Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☑ NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☑ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☑☐ Accelerated filer ☐☑ Non-accelerated filer ☐ Smaller reporting company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☑

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

	June 30, 2020			December 31, 2019				June 30, 2021			December 31, 2020
	(unaudited)							(unaudited)
Assets
Residential mortgage investments ($7.97 and $10.83 billion pledged at June 30, 2020 and December 31, 2019, respectively)	$	8,327,900			$	11,222,182
Residential mortgage investments ($7.14 and $7.71 billion pledged at June 30, 2021 and December 31, 2020, respectively)								$	7,429,792			$	7,937,552
Cash collateral receivable from derivative counterparties		103,618				65,477			78,161				74,411
Derivatives at fair value		–				1,471
Cash and cash equivalents		121,991				105,397			207,392				257,180
Receivables and other assets		115,062				125,474			134,316				136,107
	$	8,668,571			$	11,520,001		$	7,849,661			$	8,405,250
Liabilities
Secured borrowings	$	7,575,294			$	10,275,413		$	6,809,883			$	7,319,083
Derivatives at fair value		49,575				29,156			33,335				41,484
Unsecured borrowings		98,443				98,392			98,544				98,493
Common stock dividend payable		15,041				14,605			15,289				15,281
Accounts payable and accrued expenses		17,329				28,702			19,597				20,746
		7,755,682				10,446,268			6,976,648				7,495,087
Stockholders’ equity
Preferred stock - $0.10 par value; 100,000 shares authorized:
7.50% Cumulative Redeemable Preferred Stock, Series E, 10,329 shares issued and outstanding ($258,226 aggregate liquidation preference) at June 30, 2020 and December 31, 2019		250,946				250,946
7.50% Cumulative Redeemable Preferred Stock, Series E, 10,329 shares issued and outstanding ($258,226 aggregate liquidation preference) at June 30, 2021 and December 31, 2020									250,946				250,946
Common stock - $0.01 par value; 250,000 shares authorized:
96,395 and 94,606 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively		964				946
96,848 and 96,481 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively									968				965
Paid-in capital		1,266,976				1,252,481			1,269,599				1,268,439
Accumulated deficit		(664,749	)			(444,039	)		(655,406	)			(651,071	)
Accumulated other comprehensive income		58,752				13,399			6,906				40,884
		912,889				1,073,733			873,013				910,163
	$	8,668,571			$	11,520,001		$	7,849,661			$	8,405,250

	Quarter Ended						Six Months Ended						Quarter Ended						Six Months Ended
	June 30						June 30						June 30						June 30
	2020			2019			2020			2019			2021			2020			2021			2020
Interest income:
Interest income
Residential mortgage investments	$	48,133		$	85,100		$	117,361		$	168,907		$	20,776		$	48,111		$	46,941		$	117,318
Other		22			600			421			1,022			12			28			25			431
		48,155			85,700			117,782			169,929			20,788			48,139			46,966			117,749
Interest expense:
Interest expense
Secured borrowings		(13,055	)		(67,945	)		(58,328	)		(131,724	)		(2,826	)		(13,039	)		(6,998	)		(58,295	)
Unsecured borrowings		(1,900	)		(1,900	)		(3,800	)		(3,791	)		(1,900	)		(1,900	)		(3,791	)		(3,800	)
		(14,955	)		(69,845	)		(62,128	)		(135,515	)		(4,726	)		(14,939	)		(10,789	)		(62,095	)
		33,200			15,855			55,654			34,414			16,062			33,200			36,177			55,654
Other expense:
Loss on derivative instruments (net)		(6,948	)		(74,842	)		(162,687	)		(96,499	)
Other (expense) income
Gain (loss) on derivative instruments (net)														2,100			(6,948	)		4,482			(162,687	)
Loss on sale of investments (net)		–			(1,365	)		(67,820	)		(1,365	)		–			–			–			(67,820	)
Compensation-related expense		(2,330	)		(1,972	)		(4,534	)		(5,581	)		(1,861	)		(2,330	)		(3,953	)		(4,534	)
Other general and administrative expense		(1,219	)		(1,138	)		(2,421	)		(2,266	)		(772	)		(1,219	)		(2,237	)		(2,421	)
Miscellaneous other revenue (expense)		1			2			(141	)		91			–			1			2			(141	)
		(10,496	)		(79,315	)		(237,603	)		(105,620	)		(533	)		(10,496	)		(1,706	)		(237,603	)
Net income (loss)		22,704			(63,460	)		(181,949	)		(71,206	)		15,529			22,704			34,471			(181,949	)
Less preferred stock dividends		(4,842	)		(4,842	)		(9,684	)		(9,684	)		(4,842	)		(4,842	)		(9,684	)		(9,684	)
Net income (loss) to common stockholders	$	17,862		$	(68,302	)	$	(191,633	)	$	(80,890	)	$	10,687		$	17,862		$	24,787		$	(191,633	)

Net income (loss) per common share:
Net income (loss) per common share
Basic and diluted	$	0.19		$	(0.80	)	$	(2.01	)	$	(0.95	)	$	0.11		$	0.19		$	0.26		$	(2.01	)

Weighted average common shares outstanding:
Basic		95,655			84,934			95,276			84,914			95,995			95,655			95,945			95,276
Diluted		95,887			84,934			95,276			84,914			96,454			95,887			96,342			95,276

	Quarter Ended						Six Months Ended						Quarter Ended						Six Months Ended
	June 30						June 30						June 30						June 30
	2020			2019			2020			2019			2021			2020			2021			2020
Net income (loss)	$	22,704		$	(63,460	)	$	(181,949	)	$	(71,206	)	$	15,529		$	22,704		$	34,471		$	(181,949	)

Other comprehensive income
Other comprehensive (loss) income
Amounts related to available for sale securities:
Change in net unrealized gain or loss		64,659			47,185			(1,111	)		90,661			(21,881	)		64,659			(43,364	)		(1,111	)
Reclassification adjustment for amounts included in net income (loss)		–			1,365			66,864			1,365			–			–			–			66,864
Amounts related to cash flow hedges:
Change in net unrealized gain or loss		(567	)		(6,746	)		(21,818	)		(15,297	)		(7,088	)		(567	)		6,204			(21,818	)
Reclassification adjustment for amounts included in net income (loss)		938			(6,351	)		1,418			(16,922	)		1,566			938			3,182			1,418
		65,030			35,453			45,353			59,807			(27,403	)		65,030			(33,978	)		45,353
Comprehensive income (loss)	$	87,734		$	(28,007	)	$	(136,596	)	$	(11,399	)
Comprehensive (loss) income													$	(11,874	)	$	87,734		$	493		$	(136,596	)

																	Preferred Stock		Common Stock		Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income			Total Stockholders’ Equity
Balance at March 31, 2021																	$	250,946	$	968	$	1,269,021	$	(651,551	)	$	34,309		$	903,693
Net income																	–		–		–			15,529		–				15,529
Change in unrealized gain on mortgage securities, net																	–		–		–		–				(21,881	)		(21,881	)
Amounts related to cash flow hedges, net																	–		–		–		–				(5,522	)		(5,522	)
Cash dividends:
Common – $0.15 per share																	–		–		–			(14,542	)	–				(14,542	)
Preferred – $0.47 per share																	–		–		–			(4,842	)	–				(4,842	)
Other additions to capital																	–		–			578	–			–				578
Balance at June 30, 2021																	$	250,946	$	968	$	1,269,599	$	(655,406	)	$	6,906		$	873,013
	Preferred Stock		Common Stock			Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income			Total Stockholders’ Equity
Balance at March 31, 2020	$	250,946	$	964		$	1,266,045	$	(668,053	)	$	(6,278	)	$	843,624		$	250,946	$	964	$	1,266,045	$	(668,053	)	$	(6,278	)	$	843,624
Net income	–		–			–			22,704		–				22,704		–		–		–			22,704		–				22,704
Change in unrealized gain on mortgage securities, net	–		–			–		–				64,659			64,659		–		–		–		–				64,659			64,659
Amounts related to cash flow hedges, net	–		–			–		–				371			371		–		–		–		–				371			371
Cash dividends:
Common – $0.15 per share	–		–			–			(14,558	)	–				(14,558	)	–		–		–			(14,558	)	–				(14,558	)
Preferred – $0.47 per share	–		–			–			(4,842	)	–				(4,842	)	–		–		–			(4,842	)	–				(4,842	)
Other additions to capital	–		–				931	–			–				931		–		–			931	–			–				931
Balance at June 30, 2020	$	250,946	$	964		$	1,266,976	$	(664,749	)	$	58,752		$	912,889		$	250,946	$	964	$	1,266,976	$	(664,749	)	$	58,752		$	912,889

Balance at March 31, 2019	$	250,946	$	856		$	1,175,878	$	(366,110	)	$	3,308		$	1,064,878
Net loss	–		–			–			(63,460	)	–				(63,460	)
Balance at December 31, 2020																	$	250,946	$	965	$	1,268,439	$	(651,071	)	$	40,884		$	910,163
Net income																	–		–		–			34,471		–				34,471
Change in unrealized gain on mortgage securities, net	–		–			–		–				48,550			48,550		–		–		–		–				(43,364	)		(43,364	)
Amounts related to cash flow hedges, net	–		–			–		–				(13,097	)		(13,097	)	–		–		–		–				9,386			9,386
Cash dividends:
Common – $0.12 per share	–		–			–			(10,291	)	–				(10,291	)
Preferred – $0.47 per share	–		–			–			(4,842	)	–				(4,842	)
Common – $0.30 per share																	–		–		–			(29,122	)	–				(29,122	)
Preferred – $0.94 per share																	–		–		–			(9,684	)	–				(9,684	)
Other additions to capital	–			(1	)		651	–			–				650		–			3		1,160	–			–				1,163
Balance at June 30, 2019	$	250,946	$	855		$	1,176,529	$	(444,703	)	$	38,761		$	1,022,388
Balance at June 30, 2021																	$	250,946	$	968	$	1,269,599	$	(655,406	)	$	6,906		$	873,013

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

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

	Six Months Ended June 30						Six Months Ended June 30
	2020			2019			2021			2020
Operating activities:
Net loss	$	(181,949	)	$	(71,206	)
Adjustments to reconcile net loss to cash provided by operating activities:
Net income (loss)							$	34,471		$	(181,949	)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Amortization of investment premiums		36,079			36,399			43,298			36,079
Amortization of equity-based awards		1,767			1,779			1,285			1,767
Amortization of unrealized net loss (gain) on de-designated hedges		19			(9,735	)
Amortization of unrealized loss (net) on de-designated hedges								1,237			19
Loss on sale of mortgage investments		67,820			1,365			–			67,820
Loss on derivative instruments (net)		155,835			85,625
(Gain) loss on derivative instruments (net)								(4,514	)		155,835
Other depreciation and amortization		59			54			66			59
Net change in receivables, other assets, accounts payable and accrued expenses		1,479			16,608			3,971			1,479
Net cash provided by operating activities		81,109			60,889			79,814			81,109
Investing activities:
Purchases of residential mortgage investments		(1,453,161	)		(1,538,636	)		(1,411,055	)		(1,453,161	)
Proceeds from sales of residential mortgage investments		2,558,871			303,991			–			2,558,871
Interest receivable acquired with the purchase of residential mortgage investments		(2,519	)		(3,293	)		(1,815	)		(2,519	)
Principal collections on residential mortgage investments, including changes in mortgage securities principal remittance receivable		1,753,877			1,705,959			1,830,673			1,753,877
Redemption of lending counterparty investments		–			5,000
Net cash provided by investing activities		2,857,068			473,021			417,803			2,857,068
Financing activities:
Proceeds from repurchase arrangements and similar borrowings		47,502,427			71,904,683			31,565,784			47,502,427
Principal payments on repurchase arrangements and similar borrowings		(50,202,545	)		(72,141,471	)		(32,074,984	)		(50,202,545	)
Decrease in cash collateral receivable from derivative counterparties		(38,141	)		(39,076	)
Net payments on derivative settlements		(157,773	)		(115,279	)
Increase in cash collateral receivable from derivative counterparties								(3,750	)		(38,141	)
Net receipts from (payments on) derivative settlements								4,461			(157,773	)
Issuance of common stock		12,882			–			–			12,882
Other capital stock transactions		(108	)		(106	)		(104	)		(108	)
Dividends paid		(38,325	)		(23,472	)		(38,812	)		(38,325	)
Net cash used in financing activities		(2,921,583	)		(414,721	)		(547,405	)		(2,921,583	)
Net change in cash and cash equivalents		16,594			119,189			(49,788	)		16,594
Cash and cash equivalents at beginning of period		105,397			60,289			257,180			105,397
Cash and cash equivalents at end of period	$	121,991		$	179,478		$	207,392		$	121,991

Capstead Mortgage Corporation operates as a self-managed real estate investment trust for federal income tax purposes (a “REIT”) and is based in Dallas, Texas. Unless the context otherwise indicates, Capstead Mortgage Corporation, together with its subsidiaries, is referred to as “Capstead” or the “Company.” Capstead earns income from investing in a leveraged portfolio of residential mortgage pass-through securities currently consisting ~~almost exclusively~~primarily of adjustable-rate mortgage (“ARM”) securities issued and guaranteed by government-sponsored enterprises, either Fannie Mae, Freddie Mac, or by an agency of the federal government, Ginnie Mae. ~~Residential mortgage pass-through~~Together these securities ~~guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae~~ are referred to as “Agency Securities” and are considered to have limited, if any, credit risk.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and six months ended June 30, ~~2020~~2021 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, ~~2020.~~2021. For further information refer to the audited consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, ~~2019.~~

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (“ASU 2016-13”) which replaces the incurred loss impairment methodology in current GAAP with a methodology that better reflects expected credit losses. For financial instruments carried at amortized cost, impairment will be measured as a current estimate of expected lifetime credit losses. For available-for-sale debt securities in which changes in fair value are recorded in accumulated other comprehensive income, the FASB made targeted improvements eliminating the write-down of available-for-sale securities under the “other-than-temporarily” impaired model with an allowance for credit losses model. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company adopted ASU 2016-13 on January 1, 2020 which had no material effect on the Company’s results of operations, financial condition and cash flows primarily due to the limited, if any, credit risk of Agency Securities.2020.

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

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

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

	Quarter Ended							Six Months Ended								Quarter Ended						Six Months Ended
	June 30							June 30								June 30						June 30
	2020		2019					2020				2019				2021			2020			2021			2020
Basic net income (loss) per common share
Numerator for basic net income (loss) per common share:
Net income (loss)	$	22,704			$	(63,460	)		$	(181,949	)		$	(71,206	)	$	15,529		$	22,704		$	34,471		$	(181,949	)
Preferred stock dividends		(4,842		)		(4,842	)			(9,684	)			(9,684	)		(4,842	)		(4,842	)		(9,684	)		(9,684	)
Earnings participation of unvested equity awards		(40		)		(25	)			(64	)			(44	)		(24	)		(40	)		(60	)		(64	)
	$	17,822			$	(68,327	)		$	(191,697	)		$	(80,934	)	$	10,663		$	17,822		$	24,727		$	(191,697	)
Denominator for basic net income (loss) per common share:
Average number of shares of common stock outstanding		96,395				85,559				96,015				85,554			96,848			96,395			96,821			96,015
Average unvested stock awards outstanding		(740		)		(625	)			(739	)			(640	)		(853	)		(740	)		(876	)		(739	)
		95,655				84,934				95,276				84,914			95,995			95,655			95,945			95,276
	$	0.19			$	(0.80	)		$	(2.01	)		$	(0.95	)	$	0.11		$	0.19		$	0.26		$	(2.01	)
Diluted net income (loss) per common share
Numerator for diluted net income (loss) per common share	$	17,822			$	(68,327	)		$	(191,697	)		$	(80,934	)	$	10,663		$	17,822		$	24,727		$	(191,697	)

Denominator for diluted net income (loss) per common share:
Denominator for basic net income (loss) per common share		95,655				84,934				95,276				84,914			95,995			95,655			95,945			95,276
Net effect of dilutive equity awards		232				–				–				–			459			232			397			–
		95,887				84,934				95,276				84,914			96,454			95,887			96,342			95,276
	$	0.19			$	(0.80	)		$	(2.01	)		$	(0.95	)	$	0.11		$	0.19		$	0.26		$	(2.01	)

Anti-dilutive securities that could be potentially dilutive in the future that were not included in the computation of diluted net income (loss) per common share include 383,000 and 952,000 equity awards excludable under the treasury stock method for the quarter and six months ended June 30, 2020. There were ~~947,000~~0 potentially dilutive securities excluded from the computation of diluted net income (loss) per common share for the quarter and six months ended June 30, ~~2019.~~2021. There were 383,000 and 952,000 potentially dilutive securities excluded from the computation of diluted net income (loss) per common share for the quarter and six months ended June 30, 2020, respectively.

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

Unpaid
Principal
Balance

Investment Premiums

Amortized Cost Basis

Carrying
Amount (a)

Net
WAC ^(b)

Average
Yield (c)

June 30, 2020

Agency Securities:

Fannie Mae/Freddie Mac:

Fixed-rate

$
66

$
–

$
66

$
66

6.50
%

6.29
%
ARMs

7,198,558

224,809

7,423,367

7,519,108

3.12

2.31

Ginnie Mae ARMs

772,392

19,668

792,060

807,339

3.60

2.53

7,971,016

244,477

8,215,493

8,326,513

3.16

2.33

Residential mortgage loans:

Fixed-rate

95

–

95

95

4.84

5.16

ARMs

433

3

436

436

4.17

3.80

528

3

531

531

4.29

4.03

Collateral for structured
financings

842

14

856

856

7.97

7.28

$
7,972,386

$
244,494

$
8,216,880

$
8,327,900

3.16

2.33

December 31, 2019

Agency Securities:

Fannie Mae/Freddie Mac:

Fixed-rate

$
83

$
–

$
83

$
83

6.50
%

6.34
%
ARMs

8,628,656

262,293

8,890,949

8,931,789

3.45

2.66

Ginnie Mae ARMs

2,214,447

69,884

2,284,331

2,288,758

3.53

2.71

10,843,186

332,177

11,175,363

11,220,630

3.46

2.67

Residential mortgage loans:

Fixed-rate

106

1

107

107

4.84

2.07

ARMs

527

3

530

530

4.15

3.11

633

4

637

637

4.26

2.94

Collateral for structured
financings

900

15

915

915

7.99

7.51

$
10,844,719

$
332,196

$
11,176,915

$
11,222,182

3.46

2.67

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

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

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

~~bondholders.~~guaranteed. The maturity of ~~Residential mortgage investments~~Agency Securities is directly affected by prepayments of principal on the underlying mortgage loans. Consequently, actual maturities will be significantly shorter than the portfolio’s weighted average contractual maturity of 291 months.

~~Fixed-rate investments consist of residential mortgage loans and~~Capstead’s ARM Agency Securities ~~backed by residential mortgage loans with fixed rates of interest. ARMs~~ are ~~adjustable-rate Agency Securities~~ backed by residential mortgage loans that have coupon interest rates that adjust at least annually to more current interest rates or begin doing so after an initial fixed-rate period. After the initial fixed-rate period, if applicable, mortgage loans underlying ARM securities typically either (i) adjust annually based on specified margins over the one-year London interbank offered rate (“LIBOR”) or the one-year Constant Maturity U.S. Treasury Note Rate (“CMT”), (ii) adjust semiannually based on specified margins over six-month LIBOR or the six-month Secured Overnight Financing Rate (“SOFR”), or (iii) adjust monthly based on specified margins over indices such as one-month LIBOR, the Eleventh District Federal Reserve Bank Cost of Funds Index, or over a rolling twelve month average of the one-year CMT index, usually subject to periodic and lifetime limits, or caps, on the amount of such adjustments during any single interest rate adjustment period and over the contractual term of the underlying loans.

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

As of June 30, ~~2020,~~2021, the average months to roll for the Company’s ~~$3.26~~$2.94 billion (amortized cost basis) in current-reset ARM investments was approximately ~~six~~seven months while the average months to roll for the Company’s ~~$4.96~~$4.45 billion (amortized cost basis) in longer-to-reset ARM investments was approximately 5362 months.

The Company did not sell any securities during the quarter and six months ended June 30, 2021. In March 2020, the Company sold available-for-sale securities using the specific identification method for proceeds totaling $2.56 billion recognizing 0 gross realized gainsand gross realized losses totaling $67.8 million. Portfolio sales for proceeds totaling $18.4 million that settled during the second quarter of 2020 were entered into in March 2020 and all realized losses associated with these sales were recognized during the first quarter. In May 2019, the Company sold available-for-sale securities using the specific identification method for proceeds totaling $304.7 million recognizing gross realized gains of $405,000 and gross realized losses of $1.8 million.

Capstead pledges its Residential mortgage investments as collateral for secured borrowings primarily in the form of repurchase arrangements with commercial banks and other financial ~~institutions (collectively referred to as “counterparties” or “lending counterparties”).~~institutions. Repurchase arrangements entered into by the Company involve the sale and a simultaneous agreement to repurchase the transferred assets at a future date and are accounted for as financings. The Company maintains the beneficial interest in the specific securities pledged during the term of each repurchase arrangement and receives the related principal and interest payments.

The terms and conditions of secured borrowings are negotiated on a transaction-by-transaction basis when each such borrowing is initiated or renewed. The amount borrowed is generally equal to the fair value of the securities pledged, as determined by the lending counterparty, less an agreed-upon discount, referred to as a “haircut.” Interest rates are generally fixed based on prevailing rates corresponding to the terms of the borrowings. Interest may be paid monthly or at the termination of a borrowing at which time the
Company may enter into a new borrowing at prevailing haircuts and rates with the same lending counterparty or repay that counterparty and negotiate financing with a different lending counterparty. None of the Company’s lending counterparties are obligated to renew or otherwise enter into new borrowings at the conclusion of existing borrowings. In response to declines in fair value of pledged securities due to

changes in market conditions or the publishing of monthly security pay-down factors, lending counterparties typically require the Company to post additional securities as collateral, pay down borrowings or fund cash margin accounts with the counterparties in order to re-establish the agreed-upon collateral requirements. These actions are referred to as margin calls. Conversely, in response to increases in fair value of pledged securities, the Company routinely margin calls its lending counterparties in order to have previously pledged collateral returned.

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

Collateral Type	Agency Securities Pledged		Accrued Interest Receivable		Borrowings Outstanding		Average Borrowing Rates			Agency Securities Pledged		Accrued Interest Receivable		Borrowings Outstanding		Average Borrowing Rates
June 30, 2020
June 30, 2021
Borrowings under repurchase arrangements with maturities of 30 days or less	$	7,797,998	$	19,744	$	7,412,866		0.25	%	$	6,616,872	$	13,407	$	6,309,883		0.10	%
Borrowings under repurchase arrangements with maturities of 31 to 90 days		170,253		443		161,572		0.23			519,707		1,022		500,000		0.29
Similar borrowings secured by collateral for structured financings		856	–			856		7.97
	$	7,969,107	$	20,187	$	7,575,294		0.26		$	7,136,579	$	14,429	$	6,809,883		0.12

December 31, 2019
December 31, 2020
Borrowings under repurchase arrangements with maturities of 30 days or less	$	9,484,275	$	27,826	$	9,002,527		2.12	%	$	5,249,989	$	12,597	$	4,972,181		0.21	%
Borrowings under repurchase arrangements with maturities of 31 to 90 days		1,344,437		3,742		1,271,971		1.98			1,939,034		4,225		1,846,902		0.20
Similar borrowings secured by collateral for structured financings		915	–			915		7.99
Borrowings under repurchase arrangements with maturities of greater than 90 days											522,969		1,167		500,000		0.29
	$	10,829,627	$	31,568	$	10,275,413		2.10		$	7,711,992	$	17,989	$	7,319,083		0.21

Average secured borrowings outstanding were ~~$7.6~~$6.6 billion and ~~$10.2~~$7.4 billion during the quarters ended June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. Average secured borrowings outstanding during the indicated periods differed from respective ending balances ~~primarily~~ due to changes in portfolio levels and differences in the timing of portfolio acquisitions relative to portfolio runoff.

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

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

The Company discontinued hedge accounting in 2019 for its secured borrowings-related interest rate swaps and, for GAAP purposes, related changes in the fair value are recognized in the Company’s consolidated statements of operations beginning on the de-designation date. Also, for GAAP purposes, related unrealized gains and losses recorded in ~~Accumulated other comprehensive income~~ ~~through the de-designation date are being recognized as a component of interest expense in the Company’s Consolidated Statements of Operations over the remaining lives of these swaps.~~

During the quarter and six months ended June 30, ~~2020,~~2021, Capstead entered into swap agreements with notional amounts ~~of $400 million~~totaling $1.03 billion and ~~$3.20~~$1.28 billion, respectively, requiring fixed-rate interest payments averaging ~~0.02% and1.00%~~0.29%. ~~The Company terminated $5.2 billion notional amount of swaps requiring fixed-rate interest payments averaging 1.67% during the six months ended June 30, 2020, all during the first quarter. Also~~No swap agreements matured during the quarter and six months ended June 30, ~~2020, $200 million and $800 million notional amount of swaps requiring fixed-rate interest payments averaging 2.56% and 2.20% matured.~~2021. At June 30, ~~2020~~2021 the Company’s swap positions related to secured borrowings had the following characteristics (dollars in thousands):

Subsequent to June 30, 2020, the Company terminated all swaps scheduled to mature in the third and fourth quarters of 2020 and the fourth quarter of 2021 as well as $100 million notional amount scheduled to mature in the third quarter of 2021 totaling $1.4 billion notional amount of swaps requiring fixed-rate interest payments averaging 1.67%.

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

Interest rate swap agreements are measured at fair value on a recurring basis primarily using Level 2 Inputs in accordance with ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820). Fair value estimates for these Derivatives are calculated using the net discounted future fixed cash payments and the discounted future variable cash receipts which are based on expected future interest rates derived from observable market interest rate curves. ~~Eurodollar futures are measured at fair value using Level 1 inputs based on quoted exchange prices on these contracts.~~ The Company also incorporates both its own nonperformance risk and its counterparties’ nonperformance risk in determining fair value. In considering the effect of nonperformance risk, the Company considered the impact of netting and credit enhancements, such as collateral postings and guarantees, and has concluded that counterparty risk is not significant to the overall valuation.

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

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

	Balance Sheet	June 30			December 31			Balance Sheet	June 30			December 31
	Location	2020			2019			Location	2021			2020
Balance sheet-related
Swap agreements in a gain position (an asset) related to secured borrowings	(a)	$	–		$	733
Eurodollar futures contracts in a gain position	(a)	–				738
Swap agreements in a loss position (a liability) related to
unsecured borrowings	(a)		(49,575	)		(29,156	)	(a)	$	(33,335	)	$	(41,484	)
Related net interest payable	(b)		(559	)		(437	)	(b)		(603	)		(597	)
		$	(50,134	)	$	(28,122	)		$	(33,938	)	$	(42,081	)

	Location of Gain or (Loss) Recognized in	Quarter Ended June 30						Six Months Ended June 30						Location of Gain or (Loss) Recognized in	Quarter Ended June 30						Six Months Ended June 30
	Net Income		2020			2019			2020			2019		Net Income		2021			2020			2021			2020
Income statement-related
Components of Secured borrowings-related effects on interest expense:
Amount of gain reclassified from Accumulated other comprehensive income		$	–		$	–		$	–		$	7,891
Component of Secured borrowings-related effects on interest expense:
Amortization of unrealized gain, net of unrealized losses on de-designated Derivatives			(122	)		6,715			(19	)	$	9,735			$	(591	)	$	(122	)	$	(1,237	)	$	(19	)
	(a)		(122	)		6,715			(19	)		17,626		(a)		(591	)		(122	)		(1,237	)		(19	)
Component of Unsecured borrowings-related effects on interest expense:
Amount of loss reclassified from Accumulated other comprehensive income	(b)		(817	)		(364	)		(1,399	)		(704	)	(b)		(975	)		(816	)		(1,945	)		(1,399	)
(Increase) decrease in interest expense as a result of the use of Derivatives		$	(938	)	$	6,351		$	(1,418	)	$	16,922
Decrease in interest expense as a result of the use of Derivatives															$	(1,566	)	$	(938	)	$	(3,182	)	$	(1,418	)

Realized and unrealized loss on non-designated Derivatives (net) related to:
Realized and unrealized gain (loss) on non-designated Derivatives (net) related to:
Interest rate swap agreements		$	(6,664	)	$	(74,842	)	$	(159,888	)	$	(96,499	)		$	2,100		$	(6,664	)	$	4,482		$	(159,888	)
Eurodollar futures			(284	)	–				(2,799	)	–				–				(284	)	–				(2,799	)
	(c)	$	(6,948	)	$	(74,842	)	$	(162,687	)	$	(96,499	)	(c)	$	2,100		$	(6,948	)	$	4,482		$	(162,687	)

Other comprehensive income-related
Amount of loss recognized in Other comprehensive income		$	(567	)	$	(6,746	)	$	(21,818	)	$	(15,297	)
Amount of gain (loss) recognized in Other comprehensive (loss) income															$	(7,088	)	$	(567	)	$	6,204		$	(21,818	)

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

	Offsetting of Derivative Assets													Offsetting of Derivative Assets
			Gross			Net Amounts		Gross Amounts Not Offset								Gross			Net Amounts		Gross Amounts Not Offset
	Gross		Amounts			of Assets		in the Balance Sheet ^(b)						Gross		Amounts			of Assets		in the Balance Sheet ^(b)
	Amounts of		Offset in			Presented in				Cash				Amounts of		Offset in			Presented in				Cash
	Recognized		the Balance			the Balance		Financial		Collateral		Net		Recognized		the Balance			the Balance		Financial		Collateral		Net
	Assets ^(a)		Sheet ^(a)			Sheet		Instruments		Received		Amount		Assets ^(a)		Sheet ^(a)			Sheet		Instruments		Received		Amount
June 30, 2020
June 30, 2021
Counterparty 4	$	–	$	–		$	–	$	–	$	–	$	–	$	6,873	$	(6,873	)	$	0	$	0	$	0	$	0
December 31, 2019
December 31, 2020
Counterparty 4	$	6,517	$	(5,046	)	$	1,471	$	–	$	–	$	1,471	$	2,673	$	(2,673	)	$	0	$	0	$	0	$	0

	Offsetting of Financial Liabilities and Derivative Liabilities															Offsetting of Financial Liabilities and Derivative Liabilities
			Gross			Net Amounts		Gross Amounts Not Offset										Gross			Net Amounts		Gross Amounts Not Offset
	Gross		Amounts			of Liabilities		in the Balance Sheet ^(c)								Gross		Amounts			of Liabilities		in the Balance Sheet ^(c)
	Amounts of		Offset in			Presented in					Cash					Amounts of		Offset in			Presented in					Cash
	Recognized		the Balance			the Balance		Financial			Collateral			Net		Recognized		the Balance			the Balance		Financial			Collateral			Net
	Liabilities ^(a)		Sheet ^(a)			Sheet ^(b)		Instruments			Pledged			Amount		Liabilities ^(a)		Sheet ^(a)			Sheet ^(b)		Instruments			Pledged			Amount
June 30, 2020
June 30, 2021
Derivatives by counterparty:
Counterparty 1	$	50,134	$	–		$	50,134	$	–		$	(50,134	)	$	–	$	33,938	$	0		$	33,938	$	0		$	(33,938	)	$	0
Counterparty 4		72,609		(72,609	)	–		–			–			–			88		(88	)	0		0			0			0
		122,743		(72,609	)		50,134	–				(50,134	)	–			34,026		(88	)		33,938	0				(33,938	)	0
Borrowings under repurchase arrangements ^(d)		7,575,101	–				7,575,101		(7,575,101	)	–			–			6,810,348	0				6,810,348		(6,810,348	)	0			0
	$	7,697,844	$	(72,609	)	$	7,625,235	$	(7,575,101	)	$	(50,134	)	$	–	$	6,844,374	$	(88	)	$	6,844,286	$	(6,810,348	)	$	(33,938	)	$	0
December 31, 2019
December 31, 2020
Derivatives by counterparty:
Counterparty 1	$	29,593	$	–		$	29,593	$	–		$	(29,593	)	$	–	$	42,082	$	0		$	42,082	$	0		$	(42,082	)	$	0
Counterparty 4		21,601		(21,601	)		–		–		–			–			257		(257	)		0		0		0			0
		51,194		(21,601	)		29,593		–			(29,593	)	–			42,339		(257	)		42,082		0			(42,082	)	0
Borrowings under repurchase arrangements ^(d)		10,286,011	–				10,286,011		(10,286,011	)	–			–			7,320,090	0				7,320,090		(7,320,090	)	0			0
	$	10,337,205	$	(21,601	)	$	10,315,604	$	(10,286,011	)	$	(29,593	)	$	–	$	7,362,429	$	(257	)	$	7,362,172	$	(7,320,090	)	$	(42,082	)	$	0

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

rate swaps totaled ~~$5.6~~$4.8 million at June 30, ~~2020.~~ 2021. Changes in Accumulated other comprehensive income by component for the quarter and six months ended June 30, ~~2020~~2021 were as follows (in thousands):

Unrealized
Gains and Losses
on Cash Flow
Hedges

Unrealized Gains
and Losses on
Available-for-Sale
Securities

Total

Balance at March 31, 2020

$
(52,639
)

$
46,361

$
(6,278
)
Activity for the quarter ended June 30, 2020:

Other comprehensive loss (income) before
   reclassifications

(567
)

64,659

64,092

Amounts reclassified from accumulated
   other comprehensive income

938

—

938

Other comprehensive income

371

64,659

65,030

Balance at June 30, 2020

$
(52,268
)

$
111,020

$
58,752

Balance at December 31, 2019

$
(31,868
)

$
45,267

$
13,399

Activity for the six months ended June 30, 2020:

Other comprehensive loss before
   reclassifications

(21,818
)

(1,111
)

(22,929
)
Amounts reclassified from accumulated other
   comprehensive income

1,418

66,864

68,282

Other comprehensive (loss) income

(20,400
)

65,753

45,353

Balance at June 30, 2020

$
(52,268
)

$
111,020

$
58,752

	Unrealized Gains and Losses on Cash Flow Hedges			Unrealized Gains and Losses on Available-for-Sale Securities			Total
Balance at March 31, 2021	$	(28,759	)	$	63,068		$	34,309
Activity for the quarter ended June 30, 2021:
Other comprehensive loss before reclassifications		(7,088	)		(21,881	)		(28,969	)
Amounts reclassified from accumulated other comprehensive income		1,566		0				1,566
Other comprehensive loss		(5,522	)		(21,881	)		(27,403	)
Balance at June 30, 2021	$	(34,281	)	$	41,187		$	6,906

Balance at December 31, 2020	$	(43,667	)	$	84,551		$	40,884
Activity for the six months ended June 30, 2021:
Other comprehensive income (loss) before reclassifications		6,204			(43,364	)		(37,160	)
Amounts reclassified from accumulated other comprehensive income		3,182		0				3,182
Other comprehensive income (loss)		9,386			(43,364	)		(33,978	)
Balance at June 30, 2021	$	(34,281	)	$	41,187		$	6,906

Unsecured borrowings consist of 30-year junior subordinated notes issued in 2005 and 2006 and maturing in 2035 and 2036, for a total face amount of $100 million. ~~Note balances~~ The notes are currently redeemable, in whole or in part, without penalty, at the Company’s option. Balances net of deferred issuance costs, and related weighted average interest rates as of the indicated dates (calculated including issuance cost amortization and adjusted for effects of related Derivatives held as cash flow hedges) were as follows (dollars in thousands):

	June 30, 2020					December 31, 2019					June 30, 2021					December 31, 2020
	Borrowings Outstanding		Average Rate			Borrowings Outstanding		Average Rate			Borrowings Outstanding		Average Rate			Borrowings Outstanding		Average Rate
Junior subordinated notes maturing in:
October 2035 ($35,000 face amount)	$	34,412		7.87	%	$	34,392		7.88	%	$	34,450		7.86	%	$	34,431		7.87	%
December 2035 ($40,000 face amount)		39,416		7.64			39,397		7.64			39,455		7.63			39,435		7.64
September 2036 ($25,000 face amount)		24,615		7.68			24,603		7.68			24,639		7.67			24,627		7.68
	$	98,443		7.73		$	98,392		7.73		$	98,544		7.72		$	98,493		7.73

InFebruary 2020, the Company issued 1.6 million shares of common stock through an at-the-market continuous offering program at an average price of $8.21, net of fees and other costs, for net proceeds of $12.9 million. Additional amounts of equity capital may be raised in the future under continuous offering programs or by other means, subject to market conditions, compliance with federal securities laws and blackout periods.

The fair value of Capstead’s financial assets and liabilities are influenced by changes in, and market expectations for changes in, interest rates and market liquidity conditions, as well as other factors beyond the control of management. ~~With the exception of the fair value of Eurodollar futures, all~~All fair values were determined using Level 2 Inputs in accordance with ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820). ~~Eurodollar futures are derivative contracts for which Level 1 inputs are used to determine fair value.~~

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

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

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

	Amortized		Gross Unrealized						Amortized		Gross Unrealized
	Cost Basis		Gains		Losses		Fair Value		Cost Basis		Gains		Losses		Fair Value
June 30, 2020
June 30, 2021
Agency Securities classified as available-for-sale:
Fannie Mae/Freddie Mac	$	7,423,367	$	110,895	$	15,154	$	7,519,108	$	6,926,100	$	57,710	$	21,886	$	6,961,924
Ginnie Mae		792,060		15,994		715		807,339		462,505		6,009		646		467,868
Residential mortgage securities classified as held-to-maturity		922		2	–			924

December 31, 2019
December 31, 2020
Agency Securities classified as available-for-sale:
Fannie Mae/Freddie Mac		8,890,949		64,593		23,753		8,931,789		7,235,571		87,158		12,640		7,310,089
Ginnie Mae		2,284,331		11,560		7,133		2,288,758		617,430		10,541		508		627,463
Residential mortgage securities classified as held-to-maturity		998		2	–			1,000

	June 30, 2020				December 31, 2019				June 30, 2021				December 31, 2020
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Securities in an unrealized loss position of one year or greater:
Fannie Mae/Freddie Mac	$	907,036	$	11,184	$	2,030,192	$	17,069	$	266,867	$	3,478	$	690,227	$	9,533
Ginnie Mae		29,979		390		560,022		5,775		36,923		373		27,462		285
Securities in an unrealized loss position less than one year:
Fannie Mae/Freddie Mac		686,594		3,970		1,473,144		6,684		2,529,952		18,408		583,870		3,107
Ginnie Mae		37,793		325		416,888		1,358		55,522		273		41,527		223
	$	1,661,402	$	15,869	$	4,480,246	$	30,886	$	2,889,264	$	22,532	$	1,343,086	$	13,148

From a credit risk perspective, federal government support for Fannie Mae and Freddie Mac helps ensure that fluctuations in value are due to interest rate changes and are not due to credit risk associated with these securities. The unrealized losses on the Company’s investment in ARM Agency Securities were caused by interest rate changes, and the contractual cash flows of those investments are guaranteed by an agency of the U.S. government. The Company does not intend to sell the investments as of June 30, ~~2020~~2021 and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases.

All equity-based awards and other long-term incentive awards are made pursuant to the Company’s Amended and Restated 2014 Flexible Incentive Plan that was approved by stockholders in May 2014. At June 30, ~~2020,~~2021, this plan had ~~2,540,097~~1,878,295 shares of common stock remaining available for future issuances.

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

RSU activity and related information for the six months ended June 30, ~~2020~~2021 is summarized below:

				Weighted					Weighted
				Average					Average
	Number of			Grant Date		Number of			Grant Date
	Shares			Fair Value		Shares			Fair Value
Unvested RSU awards outstanding at December 31, 2019		538,945		$	8.50
Unvested RSU awards outstanding at December 31, 2020							581,365		$	7.83
Grants		191,314			8.03		267,573			5.86
Forfeitures		(148,894	)		10.52		(111,897	)		8.71
Unvested RSU awards outstanding at June 30, 2020		581,365			7.83
Vestings							(71,240	)		8.71
Unvested RSU awards outstanding at June 30, 2021							665,801			6.80

During the quarter and six months ended June 30, ~~2020,~~2021, the Company recognized in Compensation-related expense ~~$368,000~~$19,000 and ~~$638,000,~~$157,000, respectively, related to ~~this program.~~RSU awards. Unrecognized estimated compensation expense for these awards totaled $1.9 million at June 30, ~~2020,~~2021, to be expensed over a weighted average period of 1.5 years (assumes estimated attainment levels for the related performance metrics will be met).

Dividends accrue from the date of grant and will be paid in cash to the extent the units convert into shares of common stock following completion of the related performance periods. If these shares do not vest, the related dividends will be forfeited. Included in Common stock dividends payable at June 30, ~~2020~~2021 are estimated dividends payable pertaining to these awards of ~~$284,000.~~$325,000.

Restricted stock award activity for the six months ended June 30, ~~2020~~2021 is summarized below:

				Weighted					Weighted
				Average					Average
	Number of			Grant Date		Number of			Grant Date
	Shares			Fair Value		Shares			Fair Value
Unvested stock awards outstanding at December 31, 2019		615,045		$	8.14
Unvested stock awards outstanding at December 31, 2020							768,041		$	7.42
Grants		236,708			7.86		335,654			5.67
Forfeitures							(21,145	)		6.76
Vestings		(112,306	)		10.41		(259,770	)		7.77
Unvested stock awards outstanding at June 30, 2020		739,447			7.71
Unvested stock awards outstanding at June 30, 2021							822,780			6.61

During the quarter and six months ended June 30, ~~2020,~~2021, the Company recognized in Compensation-related expense $~~433,000~~455,000 and $866,000, respectively, related to amortization of the grant date fair value of employee stock awards. In addition, during the quarter and six months ended June 30, ~~2020,~~2021, the Company recognized in Other general and administrative expense ~~$131,000~~$105,000 and $263,000, respectively, related to amortization of the grant date fair value of director stock awards. Unrecognized compensation expense for unvested stock awards for employees and directors totaled $2.8 million as of June 30, ~~2020,~~2021, to be expensed over a weighted average period of 1.4 years.

Service-based stock awards issued to non-executive employees and to directors receive dividends on a current basis without risk of forfeiture if the related awards do not vest. Stock awards issued to executives defer the payment of dividends accruing between the grant dates and the end of related service periods. If these awards do not vest, the related accrued dividends will be forfeited. Included in Common stock dividend payable at June 30, ~~2020~~2021 are estimated dividends payable pertaining to these awards totaling ~~$376,000.~~$536,000.

On July 25, 2021, the Company, Benefit Street Partners Realty Trust, Inc., a Maryland corporation (“BSPRT”), Rodeo Sub I, LLC, a Maryland limited liability company and a wholly-owned subsidiary of BSPRT (“Merger Sub”), and Benefit Street Partners L.L.C., a Delaware limited liability company (“Parent Manager”), entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”). Under the terms and subject to the conditions set forth in the Merger Agreement, the Company will merge with and into Merger Sub, with Merger Sub remaining as a wholly-owned subsidiary of BSPRT (such transaction, the “Merger”). The Merger is expected to be completed in the fourth quarter of 2021.

Under the terms of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each issued and outstanding share of the Company’s common stock will be converted into the right to receive: from BSPRT, (A) a number of shares of BSPRT’s common stock, $0.01 par value per share (which will be renamed Class A common stock) (“BSPRT Common Stock”) equal to the quotient (rounded to the nearest one ten-thousandth) determined by dividing (i) the Company’s adjusted book value per share by (ii) BSPRT’s adjusted book value per share (the “Per Share Stock Consideration”), and (B) a cash amount equal to the product of (rounding to the nearest cent) (x) the Company’s adjusted book value per share multiplied by 15.75%, multiplied by (y) 22.5%, without any interest thereon (the “Per Share Cash Consideration” and together with the Per Share Stock Consideration, the “Per Common Share BSPRT Consideration”); and from the Parent Manager, a cash amount equal to the product of (rounding to the nearest cent) (A) the Company’s adjusted book value per share multiplied by 15.75%, multiplied by (B) 77.5%, without any interest thereon (together with the Per Common Share BSPRT Consideration, the “Total Per Common Share Consideration”).

In addition, each outstanding share of the Company’s 7.50% Series E Cumulative Redeemable Preferred Stock, $0.10 par value per share, will be converted into the right to receive 1 newly-issued 7.50% Series E Cumulative Redeemable Preferred Share, $0.01 par value per share, of BSPRT (the “BSPRT Series E Preferred Stock”). Cash will be paid in lieu of any fractional shares of BSPRT Common Stock that would otherwise have been received as a result of the Merger. Adjusted book value per share equals the respective company’s total consolidated common stockholders’ equity as of the last day of the month immediately preceding the month in which the closing conditions to the Merger are reasonably expected to be satisfied (other than those conditions that by their nature are to be satisfied at the closing), less, in the case of BSPRT, the aggregate Per Share Cash Consideration, divided by each respective company’s common stock issued and outstanding (excluding, in the case of the Company, any cancelled shares), plus, in the case of the Company, any shares of its common stock issuable upon the conversion of outstanding performance units immediately prior to the Effective Time, after giving pro forma effect to any additional dividends or other distributions on shares of the respective company’s common stock that are declared or are anticipated to be declared for which the record date is or will be prior to the Effective Time.

Under the Merger Agreement, each of the Company and BSPRT will pay a special dividend to their respective stockholders in cash on the last business day prior to the closing of the Merger, with a record date that is three business days before the payment date. Any dividends paid by the Company with respect to the Company’s common stock prior to the closing of the Merger will not exceed the Company’s core earnings for the quarter (or portion thereof) in which such dividend is declared, plus an additional amount, if any, necessary so that the aggregate dividend payable is equal to the minimum amount to avoid adverse tax consequences.

The obligation of each party to consummate the Merger is subject to a number of conditions, including, among others, (a) the approval of the Merger and the other transactions contemplated by the Merger Agreement by the affirmative vote of the holders of at least a majority of the outstanding shares of the Company’s common stock entitled to vote on the Merger (the “the Company Stockholder Approval”), (b) the registration and listing on the New York Stock Exchange of the shares of BSPRT Common Stock and BSPRT Series E Preferred Stock that will be issued in connection with the Merger, (c) the respective representations and warranties of the parties being true and correct, subject to the materiality standards contained in the Merger Agreement, (d) each party’s compliance in all material respects with their respective covenants and agreements set forth in the Merger Agreement, (e) the absence of a material adverse effect with respect to either the Company or BSPRT, (f) provision by each party’s counsel of a tax opinion that the other party has been organized and operated in conformity with the requirements for qualification and taxation as a REIT, (g) BSPRT has completed a reverse stock split and reclassification of its stock pursuant to the terms of the Merger Agreement, (h) BSPRT taking such actions as necessary to adopt a share repurchase program and (i) the delivery of certain documents and certificates. The obligations of the parties to consummate the Merger are not subject to any financing condition or the receipt of any financing by BSPRT or the Parent Manager.

Capstead operates as a self-managed REIT earning income from investing in a leveraged portfolio of residential mortgage pass-through securities primarily consisting ~~almost exclusively~~ of relatively short-duration ARM Agency Securities, which reset to more current interest rates within a relatively short period of time and are considered to have limited, if any, credit risk. ~~See NOTE 1 to the consolidated financial statements (included under Item 1 of this report) for defined terms used in this discussion and analysis.~~ By investing in ~~short-duration~~ ARM Agency Securities, the Company is positioned to benefit from future recoveries in financing spreads that typically contract during periods of rising interest rates and to experience smaller fluctuations in portfolio values compared to leveraged portfolios containing a significant amount of ~~longer-duration~~ fixed-rate mortgage securities. ~~Duration is a common measure of market price sensitivity to interest rate movements. A shorter duration generally indicates less interest rate risk.~~

Capstead reported for GAAP purposes net income of ~~$23~~$16 million and ~~a net loss of $182~~$34 million representing ~~$0.19~~$0.11 and ~~$(2.01)~~$0.26 per diluted common share for the quarter and six months ended June 30, ~~2020,~~2021, respectively. The Company reported core earnings of ~~$22~~$14 million and ~~$42~~$31 million ~~respectively,~~ or ~~$0.18~~$0.09 and ~~$0.34~~$0.22 per diluted common share for the quarter and six months ended June 30, ~~2020.~~2021, respectively. See “Reconciliation of GAAP and non-GAAP Financial Measures” for more information on core earnings. ~~The GAAP loss for~~

For the six months ended June 30, 2020 includes $163 million in losses on hedging-related derivatives due primarily to declining interest rates and $68 million in losses on the sale of $2.60 billion (basis) in ARM securities late in the first quarter. These sales, together with not replacing portfolio runoff in March and April helped ensure the Company had sufficient flexibility to meet future projected liquidity requirements while maintaining portfolio leverage at comfortable levels given disruptions experienced in the fixed income markets brought on by the novel coronavirus (“COVID-19”) pandemic. ~~The Company resumed replacing runoff in late April.~~ 2021, GAAP and core earnings benefited from lower rates on secured borrowings ~~rates~~ primarily due to ~~a total~~the continued impact of 150 basis points in reductions in the Fed Funds rate in March 2020 and favorable terms on new interest rate swap agreements entered into ~~during the first six months of the year.~~since then. These benefits were more than offset by lower portfolio yields due to lower coupon interest rates on loans underlying the Company’s ARM Agency Securities ~~as well as changes in lifetime~~and higher investment premium amortization primarily due to higher mortgage prepayment ~~estimates.~~

levels. Core earnings were also negatively impacted by lower average portfolio balances during the first half of 2021. The Company expects mortgage prepayment rates to remain elevated through the summer selling season before receding during the fourth quarter of 2021.

Capstead finances its residential mortgage investments by leveraging its long-term investment capital with secured borrowings consisting ~~primarily~~ of borrowings under repurchase arrangements with commercial banks and other financial institutions. Long-term investment capital declined ~~$161~~$37 million during the first half of ~~2020~~2021 to ~~$1.01 billion~~$972 million at June 30, ~~2020,~~2021, consisting of ~~$662~~$622 million of common and $251 million of preferred stockholders’ equity (recorded amounts), together with ~~$98~~$99 million of unsecured borrowings maturing in 2035 and 2036.

Capstead’s residential mortgage portfolio decreased ~~$2.89 billion~~$508 million during the first half of ~~2020~~2021 to ~~$8.33~~$7.43 billion at June 30, ~~2020.~~2021. Secured borrowings decreased ~~$2.7 billion~~$509 million to ~~$7.58~~$6.81 billion as a result of lower portfolio balances. Portfolio leverage (secured borrowings divided by long-term investment capital) decreased to ~~7.49~~7.01 to one at June 30, ~~2020~~2021 from ~~8.77~~7.26 to one at December 31, ~~2019. Management continuously evaluates~~2020. In response to pricing and ARM supply pressures in the latter half of 2020 into the second quarter of 2021, the Company reduced portfolio leverage ~~levels in light~~by only replacing a portion of ~~changes in market conditions.~~portfolio runoff.

The near-total shutdown of the U.S. economy ~~beginning~~ in March 2020 due to the COVID-19 pandemic ~~heightened fears of extremely high credit default levels~~ and ~~recession, leading to de-risking occurring at all levels~~resulting destabilization of the fixed income ~~markets. Credit asset pricing came under severe pressure destabilizing fixed income~~ markets and leading to lender margin calls, feeding additional selling as levered and even unlevered investors across the spectrum were forced to sell their most liquid positions to raise cash to meet additional margin calls and/or fund redemptions. Investors were already coming under stress due to declining Treasury rates which led to widespread portfolio liquidations and losses ~~on derivatives held~~ for ~~hedging purposes and variation (valuation-based) margin calls. As~~ the crisis deepened this additional drain on liquidity became more pronounced and included increased initial (base haircut) margin requirements due to heightened market volatility. The result at the end of March was sharply falling asset prices even as market interest rates declined.mortgage REIT industry. During this period of extreme volatility, ~~Capstead~~the Company sold a portion of its portfolio late in March 2020 and reduced its swap positions in order to ensure it had sufficient flexibility to meet future projected liquidity requirements while maintaining portfolio leverage at comfortable levels. During the crisis, the Company met all of its funding ~~requirements and maintained sufficient flexibility to meet its liquidity~~ requirements.

Intervention by the Federal Reserve beginning in March 2020 in the form of the buying of fixed-rate Agency Securities ~~since late March~~ helped stabilize this key market sector leading to improved pricing levels for fixed-rate Agency ~~Securities through the second quarter.~~Securities. While the Federal Reserve has not purchased ARM Agency Securities specifically, these actions ~~also~~ contributed ~~to a more stable operating environment for Capstead, leading~~ to improved pricing levels for ~~ARM Agency Securities.~~mortgage assets in general and stabilized the operating environment for market participants including Capstead.

The Company’s potential liquidity at June 30, ~~2020~~2021 was ~~$500~~$510 million and it believes it has ample access to necessary financing through its existing lending counterparties to meet its liquidity needs. See “Utilization of Long-term Investment Capital and Potential Liquidity” for further discussion.

The Company continues to operate portions of its business continuity plan in response to the pandemic and has not experienced any operational disruption due to its small number of employees who are all able to work remotely. Management will continue to closely monitor the situation and adapt its response as necessary to ~~ensure there are no~~avoid any operational disruptions.

During February 2020, Capstead issued 1.6 million shares of common stock through an at-the-market continuous offering program at an average issue price of $8.21, net of fees and other costs, for net proceeds of $12.9 million. Additional amounts of equity capital may be raised in the future under continuous offering programs or by other means, subject to market conditions, compliance with federal securities laws and blackout periods.

Book value per share (total stockholders’ equity, less liquidation preferences for outstanding shares of preferred stock, divided by outstanding shares of common stock) as of June 30, ~~2020~~2021 was ~~$6.79~~$6.35 per share, ~~an increase~~a decrease of ~~$0.72~~$0.31 per share or ~~11.8%~~4.8% from March 31, ~~2020~~2021 book value of ~~$6.07~~$6.66 per share, primarily reflecting ~~$0.67 per share~~$0.23 in portfolio-related ~~increases in value. Book value declined $1.83 from December 31, 2019 of $8.62 primarily due to derivative-related~~ declines in ~~value.~~value, $0.04 in dividends distributed in excess of GAAP net income and $0.04 in derivative-related decreases.

All ~~but $1 million~~ of Capstead’s residential mortgage investments portfolio and all of its derivatives are recorded at fair value on the Company’s balance sheet and are therefore included in the calculation of book value per common share. None of the Company’s borrowings are recorded at fair value. See NOTE 98 to the consolidated financial statements (included under Item 1 of this report) for additional disclosures regarding fair values of financial instruments held or issued by the Company.

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

The following table illustrates Capstead’s portfolio of residential mortgage investments for the quarter and six months ended June 30, ~~2020~~2021 (dollars in thousands):

Capstead’s investment strategy focuses on managing a portfolio of residential mortgage investments primarily consisting ~~almost exclusively~~ of ARM Agency Securities. Agency Securities are considered to have limited, if any, credit risk because the timely payment of principal and interest is guaranteed by Fannie Mae and Freddie Mac, which are ~~federally chartered corporations,~~government-sponsored enterprises, or Ginnie Mae, which is an agency of the federal government. Federal government support for Fannie Mae and Freddie Mac has largely alleviated market concerns regarding the ability of Fannie Mae and Freddie Mac to fulfill their guarantee obligations.

By focusing on investing in ~~short-duration~~ ARM Agency Securities, changes in fair value caused by changes in interest rates are typically relatively modest compared to changes in fair value of longer-duration ~~ARM or~~ fixed-rate assets. Declines in fair value caused by increases in interest rates are generally recoverable in a relatively short period of time as coupon interest rates on the underlying mortgage loans reset to rates more reflective of the then-current interest rate environment. This investment strategy positions the Company to benefit from potential recoveries in financing ~~spreads.~~spreads that typically contract during periods of rising interest rates.

Capstead classifies its ARM securities based on the average length of time until the loans underlying each security reset to more current rates (“months-to-roll”) (less than 18 months for “current-reset” ARM securities, and 18 months or greater for “longer-to-reset” ARM securities). The Company’s ARM holdings featured the following characteristics at June 30, ~~2020~~2021 (dollars in thousands):

ARM Type		Amortized Cost Basis ^(a)	Net WAC ^(b)		Fully Indexed WAC ^(b)		Average Net Margins ^(b)		Average Periodic Caps ^(b)		Average Lifetime Caps ^(b)		Months To Roll		Amortized Cost Basis ^(a)	Net WAC ^(b)		Fully Indexed WAC ^(b)		Average Net Margins ^(b)		Average Periodic Caps ^(b)		Average Lifetime Caps ^(b)		Months To Roll
Current-reset ARMs:
Fannie Mae Agency Securities	$	2,333,856	3.21	%	2.21	%	1.65	%	2.80	%	6.18	%	5.9	$	2,045,314	2.19	%	1.87	%	1.64	%	2.90	%	6.99	%	6.6
Freddie Mac Agency Securities		756,755	3.26		2.24		1.76		2.28		5.51		7.5		744,207	2.37		1.96		1.73		2.09		6.18		8.3
Ginnie Mae Agency Securities		164,807	3.32		1.69		1.52		1.12		5.53		4.9		153,647	2.38		1.59		1.51		1.09		6.08		5.2
Residential mortgage loans		436	4.17		4.69		2.09		1.76		11.25		6.1
(40% of total)		3,255,854	3.23		2.19		1.67		2.59		5.99		6.2		2,943,168	2.24		1.88		1.66		2.60		6.74		7.0
Longer-to-reset ARMs:
Fannie Mae Agency Securities		2,769,701	3.05		2.14		1.60		4.09		5.02		52.0		2,031,208	2.68		2.36		1.67		4.43		5.04		62.7
Freddie Mac Agency Securities		1,563,055	3.00		2.21		1.66		4.21		5.03		60.0		2,105,371	2.42		2.58		1.75		4.45		5.02		65.4
Ginnie Mae Agency Securities		627,253	3.68		1.66		1.50		1.00		5.00		43.9		308,858	3.59		1.57		1.50		1.00		5.00		32.5
(60% of total)		4,960,009	3.12		2.10		1.61		3.74		5.02		53.5		4,445,437	2.62		2.41		1.69		4.20		5.03		61.9
	$	8,215,863	3.16		2.14		1.63		3.29		5.40		34.8	$	7,388,605	2.47		2.20		1.68		3.56		5.71		40.1
Gross WAC (rate paid by borrowers)^(c)			3.79													3.11

~~Approximately 24%~~ARM securities held by Capstead are backed by mortgage loans that have coupon interest rates that adjust at least annually to more current interest rates or begin doing so after an initial fixed-rate period. These coupon interest rate adjustments are usually subject to periodic and lifetime limits, or caps, on the amount of such adjustments during any single interest rate adjustment period and over the contractual term of the underlying loans. After the initial fixed-rate period, if applicable, the coupon interest rates of mortgage loans underlying the Company’s ARM securities typically adjust either (a) annually based on specified margins over the one-year London interbank offered rate (“LIBOR”) or the one-year Constant Maturity U.S. Treasury Note Rate (“CMT”), (b) semiannually based on specified margins over six-month LIBOR or the six-month Secured Overnight Financing Rate (“SOFR”), or ~~$763 million~~(c) monthly based on specified margins over indices such as one-month LIBOR, the Eleventh District Federal Reserve Bank Cost of Funds Index, or over a rolling twelve month average of the one-year CMT index. Fannie Mae and Freddie Mac began accepting ARM loans based on SOFR in August 2020 and stopped accepting LIBOR-based ARM loans after December 2020 due to the scheduled discontinuation of LIBOR in December 2021. The Company expects to continue investing in Agency ARM Securities backed by a variety of indices including SOFR-based ARM securities.

Approximately 14% of the Company’s current-reset ARM securities are scheduled to reset in rate within three months, 44% are scheduled to reset in rate between four and six months, 27% are scheduled to reset in rate between seven and 12 months, and 15% are scheduled to reset in rate between 13 and 18 months. The Company’s current-reset ARM securities include $572 million (approximately 20% of the total current-reset ARM securities, with average net WACs of ~~2.70%~~2.78% and fully-indexed WACs of ~~2.16%~~1.89%) that will reset in rate for the first time in less than 18 months based on indices in effect at June 30, ~~2020.~~2021. After consideration of any applicable initial fixed-rate periods, at June 30, ~~2020~~2021 approximately ~~90%~~81%, 5%14% and 3% of the Company’s ARM securities were backed by mortgage loans that reset annually, semi-annually and monthly, respectively, while approximately 2% reset every five years. Approximately 3%2% of the Company’s ARM securities were backed by interest-only loans, with remaining interest-only payment periods averaging 1410 months at June 30, ~~2020.~~2021. All percentages are based on averages of the characteristics of mortgage loans underlying each security and calculated using unpaid principal balances as of the indicated date.

Capstead ~~has traditionally financed~~finances its residential mortgage investments by leveraging its long-term investment capital with secured borrowings consisting ~~primarily~~ of borrowings under repurchase arrangements with commercial banks and other financial institutions that involve the sale and a simultaneous agreement to repurchase the transferred assets at a future date and are accounted for as financings. The Company maintains the beneficial interest in the specific securities pledged during the term of each repurchase arrangement and receives the related principal and interest payments.

The terms and conditions of secured borrowings are negotiated on a transaction-by-transaction basis when each such borrowing is initiated or renewed. None of the Company’s counterparties are obligated to renew or otherwise enter into new borrowings at the conclusion of existing borrowings. Collateral requirements in excess of amounts borrowed (referred to as “haircuts”) averaged ~~4.50 percent~~4.3% of the fair value of pledged residential mortgage pass-through securities at June 30, ~~2020,~~2021, relatively consistent with prior year. After considering haircuts and related interest receivable on the collateral, as well as interest payable on these borrowings, the Company had ~~$413~~$341 million of capital at risk with its lending counterparties at June 30, ~~2020.~~2021. The Company did not have capital at risk with any single counterparty exceeding 6%5% of total stockholders’ equity at June 30, ~~2020.~~2021.

Secured borrowing rates are ~~generally~~ fixed based on prevailing rates corresponding to the terms of the borrowings. Interest may be paid monthly or at the termination of a borrowing at which time the Company may enter into a new borrowing at prevailing haircuts and rates with the same counterparty or repay that counterparty and negotiate financing with a different counterparty. When the fair value of pledged securities declines due to changes in market conditions or the publishing of monthly security pay-down factors, lenders typically require the Company to post additional securities as collateral, pay down borrowings or fund cash margin accounts with the counterparties in order to re-establish the agreed-upon collateral requirements, referred to as margin calls. Conversely, if collateral fair values increase, lenders are required to release collateral back to the Company pursuant to Company-issued margin calls.

As of June 30, ~~2020,~~2021, the Company’s secured borrowings totaled ~~$7.58~~$6.81 billion with 19 counterparties at average rates of ~~0.25%~~0.12%, before the effects of currently-paying interest rate swap agreements. The Company typically uses interest rate swap agreements with terms between 18 and 36 months and variable rate receipts based on ~~three-month LIBOR~~SOFR or Fed Funds to help mitigate exposure to rising short-term interest rates. During the first half of ~~2020,~~2021, the Company ~~decreased~~increased its swap positions by ~~$2.80~~$1.28 billion notional amount. At quarter-end the Company held ~~$4.60~~$4.25 billion notional amount of these derivatives at fixed rates averaging ~~1.27%~~0.11% with contract expirations occurring at various dates through the second quarter of ~~2022~~2024 and a weighted average expiration of 1521 months.

Including the effects of these derivatives, the Company’s residential mortgage investments and secured borrowings had estimated durations at June 30, ~~2020~~2021 of 1414¾ months and ~~nine~~12¾ months, respectively, for a net duration gap of approximately ~~five~~two months – see “Interest Rate Risk” for further information about the Company’s sensitivity to changes in market interest rates. The Company intends to continue to manage interest rate risk associated with holding and financing its residential mortgage investments by utilizing suitable ~~derivatives~~derivative financial instruments such as interest rate swap agreements, Eurodollar futures and longer-maturity secured borrowings, if available at attractive rates and terms.

Capstead’s investment strategy involves managing an appropriately leveraged portfolio of ARM Agency Securities that management believes can produce attractive risk-adjusted returns over the long term, while reducing, but not eliminating, sensitivity to changes in interest rates. The potential liquidity inherent in the Company’s unencumbered residential mortgage investments is as important as the actual level of cash and cash equivalents carried on the balance sheet because secured borrowings generally can be increased or decreased on a daily basis to meet cash flow requirements and otherwise manage capital resources efficiently. Potential liquidity is affected by, among other factors:

Capstead’s utilization of its long-term investment capital and its estimated potential liquidity were as follows as of June 30, ~~2020~~2021 in comparison with December 31, ~~2019~~2020 (dollars in thousands):

	Investments ^(a)		Secured Borrowings		Capital Employed		Potential Liquidity ^(b)		Portfolio Leverage	Investments ^(a)		Secured Borrowings		Capital Employed		Potential Liquidity ^(b)		Portfolio Leverage
Residential mortgage investments	$	8,327,900	$	7,575,294	$	752,606	$	377,575		$	7,429,792	$	6,809,883	$	619,909	$	302,567
Cash collateral receivable from derivative counterparties, net ^(c)						54,043	–								44,826	–
Other assets, net of other liabilities						204,683		121,991							306,822		207,392
Balances as of June 30, 2020:	$	8,327,900	$	7,575,294	$	1,011,332	$	499,566	7.49:1
Balances as of June 30, 2021:										$	7,429,792	$	6,809,883	$	971,557	$	509,959	7.01:1

Balances as of December 31, 2019	$	11,222,182	$	10,275,413	$	1,172,125	$	537,134	8.77:1
Balances as of December 31, 2020										$	7,937,552	$	7,319,083	$	1,008,656	$	524,037	7.26:1

In order to efficiently manage its liquidity and capital resources, Capstead attempts to maintain sufficient liquidity reserves to fund borrowing and derivative margin calls under stressed market conditions, including margin calls resulting from monthly principal payments (remitted to the Company 20 to 45 days after any given month-end), as well as reasonably possible declines in the market value of pledged assets and derivative positions. Should market conditions deteriorate, management may reduce portfolio leverage and increase liquidity by raising new equity capital, selling mortgage securities and/or curtailing

the replacement of portfolio runoff. Additionally, the Company routinely does business with a large number of lending counterparties, which bolsters financial flexibility to address challenging market conditions and limits exposure to any individual counterparty.

The Company’s leverage ratio of 7.49:1 at June 30, 2020 is the result of improved valuations of its existing portfolio, coupled with not fully replacing second quarter portfolio runoff. In light of the volatility experienced in the first quarter, the Company began reinvesting portfolio runoff in late April at attractive levels, replacing all of May and June runoff. The Company expects in the near-term for leverage to remain at or near these levels given current market conditions. Future levels of portfolio leverage will be dependent

~~on many factors, including the size and composition of the Company’s investment portfolio (see “Liquidity and Capital Resources”).~~

Management believes the presentation of core earnings and core earnings per common share, both non-GAAP financial measures, when analyzed in conjunction with the Company’s GAAP operating results, allows investors to more effectively evaluate the Company’s performance and provide investors management’s view of the Company’s economic performance. The Company defines core earnings as GAAP net income (loss) excluding (a) unrealized (gain) loss on derivative instruments, (b) realized loss (gain) on termination of derivative instruments, (c) amortization of unrealized (gain) loss of derivative instruments held at the time of de-designation, and (d) realized loss (gain) on securities. The Company’s presentation of core earnings may not be comparable to similarly-titled measures of other companies, who may use different calculations.

The following reconciles GAAP net income (loss) ~~income~~ and net income (loss) ~~income~~ per diluted common share to core earnings and core earnings per common share:

	Quarter Ended June 30															Six Months Ended June 30																Quarter Ended June 30												Six Months Ended June 30
	2020							2019								2020								2019								2021						2020						2021						2020
	Amount			Per Share				Amount				Per Share				Amount				Per Share				Amount				Per Share				Amount			Per Share			Amount			Per Share			Amount			Per Share			Amount			Per Share
Net income (loss)	$	22,704			$	0.19			$	(63,460	)		$	(0.80	)		$	(181,949	)		$	(2.01	)		$	(71,206	)		$	(0.95	)	$	15,529		$	0.11		$	22,704		$	0.19		$	34,471		$	0.26		$	(181,949	)	$	(2.01	)
Unrealized (gain) loss on non-designated derivative instruments		(2,229	)			(0.02	)			59,388				0.70				53,953				0.57				85,625				1.01			(2,286	)		(0.02	)		(2,229	)		(0.02	)		(4,514	)		(0.05	)		53,953			0.57
Realized loss (net) on termination of derivative instruments		1,320				0.01				24,202				0.28				101,885				1.07				24,202				0.28
Realized loss on termination of derivative instruments																																	–			–			1,320			0.01			—			–			101,885			1.07
Amortization of unrealized gain, net of unrealized losses on de-designated derivative instruments		122				0.00				(6,715	)			(0.08	)			19				0.00				(9,735	)			(0.12	)		591			0.00			122			0.00			1,237			0.01			19			0.00
Realized loss on sale of investments		–				–				1,365				0.02				67,820				0.71				1,365				0.02			–			–			–			–			–			–			67,820			0.71
Core earnings	$	21,917			$	0.18			$	14,780			$	0.12			$	41,728			$	0.34			$	30,251			$	0.24		$	13,834		$	0.09		$	21,917		$	0.18		$	31,194		$	0.22		$	41,728		$	0.34

Management believes that presenting financing spreads on residential mortgage investments, a non-GAAP financial measure, provides useful information for evaluating the performance of the Company’s portfolio as opposed to total financing spreads because the non-GAAP measure speaks specifically to the performance of the Company’s investment portfolio. The following reconciles these measures for the indicated periods:

	Quarter Ended June 30						Six Months Ended June 30						Quarter Ended June 30						Six Months Ended June 30
	2020			2019			2020			2019			2021			2020			2021			2020
Total financing spreads		1.52	%		0.34	%		1.03	%		0.38	%		0.84	%		1.52	%		0.93	%		1.03	%
Impact of yields on other interest-earning assets ^(a)		0.04			0.01			0.02			0.01			0.02			0.04			0.02			0.02
Impact of borrowing rates on other interest-paying liabilities ^(a)		0.09			0.05			0.07			0.05			0.11			0.09			0.11			0.07
Impact of amortization of unrealized gain, net of unrealized losses on de-designated Derivatives		0.01			(0.24	)		0.00			(0.18	)		0.03			0.01			0.03			0.00
Impact of net interest cash flows on non-designated Derivatives		(0.41	)		0.31			(0.15	)		0.24			(0.01	)		(0.41	)		(0.00	)		(0.15	)
Financing spreads on residential mortgage investments		1.25			0.47			0.97			0.50			0.99			1.25			1.09			0.97

	Quarter Ended						Six Months Ended						Quarter Ended						Six Months Ended
	June 30						June 30						June 30						June 30
	2020			2019			2020			2019			2021			2020			2021			2020
Income statement data: (in thousands, except per share data)
Income statement data (in thousands, except per share data)
Interest income on residential mortgage investments	$	48,133		$	85,100		$	117,361		$	168,907		$	20,776		$	48,111		$	46,941		$	117,318
Related interest expense		(13,055	)		(67,945	)		(58,328	)		(131,724	)		(2,826	)		(13,039	)		(6,998	)		(58,295	)
		35,078			17,155			59,033			37,183			17,950			35,072			39,943			59,023
Other interest income (expense)		(1,878	)		(1,300	)		(3,379	)		(2,769	)		(1,888	)		(1,872	)		(3,766	)		(3,369	)
		33,200			15,855			55,654			34,414			16,062			33,200			36,177			55,654
Other expense:
Loss on derivative instruments (net)		(6,948	)		(74,842	)		(162,687	)		(96,499	)
Other (expense) income:
Gain (loss) on derivative instruments (net)														2,100			(6,948	)		4,482			(162,687	)
Loss on sale of investments (net)		–			(1,365	)		(67,820	)		(1,365	)		–			–			–			(67,820	)
Compensation-related expense		(2,330	)		(1,972	)		(4,534	)		(5,581	)		(1,861	)		(2,330	)		(3,953	)		(4,534	)
Other general and administrative expense		(1,219	)		(1,138	)		(2,421	)		(2,266	)		(772	)		(1,219	)		(2,237	)		(2,421	)
Miscellaneous other revenue (expense)		1			2			(141	)		91			–			1			2			(141	)
		(10,496	)		(79,315	)		(237,603	)		(105,620	)		(533	)		(10,496	)		(1,706	)		(237,603	)
Net income (loss)	$	22,704		$	(63,460	)	$	(181,949	)	$	(71,206	)	$	15,529		$	22,704		$	34,471		$	(181,949	)
Net income (loss) per diluted common share	$	0.19		$	(0.80	)	$	(2.01	)	$	(0.95	)	$	0.11		$	0.19		$	0.26		$	(2.01	)
Average diluted shares outstanding		95,887			84,934			95,276			84,914			96,454			95,887			96,342			95,276
Core earnings ^(a)	$	21,917		$	14,780		$	41,728		$	30,251		$	13,834		$	21,917		$	31,194		$	41,728
Core earnings per diluted common share^(a)		0.18			0.12			0.34			0.24			0.09			0.18			0.22			0.34

Key operating statistics: (dollars in millions)
Key operating statistics (dollars in millions)
Average yields:
Residential mortgage investments		2.33	%		2.82	%		2.42	%		2.79	%		1.14	%		2.33	%		1.26	%		2.42	%
Other interest-earning assets		0.06			2.00			0.59			2.12			0.05			0.06			0.05			0.59
Total average yields		2.29			2.81			2.40			2.78			1.12			2.29			1.24			2.40
Average borrowing rates:
Secured borrowings ^(a)(b)		1.09			2.35			1.45			2.29			0.15			1.09			0.17			1.45
Unsecured borrowings		7.72			7.73			7.72			7.71			7.71			7.72			7.70			7.72
Total average borrowing rates		1.17			2.40			1.52			2.34			0.28			1.17			0.32			1.52
Average total financing spreads		1.52			0.34			1.03			0.38			0.84			1.52			0.93			1.03
Average financing spreads on residential mortgage investments^(a)		1.25			0.47			0.97			0.50			0.99			1.25			1.09			0.97
Average CPR		32.89			26.29			29.80			23.45			40.19			32.89			38.65			29.80
Average balance information:
Residential mortgage investments (cost basis)	$	8,257		$	12,065		$	9,691		$	12,117		$	7,291		$	8,257		$	7,434		$	9,691
Other interest-earning assets		146			120			144			96			104			146			113			144
Secured borrowings		7,648			11,193			8,993			11,175			6,601			7,648			6,742			8,993
Unsecured borrowings (included in long-term investment capital)		98			98			98			98			99			98			99			98
Long-term investment capital (“LTIC”)		988			1,149			1,056			1,156			997			988			1,003			1,056
Operating costs as a percentage of average LTIC		1.45	%		1.09	%		1.32	%		1.20	%		1.06	%		1.45	%		1.24	%		1.32	%
Return on average common equity capital ^(c)		10.76			4.98			9.58			5.14			5.57			10.76			6.63			9.58

Capstead reported for GAAP purposes net income of ~~$23~~$16 million and ~~a net loss of $182~~$34 million ~~or $0.19~~representing $0.11 and ~~$(2.01)~~$0.26 per diluted common share ~~during~~for the quarter and six months ended June 30, ~~2020,~~2021, respectively. This compares to a GAAP net income of $23 million and net loss of ~~$64~~$182 million representing $0.19 and ~~$71 million or $(0.80) and $(0.95)~~$(2.01) per diluted common share for the same periods in ~~2019.~~2020. GAAP net income ~~was~~benefited from lower borrowing rates by $9 million while being negatively impacted ~~primarily~~by lower yields on residential mortgage investments by $22 million and lower average portfolio balance by $5 million during the quarter ended June 30, 2021 compared to the same period in 2020. The difference in GAAP net income (loss) for the ~~first quarter by losses on derivatives of~~six months ended June 30, 2021 was due to $156 million ~~due largely to lower prevailing interest rates~~of hedging-related derivative losses and $68 million of losses on sales of investments ~~of $68 million due to COVID-19 pandemic related disruptions to~~that were recognized during the ~~fixed income markets.~~same period in 2020.

Capstead’s core earnings, a non-GAAP financial measure, totaled $14 million and $31 million or $0.09 and $0.22 per diluted common share for the quarter and six months ended June 30, 2021, respectively, compared to core earnings of $22 million and $42 million or $0.18 and $0.34 per diluted common share for the ~~quarter and six months ended June 30, 2020, respectively, compared to core earnings of $15 million and $30 million or $0.12 and $0.24 per diluted common share for the~~ same ~~period~~periods in ~~2019.~~2020. Core earnings in the first half of ~~2020~~2021 benefited from lower borrowing rates while being ~~partially offset~~negatively impacted by lower yields on ~~its~~ residential mortgage investments and lower average portfolio ~~balances following asset sales in response to the COVID-19 pandemic in late March.~~balances.

Interest income on residential mortgage investments was lower by ~~$37~~$27 million and ~~$52~~$70 million for the quarter and six months ended June 30, ~~2020,~~2021, respectively, compared to the same ~~periods~~period in ~~2019. This decrease is attributable to $24~~2020. Lower average yields drove $22 million and ~~$31~~$47 million, respectively, inof the decreases ~~related to~~while lower average portfolio balances ~~and $13~~drove the remaining $5 million and ~~$21~~$23 million, ~~respectively, in decreases related to lower average yields.~~respectively.

Yields on residential mortgage investments averaged 1.14% and 1.26% for the quarter and six months ended June 30, ~~2020 decreased 49~~2021, respectively, a decrease of 119 basis points and 37116 basis points compared to the same periods in ~~2019, averaging 2.33% and 2.42%, respectively,~~2020. This is primarily due to lower coupon interest rates on loans underlying the Company’s ARM Agency Securities that have reset based on lower prevailing interest rates, as well as lower coupons on acquisitions and other changes in portfolio composition. Yields were also negatively impacted by higher premium amortization compared to the same periods in ~~2019~~2020 due primarily to higher levels of mortgage prepayments experienced on the portfolio.

Historically low interest rates have led to high prepayments across all mortgage products. While ARM securities are priced to incur higher prepayments than fixed rate securities, and fixed rate securities have incurred higher percentage increases than ARM securities over previous levels since March 2020, the Company’s ARM securities have experienced elevated prepayments negatively affecting yields. The Company expects mortgage prepayment rates ~~experienced on our portfolio.~~to remain elevated through the summer selling season before receding during the fourth quarter of 2021.

Interest expense on secured borrowings was lower by ~~$55~~$10 million and ~~$73~~$51 million for the quarter and six months ended June 30, ~~2020,~~2021, respectively, compared to the same periods in ~~2019.~~2020. This decrease is attributable to ~~$38~~$9 million and ~~$51~~$39 million, respectively, in decreases related to lower average borrowing rates and ~~$17~~$1 million and ~~$22~~$12 million, respectively, in decreases related to lower average borrowings.

Secured borrowing rates, after adjusting for hedging activities, decreased ~~126~~94 basis points and 84128 basis points for the quarter and six months ended June 30, ~~2020,~~2021, respectively, compared to the same ~~period~~periods in ~~2019~~2020 to average ~~1.09%~~0.15% and ~~1.45%~~0.17%. Market conditions contributed to lower borrowing rates, including ~~three 25~~150 basis ~~point decreases~~points in reductions to the Federal Funds rate ~~during the last half of 2019 followed by 150 basis points in rate cuts~~ in March 2020. Average fixed-rate swap payment rates were ~~138~~eight and ~~153~~six basis points for the quarter and six months ended June 30, ~~2020,~~2021, respectively, compared to ~~220~~138 and ~~211~~153 basis points for the same periods in ~~2019.~~2020. This decline was ~~largely~~ due to lower available two- and three-year swap rates in 2021 as well as efforts in 2020 to reposition the swap portfolio to take advantage of declining market interest ~~rates over the course of 2019 and a reduction in swap positions due to asset sales in the first half of 2020.~~rates. Currently-paying swap ~~balances~~notional amounts were lower, averaging ~~$4.37~~$3.47 billion and ~~$5.73~~$3.23 billion for the quarter and six months ended June 30, ~~2020,~~2021, respectively, compared to ~~$8.05~~$4.37 billion and ~~$7.69~~$5.73 billion for the same periods in ~~2019.~~2020. Future secured borrowing rates will be dependent on market conditions, including overall levels of market interest rates

as well as the availability of longer-maturity borrowings and interest rate swap agreements at attractive rates.

Total operating costs, which include Compensation-related expense and Other general and administrative expense, were ~~higher~~lower by ~~$439,000~~$916,000 and $765,000 during the quarter ~~ended June 30, 2020 compared to the same period in 2019. For the~~and six months ended June 30, ~~2020, total operating costs were lower by $891,000~~2021, respectively, compared to the same ~~period~~periods in ~~2019. The variance between the periods was primarily related to adjustments to short-term incentive compensation in the respective periods.~~

Capstead’s primary sources of funds are secured borrowings and monthly principal and interest payments on its investments. Other sources of funds may include proceeds from debt and equity offerings and asset sales. The timing, manner, price and amount of any future common and preferred issuances and any common or preferred stock repurchases will be made in the open market at the Company’s discretion, subject to economic and market conditions, stock price, compliance with federal securities laws and tax regulations as well as blackout periods associated with the dissemination of important Company-specific news.

The Company generally uses its liquidity to pay down secured borrowings to reduce borrowing costs and otherwise efficiently manage its long-term investment capital. Because the level of these borrowings can generally be adjusted on a daily basis, the Company’s potential liquidity inherent in its unencumbered residential mortgage investments is as important as the level of cash and cash equivalents carried on the balance sheet. The table included under “Utilization of Long-term Investment Capital and Potential Liquidity” illustrates management’s estimate of additional funds potentially available to the Company at June 30, ~~2020.~~2021. The discussion accompanying this table and under ~~“COVID-19”~~“COVID-19 Pandemic” provides insight into the Company’s current liquidity position and perspective on what level of portfolio leverage to employ under current market conditions. The Company currently believes that it has sufficient liquidity and capital resources available for the acquisition of additional investments, repayments on borrowings and the payment of cash dividends as required for the Company’s continued qualification as a REIT.

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

Future borrowings are dependent upon the willingness of lenders to participate in the financing of Agency Securities, lender collateral requirements and the lenders’ determination of the fair value of the securities pledged as collateral, which fluctuates with changes in interest rates and liquidity conditions within the commercial banking and mortgage finance industries. None of the Company’s borrowing counterparties are obligated to renew or otherwise enter into new borrowings at the conclusion of existing borrowings. Secured borrowings totaled ~~$7.58~~$6.81 billion at June 30, ~~2020~~2021,, all maturing within 90 days. Secured borrowings began the year at ~~$10.28~~$7.32 billion and averaged ~~$7.65~~$6.60 billion during the quarter ended June 30, ~~2020.~~2021. Average secured borrowings can differ from period-end balances for a number of reasons including portfolio growth or contraction, as well as differences in the timing of portfolio acquisitions relative to portfolio runoff.

To help mitigate exposure to rising short-term interest rates, the Company uses derivatives supplemented with longer-maturity secured borrowings when available at attractive rates and terms. At quarter-end the Company held ~~$4.60~~$4.25 billion notional amount of portfolio financing-related interest rate swap agreements with contract expirations occurring at various dates through the second quarter of ~~2022~~2024 and a weighted average expiration of 1521 months. The Company also holds swap agreements effectively locking in ~~lower~~ fixed rates of interest during the 20-year floating rate terms of the Company’s $100 million face amount of unsecured borrowings that mature in 2035 and 2036. The Company intends to continue to utilize suitable

derivatives such as interest rate swap agreements or other derivatives and longer-maturity secured borrowings to manage interest rate risk when available at attractive rates and terms.

~~programs or by other means, subject to market conditions, compliance with federal securities laws and blackout periods.~~

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

Derivatives and longer-maturity secured borrowings transactions lengthen the effective duration of the Company’s secured borrowings to more closely match the duration of its portfolio of residential mortgage investments. Including the effects of derivatives held to hedge changes in secured borrowing rates, at June 30, ~~2020~~2021 the Company’s residential mortgage investments and secured borrowings had estimated durations of approximately 1414¾ months and ~~nine~~12¾ months, respectively, for a net duration gap of approximately ~~five~~two months. The Company intends to continue to manage interest rate risk associated with holding and financing its residential mortgage investments by utilizing suitable interest rate swap agreements or other derivatives and longer-maturity secured borrowings, if available at attractive rates and terms.

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

This model is the primary tool used by management to assess the direction and magnitude of changes in net interest margins and portfolio values resulting solely from changes in interest rates. Key modeling assumptions include mortgage prepayment speeds, adequate levels of market liquidity, current market conditions, index floors, and portfolio leverage levels. ~~A floor of 0.00% is assumed for all pertinent indices except the Federal Funds Rate, which has no floor. However, it is assumed that borrowing rates cannot decline beyond a floor of 0.15%.~~ These assumptions are inherently uncertain and, as a result, modeling cannot precisely estimate the impact of higher or lower interest rates. Actual results will differ from simulated results due to the timing, magnitude and frequency of interest rate changes, other changes in market conditions, changes in management strategies and other factors.

The table below reflects the estimated impact of instantaneous parallel shifts in the yield curve on net interest margins and the fair value of Capstead’s portfolio of residential mortgage investments and related derivatives at June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, subject to the modeling parameters described above.

Federal
Funds
Rate

10-year U.S.
Treasury
Rate

Down
1.00%

Down
0.50%

Up
0.50%

Up
1.00%

Projected 12-month percentage
   change in net interest margins: ^(a)(b)

June 30, 2020

0.00-0.25
%

0.66
%

(40.6
)%

(14.3
)%

(0.5
)%

(3.6
)%
December 31, 2019

1.50-1.75

1.92

1.6

1.2

(0.6
)

(3.7
)

Projected percentage change in
   portfolio and related derivative
   values: ^(a)

June 30, 2020

0.00-0.25

0.66

0.0

0.1

(0.4
)

(0.7
)
December 31, 2019

1.50-1.75

1.92

(0.1
)

0.0

(0.2
)

(0.4
)

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

Projected 12-month percentage change in net interest margins: ^(a)(b)
June 30, 2021	0.00-0.25	%		1.47	%		6.7	%		2.6	%		(1.2	)%		(3.2	)%
December 31, 2020	0.00-0.25			0.92			11.3			5.0			(3.4	)		(9.0	)

Projected percentage change in portfolio and related derivative values: ^(a)
June 30, 2021	0.00-0.25			1.47			(0.3	)		0.0			(0.2	)		(0.4	)
December 31, 2020	0.00-0.25			0.92			(0.1	)		0.0			(0.4	)		(0.7	)

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

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

Mortgage prepayment expectations can change based on how current and projected changes in interest rates impact the economic attractiveness of mortgage refinance opportunities, if available, and other factors such as lending industry underwriting practices and capacity constraints, regulatory changes,

borrower credit profiles and the health of the economy and housing markets. Management estimates future mortgage prepayments based on these factors and past experiences with specific

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

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

The accounting for changes in fair value of each derivative held depends on whether it has been designated as an accounting hedge, as well as the type of hedging relationship identified. To qualify as a cash flow hedge for accounting purposes, at the inception of the hedge relationship the Company must anticipate and document that the hedge relationship will be highly effective and must monitor ongoing effectiveness on at least a quarterly basis. As long as the hedge relationship remains highly effective, changes in fair value of the derivative are recorded in Accumulated other comprehensive income. 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 ~~income~~ (expense). income.

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

This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “intend,” “will be,” “will likely continue,” “will likely result,” or words or phrases of similar meaning. Forward-looking statements are based largely on the expectations of management and are subject to a number of risks and uncertainties including, but not limited to, the following:

In light of the ongoing COVID-19 pandemic, several of the risks and uncertainties described above are more likely to occur and/or the potential impact therefrom is harder to estimate. In particular, the impact of COVID-19 on fluctuations in interest rates and levels of mortgage prepayments, liquidity of secondary markets and credit markets, including the availability of financing at reasonable levels and terms to support investing on a leveraged basis, and changes in general economic conditions, are especially unclear at this time. Given this unprecedented uncertainty, actual results could differ materially from those anticipated or implied in the forward-looking statements included herein. In addition to the above considerations, actual results and liquidity are affected by other risks and uncertainties which could cause actual results to be significantly different from those expressed or implied by any forward-looking statements included herein. It is not possible to identify all of the risks, uncertainties and other factors that may affect future results. In light of these risks and uncertainties, the forward-looking events and circumstances discussed herein may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements. Forward-looking statements speak only as of the date the statement is made and the Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, readers of this document are cautioned not to place undue reliance on any forward-looking statements included herein.

For a further discussion of these and other factors that could impact our future results and performance, see “Risk Factors” under Part I, Item 1A of our Annual Report on Form 10-K for the year ended

December 31, ~~2019,~~2020, filed with the U.S. Securities and Exchange Commission (the “SEC”) on February ~~21, 2020.~~ 19, 2021, as well as our subsequent filings with the SEC.

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

As of June 30, ~~2020~~2021, an evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of June 30, ~~2020~~2021. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to June 30, ~~2020~~2021.

There have been no material changes in our risk factors during the six months ended June 30, ~~2020~~2021 from those previously disclosed in “Risk Factors” under Part I, Item 1A. of our ~~2019~~2020 Form 10-K, ~~and Part II, Item 1A. of our March 2020 Form 10-Q.~~other than set forth below. You should carefully consider the risk factors discussed in our ~~2019~~2020 Form 10-K and ~~March 2020 Form 10-Q,~~below, which could materially affect our business, liquidity, earnings, financial condition and future prospects. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, liquidity, earnings, financial condition and future prospects.

The recently announced merger with Benefit Street Partners Realty Trust, Inc. may not be completed, which could adversely affect our business operations and stock price and subject us to a number of risks.

On July 26, 2021, the Company announced its entry into a definitive Agreement and Plan of Merger with Benefit Street Partners Realty Trust, Inc. The completion of the merger is subject to a number of conditions, including the approval by a majority of the outstanding shares of common stock of the Company. If the merger is not completed for any reason, we would remain liable for significant transaction costs, including, in certain circumstances, termination fees of up to $26.7 million, and the focus of our management would have been diverted from seeking other potential strategic opportunities, in each case without realizing any benefits of a completed merger. For these and other reasons, a failed merger could adversely affect our financial condition and results of operations. Furthermore, if we do not complete the merger, the market price of our common stock may decline significantly from the current market price and our current stockholders will not enjoy the benefits of holding stock in the combined company. Certain costs associated with the merger have already been incurred or may be payable even if the merger is not completed.

Further, a failed transaction may result in negative publicity or a negative impression of us in the investment community. And any disruptions to our business resulting from the announcement and pendency of the merger, including any adverse changes in our relationships with our employees could continue or accelerate in the event of a failed transaction.

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


Maryland		75-2027937
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
8401 North Central Expressway, Suite 800, Dallas, TX		75225-4404
(Address of principal executive offices)		(Zip Code)


Title of each class	Trading Symbols	Name of each exchange on which registered
Common Stock ($0.01 par value)	CMO	New York Stock Exchange
7.50% Series E Cumulative Redeemable Preferred Stock ($0.10 par value)	CMOPRE	New York Stock Exchange


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

Consolidated Balance Sheets — June 30, ~~2020~~2021 and December 31, ~~201~~20920		3

Consolidated Statements of Operations — Quarter and Six Months Ended June 30, ~~2020~~2021 and 201920		4

Consolidated Statements of Comprehensive Income — Quarter and Six Months Ended June 30, ~~2020~~2021 and 201920		5

Consolidated Statements of Stockholders’ Equity — Quarter and Six Months Ended June 30, ~~2020~~2021 and 201920		6

Consolidated Statements of Cash Flows — Six Months Ended June 30, ~~2020~~2021 and 201920		7

Notes to Consolidated Financial Statements		8

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2122

ITEM 3.	Quantitative and Qualitative Disclosure of Market Risk	3638

ITEM 4.	Controls and Procedures	3638

PART II. — OTHER INFORMATION
ITEM 1A.	Risk Factors	3739
ITEM 6.	Exhibits	3740

SIGNATURES		3942

Period of Contract Expiration	Notional Amount		Average Fixed-Rate Payment Requirement
Third quarter 2020	$	200,000		1.64	%
Fourth quarter 2020		200,000		2.04
Third quarter 2021		2,500,000		1.25
Fourth quarter 2021		900,000		1.61
First quarter 2022		400,000		1.37
Second quarter 2022		400,000		0.02
	$	4,600,000

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


Common Stock ($0.01par value)		~~96,468,729~~96,875,560 as of August ~~4, 2020~~3, 2021

		June 30, 2020				December 31, 2019
	Fair Value Hierarchy	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Residential mortgage loans	Level 2	$	531	$	550	$	637	$	650
Secured borrowings-related interest rate swap agreements	Level 2	–		–			733		733
Eurodollar futures contracts	Level 1	–		–			738		738
Financial liabilities:
Unsecured borrowings	Level 2		98,443		35,200		98,392		68,100
Unsecured borrowings-related interest rate swap agreements	Level 2		49,575		49,575		29,156		29,156

2.1		Agreementand Plan of Merger, dated July 25, 2021, by and among Capstead Mortgage Corporation, Benefit Street Partners Realty Trust, Inc., Rodeo Sub I, LLC and Benefit Street Partners LLC.⁽¹⁾
3.1		Charter, including Articles of Incorporation, Articles Supplementary for each series of preferred shares no longer outstanding and all other amendments to such Articles of Incorporation.⁽¹⁾⁽²⁾
3.2		Articles Supplementary classifying and designating the Registrant’s 7.50% Series E Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share, par value $0.10 per share.⁽²⁾⁽³⁾
3.3		Amended and Restated Bylaws.⁽³⁾⁽⁴⁾
3.4		Amendment to the Amended and Restated Bylaws of Capstead Mortgage Corporation, dated July 25, 2021.⁽¹⁾
4.1		Specimen of Common Stock Certificate.⁽⁴⁾⁽⁵⁾
4.2		Specimen of stock certificate evidencing the 7.50% Series E Cumulative Redeemable Preferred Stock of the Registrant, liquidation preference $25.00 per share, par value $0.10 per share.⁽²⁾⁽³⁾
4.3		Junior Subordinated Indenture dated September 26, 2005.⁽⁵⁾⁽⁶⁾
4.4		Indenture dated December 15, 2005.⁽⁵⁾⁽⁶⁾
4.5		Indenture dated September 11, 2006.⁽⁵⁾⁽⁶⁾
4.6		Description of Securities. ⁽⁶⁾⁽⁷⁾
10.01		Amended and Restated Deferred Compensation Plan.⁽⁷⁸⁾
10.02		Amended and Restated 2014 Flexible Incentive Plan.⁽⁸⁹⁾
10.03		Amendment No. 1 to the Amended and Restated 2014 Flexible Incentive Plan.⁽⁹¹⁰⁾
10.04		Third Amended and Restated Incentive Bonus Plan.⁽⁷⁸⁾
10.05		Form of nonqualified stock option and stock award agreements for non-employee directors.⁽⁵⁾⁽⁶⁾
10.06		Form of restricted stock agreement for executive employees. ⁽¹⁰¹¹⁾
10.07		~~2018~~2019 Long-Term Performance Unit Award Criteria. ⁽¹⁰¹¹⁾
10.08		Form of performance unit agreement for executive employees. ⁽¹⁰¹¹⁾
10.09		~~2019 Annual Incentive Compensation Program.~~ ⁽¹¹⁾
~~10.10~~		~~Form of restricted stock agreement for executive employees.~~ ⁽¹¹⁾
~~10.11~~		~~2019 Long-Term Performance Unit Award Criteria.~~ ⁽¹¹⁾
~~10.12~~		~~Form of performance unit agreement for executive employees.~~ ⁽¹¹⁾
~~10.13~~		~~2020 Annual Incentive Compensation Program.~~ ⁽¹²⁾
~~10.14~~		Form of restricted stock agreement for executive employees. ⁽¹²⁾
~~10.15~~10.10		2020 Long-Term Performance Unit Award Criteria. ⁽¹²⁾
~~10.16~~10.11		Form of performance unit agreement for executive employees. ⁽¹²⁾
~~10.17~~10.12		2021 Annual Incentive Compensation Program. ⁽¹³⁾
10.13		Form of restricted stock agreement for executive employees. ⁽¹³⁾
10.14		2021 Long-Term Performance Unit Award Criteria. ⁽¹³⁾
10.15		Form of performance unit agreement for executive employees. ⁽¹³⁾
10.16		Form of Change in Control/Severance Agreement for executive officers. ⁽¹³⁴⁾
~~10.18~~10.17		~~Sales~~Form of Equity Distribution Agreement, dated ~~October 23, 2019, by and between the Company and the Sales Manager.~~January 12, 2021. ⁽¹⁴⁾⁽¹⁵⁾
31.1		Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002*
31.2		Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002*
32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**

~~Exhibit~~ ~~Number~~		~~DESCRIPTION~~
32.2		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
101.INS		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.*
101.SCH		Inline XBRL Taxonomy Extension Schema*
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase*
101.DEF		Inline XBRL Additional Taxonomy Extension Definition Linkbase*
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase*


	CAPSTEAD MORTGAGE CORPORATION Registrant

Date: August ~~4, 2020~~3, 2021	By:	/s/ PHILLIP A. REINSCH
		Phillip A. Reinsch
		President and Chief Executive Officer


Date: August ~~4, 2020~~3, 2021	By:	/s/ LANCE J. PHILLIPS
		Lance J. Phillips
		Senior Vice President, Chief Financial Officer
		and Secretary (Principal Financial and
		Accounting Officer)