DISCLOSURES REGARDING FAIR VALUES OF FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2014

DISCLOSURES REGARDING FAIR VALUES OF FINANCIAL INSTRUMENTS [Abstract]

DISCLOSURES REGARDING FAIR VALUES OF FINANCIAL INSTRUMENTS

NOTE 10 ¾ DISCLOSURES REGARDING FAIR VALUES OF FINANCIAL INSTRUMENTS

This note provides fair value-related disclosures as of the indicated balance sheet dates for Capstead’s financial assets and liabilities, most of which 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.  All fair values were determined using Level 2 Inputs in accordance with ASC 820.

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 for mortgage securities, the Company considers recent trading activity for similar investments and pricing levels indicated by lenders in connection with designating collateral for repurchase arrangements, provided such pricing levels are considered indicative of actual market clearing transactions.  In determining fair value estimates for longer-term borrowings under repurchase arrangements, 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 the longer-term borrowings.  In determining fair value estimates for unsecured borrowings, the Company considers current pricing for financial instruments with similar characteristics.  Excluded from these disclosures are financial instruments for which the Company’s cost basis is deemed to approximate fair value due primarily to the short duration of these instruments, which are valued using primarily Level 1 measurements, including Cash and cash equivalents, cash collateral receivable from, or payable to, interest rate swap counterparties, receivables, payables and borrowings under repurchase arrangements with initial terms of 120 days or less.  See NOTE 7 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):

	September 30, 2014				December 31, 2013
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Residential mortgage loans	$	5,285	$	5,400	$	6,898	$	7,000
Interest rate swap agreements		2,397		2,397		5,005		5,005
Financial liabilities:
Repurchase arrangements with initial terms of greater than 120 days		1,778,517		1,778,700		36,299		36,300
Unsecured borrowings		100,000		100,400		100,000		101,000
Interest rate swap agreements		18,276		18,276		11,304		11,304

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

	Amortized		Gross Unrealized
	Cost Basis		Gains		Losses		Fair Value
September 30, 2014
Agency Securities classified as available-for-sale:
Fannie Mae/Freddie Mac	$	10,711,999	$	242,301	$	5,517	$	10,948,783
Ginnie Mae		2,753,329		16,838		5,709		2,764,458
Residential mortgage securities classified as held-to-maturity		3,754		128		–		3,882
December 31, 2013
Agency Securities classified as available-for-sale:
Fannie Mae/Freddie Mac		11,019,116		224,456		12,468		11,231,104
Ginnie Mae		2,220,035		18,384		4,924		2,233,495
Residential mortgage securities classified as held-to-maturity		4,376		211		–		4,587

	September 30, 2014				December 31, 2013
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Securities in an unrealized loss position:
One year or greater	$	689,189	$	6,491	$	39,030	$	380
Less than one year		1,680,345		4,735		2,857,724		17,012
	$	2,369,534	$	11,226	$	2,896,754	$	17,392

Capstead’s investment strategy involves managing a leveraged portfolio of seasoned, short-duration ARM Agency Securities and management expects these securities will be held until payoff absent a major shift in strategy or a severe contraction in the Company’s ability to obtain financing to support its portfolio.  Declines in fair value caused by increases in interest rates are typically modest for investments in short-duration ARM Agency Securities compared to investments in longer-duration ARM or fixed-rate assets.  These declines are generally recoverable in a relatively short period of time as coupon interest rates on the underlying mortgage loans reset to rates more reflective of the then current interest rate environment.

From a credit risk perspective, federal government support for the GSEs helps ensure that fluctuations in value due to credit risk associated with these securities will be limited.  Given that (a) any existing unrealized losses on mortgage securities held by the Company are not attributable to credit risk and declines in fair value of ARM securities due to changes in interest rates are generally recoverable in a relatively short period of time, (b) the Company typically holds its investments to maturity, and (c) it is more likely than not that the Company will not be required to sell any of its investments given the resiliency of the financing market for Agency Securities, none of these investments are considered other-than-temporarily impaired at September 30, 2014.