Capstead Mortgage Corporation Announces Second Quarter 2010 Results

Capstead Mortgage Corporation (NYSE: CMO) ("Capstead” or the "Company”) today reported net income of $29,759,000 or $0.35 per diluted common share for the quarter ended June 30, 2010. This compares to net income of $42,507,000, or $0.58 per diluted common share for the quarter ended June 30, 2009. The Company paid a second quarter dividend of $0.36 per common share on July 20, 2010.

Second Quarter Earnings and Related Discussion

Capstead is a self-managed real estate investment trust for federal income tax purposes that invests in a leveraged portfolio of residential adjustable-rate mortgage, or ARM, securities issued and guaranteed by federal government-sponsored enterprises, either Fannie Mae or Freddie Mac (the "GSEs”), or by an agency of the federal government, Ginnie Mae. For the quarter ended June 30, 2010, the Company reported net interest margins on interest-earning assets of $34,436,000 compared to $44,687,000 for the quarter ended March 31, 2010. Net interest margins were lower during the current quarter primarily as a result of lower portfolio balances and other affects of GSE buyouts of seriously delinquent loans from their mortgage guarantee portfolios. Total financing spreads averaged 1.71% during the second quarter of 2010, compared to 2.14% during the first quarter of 2010.

Yields on the Company’s interest-earning assets averaged 2.47% during the second quarter of 2010, a decline of 52 basis points from an average of 2.99% achieved during the first quarter of 2010. The decline reflects lower coupon interest rates on ARM loans underlying the portfolio that reset to more current interest rates and lower yielding portfolio acquisitions, as well as higher investment premium amortization due to elevated levels of mortgage prepayments. Portfolio runoff averaged 37.9% on an annualized basis during the second quarter (a 36.2% constant prepayment rate) compared to 31.8% (a 30.0% constant prepayment rate) during the first quarter of 2010. Elevated levels of mortgage prepayments are expected to continue into the third quarter with the expected conclusion of the GSE buyout programs in June (reflected in July portfolio runoff). Yields on ARM securities fluctuate with changes in mortgage prepayments and adjust over time to more current interest rates as coupon interest rates on the underlying mortgage loans reset.

Interest rates on all interest-bearing liabilities, including the Company’s long-term unsecured borrowings, averaged 0.76% during the second quarter of 2010, a decline of 9 basis points from an average of 0.85% during the first quarter of 2010. The Company’s repurchase arrangements and similar borrowings at June 30, 2010 totaled $6.90 billion consisting primarily of 30-day borrowings with 19 counterparties at an average rate of 0.29%, before consideration of interest rate hedging transactions. The Company pays fixed rates of interest averaging 1.34% on interest rate swap agreements with notional amounts totaling $2.80 billion and average maturities of 14 months at June 30, 2010. Variable payments based on one- and three-month London Interbank Offered Rate (LIBOR) received by the Company under these agreements tend to offset a significant portion of the interest owed on a like amount of the Company’s borrowings.

During the current quarter the Company acquired $927 million in primarily current-reset ARM securities contributing to a modest increase in the portfolio during this period. Portfolio leverage ended the quarter at 6.20 to one compared to 6.37 to one at March 31, 2010 and 6.67 to one at December 31, 2009. The following table progresses the Company’s portfolio of mortgage securities and similar investments for the quarter and six months ended June 30, 2010 (in thousands):

Book Value per Common Share

Nearly all of Capstead’s mortgage investments and all of its interest rate swap agreements are reflected at fair value on the Company’s balance sheet and are therefore included in the calculation of book value per common share. The fair value of these positions is impacted by market conditions, including changes in interest rates, and the availability of financing at reasonable rates and leverage levels. The Company’s investment strategy attempts to mitigate these risks by focusing almost exclusively on investments in agency-guaranteed mortgage 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. Because of these characteristics, the fair value of Capstead’s portfolio is considerably less vulnerable to significant pricing declines caused by credit concerns or rising interest rates compared to portfolios that contain a significant amount of non-agency and/or fixed-rate mortgage securities.

The following table illustrates the progression of book value per common share for the quarter and six months ended June 30, 2010:

Management Remarks

Commenting on current operating and market conditions, Andrew F. Jacobs, President and Chief Executive Officer, said, "The GSE buyout programs have created a period of sharply higher portfolio runoff, which has contributed to higher premium amortization and lower portfolio yields. During the second quarter of 2010, we acquired a sufficient amount of primarily current-reset ARM securities to replace runoff for the quarter and grow the portfolio modestly. That said, we will continue to be disciplined in our acquisition of securities and accordingly, it may take until year-end to redeploy capital made available from the GSE buyout programs.

"The GSEs have largely concluded their buyout programs with the June buyouts that will be reflected in July portfolio runoff. As a result, portfolio yields and financing spreads are expected to trend lower in the third quarter even as rates on our borrowings remain at favorable levels. We expect mortgage prepayments and related investment premium amortization to moderate in the fourth quarter, allowing portfolio yields and financing spreads to begin to recover. Consequently, we anticipate reporting improved operating results for the fourth quarter.

"We remain confident and focused in our investment strategy of managing a conservatively leveraged portfolio of agency-guaranteed residential ARM securities that can produce attractive risk-adjusted returns over the long term while reducing, but not eliminating, sensitivity to changes in interest rates.”

Earnings Conference Call Details

An earnings conference call and live audio webcast will be hosted Thursday, July 29, 2010 at 9:00 a.m. ET. The conference call may be accessed by dialing toll free (877) 407-8033 in the U.S. and Canada or (201) 689-8033 for international callers. A live audio webcast of the conference call can be accessed in the investor relations section of the Company’s website at www.capstead.com, and an audio archive of the webcast will be available for approximately 60 days. A replay of the call will be available through August 12, 2010 by dialing toll free (877) 660-6853 in the U.S. and Canada or (201) 612-7415 for international callers and entering account number 286 and conference ID 353624.

Cautionary 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,” "project,” "will be,” "will likely continue,” "will likely result,” or words or phrases of similar meaning. These 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:

• changes in general economic conditions;
• fluctuations in interest rates and levels of mortgage prepayments;
• the effectiveness of risk management strategies;
• the impact of differing levels of leverage employed;
• liquidity of secondary markets and credit markets;
• the availability of financing at reasonable levels and terms to support investing on a leveraged basis;
• the availability of new investment capital;
• increases in costs and other general competitive factors;
• deterioration in credit quality and ratings;
• the availability of suitable qualifying investments from both an investment return and regulatory perspective;
• the availability of residential mortgage pass-through securities issued and guaranteed by federal government-sponsored enterprises, currently Fannie Mae or Freddie Mac, or by an agency of the federal government, currently Ginnie Mae; and
• changes in legislation or regulation affecting federal government-sponsored enterprises and similar federal government agencies and related guarantees.

In addition to the above considerations, actual results and liquidity are affected by other risks and uncertainties many of which are set forth in the "Risk Factors” sections contained in the Company’s periodic filings with the SEC, which could cause actual results to be significantly different from those expressed or implied by these forward-looking statements. Any 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. 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. Accordingly, readers of this document are cautioned not to place undue reliance on the forward-looking statements.