
    12,360
    
    
    $
    6,856
    
    
    $
    19,216Total interest expense
    
    
    9,457
    
    
    
    6,589
    
    
    
    16,046$
    2,903
    
    
    $
    267
    
    
    $
    3,170
 
 *
    
    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. -14-




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 FINANCIAL CONDITION
 Overview
      -15-




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Risk Factors and Critical Accounting Policies
  Accounting for Acquisitions of Mortgage Securities Seller-Financed using Repurchase Arrangements
  Residential Mortgage Investments
   -16-




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Commercial Real Estate-related Assets
    -17-




---



##### Table of Contents



Mortgage Securities and Similar Investments Yield and Cost Analysis
  Projected
    
    
    Lifetime1stQuarter Average
    
    
    As of March 31, 2007
    
    
    2ndQuarter
    
    
    RunoffBasis(a)
    
    
    Yield/Cost
    
    
    Runoff
    
    
    Premiums
    
    
    Basis(a)
    
    
    Yield/Cost(b)
    
    
    AssumptionsAgency Securities:Fannie Mae/Freddie Mac:Fixed-rate
    
    $
    16,389
    
    
    
    6.36
    %
    
    
    23
    %
    
    $
    48
    
    
    $
    15,773
    
    
    
    6.42
    %
    
    
    38
    %ARMs
    
    
    4,454,025
    
    
    
    5.49
    
    
    
    28
    
    
    
    63,443
    
    
    
    4,570,074
    
    
    
    5.61
    
    
    
    31Ginnie Mae ARMs
    
    
    722,811
    
    
    
    5.34
    
    
    
    32
    
    
    
    2,820
    
    
    
    688,612
    
    
    
    5.36
    
    
    
    295,193,225
    
    
    
    5.48
    
    
    
    28
    
    
    
    66,311
    
    
    
    5,274,459
    
    
    
    5.58
    
    
    
    31Non-agency Securities:Fixed-rate
    
    
    17,217
    
    
    
    6.92
    
    
    
    23
    
    
    
    34
    
    
    
    16,599
    
    
    
    6.96
    
    
    
    37ARMs
    
    
    30,579
    
    
    
    6.76
    
    
    
    28
    
    
    
    280
    
    
    
    29,353
    
    
    
    6.90
    
    
    
    3847,796
    
    
    
    6.82
    
    
    
    26
    
    
    
    314
    
    
    
    45,952
    
    
    
    6.92
    
    
    
    38Commercial loans
    
    
    2,715
    
    
    
    18.00
    
    
    
    
    
    
    
    
    
    
    
    2,754
    
    
    
    18.00
    
    
    
    Collateral for
structured
financings
    
    
    5,735
    
    
    
    7.96
    
    
    
    2
    
    
    
    90
    
    
    
    5,762
    
    
    
    7.96
    
    
    
    305,249,471
    
    
    
    5.50
    
    
    
    28
    
    
    $
    66,715
    
    
    
    5,328,927
    
    
    
    5.59
    
    
    
    31Related borrowings:30-day LIBOR
    
    
    3,578,121
    
    
    
    5.30
    
    
    
    
    
    
    
    
    
    
    
    3,590,286
    
    
    
    5.29>30-day LIBOR
    
    
    1,317,115
    
    
    
    4.88
    
    
    
    
    
    
    
    
    
    
    
    1,379,673
    
    
    
    4.98Structured financings
    
    
    5,735
    
    
    
    7.96
    
    
    
    
    
    
    
    
    
    
    
    5,762
    
    
    
    7.964,900,971
    
    
    
    5.19
    
    
    
    
    
    
    
    
    
    
    
    4,975,721
    
    
    
    5.21Capital employed/
financing spread
    
    $
    348,500
    
    
    
    0.31
    
    
    
    
    
    
    
    
    
    
    $
    353,206
    
    
    
    0.38Return on assets(c)
    
    
    
    
    
    
    0.65
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.67
 
 (a)
    
    Basis represents the Companys investment before unrealized gains and losses. Asset
yields, runoff rates, borrowing rates and resulting financing spread are presented on an
annualized basis.(b)
    
    Projected annualized yields and borrowing rates reflect anticipated ARM coupon resets and
runoff rates, assuming no change in the federal funds rate during the forecast period and a
gradual rise in the One-Year Treasury Rate through the remainder of 2007, as adjusted for
expected second quarter portfolio acquisitions as of May 3, 2007, the date first quarter
earnings were released. Actual yields realized in future periods largely depend upon (i)
changes in portfolio composition, (ii) actual ARM coupon resets, which can fluctuate from
projections based on changes to the underlying indexes, (iii) actual runoff and (iv) any
changes in lifetime runoff assumptions. Interest rates on borrowings that reset every 30
days based on 30-day LIBOR largely depend on changes or anticipated changes in the federal
funds rate. As of May 3, 2007, projected average portfolio yields, borrowing rates,
financing spreads and runoff rates over the next four quarters for Capsteads existing
portfolio, (adjusted for expected portfolio acquisitions through June 30, 2007 only), were as
follows: Ending
    
    Ending
    
    Portfolio AveragesFederal
    
    One-Year
    
    
    
    
    
    Borrowing
    
    Financing
    
    RunoffFunds Rates
    
    Treasury Rate
    
    Yields
    
    Rates
    
    Spreads
    
    RatesSecond Quarter 2007
    
    
    5.25%
    
    
    
    5.07
    
    
    
    5.59%
    
    
    
    5.21%
    
    
    
    0.38%
    
    
    
    30%Third Quarter 2007
    
    
    5.25
    
    
    
    5.17
    
    
    
    5.71
    
    
    
    5.20
    
    
    
    0.51
    
    
    
    31Fourth Quarter 2007
    
    
    5.25
    
    
    
    5.30
    
    
    
    5.91
    
    
    
    5.19
    
    
    
    0.72
    
    
    
    29First Quarter 2008
    
    
    5.25
    
    
    
    5.30
    
    
    
    6.00
    
    
    
    5.20
    
    
    
    0.80
    
    
    
    30
 (c)
    
    The Company generally uses its liquidity to pay down borrowings. Return on assets is
calculated on an annualized basis assuming the use of this liquidity to reduce borrowing
costs.
 -18-




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Book Value per Common Share
   -19-




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Utilization of Investment Capital and Potential Liquidity
  Related
    
    
    Capital
    
    
    PotentialInvestments(a)
    
    
    Borrowings
    
    
    Employed(a)
    
    
    Liquidity(a)Residential mortgage securities
    
    $
    5,352,918
    
    
    $
    4,975,721
    
    
    $
    377,197
    
    
    $
    221,640Commercial real estate-related assets:Commercial loans
    
    
    2,754
    
    
    
    
    
    
    
    2,754
    
    
    
    Investment in Redtail Capital
    
    
    16,930
    
    
    
    
    
    
    
    16,930
    
    
    
    190$
    5,372,602
    
    
    $
    4,975,721
    
    
    
    396,881
    
    
    
    221,830Other assets, net of other liabilities
    
    
    
    
    
    
    
    
    
    
    54,106
    
    
    
    5,602First quarter common dividend
    
    
    
    
    
    
    
    
    
    
    (385
    )
    
    
    (385)
    (b)$
    450,602
    
    
    $
    227,047Balances as of December 31, 2006
    
    $
    5,269,355
    
    
    $
    4,876,134
    
    
    $
    439,962
    
    
    $
    226,330
 
 (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 the fair value of related collateral as of the indicated
dates adjusted for other sources (uses) of liquidity such as unrestricted cash and cash
equivalents, cash flow (requirements) distributions from Redtail Capital and dividends
payable.(b)
    
    The first quarter 2007 common dividend was declared March 15, 2007 and paid April 20, 2007
to stockholders of record as of March 30, 2007.  -20-




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##### Table of Contents



RESULTS OF OPERATIONS
  Quarter Ended March 312007
    
    
    2006Income statement data:Mortgage securities and similar investments:Agency Securities
    
    $
    8,267
    
    
    $
    5,203Non-agency Securities
    
    
    166
    
    
    
    180Commercial loans
    
    
    120
    
    
    
    8,553
    
    
    
    5,383Other revenue (expense):Other revenue
    
    
    871
    
    
    
    166Interest on unsecured borrowings
    
    
    (2,187
    )
    
    
    (1,587
    )Other operating expense
    
    
    (1,674
    )
    
    
    (1,673
    )(2,990
    )
    
    
    (3,094
    )Equity in earnings of unconsolidated affiliates
    
    
    664
    
    
    
    422Net income
    
    $
    6,227
    
    
    $
    2,711Diluted earnings (loss) per common share
    
    $
    0.06
    
    
    $
    (0.12
    )Key portfolio statistics:Average yields:Agency Securities
    
    
    5.48
    %
    
    
    4.50
    %Non-agency Securities
    
    
    6.82
    
    
    
    5.74Commercial loans
    
    
    18.00
    
    
    
    Collateral for structured financings
    
    
    7.96
    
    
    
    7.34Total average yields
    
    
    5.50
    
    
    
    4.52Average related borrowing rates:30-day LIBOR
    
    
    5.30
    
    
    
    4.51Greater than 30-day LIBOR
    
    
    4.88
    
    
    
    3.92Structured financings
    
    
    7.96
    
    
    
    7.34Total related borrowing rates
    
    
    5.19
    
    
    
    4.38Average financing spreads
    
    
    0.31
    
    
    
    0.14Average portfolio balances:Agency Securities
    
    $
    5,193
    
    
    $
    4,605Non-agency Securities
    
    
    48
    
    
    
    67Commercial loans
    
    
    3
    
    
    
    Collateral for structured financings
    
    
    6
    
    
    
    95,250
    
    
    
    4,681Related average borrowings
    
    
    4,901
    
    
    
    4,340Average capital deployed
    
    $
    349
    
    
    $
    341Average portfolio runoff rates:Agency Securities
    
    
    28
    %
    
    
    30
    %Total
    
    
    28
    
    
    
    30
 -21-




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-22-




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LIQUIDITY AND CAPITAL RESOURCES
    -23-




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##### Table of Contents



RISK FACTORS
 General Discussion of Effects of Interest Rate Changes
  Fully
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    MonthsNet
    
    
    Indexed
    
    
    Net
    
    
    Periodic
    
    
    Lifetime
    
    
    ToARM Type
    
    Basis *
    
    
    WAC
    
    
    WAC
    
    
    Margins
    
    
    Caps
    
    
    Caps
    
    
    RollCurrent-reset ARMs:Agency Securities:Fannie Mae/Freddie Mac
    
    $
    2,997,626
    
    
    
    6.25
    %
    
    
    6.74
    %
    
    
    1.84
    %
    
    
    4.10
    %
    
    
    10.67
    %
    
    
    4.9Ginnie Mae
    
    
    688,612
    
    
    
    5.44
    
    
    
    6.41
    
    
    
    1.54
    
    
    
    1.00
    
    
    
    9.87
    
    
    
    5.6Non-agency Securities
    
    
    29,353
    
    
    
    7.15
    
    
    
    7.44
    
    
    
    2.11
    
    
    
    1.71
    
    
    
    11.30
    
    
    
    5.43,715,591
    
    
    
    6.11
    
    
    
    6.68
    
    
    
    1.78
    
    
    
    3.51
    
    
    
    10.53
    
    
    
    5.0Longer-to-reset ARMs:Agency Securities:Fannie Mae/Freddie Mac
    
    
    1,572,448
    
    
    
    6.23
    
    
    
    7.04
    
    
    
    1.75
    
    
    
    3.96
    
    
    
    12.04
    
    
    
    46.4$
    5,288,039
    
    
    
    6.14
    
    
    
    6.79
    
    
    
    1.77
    
    
    
    3.64
    
    
    
    10.98
    
    
    
    17.3
 
 *
    
    Basis represents the Companys investment before unrealized gains and losses.  -24-




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Interest Rate Sensitivity on Operating Results
  -25-




---



##### Table of Contents



30-day
    
    10-year U.S.LIBOR
    
    TreasuryRate
    
    Rate
    
    Immediate Change In:*One-month to one-year
    
    
    
    
    
    
    
    
    
    Down
    
    Down
    
    
    
    
    
    Up
    
    
    Upinterest rates
    
    
    
    
    
    
    
    
    
    
    1.00
    %
    
    
    1.00
    %
    
    Flat
    
    
    
    1.00
    %
    
    
    1.00
    %10-year U.S. Treasury
    
    
    
    
    
    
    
    
    
    Down
    
    
    
    
    
    Down
    
    
    
    
    
    Uprate
    
    
    
    
    
    
    
    
    
    
    1.00
    %
    
    Flat
    
    
    
    1.00
    %
    
    Flat
    
    
    
    1.00
    %Projected 12-month
earnings change:March 31, 2007
    
    
    5.32
    %
    
    
    4.64
    %
    
    $
    8,000
    
    
    $
    10,900
    
    
    $
    (6,600
    )
    
    $
    (19,200
    )
    
    $
    (15,900
    )December 31, 2006
    
    
    5.32
    
    
    
    4.70
    
    
    
    11,900
    
    
    
    14,300
    
    
    
    (5,500
    )
    
    
    (24,700
    )
    
    
    (21,700
    )
 
 *
    
    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.  Risks Associated With Credit-Sensitive Investments
   -26-




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Tax Status
  -27-




---



##### Table of Contents



Investment Company Act of 1940
   CRITICAL ACCOUNTING POLICIES
  -28-




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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 the interest rate 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 held 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. 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. Considerable judgment is
required interpreting market data to develop estimated fair
values, particularly in circumstances of deteriorating credit
quality and market liquidity (see NOTE 8 to the accompanying
unaudited 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 an individual asset 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.
 FORWARD LOOKING STATEMENTS
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS
  -29-




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
  
 PART II. OTHER INFORMATION
 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 (a)
    
    The annual meeting of stockholders was held on May 3, 2007.
 (b)
    
    The board members included in (c) below were elected to Capsteads Board of Directors
(constituting the entire Board of Directors).
  Withheld/
    
    BrokerFor
    
    Against
    
    Abstentions
    
    Non-votes
    
    
    Election of board members:Jack Biegler
    
    
    17,454,926
    
    
    
    
    
    
    
    414,024
    
    
    
    Andrew F. Jacobs
    
    
    17,440,628
    
    
    
    
    
    
    
    428,322
    
    
    
    Gary Keiser
    
    
    17,452,687
    
    
    
    
    
    
    
    416,263
    
    
    
    Paul M. Low
    
    
    17,359,225
    
    
    
    
    
    
    
    509,725
    
    
    
    Christopher W. Mahowald
    
    
    17,333,184
    
    
    
    
    
    
    
    535,766
    
    
    
    Michael G. ONeil
    
    
    17,397,683
    
    
    
    
    
    
    
    471,267
    
    
    
    Mark S. Whiting
    
    
    17,381,970
    
    
    
    
    
    
    
    486,980
    
    
    
    
    
    
    Approval of an amendment to
the 2004 Flexible
Long-Term Incentive Plan
    
    
    6,208,611
    
    
    
    3,906,381
    
    
    
    159,192
    
    
    
    
    
    
    Ratify Appointment of Ernst &
Young LLP as the Companys
independent registered
public accounting
firm for 2007
    
    
    17,495,618
    
    
    
    225,536
    
    
    
    147,796
    
    
    
    
    
    
    Other matters (no other
matters)
 -30-




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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 10  Amended and Restated 2004 Flexible Long-Term Incentive Plan, dated as of May 3,
2007.Exhibit 12  Computation of Ratio of Earnings 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 February 8, 2007 furnishing the press release announcing
fourth quarter 2006 results.Current Report on Form 8-K dated March 21, 2007 to file a presentation to the investment
community.
 
 SIGNATURES
  CAPSTEAD MORTGAGE CORPORATIONRegistrantDate:  May 8, 2007
    By:
    /s/ ANDREW F. JACOBSAndrew F. JacobsPresident and Chief Executive OfficerDate:  May 8, 2007
    By:
    /s/ PHILLIP A. REINSCHPhillip A. ReinschExecutive Vice President and
Chief Financial Officer -31-