##### 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: June 30, 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 þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o
 o þ
 APPLICABLE ONLY TO CORPORATE ISSUERS:
  Common Stock ($0.01 par value)
    
    65,070,050 as of August 6, 2009




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##### 



CAPSTEAD MORTGAGE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2009
 INDEX
 PART I.  FINANCIAL INFORMATION
  
 PageITEM 1.
    
    Financial Statements (unaudited)Consolidated Balance Sheets  June 30, 2009 and December 31, 2008
    
    
    3Consolidated Statements of Income  Quarter and Six Months Ended June 30, 2009 and 2008
    
    
    4Consolidated Statements of Cash Flows  Six Months Ended June 30, 2009 and 2008
    
    
    5Notes to Consolidated Financial Statements
    
    
    6ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20ITEM 3.
    
    Qualitative and Quantitative Disclosure of Market Risk
    
    
    40ITEM 4.
    
    Controls and Procedures
    
    
    40PART II.  OTHER INFORMATIONITEM 6.
    
    Exhibits and Reports on Form 8-K
    
    
    41SIGNATURES
    
    
    42Computation 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
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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)
 June 30, 2009
    
    
    December 31, 2008(unaudited)Assets:Mortgage securities and similar investments
($7.2 billion pledged under repurchase arrangements)
    
    $
    7,605,202
    
    
    $
    7,499,249Cash collateral receivable from interest rate swap counterparties
    
    
    39,864
    
    
    
    53,676Interest rate swap agreements at fair value
    
    
    528
    
    
    
    Cash and cash equivalents
    
    
    122,030
    
    
    
    96,839Receivables and other assets
    
    
    79,837
    
    
    
    76,481Investments in unconsolidated affiliates
    
    
    3,117
    
    
    
    3,117$
    7,850,578
    
    
    $
    7,729,362Liabilities:Repurchase arrangements and similar borrowings
    
    $
    6,735,304
    
    
    $
    6,751,500Unsecured borrowings
    
    
    103,095
    
    
    
    103,095Interest rate swap agreements at fair value
    
    
    29,789
    
    
    
    46,679Common stock dividend payable
    
    
    37,047
    
    
    
    22,728Accounts payable and accrued expenses
    
    
    28,764
    
    
    
    44,9106,933,999
    
    
    
    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
June 30, 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
June 30, 2009 and December 31, 2008
($180,025 aggregate liquidation preference)
    
    
    176,705
    
    
    
    176,705Common stock  $0.01 par value; 250,000 shares authorized:63,874 and 63,135 shares issued and outstanding at
June 30, 2009 and December 31, 2008, respectively
    
    
    639
    
    
    
    631Paid-in capital
    
    
    985,314
    
    
    
    975,893Accumulated deficit
    
    
    (356,154
    )
    
    
    (358,155
    )Accumulated other comprehensive income (loss)
    
    
    107,355
    
    
    
    (37,379
    )916,579
    
    
    
    760,450$
    7,850,578
    
    
    $
    7,729,362
 See accompanying notes to consolidated financial statements.
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CAPSTEAD MORTGAGE CORPORATION
 
 CONSOLIDATED STATEMENTS OF INCOME
 (in thousands, except per share amounts)
 (unaudited)
 Quarter Ended
    
    
    Six Months EndedJune 30
    
    
    June 302009
    
    
    2008
    
    
    2009
    
    
    2008Interest income:Mortgage securities and similar investments
    
    $
    81,062
    
    
    $
    97,332
    
    
    $
    168,946
    
    
    $
    203,683Other
    
    
    133
    
    
    
    782
    
    
    
    350
    
    
    
    1,58681,195
    
    
    
    98,114
    
    
    
    169,296
    
    
    
    205,269Interest expense:Repurchase arrangements and similar borrowings
    
    
    (31,626
    )
    
    
    (55,019
    )
    
    
    (71,583
    )
    
    
    (124,325
    )Unsecured borrowings
    
    
    (2,187
    )
    
    
    (2,187
    )
    
    
    (4,374
    )
    
    
    (4,374
    )(33,813
    )
    
    
    (57,206
    )
    
    
    (75,957
    )
    
    
    (128,699
    )47,382
    
    
    
    40,908
    
    
    
    93,339
    
    
    
    76,570Other revenue (expense):Miscellaneous other revenue (expense)
    
    
    (804
    )
    
    
    (55
    )
    
    
    (909
    )
    
    
    (1,424
    )Incentive compensation expense
    
    
    (1,243
    )
    
    
    (2,270
    )
    
    
    (2,377
    )
    
    
    (4,520
    )General and administrative expense
    
    
    (2,893
    )
    
    
    (1,920
    )
    
    
    (5,600
    )
    
    
    (3,881
    )(4,940
    )
    
    
    (4,245
    )
    
    
    (8,886
    )
    
    
    (9,825
    )Income before equity in earnings of
unconsolidated affiliates
    
    
    42,442
    
    
    
    36,663
    
    
    
    84,453
    
    
    
    66,745Equity in earnings of unconsolidated affiliates
    
    
    65
    
    
    
    65
    
    
    
    130
    
    
    
    130Net income
    
    $
    42,507
    
    
    $
    36,728
    
    
    $
    84,583
    
    
    $
    66,875Net income available to common stockholders:Net income
    
    $
    42,507
    
    
    $
    36,728
    
    
    $
    84,583
    
    
    $
    66,875Less cash dividends paid on preferred shares
    
    
    (5,061
    )
    
    
    (5,063
    )
    
    
    (10,122
    )
    
    
    (10,127
    )$
    37,446
    
    
    $
    31,665
    
    
    $
    74,461
    
    
    $
    56,748Net income per common share:Basic
    
    $
    0.59
    
    
    $
    0.59
    
    
    $
    1.18
    
    
    $
    1.13Diluted
    
    
    0.58
    
    
    
    0.58
    
    
    
    1.15
    
    
    
    1.11Cash dividends declared per share:Common
    
    $
    0.580
    
    
    $
    0.590
    
    
    $
    1.140
    
    
    $
    1.110Series A Preferred
    
    
    0.400
    
    
    
    0.400
    
    
    
    0.800
    
    
    
    0.800Series B Preferred
    
    
    0.315
    
    
    
    0.315
    
    
    
    0.630
    
    
    
    0.630
 See accompanying notes to consolidated financial statements.
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CAPSTEAD MORTGAGE CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands, unaudited)
 Six Months Ended June 302009
    
    
    2008Operating activities:Net income
    
    $
    84,583
    
    
    $
    66,875Noncash items:Amortization of investment premiums
    
    
    12,135
    
    
    
    15,032Depreciation and other amortization
    
    
    141
    
    
    
    117Equity-based compensation costs
    
    
    597
    
    
    
    628Amounts related to interest rate swap agreements
    
    
    736
    
    
    
    163Impairment charge related to commercial real estate loans
    
    
    750
    
    
    
    Loss from portfolio restructurings
    
    
    
    
    
    
    1,408Net change in receivables, other assets, accounts payable and
accrued expenses
    
    
    (18,006
    )
    
    
    10,095Net cash provided by operating activities
    
    
    80,936
    
    
    
    94,318Investing activities:Purchases of mortgage securities and similar investments
    
    
    (610,959
    )
    
    
    (2,332,970
    )Proceeds from sales of mortgage securities and similar investments
    
    
    
    
    
    
    766,800Principal collections on mortgage securities and similar investments
    
    
    617,139
    
    
    
    792,063Net cash provided by (used in) investing activities
    
    
    6,180
    
    
    
    (774,107
    )Financing activities:Proceeds from repurchase arrangements and similar borrowings
    
    
    33,123,644
    
    
    
    32,658,780Principal payments on repurchase arrangements and similar borrowings
    
    
    (33,139,834
    )
    
    
    (32,091,771
    )Payment on early termination of interest rate swap agreement
    
    
    
    
    
    
    (2,275
    )Decrease (increase) in cash collateral receivable from interest rate
swap counterparties
    
    
    13,812
    
    
    
    (12,110
    )Capital stock transactions
    
    
    8,805
    
    
    
    208,516Dividends paid
    
    
    (68,352
    )
    
    
    (45,870
    )Net cash (used in) provided by financing activities
    
    
    (61,925
    )
    
    
    715,270Net change in cash and cash equivalents
    
    
    25,191
    
    
    
    35,481Cash and cash equivalents at beginning of period
    
    
    96,839
    
    
    
    6,653Cash and cash equivalents at end of period
    
    $
    122,030
    
    
    $
    42,134
 See accompanying notes to consolidated financial statements.
 -5-




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CAPSTEAD MORTGAGE CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2009
 (unaudited)
 NOTE 1  BUSINESS
  NOTE 2  BASIS OF PRESENTATION
 Interim Financial Reporting and Reclassifications
  Recent Accounting Developments
 Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities
 Accounting for Transfers of
Financial Assets and Repurchase Financing Transactions
 -6-




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Recognition and Presentation of Other-Than-Temporary Impairments Determining Fair Value When the Volume and Level of Activity
for an Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly Interim Disclosures
About Fair Value of Financial Instruments
  Subsequent Events
 Amendments to FASB Interpretation No. 46(R)
 NOTE 3  EARNINGS PER COMMON SHARE
  -7-




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Quarter Ended
    
    
    Six Months EndedJune 30
    
    
    June 302009
    
    
    2008
    
    
    2009
    
    
    2008Numerator for basic earnings per common share:Net income
    
    $
    42,507
    
    
    $
    36,728
    
    
    $
    84,583
    
    
    $
    66,875Less:Series A and B preferred share dividends
    
    
    (5,061
    )
    
    
    (5,063
    )
    
    
    (10,122
    )
    
    
    (10,127
    )Basic earnings impact of nonvested stock awards
    
    
    (120
    )
    
    
    (193
    )
    
    
    (357
    )
    
    
    (385
    )$
    37,326
    
    
    $
    31,472
    
    
    $
    74,104
    
    
    $
    56,363Weighted average common shares outstanding:Total average shares outstanding
    
    
    63,486
    
    
    
    53,815
    
    
    
    63,323
    
    
    
    50,175Less:Average nonvested stock awards outstanding
    
    
    (370
    )
    
    
    (362
    )
    
    
    (388
    )
    
    
    (372
    )63,116
    
    
    
    53,453
    
    
    
    62,935
    
    
    
    49,803Basic earnings per common share
    
    $
    0.59
    
    
    $
    0.59
    
    
    $
    1.18
    
    
    $
    1.13Numerator for diluted earnings per common share:Net income
    
    $
    42,507
    
    
    $
    36,728
    
    
    $
    84,583
    
    
    $
    66,875Less:Diluted earnings impact of nonvested
stock awards
    
    
    (120
    )
    
    
    (193
    )
    
    
    (357
    )
    
    
    (385
    )$
    42,387
    
    
    $
    36,535
    
    
    $
    84,226
    
    
    $
    66,490Denominator for diluted earnings per common share:Weighted average common shares outstanding
    
    
    63,116
    
    
    
    53,453
    
    
    
    62,935
    
    
    
    49,803Net effect of dilutive option awards
    
    
    96
    
    
    
    160
    
    
    
    97
    
    
    
    215Net effect of dilutive convertible preferred shares
    
    
    9,928
    
    
    
    9,829
    
    
    
    9,929
    
    
    
    9,82473,140
    
    
    
    63,442
    
    
    
    72,961
    
    
    
    59,842Diluted earnings per common share
    
    $
    0.58
    
    
    $
    0.58
    
    
    $
    1.15
    
    
    $
    1.11
  Quarter Ended
    
    
    Six Months EndedJune 30
    
    
    June 302009
    
    
    2008
    
    
    2009
    
    
    2008Antidilutive equity awards:Shares issuable under option awards
    
    
    40
    
    
    
    40
    
    
    
    70
    
    
    
    10Nonvested stock awards
    
    
    118
    
    
    
    
    
    
    
    
    
    
    
    
 -8-




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NOTE 4  MORTGAGE SECURITIES AND SIMILAR INVESTMENTS
 Mortgage securities and similar investments
 InvestmentPrincipal
    
    
    Premiums
    
    
    
    
    
    
    Carrying
    
    
    Net
    
    
    AverageBalance
    
    
    (Discounts)
    
    
    Basis
    
    
    Amount(a)
    
    
    WAC(b)
    
    
    Yield(b)June 30, 2009Agency Securities:Fannie Mae/Freddie Mac:Fixed-rate
    
    $
    7,971
    
    
    $
    25
    
    
    $
    7,996
    
    
    $
    8,013
    
    
    
    6.69
    %
    
    
    6.16
    %ARMs
    
    
    6,945,668
    
    
    
    88,914
    
    
    
    7,034,582
    
    
    
    7,166,480
    
    
    
    4.74
    
    
    
    4.35Ginnie Mae ARMs
    
    
    363,779
    
    
    
    1,941
    
    
    
    365,720
    
    
    
    370,559
    
    
    
    4.45
    
    
    
    4.327,317,418
    
    
    
    90,880
    
    
    
    7,408,298
    
    
    
    7,545,052
    
    
    
    4.73
    
    
    
    4.35Residential mortgage loans:Fixed-rate
    
    
    4,525
    
    
    
    6
    
    
    
    4,531
    
    
    
    4,531
    
    
    
    7.09
    
    
    
    6.91ARMs
    
    
    8,618
    
    
    
    77
    
    
    
    8,695
    
    
    
    8,695
    
    
    
    4.92
    
    
    
    5.2113,143
    
    
    
    83
    
    
    
    13,226
    
    
    
    13,226
    
    
    
    5.66
    
    
    
    5.81Commercial real estate
loans
    
    
    44,110
    
    
    
    
    
    
    
    44,110
    
    
    
    43,079
    
    
    
    
    
    
    
    Collateral for structured
financings
    
    
    3,782
    
    
    
    63
    
    
    
    3,845
    
    
    
    3,845
    
    
    
    8.13
    
    
    
    7.78$
    7,378,453
    
    
    $
    91,026
    
    
    $
    7,469,479
    
    
    $
    7,605,202
    
    
    
    4.70
    
    
    
    4.33December 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
    
    
    
    43,163
    
    
    
    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
    
    
    $
    7,499,249
    
    
    
    5.29
    
    
    
    4.92
 (a)
    
    Includes unrealized gains and losses for securities classified as available-for-sale,
if applicable (see NOTE 9) and an allowance for possible loan losses on commercial real estate
loans totaling $1.0 million and $281,000 at June 30, 2009 and December 31, 2008, respectively.(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.
  -9-




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Receivables and other assets Miscellaneous other revenue (expense)
 NOTE 5  INVESTMENTS IN UNCONSOLIDATED AFFILIATES
 Unsecured borrowings Unsecured borrowings
 -10-




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NOTE 6  REPURCHASE ARRANGEMENTS AND SIMILAR
BORROWINGS, INCLUDING RELATED HEDGING ACTIVITY
 Mortgage securities and similar investments
  Repurchase arrangements and similar borrowings
 June 30, 2009
    
    
    December 31, 2008Borrowings
    
    
    Average
    
    
    Borrowings
    
    
    AverageCollateral Type
    
    Outstanding
    
    
    Rate *
    
    
    Outstanding
    
    
    Rate *Borrowings with maturities of 30 days or less:Agency Securities
    
    $
    6,399,549
    
    
    
    0.65
    %
    
    $
    5,179,137
    
    
    
    2.74
    %Borrowings with maturities greater than 30 days:Agency Securities (31 to 90 days)
    
    
    331,910
    
    
    
    5.10
    
    
    
    835,628
    
    
    
    2.87Agency Securities (91 to 360 days)
    
    
    
    
    
    
    
    
    
    
    732,139
    
    
    
    5.13331,910
    
    
    
    5.10
    
    
    
    1,567,767
    
    
    
    3.93Similar borrowings:Collateral for structured financings
    
    
    3,845
    
    
    
    8.13
    
    
    
    4,596
    
    
    
    8.09$
    6,735,304
    
    
    
    0.87
    
    
    $
    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 1.73% and 3.55% as of June 30, 2009 and December 31, 2008,
respectively.
  -11-




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Balance Sheet
    
    June 30,
    
    
    December 31,Location
    
    2009
    
    
    2008Balance sheet-relatedDerivatives designated as cash flow hedging instruments:Interest rate swap agreements at fair value  assets (c)
    
    (a)
    
    $
    528
    
    
    $
    Interest rate swap agreements at fair value  (liabilities) (c)
    
    (a)
    
    
    (29,789
    )
    
    
    (46,679
    )Related net interest payable
    
    (b)
    
    
    (16,263
    )
    
    
    (12,909
    )$
    (45,524
    )
    
    $
    (59,588
    )
 Location ofGain or(Loss)Recognized
    
    Quarter Ended
    
    
    Six Months Endedin
    
    June 30
    
    
    June 30Net Income
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Income statement-relatedComponents of effect on Interest expense:
    
    (a)Amount of gain (loss) reclassified from AOCI:Effective portion of active positions
    
    
    
    $
    (14,303
    )
    
    $
    (3,077
    )
    
    $
    (26,580
    )
    
    $
    (3,262
    )Effective portion of terminated positions
    
    (d)
    
    
    (303
    )
    
    
    (188
    )
    
    
    (559
    )
    
    
    (249
    )(14,606
    )
    
    
    (3,265
    )
    
    
    (27,139
    )
    
    
    (3,511
    )Amount of gain (loss) recognized
(ineffective portion)
    
    
    
    
    99
    
    
    
    290
    
    
    
    585
    
    
    
    910(Increase) decrease in Interest expense
    
    
    
    
    (14,507
    )
    
    
    (2,975
    )
    
    
    (26,554
    )
    
    
    (2,601
    )Holding gains on interest rate swap
agreements realized prior to designation
as cash flow hedge
    
    (e)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81(Decrease) increase in Net income
as a result of the use of interest
rate swap agreements
    
    
    
    $
    (14,507
    )
    
    $
    (2,975
    )
    
    $
    (26,554
    )
    
    $
    (2,520
    )Other comprehensive income-related:Amount of gain (loss) recognized in
other comprehensive income (loss)
(effective portion)
    
    
    
    $
    (4,721
    )
    
    $
    24,623
    
    
    $
    (8,987
    )
    
    $
    (5,380
    )
 (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 $31.3 million as of June 30, 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.
 Fair Value Measurements
 -12-




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##### Table of Contents



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
 -13-




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##### Table of Contents



Quarter Ended
    
    
    Six Months EndedJune 30
    
    
    June 302009
    
    
    2008
    
    
    2009
    
    
    2008Net income
    
    $
    42,507
    
    
    $
    36,728
    
    
    $
    84,583
    
    
    $
    66,875Other comprehensive income (loss):Amounts related to available-for-sale
securities:Reclassification adjustments for amounts
included in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,408Change in net unrealized gains
    
    
    61,017
    
    
    
    10,972
    
    
    
    126,582
    
    
    
    507Amounts related to cash flow hedges:Change in net unrealized losses
    
    
    (4,721
    )
    
    
    24,623
    
    
    
    (8,987
    )
    
    
    (3,105
    )Early termination of interest rate swap
agreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,275
    )Reclassification adjustment for amounts
included in net income
    
    
    14,606
    
    
    
    3,261
    
    
    
    27,139
    
    
    
    3,507Other comprehensive income (loss)
    
    
    70,902
    
    
    
    38,856
    
    
    
    144,734
    
    
    
    42Comprehensive income (loss)
    
    $
    113,409
    
    
    $
    75,584
    
    
    $
    229,317
    
    
    $
    66,917
 NOTE 9  DISCLOSURES REGARDING FAIR VALUES OF FINANCIAL INSTRUMENTS
 Cash and cash
equivalents Cash collateral receivable from interest rate swap counterparties
  Unsecured borrowings
 -14-




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##### Table of Contents



June 30, 2009
    
    
    December 31, 2008Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueFinancial Assets:Residential mortgage loans
    
    $
    13,226
    
    
    $
    13,300
    
    
    $
    15,004
    
    
    $
    15,000Commercial real estate loans
    
    
    43,079
    
    
    
    23,800
    
    
    
    43,163
    
    
    
    25,500Interest rate swap agreements
    
    
    528
    
    
    
    528
    
    
    
    
    
    
    
    Financial Liabilities:Repurchase arrangements with initial
terms of greater than 90 days
    
    
    556,980
    
    
    
    560,100
    
    
    
    1,127,420
    
    
    
    1,142,900Unsecured borrowings
    
    
    103,095
    
    
    
    93,600
    
    
    
    103,095
    
    
    
    85,900Interest rate swap agreements
    
    
    29,789
    
    
    
    29,789
    
    
    
    46,679
    
    
    
    46,679
  Gross UnrealizedBasis
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAs of June 30, 2009Agency Securities classified as available-for-sale
    
    $
    7,400,509
    
    
    $
    138,986
    
    
    $
    2,232
    
    
    $
    7,537,263Mortgage securities classified as held-to-maturity
    
    
    11,634
    
    
    
    436
    
    
    
    
    
    
    
    12,070As 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
  June 30, 2009
    
    
    December 31, 2008Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    Value
    
    
    LossSecurities in an unrealized loss position:One year or greater
    
    $
    326,338
    
    
    $
    1,275
    
    
    $
    157,675
    
    
    $
    2,454Less than one year
    
    
    511,874
    
    
    
    957
    
    
    
    2,762,619
    
    
    
    37,278$
    838,212
    
    
    $
    2,232
    
    
    $
    2,920,294
    
    
    $
    39,732
   -15-




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##### Table of Contents



Miscellaneous other revenue (expense)
 NOTE 10  COMPENSATION PROGRAMS
  Performance-based Cash Compensation Program to Augment Base Salaries
 General and administrative expense
 Annual Incentive Compensation
  Net income Incentive compensation expense Unsecured borrowings, Investments in unconsolidated affiliates Unsecured
borrowings Stockholders equity, Accumulated other comprehensive income (loss) Unsecured
 -16-




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##### Table of Contents



borrowings, Incentive compensation expense Accounts payable and accrued
expenses
 Long-term Equity-based Awards
   TotalYear of
    
    Grant Date
    
    
    Original
    
    
    Shares Vesting In:Grant
    
    Fair Value
    
    
    Grants
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    20142005
    
    $
    7.86
    
    
    
    172,600
    
    
    
    35,100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2006
    
    
    8.06
    
    
    
    218,957
    
    
    
    48,126
    
    
    
    44,374
    
    
    
    44,374
    
    
    
    
    
    
    
    
    
    
    
    2007
    
    
    12.93
    
    
    
    156,000
    
    
    
    24,672
    
    
    
    23,672
    
    
    
    23,665
    
    
    
    23,665
    
    
    
    23,663
    
    
    
    23,6632008
    
    
    12.87
    
    
    
    6,000
    
    
    
    6,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2009
    
    
    11.39
    
    
    
    6,000
    
    
    
    
    
    
    
    6,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
   Weighted AverageNumber of
    
    
    Grant DateShares
    
    
    Fair ValueStock awards outstanding at December 31, 2008
    
    
    479,132
    
    
    $
    10.30Grants
    
    
    6,000
    
    
    
    11.39Forfeitures
    
    
    (17,500
    )
    
    
    9.19Vested
    
    
    (113,898
    )
    
    
    9.39Stock awards outstanding at June 30, 2009
    
    
    353,734
    
    
    
    10.66
  -17-




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##### Table of Contents



General and
administrative expense
  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
    
    
    
    36,000
    
    
    
    36,000
    
    
    
    2007
    
    
    0.89
    
    
    
    10.46
    
    
    
    220,500
    
    
    
    40,750
    
    
    
    40,750
    
    
    
    40,7502008
    
    
    2.08
    
    
    
    12.87
    
    
    
    30,000
    
    
    
    30,000
    
    
    
    
    
    
    
    2009
    
    
    1.52
    
    
    
    11.69
    
    
    
    30,000
    
    
    
    
    
    
    
    30,000
    
    
    
    
 *
    
    Based on volatility factors of 27%, 31%, 27%, 50% and 51% for years 2005, 2006,
2007, 2008 and 2009, respectively; dividend yields of 10% for years 2005 through 2007,
12% for 2008 and 14% for 2009; risk-free rates of 3.76%, 4.91%, 4.60%, 2.91% and 1.70%
for years 2005, 2006, 2007, 2008 and 2009, respectively; and four year expected terms.
  Number of
    
    
    Weighted AverageShares
    
    
    Exercise PriceOption awards outstanding at December 31, 2008
    
    
    555,750
    
    
    $
    9.12Grants
    
    
    30,000
    
    
    
    11.69Forfeitures
    
    
    (43,750
    )
    
    
    8.43Exercises
    
    
    (89,375
    )
    
    
    7.91Option awards outstanding at June 30, 2009
    
    
    452,625
    
    
    
    9.59
 General and
administrative expense
 Other Benefit Programs
 General and administrative expense
 -18-




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##### Table of Contents



NOTE 11  NET INTEREST INCOME ANALYSIS
  Quarter Ended June 302009
    
    
    2008
    
    
    Related Changes inAverage
    
    
    
    
    
    
    AverageAmount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Rate*
    
    
    Volume*
    
    
    Total*Interest income:Mortgage securities and
similar investments
    
    $
    81,062
    
    
    
    4.33
    %
    
    $
    97,332
    
    
    
    5.30
    %
    
    $
    (18,115
    )
    
    $
    1,845
    
    
    $
    (16,270
    )Other
    
    
    133
    
    
    
    0.43
    
    
    
    782
    
    
    
    2.74
    
    
    
    (713
    )
    
    
    64
    
    
    
    (649
    )81,195
    
    
    
    4.27
    
    
    
    98,114
    
    
    
    5.26
    
    
    
    (18,828
    )
    
    
    1,909
    
    
    
    (16,919
    )Interest expense:Repurchase arrangements
and similar borrowings
    
    $
    (31,626
    )
    
    
    1.86
    
    
    $
    (55,019
    )
    
    
    3.25
    
    
    $
    (23,415
    )
    
    $
    22
    
    
    $
    (23,393
    )Unsecured borrowings
    
    
    (2,187
    )
    
    
    8.49
    
    
    
    (2,187
    )
    
    
    8.49
    
    
    
    
    
    
    
    
    
    
    
    (33,813
    )
    
    
    1.96
    
    
    
    (57,206
    )
    
    
    3.33
    
    
    
    (23,415
    )
    
    
    22
    
    
    
    (23,393
    )$
    47,382
    
    
    
    2.31
    
    
    $
    40,908
    
    
    
    1.93
    
    
    $
    4,587
    
    
    $
    1,887
    
    
    $
    6,474
 Six Months Ended June 302009
    
    
    2008
    
    
    Related Changes inAverage
    
    
    
    
    
    
    AverageAmount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Rate*
    
    
    Volume*
    
    
    Total*Interest income:Mortgage securities and
similar investments
    
    $
    168,946
    
    
    
    4.51
    %
    
    $
    203,683
    
    
    
    5.49
    %
    
    $
    (36,729
    )
    
    $
    1,992
    
    
    $
    (34,737
    )Other
    
    
    350
    
    
    
    0.56
    
    
    
    1,586
    
    
    
    3.22
    
    
    
    (1,580
    )
    
    
    344
    
    
    
    (1,236
    )169,296
    
    
    
    4.44
    
    
    
    205,269
    
    
    
    5.46
    
    
    
    (38,309
    )
    
    
    2,336
    
    
    
    (35,973
    )Interest expense:Repurchase arrangements
and similar borrowings
    
    $
    (71,583
    )
    
    
    2.11
    
    
    $
    (124,325
    )
    
    
    3.61
    
    
    $
    (50,736
    )
    
    $
    (2,006
    )
    
    $
    (52,742
    )Unsecured borrowings
    
    
    (4,374
    )
    
    
    8.49
    
    
    
    (4,374
    )
    
    
    8.49
    
    
    
    
    
    
    
    
    
    
    
    (75,957
    )
    
    
    2.20
    
    
    
    (128,699
    )
    
    
    3.68
    
    
    
    (50,736
    )
    
    
    (2,006
    )
    
    
    (52,742
    )$
    93,339
    
    
    
    2.24
    
    
    $
    76,570
    
    
    
    1.78
    
    
    $
    12,427
    
    
    $
    4,342
    
    
    $
    16,769
 *
    
    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.
 -19-




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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
  -20-




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##### Table of Contents



Capital Raising Activity
  Book Value per Com m on Share
  Six MonthsQuarter Ended
    
    
    EndedMarch 31
    
    
    June 30
    
    
    June 30Book value per common share, beginning of period
    
    $
    9.14
    
    
    $
    10.34
    
    
    $
    9.14Accretion attributed to capital transactions
    
    
    0.01
    
    
    
    0.02
    
    
    
    0.04Earnings in excess of dividend distributions
    
    
    0.02
    
    
    
    0.01
    
    
    
    0.03Improvement in value of mortgage securities classified
as available-for-sale
    
    
    1.04
    
    
    
    0.96
    
    
    
    1.98Improvement in value of interest rate swap agreements
designated as cash flow hedges
    
    
    0.13
    
    
    
    0.15
    
    
    
    0.29Book value per common share, end of period
    
    $
    10.34
    
    
    $
    11.48
    
    
    $
    11.48
 Residential Mortgage Investments
  -21-




---



##### 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
    
    $
    4,672,095
    
    
    
    4.02
    %
    
    
    2.82
    %
    
    
    1.83
    %
    
    
    3.68
    %
    
    
    10.52
    %
    
    
    4.8Ginnie Mae
    
    
    365,720
    
    
    
    4.45
    
    
    
    2.03
    
    
    
    1.53
    
    
    
    1.00
    
    
    
    9.99
    
    
    
    5.5Residential mortgage
loans
    
    
    8,695
    
    
    
    4.92
    
    
    
    3.15
    
    
    
    2.05
    
    
    
    1.53
    
    
    
    11.14
    
    
    
    5.85,046,510
    
    
    
    4.06
    
    
    
    2.77
    
    
    
    1.81
    
    
    
    3.48
    
    
    
    10.48
    
    
    
    4.9Longer-to-reset ARMs:Agency Securities:Fannie
Mae/Freddie Mac
    
    
    2,362,487
    
    
    
    6.16
    
    
    
    2.94
    
    
    
    1.66
    
    
    
    2.83
    
    
    
    11.63
    
    
    
    30.7$
    7,408,997
    
    
    
    4.73
    
    
    
    2.82
    
    
    
    1.76
    
    
    
    3.28
    
    
    
    10.85
    
    
    
    13.1
 (a)
    
    Basis represents the Companys investment (unpaid principal balance plus unamortized
investment premium) before unrealized gains and losses. As of June 30, 2009, the ratio of
basis to related unpaid principal balance for the Companys ARM securities was 101.24. 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 and
as such, represents the cash yield earned by the Company before amortization of investment
premiums. Fully indexed WAC represents the coupon upon one or more resets using interest rate
indexes as of June 30, 2009 and the applicable net margin.
  -22-




---



##### Table of Contents



Commercial Real Estate-related Assets
  -23-




---



##### 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
    
    $
    7,562,123
    
    
    $
    6,735,304
    
    
    $
    826,819
    
    
    $
    373,715Commercial real estate-related assets
    
    
    43,079
    
    
    
    
    
    
    
    43,079
    
    
    
    $
    7,605,202
    
    
    $
    6,735,304
    
    
    
    869,898
    
    
    
    373,715Other assets, net of other liabilities
    
    
    
    
    
    
    
    
    
    
    183,706
    
    
    
    122,030First quarter common dividend
    
    
    
    
    
    
    
    
    
    
    (37,047
    )
    
    
    (37,047
    ) (b)$
    1,016,557
    
    
    $
    458,698Balances as of December 31, 2008
    
    $
    7,499,249
    
    
    $
    6,751,500
    
    
    $
    860,428
    
    
    $
    302,931
 (a)
    
    Investments are stated at carrying amounts on the Companys balance sheets. 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 second quarter 2009 common dividend was declared June 11, 2009 and paid July 20,
2009 to stockholders of record as of June 30, 2009.
 -24-




---



##### Table of Contents



Recent Accounting Developments
 Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities
 Accounting for Transfers of
Financial Assets and Repurchase Financing Transactions
 Recognition and Presentation of Other-Than-Temporary Impairments Determining Fair Value When the Volume and Level of Activity
for an Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly Interim Disclosures
About Fair Value of Financial Instruments
 -25-




---



##### Table of Contents



Subsequent Events
 Amendments to FASB Interpretation No. 46(R)
 -26-




---



##### Table of Contents



RESULTS OF OPERATIONS
 Quarter Ended
    
    
    Six MonthsJune 30
    
    
    Ended June 302009
    
    
    2008
    
    
    2009
    
    
    2008Income statement data(dollars in thousands, except per share data):Interest income:Mortgage securities and similar investments
    
    $
    81,062
    
    
    $
    97,332
    
    
    $
    168,946
    
    
    $
    203,683Other
    
    
    133
    
    
    
    782
    
    
    
    350
    
    
    
    1,58681,195
    
    
    
    98,114
    
    
    
    169,296
    
    
    
    205,269Interest expense:Repurchase arrangements and similar borrowings
    
    
    (31,626
    )
    
    
    (55,019
    )
    
    
    (71,583
    )
    
    
    (124,325
    )Unsecured borrowings
    
    
    (2,187
    )
    
    
    (2,187
    )
    
    
    (4,374
    )
    
    
    (4,374
    )(33,813
    )
    
    
    (57,206
    )
    
    
    (75,957
    )
    
    
    (128,699
    )47,382
    
    
    
    40,908
    
    
    
    93,339
    
    
    
    76,570Other revenue (expense):Miscellaneous other revenue (expense)
    
    
    (804
    )
    
    
    (55
    )
    
    
    (909
    )
    
    
    (1,424
    )Incentive compensation expense
    
    
    (1,243
    )
    
    
    (2,270
    )
    
    
    (2,377
    )
    
    
    (4,520
    )General and administrative expense
    
    
    (2,893
    )
    
    
    (1,920
    )
    
    
    (5,600
    )
    
    
    (3,881
    )(4,940
    )
    
    
    (4,245
    )
    
    
    (8,886
    )
    
    
    (9,825
    )42,442
    
    
    
    36,663
    
    
    
    84,453
    
    
    
    66,745Equity in earnings of unconsolidated affiliates
    
    
    65
    
    
    
    65
    
    
    
    130
    
    
    
    130Net income
    
    $
    42,507
    
    
    $
    36,728
    
    
    $
    84,583
    
    
    $
    66,875Net income available to common stockholders, after
preferred share dividends
    
    $
    37,446
    
    
    $
    31,665
    
    
    $
    74,461
    
    
    $
    56,748Diluted earnings per common share
    
    $
    0.58
    
    
    $
    0.58
    
    
    $
    1.15
    
    
    $
    1.11Average diluted shares outstanding:
    
    
    73,140
    
    
    
    63,442
    
    
    
    72,961
    
    
    
    59,842Key
portfolio statistics(dollars in millions):Average yields:Mortgage securities and similar investments
    
    
    4.33
    %
    
    
    5.30
    %
    
    
    4.51
    %
    
    
    5.49
    %Other
    
    
    0.43
    
    
    
    2.74
    
    
    
    0.56
    
    
    
    3.22Total average yields
    
    
    4.27
    
    
    
    5.26
    
    
    
    4.44
    
    
    
    5.46Average borrowing rates:Repurchase arrangements and similar borrowings
    
    
    1.86
    
    
    
    3.25
    
    
    
    2.11
    
    
    
    3.61Unsecured borrowings
    
    
    8.49
    
    
    
    8.49
    
    
    
    8.49
    
    
    
    8.49Total borrowing rates
    
    
    1.96
    
    
    
    3.33
    
    
    
    2.20
    
    
    
    3.68Total financing spreads
    
    
    2.31
    
    
    
    1.93
    
    
    
    2.24
    
    
    
    1.78Net yield on total interest-earning assets
    
    
    2.50
    
    
    
    2.20
    
    
    
    2.47
    
    
    
    2.05Average portfolio runoff rate
    
    
    16.49
    
    
    
    20.41
    
    
    
    15.39
    
    
    
    19.70Average interest-earning assets and interest-bearing
liabilities:Mortgage securities and similar investments
    
    $
    7,482
    
    
    $
    7,349
    
    
    $
    7,499
    
    
    $
    7,427Other interest-earning assets
    
    
    125
    
    
    
    115
    
    
    
    125
    
    
    
    99Repurchase arrangements and similar borrowings
    
    
    6,739
    
    
    
    6,704
    
    
    
    6,764
    
    
    
    6,819Unsecured borrowings
    
    
    103
    
    
    
    103
    
    
    
    103
    
    
    
    103Average long-term investment capital
    
    
    991
    
    
    
    828
    
    
    
    958
    
    
    
    785General and administrative and incentive
compensation expense as a percentage of
average long-term investment capital
    
    
    1.67
    %
    
    
    2.03
    %
    
    
    1.68
    %
    
    
    2.15
    %Return on average long-term investment capital
    
    
    18.05
    
    
    
    18.86
    
    
    
    18.69
    
    
    
    18.21
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LIQUIDITY AND CAPITAL RESOURCES
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Interest Rate Sensitivity on Operating Results
  Federal
    
    
    10-year U.S.Funds
    
    
    TreasuryRate
    
    
    Rate
    
    
    Immediate Change In:*30-day to one-year rates
    
    
    
    
    
    
    
    
    
    Flat
    
    Up 1.00%
    
    Up 1.00%
    
    Up 2.00%
    
    Up 3.00%10-year U.S. Treasury rate
    
    
    
    
    
    
    
    
    
    Down 1.00%
    
    Flat
    
    Up 1.00%
    
    Up 2.00%
    
    Up 3.00%Projected 12-month
income change:June 30, 2009
    
    
    <0.25
    %
    
    
    3.54
    %
    
    $
    (10,000
    )
    
    $
    (14,300
    )
    
    $
    (9,400
    )
    
    $
    (24,800
    )
    
    $
    (43,000
    )December 31, 2008
    
    
    <0.25
    
    
    
    2.21
    
    
    
    (9,400
    )
    
    
    (17,900
    )
    
    
    (13,300
    )
    
    
    (31,000
    )
    
    
    (49,000
    )
 *
    
    Sensitivity of earnings to changes in interest rates is calculated based on actual rates
on the indicated dates. Projected 12-month earnings changes are 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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
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
    
    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 recognized in earnings as a component of Other revenue (expense)if (a) the
decline was credit-related or (b) it was determined to be more likely than not that the
Company will incur a loss via an asset sale. Other-than-temporary impairment of a mortgage
security because of other factors would be recognized in Accumulated other comprehensive
income (loss)and amortized to earnings as a yield adjustment.Considerable judgment is also required in determining whether an impairment charge should be
recognized on an investment in an unsecuritized loan. The amount of any such impairment,
regardless of whether it arose due to credit issues or other factors, would be recognized in
earnings as a component of Other revenue (expense). The amount of 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 as a component of Interest
expense. Changes in fair value of Derivatives not held as accounting hedges, or for which
the hedge relationship is deemed to no longer be highly effective and as a result hedge
accounting is terminated, are recorded in earnings as a component of Other revenue (expense).
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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 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
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PART II. OTHER INFORMATION
 
 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 April 30, 2009 furnishing the press
release announcing first quarter 2009 results, and announcing board
member Jack Biegler to succeed Paul Low as Chairman of the Board.Current Report on Form 8-K dated May 1, 2009 to file investor
presentation materials pertaining to the Companys first quarter
earnings conference call.Current Report on Form 8-K dated May 15, 2009 to file a presentation
to the investment community, as well as an updated first quarter 2009
investor fact sheet.
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SIGNATURES
  CAPSTEAD MORTGAGE CORPORATIONRegistrantDate:  August 6, 2009
    By:
    /s/ ANDREW F. JACOBSAndrew F. JacobsPresident and Chief Executive OfficerDate:  August 6, 2009
    By:
    /s/ PHILLIP A. REINSCHPhillip A. ReinschExecutive Vice President and
Chief Financial Officer -42-