DISCLOSURES REGARDING FAIR VALUES OF FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2013

DISCLOSURES REGARDING FAIR VALUES OF FINANCIAL INSTRUMENTS [Abstract]

DISCLOSURES REGARDING FAIR VALUES OF FINANCIAL INSTRUMENTS

NOTE 10 ¾ DISCLOSURES REGARDING FAIR VALUES OF FINANCIAL INSTRUMENTS

This note provides fair value disclosures as of the indicated balance sheet dates, all of which are determined using Level 2 Inputs in accordance with ASC 820, for Capstead’s financial assets and liabilities, most of which are influenced by changes in, and market expectations for changes in, interest rates and market liquidity conditions, as well as other factors beyond the control of management.

Residential mortgage investments, nearly all of which are mortgage securities classified as available-for-sale, are measured at fair value on a recurring basis.  In determining fair value estimates for mortgage securities the Company considers recent trading activity for similar investments and pricing levels indicated by lenders in connection with designating collateral for repurchase arrangements, provided such pricing levels are considered indicative of actual market clearing transactions.  In determining fair value estimates for longer-term borrowings under repurchase arrangements, if any, the Company considers pricing levels indicated by lenders for entering into new transactions using similar pledged collateral with terms equal to the remaining terms of the longer-term borrowings.  In determining fair value estimates for unsecured borrowings, the Company considers current pricing for financial instruments with similar characteristics.  Excluded from these disclosures are financial instruments for which the Company’s cost basis is deemed to approximate fair value due primarily to the short duration of these instruments, which are valued using primarily Level 1 measurements, including Cash and cash equivalents, cash collateral receivable from, or payable to, interest rate swap counterparties, receivables, payables and borrowings under repurchase arrangements with initial terms of 120 days or less.  See NOTE 7 for information relative to the valuation of interest rate swap agreements.

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

	September 30, 2013				December 31, 2012
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Residential mortgage loans	$	7,242	$	7,300	$	8,063	$	8,200
Interest rate swap agreements		1,558		1,558		169		169
Financial liabilities:
Repurchase arrangements with initial terms of greater than 120 days		36,299		36,300		41,520		41,500
Unsecured borrowings		103,095		104,100		103,095		104,600
Interest rate swap agreements		11,425		11,425		32,868		32,868

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

	Amortized		Gross Unrealized
	Cost Basis		Gains		Losses		Fair Value
As of September 30, 2013
Agency Securities classified as available-for-sale	$	13,504,096	$	244,090	$	21,678	$	13,726,508
Residential mortgage securities classified as held-to-maturity		4,561		224		–		4,785
As of December 31, 2012
Agency Securities classified as available-for-sale		13,519,657		328,412		1,963		13,846,106
Residential mortgage securities classified as held-to-maturity		5,989		309		–		6,298

	September 30, 2013				December 31, 2012
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Securities in an unrealized loss position:
One year or greater	$	24,903	$	207	$	29,760	$	120
Less than one year		3,198,273		21,471		751,645		1,843
	$	3,223,176	$	21,678	$	781,405	$	1,963

Capstead’s investment strategy involves managing a leveraged portfolio of primarily ARM Agency Securities and management expects these securities will be held until payoff absent a major shift in strategy.  Declines in fair value caused by increases in interest rates are typically modest for investments in relatively short duration ARM Agency Securities compared to investments in longer-duration, fixed-rate assets.  These declines are generally recoverable in a relatively short period of time as coupon interest rates on the underlying mortgage loans reset to rates more reflective of the then current interest rate environment.

From a credit risk perspective, federal government support for the GSEs helps ensure that fluctuations in value due to credit risk associated with these securities will be limited.  Given that (a) any existing unrealized losses on mortgage securities held by the Company are not attributable to credit risk, (b) the Company typically holds its investments to maturity, and (c) it is more likely than not that the Company will not be required to sell any of its investments, none of these investments are considered other-than-temporarily impaired at September 30, 2013.