Disclosures Regarding Fair Values Of Financial Instruments

6 Months Ended

Jun. 30, 2011

Disclosure Regarding Fair Values Of Financial Instruments

Disclosures Regarding Fair Values Of Financial Instruments

NOTE 9 — DISCLOSURES REGARDING FAIR VALUES OF FINANCIAL INSTRUMENTS

The following tables and related discussion provide fair value 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. 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, including Cash and cash equivalents, cash collateral receivable from and payable to interest rate swap counterparties, receivables, payables and borrowings under repurchase arrangements with initial terms of 120 days or less.

The Company's holdings of residential mortgage securities, nearly all of which are classified as available-for-sale, are measured at fair value on a recurring basis using Level Two Inputs in accordance with ASC 820. 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. See NOTE 6 for information relative to the valuation of interest rate swap agreements.

Fair value disclosures for financial instruments other than debt securities were as follows (in thousands):

	June 30, 2011				December 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Residential mortgage loans	$	9,498	$	9,700	$	10,720	$	11,000
Interest rate swap agreements		9,356		9,356		9,597		9,597
Financial liabilities:
Repurchase arrangements with initial terms of greater than 120 days		316,284		316,300		–		–
Unsecured borrowings		103,095		105,200		103,095		103,800
Interest rate swap agreements		19,962		19,962		16,337		16,337

Fair value and related disclosures for debt securities were as follows (in thousands):

			Gross Unrealized
	Basis		Gains		Losses		Fair Value
As of June 30, 2011
Agency Securities classified as available-for-sale	$	11,196,191	$	212,005	$	1,184	$	11,407,012
Residential mortgage securities classified as held-to-maturity		7,651		429		–		8,080
As of December 31, 2010
Agency Securities classified as available-for-sale		8,316,307		181,691		1,317		8,496,681
Residential mortgage securities classified as held-to-maturity		8,290		454		–		8,744

	June 30, 2011				December 31, 2010
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Securities in an unrealized loss position:
One year or greater	$	232		$        1	$	1,694		$        2
Less than one year		568,989		1,183		334,224		1,315
	$	569,221		$ 1,184	$	335,918		$ 1,317

Managing a leveraged portfolio of primarily ARM Agency Securities is the core focus of Capstead's investment strategy and management expects these securities will be held until payoff absent a major shift in the Company's investment focus. Declines in fair value caused by increases in interest rates are typically modest for investments in relatively short-duration ARM Agency Securities compared to investments in longer-duration, fixed-rate assets. These declines are generally recoverable in a relatively short period of time as the coupon interest rates on the underlying mortgage loans reset to rates more reflective of the then current interest rate environment allowing for the potential recovery of financing spreads diminished during periods of rising interest rates.

From a credit risk perspective, the real or implied federal government guarantee associated with Agency Securities, particularly in light of the conservatorship of the GSEs by the federal government, 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, (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, none of these investments are considered other-than-temporarily impaired at June 30, 2011.