10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

✓ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended:  March 31, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ______________

Commission File Number:  001-08896

CAPSTEAD MORTGAGE CORPORATION

(Exact name of Registrant as specified in its Charter)

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)

(214) 874-2323

(Registrant’s telephone number, including area code)

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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post 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    

Emerging growth 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   ✓

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

Common Stock ($0.01 par value) 92,445,903 as of April 30, 2018

CAPSTEAD MORTGAGE CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2018

INDEX

PART I. — FINANCIAL INFORMATION
		Page
ITEM 1.	Financial Statements (unaudited)
Consolidated Balance Sheets — March 31, 2018 and December 31, 2017		3
Consolidated Statements of Income — Quarter Ended March 31, 2018 and 2017		4
Consolidated Statements of Comprehensive Income — Quarter Ended March 31, 2018 and 2017		5
Consolidated Statements of Cash Flows — Quarter Ended March 31, 2018 and 2017		6
Notes to Consolidated Financial Statements		7
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
ITEM 3.	Quantitative and Qualitative Disclosure of Market Risk	36
ITEM 4.	Controls and Procedures	36
PART II. — OTHER INFORMATION
ITEM 1A.	Risk Factors	37
ITEM 6.	Exhibits	37
SIGNATURES		39

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ITEM 1.    FINANCIAL STATEMENTS

PART I. — FINANCIAL INFORMATION

CAPSTEAD MORTGAGE CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except pledged and per share amounts)

	March 31, 2018			December 31, 2017
	(unaudited)
Assets
Residential mortgage investments ($12.59 and $12.98 billion    pledged at March 31, 2018 and December 31, 2017, respectively)	$	13,052,071			$	13,454,098
Cash collateral receivable from interest rate swap counterparties		36,586				42,506
Interest rate swap agreements at fair value		387				–
Cash and cash equivalents		89,915				103,907
Receivables and other assets		113,565				132,938
	$	13,292,524			$	13,733,449
Liabilities
Secured borrowings	$	11,944,841			$	12,331,060
Interest rate swap agreements at fair value		18,265				23,772
Unsecured borrowings		98,216				98,191
Common stock dividend payable		15,069				18,487
Accounts payable and accrued expenses		23,905				23,063
		12,100,296				12,494,573
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 March 31, 2018 and December 31, 2017		250,946				250,946
Common stock - $0.01 par value; 250,000 shares authorized:
92,494 and 95,698 shares issued and outstanding at March 31,    2018 and December 31, 2017, respectively		925				957
Paid-in capital		1,242,573				1,271,425
Accumulated deficit		(346,570	)			(346,570	)
Accumulated other comprehensive income		44,354				62,118
		1,192,228				1,238,876
	$	13,292,524			$	13,733,449

See accompanying notes to consolidated financial statements.

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CAPSTEAD MORTGAGE CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(unaudited)

	Quarter Ended
	March 31
	2018			2017
Interest income:
Residential mortgage investments	$	69,138		$	54,841
Other		408			153
		69,546			54,994
Interest expense:
Secured borrowings		(45,021	)		(28,240	)
Unsecured borrowings		(1,891	)		(1,891	)
		(46,912	)		(30,131	)
		22,634			24,863
Other revenue (expense):
Compensation-related expense		(2,048	)		(1,115	)
Other general and administrative expense		(1,237	)		(1,062	)
Miscellaneous other revenue		71			15
		(3,214	)		(2,162	)
Net income	$	19,420		$	22,701
Net income available to common stockholders:
Net income	$	19,420		$	22,701
Less preferred stock dividends		(4,842	)		(3,864	)
	$	14,578		$	18,837
Net income per common share:
Basic and diluted	$	0.16		$	0.20
Weighted average common shares outstanding:
Basic		93,425			95,755
Diluted		93,506			95,875
Cash dividends declared per share:
Common	$	0.16		$	0.21
Series E preferred		0.47			0.47

See accompanying notes to consolidated financial statements.

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CAPSTEAD MORTGAGE CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands, unaudited)

	Quarter Ended
	March 31
	2018			2017
Net income	$	19,420		$	22,701
Other comprehensive income (loss)
Amounts related to available-for-sale securities:
Change in net unrealized gains (losses)		(44,053	)		3,996
Amounts related to cash flow hedges:
Change in net unrealized gains (losses)		30,933			8,096
Reclassification adjustment for amounts    included in net income		(4,644	)		1,661
		(17,764	)		13,753
Comprehensive income	$	1,656		$	36,454

See accompanying notes to consolidated financial statements.

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CAPSTEAD MORTGAGE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

	Quarter Ended March 31
	2018			2017
Operating activities:
Net income	$	19,420		$	22,701
Noncash items:
Amortization of investment premiums		25,620			30,385
Amortization of equity-based awards		415			637
Other depreciation and amortization		26			29
Change in recorded measureable hedge ineffectiveness on    interest rate swap agreements designated as cash flow hedges		–			182
Net change in receivables, other assets, accounts payable and    accrued expenses		1,290			(2,453	)
Net cash provided by operating activities		46,771			51,481
Investing activities:
Purchases of residential mortgage investments		(461,381	)		(1,036,560	)
Interest receivable acquired with the purchase of residential    mortgage investments		(798	)		(1,722	)
Principal collections on residential mortgage investments,    including changes in mortgage securities principal remittance    receivable		812,524			933,699
Net cash provided by (used in) investing activities		350,345			(104,583	)
Financing activities:
Proceeds from repurchase arrangements and similar    borrowings		48,138,234			36,205,044
Principal payments on repurchase arrangements and similar    borrowings		(48,524,450	)		(36,062,662	)
Decrease (increase) in cash collateral receivable from interest rate    swap counterparties		5,920			(15,265	)
Net proceeds from interest rate swap settlements		21,324			20,070
Proceeds from issuance of preferred shares		–			299
Common stock repurchases		(29,062	)		–
Other capital stock transactions		(72	)		(261	)
Dividends paid		(23,002	)		(26,217	)
Net cash (used in) provided by financing activities		(411,108	)		121,008
Net change in cash and cash equivalents		(13,992	)		67,906
Cash and cash equivalents at beginning of period		103,907			56,732
Cash and cash equivalents at end of period	$	89,915		$	124,638

See accompanying notes to consolidated financial statements.

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CAPSTEAD MORTGAGE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2018

(unaudited)

NOTE 1 — BUSINESS

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 consisting almost exclusively 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 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.

NOTE 2 — BASIS OF PRESENTATION

Interim Financial Reporting

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 ended March 31, 2018 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2018.  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, 2017.

Recent Accounting Pronouncements

In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-18, Statement of Cash Flows: Restricted Cash (“ASU 2016-18”) which clarifies how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company adopted ASU 2016-18 on January 1, 2018, which had no effect on the Company’s results of operations, financial condition or cash flows.

In May 2017, the FASB issued Accounting Standards Update No. 2017-09, Compensation-Stock Compensation: Scope of Modification Accounting (“ASU 2017-09”) which allows companies to make certain changes to stock awards without accounting for them as modifications. It does not change the accounting for modifications. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company adopted ASU 2017-09 on January 1, 2018, which had no effect on the Company’s results of operations, financial condition or cash flows.

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NOTE 3 — NET INCOME PER COMMON SHARE

Basic net income 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 stock awards.  Participating securities include unvested equity awards that contain non-forfeitable rights to dividends prior to vesting.

Diluted net income per common share is computed by dividing the numerator used to compute basic net income per common share by the denominator used to compute basic net income 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 the occurrence of a change in control and therefore are not considered dilutive securities absent such an occurrence.  Any unvested equity awards that are deemed participating securities are included in the calculation of diluted net income 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 per common share were as follows for the indicated periods (dollars in thousands, except per share amounts):

	Quarter Ended
	March 31
	2018			2017
Basic net income per common share
Numerator for basic net income per common share:
Net income	$	19,420		$	22,701
Preferred stock dividends		(4,842	)		(3,864	)
Earnings participation of unvested equity awards		(32	)		(40	)
	$	14,546		$	18,797
Denominator for basic net income per common share:
Average number of shares of common stock outstanding		93,867			96,061
Average unvested stock awards outstanding		(442	)		(306	)
		93,425			95,755
	$	0.16		$	0.20
Diluted net income per common share
Numerator for diluted net income per common share:
Numerator for basic net income per common share	$	14,546		$	18,797
Denominator for diluted net income per common share:
Denominator for basic net income per common share		93,425			95,755
Net effect of dilutive equity awards		81			120
		93,506			95,875
	$	0.16		$	0.20

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NOTE 4 — RESIDENTIAL mortgage investments

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 (b)
March 31, 2018
Agency Securities:
Fannie Mae/Freddie Mac:
Fixed-rate	$	209	$	1	$	210	$	210		6.50	%		5.94	%
ARMs		9,904,243		303,393		10,207,636		10,218,600		3.02			2.10
Ginnie Mae ARMs		2,759,328		80,738		2,840,066		2,830,293		2.88			2.00
		12,663,780		384,132		13,047,912		13,049,103		2.99			2.08
Residential mortgage loans:
Fixed-rate		623		1		624		624		6.76			4.96
ARMs		1,155		7		1,162		1,162		4.04			3.04
		1,778		8		1,786		1,786		4.99			3.70
Collateral for structured    financings		1,163		19		1,182		1,182		8.17			9.72
	$	12,666,721	$	384,159	$	13,050,880	$	13,052,071		2.99			2.08
December 31, 2017
Agency Securities:
Fannie Mae/Freddie Mac:
Fixed-rate	$	265	$	1	$	266	$	266		6.51	%		6.22	%
ARMs		10,216,099		313,547		10,529,646		10,578,364		2.97			1.93
Ginnie Mae ARMs		2,791,340		84,297		2,875,637		2,872,163		2.78			1.83
		13,007,704		397,845		13,405,549		13,450,793		2.93			1.91
Residential mortgage loans:
Fixed-rate		645		1		646		646		6.74			5.32
ARMs		1,211		7		1,218		1,218		4.04			3.19
		1,856		8		1,864		1,864		4.98			3.91
Collateral for structured    financings		1,418		23		1,441		1,441		7.94			7.67
	$	13,010,978	$	397,876	$	13,408,854	$	13,454,098		2.93			1.91

(a) Includes unrealized gains and losses for residential mortgage investments classified as available-for-sale.

(b) Net WAC, or weighted average coupon, is the weighted average interest rate of the mortgage loans underlying the indicated investments net of servicing and other fees as of the indicated balance sheet date.  Net WAC is expressed as a percentage calculated on an annualized basis on the unpaid principal balances of the mortgage loans underlying these investments.  Average yield is presented for the quarter then ended, and is based on the cash component of interest income expressed as a percentage calculated on an annualized basis on average amortized cost basis (the “cash yield”) less the effects of amortizing investment premiums.  Investment premium amortization is determined using the interest method and incorporates actual and anticipated future mortgage prepayments.

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

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the related bondholders.  The maturity of Residential mortgage investments 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 288 months.

Fixed-rate investments consist of residential mortgage loans and Agency Securities backed by residential mortgage loans with fixed rates of interest.  Adjustable-rate investments generally are ARM 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 (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 March 31, 2018, the average months to roll for the Company’s $6.84 billion (amortized cost basis) in current-reset ARM investments was 6.3 months while the average months to roll for the Company’s $6.20 billion (amortized cost basis) in longer-to-reset ARM investments was 42.0 months.

NOTE 5 — SECURED borrowings

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”).  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.

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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	Collateral Carrying Amount		Accrued Interest Receivable		Borrowings Outstanding		Average Borrowing Rates
March 31, 2018
Borrowings under repurchase arrangements with    maturities of 30 days or less:
Agency Securities	$	12,559,176	$	31,369	$	11,913,651		1.88	%
Borrowings under repurchase arrangements with    maturities greater than 30 days:
Agency Securities (31 to 90 days)		32,595		72		30,008		1.78
Similar borrowings:
Collateral for structured financings		1,182		–		1,182		8.17
	$	12,592,953	$	31,441	$	11,944,841		1.88
Quarter-end borrowing rates adjusted for effects    of related derivative financial instruments    (Derivatives) held as cash flow hedges								1.63
December 31, 2017
Borrowings under repurchase arrangements with    maturities of 30 days or less:
Agency Securities	$	12,943,193	$	30,646	$	12,296,546		1.60	%
Borrowings under repurchase arrangements with    maturities greater than 30 days:
Agency Securities (31 to 90 days)		35,568		75		33,073		1.53
Similar borrowings:
Collateral for structured financings		1,441	–			1,441		7.94
	$	12,980,202	$	30,721	$	12,331,060		1.60
Year-end borrowing rates adjusted for effects of    related Derivatives held as cash flow hedges								1.46

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 as illustrated below (dollars in thousands):

	Quarter Ended
	March 31, 2018					December 31, 2017
	Average Borrowings		Average Rate			Average Borrowings		Average Rate
Average borrowings and rates adjusted for the    effects of related Derivatives held as cash flow    hedges for the indicated periods	$	12,235,554		1.47	%	$	12,408,550		1.29	%

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

Capstead attempts to mitigate exposure to higher interest rates by entering into one- and three-month LIBOR-indexed, pay-fixed, receive-variable, interest rate swap agreements.  These Derivatives are designated as cash flow hedges of the variability of the underlying benchmark interest rate of current and forecasted 30- to 90-day secured borrowings.  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 designated borrowings, leaving the fixed-rate swap payments as the Company’s effective borrowing rate, subject to certain adjustments.  These adjustments include differences between variable-rate payments received on the swap agreements and related unhedged borrowing rates as well as the effects of any measured hedge ineffectiveness.  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.

During the quarter ended March 31, 2018, Capstead entered into swap agreements with notional amounts of $500 million requiring fixed-rate interest payments each averaging 2.44% for two and three-year periods commencing on various dates between February and April 2018. Also during the quarter ended March 31, 2018, $1.70 billion notional amount of swaps requiring fixed-rate interest payments averaging 0.76% matured.  At March 31, 2018, the Company’s portfolio financing-related swap positions had the following characteristics (dollars in thousands):

Period of Contract Expiration	Notional Amount		Average Fixed-Rate Payment Requirement
Second quarter 2018	$	600,000		0.79	%
Third quarter 2018		400,000		0.88
Fourth quarter 2018		800,000		1.15
First quarter 2019		950,000		1.58
Second quarter 2019		1,650,000		1.33
Third quarter 2019		550,000		1.40
Fourth quarter 2019		700,000		1.72
First quarter 2020		600,000		2.07
Second quarter 2020		100,000		2.56
Third quarter 2020		200,000		1.64
Fourth quarter 2020		200,000		2.04
First quarter 2021		100,000		2.67
	$	6,850,000

In 2010 the Company entered into forward-starting, 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.  These Derivatives are designated as cash flow hedges of the variability of the underlying contractual rate associated with the floating-rate terms of these long-term borrowings which began on various dates between October 2015 and September 2016.

Interest rate swap agreements are measured at fair value on a recurring basis primarily using Level Two Inputs in accordance with ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820).  In determining fair value estimates for these Derivatives, Capstead utilizes the standard methodology of netting the discounted future fixed cash payments and the discounted future variable cash receipts which

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are based on expected future interest rates derived from observable market interest rate curves.  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 held as cash flow hedges of 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.  At March 31, 2018, Cash collateral receivable from interest rate swap counterparties includes initial margin for all swap agreements and variation margin for non-exchange traded swap agreements.  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	March 31			December 31
	Location	2018			2017
Balance sheet-related
Swap agreements in a gain position (an asset) related to    secured borrowings	(a)	$	387		$	–
Swap agreements in a loss position (a liability) related to
unsecured borrowings	(a)		(18,265	)		(23,772	)
Related net interest payable	(b)		(954	)		(484	)
		$	(18,832	)	$	(24,256	)

(a) The fair value of Derivatives with unrealized gains are aggregated and recorded as an asset on the face of the Balance Sheets separately from the fair value of Derivatives with unrealized losses that are recorded as a liability.  The amount of unrealized gains, net of unrealized losses, scheduled to be recognized in the Statements of Income over the next twelve months primarily in the form of current market rates in excess of fixed-rate swap payments totaled $42.1 million at March 31, 2018.

(b) Included in “Accounts payable and accrued expenses” on the face of the Balance Sheets.

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	Location of Gain or (Loss) Recognized in	Quarter Ended March 31
	Net Income		2018			2017
Income statement-related
Components of Secured borrowings-related effects    on interest expense:
Amount of gain (loss) reclassified from    Accumulated other comprehensive income		$	5,247		$	(888	)
Amount of loss recognized in income		–				(393	)
	(a)		5,247			(1,281	)
Component of Unsecured borrowings-related    effects on interest expense:
Amount of loss reclassified from Accumulated    other comprehensive income	(b)		(603	)		(773	)
Decrease (increase) in interest expense and increase     (decrease) in Net income as a result of the use     of Derivatives		$	4,644		$	(2,054	)
Other comprehensive income-related
Amount of gain recognized in Other    comprehensive income		$	30,933		$	8,096

(a) Included in “Interest expense:  Secured borrowings” on the face of the Statements of Income.

(b) Included in “Interest expense:  Unsecured borrowings” on the face of the Statements of Income.

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

Gross

Net Amounts

Gross Amounts Not Offset

Gross

Amounts

of Assets

in the Balance Sheet (b)

Amounts of

Offset in

Presented in

Cash

Recognized

the Balance

the Balance

Financial

Collateral

Net

Assets (a)

Sheet (a)

Sheet

Instruments

Received

Amount

March 31, 2018

Counterparty 4

$

49,821

$

(49,434

)

$

387

$

–

$

–

$

387

December 31, 2017

Counterparty 4

$

30,676

$

(30,676

)

$

–

$

–

$

–

$

–

(a) Included in gross amounts of recognized assets at March 31, 2018 is the fair value of exchange-traded swap agreements, calculated including accrued interest.  Included in gross amounts offset in the balance sheet are variation margin amounts associated with these swaps at March 31, 2018.

(b) Amounts presented are limited to recognized liabilities and cash collateral received associated with the indicated counterparty sufficient to reduce the related Net Amount to zero in accordance with ASU No. 2011-11, as amended by ASU No. 2013-01.

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	Offsetting of Financial Liabilities and Derivative Liabilities
			Gross			Net Amounts		Gross Amounts Not Offset
	Gross		Amounts			of Liabilities		in the Balance Sheet (c)
	Amounts of		Offset in			Presented in					Cash
	Recognized		the Balance			the Balance		Financial			Collateral			Net
	Liabilities (a)		Sheet (a)			Sheet (b)		Instruments			Pledged			Amount
March 31, 2018
Derivatives by    counterparty:
Counterparty 1	$	19,219	$	–		$	19,219	$	–		$	(19,219	)	$	–
Counterparty 4		316		(316	)	–		–			–			–
		19,535		(316	)		19,219	–				(19,219	)	–
Borrowings under    repurchase    arrangements (d)		11,953,111	–				11,953,111		(11,953,111	)	–			–
	$	11,972,646	$	(316	)	$	11,972,330	$	(11,953,111	)	$	(19,219	)	$	–
December 31, 2017
Derivatives by    counterparty:
Counterparty 1	$	24,256	$	–		$	24,256	$	–		$	(24,256	)	$	–
Counterparty 4		3,701		(3,701	)		–		–		–			–
		27,957		(3,701	)		24,256		–			(24,256	)	–
Borrowings under    repurchase    arrangements (d)		12,337,299	–				12,337,299		(12,337,299	)	–			–
	$	12,365,256	$	(3,701	)	$	12,361,555	$	(12,337,299	)	$	(24,256	)	$	–

(a) Included in gross amounts of recognized liabilities at March 31, 2018 is the fair value of non-exchange traded swap agreements (Counterparty 1) and exchange-traded swap agreements (Counterparty 4), calculated including accrued interest.  Included in gross amounts offset in the balance sheet are variation margin amounts associated with exchange-traded swap agreements at March 31, 2018.

(b) Amounts presented are limited to recognized liabilities and cash collateral received associated with the indicated counterparty sufficient to reduce the related Net Amount to zero in accordance with ASU No. 2011-11, as amended by ASU No. 2013-01.

(c) Amounts presented are limited to recognized assets and collateral pledged associated with the indicated counterparty sufficient to reduce the related Net Amount to zero in accordance with ASU No. 2011-11, as amended by ASU No. 2013-01.

(d) Amounts include accrued interest payable of $9.5 million and $7.7 million on borrowings under repurchase arrangements as of March 31, 2018 and December 31, 2017, respectively.

Changes in Accumulated other comprehensive income by component for the quarter ended March 31, 2018 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 December 31, 2017	$	16,874		$	45,244		$	62,118
Activity for the quarter ended March 31, 2018:
Other comprehensive income (loss) before    reclassifications		30,933			(44,053	)		(13,120	)
Amounts reclassified from accumulated    other comprehensive income		(4,644	)	–				(4,644	)
Other comprehensive income (loss)		26,289			(44,053	)		(17,764	)
Balance at March 31, 2018	$	43,163		$	1,191		$	44,354

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NOTE 7 — unsecured BORROWINGS

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 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):

	March 31, 2018					December 31, 2017
	Borrowings Outstanding		Average Rate			Borrowings Outstanding		Average Rate
Junior subordinated notes maturing in:
October 2035 ($35,000 face amount)	$	34,325		7.89	%	$	34,315		7.90	%
December 2035 ($40,000 face amount)		39,330		7.66			39,320		7.66
September 2036 ($25,000 face amount)		24,561		7.70			24,556		7.70
	$	98,216		7.75		$	98,191		7.75

NOTE 8 — Capital transactions

On November 1, 2017, Capstead’s Board of Directors authorized the reinstatement of its previously unused $100 million common stock repurchase program. During the quarter ended March 31, 2018 the Company repurchased 3.4 million shares in the open market for approximately $29.1 million (an average repurchase price, including underwriting fees, of $8.60).  An additional 48,000 share repurchases settled subsequent to quarter-end for $410,000 (an average repurchase price, including underwriting fees, of $8.57), leaving a remaining repurchase program authorization of approximately $67 million.  Repurchases made pursuant to the program are made in the open market in accordance with and as permitted by securities laws and other legal requirements.  The timing, manner, price and amount of any future repurchases will be determined by the Company in its discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors including alternative capital investment opportunities.  In addition, the Company may enter into Rule 10b5-1 plans under which repurchases can be made. The authorization does not obligate the Company to acquire any particular amount of common stock and repurchases under the program and the program itself may be suspended or discontinued at the Company’s discretion without prior notice.  

NOTE 9 — FAIR VALUE

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 lending counterparty investments, all fair values were determined using Level 2 Inputs in accordance with ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820).  Lending counterparty investments are nonmarketable securities classified as assets for which Level 3 Inputs are used to determine fair value.  These assets are considered strategic investments that are carried at cost and periodically valued and evaluated for impairment.  No impairment charges have been recorded relative to these investments and the Company’s cost basis is deemed to approximate 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

-16-

the remaining terms of the 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, or payable to, interest rate swap 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):

	March 31, 2018				December 31, 2017
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Residential mortgage loans	$	1,786	$	1,800	$	1,864	$	1,900
Lending counterparty investments		5,002		5,002		5,002		5,002
Secured borrowings-related interest rate swap    agreements		387		387		–		–
Financial liabilities:
Secured borrowings with initial terms of    greater than 120 days		–		–		33,073		33,100
Unsecured borrowings		98,216		77,600		98,191		74,100
Unsecured borrowings-related interest rate    swap agreements		18,265		18,265		23,772		23,772

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, 2018
Agency Securities classified as available-for-sale:
Fannie Mae/Freddie Mac	$	10,207,636	$	79,710	$	68,746	$	10,218,600
Ginnie Mae		2,840,066		9,628		19,401		2,830,293
Residential mortgage securities classified as    held-to-maturity		1,392		14	–			1,406
December 31, 2017
Agency Securities classified as available-for-sale:
Fannie Mae/Freddie Mac		10,529,646		85,740		37,022		10,578,364
Ginnie Mae		2,875,637		8,958		12,432		2,872,163
Residential mortgage securities classified as    held-to-maturity		1,706		17	–			1,723

	March 31, 2018				December 31, 2017
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Securities in an unrealized loss position:
One year or greater	$	2,342,577	$	34,142	$	2,552,668	$	26,701
Less than one year		4,844,667		54,005		4,665,883		22,752
	$	7,187,244	$	88,147	$	7,218,551	$	49,453

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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 Fannie Mae and Freddie Mac 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 were considered other-than-temporarily impaired at March 31, 2018.

NOTE 10 — COMPENSATION PROGRAMS

Capstead’s annual and long-term incentive compensation programs for key executives are largely nondiscretionary, formulaic and target-based, utilizing multiple pre-established performance goals (referred to as “metrics”) and defined threshold, target and maximum award amounts determined by reference to established percentages of base salaries. Metrics used include (a) relative and absolute economic return (change in book value per share of common stock plus common stock dividends divided by beginning book value per share), (b) relative operating cost efficiency (operating expenses divided by Unsecured borrowings and Stockholders’ equity), (c) relative total stockholder return (change in stock price plus reinvested dividends, and (d) attainment of individual goals and objectives.  Each performance metric is assigned a weighting and performance relative to each metric is calculated separately. No awards can be earned for performance below defined threshold return levels and awards are capped for performance above defined maximum return levels. Awards are made pursuant to the Company’s Amended and Restated 2014 Flexible Incentive Plan that was approved by stockholders in May 2014.  At March 31, 2018, this plan had 3,369,164 shares of common stock remaining available for future issuances.

Short-term Incentive Compensation Programs

Under the provisions of Capstead’s annual incentive compensation program, participating executives have overall target award opportunities ranging from 75% to 125% of base salary. Recognized in Compensation-related expense during the first quarter of 2018 and included in Accounts payable and accrued expenses at March 31, 2018 are annual incentive compensation accruals for participating executives, together with discretionary accruals for all other employees, totaling $568,000.  

The Company administers an additional performance-based short-term incentive compensation program for key executives that provides for quarterly cash payments equal to per share dividends declared on Capstead’s common stock multiplied by a notional amount of non-vesting shares of common stock (“Dividend Equivalent Rights” or “DERs”).  DERs only represent the right to receive the same cash distributions that the Company’s common stockholders are entitled to receive during the term of the grants, subject to certain conditions, including continuous service.  Included in Accounts payable and accrued expenses and recognized in Compensation-related expense are first quarter 2018 DERs distribution amounts totaling $96,000 that were paid in April 2018.

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Long-term Equity-based Awards – Performance-based RSUs

Capstead’s performance-based long-term incentive compensation program for key executives provides for the grant of performance-based RSUs that are convertible into shares of common stock following three-year performance periods, contingent upon whether, and to what extent, performance metrics are met or exceeded.  The actual number of shares of common stock the units can convert into for each of the metrics, if any, can range from one-half of a share per unit if that metric’s threshold level of performance is met, to two shares per unit if the related maximum level of performance is met or exceeded, adjusted for the weighting assigned to the metric.  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 related performance periods.

Pursuant to this program, in January 2018 and 2017, as well as February 2016 the Company granted 183,137, 148,894 and 269,354 RSUs with three-year performance periods ending December 31, 2020, 2019 and 2018, respectively.  Initial grant date fair values developed for compensation cost purposes of $8.71, $10.52 and $8.03 were assigned to the units of each grant, respectively. Amounts actually expensed are largely predicated on estimated performance metric attainment. RSUs granted in January 2015 did not meet the criteria for conversion into shares of common stock pursuant to the applicable performance criteria and, accordingly, outstanding RSUs awarded under these grants totaling 117,255 were forfeited in the first quarter 2018.   Recognized in Compensation-related expense are $3,000 and $312,000 related to this program during the quarters ended March 31, 2018 and 2017, respectively.  Included in Common stock dividends payable at March 31, 2018 are estimated dividends payable pertaining to these awards of $137,000.  

RSU activity for the quarter ended March 31, 2018 is summarized below:

				Weighted
				Average
	Number of			Grant Date
	Shares			Fair Value
Unvested RSU awards outstanding at December 31, 2017		435,976		$	9.10
Grants		183,137			8.71
Forfeitures		(117,255	)		8.83
Unvested RSU awards outstanding at March 31, 2018		501,858			9.02

Long-term Equity-based Awards – Stock Awards

In January 2018 and 2017, as well as February 2016, respectively, the Company granted service-based stock awards for 126,451, 74,446 and 67,337 shares of common stock with grant date fair values of $8.60, $10.41 and $9.32 per share to executives awarded RSUs. Outstanding awards under this program and related deferred dividends are scheduled to vest in January 2021, January 2020 and February 2019, respectively, assuming service conditions are met.  In January of 2018, 2017 and 2016, respectively, the Company granted service-based stock awards for 57,283, 49,416 and 61,272 shares of common stock with grant date fair values of $8.60, $10.41 and $7.87 per share to employees not awarded RSUs.  These awards vest in January of 2021, 2020 and 2019, respectively, assuming service conditions are met.

As a component of the Company’s director compensation program, directors are granted service-based stock awards annually upon election or re-election to the board of directors that vest approximately one year from issuance.  In July 2017 director common stock awards for a total of 41,797 shares with a grant date fair value of $10.05 per share were granted that will vest in July 2018.

-19-

Performance-based and service-based stock award activity for the quarter ended March 31, 2018 is summarized below:

				Weighted
				Average
	Number of			Grant Date
	Shares			Fair Value
Unvested stock awards outstanding at December 31, 2017		296,940		$	9.90
Grants		183,734			8.60
Vestings		(34,899	)		12.47
Unvested stock awards outstanding at March 31, 2018		445,775			9.17

During the quarters ended March 31, 2018 and 2017, the Company recognized in Compensation-related expense $307,000 and $220,000, respectively, related to amortization of the grant date fair value of employee stock awards.  In addition, the Company recognized in Other general and administrative expense $105,000 related to amortization of the grant date fair value of director stock awards during the quarters ended March 31, 2018 and 2017.  Unrecognized compensation expense for unvested stock awards for employees and directors totaled $2.6 million as of March 31, 2018, to be expensed over a weighted average period of 1.6 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.

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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

FINANCIAL CONDITION

Overview

Capstead operates as a self-managed REIT earning income from investing in a leveraged portfolio of residential mortgage pass-through securities consisting almost exclusively of 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 ARM or 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 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 totaled $1.29 billion at March 31, 2018, consisting of $941 million of common and $251 million of preferred stockholders’ equity, together with $98 million of unsecured borrowings maturing in 2035 and 2036 (recorded amounts).  Long-term investment capital decreased $47 million during the quarter ended March 31, 2018 as a result of common stock repurchases totaling $29 million and declines in portfolio valuations that outstripped increases in swap gains.  

Book value per share of common stock (total stockholders’ equity, less liquidation preferences for outstanding shares of preferred stock, divided by outstanding shares of common stock) declined 1.5% ($0.15) to $10.10 per share, as declines in portfolio value were only partially offset by swap gains and common stock repurchases. These repurchases totaled approximately 3.5% of outstanding common stock at a meaningful discount to recorded book value and contributed $0.06 in book value accretion for the quarter.

Capstead’s residential mortgage investments portfolio decreased $402 million during the first quarter of 2018 to $13.05 billion at March 31, 2018 as a portion of capital made available from portfolio runoff was used to repurchase common shares. Secured borrowings decreased $386 million to $11.94 billion.  Portfolio leverage (secured borrowings divided by long-term investment capital) increased to 9.26 to one at March 31, 2018 from 9.22 to one at December 31, 2017.  Management believes current portfolio leverage levels represent an appropriate use of leverage under current market conditions for a portfolio consisting of seasoned, short-duration ARM Agency Securities.

Capstead reported net income of $19 million or $0.16 per diluted common share for the quarter ended March 31, 2018, compared to $23 million or $0.19 per diluted common share for the quarter ended December 31, 2017.  Earnings in the first quarter of 2018 benefited from higher cash yields and lower mortgage prepayment levels while being negatively impacted by higher borrowing costs due largely to Federal Reserve actions to increase short-term interest rates. Earnings in the fourth quarter 2017 also included $1.9 million in other income related to the enactment of the Tax Cuts and Jobs Act. Cash yields are expected to continue trending higher based on higher prevailing six- and 12-month interest rate indices. The Company declared a first quarter 2018 common dividend of $0.16 per share that was paid on April 20, 2018 to holders of record on March 31, 2018.  

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The size and composition of Capstead’s investment portfolio depends on investment strategies being implemented by management, as well as overall market conditions, including the availability of attractively priced investments and suitable financing to leverage the Company’s investment capital.  Market conditions are influenced by, among other things, current and future expectations for short-term interest rates, mortgage prepayments and market liquidity.

Common Stock Repurchase Program

Pursuant to its $100 million stock repurchase program reactivated last November, the Company repurchased 3.4 million shares in the open market for $29 million during the first quarter of 2018 at an average repurchase price, including underwriting fees, of $8.60, or approximately 83.9% of the Company’s December 31, 2017 book value per share. These repurchases generated $0.06 per common share in book value accretion. An additional 48,000 share repurchases settled subsequent to quarter-end at an average repurchase price, including underwriting fees, of $8.57.  Approximately $67 million remains under the repurchase program.  

Repurchases made pursuant to the program are made in the open market in accordance with and as permitted by securities laws and other legal requirements.  The timing, manner, price and amount of any repurchases will be determined by the Company in its discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors including alternative capital investment opportunities.  In addition, the Company may enter into Rule 10b5-1 plans under which repurchases can be made. The authorization does not obligate the Company to acquire any particular amount of common stock and repurchases under the program and the program itself may be suspended or discontinued at the Company’s discretion without prior notice.

Book Value per Common Share

All but $3 million of Capstead’s residential mortgage investments portfolio and all of its interest rate swap agreements are recorded at fair value on the Company’s balance sheet and are therefore included in the calculation of book value per share of common stock.  The Company’s borrowings, however, are not recorded at fair value on the balance sheet.  See NOTE 9 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.  

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The following table illustrates the progression of Capstead’s book value per share of common stock as well as changes in book value expressed as percentages of beginning book value for the quarter ended March 31, 2018:

Book value per common share, beginning of quarter	$	10.25
Change in net unrealized gains on mortgage    securities classified as available-for-sale		(0.48	)
Change in net unrealized gains and losses on interest rate    swap agreements designated as cash flow hedges of:
Secured borrowings		0.23
Unsecured borrowings		0.06
		(0.19	)	(1.9	)%
Capital transactions:
Accretion from common stock repurchases		0.06
Other, principally stock compensation-related activity		(0.02	)
		0.04		0.4	%
Book value per common share, end of period	$	10.10
Decrease in book value per common share during the    quarter	$	(0.15	)	(1.5	)%

Residential Mortgage Investments

The following table illustrates the progression of Capstead’s portfolio of residential mortgage investments for the quarter ended March 31, 2018 (dollars in thousands):

Residential mortgage investments, beginning of quarter	$	13,454,098
Portfolio acquisitions (principal amount)		449,476
Investment premiums on acquisitions*		11,905
Portfolio runoff (principal amount)		(793,735	)
Investment premium amortization		(25,620	)
Decrease in net unrealized gains on securities classified    as available-for-sale		(44,053	)
Residential mortgage investments, end of period	$	13,052,071
Decrease in residential mortgage investments during the    quarter	$	(402,027	)

* Residential mortgage investments typically are acquired at a premium to the securities’ unpaid principal balances.  Investment premiums are recognized in earnings as portfolio yield adjustments using the interest method over the estimated lives of the related investments.  As such, the level of mortgage prepayments impacts how quickly investment premiums are amortized.

Capstead’s investment strategy focuses on managing a portfolio of residential mortgage investments 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, 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

-23-

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 that typically contract during periods of rising interest rates.

ARM securities are backed by mortgage loans that generally 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 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 (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.

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 March 31, 2018 (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
Current-reset ARMs:
Fannie Mae Agency Securities	$		3,819,650	3.25	%		4.16	%		1.69	%		2.91	%		9.36	%		5.9
Freddie Mac Agency Securities			1,583,361	3.31			4.37			1.80			2.40			9.19			7.3
Ginnie Mae Agency Securities			1,440,390	2.73			3.61			1.51			1.06			8.27			6.3
Residential mortgage loans			1,162	4.04			4.30			2.11			1.71			11.17			5.1
(52% of total)			6,844,563	3.15			4.09			1.68			2.40			9.09			6.3
Longer-to-reset ARMs:
Fannie Mae Agency Securities			3,124,835	2.77			4.24			1.59			3.08			7.77			41.6
Freddie Mac Agency Securities			1,679,790	2.73			4.29			1.64			2.70			7.80			38.8
Ginnie Mae Agency Securities			1,399,676	3.03			3.59			1.50			1.01			8.03			46.4
(48% of total)			6,204,301	2.82			4.11			1.58			2.11			7.88			42.0
	$		13,048,864	2.99			4.10			1.63			2.28			8.59			23.3
Gross WAC (rate paid by    borrowers) (c)				3.59

(a) Amortized cost basis represents the Company’s investment (unpaid principal balance plus unamortized investment premiums) before unrealized gains and losses.  At March 31, 2018, the ratio of amortized cost basis to unpaid principal balance for the Company’s ARM holdings was 103.03.  This table excludes $2 million in fixed-rate agency-guaranteed mortgage pass-through securities, residential mortgage loans and private residential mortgage pass-through securities held as collateral for structured financings.  

(b) Net WAC, or weighted average coupon, is the weighted average interest rate of the mortgage loans underlying the indicated investments, net of servicing and other fees as of the indicated date. Net WAC is expressed as a percentage calculated on an annualized basis on the unpaid principal balances of the mortgage loans underlying these investments.  As such, it is similar to the cash yield on the portfolio which is calculated using amortized cost basis.  Fully indexed WAC represents the weighted average coupon upon one or more resets using interest rate indexes and net margins as of the indicated date.  Average net margins represent the weighted average levels over the underlying indexes that the portfolio can adjust to upon reset, usually subject to initial, periodic and/or lifetime caps on the amount of such adjustments during any single interest rate adjustment period and over the contractual term of the underlying loans.  ARM securities with initial fixed-rate periods of five years or longer typically have either 200 or 500 basis point initial caps with 200 basis point periodic caps.  Additionally, certain ARM securities held by the Company are subject only to lifetime caps or are not subject to a cap.  For presentation purposes, average periodic caps in the table above reflect initial caps until after an ARM security has reached its initial reset date and lifetime caps, less the current net WAC, for ARM securities subject only to lifetime caps.  At quarter-end, 76% of current-reset ARMs were subject to periodic caps averaging 1.75%; 17% were subject to initial caps averaging 3.37%; and 7% were subject to lifetime caps averaging 7.07%.  All longer-to-reset ARM securities at March 31, 2018 were subject to initial caps.  

(c) Gross WAC is the weighted average interest rate of the mortgage loans underlying the indicated investments, including servicing and other fees paid by borrowers, as of the indicated balance sheet date.

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After consideration of any applicable initial fixed-rate periods, at March 31, 2018 approximately 90%, 5% 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 83% of the Company’s current-reset ARM securities have reached an initial coupon reset date, while none of its longer-to-reset ARM securities have reached an initial coupon reset date.  Additionally, at March 31, 2018 approximately 5% of the Company’s ARM securities were backed by interest-only loans, with remaining interest-only payment periods averaging 25 months.  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.  

Secured Borrowings

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.  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.  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 4.5 percent and ranged from 3.0 to 5.0 percent of the fair value of pledged residential mortgage pass-through securities at March 31, 2018.  After considering haircuts and related interest receivable on the collateral, as well as interest payable on these borrowings, the Company had $670 million of capital at risk with its lending counterparties at March 31, 2018.  The Company did not have capital at risk with any single counterparty exceeding 5% of total stockholders’ equity at March 31, 2018.

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 March 31, 2018 the Company’s secured borrowings totaled $11.94 billion with 22 counterparties at average rates of 1.88%, before the effects of currently-paying interest rate swap agreements held as cash flow hedges and 1.63% including the effects of these derivatives.  The Company typically uses two- and three-year term interest rate swap agreements with variable rate receipts based on either one-month or three-month LIBOR to help mitigate exposure to rising short-term interest rates.  At quarter-end the Company held $6.85 billion notional amount of portfolio financing-related interest rate swap agreements with contract expirations occurring at various dates through the first quarter of 2021 and a weighted average expiration of 14 months.  

After consideration of all portfolio financing-related swap positions entered into as of quarter-end, the Company’s residential mortgage investments and secured borrowings had estimated durations at March 31, 2018 of 12 and 8 months, respectively, for a net duration gap of approximately 4 months – see

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“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 derivative financial instruments such as interest rate swap agreements as well as longer-maturity secured borrowings, if available at attractive rates and terms.  

Utilization of Long-term Investment Capital and Potential Liquidity

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:

• current portfolio leverage levels,

• changes in market value of assets pledged and interest rate swap agreements held for hedging purposes as determined by lending and swap counterparties,

• mortgage prepayment levels,

• collateral requirements of lending and swap counterparties, and

• general conditions in the commercial banking and mortgage finance industries.

Capstead’s utilization of its long-term investment capital and its estimated potential liquidity were as follows as of March 31, 2018 in comparison with December 31, 2017 (in thousands):

	Investments (a)		Secured Borrowings		Capital Employed		Potential Liquidity (b)		Portfolio Leverage
Residential mortgage investments	$	13,052,071	$	11,944,841	$	1,107,230	$	515,574
Cash collateral receivable from swap    counterparties, net (c)						18,708	–
Other assets, net of other liabilities						164,506		89,915
Balances as of March 31, 2018:	$	13,052,071	$	11,944,841	$	1,290,444	$	605,489	9.26:1
Balances as of December 31, 2017	$	13,454,098	$	12,331,060	$	1,337,067	$	613,791	9.22:1

(a) Investments are stated at balance sheet carrying amounts, which generally reflect estimated fair value as of the indicated dates.

(b) Potential liquidity is based on maximum amounts of borrowings available under existing uncommitted financing arrangements considering management’s estimate of the fair value of residential mortgage investments held as of the indicated dates adjusted for other sources of liquidity such as cash and cash equivalents.

(c) Cash collateral receivable from swap counterparties is presented net of cash collateral payable to swap counterparties, if applicable, and the fair value of interest rate swap positions as of the indicated date.

In order to efficiently manage its liquidity and capital resources, Capstead attempts to maintain sufficient liquidity reserves to fund borrowing and interest rate swap 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 swap 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.  

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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 current portfolio leverage levels represent an appropriate use of leverage under current market conditions for a portfolio consisting of seasoned, short-duration ARM Agency Securities.  

Supplemental Analysis of Quarterly Financing Spreads

Quarterly financing spreads and mortgage prepayment rates were as follows for the indicated periods:

	2018			2017												2016
	Q1			Q4			Q3			Q2			Q1			Q4			Q3			Q2
Total financing spreads: (a)
Yields on all interest-earning    assets		2.07	%		1.90	%		1.68	%		1.65	%		1.67	%		1.49	%		1.45	%		1.53	%
Borrowing rates on all    interest-paying liabilities		1.52			1.34			1.22			1.13			0.99			0.94			0.89			0.89
Total financing spreads		0.55			0.56			0.46			0.52			0.68			0.55			0.56			0.64
Financing spreads on residential    mortgage investments, a non-    GAAP financial measure:
Cash yields on residential    mortgage investments (b)		2.85			2.79			2.72			2.66			2.60			2.55			2.52			2.50
Investment premium    amortization (b)		(0.77	)		(0.88	)		(1.03	)		(1.00	)		(0.93	)		(1.05	)		(1.06	)		(0.96	)
Yields on residential    mortgage investments		2.08			1.91			1.69			1.66			1.67			1.50			1.46			1.54
Unhedged secured borrowing    rates (c)		1.64			1.39			1.33			1.09			0.89			0.79			0.69			0.67
Hedged secured borrowing    rates (c)		1.35			1.23			1.10			1.08			0.96			0.95			0.93			0.96
Secured borrowing rates		1.47			1.29			1.17			1.08			0.93			0.89			0.84			0.84
Financing spreads on    residential mortgage    investments		0.61			0.62			0.52			0.58			0.74			0.61			0.62			0.70
Constant prepayment rate (“CPR”)		19.64			22.50			25.77			24.69			22.93			25.59			25.80			23.19

(a) All interest-earning assets include residential mortgage investments, overnight investments and cash collateral receivable from interest rate swap counterparties.  All interest-paying liabilities include unsecured borrowings and cash collateral payable to interest rate swap counterparties.

(b) Cash yields are based on the cash component of interest income.  Investment premium amortization is determined using the interest method which incorporates actual and anticipated future mortgage prepayments.  Both are expressed as a percentage calculated on average amortized cost basis for the indicated periods.

(c) Unhedged borrowing rates represent average rates on secured borrowings, before consideration of related currently-paying interest rate swap agreements.  Hedged borrowing rates represent the average fixed-rate payments made on currently-paying interest rate swap agreements held for portfolio hedging purposes adjusted for differences between LIBOR-based variable-rate payments received on these swaps and unhedged borrowing rates, as well as the effects of any hedge ineffectiveness.  Average fixed-rate swap payments were 1.34% for the first quarter of 2018, while variable-rate payment adjustments and clearing fees equated to 0.01% on average currently-paying swap notional amounts outstanding for the same period.  During 2017, fixed-rate swap payments averaged 1.04% while variable-rate payment adjustments averaged 0.05% on average notional amounts outstanding.

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Cash yields continue to benefit from higher coupon interest rates as mortgage loans underlying the Company’s current-reset ARM securities reset to higher rates based on higher prevailing six- and 12-month interest rate indices.  The majority of these loans reset annually based on margins over indices, such as 12-month LIBOR, which have increased considerably since mid-2016.  

Portfolio yield adjustments for investment premium amortization are primarily driven by mortgage prepayment and investment premium levels.  Mortgage prepayment levels are heavily influenced by the availability of mortgage financing at attractive terms and the overall health of the housing markets, as well as seasonal factors.  Continued declines in mortgage prepayments in the first quarter of 2018 were largely a function of seasonality and higher prevailing mortgage interest rates. Second and third quarter 2018 prepayment activity will likely be higher, driven by season considerations such as the summer home buying season and available processing days, with refinancing activity primarily centered on homeowners whose mortgages are resetting higher.

Higher unhedged borrowing rates are heavily influenced by the Federal Reserve’s actions to increase the Federal Funds Rate. Increases thus far in 2018 are primarily attributable to the 25 basis point Federal Funds Rate increases in December 2017 and, to a lesser extent, March 2018, while 2017 borrowing rates were impacted by four 25 basis point increases between December 2016 and December 2017.  Fixed swap rates generally increased over the periods presented as older, lower-rate swap agreements expired and newer, higher-rate swaps were entered into in order to provide important balance sheet and future financing spread protection, particularly as it pertains to additions to the longer-to-reset portion of the Company’s ARM securities portfolio.  

Reconciliation of GAAP and non-GAAP Financing Spread Disclosures

Financing spreads on residential mortgage investments differ from total financing spreads, an all-inclusive GAAP measure, that is based on all interest-earning assets and liabilities. Management believes presenting financing spreads on residential mortgage investments provides useful information for evaluating portfolio performance.  The following reconciles these measures for the indicated periods:

	2018			2017												2016
	Q1			Q4			Q3			Q2			Q1			Q4			Q3			Q2
Total financing spreads		0.55	%		0.56	%		0.46	%		0.52	%		0.68	%		0.55	%		0.56	%		0.64	%
Impact of yields on other    interest-earning assets*		0.01			0.01			0.01			0.01			-			0.01			0.01			0.01
Impact of borrowing rates on    other interest-paying liabilities*		0.05			0.05			0.05			0.05			0.06			0.05			0.05			0.05
Financing spreads on residential    mortgage investments		0.61			0.62			0.52			0.58			0.74			0.61			0.62			0.70

* Other interest-earning assets consist of overnight investments and cash collateral receivable from interest rate swap counterparties. Other interest-paying liabilities consist of unsecured borrowings (at average borrowing rates of 7.70% for the first quarter of 2018) and, at times, cash collateral payable to interest rate swap counterparties.

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RESULTS OF OPERATIONS

	Quarter Ended
	March 31
	2018			2017
Income statement data: (in thousands, except per share data)
Interest income on residential mortgage investments
(before investment premium amortization)	$	94,758		$	85,226
Investment premium amortization		(25,620	)		(30,385	)
Related interest expense		(45,021	)		(28,240	)
		24,117			26,601
Other interest income (expense)		(1,483	)		(1,738	)
		22,634			24,863
Other revenue (expense):
Compensation-related expense		(2,048	)		(1,115	)
Other general and administrative expense		(1,237	)		(1,062	)
Miscellaneous other revenue		71			15
		(3,214	)		(2,162	)
Net income	$	19,420		$	22,701
Net income per diluted common share	$	0.16		$	0.20
Average diluted shares outstanding		93,506			95,875
Key operating statistics: (dollars in millions)
Average yields:
Residential mortgage investments:
Cash yields		2.85	%		2.60	%
Investment premium amortization		(0.77	)		(0.93	)
Adjusted yields		2.08			1.67
Other interest-earning assets		1.33			0.54
Total average yields		2.07			1.67
Average borrowing rates:
Secured borrowings:
Unhedged borrowing rates		1.64			0.89
Hedged borrowing rates		1.35			0.96
Adjusted secured borrowing rates		1.47			0.93
Unsecured borrowings		7.70			7.71
Total average borrowing rates		1.52			0.99
Average total financing spreads		0.55			0.68
Average financing spreads on residential mortgage investments,    a non-GAAP financial measure (a)		0.61			0.74
Average CPR		19.64			22.93
Average balance information:
Residential mortgage investments (cost basis)	$	13,303		$	13,102
Other interest-earning assets		123			114
Secured borrowings		12,236			12,087
Unsecured borrowings(included in long-term    investment capital)		98			98
Long-term investment capital (“LTIC”)		1,315			1,361
Operating costs as a percentage of average LTIC (b)		1.01	%		0.74	%
Return on average LTIC		6.57			7.33
Return on average common equity capital		6.12			7.18

(a) Financing spreads on residential mortgage investments is a non-GAAP financial measure based solely on yields on Capstead’s residential mortgage investments, net of secured borrowing rates, adjusted for currently-paying interest rate swap agreements held for hedging purposes.  This measure differs from total financing spreads, an all-inclusive GAAP measure that includes yields on all interest-earning assets, as well as rates paid on all interest-bearing liabilities, principally unsecured borrowings.  See “Reconciliation of GAAP and non-GAAP Financing Spread Disclosures” for a reconciliation of these financial measures and the Company’s rationale for using this non-GAAP financial measure.

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Capstead’s net income totaled $19 million or $0.16 per diluted common share for the quarter ended March 31, 2018, compared to $23 million or $0.20 per diluted common share for the same period in 2017.  Earnings in the first quarter of 2018 benefited from higher cash yields and lower investment premium amortization caused by lower mortgage prepayment levels while being negatively impacted by higher borrowing costs.  

Interest income on residential mortgage investments was higher by $14.3 million for the quarter ended March 31, 2018 compared to the same period in 2017.  The increase is attributable to $13.4 million in increases related to higher average yields and $852,000 in increases related to higher average portfolio balances.

Interest expense on secured borrowings was higher by $16.8 million for the quarter ended March 31, 2018 compared to the same period in 2017.  The increase is attributable to $16.4 million in increases related to higher average borrowing rates and $350,000 in increases related to higher average borrowings.

Yields on residential mortgage investments increased 41 basis points compared to the same period in 2017, averaging 2.08% for the quarter ended March 31, 2018. Cash yields increased 25 basis points, averaging 2.85% for the quarter ended March 31, 2018 compared to the same period in 2017, largely due to ARM loan coupon interest rates resetting higher to more current rates. Negative yield adjustments for investment premium amortization declined 16 basis points during the quarter ended March 31, 2018 compared to the same period in 2017 to average 77 basis points, primarily as a result of lower mortgage prepayment rates.  Mortgage prepayment levels are influenced by the availability of mortgage financing at attractive terms and the health of the housing markets as well as seasonal factors.  

Secured borrowing rates adjusted for currently-paying interest rate swap agreements held for hedging purposes increased 54 basis points for the quarter ended March 31, 2018 compared to the same period in 2017 to average 1.47%. Market conditions, including the 25 basis point increases in the Federal Funds Rate in December 2017 and March 2018, contributed to higher borrowing rates.  Swap costs were impacted by the expiration of older, lower-rate swaps and the addition of new higher-rate swaps, partially offset by higher variable rate swap receipts as a result of higher short-term LIBOR rates.  Average fixed-rate swap payment rates were 134 basis points for the quarter ended March 31, 2018 compared to 89 basis points for the same period in 2017.  Currently-paying swap balances were lower, averaging $7.16 billion for the quarter ended March 31, 2018, respectively, compared to $7.84 billion for the same period in 2017.  Future secured borrowing rates are 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.

Capstead sees its internally-managed structure and agency-focused investment strategy as key to its consistently low operating costs (compensation, general and administrative expenses). Operating costs were higher in the first quarter of 2018 compared to the same period in 2017 primarily due to adjustments made in the first quarter of 2017 finalizing the 2016 short-term incentive compensation plan.

liquidity and capital resources

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 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

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Company at March 31, 2018 and the accompanying discussion provides insight into the Company’s 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.

None of the Company’s borrowing counterparties are obligated to renew or otherwise enter into new borrowings at the conclusion of existing borrowings.  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.  Secured borrowings totaled $11.94 billion at March 31, 2018, all maturing within 90 days.  Secured borrowings began the year at $12.33 billion and averaged $12.24 billion during the quarter ended March 31, 2018.  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.  

The Company typically uses two- and three-year term interest rate swap agreements with variable rate receipts based on either one-month or three-month LIBOR to help mitigate exposure to rising short-term interest rates.  At quarter-end the Company held $6.85 billion notional amount of portfolio financing-related interest rate swap agreements with contract expirations occurring at various dates through the first quarter of 2021 and a weighted average expiration of 14 months. Relative to the 20-year floating rate terms of the Company’s $100 million face amount of unsecured borrowings, in 2010 the Company entered into forward-starting swap agreements to effectively lock in fixed rates of interest on these borrowings.  The Company intends to continue to utilize suitable derivative financial instruments such as interest rate swap agreements and longer-maturity secured borrowings to manage interest rate risk when available at attractive rates and terms.

Pursuant to its $100 million stock repurchase program reactivated last November, during the first quarter of 2018 the Company repurchased 3.4 million shares in the open market for approximately $29 million. An additional 48,000 share repurchases settled subsequent to quarter-end for $410,000, leaving a remaining repurchase program authorization of approximately $67 million. Future levels of stock repurchases will largely be dependent upon market conditions including alternative investment opportunities.

The timing, manner, price and amount of any future common and preferred issuances and any common stock repurchases pursuant to these programs 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.  

Interest Rate Risk

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

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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.  

To further reduce exposure to higher short-term interest rates, the Company uses interest rate swap agreements that typically require interest payments for two-year terms, as well as longer-maturity secured borrowings, if available at attractive rates and terms.  These transactions lengthen the effective duration of the Company’s secured borrowings to more closely match the duration of its portfolio of residential mortgage investments.  After consideration of portfolio financing-related swap positions held to hedge changes in short-term interest rates, at March 31, 2018 the Company’s residential mortgage investments and secured borrowings had estimated durations of 12 and 8 months, respectively, for a net duration gap of approximately 4 months.  The Company intends to continue to manage interest rate risk associated with holding and financing its residential mortgage investments by utilizing suitable derivative financial instruments such as interest rate swap agreements and longer-maturity secured borrowings, if available at attractive rates and terms.

Capstead performs sensitivity analyses using a model 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 derivative financial instruments 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, and portfolio leverage levels.  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.

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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 derivative financial instruments as of the indicated dates, 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)
March 31, 2018	1.50-1.75	%		2.74	%		8.3	%		5.1	%		(8.1	)%		(22.5	)%
December 31, 2017	1.25-1.50			2.41			3.1			(2.1	)		(8.2	)		(22.0	)
Projected percentage change in    portfolio and related derivative    values: (a)
March 31, 2018	1.50-1.75			2.74			0.1			0.1			(0.3	)		(0.6	)
December 31, 2017	1.25-1.50			2.41			0.1			0.1			(0.3	)		(0.6	)

(a) Sensitivity of net interest margins as well as portfolio and related derivative values to changes in interest rates is determined relative to the actual rates at the applicable date. Note that the projected 12-month net interest margin change is predicated on acquisitions of similar assets sufficient to replace runoff.  There can be no assurance that suitable investments will be available for purchase at attractive prices, if investments made will behave in the same fashion as assets currently held or if management will choose to replace runoff with such assets.

(b) The variance in sensitivity at March 31, 2018 compared to December 31, 2017 is in large part due to prepayment speeds, forecasted portfolio and leverage.  Also affecting the variance are loans underlying the portfolio subject to caps, as well as the effects of changes in projected net interest margins between the periods.  See “Residential Mortgage Investments” for further discussion of the characteristics of the Company’s residential ARM portfolio.

CRITICAL ACCOUNTING POLICIES

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:

• Amortization of investment premiums on residential mortgage investments – Investment premiums on residential mortgage investments are recognized in earnings as adjustments to interest income by the interest method over the estimated lives of the related assets.  The single largest determinant in amortizing investment premiums is actual portfolio runoff (scheduled and unscheduled principal paydowns) for a given accounting period.  This is because the investment premium associated with actual runoff is amortized when the runoff occurs pursuant to the interest method.  Amortization is also affected by estimates and judgments related to future levels of mortgage prepayments used in determining additional amortization that may be necessary to achieve the required effective yield over the estimated life of the related investment.

-33-

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.

• Fair value and impairment accounting for residential mortgage investments – Nearly all of Capstead’s residential mortgage investments are held in the form of mortgage securities that are classified as available-for-sale and recorded at fair value on the balance sheet with unrealized gains and losses recorded in Stockholders’ equity as a component of Accumulated other comprehensive income.  As such, these unrealized gains and losses enter into the calculation of book value per common share, a key financial metric used by investors in evaluating the Company.  Fair values fluctuate with current and projected changes in interest rates, prepayment expectations and other factors such as market liquidity conditions and the perceived credit quality of Agency Securities.  Judgment is required to interpret market data and develop estimated fair values, particularly in circumstances of deteriorating credit quality and market liquidity.  See NOTE 9 to the consolidated financial statements (included under Item 1 of this report) for discussion of how Capstead values its residential mortgage investments.

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 that is determined to be other-than-temporary, the difference between amortized cost and fair value would be recognized in earnings as a component of Other revenue (expense) if 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.  Other-than-temporary impairment of a mortgage security due to other factors would be recognized in Accumulated other comprehensive income.

• Accounting for derivative financial instruments – Capstead uses derivatives for risk management purposes.  Derivatives are recorded as assets or liabilities and carried at fair value and consequently, changes in value of these instruments enter into the calculation of book value per common share.  Fair values fluctuate with current and projected changes in interest rates and other factors such as the Company’s and its counterparties’ nonperformance risk.  Judgment is required to develop estimated fair values.

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 revenue (expense).  

The Company currently uses interest rate swap agreements in hedge relationships accounted for as cash flow hedges in order to hedge variability in borrowing rates due to changes in the underlying benchmark interest rate related to a designated portion of current and anticipated future 30- and 90-day secured borrowings and the 20-year floating-rate periods of unsecured borrowings.  Variable-rate payments to be received on swap agreements are recorded in interest expense as an offset to interest owed on related designated borrowings while fixed-rate swap payments to be made are also recorded in interest expense resulting in an effectively fixed borrowing rate on these borrowings, subject to certain adjustments.  See NOTE 6 to the consolidated financial statements (included under Item 1 of this report) and “Financial Condition – Residential Mortgage Investments” for additional information regarding the Company’s current use of derivatives and its related risk management policies.

-34-

STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

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:

• fluctuations in interest rates and levels of mortgage prepayments;

• changes in market conditions as a result of federal corporate and individual income tax reform, federal government fiscal challenges and Federal Reserve monetary policy, including policy regarding its holdings of Agency and U.S. Treasury Securities;

• liquidity of secondary markets and credit markets, including the availability of financing at reasonable levels and terms to support investing on a leveraged basis;

• the impact of differing levels of leverage employed;

• changes in legislation or regulation affecting Agency Securities and similar federal government agencies and related guarantees;

• deterioration in credit quality and ratings of existing or future issuances of Agency Securities;

• the effectiveness of risk management strategies;

• the availability of suitable qualifying investments from both an investment return and regulatory perspective;

• the availability of new investment capital;

• the ability to maintain real estate investment trust (“REIT”) status;

• changes in legislation or regulation affecting exemptions for mortgage REITs from regulation under the Investment Company Act of 1940;

• other changes in legislation or regulation affecting the mortgage and banking industries; and

• changes in general economic conditions, increases in costs and other general competitive factors.

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, 2017, filed with the U.S. Securities and Exchange Commission on February 20, 2018.  

-35-

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS

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.”

Item 4.    Controls and Procedures

As of March 31, 2018, 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 March 31, 2018.  There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to March 31, 2018.

-36-

PART II. — OTHER INFORMATION

ITEM 1A. RISK FACTORS

There have been no material changes in our risk factors during the three months ended March 31, 2018 from those previously disclosed in “Risk Factors” under Part I, Item 1A of our 2017 Form 10-K.

ITEM 6.    EXHIBITS

Exhibit Number DESCRIPTION

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)
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	Amended and Restated Bylaws.(3)
4.1	Specimen of Common Stock Certificate.(4)
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)
4.3	Junior Subordinated Indenture dated September 26, 2005.(5)
4.4	Indenture dated December 15, 2005.(5)
4.5	Indenture dated September 11, 2006.(5)
10.01	Amended and Restated Deferred Compensation Plan.(5)
10.02	Amended and Restated 2014 Flexible Incentive Plan.(6)
10.03	Amendment No. 1 to the Amended and Restated 2014 Flexible Incentive Plan.(7)
10.04	Second Amended and Restated Incentive Bonus Plan.(8)
10.05	Form of nonqualified stock option and stock award agreements for non-employee directors.(5)
10.06	2016 Annual Incentive Compensation Program.(9)
10.07	Form of restricted stock agreement for employees. (9)
10.08	2016 Long-Term Performance Unit Award Criteria. (9)
10.09	Form of performance unit agreement for employees. (9)
10.10	2017 Annual Incentive Compensation Program.(10)
10.11	Form of restricted stock agreement for employees. (10)
10.12	2017 Long-Term Performance Unit Award Criteria. (10)
10.13	Form of performance unit agreement for employees. (10)
10.14	2018 Annual Incentive Compensation Program.(11)
10.15	Form of restricted stock agreement for employees. (11)
10.16	2018 Long-Term Performance Unit Award Criteria. (11)
10.17	Form of performance unit agreement for employees. (11)
10.18	Consulting Agreement, dated July 14, 2016, by and between the Company and Andrew F. Jacobs. (12)
10.19	Sales Agreement, dated December 6, 2017, by and between the Company and the Sales Manager. (13)
10.20	Form of Change in Control/Severance Agreement for executive officers(14)
12	Computation of ratio of net income to fixed charges and ratio of net income to combined fixed charges and preferred stock dividends.*
31.1	Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002*

-37-

Exhibit Number DESCRIPTION

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**
32.2	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
101.INS	XBRL Instance Document*
101.SCH	XBRL Taxonomy Extension Schema*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase*
101.DEF	XBRL Additional Taxonomy Extension Definition Linkbase*
101.LAB	XBRL Taxonomy Extension Label Linkbase*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase*

(1) Incorporated by reference to the Registrant’s Annual Report on Form 10-K/A (No. 001-08896) for the year ended December 31, 2012.

(2) Incorporated by reference to the Registrant’s Registration of Certain Classes of Securities on Form 8-A (No. 001-08896) dated May 13, 2013.

(3) Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on February 3, 2014, for the event dated January 29, 2014.

(4) Incorporated by reference to the Registrant’s Registration Statement on Form S-3 (No. 333-63358) dated June 19, 2001.

(5) Incorporated by reference to the Registrant’s Annual Report on Form 10-K (No. 001-08896) for the year ended December 31, 2011.

(6) Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on May 30, 2014, for the event dated May 28, 2014.

(7) Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on February 20, 2015, for the event dated February 20, 2015.

(8) Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on May 5, 2011, for the event dated May 4, 2011.

(9) Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on February 4, 2016, for the event dated February 1, 2016.

(10) Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on January 5, 2017, for the event dated January 3, 2017.

(11) Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on January 4, 2018, for the event dated January 3, 2018.

(12) Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on July 15, 2016, for the event dated July 14, 2016.

(13) Incorporated by reference to the Registrant’s Current Report on Form 8-K (No. 001-08896), filed on December 11, 2017, for the event dated December 6, 2017.

(14) Incorporated by reference to the Registrant’s Annual Report on Form 10-K (No. 001-08896) for the year ended December 31, 2017.

* Filed herewith

** Furnished herewith

-38-

SIGNATURES

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.

	CAPSTEAD MORTGAGE CORPORATION Registrant
Date: April 30, 2018	By:	/s/ PHILLIP A. REINSCH
		Phillip A. Reinsch
		President and Chief Executive Officer

Date: April 30, 2018	By:	/s/ LANCE J. PHILLIPS
		Lance J. Phillips
		Senior Vice President, Chief Financial Officer
		and Secretary (Principal Financial and
		Accounting Officer)

-39-

EX-12

EXHIBIT 12

CAPSTEAD MORTGAGE CORPORATION

COMPUTATION OF RATIO OF NET INCOME TO FIXED CHARGES AND RATIO OF NET INCOME TO COMBINED FIXED CHARGES AND PREFERRED STOCK ITEMS

(In thousands, except ratios)

(Unaudited)

Computation of ratio of net income to fixed charges:

	Three Months Ended March 31,		Year Ended December 31
	2018		2017		2016		2015		2014		2013
Fixed charges	$	46,912	$	146,367	$	115,486	$	93,975	$	73,643	$	75,104
Fixed charges	$	46,912	$	146,367	$	115,486	$	93,975	$	73,643	$	75,104
Net income		19,420		79,589		82,873		108,325		140,820		126,487
	$	66,332	$	225,956	$	198,359	$	202,300	$	214,463	$	201,591
Ratio of net income to   fixed charges	1.41:1		1.54:1		1.72:1		2.15:1		2.91:1		2.68:1

Computation of ratio of net income to combined fixed charges and preferred stock dividends:

	Three Months Ended March 31,		Year Ended December 31
	2018		2017		2016		2015		2014		2013
Fixed charges	$	46,912	$	146,367	$	115,486	$	93,975	$	73,643	$	75,104
Preferred stock items:
Redemption preference   premiums*	–		–		–		–		–			19,924
Dividends		4,842		17,442		15,372		15,160		13,781		17,536
Combined fixed charges   and preferred stock   items	$	51,754	$	163,809	$	130,858	$	109,135	$	87,424	$	112,564
Fixed charges	$	46,912	$	146,367	$	115,486	$	93,975	$	73,643	$	75,104
Net income		19,420		79,589		82,873		108,325		140,820		126,487
	$	66,332	$	225,956	$	198,359	$	202,300	$	214,463	$	201,591
Ratio of net income to   combined fixed charges   and preferred  stock   dividends	1.28:1		1.38:1		1.52:1		1.85:1		2.45:1		1.79:1

* Capstead’s Series A and B preferred shares were redeemed in June 2013.  The ratio of net income to combined fixed charges and preferred stock dividends excluding the redemption preference premiums was 2.18:1 for the year ended December 31, 2013.

EX-31.1

exhibit 31.1

cAPSTEAD MORTGAGE CORPORATION

Certification Pursuant to section 302(a)

of the Sarbanes-Oxley Act of 2002

I, Phillip A. Reinsch, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Capstead Mortgage Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  April 30, 2018	By:	/s/ PHILLIP A. REINSCH
		Phillip A. Reinsch
		President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CAPSTEAD MORTGAGE CORPORATION

CERTIFICATION PURSUANT TO SECTION 302(a)

OF THE SARBANES-OXLEY ACT OF 2002

I, Lance J. Phillips, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Capstead Mortgage Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 30, 2018	By:	/s/ LANCE J. PHILLIPS
		Lance J. Phillips
		Senior Vice President, Chief
		Financial Officer and Secretary

EX-32.1

EXHIBIT 32.1

CAPSTEAD MORTGAGE CORPORATION

Certifications Pursuant to

18 U.S.C. Section 1350,

As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Capstead Mortgage Corporation (the “Company”) for the period ended March 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Phillip A. Reinsch, President and Chief Executive Officer of the Company, certify to my knowledge and in my capacity as an officer of the Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  April 30, 2018	By:	/s/ PHILLIP A. REINSCH
		Phillip A. Reinsch
		President and Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CAPSTEAD MORTGAGE CORPORATION

CERTIFICATIONS PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Capstead Mortgage Corporation (the “Company”) for the period ended March 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lance J. Phillips, Senior Vice President, Chief Financial Officer and Secretary of the Company, certify to my knowledge and in my capacity as an officer of the Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: April 30, 2018	By:	/s/ LANCE J. PHILLIPS
		Lance J. Phillips
		Senior Vice President, Chief
		Financial Officer and Secretary

XML

Document and Entity Information - shares	3 Months Ended
	Mar. 31, 2018	Apr. 30, 2018
Document And Entity Information [Abstract]
Entity Registrant Name	CAPSTEAD MORTGAGE CORP
Entity Central Index Key	0000766701
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	Yes
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		92,445,903
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	Q1
Trading Symbol	CMO
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2018

XML

CONSOLIDATED BALANCE SHEETS (UNAUDITED) - USD ($) $ in Thousands	Mar. 31, 2018	Dec. 31, 2017
Assets
Residential mortgage investments ($12.59 and $12.98 billion pledged at March 31, 2018 and December 31, 2017, respectively)	$ 13,052,071	$ 13,454,098
Cash collateral receivable from interest rate swap counterparties	36,586	42,506
Interest rate swap agreements at fair value	387
Cash and cash equivalents	89,915	103,907
Receivables and other assets	113,565	132,938
Total assets	13,292,524	13,733,449
Liabilities
Secured borrowings	11,944,841	12,331,060
Interest rate swap agreements at fair value	18,265	23,772
Unsecured borrowings	98,216	98,191
Common stock dividend payable	15,069	18,487
Accounts payable and accrued expenses	23,905	23,063
Total liabilities	12,100,296	12,494,573
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 March 31, 2018 and December 31, 2017	250,946	250,946
Common stock - $0.01 par value; 250,000 shares authorized: 92,494 and 95,698 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively	925	957
Paid-in capital	1,242,573	1,271,425
Accumulated deficit	(346,570)	(346,570)
Accumulated other comprehensive income	44,354	62,118
Total stockholders' equity	1,192,228	1,238,876
Total liabilities and equity	$ 13,292,524	$ 13,733,449

XML

CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Parenthetical) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2018	Dec. 31, 2017
Assets
Residential mortgage investments pledged	$ 12,590,000	$ 12,980,000
Stockholders’ equity
Preferred stock, par value (in dollars per share)	$ 0.10	$ 0.10
Preferred stock, shares authorized (in shares)	100,000	100,000
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	250,000	250,000
Common stock, shares issued (in shares)	92,494	95,698
Common stock, shares outstanding (in shares)	92,494	95,698
Cumulative Redeemable Preferred Stock, Series E [Member]
Stockholders’ equity
Preferred stock, shares issued (in shares)	10,329	10,329
Preferred stock, shares outstanding (in shares)	10,329	10,329
Preferred stock, dividend rate	7.50%	7.50%
Preferred stock, aggregate liquidation preference	$ 258,226	$ 258,226

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CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
Interest income:
Residential mortgage investments	$ 69,138	$ 54,841
Other	408	153
Interest income	69,546	54,994
Interest expense:
Secured borrowings	(45,021)	(28,240)
Unsecured borrowings	(1,891)	(1,891)
Interest expense	(46,912)	(30,131)
Net interest income (expense)	22,634	24,863
Other revenue (expense):
Compensation-related expense	(2,048)	(1,115)
Other general and administrative expense	(1,237)	(1,062)
Miscellaneous other revenue	71	15
Operating expenses	(3,214)	(2,162)
Net income	19,420	22,701
Net income available to common stockholders:
Net income	19,420	22,701
Less preferred stock dividends	(4,842)	(3,864)
Net income available to common stockholders	$ 14,578	$ 18,837
Net income per common share:
Basic and diluted	$ 0.16	$ 0.20
Weighted average common shares outstanding:
Basic (in shares)	93,425	95,755
Diluted (in shares)	93,506	95,875
Cash dividends declared per share:
Common (in dollars per share)	$ 0.16	$ 0.21
Series E Preferred [Member]
Cash dividends declared per share:
Series E preferred (in dollars per share)	$ 0.47	$ 0.47

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
Statement Of Income And Comprehensive Income [Abstract]
Net income	$ 19,420	$ 22,701
Amounts related to available-for-sale securities:
Change in net unrealized gains (losses)	(44,053)	3,996
Amounts related to cash flow hedges:
Change in net unrealized gains (losses)	30,933	8,096
Reclassification adjustment for amounts included in net income	(4,644)	1,661
Other comprehensive income (loss)	(17,764)	13,753
Comprehensive income	$ 1,656	$ 36,454

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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
Operating activities:
Net income	$ 19,420	$ 22,701
Noncash items:
Amortization of investment premiums	25,620	30,385
Amortization of equity-based awards	415	637
Other depreciation and amortization	26	29
Change in recorded measureable hedge ineffectiveness on interest rate swap agreements designated as cash flow hedges		182
Net change in receivables, other assets, accounts payable and accrued expenses	1,290	(2,453)
Net cash provided by operating activities	46,771	51,481
Investing activities:
Purchases of residential mortgage investments	(461,381)	(1,036,560)
Interest receivable acquired with the purchase of residential mortgage investments	(798)	(1,722)
Principal collections on residential mortgage investments, including changes in mortgage securities principal remittance receivable	812,524	933,699
Net cash provided by (used in) investing activities	350,345	(104,583)
Financing activities:
Proceeds from repurchase arrangements and similar borrowings	48,138,234	36,205,044
Principal payments on repurchase arrangements and similar borrowings	(48,524,450)	(36,062,662)
Decrease (increase) in cash collateral receivable from interest rate swap counterparties	5,920	(15,265)
Net proceeds from interest rate swap settlements	21,324	20,070
Proceeds from issuance of preferred shares		299
Common stock repurchases	(29,062)
Other capital stock transactions	(72)	(261)
Dividends paid	(23,002)	(26,217)
Net cash (used in) provided by financing activities	(411,108)	121,008
Net change in cash and cash equivalents	(13,992)	67,906
Cash and cash equivalents at beginning of period	103,907	56,732
Cash and cash equivalents at end of period	$ 89,915	$ 124,638

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BUSINESS

3 Months Ended

Mar. 31, 2018

Organization Consolidation And Presentation Of Financial Statements [Abstract]

BUSINESS

NOTE 1 — BUSINESS

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 consisting almost exclusively 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 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.

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BASIS OF PRESENTATION

3 Months Ended

Mar. 31, 2018

Organization Consolidation And Presentation Of Financial Statements [Abstract]

BASIS OF PRESENTATION

NOTE 2 — BASIS OF PRESENTATION

Interim Financial Reporting

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 ended March 31, 2018 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2018.  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, 2017.

Recent Accounting Pronouncements

In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-18, Statement of Cash Flows: Restricted Cash (“ASU 2016-18”) which clarifies how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company adopted ASU 2016-18 on January 1, 2018, which had no effect on the Company’s results of operations, financial condition or cash flows.

In May 2017, the FASB issued Accounting Standards Update No. 2017-09, Compensation-Stock Compensation: Scope of Modification Accounting (“ASU 2017-09”) which allows companies to make certain changes to stock awards without accounting for them as modifications. It does not change the accounting for modifications. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company adopted ASU 2017-09 on January 1, 2018, which had no effect on the Company’s results of operations, financial condition or cash flows.

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NET INCOME PER COMMON SHARE

3 Months Ended

Mar. 31, 2018

Earnings Per Share [Abstract]

NET INCOME PER COMMON SHARE

NOTE 3 — NET INCOME PER COMMON SHARE

Basic net income 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 stock awards.  Participating securities include unvested equity awards that contain non-forfeitable rights to dividends prior to vesting.

Diluted net income per common share is computed by dividing the numerator used to compute basic net income per common share by the denominator used to compute basic net income 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 the occurrence of a change in control and therefore are not considered dilutive securities absent such an occurrence.  Any unvested equity awards that are deemed participating securities are included in the calculation of diluted net income 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 per common share were as follows for the indicated periods (dollars in thousands, except per share amounts):

	Quarter Ended
	March 31
	2018			2017
Basic net income per common share
Numerator for basic net income per common share:
Net income	$	19,420		$	22,701
Preferred stock dividends		(4,842	)		(3,864	)
Earnings participation of unvested equity awards		(32	)		(40	)
	$	14,546		$	18,797
Denominator for basic net income per common share:
Average number of shares of common stock outstanding		93,867			96,061
Average unvested stock awards outstanding		(442	)		(306	)
		93,425			95,755
	$	0.16		$	0.20
Diluted net income per common share
Numerator for diluted net income per common share:
Numerator for basic net income per common share	$	14,546		$	18,797
Denominator for diluted net income per common share:
Denominator for basic net income per common share		93,425			95,755
Net effect of dilutive equity awards		81			120
		93,506			95,875
	$	0.16		$	0.20

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RESIDENTIAL MORTGAGE INVESTMENTS

3 Months Ended

Mar. 31, 2018

Residential Mortgage [Member]

RESIDENTIAL MORTGAGE INVESTMENTS

NOTE 4 — RESIDENTIAL mortgage investments

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 (b)
March 31, 2018
Agency Securities:
Fannie Mae/Freddie Mac:
Fixed-rate	$	209	$	1	$	210	$	210		6.50	%		5.94	%
ARMs		9,904,243		303,393		10,207,636		10,218,600		3.02			2.10
Ginnie Mae ARMs		2,759,328		80,738		2,840,066		2,830,293		2.88			2.00
		12,663,780		384,132		13,047,912		13,049,103		2.99			2.08
Residential mortgage loans:
Fixed-rate		623		1		624		624		6.76			4.96
ARMs		1,155		7		1,162		1,162		4.04			3.04
		1,778		8		1,786		1,786		4.99			3.70
Collateral for structured    financings		1,163		19		1,182		1,182		8.17			9.72
	$	12,666,721	$	384,159	$	13,050,880	$	13,052,071		2.99			2.08
December 31, 2017
Agency Securities:
Fannie Mae/Freddie Mac:
Fixed-rate	$	265	$	1	$	266	$	266		6.51	%		6.22	%
ARMs		10,216,099		313,547		10,529,646		10,578,364		2.97			1.93
Ginnie Mae ARMs		2,791,340		84,297		2,875,637		2,872,163		2.78			1.83
		13,007,704		397,845		13,405,549		13,450,793		2.93			1.91
Residential mortgage loans:
Fixed-rate		645		1		646		646		6.74			5.32
ARMs		1,211		7		1,218		1,218		4.04			3.19
		1,856		8		1,864		1,864		4.98			3.91
Collateral for structured    financings		1,418		23		1,441		1,441		7.94			7.67
	$	13,010,978	$	397,876	$	13,408,854	$	13,454,098		2.93			1.91

(a) Includes unrealized gains and losses for residential mortgage investments classified as available-for-sale.

(b) Net WAC, or weighted average coupon, is the weighted average interest rate of the mortgage loans underlying the indicated investments net of servicing and other fees as of the indicated balance sheet date.  Net WAC is expressed as a percentage calculated on an annualized basis on the unpaid principal balances of the mortgage loans underlying these investments.  Average yield is presented for the quarter then ended, and is based on the cash component of interest income expressed as a percentage calculated on an annualized basis on average amortized cost basis (the “cash yield”) less the effects of amortizing investment premiums.  Investment premium amortization is determined using the interest method and incorporates actual and anticipated future mortgage prepayments.

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.  The maturity of Residential mortgage investments 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 288 months.

Fixed-rate investments consist of residential mortgage loans and Agency Securities backed by residential mortgage loans with fixed rates of interest.  Adjustable-rate investments generally are ARM 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 (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 March 31, 2018, the average months to roll for the Company’s $6.84 billion (amortized cost basis) in current-reset ARM investments was 6.3 months while the average months to roll for the Company’s $6.20 billion (amortized cost basis) in longer-to-reset ARM investments was 42.0 months.

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SECURED BORROWINGS

3 Months Ended

Mar. 31, 2018

Disclosure Of Repurchase Agreements [Abstract]

SECURED BORROWINGS

NOTE 5 — SECURED borrowings

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”).  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	Collateral Carrying Amount		Accrued Interest Receivable		Borrowings Outstanding		Average Borrowing Rates
March 31, 2018
Borrowings under repurchase arrangements with    maturities of 30 days or less:
Agency Securities	$	12,559,176	$	31,369	$	11,913,651		1.88	%
Borrowings under repurchase arrangements with    maturities greater than 30 days:
Agency Securities (31 to 90 days)		32,595		72		30,008		1.78
Similar borrowings:
Collateral for structured financings		1,182		–		1,182		8.17
	$	12,592,953	$	31,441	$	11,944,841		1.88
Quarter-end borrowing rates adjusted for effects    of related derivative financial instruments    (Derivatives) held as cash flow hedges								1.63
December 31, 2017
Borrowings under repurchase arrangements with    maturities of 30 days or less:
Agency Securities	$	12,943,193	$	30,646	$	12,296,546		1.60	%
Borrowings under repurchase arrangements with    maturities greater than 30 days:
Agency Securities (31 to 90 days)		35,568		75		33,073		1.53
Similar borrowings:
Collateral for structured financings		1,441	–			1,441		7.94
	$	12,980,202	$	30,721	$	12,331,060		1.60
Year-end borrowing rates adjusted for effects of    related Derivatives held as cash flow hedges								1.46

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 as illustrated below (dollars in thousands):

	Quarter Ended
	March 31, 2018					December 31, 2017
	Average Borrowings		Average Rate			Average Borrowings		Average Rate
Average borrowings and rates adjusted for the    effects of related Derivatives held as cash flow    hedges for the indicated periods	$	12,235,554		1.47	%	$	12,408,550		1.29	%

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

3 Months Ended

Mar. 31, 2018

Derivative Instruments And Hedging Activities Disclosure [Abstract]

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

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

Capstead attempts to mitigate exposure to higher interest rates by entering into one- and three-month LIBOR-indexed, pay-fixed, receive-variable, interest rate swap agreements.  These Derivatives are designated as cash flow hedges of the variability of the underlying benchmark interest rate of current and forecasted 30- to 90-day secured borrowings.  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 designated borrowings, leaving the fixed-rate swap payments as the Company’s effective borrowing rate, subject to certain adjustments.  These adjustments include differences between variable-rate payments received on the swap agreements and related unhedged borrowing rates as well as the effects of any measured hedge ineffectiveness.  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.

During the quarter ended March 31, 2018, Capstead entered into swap agreements with notional amounts of $500 million requiring fixed-rate interest payments each averaging 2.44% for two and three-year periods commencing on various dates between February and April 2018. Also during the quarter ended March 31, 2018, $1.70 billion notional amount of swaps requiring fixed-rate interest payments averaging 0.76% matured.  At March 31, 2018, the Company’s portfolio financing-related swap positions had the following characteristics (dollars in thousands):

Period of Contract Expiration	Notional Amount		Average Fixed-Rate Payment Requirement
Second quarter 2018	$	600,000		0.79	%
Third quarter 2018		400,000		0.88
Fourth quarter 2018		800,000		1.15
First quarter 2019		950,000		1.58
Second quarter 2019		1,650,000		1.33
Third quarter 2019		550,000		1.40
Fourth quarter 2019		700,000		1.72
First quarter 2020		600,000		2.07
Second quarter 2020		100,000		2.56
Third quarter 2020		200,000		1.64
Fourth quarter 2020		200,000		2.04
First quarter 2021		100,000		2.67
	$	6,850,000

In 2010 the Company entered into forward-starting, 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.  These Derivatives are designated as cash flow hedges of the variability of the underlying contractual rate associated with the floating-rate terms of these long-term borrowings which began on various dates between October 2015 and September 2016.

Interest rate swap agreements are measured at fair value on a recurring basis primarily using Level Two Inputs in accordance with ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820).  In determining fair value estimates for these Derivatives, Capstead utilizes the standard methodology of netting the 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.  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 held as cash flow hedges of 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.  At March 31, 2018, Cash collateral receivable from interest rate swap counterparties includes initial margin for all swap agreements and variation margin for non-exchange traded swap agreements.  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	March 31			December 31
	Location	2018			2017
Balance sheet-related
Swap agreements in a gain position (an asset) related to    secured borrowings	(a)	$	387		$	–
Swap agreements in a loss position (a liability) related to
unsecured borrowings	(a)		(18,265	)		(23,772	)
Related net interest payable	(b)		(954	)		(484	)
		$	(18,832	)	$	(24,256	)

(a) The fair value of Derivatives with unrealized gains are aggregated and recorded as an asset on the face of the Balance Sheets separately from the fair value of Derivatives with unrealized losses that are recorded as a liability.  The amount of unrealized gains, net of unrealized losses, scheduled to be recognized in the Statements of Income over the next twelve months primarily in the form of current market rates in excess of fixed-rate swap payments totaled $42.1 million at March 31, 2018.

(b) Included in “Accounts payable and accrued expenses” on the face of the Balance Sheets.

	Location of Gain or (Loss) Recognized in	Quarter Ended March 31
	Net Income		2018			2017
Income statement-related
Components of Secured borrowings-related effects    on interest expense:
Amount of gain (loss) reclassified from    Accumulated other comprehensive income		$	5,247		$	(888	)
Amount of loss recognized in income		–				(393	)
	(a)		5,247			(1,281	)
Component of Unsecured borrowings-related    effects on interest expense:
Amount of loss reclassified from Accumulated    other comprehensive income	(b)		(603	)		(773	)
Decrease (increase) in interest expense and increase     (decrease) in Net income as a result of the use     of Derivatives		$	4,644		$	(2,054	)
Other comprehensive income-related
Amount of gain recognized in Other    comprehensive income		$	30,933		$	8,096

(a) Included in “Interest expense:  Secured borrowings” on the face of the Statements of Income.

(b) Included in “Interest expense:  Unsecured borrowings” on the face of the Statements of Income.

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

Gross

Net Amounts

Gross Amounts Not Offset

Gross

Amounts

of Assets

in the Balance Sheet (b)

Amounts of

Offset in

Presented in

Cash

Recognized

the Balance

the Balance

Financial

Collateral

Net

Assets (a)

Sheet (a)

Sheet

Instruments

Received

Amount

March 31, 2018

Counterparty 4

$

49,821

$

(49,434

)

$

387

$

–

$

–

$

387

December 31, 2017

Counterparty 4

$

30,676

$

(30,676

)

$

–

$

–

$

–

$

–

(a) Included in gross amounts of recognized assets at March 31, 2018 is the fair value of exchange-traded swap agreements, calculated including accrued interest.  Included in gross amounts offset in the balance sheet are variation margin amounts associated with these swaps at March 31, 2018.

(b) Amounts presented are limited to recognized liabilities and cash collateral received associated with the indicated counterparty sufficient to reduce the related Net Amount to zero in accordance with ASU No. 2011-11, as amended by ASU No. 2013-01.

	Offsetting of Financial Liabilities and Derivative Liabilities
			Gross			Net Amounts		Gross Amounts Not Offset
	Gross		Amounts			of Liabilities		in the Balance Sheet (c)
	Amounts of		Offset in			Presented in					Cash
	Recognized		the Balance			the Balance		Financial			Collateral			Net
	Liabilities (a)		Sheet (a)			Sheet (b)		Instruments			Pledged			Amount
March 31, 2018
Derivatives by    counterparty:
Counterparty 1	$	19,219	$	–		$	19,219	$	–		$	(19,219	)	$	–
Counterparty 4		316		(316	)	–		–			–			–
		19,535		(316	)		19,219	–				(19,219	)	–
Borrowings under    repurchase    arrangements (d)		11,953,111	–				11,953,111		(11,953,111	)	–			–
	$	11,972,646	$	(316	)	$	11,972,330	$	(11,953,111	)	$	(19,219	)	$	–
December 31, 2017
Derivatives by    counterparty:
Counterparty 1	$	24,256	$	–		$	24,256	$	–		$	(24,256	)	$	–
Counterparty 4		3,701		(3,701	)		–		–		–			–
		27,957		(3,701	)		24,256		–			(24,256	)	–
Borrowings under    repurchase    arrangements (d)		12,337,299	–				12,337,299		(12,337,299	)	–			–
	$	12,365,256	$	(3,701	)	$	12,361,555	$	(12,337,299	)	$	(24,256	)	$	–

(a) Included in gross amounts of recognized liabilities at March 31, 2018 is the fair value of non-exchange traded swap agreements (Counterparty 1) and exchange-traded swap agreements (Counterparty 4), calculated including accrued interest.  Included in gross amounts offset in the balance sheet are variation margin amounts associated with exchange-traded swap agreements at March 31, 2018.

(b) Amounts presented are limited to recognized liabilities and cash collateral received associated with the indicated counterparty sufficient to reduce the related Net Amount to zero in accordance with ASU No. 2011-11, as amended by ASU No. 2013-01.

(c) Amounts presented are limited to recognized assets and collateral pledged associated with the indicated counterparty sufficient to reduce the related Net Amount to zero in accordance with ASU No. 2011-11, as amended by ASU No. 2013-01.

(d) Amounts include accrued interest payable of $9.5 million and $7.7 million on borrowings under repurchase arrangements as of March 31, 2018 and December 31, 2017, respectively.

Changes in Accumulated other comprehensive income by component for the quarter ended March 31, 2018 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 December 31, 2017	$	16,874		$	45,244		$	62,118
Activity for the quarter ended March 31, 2018:
Other comprehensive income (loss) before    reclassifications		30,933			(44,053	)		(13,120	)
Amounts reclassified from accumulated    other comprehensive income		(4,644	)	–				(4,644	)
Other comprehensive income (loss)		26,289			(44,053	)		(17,764	)
Balance at March 31, 2018	$	43,163		$	1,191		$	44,354

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UNSECURED BORROWINGS

3 Months Ended

Mar. 31, 2018

Debt Disclosure [Abstract]

UNSECURED BORROWINGS

NOTE 7 — unsecured BORROWINGS

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 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):

	March 31, 2018					December 31, 2017
	Borrowings Outstanding		Average Rate			Borrowings Outstanding		Average Rate
Junior subordinated notes maturing in:
October 2035 ($35,000 face amount)	$	34,325		7.89	%	$	34,315		7.90	%
December 2035 ($40,000 face amount)		39,330		7.66			39,320		7.66
September 2036 ($25,000 face amount)		24,561		7.70			24,556		7.70
	$	98,216		7.75		$	98,191		7.75

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CAPITAL TRANSACTIONS

3 Months Ended

Mar. 31, 2018

Equity Abstract

CAPITAL TRANSACTIONS

NOTE 8 — Capital transactions

On November 1, 2017, Capstead’s Board of Directors authorized the reinstatement of its previously unused $100 million common stock repurchase program. During the quarter ended March 31, 2018 the Company repurchased 3.4 million shares in the open market for approximately $29.1 million (an average repurchase price, including underwriting fees, of $8.60).  An additional 48,000 share repurchases settled subsequent to quarter-end for $410,000 (an average repurchase price, including underwriting fees, of $8.57), leaving a remaining repurchase program authorization of approximately $67 million.  Repurchases made pursuant to the program are made in the open market in accordance with and as permitted by securities laws and other legal requirements.  The timing, manner, price and amount of any future repurchases will be determined by the Company in its discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors including alternative capital investment opportunities.  In addition, the Company may enter into Rule 10b5-1 plans under which repurchases can be made. The authorization does not obligate the Company to acquire any particular amount of common stock and repurchases under the program and the program itself may be suspended or discontinued at the Company’s discretion without prior notice.  

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FAIR VALUE

3 Months Ended

Mar. 31, 2018

Fair Value Disclosures [Abstract]

FAIR VALUE

NOTE 9 — FAIR VALUE

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 lending counterparty investments, all fair values were determined using Level 2 Inputs in accordance with ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820).  Lending counterparty investments are nonmarketable securities classified as assets for which Level 3 Inputs are used to determine fair value.  These assets are considered strategic investments that are carried at cost and periodically valued and evaluated for impairment.  No impairment charges have been recorded relative to these investments and the Company’s cost basis is deemed to approximate 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 the 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, or payable to, interest rate swap 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):

	March 31, 2018				December 31, 2017
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Residential mortgage loans	$	1,786	$	1,800	$	1,864	$	1,900
Lending counterparty investments		5,002		5,002		5,002		5,002
Secured borrowings-related interest rate swap    agreements		387		387		–		–
Financial liabilities:
Secured borrowings with initial terms of    greater than 120 days		–		–		33,073		33,100
Unsecured borrowings		98,216		77,600		98,191		74,100
Unsecured borrowings-related interest rate    swap agreements		18,265		18,265		23,772		23,772

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, 2018
Agency Securities classified as available-for-sale:
Fannie Mae/Freddie Mac	$	10,207,636	$	79,710	$	68,746	$	10,218,600
Ginnie Mae		2,840,066		9,628		19,401		2,830,293
Residential mortgage securities classified as    held-to-maturity		1,392		14	–			1,406
December 31, 2017
Agency Securities classified as available-for-sale:
Fannie Mae/Freddie Mac		10,529,646		85,740		37,022		10,578,364
Ginnie Mae		2,875,637		8,958		12,432		2,872,163
Residential mortgage securities classified as    held-to-maturity		1,706		17	–			1,723

	March 31, 2018				December 31, 2017
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Securities in an unrealized loss position:
One year or greater	$	2,342,577	$	34,142	$	2,552,668	$	26,701
Less than one year		4,844,667		54,005		4,665,883		22,752
	$	7,187,244	$	88,147	$	7,218,551	$	49,453

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 Fannie Mae and Freddie Mac 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 were considered other-than-temporarily impaired at March 31, 2018.

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COMPENSATION PROGRAMS

3 Months Ended

Mar. 31, 2018

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

COMPENSATION PROGRAMS

NOTE 10 — COMPENSATION PROGRAMS

Capstead’s annual and long-term incentive compensation programs for key executives are largely nondiscretionary, formulaic and target-based, utilizing multiple pre-established performance goals (referred to as “metrics”) and defined threshold, target and maximum award amounts determined by reference to established percentages of base salaries. Metrics used include (a) relative and absolute economic return (change in book value per share of common stock plus common stock dividends divided by beginning book value per share), (b) relative operating cost efficiency (operating expenses divided by Unsecured borrowings and Stockholders’ equity), (c) relative total stockholder return (change in stock price plus reinvested dividends, and (d) attainment of individual goals and objectives.  Each performance metric is assigned a weighting and performance relative to each metric is calculated separately. No awards can be earned for performance below defined threshold return levels and awards are capped for performance above defined maximum return levels. Awards are made pursuant to the Company’s Amended and Restated 2014 Flexible Incentive Plan that was approved by stockholders in May 2014.  At March 31, 2018, this plan had 3,369,164 shares of common stock remaining available for future issuances.

Short-term Incentive Compensation Programs

Under the provisions of Capstead’s annual incentive compensation program, participating executives have overall target award opportunities ranging from 75% to 125% of base salary. Recognized in Compensation-related expense during the first quarter of 2018 and included in Accounts payable and accrued expenses at March 31, 2018 are annual incentive compensation accruals for participating executives, together with discretionary accruals for all other employees, totaling $568,000.  

The Company administers an additional performance-based short-term incentive compensation program for key executives that provides for quarterly cash payments equal to per share dividends declared on Capstead’s common stock multiplied by a notional amount of non-vesting shares of common stock (“Dividend Equivalent Rights” or “DERs”).  DERs only represent the right to receive the same cash distributions that the Company’s common stockholders are entitled to receive during the term of the grants, subject to certain conditions, including continuous service.  Included in Accounts payable and accrued expenses and recognized in Compensation-related expense are first quarter 2018 DERs distribution amounts totaling $96,000 that were paid in April 2018.

Long-term Equity-based Awards – Performance-based RSUs

Capstead’s performance-based long-term incentive compensation program for key executives provides for the grant of performance-based RSUs that are convertible into shares of common stock following three-year performance periods, contingent upon whether, and to what extent, performance metrics are met or exceeded.  The actual number of shares of common stock the units can convert into for each of the metrics, if any, can range from one-half of a share per unit if that metric’s threshold level of performance is met, to two shares per unit if the related maximum level of performance is met or exceeded, adjusted for the weighting assigned to the metric.  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 related performance periods.

Pursuant to this program, in January 2018 and 2017, as well as February 2016 the Company granted 183,137, 148,894 and 269,354 RSUs with three-year performance periods ending December 31, 2020, 2019 and 2018, respectively.  Initial grant date fair values developed for compensation cost purposes of $8.71, $10.52 and $8.03 were assigned to the units of each grant, respectively. Amounts actually expensed are largely predicated on estimated performance metric attainment. RSUs granted in January 2015 did not meet the criteria for conversion into shares of common stock pursuant to the applicable performance criteria and, accordingly, outstanding RSUs awarded under these grants totaling 117,255 were forfeited in the first quarter 2018.   Recognized in Compensation-related expense are $3,000 and $312,000 related to this program during the quarters ended March 31, 2018 and 2017, respectively.  Included in Common stock dividends payable at March 31, 2018 are estimated dividends payable pertaining to these awards of $137,000.  

RSU activity for the quarter ended March 31, 2018 is summarized below:

				Weighted
				Average
	Number of			Grant Date
	Shares			Fair Value
Unvested RSU awards outstanding at December 31, 2017		435,976		$	9.10
Grants		183,137			8.71
Forfeitures		(117,255	)		8.83
Unvested RSU awards outstanding at March 31, 2018		501,858			9.02

Long-term Equity-based Awards – Stock Awards

In January 2018 and 2017, as well as February 2016, respectively, the Company granted service-based stock awards for 126,451, 74,446 and 67,337 shares of common stock with grant date fair values of $8.60, $10.41 and $9.32 per share to executives awarded RSUs. Outstanding awards under this program and related deferred dividends are scheduled to vest in January 2021, January 2020 and February 2019, respectively, assuming service conditions are met.  In January of 2018, 2017 and 2016, respectively, the Company granted service-based stock awards for 57,283, 49,416 and 61,272 shares of common stock with grant date fair values of $8.60, $10.41 and $7.87 per share to employees not awarded RSUs.  These awards vest in January of 2021, 2020 and 2019, respectively, assuming service conditions are met.

As a component of the Company’s director compensation program, directors are granted service-based stock awards annually upon election or re-election to the board of directors that vest approximately one year from issuance.  In July 2017 director common stock awards for a total of 41,797 shares with a grant date fair value of $10.05 per share were granted that will vest in July 2018.

Performance-based and service-based stock award activity for the quarter ended March 31, 2018 is summarized below:

				Weighted
				Average
	Number of			Grant Date
	Shares			Fair Value
Unvested stock awards outstanding at December 31, 2017		296,940		$	9.90
Grants		183,734			8.60
Vestings		(34,899	)		12.47
Unvested stock awards outstanding at March 31, 2018		445,775			9.17

During the quarters ended March 31, 2018 and 2017, the Company recognized in Compensation-related expense $307,000 and $220,000, respectively, related to amortization of the grant date fair value of employee stock awards.  In addition, the Company recognized in Other general and administrative expense $105,000 related to amortization of the grant date fair value of director stock awards during the quarters ended March 31, 2018 and 2017.  Unrecognized compensation expense for unvested stock awards for employees and directors totaled $2.6 million as of March 31, 2018, to be expensed over a weighted average period of 1.6 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.

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BASIS OF PRESENTATION (Policies)

3 Months Ended

Mar. 31, 2018

Organization Consolidation And Presentation Of Financial Statements [Abstract]

Interim Financial Reporting

Interim Financial Reporting

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 ended March 31, 2018 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2018.  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, 2017.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-18, Statement of Cash Flows: Restricted Cash (“ASU 2016-18”) which clarifies how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company adopted ASU 2016-18 on January 1, 2018, which had no effect on the Company’s results of operations, financial condition or cash flows.

In May 2017, the FASB issued Accounting Standards Update No. 2017-09, Compensation-Stock Compensation: Scope of Modification Accounting (“ASU 2017-09”) which allows companies to make certain changes to stock awards without accounting for them as modifications. It does not change the accounting for modifications. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company adopted ASU 2017-09 on January 1, 2018, which had no effect on the Company’s results of operations, financial condition or cash flows.

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NET INCOME PER COMMON SHARE (Tables)

3 Months Ended

Mar. 31, 2018

Earnings Per Share [Abstract]

Components of Computation of Basic and Diluted Net Income per Common Share

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

	Quarter Ended
	March 31
	2018			2017
Basic net income per common share
Numerator for basic net income per common share:
Net income	$	19,420		$	22,701
Preferred stock dividends		(4,842	)		(3,864	)
Earnings participation of unvested equity awards		(32	)		(40	)
	$	14,546		$	18,797
Denominator for basic net income per common share:
Average number of shares of common stock outstanding		93,867			96,061
Average unvested stock awards outstanding		(442	)		(306	)
		93,425			95,755
	$	0.16		$	0.20
Diluted net income per common share
Numerator for diluted net income per common share:
Numerator for basic net income per common share	$	14,546		$	18,797
Denominator for diluted net income per common share:
Denominator for basic net income per common share		93,425			95,755
Net effect of dilutive equity awards		81			120
		93,506			95,875
	$	0.16		$	0.20

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RESIDENTIAL MORTGAGE INVESTMENTS (Tables)

3 Months Ended

Mar. 31, 2018

Investments Debt And Equity Securities [Abstract]

Schedule of Residential Mortgage Investments

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 (b)
March 31, 2018
Agency Securities:
Fannie Mae/Freddie Mac:
Fixed-rate	$	209	$	1	$	210	$	210		6.50	%		5.94	%
ARMs		9,904,243		303,393		10,207,636		10,218,600		3.02			2.10
Ginnie Mae ARMs		2,759,328		80,738		2,840,066		2,830,293		2.88			2.00
		12,663,780		384,132		13,047,912		13,049,103		2.99			2.08
Residential mortgage loans:
Fixed-rate		623		1		624		624		6.76			4.96
ARMs		1,155		7		1,162		1,162		4.04			3.04
		1,778		8		1,786		1,786		4.99			3.70
Collateral for structured    financings		1,163		19		1,182		1,182		8.17			9.72
	$	12,666,721	$	384,159	$	13,050,880	$	13,052,071		2.99			2.08
December 31, 2017
Agency Securities:
Fannie Mae/Freddie Mac:
Fixed-rate	$	265	$	1	$	266	$	266		6.51	%		6.22	%
ARMs		10,216,099		313,547		10,529,646		10,578,364		2.97			1.93
Ginnie Mae ARMs		2,791,340		84,297		2,875,637		2,872,163		2.78			1.83
		13,007,704		397,845		13,405,549		13,450,793		2.93			1.91
Residential mortgage loans:
Fixed-rate		645		1		646		646		6.74			5.32
ARMs		1,211		7		1,218		1,218		4.04			3.19
		1,856		8		1,864		1,864		4.98			3.91
Collateral for structured    financings		1,418		23		1,441		1,441		7.94			7.67
	$	13,010,978	$	397,876	$	13,408,854	$	13,454,098		2.93			1.91

(a) Includes unrealized gains and losses for residential mortgage investments classified as available-for-sale.

(b) Net WAC, or weighted average coupon, is the weighted average interest rate of the mortgage loans underlying the indicated investments net of servicing and other fees as of the indicated balance sheet date.  Net WAC is expressed as a percentage calculated on an annualized basis on the unpaid principal balances of the mortgage loans underlying these investments.  Average yield is presented for the quarter then ended, and is based on the cash component of interest income expressed as a percentage calculated on an annualized basis on average amortized cost basis (the “cash yield”) less the effects of amortizing investment premiums.  Investment premium amortization is determined using the interest method and incorporates actual and anticipated future mortgage prepayments.

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SECURED BORROWINGS (Tables)

3 Months Ended

Mar. 31, 2018

Disclosure Of Repurchase Agreements [Abstract]

Schedule of Secured Borrowings

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	Collateral Carrying Amount		Accrued Interest Receivable		Borrowings Outstanding		Average Borrowing Rates
March 31, 2018
Borrowings under repurchase arrangements with    maturities of 30 days or less:
Agency Securities	$	12,559,176	$	31,369	$	11,913,651		1.88	%
Borrowings under repurchase arrangements with    maturities greater than 30 days:
Agency Securities (31 to 90 days)		32,595		72		30,008		1.78
Similar borrowings:
Collateral for structured financings		1,182		–		1,182		8.17
	$	12,592,953	$	31,441	$	11,944,841		1.88
Quarter-end borrowing rates adjusted for effects    of related derivative financial instruments    (Derivatives) held as cash flow hedges								1.63
December 31, 2017
Borrowings under repurchase arrangements with    maturities of 30 days or less:
Agency Securities	$	12,943,193	$	30,646	$	12,296,546		1.60	%
Borrowings under repurchase arrangements with    maturities greater than 30 days:
Agency Securities (31 to 90 days)		35,568		75		33,073		1.53
Similar borrowings:
Collateral for structured financings		1,441	–			1,441		7.94
	$	12,980,202	$	30,721	$	12,331,060		1.60
Year-end borrowing rates adjusted for effects of    related Derivatives held as cash flow hedges								1.46

Schedule of Average Borrowings Outstanding

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 as illustrated below (dollars in thousands):

	Quarter Ended
	March 31, 2018					December 31, 2017
	Average Borrowings		Average Rate			Average Borrowings		Average Rate
Average borrowings and rates adjusted for the    effects of related Derivatives held as cash flow    hedges for the indicated periods	$	12,235,554		1.47	%	$	12,408,550		1.29	%

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USE OF DERIVATIVES, OFFSETTING DISCLOSURES AND CHANGES IN OTHER COMPREHENSIVE INCOME BY COMPONENT (Tables)

3 Months Ended

Mar. 31, 2018

Derivative Instruments And Hedging Activities Disclosure [Abstract]

Schedule of Swap Agreements Expiration Period and Characteristics

At March 31, 2018, the Company’s portfolio financing-related swap positions had the following characteristics (dollars in thousands):

Period of Contract Expiration	Notional Amount		Average Fixed-Rate Payment Requirement
Second quarter 2018	$	600,000		0.79	%
Third quarter 2018		400,000		0.88
Fourth quarter 2018		800,000		1.15
First quarter 2019		950,000		1.58
Second quarter 2019		1,650,000		1.33
Third quarter 2019		550,000		1.40
Fourth quarter 2019		700,000		1.72
First quarter 2020		600,000		2.07
Second quarter 2020		100,000		2.56
Third quarter 2020		200,000		1.64
Fourth quarter 2020		200,000		2.04
First quarter 2021		100,000		2.67
	$	6,850,000

Impact of Derivative Instruments on Statements of Financial Performance and Financial Position

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	March 31			December 31
	Location	2018			2017
Balance sheet-related
Swap agreements in a gain position (an asset) related to    secured borrowings	(a)	$	387		$	–
Swap agreements in a loss position (a liability) related to
unsecured borrowings	(a)		(18,265	)		(23,772	)
Related net interest payable	(b)		(954	)		(484	)
		$	(18,832	)	$	(24,256	)

(a) The fair value of Derivatives with unrealized gains are aggregated and recorded as an asset on the face of the Balance Sheets separately from the fair value of Derivatives with unrealized losses that are recorded as a liability.  The amount of unrealized gains, net of unrealized losses, scheduled to be recognized in the Statements of Income over the next twelve months primarily in the form of current market rates in excess of fixed-rate swap payments totaled $42.1 million at March 31, 2018.

(b) Included in “Accounts payable and accrued expenses” on the face of the Balance Sheets.

	Location of Gain or (Loss) Recognized in	Quarter Ended March 31
	Net Income		2018			2017
Income statement-related
Components of Secured borrowings-related effects    on interest expense:
Amount of gain (loss) reclassified from    Accumulated other comprehensive income		$	5,247		$	(888	)
Amount of loss recognized in income		–				(393	)
	(a)		5,247			(1,281	)
Component of Unsecured borrowings-related    effects on interest expense:
Amount of loss reclassified from Accumulated    other comprehensive income	(b)		(603	)		(773	)
Decrease (increase) in interest expense and increase     (decrease) in Net income as a result of the use     of Derivatives		$	4,644		$	(2,054	)
Other comprehensive income-related
Amount of gain recognized in Other    comprehensive income		$	30,933		$	8,096

(a) Included in “Interest expense:  Secured borrowings” on the face of the Statements of Income.

(b) Included in “Interest expense:  Unsecured borrowings” on the face of the Statements of Income.

Schedule of Offsetting Disclosures for Asset Derivatives Held and Repurchase Arrangements and Similar Borrowings Outstanding

The following tables provide disclosures concerning offsetting of financial liabilities and Derivatives as of the indicated dates (in thousands):

Offsetting of Derivative Assets

Gross

Net Amounts

Gross Amounts Not Offset

Gross

Amounts

of Assets

in the Balance Sheet (b)

Amounts of

Offset in

Presented in

Cash

Recognized

the Balance

the Balance

Financial

Collateral

Net

Assets (a)

Sheet (a)

Sheet

Instruments

Received

Amount

March 31, 2018

Counterparty 4

$

49,821

$

(49,434

)

$

387

$

–

$

–

$

387

December 31, 2017

Counterparty 4

$

30,676

$

(30,676

)

$

–

$

–

$

–

$

–

(a) Included in gross amounts of recognized assets at March 31, 2018 is the fair value of exchange-traded swap agreements, calculated including accrued interest.  Included in gross amounts offset in the balance sheet are variation margin amounts associated with these swaps at March 31, 2018.

(b) Amounts presented are limited to recognized liabilities and cash collateral received associated with the indicated counterparty sufficient to reduce the related Net Amount to zero in accordance with ASU No. 2011-11, as amended by ASU No. 2013-01.

Schedule of Offsetting Disclosures for Liability Derivatives Held and Repurchase Arrangements and Similar Borrowings Outstanding

	Offsetting of Financial Liabilities and Derivative Liabilities
			Gross			Net Amounts		Gross Amounts Not Offset
	Gross		Amounts			of Liabilities		in the Balance Sheet (c)
	Amounts of		Offset in			Presented in					Cash
	Recognized		the Balance			the Balance		Financial			Collateral			Net
	Liabilities (a)		Sheet (a)			Sheet (b)		Instruments			Pledged			Amount
March 31, 2018
Derivatives by    counterparty:
Counterparty 1	$	19,219	$	–		$	19,219	$	–		$	(19,219	)	$	–
Counterparty 4		316		(316	)	–		–			–			–
		19,535		(316	)		19,219	–				(19,219	)	–
Borrowings under    repurchase    arrangements (d)		11,953,111	–				11,953,111		(11,953,111	)	–			–
	$	11,972,646	$	(316	)	$	11,972,330	$	(11,953,111	)	$	(19,219	)	$	–
December 31, 2017
Derivatives by    counterparty:
Counterparty 1	$	24,256	$	–		$	24,256	$	–		$	(24,256	)	$	–
Counterparty 4		3,701		(3,701	)		–		–		–			–
		27,957		(3,701	)		24,256		–			(24,256	)	–
Borrowings under    repurchase    arrangements (d)		12,337,299	–				12,337,299		(12,337,299	)	–			–
	$	12,365,256	$	(3,701	)	$	12,361,555	$	(12,337,299	)	$	(24,256	)	$	–

(a) Included in gross amounts of recognized liabilities at March 31, 2018 is the fair value of non-exchange traded swap agreements (Counterparty 1) and exchange-traded swap agreements (Counterparty 4), calculated including accrued interest.  Included in gross amounts offset in the balance sheet are variation margin amounts associated with exchange-traded swap agreements at March 31, 2018.

(b) Amounts presented are limited to recognized liabilities and cash collateral received associated with the indicated counterparty sufficient to reduce the related Net Amount to zero in accordance with ASU No. 2011-11, as amended by ASU No. 2013-01.

(c) Amounts presented are limited to recognized assets and collateral pledged associated with the indicated counterparty sufficient to reduce the related Net Amount to zero in accordance with ASU No. 2011-11, as amended by ASU No. 2013-01.

(d) Amounts include accrued interest payable of $9.5 million and $7.7 million on borrowings under repurchase arrangements as of March 31, 2018 and December 31, 2017, respectively.

Changes in Accumulated Other Comprehensive Income

Changes in Accumulated other comprehensive income by component for the quarter ended March 31, 2018 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 December 31, 2017	$	16,874		$	45,244		$	62,118
Activity for the quarter ended March 31, 2018:
Other comprehensive income (loss) before    reclassifications		30,933			(44,053	)		(13,120	)
Amounts reclassified from accumulated    other comprehensive income		(4,644	)	–				(4,644	)
Other comprehensive income (loss)		26,289			(44,053	)		(17,764	)
Balance at March 31, 2018	$	43,163		$	1,191		$	44,354

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UNSECURED BORROWINGS (Tables)

3 Months Ended

Mar. 31, 2018

Debt Disclosure [Abstract]

Schedule of Subordinated Note Balances and Related Weighted Average Interest Rates

Note 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):

	March 31, 2018					December 31, 2017
	Borrowings Outstanding		Average Rate			Borrowings Outstanding		Average Rate
Junior subordinated notes maturing in:
October 2035 ($35,000 face amount)	$	34,325		7.89	%	$	34,315		7.90	%
December 2035 ($40,000 face amount)		39,330		7.66			39,320		7.66
September 2036 ($25,000 face amount)		24,561		7.70			24,556		7.70
	$	98,216		7.75		$	98,191		7.75

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FAIR VALUE (Tables)

3 Months Ended

Mar. 31, 2018

Fair Value Disclosures [Abstract]

Financial Instruments Other than Debt Securities

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

	March 31, 2018				December 31, 2017
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Residential mortgage loans	$	1,786	$	1,800	$	1,864	$	1,900
Lending counterparty investments		5,002		5,002		5,002		5,002
Secured borrowings-related interest rate swap    agreements		387		387		–		–
Financial liabilities:
Secured borrowings with initial terms of    greater than 120 days		–		–		33,073		33,100
Unsecured borrowings		98,216		77,600		98,191		74,100
Unsecured borrowings-related interest rate    swap agreements		18,265		18,265		23,772		23,772

Fair Value and Related Disclosures for Debt Securities

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, 2018
Agency Securities classified as available-for-sale:
Fannie Mae/Freddie Mac	$	10,207,636	$	79,710	$	68,746	$	10,218,600
Ginnie Mae		2,840,066		9,628		19,401		2,830,293
Residential mortgage securities classified as    held-to-maturity		1,392		14	–			1,406
December 31, 2017
Agency Securities classified as available-for-sale:
Fannie Mae/Freddie Mac		10,529,646		85,740		37,022		10,578,364
Ginnie Mae		2,875,637		8,958		12,432		2,872,163
Residential mortgage securities classified as    held-to-maturity		1,706		17	–			1,723

Securities in Unrealized Loss Position

	March 31, 2018				December 31, 2017
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Securities in an unrealized loss position:
One year or greater	$	2,342,577	$	34,142	$	2,552,668	$	26,701
Less than one year		4,844,667		54,005		4,665,883		22,752
	$	7,187,244	$	88,147	$	7,218,551	$	49,453

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COMPENSATION PROGRAMS (Tables)

3 Months Ended

Mar. 31, 2018

Performance-based RSUs [Member]

Schedule of Performance-Based and Service-Based Stock Award Activity

RSU activity for the quarter ended March 31, 2018 is summarized below:

				Weighted
				Average
	Number of			Grant Date
	Shares			Fair Value
Unvested RSU awards outstanding at December 31, 2017		435,976		$	9.10
Grants		183,137			8.71
Forfeitures		(117,255	)		8.83
Unvested RSU awards outstanding at March 31, 2018		501,858			9.02

Stock Awards Activity [Member]

Schedule of Performance-Based and Service-Based Stock Award Activity

Performance-based and service-based stock award activity for the quarter ended March 31, 2018 is summarized below:

				Weighted
				Average
	Number of			Grant Date
	Shares			Fair Value
Unvested stock awards outstanding at December 31, 2017		296,940		$	9.90
Grants		183,734			8.60
Vestings		(34,899	)		12.47
Unvested stock awards outstanding at March 31, 2018		445,775			9.17

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NET INCOME PER COMMON SHARE - Additional Information (Details)	3 Months Ended	12 Months Ended
	Mar. 31, 2018	Dec. 31, 2017
Cumulative Redeemable Preferred Stock, Series E [Member]
Earnings Per Share, Basic, by Common Class, Including Two Class Method [Line Items]
Preferred stock, dividend rate	7.50%	7.50%

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NET INCOME PER COMMON SHARE - Components of Computation of Basic and Diluted Net Income per Common Share (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
Numerator for basic net income per common share [Abstract]
Net income	$ 19,420	$ 22,701
Preferred stock dividends	(4,842)	(3,864)
Earnings participation of unvested equity awards	(32)	(40)
Numerator for basic net income per common share	$ 14,546	$ 18,797
Denominator for basic net income per common share [Abstract]
Average number of shares of common stock outstanding (in shares)	93,867	96,061
Average unvested stock awards outstanding (in shares)	(442)	(306)
Denominator for basic net income per common share (in shares)	93,425	95,755
Basic net income per common share (in dollars per share)	$ 0.16	$ 0.20
Numerator for diluted net income per common share [Abstract]
Numerator for basic net income per common share	$ 14,546	$ 18,797
Denominator for diluted net income per common share [Abstract]
Denominator for basic net income per common share (in shares)	93,425	95,755
Net effect of dilutive equity awards (in shares)	81	120
Denominator for diluted net income per common share (in shares)	93,506	95,875
Diluted net income per common share (in dollars per share)	$ 0.16	$ 0.20

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RESIDENTIAL MORTGAGE INVESTMENTS - Schedule of Residential Mortgage Investments (Details) - USD ($) $ in Thousands		3 Months Ended	12 Months Ended
		Mar. 31, 2018	Dec. 31, 2017
Financing Receivable, Recorded Investment [Line Items]
Unpaid Principal Balance		$ 12,666,721	$ 13,010,978
Investment Premiums		384,159	397,876
Amortized Cost Basis		13,050,880	13,408,854
Carrying Amount	[1]	$ 13,052,071	$ 13,454,098
Net WAC	[2]	2.99%	2.93%
Average Yield	[2]	2.08%	1.91%
Agency Securities [Member]
Financing Receivable, Recorded Investment [Line Items]
Unpaid Principal Balance		$ 12,663,780	$ 13,007,704
Investment Premiums		384,132	397,845
Amortized Cost Basis		13,047,912	13,405,549
Carrying Amount	[1]	$ 13,049,103	$ 13,450,793
Net WAC	[2]	2.99%	2.93%
Average Yield	[2]	2.08%	1.91%
Agency Securities [Member] | Fannie Mae/Freddie Mac [Member] | Fixed-Rate [Member]
Financing Receivable, Recorded Investment [Line Items]
Unpaid Principal Balance		$ 209	$ 265
Investment Premiums		1	1
Amortized Cost Basis		210	266
Carrying Amount	[1]	$ 210	$ 266
Net WAC	[2]	6.50%	6.51%
Average Yield	[2]	5.94%	6.22%
Agency Securities [Member] | Fannie Mae/Freddie Mac [Member] | ARMs [Member]
Financing Receivable, Recorded Investment [Line Items]
Unpaid Principal Balance		$ 9,904,243	$ 10,216,099
Investment Premiums		303,393	313,547
Amortized Cost Basis		10,207,636	10,529,646
Carrying Amount	[1]	$ 10,218,600	$ 10,578,364
Net WAC	[2]	3.02%	2.97%
Average Yield	[2]	2.10%	1.93%
Agency Securities [Member] | Ginnie Mae [Member] | ARMs [Member]
Financing Receivable, Recorded Investment [Line Items]
Unpaid Principal Balance		$ 2,759,328	$ 2,791,340
Investment Premiums		80,738	84,297
Amortized Cost Basis		2,840,066	2,875,637
Carrying Amount	[1]	$ 2,830,293	$ 2,872,163
Net WAC	[2]	2.88%	2.78%
Average Yield	[2]	2.00%	1.83%
Residential Mortgage Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Unpaid Principal Balance		$ 1,778	$ 1,856
Investment Premiums		8	8
Amortized Cost Basis		1,786	1,864
Carrying Amount	[1]	$ 1,786	$ 1,864
Net WAC	[2]	4.99%	4.98%
Average Yield	[2]	3.70%	3.91%
Residential Mortgage Loans [Member] | Fixed-Rate [Member]
Financing Receivable, Recorded Investment [Line Items]
Unpaid Principal Balance		$ 623	$ 645
Investment Premiums		1	1
Amortized Cost Basis		624	646
Carrying Amount	[1]	$ 624	$ 646
Net WAC	[2]	6.76%	6.74%
Average Yield	[2]	4.96%	5.32%
Residential Mortgage Loans [Member] | ARMs [Member]
Financing Receivable, Recorded Investment [Line Items]
Unpaid Principal Balance		$ 1,155	$ 1,211
Investment Premiums		7	7
Amortized Cost Basis		1,162	1,218
Carrying Amount	[1]	$ 1,162	$ 1,218
Net WAC	[2]	4.04%	4.04%
Average Yield	[2]	3.04%	3.19%
Collateral for Structured Financings [Member]
Financing Receivable, Recorded Investment [Line Items]
Unpaid Principal Balance		$ 1,163	$ 1,418
Investment Premiums		19	23
Amortized Cost Basis		1,182	1,441
Carrying Amount	[1]	$ 1,182	$ 1,441
Net WAC	[2]	8.17%	7.94%
Average Yield	[2]	9.72%	7.67%

[1] Includes unrealized gains and losses for residential mortgage investments classified as available-for-sale.

[2] Net WAC, or weighted average coupon, is the weighted average interest rate of the mortgage loans underlying the indicated investments net of servicing and other fees as of the indicated balance sheet date. Net WAC is expressed as a percentage calculated on an annualized basis on the unpaid principal balances of the mortgage loans underlying these investments. Average yield is presented for the quarter then ended, and is based on the cash component of interest income expressed as a percentage calculated on an annualized basis on average amortized cost basis (the “cash yield”) less the effects of amortizing investment premiums. Investment premium amortization is determined using the interest method and incorporates actual and anticipated future mortgage prepayments.

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RESIDENTIAL MORTGAGE INVESTMENTS - Additional Information (Details) $ in Millions	3 Months Ended
	Mar. 31, 2018 USD ($)
Financing Receivable, Recorded Investment [Line Items]
Mortgage securities weighted average contractual maturity	288 months
Available for sale ARM securities, current-reset	$ 6,840
Available for sale ARM securities, longer-to-reset	$ 6,200
Current-Reset ARMs [Member]
Financing Receivable, Recorded Investment [Line Items]
Agency securities average months to roll	6 months 9 days
Current-Reset ARMs [Member] | Maximum [Member]
Financing Receivable, Recorded Investment [Line Items]
Agency securities months to roll	18 months
Longer-To-Reset ARMs [Member]
Financing Receivable, Recorded Investment [Line Items]
Agency securities average months to roll	42 months
Longer-To-Reset ARMs [Member] | Minimum [Member]
Financing Receivable, Recorded Investment [Line Items]
Agency securities months to roll	18 months

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SECURED BORROWINGS - Schedule of Secured Borrowings (Details) - USD ($) $ in Thousands		Mar. 31, 2018	Dec. 31, 2017
Secured Borrowings, Including Interest Rate Hedging Activity [Line Items]
Collateral carrying amount		$ 12,590,000	$ 12,980,000
Borrowings outstanding	[1],[2]	$ 11,953,111	$ 12,337,299
Quarter-End Borrowing Rates Adjusted for Effects of Related Derivative Financial Instruments ("Derivatives") Held as Cash Flow Hedges [Member]
Secured Borrowings, Including Interest Rate Hedging Activity [Line Items]
Average borrowing rates		1.63%
Year-End Borrowing Rates Adjusted for Effects of Related Derivatives Held as Cash Flow Hedges [Member]
Secured Borrowings, Including Interest Rate Hedging Activity [Line Items]
Average borrowing rates			1.46%
Agency Securities [Member]
Secured Borrowings, Including Interest Rate Hedging Activity [Line Items]
Collateral carrying amount		$ 12,592,953	$ 12,980,202
Accrued interest receivable		31,441	30,721
Borrowings outstanding		$ 11,944,841	$ 12,331,060
Average borrowing rates		1.88%	1.60%
Agency Securities [Member] | Borrowings with Maturities of 30 Days or Less [Member]
Secured Borrowings, Including Interest Rate Hedging Activity [Line Items]
Collateral carrying amount		$ 12,559,176	$ 12,943,193
Accrued interest receivable		31,369	30,646
Borrowings outstanding		$ 11,913,651	$ 12,296,546
Average borrowing rates		1.88%	1.60%
Agency Securities [Member] | Borrowings with Maturities of 31 to 90 Days [Member]
Secured Borrowings, Including Interest Rate Hedging Activity [Line Items]
Collateral carrying amount		$ 32,595	$ 35,568
Accrued interest receivable		72	75
Borrowings outstanding		$ 30,008	$ 33,073
Average borrowing rates		1.78%	1.53%
Agency Securities [Member] | Similar Borrowings [Member]
Secured Borrowings, Including Interest Rate Hedging Activity [Line Items]
Collateral carrying amount		$ 1,182	$ 1,441
Borrowings outstanding		$ 1,182	$ 1,441
Average borrowing rates		8.17%	7.94%

[1] Amounts include accrued interest payable of $9.5 million and $7.7 million on borrowings under repurchase arrangements as of March 31, 2018 and December 31, 2017, respectively.

[2] Included in gross amounts of recognized liabilities at March 31, 2018 is the fair value of non-exchange traded swap agreements (Counterparty 1) and exchange-traded swap agreements (Counterparty 4), calculated including accrued interest. Included in gross amounts offset in the balance sheet are variation margin amounts associated with exchange-traded swap agreements at March 31, 2018.

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SECURED BORROWINGS - Schedule of Average Borrowings Outstanding (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Dec. 31, 2017
Disclosure Of Repurchase Agreements [Abstract]
Average borrowings for the effects of related derivatives held as cash flow hedges	$ 12,235,554	$ 12,408,550
Effective borrowing rate considering cash flow hedges	1.47%	1.29%

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USE OF DERIVATIVES, OFFSETTING DISCLOSURES AND CHANGES IN OTHER COMPREHENSIVE INCOME BY COMPONENT - Additional Information (Details) - USD ($) $ in Millions	3 Months Ended	12 Months Ended
	Mar. 31, 2018	Dec. 31, 2010
Derivative Instruments and Hedging Activities Disclosures [Line Items]
SWAP agreement notional amount during period	$ 500	$ 100
SWAP agreement average interest rate during period	2.44%	4.09%
Swap agreement notional amount expiring during period	$ 1,700
SWAP agreement average interest rate expiring during period	0.76%
Interest Rate Swap Agreements [Member]
Notional Disclosures [Abstract]
Payment term of LIBOR interest rate agreement		20 years

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USE OF DERIVATIVES, OFFSETTING DISCLOSURES AND CHANGES IN OTHER COMPREHENSIVE INCOME BY COMPONENT - Schedule of Swap Agreements Expiration Period and Characteristics (Details) $ in Thousands	Mar. 31, 2018 USD ($)
Notional Disclosures [Abstract]
Notional Amount	$ 6,850,000
Interest Rate SWAP Currently-Paying Contracts Expiring Second Quarter 2018 [Member]
Notional Disclosures [Abstract]
Notional Amount	$ 600,000
Average Fixed-Rate Payment Requirement	0.79%
Interest Rate SWAP Currently-Paying Contracts Expiring Third Quarter 2018 [Member]
Notional Disclosures [Abstract]
Notional Amount	$ 400,000
Average Fixed-Rate Payment Requirement	0.88%
Interest Rate SWAP Currently-Paying Contracts Expiring Fourth Quarter 2018 [Member]
Notional Disclosures [Abstract]
Notional Amount	$ 800,000
Average Fixed-Rate Payment Requirement	1.15%
Interest Rate SWAP Currently-Paying Contracts Expiring First Quarter 2019 [Member]
Notional Disclosures [Abstract]
Notional Amount	$ 950,000
Average Fixed-Rate Payment Requirement	1.58%
Interest Rate SWAP Currently-Paying Contracts Expiring Second Quarter 2019 [Member]
Notional Disclosures [Abstract]
Notional Amount	$ 1,650,000
Average Fixed-Rate Payment Requirement	1.33%
Interest Rate SWAP Currently-Paying Contracts Expiring Third Quarter 2019 [Member]
Notional Disclosures [Abstract]
Notional Amount	$ 550,000
Average Fixed-Rate Payment Requirement	1.40%
Interest Rate SWAP Currently-Paying Contracts Expiring Fourth Quarter 2019 [Member]
Notional Disclosures [Abstract]
Notional Amount	$ 700,000
Average Fixed-Rate Payment Requirement	1.72%
Interest Rate SWAP Currently-Paying Contracts Expiring First Quarter 2020 [Member]
Notional Disclosures [Abstract]
Notional Amount	$ 600,000
Average Fixed-Rate Payment Requirement	2.07%
Interest Rate SWAP Currently-Paying Contracts Expiring Second Quarter 2020 [Member]
Notional Disclosures [Abstract]
Notional Amount	$ 100,000
Average Fixed-Rate Payment Requirement	2.56%
Interest Rate SWAP Currently-Paying Contracts Expiring Third Quarter 2020 [Member]
Notional Disclosures [Abstract]
Notional Amount	$ 200,000
Average Fixed-Rate Payment Requirement	1.64%
Interest Rate SWAP Currently-Paying Contracts Expiring Fourth Quarter 2020 [Member]
Notional Disclosures [Abstract]
Notional Amount	$ 200,000
Average Fixed-Rate Payment Requirement	2.04%
Interest Rate SWAP Currently-Paying Contracts Expiring First Quarter 2021 [Member]
Notional Disclosures [Abstract]
Notional Amount	$ 100,000
Average Fixed-Rate Payment Requirement	2.67%

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USE OF DERIVATIVES, OFFSETTING DISCLOSURES AND CHANGES IN OTHER COMPREHENSIVE INCOME BY COMPONENT - Components of Balance Sheet (Details) - USD ($) $ in Thousands		Mar. 31, 2018	Dec. 31, 2017
Balance sheet-related [Abstract]
Swap agreements in a gain position (an asset) related to borrowings		$ 387
Swap agreements in a loss position (a liability) related to borrowings		(18,265)	$ (23,772)
Interest rate swap agreements at fair value, net assets (liability)		(18,832)	(24,256)
Receivable and Other Assets [Member] | Interest Rate Swap Agreements [Member] | Secured Borrowings [Member]
Balance sheet-related [Abstract]
Swap agreements in a gain position (an asset) related to borrowings	[1]	387
Interest Rate Swap Agreements At Fair Value | Unsecured Borrowings [Member]
Balance sheet-related [Abstract]
Swap agreements in a loss position (a liability) related to borrowings	[1]	(18,265)	(23,772)
Accounts Payable and Accrued Liabilities [Member]
Balance sheet-related [Abstract]
Related net interest payable	[2]	$ (954)	$ (484)

[1] The fair value of Derivatives with unrealized gains are aggregated and recorded as an asset on the face of the Balance Sheets separately from the fair value of Derivatives with unrealized losses that are recorded as a liability. The amount of unrealized gains, net of unrealized losses, scheduled to be recognized in the Statements of Income over the next twelve months primarily in the form of current market rates in excess of fixed-rate swap payments totaled $42.1 million at March 31, 2018.

[2] Included in “Accounts payable and accrued expenses” on the face of the Balance Sheets.

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USE OF DERIVATIVES, OFFSETTING DISCLOSURES AND CHANGES IN OTHER COMPREHENSIVE INCOME BY COMPONENT - Components Balance Sheet (Parenthetical) (Details) $ in Millions	3 Months Ended
	Mar. 31, 2018 USD ($)
Notional Disclosures [Abstract]
Derivative instruments unrealized gains to be recognized	$ 42.1

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USE OF DERIVATIVES, OFFSETTING DISCLOSURES AND CHANGES IN OTHER COMPREHENSIVE INCOME BY COMPONENT - Components of Income Statement and Other Comprehensive Income (Details) - USD ($) $ in Thousands		3 Months Ended
		Mar. 31, 2018	Mar. 31, 2017
Income statement-related [Abstract]
Amount of gain (loss) reclassified from Accumulated other comprehensive income		$ (4,644)	$ 1,661
Other comprehensive income (loss)-related [Abstract]
Amount of gain recognized in Other comprehensive income		30,933	8,096
Interest Expense [Member]
Income statement-related [Abstract]
Decrease (increase) in interest expense and increase(decrease) in Net income as a result of the use of Derivatives		4,644	(2,054)
Interest Expense [Member] | Secured Borrowings [Member]
Income statement-related [Abstract]
Amount of gain (loss) reclassified from Accumulated other comprehensive income		5,247	(888)
Amount of loss recognized in income			(393)
Decrease (increase) in interest expense and increase(decrease) in Net income as a result of the use of Derivatives	[1]	5,247	(1,281)
Interest Expense [Member] | Unsecured Borrowings [Member]
Income statement-related [Abstract]
Amount of gain (loss) reclassified from Accumulated other comprehensive income	[2]	$ (603)	$ (773)

[1] Included in “Interest expense: Secured borrowings” on the face of the Statements of Income.

[2] Included in “Interest expense: Unsecured borrowings” on the face of the Statements of Income

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USE OF DERIVATIVES, OFFSETTING DISCLOSURES AND CHANGES IN OTHER COMPREHENSIVE INCOME BY COMPONENT - Schedule of Offsetting of Derivative Assets (Details) - USD ($) $ in Thousands		Mar. 31, 2018	Dec. 31, 2017
Offsetting of derivative assets [Abstract]
Gross Amounts of Recognized Assets		$ 387
Net Amounts of Assets Presented in the Balance Sheet		18,832	$ 24,256
Offsetting Derivatives Assets [Member] | Counterparty 4 [Member]
Offsetting of derivative assets [Abstract]
Gross Amounts of Recognized Assets	[1]	49,821	30,676
Gross Amounts Offset in the Balance Sheet	[1]	(49,434)	(30,676)
Net Amounts of Assets Presented in the Balance Sheet		387	0
Financial Instruments	[2]	0	0
Cash Collateral Received	[2]	0	0
Net Amount		$ 387	$ 0

[1] Included in gross amounts of recognized assets at March 31, 2018 is the fair value of exchange-traded swap agreements, calculated including accrued interest. Included in gross amounts offset in the balance sheet are variation margin amounts associated with these swaps at March 31, 2018.

[2] Amounts presented are limited to recognized liabilities and cash collateral received associated with the indicated counterparty sufficient to reduce the related Net Amount to zero in accordance with ASU No. 2011-11, as amended by ASU No. 2013-01.

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USE OF DERIVATIVES, OFFSETTING DISCLOSURES AND CHANGES IN OTHER COMPREHENSIVE INCOME BY COMPONENT - Schedule of Offsetting of Financial Liabilities and Derivative Liabilities (Details) - USD ($) $ in Thousands		Mar. 31, 2018	Dec. 31, 2017
Offsetting of financial liabilities and derivative liabilities [Abstract]
Gross Amounts of Recognized Liabilities (Derivatives)		$ 18,265	$ 23,772
Cash Collateral Pledged (Derivatives)		(36,586)	(42,506)
Gross Amounts of Recognized Liabilities (Repurchase Arrangements)	[1],[2]	11,953,111	12,337,299
Gross Amounts Offset in the Balance Sheet (Repurchase Arrangements)	[1],[2]	0	0
Net Amounts of Liabilities Presented in the Balance Sheet (Repurchase Arrangements)	[1],[3]	11,953,111	12,337,299
Financial Instruments (Repurchase Arrangements)	[1],[4]	(11,953,111)	(12,337,299)
Cash Collateral Pledged (Repurchase Arrangements)	[1],[4]	0	0
Net Amount (Repurchase Arrangements)	[1]	0	0
Gross Amounts of Recognized Liabilities (Financial Liabilities Total)	[2]	11,972,646	12,365,256
Gross Amounts Offset in the Balance Sheet (Financial Liabilities Total)	[2]	(316)	(3,701)
Net Amounts of Liabilities Presented in the Balance Sheet (Financial Liabilities Total)	[3]	11,972,330	12,361,555
Financial Instruments (Financial Liabilities Total)	[4]	(11,953,111)	(12,337,299)
Cash Collateral Pledged (Financial Liabilities Total)	[4]	(19,219)	(24,256)
Net Amount (Financial Liabilities Total)		0	0
Counterparty 1 [Member]
Offsetting of financial liabilities and derivative liabilities [Abstract]
Gross Amounts of Recognized Liabilities (Derivatives)	[2]	19,219	24,256
Gross Amounts Offset in the Balance Sheet (Derivatives)	[2]	0	0
Net Amounts of Liabilities Presented in the Balance Sheet (Derivatives)	[3]	19,219	24,256
Financial Instruments (Derivatives)	[4]	0	0
Cash Collateral Pledged (Derivatives)	[4]	(19,219)	(24,256)
Net Amount (Derivatives)		0	0
Counterparty 4 [Member]
Offsetting of financial liabilities and derivative liabilities [Abstract]
Gross Amounts of Recognized Liabilities (Derivatives)	[2]	316	3,701
Gross Amounts Offset in the Balance Sheet (Derivatives)	[2]	(316)	(3,701)
Net Amounts of Liabilities Presented in the Balance Sheet (Derivatives)	[3]	0	0
Financial Instruments (Derivatives)	[4]	0	0
Cash Collateral Pledged (Derivatives)	[4]	0	0
Net Amount (Derivatives)		0	0
Derivative Counterparties [Member]
Offsetting of financial liabilities and derivative liabilities [Abstract]
Gross Amounts of Recognized Liabilities (Derivatives)	[2]	19,535	27,957
Gross Amounts Offset in the Balance Sheet (Derivatives)	[2]	(316)	(3,701)
Net Amounts of Liabilities Presented in the Balance Sheet (Derivatives)	[3]	19,219	24,256
Financial Instruments (Derivatives)	[4]	0	0
Cash Collateral Pledged (Derivatives)	[4]	(19,219)	(24,256)
Net Amount (Derivatives)		$ 0	$ 0

[1] Amounts include accrued interest payable of $9.5 million and $7.7 million on borrowings under repurchase arrangements as of March 31, 2018 and December 31, 2017, respectively.

[2] Included in gross amounts of recognized liabilities at March 31, 2018 is the fair value of non-exchange traded swap agreements (Counterparty 1) and exchange-traded swap agreements (Counterparty 4), calculated including accrued interest. Included in gross amounts offset in the balance sheet are variation margin amounts associated with exchange-traded swap agreements at March 31, 2018.

[3] Amounts presented are limited to recognized liabilities and cash collateral received associated with the indicated counterparty sufficient to reduce the related Net Amount to zero in accordance with ASU No. 2011-11, as amended by ASU No. 2013-01.

[4] Amounts presented are limited to recognized assets and collateral pledged associated with the indicated counterparty sufficient to reduce the related Net Amount to zero in accordance with ASU No. 2011-11, as amended by ASU No. 2013-01.

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USE OF DERIVATIVES, OFFSETTING DISCLOSURES AND CHANGES IN OTHER COMPREHENSIVE INCOME BY COMPONENT - Schedule of Offsetting of Financial Liabilities and Derivative Liabilities (Parenthetical) (Details) - USD ($) $ in Millions	Mar. 31, 2018	Dec. 31, 2017
Portfolio-Related Secured Borrowings [Member]
Notional Disclosures [Abstract]
Accrued interest payable	$ 9.5	$ 7.7

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USE OF DERIVATIVES, OFFSETTING DISCLOSURES AND CHANGES IN OTHER COMPREHENSIVE INCOME BY COMPONENT - Changes in Accumulated Other Comprehensive Income (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Mar. 31, 2017
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning Balance	$ 1,238,876
Other comprehensive income (loss)	(17,764)	$ 13,753
Ending Balance	1,192,228
Unrealized Gains and Losses on Cash Flow Hedges [Member]
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning Balance	16,874
Other comprehensive income (loss) before reclassifications	30,933
Amounts reclassified from accumulated other comprehensive income	(4,644)
Other comprehensive income (loss)	26,289
Ending Balance	43,163
Unrealized Gains and Losses on Available-for-sale Securities [Member]
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning Balance	45,244
Other comprehensive income (loss) before reclassifications	(44,053)
Amounts reclassified from accumulated other comprehensive income	0
Other comprehensive income (loss)	(44,053)
Ending Balance	1,191
Accumulated Other Comprehensive Income [Member]
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning Balance	62,118
Other comprehensive income (loss) before reclassifications	(13,120)
Amounts reclassified from accumulated other comprehensive income	(4,644)
Other comprehensive income (loss)	(17,764)
Ending Balance	$ 44,354

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UNSECURED BORROWINGS - Additional Information (Details) - Junior Subordinated Debt [Member] $ in Millions	3 Months Ended
	Mar. 31, 2018 USD ($)
Debt Instrument [Line Items]
Junior subordinated notes maturity term	30 years
Face amount of junior subordinated notes	$ 100

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UNSECURED BORROWINGS - Schedule of Subordinated Note Balances and Related Weighted Average Interest Rates (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2018	Dec. 31, 2017
Debt Instrument [Line Items]
Borrowings Outstanding	$ 98,216	$ 98,191
Effective interest rate	7.75%	7.75%
October 2035 [Member]
Debt Instrument [Line Items]
Borrowings Outstanding	$ 34,325	$ 34,315
Effective interest rate	7.89%	7.90%
Junior subordinated notes, maturity period	Oct. 31, 2035
Face amount of junior subordinated notes	$ 35,000
December 2035 [Member]
Debt Instrument [Line Items]
Borrowings Outstanding	$ 39,330	$ 39,320
Effective interest rate	7.66%	7.66%
Junior subordinated notes, maturity period	Dec. 31, 2035
Face amount of junior subordinated notes	$ 40,000
September 2036 [Member]
Debt Instrument [Line Items]
Borrowings Outstanding	$ 24,561	$ 24,556
Effective interest rate	7.70%	7.70%
Junior subordinated notes, maturity period	Sep. 30, 2036
Face amount of junior subordinated notes	$ 25,000

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CAPITAL TRANSACTIONS - Additional Information (Details) - USD ($)		3 Months Ended
	Apr. 01, 2018	Mar. 31, 2018	Nov. 01, 2017
Class of Stock [Line Items]
Common stock repurchase program			$ 100,000,000
Shares repurchased (in shares)		3,400,000
Shares repurchased, value		$ 29,100,000
Shares average repurchase price including underwriting fees		$ 8.60
Subsequent Event [Member]
Class of Stock [Line Items]
Shares average repurchase price including underwriting fees	$ 8.57
Shares repurchased and settled (in shares)	48,000
Shares repurchased and settled, value	$ 410,000
Stock remaining repurchase program authorized amount	$ 67,000,000

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FAIR VALUE - Additional Information (Details)	3 Months Ended
	Mar. 31, 2018
Maximum [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Repurchase arrangements, initial term	120 days

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FAIR VALUE - Financial Instruments Other than Debt Securities (Details) - USD ($) $ in Thousands	Mar. 31, 2018	Dec. 31, 2017
Financial assets [Abstract]
Residential mortgage loans	$ 13,052,071	$ 13,454,098
Carrying Amount [Member]
Financial assets [Abstract]
Residential mortgage loans	1,786	1,864
Lending counterparty investments	5,002	5,002
Financial liabilities [Abstract]
Secured borrowings with initial terms of greater than 120 days		33,073
Unsecured borrowings	98,216	98,191
Fair Value [Member]
Financial assets [Abstract]
Residential mortgage loans	1,800	1,900
Lending counterparty investments	5,002	5,002
Financial liabilities [Abstract]
Secured borrowings with initial terms of greater than 120 days		33,100
Unsecured borrowings	77,600	74,100
Interest Rate Swap Agreements [Member] | Carrying Amount [Member] | Secured Borrowings [Member]
Financial assets [Abstract]
Secured borrowings-related interest rate swap agreements	387
Interest Rate Swap Agreements [Member] | Carrying Amount [Member] | Unsecured Borrowings [Member]
Financial liabilities [Abstract]
Interest rate swap agreements	18,265	23,772
Interest Rate Swap Agreements [Member] | Fair Value [Member] | Secured Borrowings [Member]
Financial assets [Abstract]
Secured borrowings-related interest rate swap agreements	387
Interest Rate Swap Agreements [Member] | Fair Value [Member] | Unsecured Borrowings [Member]
Financial liabilities [Abstract]
Interest rate swap agreements	$ 18,265	$ 23,772

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FAIR VALUE - Fair Value and Related Disclosures for Debt Securities (Details) - USD ($) $ in Thousands	Mar. 31, 2018	Dec. 31, 2017
Residential Mortgage Securities Classified as Held-to-Maturity [Member]
Held-to-maturity securities disclosure [Abstract]
Held-to-maturities, Amortized Cost Basis	$ 1,392	$ 1,706
Held-to-maturities, Gross Unrealized Gains	14	17
Held-to-maturities, Fair Value	1,406	1,723
Agency Securities Classified as Available-for-sale [Member] | Fannie Mae/Freddie Mac [Member]
Available-for-sale securities disclosure Items [Abstract]
Available-for-sale securities, Amortized Cost Basis	10,207,636	10,529,646
Available-for-sale securities, Gross Unrealized Gains	79,710	85,740
Available-for-sale securities, Gross Unrealized Losses	68,746	37,022
Available-for-sale securities, Fair Value	10,218,600	10,578,364
Agency Securities Classified as Available-for-sale [Member] | Ginnie Mae [Member]
Available-for-sale securities disclosure Items [Abstract]
Available-for-sale securities, Amortized Cost Basis	2,840,066	2,875,637
Available-for-sale securities, Gross Unrealized Gains	9,628	8,958
Available-for-sale securities, Gross Unrealized Losses	19,401	12,432
Available-for-sale securities, Fair Value	$ 2,830,293	$ 2,872,163

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FAIR VALUE - Securities in Unrealized Loss Position (Details) - USD ($) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2018	Dec. 31, 2017
Securities in an unrealized loss position, fair value [Abstract]
One year or greater	$ 2,342,577	$ 2,552,668
Less than one year	4,844,667	4,665,883
Fair Value, Total	7,187,244	7,218,551
Securities in an unrealized loss position, aggregate loss [Abstract]
One year or greater	34,142	26,701
Less than one year	54,005	22,752
Unrealized Losses, Total	$ 88,147	$ 49,453

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COMPENSATION PROGRAMS - Additional Information (Details) - USD ($)	1 Months Ended				3 Months Ended
	Jan. 31, 2018	Jan. 31, 2017	Feb. 29, 2016	Jan. 31, 2016	Mar. 31, 2018	Mar. 31, 2017	Dec. 31, 2017
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Short-term incentive compensation program accruals					$ 568,000
Dividend equivalent rights payable					$ 15,069,000		$ 18,487,000
Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Targeted award opportunity on base salary					75.00%
Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Targeted award opportunity on base salary					125.00%
Long-Term Equity-Based Awards [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Common shares available for future issuances (in shares)					3,369,164
Dividend Equivalent Rights Program [Member] | Accounts Payable and Accrued Liabilities [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Dividend equivalent rights payable					$ 96,000
Performance-based RSUs [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Dividend equivalent rights payable					$ 137,000
Share awards performance period					3 years
Total original grants (in shares)	183,137	148,894	269,354		183,137
Grant date fair value per share (in dollars per share)	$ 8.71	$ 10.52	$ 8.03		$ 8.71
Forfeitures (in shares)					(117,255)
Long term incentive compensation expense					$ 3,000	$ 312,000
Performance-based RSUs [Member] | December 2015 [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Forfeitures (in shares)					(117,255)
Service-Based Stock Awards [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total original grants (in shares)					41,797
Grant date fair value per share (in dollars per share)					$ 10.05
Grant date					Jul. 31, 2017
Service-based stock awards issuance period					1 year
Service-Based Stock Awards [Member] | Management [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total original grants (in shares)	126,451	74,446	67,337
Grant date fair value per share (in dollars per share)	$ 8.60	$ 10.41	$ 9.32
Share-based compensation arrangement by share-based payment award vesting period	2021-01	2020-01	2019-02
Service-Based Stock Awards [Member] | Employee [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total original grants (in shares)	57,283	49,416		61,272
Grant date fair value per share (in dollars per share)	$ 8.60	$ 10.41		$ 7.87
Share-based compensation arrangement by share-based payment award vesting period	2021-01	2020-01		2019-01
Stock Awards Activity [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total original grants (in shares)					183,734
Grant date fair value per share (in dollars per share)					$ 8.60
Long term incentive compensation expense					$ 307,000	220,000
Other general and administrative expense					105,000	$ 105,000
Total of unrecognized compensation expense for unvested stock award					$ 2,600,000
Compensation cost not yet recognized, period for recognition					1 year 7 months 6 days

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COMPENSATION PROGRAMS - Schedule of Performance-Based Restricted Stock Units Activity (Details) - Performance-based RSUs [Member] - $ / shares	1 Months Ended			3 Months Ended
	Jan. 31, 2018	Jan. 31, 2017	Feb. 29, 2016	Mar. 31, 2018
Equity instruments other than options, nonvested, number of shares [Roll Forward]
Unvested equity awards outstanding at beginning of period (in shares)	435,976			435,976
Grants (in shares)	183,137	148,894	269,354	183,137
Forfeitures (in shares)				(117,255)
Unvested equity outstanding at end of period (in shares)				501,858
Equity instruments other than options, nonvested, weighted average grant date fair value [Abstract]
Unvested equity awards outstanding at beginning of period (in dollars per share)	$ 9.10			$ 9.10
Grants (in dollars per share)	$ 8.71	$ 10.52	$ 8.03	8.71
Forfeitures (in dollars per share)				8.83
Unvested equity awards outstanding at end of period (in dollars per share)				$ 9.02

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COMPENSATION PROGRAMS - Schedule of Performance-Based and Service-Based Stock Award Activity (Details) - Stock Awards Activity [Member]	3 Months Ended
	Mar. 31, 2018 $ / shares shares
Equity instruments other than options, nonvested, number of shares [Roll Forward]
Unvested equity awards outstanding at beginning of period (in shares) | shares	296,940
Grants (in shares) | shares	183,734
Vestings (in shares) | shares	(34,899)
Unvested equity outstanding at end of period (in shares) | shares	445,775
Equity instruments other than options, nonvested, weighted average grant date fair value [Abstract]
Unvested equity awards outstanding at beginning of period (in dollars per share) | $ / shares	$ 9.90
Grants (in dollars per share) | $ / shares	8.60
Vestings (in dollars per share) | $ / shares	12.47
Unvested equity awards outstanding at end of period (in dollars per share) | $ / shares	$ 9.17