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FAIR VALUE

9 Months Ended

Sep. 30, 2020

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 Eurodollar futures, all fair values were determined using Level 2 Inputs in accordance with ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820). Eurodollar futures are derivative contracts for which Level 1 inputs are used to determine fair value.

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

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

		September 30, 2020				December 31, 2019
	Fair Value Hierarchy	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Residential mortgage loans	Level 2	$	487	$	500	$	637	$	650
Secured borrowings-related interest rate swap agreements	Level 2	–		–			733		733
Eurodollar futures contracts	Level 1	–		–			738		738
Financial liabilities:
Secured borrowings with initial terms of greater than 120 days	Level 2		500,000		500,050	–		–
Unsecured borrowings	Level 2		98,468		44,500		98,392		68,100
Unsecured borrowings-related interest rate swap agreements	Level 2		46,529		46,529		29,156		29,156

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

	Amortized		Gross Unrealized
	Cost Basis		Gains		Losses		Fair Value
September 30, 2020
Agency Securities classified as available-for-sale:
Fannie Mae/Freddie Mac	$	7,454,503	$	98,588	$	12,987	$	7,540,104
Ginnie Mae		720,173		13,307		451		733,029
Residential mortgage securities classified as held-to-maturity		889		2	–			891

December 31, 2019
Agency Securities classified as available-for-sale:
Fannie Mae/Freddie Mac		8,890,949		64,593		23,753		8,931,789
Ginnie Mae		2,284,331		11,560		7,133		2,288,758
Residential mortgage securities classified as held-to-maturity		998		2	–			1,000

	September 30, 2020				December 31, 2019
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Securities in an unrealized loss position of one year or greater:
Fannie Mae/Freddie Mac	$	766,235	$	9,739	$	2,030,192	$	17,069
Ginnie Mae		26,214		265		560,022		5,775
Securities in an unrealized loss position less than one year:
Fannie Mae/Freddie Mac		672,510		3,248		1,473,144		6,684
Ginnie Mae		26,997		186		416,888		1,358
	$	1,491,956	$	13,438	$	4,480,246	$	30,886

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

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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