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DISCLOSURES REGARDING FAIR VALUES OF FINANCIAL INSTRUMENTS
3 Months Ended
Mar. 31, 2015
DISCLOSURES REGARDING FAIR VALUES OF FINANCIAL INSTRUMENTS [Abstract]  
DISCLOSURES REGARDING FAIR VALUES OF FINANCIAL INSTRUMENTS
NOTE 9 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 ASU 2010-06, Fair Value Measurements and Disclosures (Topic 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 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):

  
March 31, 2015
  
December 31, 2014
 
   
Carrying
Amount
  
Fair
Value
  
Carrying
Amount
  
Fair
Value
 
Financial assets:
        
Residential mortgage loans
 
$
4,605
  
$
4,700
  
$
4,909
  
$
5,000
 
Interest rate swap agreements
  
285
   
285
   
1,657
   
1,657
 
Financial liabilities:
                
Repurchase arrangements with initial terms of greater than 120 days
  
2,375,000
   
2,376,100
   
2,128,517
   
2,128,400
 
Unsecured borrowings
  
100,000
   
100,300
   
100,000
   
100,500
 
Interest rate swap agreements
  
37,791
   
37,791
   
27,034
   
27,034
 

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
 
March 31, 2015
        
Agency Securities classified as available-for-sale:
        
Fannie Mae/Freddie Mac
 
$
10,715,709
  
$
243,152
  
$
559
  
$
10,958,302
 
Ginnie Mae
  
3,167,628
   
20,148
   
3,903
   
3,183,873
 
Residential mortgage securities classified as held-to-maturity
  
3,304
   
98
   
   
3,402
 
December 31, 2014
                
Agency Securities classified as available-for-sale:
                
Fannie Mae/Freddie Mac
 
$
10,559,231
  
$
243,351
  
$
2,218
  
$
10,800,364
 
Ginnie Mae
  
3,087,570
   
16,755
   
5,157
   
3,099,168
 
Residential mortgage securities classified as held-to-maturity
  
3,663
   
124
   
   
3,787
 

  
March 31, 2015
    December 31, 2014 
  
Fair
Value
  
Unrealized
Loss
  
Fair
Value
  
Unrealized
Loss
 
Securities in an unrealized loss position:
        
One year or greater
 
$
530,711
  
$
3,405
  
$
706,839
  
$
5,320
 
Less than one year
  
407,266
   
1,057
   
1,095,724
   
2,055
 
  
$
937,977
  
$
4,462
  
$
1,802,563
  
$
7,375
 

Capstead’s investment strategy involves managing a leveraged portfolio of relatively 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 March 31, 2015.