RESIDENTIAL MORTGAGE INVESTMENTS

3 Months Ended

Mar. 31, 2021

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 (c)
March 31, 2021
Agency Securities:
Fannie Mae/Freddie Mac ARMs	$	6,538,592	$	250,015	$	6,788,607	$	6,843,364		2.56	%		1.40	%
Ginnie Mae ARMs		537,617		16,119		553,736		562,047		3.25			1.16
	$	7,076,209	$	266,134	$	7,342,343	$	7,405,411		2.61			1.38

December 31, 2020
Agency Securities:
Fannie Mae/Freddie Mac ARMs	$	6,982,650	$	252,921	$	7,235,571	$	7,310,089		2.67	%		1.51	%
Ginnie Mae ARMs		599,726		17,704		617,430		627,463		3.39			2.05
	$	7,582,376	$	270,625	$	7,853,001	$	7,937,552		2.73			1.55

(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.

(c)

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. The maturity of Agency Securities 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 289 months.

Capstead’s ARM Agency Securities are 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, 2021, the average months to roll for the Company’s $2.97 billion (amortized cost basis) in current-reset ARM investments was approximately seven months while the average months to roll for

the Company’s $4.37 billion (amortized cost basis) in longer-to-reset ARM investments was approximately 55 months.

The Company did not sell any securities during the quarter ended March 31, 2021. In March 2020, the Company sold available-for-sale securities using the specific identification method for proceeds totaling $2.56 billion recognizing no gross realized gains and gross realized losses totaling $67.8 million.