UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: March 31, 2007

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

For the transition period from                      to                     

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
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (214) 874-2323

Indicate by check mark whether the Registrant (1) has filed all documents and 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 þ NO o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). (Check one):

Large accelerated filer o      Accelerated filer þ      Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES o NO þ

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

Common Stock ($0.01 par value)		19,255,552 as of May 8, 2007

 

 

CAPSTEAD MORTGAGE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2007

INDEX

		Page
PART I. — FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets — March 31, 2007 and December 31, 2006			3
Consolidated Statements of Operations — Quarter Ended March 31, 2007 and 2006			4
Consolidated Statements of Cash Flows — Quarter Ended March 31, 2007 and 2006			5
Notes to Consolidated Financial Statements			6
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
ITEM 3. Qualitative and Quantitative Disclosure of Market Risk			29
ITEM 4. Controls and Procedures			30
PART II. — OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders			30
ITEM 6. Exhibits and Reports on Form 8-K			31
SIGNATURES			31
Amended and Restated 2004 Flexible Long-Term Incentive Plan
Computation of Ratio of Earnings to Combined Fixed Charges
Certification Pursuant to Section 302
Certification Pursuant to Section 302
Certification Pursuant to Section 906

ITEM 1. FINANCIAL STATEMENTS

PART I. — FINANCIAL INFORMATION

CAPSTEAD MORTGAGE CORPORATION

		March 31, 2007				December 31, 2006
		(unaudited)				(NOTE 2)
Assets:
Mortgage securities and similar investments ($5.2 billion pledged under repurchase arrangements)		$	5,355,672			$	5,252,399
Investments in unconsolidated affiliates			20,047				20,073
Receivables and other assets			67,022				69,869
Cash and cash equivalents			5,602				5,661
		$	5,448,343			$	5,348,002
Liabilities:
Repurchase arrangements and similar borrowings		$	4,975,721			$	4,876,134
Unsecured borrowings			103,095				103,095
Common stock dividend payable			385				385
Accounts payable and accrued expenses			18,540				28,426
			5,097,741				5,008,040
Stockholders’ equity:
Preferred stock — $0.10 par value; 100,000 shares authorized:
$1.60 Cumulative Preferred Stock, Series A, 202 shares issued and outstanding at March 31, 2007 and December 31, 2006 ($3,317 aggregate liquidation preference)			2,828				2,828
$1.26 Cumulative Convertible Preferred Stock, Series B, 15,819 shares issued and outstanding at March 31, 2007 and December 31, 2006 ($180,025 aggregate liquidation preference)			176,705				176,705
Common stock — $0.01 par value; 100,000 shares authorized:
19,253 shares issued and outstanding at March 31, 2007 and December 31, 2006			192				192
Paid-in capital			497,150				497,418
Accumulated deficit			(353,163	)			(354,617	)
Accumulated other comprehensive income			26,890				17,436
			350,602				339,962
		$	5,448,343			$	5,348,002

See accompanying notes to consolidated financial statements.

CAPSTEAD MORTGAGE CORPORATION

		Quarter Ended March 31
		2007				2006
Mortgage securities and similar investments:
Interest income		$	72,142			$	52,926
Interest expense			(63,589	)			(47,543	)
			8,553				5,383
Other revenue (expense):
Other revenue			871				166
Interest expense on unsecured borrowings			(2,187	)			(1,587	)
Other operating expense			(1,674	)			(1,673	)
			(2,990	)			(3,094	)
Income before equity in earnings of unconsolidated affiliates			5,563				2,289
Equity in earnings of unconsolidated affiliates			664				422
Net income		$	6,227			$	2,711
Net income available (loss attributable) to common stockholders:
Net income		$	6,227			$	2,711
Less cash dividends paid on preferred stock			(5,064	)			(5,064	)
		$	1,163			$	(2,353	)
Basic and diluted earnings (loss) per common share		$	0.06			$	(0.12	)
Cash dividends declared per share:
Common		$	0.020			$	0.020
Series A Preferred			0.400				0.400
Series B Preferred			0.315				0.315

See accompanying notes to consolidated financial statements.

CAPSTEAD MORTGAGE CORPORATION

		Quarter Ended March 31
		2007				2006
Operating activities:
Net income		$	6,227			$	2,711
Noncash items:
Amortization of investment premiums			5,671				5,967
Depreciation and other amortization			63				24
Stock-based compensation			214				125
Undistributed earnings of unconsolidated affiliates			—				(228	)
Net change in receivables, other assets, accounts payable and accrued expenses			(5,172	)			(3,212	)
Net cash provided by operating activities			7,003				5,387
Investing activities:
Purchases of mortgage securities and similar investments			(524,395	)			(842,261	)
Principal collections on mortgage securities and similar investments			423,150				402,797
Investment in unconsolidated affiliates — commercial real estate loan limited partnership			26				(9,218	)
Net cash used in investing activities of continuing operations			(101,219	)			(448,682	)
Net cash used in investing activities of discontinued operation			—				(2,884	)
Net cash used in investing activities			(101,219	)			(451,566	)
Financing activities:
Net increase in repurchase arrangements and similar borrowings			99,587				441,377
Capital stock transactions			19				10
Dividends paid			(5,449	)			(5,445	)
Net cash provided by financing activities			94,157				435,942
Net change in cash and cash equivalents			(59	)			(10,237	)
Cash and cash equivalents at beginning of period			5,661				33,937
Cash and cash equivalents at end of period		$	5,602			$	23,700

See accompanying notes to consolidated financial statements.

CAPSTEAD MORTGAGE CORPORATION

NOTE 1 — BUSINESS

Capstead Mortgage Corporation operates as a 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 real estate-related assets on a leveraged basis. These investments currently consist primarily of a core portfolio of residential adjustable-rate mortgage (“ARM”) securities issued and guaranteed by government-sponsored entities, either Fannie Mae or Freddie Mac, or by an agency of the federal government, Ginnie Mae (collectively, “Agency Securities”). Capstead also seeks to opportunistically invest a portion of its investment capital in credit-sensitive commercial real estate-related assets, including subordinate commercial real estate loans.

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, 2007 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2007. For further information refer to the consolidated financial statements and footnotes thereto incorporated by reference in the Company’s annual report on Form 10-K for the year ended December 31, 2006.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

Accounting for Acquisitions of Mortgage Securities Seller-Financed using Repurchase Arrangements

From time to time Capstead will finance acquisitions of mortgage investments with the seller using repurchase arrangements. Consistent with prevailing industry practice, the Company records such assets and the related financings gross on its balance sheet, and the corresponding interest income and interest expense gross on its income statement. In addition, the asset is typically a security held available-for-sale, and any change in fair value of the asset is recorded as a component of Other comprehensive income.

Under a recent technical interpretation of the pertinent accounting rules, in a transaction where assets are acquired from and financed under a repurchase agreement with the same counterparty, the acquisition may not qualify as a sale from the seller’s perspective. In such cases, the seller may be required to continue to consolidate the assets sold based on their “continuing involvement” with such assets. The result is that the buyer may be precluded from presenting any such assets gross on its balance sheet and may instead be required to treat its net investment in such assets as a derivative financial instrument (“Derivative”) until such time as the assets are no longer financed with the seller. The resulting Derivative would be marked to market through earnings.

The accounting rules related to this issue are currently under review by the Financial Accounting Standards Board. The Company had less than $50 million in seller-financed acquisitions as of March 31, 2007. Management does not believe changing the accounting treatment for any past transactions, if required, would have a material effect on its reported earnings, taxable income or financial position. Also, it would not affect Capstead’s status as a REIT or cause it to fail to qualify for its Investment Company Act exemption which requires that the Company must, among other things, maintain at least 55% of its assets directly in qualifying real estate interests.

Accounting for Uncertainty in Income Taxes

The Company adopted the provisions for Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”) on January 1, 2007. In implementing FIN 48, the Company did not recognize any liability for unrecognized tax benefits and does not expect to recognize a change in unrecognized tax benefits within the next twelve months. If applicable, the Company will recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. No such accruals were necessary as of March 31, 2007. The Company and certain of its subsidiaries file federal and various state income tax returns. The Company is generally no longer subject to income tax examinations by tax authorities for years before 2003.

NOTE 3 — EARNINGS (LOSS) PER COMMON SHARE

Basic earnings (loss) per common share is computed by dividing net income, after deducting preferred share dividends, by the weighted average number of common shares outstanding. Diluted earnings (loss) per common share is computed by dividing net income, after deducting dividends on convertible preferred shares when such shares are antidilutive, by the weighted average number of common shares and common share equivalents outstanding, giving effect to equity awards and convertible preferred shares, when such awards and shares are dilutive. For calculation purposes the Series A and B preferred shares are considered dilutive whenever basic income per common share exceeds each Series’ dividend divided by the conversion rate applicable for that period. Components of the computation of basic and diluted earnings (loss) per common share were as follows (in thousands, except per share amounts):

		Quarter Ended March 31
		2007				2006
Numerators for basic earnings (loss) per common share:
Net income		$	6,227			$	2,711
Less Series A and B preferred share dividends			(5,064	)			(5,064	)
Income available (loss attributable) to common stockholders		$	1,163			$	(2,353	)
Weighted average common shares outstanding			18,933				18,872
Basic earnings (loss) per common share		$	0.06			$	(0.12	)
Numerators for diluted earnings (loss) per common share:
Net income		$	6,227			$	2,711
Less dividends on antidilutive convertible preferred shares			(5,064	)			(5,064	)
Income available (loss attributable)to common stockholders		$	1,163			$	(2,353	)
Denominator for diluted earnings (loss) per common share:
Weighted average common shares outstanding			18,933				18,872
Net effect of dilutive equity awards			121				—
			19,054				18,872
Diluted earnings (loss) per common share		$	0.06			$	(0.12	)

Potentially dilutive securities excluded from the calculation of diluted earnings (loss) per common share were as follows (in thousands):

		Quarter Ended March 31
		2007				2006
Equity awards:
Shares issuable under option awards			205				696
Nonvested stock awards			—				171
Convertible preferred shares:
Series A shares			202				202
Series B shares			15,819				15,819

NOTE 4 — MORTGAGE SECURITIES AND SIMILAR INVESTMENTS

Agency Securities carry an implied AAA rating and therefore limited, if any, credit risk. Private residential mortgage pass-through securities formed prior to 1995 when Capstead operated a mortgage conduit are referred to as “Non-Agency Securities.” The related credit risk is borne by the Company or by AAA-rated private mortgage insurers. Commercial loans are subordinate loans that carry credit risk associated with specific commercial real estate collateral. Collateral for structured financings consists of Non-agency Securities pledged to secure these securitizations. The related credit risk is borne by bondholders of the securitization to which the collateral is pledged. The maturity of mortgage securities is directly affected by the rate of principal prepayments on the underlying mortgage loans.

Mortgage securities and similar investments and related weighted average rates classified by collateral type and interest rate characteristics were as follows (dollars in thousands):

		Principal				Investment								Carrying				Net				Average
		Balance				Premiums				Basis				Amount (a)				WAC (b)				Yield (b)
March 31, 2007
Agency Securities:
Fannie Mae/Freddie Mac:
Fixed-rate		$	15,725			$	48			$	15,773			$	15,795				6.63	%			6.36	%
ARMs			4,506,631				63,443				4,570,074				4,590,682				6.25				5.49
Ginnie Mae ARMs			685,792				2,820				688,612				694,416				5.44				5.34
			5,208,148				66,311				5,274,459				5,300,893				6.14				5.48
Non-agency Securities:
Fixed-rate			16,565				34				16,599				16,628				7.19				6.92
ARMs			29,073				280				29,353				29,635				7.15				6.76
			45,638				314				45,952				46,263				7.17				6.82
Commercial loans			2,754				—				2,754				2,754				18.00				18.00
Collateral for structured financings			5,672				90				5,762				5,762				8.06				7.96
		$	5,262,212			$	66,715			$	5,328,927			$	5,355,672				6.16				5.50

		Principal				Investment								Carrying				Net				Average
		Balance				Premiums				Basis				Amount (a)				WAC (b)				Yield (b)
December 31, 2006
Agency Securities:
Fannie Mae/Freddie Mac:
Fixed-rate		$	16,819			$	52			$	16,871			$	16,895				6.63	%			6.29	%
ARMs			4,343,740				61,381				4,405,121				4,418,446				6.14				5.36
Ginnie Mae ARMs			752,301				2,757				755,058				758,660				5.23				5.20
			5,112,860				64,190				5,177,050				5,194,001				6.01				5.34
Non-agency Securities:
Fixed-rate			17,734				41				17,775				17,804				7.19				6.83
ARMs			31,562				303				31,865				32,164				6.99				6.81
			49,296				344				49,640				49,968				7.06				6.81
Commercial loans			2,635				—				2,635				2,635				18.00				18.00
Collateral for structured financings			5,705				90				5,795				5,795				8.06				7.58
		$	5,170,496			$	64,624			$	5,235,120			$	5,252,399				6.03				5.36

Fixed-rate investments generally are mortgage securities backed by mortgage loans that have fixed rates of interest over the contractual term of the loans. Adjustable-rate investments generally are ARM 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, ARM securities either (i) adjust annually based on a specified margin over the one-year Constant Maturity U.S. Treasury Note Rate (“CMT”) or the one-year London Interbank Offered Rate (“LIBOR”), (ii) adjust semiannually based on a specified margin over six-month LIBOR, or (iii) adjust monthly based on a specified margin over an index such as LIBOR, CMT or the Eleventh District Federal Reserve Bank Cost of Funds Index, usually subject to periodic and lifetime limits on the amount of such adjustments during any single interest rate adjustment period and over the contractual term of the loans. The Company classifies its ARM securities based on each security’s average number of months until coupon reset (“months-to-roll”). Current-reset ARM securities have a months-to-roll of 18 months or less while longer-to-reset ARM securities have a months-to-roll of greater than 18 months. The average months-to-roll for the $3.74 billion in current-reset ARM securities held by the Company as of March 31, 2007 was five months compared to 46 months for the Company’s $1.58 billion in longer-to-reset ARM securities.

NOTE 5 — INVESTMENTS IN UNCONSOLIDATED AFFILIATES

In July 2005 Capstead and Crescent Real Estate Equities Company (NYSE: CEI) formed Redtail Capital Partners, L.P. (“Redtail Capital”), a limited partnership owned and capitalized 75% by Capstead and 25% by CEI, for the purpose of investing in a leveraged portfolio of subordinate commercial real estate loans that meet certain criteria over a two-year investment period ending in July 2007. A master agreement between the parties contemplates a follow-on partnership with similar terms to make additional investments over the following two-year period ending in July 2009. CEI is responsible for identifying investment opportunities and managing the loan portfolio and is paid a management fee and may earn incentives based on portfolio performance. Capstead must approve any investments made by Redtail Capital.

Redtail Capital finances up to 75% of the value of its investments using a committed master repurchase agreement with a major investment banking firm through August 9, 2007, after which four equal

repurchase payments are due quarterly through August 9, 2008, unless the term of the agreement is extended. Amounts available to be borrowed under this facility and related borrowing rates are dependent upon the characteristics of the pledged collateral and can change based on changes in the fair value of the pledged collateral. As of March 31, 2007, Redtail Capital had borrowed $41.3 million under this facility to fund investments totaling $63.2 million consisting of junior liens on two luxury full-service hospitality properties. Capstead’s investment in Redtail Capital totaled $17.0 million as of March 31, 2007 and the Company’s equity in earnings of the venture totaled $599,000 during the three months ended March 31, 2007.

To facilitate the issuance of unsecured borrowings, in September and December 2005 and in September 2006 Capstead formed and capitalized three Delaware statutory trusts through the issuance to the Company of the trusts’ common securities totaling $3.1 million (see NOTE 7). The Company’s equity in the earnings of the trusts (consisting solely of the common trust securities’ pro rata share in interest accruing on Capstead’s junior subordinated notes issued to the trusts) totaled $65,000 during the three months ended March 31, 2007.

NOTE 6 — REPURCHASE ARRANGEMENTS AND SIMILAR BORROWINGS

Capstead generally pledges its Mortgage securities and similar investments as collateral under uncommitted repurchase arrangements with well-established investment banking firms, the terms and conditions of which are negotiated on a transaction-by-transaction basis. These repurchase arrangements generally have maturities of less than 31 days, although from time to time the Company may extend maturities on a portion of its borrowings. Interest rates on these borrowings are generally based on the corresponding LIBOR rate for the maturity of each borrowing. Amounts available to be borrowed under these arrangements are dependent upon the fair value of the securities pledged as collateral, which fluctuates with changes in interest rates, credit quality and liquidity conditions within the investment banking, mortgage finance and real estate industries. Until 1995 the Company operated a mortgage conduit, pooling mortgage loans into Non-agency Securities and issuing structured financings backed by both Agency and Non-agency Securities. The maturity of outstanding structured financings is directly affected by the rate of principal prepayments on the related collateral and are subject to redemption provided certain requirements specified in the related indentures have been met (referred to as “Clean-up Calls”). Repurchase arrangements and similar borrowings, classified by type of collateral and maturities, and related weighted average interest rates were as follows (dollars in thousands):

		March 31, 2007								December 31, 2006
		Borrowings				Average				Borrowings				Average
		Outstanding				Rate(a)				Outstanding				Rate(a)
Borrowings with maturities of 30 days or less:
Agency Securities		$	2,522,820				5.29	%		$	2,048,151				5.30	%
Non-agency Securities			42,623				5.82				45,764				5.85
			2,565,443				5.30				2,093,915				5.32
Borrowings with maturities greater than 30 days:
Agency Securities (31 to 90 days)			1,024,843				5.29				1,741,751				5.16
Agency Securities (91 to 360 days)			25,025				4.76				—				—
Agency Securities (greater than 360 days)			1,354,648				4.99				1,034,673				4.98
			2,404,516				5.11				2,776,424				5.09
Structured financings			5,762				7.96				5,795				7.58
		$	4,975,721				5.21			$	4,876,134				5.19

The weighted average effective interest rate on Repurchase arrangements and similar borrowings was 5.19% during the quarter ended March 31, 2007.

NOTE 7 — UNSECURED BORROWINGS

Unsecured borrowings consist of 30-year junior subordinated notes issued in September 2005, December 2005 and September 2006 by Capstead to Capstead Mortgage Trust I, Trust II and Trust III, respectively. These unconsolidated affiliates of the Company were formed to issue $3.1 million of the trusts’ common securities to Capstead and to privately place $100 million of preferred securities with unrelated third party investors.

Note balances and related weighted average interest rates (calculated including issue cost amortization) listed by trust were as follows (dollars in thousands):

		March 31, 2007								December 31, 2006
		Borrowings				Average				Borrowings				Average
		Outstanding				Rate (a)				Outstanding				Rate (a)
Junior subordinated notes:
Capstead Mortgage Trust I		$	36,083				8.31	%		$	36,083				8.31	%
Capstead Mortgage Trust II			41,238				8.46				41,238				8.46
Capstead Mortgage Trust III			25,774				8.78				25,774				8.78
		$	103,095				8.49			$	103,095				8.49

(a) Average rate is presented as of the indicated balance sheet date.

The junior subordinated notes pay interest to the trusts quarterly calculated at fixed rates of 8.19% to 8.685% for ten years from issuance and subsequently at prevailing three-month LIBOR rates plus 3.30% to 3.50% for 20 years, reset quarterly. The trusts remit dividends pro rata to the common and preferred trust securities based on the same terms as the subordinated notes provided that payments on the trusts’ common securities are subordinate to payments on the related preferred securities. The Capstead Mortgage Trust I notes and trust securities mature in October 2035 and are redeemable, in whole or in part, without penalty, at the Company’s option anytime on or after October 30, 2010. The Capstead Mortgage Trust II notes and trust securities mature in December 2035 and are redeemable, in whole or in part, without penalty, at the Company’s option anytime on or after December 15, 2015. The Capstead Mortgage Trust III notes and trust securities mature in September 2036 and are redeemable, in whole or in part, without penalty, at the Company’s option anytime on or after September 15, 2016. Included in Receivables and other assets are $2.9 million in issue costs associated with these transactions. The weighted average effective interest rate for Unsecured borrowings (calculated including issue cost amortization) was 8.49% for the quarter ended March 31, 2007.

NOTE 8 — DISCLOSURES REGARDING FAIR VALUES OF FINANCIAL INSTRUMENTS

Fair values of the Company’s investments are influenced by changes in, and market expectations for changes in, interest rates and levels of mortgage prepayments as well as other factors beyond the control of management. Because most of the Company’s investments adjust to more current rates at least annually, or will begin adjusting annually after an initial fixed-rate period, declines in fair value caused by increases in interest rates can be largely recovered in a relatively short period of time. Given that managing a large portfolio of primarily ARM mortgage securities remains the core focus of Capstead’s investment strategy, management expects these securities will be held to maturity. Consequently, temporary declines in value because of increases in interest rates would not constitute other-than-temporary impairments in value necessitating writedowns, absent a major shift in the Company’s investment focus.

Disclosures for mortgage securities in an unrealized loss position were as follows (in thousands):

		March 31, 2007								December 31, 2006
		Fair				Unrealized				Fair				Unrealized
		Value				Loss				Value				Loss
Securities in an unrealized loss position:
One year or greater		$	805,041			$	4,071			$	837,123			$	6,392
Less than one year			179,673				654				487,144				1,839
		$	984,714			$	4,725			$	1,324,267			$	8,231

Fair value disclosures for mortgage securities classified as available-for-sale were as follows (in thousands):

						Gross				Gross
						Unrealized				Unrealized				Fair
		Basis				Gains				Losses				Value
As of March 31, 2007
Agency Securities:
Fixed-rate		$	291			$	22			$	—			$	313
ARMs			5,258,686				31,122				4,710				5,285,098
			5,258,977				31,144				4,710				5,285,411
Non-agency Securities			23,296				316				5				23,607
		$	5,282,273			$	31,460			$	4,715			$	5,309,018
As of December 31, 2006
Agency Securities:
Fixed-rate		$	329			$	24			$	—			$	353
ARMs			5,160,179				25,136				8,209				5,177,106
			5,160,508				25,160				8,209				5,177,459
Non-agency Securities			25,292				334				6				25,620
		$	5,185,800			$	25,494			$	8,215			$	5,203,079

Mortgage securities classified as held-to-maturity were as follows (in thousands):

						Gross				Gross
						Unrealized				Unrealized				Fair
		Basis				Gains				Losses				Value
As of March 31, 2007
Collateral released from structured financings:
Agency Securities		$	15,482			$	297			$	—			$	15,779
Non-agency Securities			22,656				352				10				22,998
Collateral for structured financings			5,762				—				—				5,762
		$	43,900			$	649			$	10			$	44,539
As of December 31, 2006
Collateral released from structured financings:
Agency Securities		$	16,542			$	306			$	1			$	16,847
Non-agency Securities			24,348				328				15				24,661
Collateral for structured financings			5,795				—				—				5,795
		$	46,685			$	634			$	16			$	47,303

NOTE 9 — COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is net income plus other comprehensive income (loss), which, for the periods presented, consists primarily of the noncash change in valuation of mortgage securities classified as available-for-sale. As of March 31, 2007, the accumulated other comprehensive income component of stockholders’ equity consisted of $26.7 million in net unrealized gains on mortgage securities held available for sale and $145,000 in amounts related to terminated cash flow hedges. Disclosures related to comprehensive income (loss) were as follows (in thousands):

		Quarter Ended March 31
		2007				2006
Net income		$	6,227			$	2,711
Other comprehensive income (loss):
Amounts related to cash flow hedges:
Reclassification adjustment for amounts included in net income			(12	)			(16	)
Amounts related to securities held available-for-sale:
Change in valuation of mortgage securities held available-for-sale			9,466				(7,518	)
Other comprehensive income (loss)			9,454				(7,534	)
Comprehensive income (loss)		$	15,681			$	(4,823	)

NOTE 10 — LONG-TERM INCENTIVE AND OTHER PLANS

The Company sponsors long-term incentive plans to provide for the issuance of stock awards, option awards and other incentive-based equity awards to directors and employees (collectively, the “Plans”). As of March 31, 2007, the Plans had 324,803 common shares remaining available for future issuance. In May and June 2005 stock awards for a total of 172,600 common shares were issued to directors and employees (average grant date fair value: $7.86 per share) that vest proportionally over four years, subject to certain restrictions, including continuous service. In December 2006 stock awards for a total of 197,500 common shares were issued to employees (average grant date fair value: $8.19 per share) that vest over four years, subject to similar restrictions. Also during 2006, stock awards for 21,457 common shares were issued to a new employee and certain directors (average grant date fair value: $6.86 per share), 6,457 shares of which were vested at grant with the remaining shares vesting proportionally over three years, subject to similar restrictions. Stock award activity during the three months ended March 31, 2007 is summarized below:

						Weighted Average
		Number of				Grant Date
		Shares				Fair Value
Stock awards outstanding as of December 31, 2006			321,550			$8.02
Forfeitures			(2,500	)		8.19
Stock awards outstanding as of March 31, 2007			319,050			8.02

Option awards currently outstanding have contractual terms and vesting requirements at the grant date of up to ten years and generally have been issued with strike prices equal to the quoted market prices of the Company’s common shares on the date of grant. The fair value of each option award is estimated on the date of grant using a Black-Scholes option pricing model. The Company estimates option exercises, expected holding periods and forfeitures based on past experience and current expectations for option performance and employee/director attrition. The risk-free rate is based on market rates for the expected life of the option. Expected dividends are based on historical experience and expectations for future performance. In measuring volatility factors in recent years, the Company considered volatilities experienced by certain other companies in the mortgage REIT industry in addition to historical volatilities of Capstead shares given past circumstances affecting the trading of Capstead shares not expected to reoccur.

During 2005 option awards granted to directors and employees totaled 430,000 shares with an average price of $7.85 and an average fair value of $0.61 per share, which was determined using average expected terms of four years, volatility factors of 27%, dividend yields of 10% and risk-free rates of 3.76%. During 2006 option awards granted to directors and employees totaled 258,000 shares with an average price of $7.43 and an average fair value of $0.78 per share, which was determined using average expected terms of four years, volatility factors of 31%, dividend yields of 10% and risk-free rates of 4.91%. Option award activity during the three months ended March 31, 2007 is summarized below:

		Number of				Weighted Average
		Shares				Exercise Price
Option awards outstanding as of December 31, 2006			855,552			$	13.02
Expirations			(53,520	)			33.77
Exercises			(2,500	)			7.82
Option awards outstanding as of March 31, 2007			799,532			$	11.65

The weighted average remaining contractual term, average exercise price and aggregate intrinsic value for the 389,907 exercisable option awards outstanding as March 31, 2007 was five years, $15.88 and $542,000, respectively. The total intrinsic value of option awards exercised during 2007 and 2006 was $2,000 and $5,000, respectively. There were no exercises of option awards in 2005. Unrecognized compensation costs for all unvested equity awards totaled $2.4 million as of March 31, 2007, to be expensed over a weighted average period of two years.

The Company also sponsors a qualified defined contribution retirement plan for all employees and a nonqualified deferred compensation plan for certain of its officers. In general the Company matches up to 50% of a participant’s voluntary contribution up to a maximum of 6% of a participant’s compensation and discretionary contributions of up to another 3% of compensation regardless of participation in the plans. All Company contributions are subject to certain vesting requirements. Contribution expenses were $29,000 for the three months ended March 31, 2007.

NOTE 11 — NET INTEREST INCOME ANALYSIS

The following tables summarize interest income, interest expense and weighted average interest rates for Mortgage securities and similar investments and related changes in interest income and interest expense due to changes in interest rates versus changes in volume (dollars in thousands):

		Quarter Ended March 31
		2007								2006
						Average								Average
		Amount				Rate				Amount				Rate
Interest income		$	72,142				5.50	%		$	52,926				4.52	%
Interest expense			(63,589	)			5.19				(47,543	)			4.38
		$	8,553				0.31			$	5,383				0.14

		Quarter Ended March 31, 2007
		Rate *				Volume *				Total *
Total interest income		$	12,360			$	6,856			$	19,216
Total interest expense			9,457				6,589				16,046
		$	2,903			$	267			$	3,170

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

FINANCIAL CONDITION

Overview

Capstead Mortgage Corporation (together with its subsidiaries, “Capstead” or the “Company”) operates as a real estate investment trust for federal income tax purposes (a “REIT”) and is based in Dallas, Texas. Capstead earns income from investing in real estate-related assets on a leveraged basis. These investments currently consist primarily of a core portfolio of residential adjustable-rate mortgage (“ARM”) securities issued and guaranteed by government-sponsored entities, either Fannie Mae or Freddie Mac, or by an agency of the federal government, Ginnie Mae (collectively, “Agency Securities”). Agency Securities carry an implied AAA rating with limited credit risk.

Capstead also seeks to opportunistically invest a portion of its long-term investment capital in commercial real estate-related assets, including subordinate commercial real estate loans that have been prudently underwritten and have attractive risk-adjusted returns. Management believes such investments can provide earnings support during periods of rising short-term interest rates. As of March 31, 2007, the Company had committed less than 5% of its long-term investment capital to these investments and made no new commercial investments during the current quarter. This reflects management’s cautious approach to investing in this sector and attractive opportunities that have been available to grow the Company’s residential mortgage securities portfolio. Over the next several years the Company anticipates allocating up to 20% of its long-term investment capital to this sector, as attractive opportunities become available. To this end, over the past year the Company made significant progress in developing and expanding capabilities and opportunities to internally source, close and monitor this type of investment.

Capstead’s long-term investment capital totaled $451 million as of March 31, 2007, consisting of $351 million in common and perpetual preferred stockholders’ equity and $100 million of long-term unsecured borrowings (net of related investments in statutory trusts). Common stockholders’ equity increased approximately $11 million from year-end, or $0.56 per common share, attributable primarily to a higher valuation of the Company’s $5.35 billion residential mortgage securities portfolio as a result of increased portfolio yields and lower prevailing interest rates.

Financing spreads earned on the Company’s mortgage securities and similar investments (the difference between yields earned on these investments and interest rates charged on related borrowings) began recovering late in 2006 after having declined steadily, despite increasing portfolio yields, due to higher borrowing rates because of actions taken by the Federal Open Market Committee (“Federal Reserve”) to increase the federal funds rate a total of 425 basis points to 5.25% between June 2004 and June 2006. While interest rates on approximately 75% of the Company’s borrowings rise (and fall) almost immediately in response to changes in short-term interest rates, yields on ARM securities change slowly by comparison because coupon interest rates on the underlying mortgage loans may reset only once a year or begin resetting after an initial fixed-rate period and the amount of each reset can be limited or capped. Yields on the Company’s holdings of ARM securities are expected to continue increasing in the coming quarters, at least through the end of 2007. As a result, financing spreads and financial results are expected to continue to improve, provided the Federal Reserve has finished raising rates for this interest rate cycle. Should the Federal Reserve lower the federal funds rate during 2007, improvements in financing spreads and financial results should be more pronounced.

The size and composition of Capstead’s investment portfolios depend on investment strategies being implemented by management, the availability of investment capital and overall market conditions,

including the availability of attractively priced investments. Market conditions are influenced by, among other things, current levels of, and expectations for future levels of, short-term interest rates and mortgage prepayments.

Risk Factors and Critical Accounting Policies

Under the captions “Risk Factors” and “Critical Accounting Policies” are discussions of risk factors and critical accounting policies affecting Capstead’s financial condition and results of operations that are an integral part of this discussion and analysis. Readers are strongly urged to consider the potential impact of these factors and accounting policies on the Company while reading this document.

Accounting for Acquisitions of Mortgage Securities Seller-Financed using Repurchase Arrangements

As discussed more fully in NOTE 2 to the accompanying financial statements, under a recent technical interpretation of the pertinent accounting rules, when assets are acquired from and financed under a repurchase agreement with the same counterparty, the acquisitions may not qualify as purchases and the buyer may be precluded from presenting any such assets gross on its balance sheet and instead may be required to treat its net investment in such assets as a derivative financial instrument (“Derivative”) until such time as the assets are no longer financed with the seller. The resulting Derivative would be marked to market through earnings. This potential change in accounting treatment does not affect the economics of the transactions but does affect how the transactions are reported in the financial statements. Should Capstead be required to adopt this accounting, its cash flows, liquidity and ability to pay a dividend would be unchanged, and Capstead does not believe taxable income would be affected, particularly given the limited use by the Company of seller-financing.

Residential Mortgage Investments

As of March 31, 2007, Capstead’s residential mortgage securities portfolio consisted primarily of ARM Agency Securities. ARM securities held by the Company 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. The Company classifies its ARM securities based on each security’s average number of months until coupon reset (“months-to-roll”). Current-reset ARM securities have a months-to-roll of 18 months or less while longer-to-reset ARM securities have a months-to-roll of greater than 18 months. The average months-to-roll for the Company’s $3.74 billion in current-reset ARM securities was less than six months as of March 31, 2007 while the average months-to-roll for the Company’s $1.58 billion in longer-to-reset ARM securities was 46 months. Agency Securities carry an implied AAA-rating with limited credit risk. Non-agency securities are private mortgage pass-through securities whereby the related credit risk of the underlying loans is borne by the Company or by AAA-rated private mortgage insurers (“Non-agency Securities”). Mortgage securities held by Capstead are generally financed under repurchase arrangements with investment banking firms pursuant to which specific securities are pledged as collateral.

During the first quarter of 2007, Capstead increased its residential mortgage securities portfolio nearly $100 million to approximately $5.35 billion with acquisitions of ARM securities totaling $515 million, more than offsetting $423 million of portfolio runoff. The increase in the portfolio during the first quarter reflects the deployment of a modest increase in long-term investment capital primarily attributable to higher portfolio valuation. Mortgage prepayments decreased slightly during the first quarter to an annualized runoff rate of 28% from 29% during the fourth quarter of 2006. Since Capstead typically purchases investments at a premium to the asset’s unpaid principal balance, high levels of mortgage prepayments can put downward pressure on ARM security yields because the level of mortgage prepayments impacts how quickly these investment premiums are written off against earnings

as portfolio yield adjustments. Prepayments are generally lower during the winter months reflecting seasonal housing patterns in the United States. As the underlying coupon interest rates on the Company’s current-reset ARM securities reset higher, more of these loans become susceptible to prepayment if prevailing mortgage interest rates provide an incentive for homeowners with ARM loans to refinance and lock in attractive longer-term interest rates. Conversely, higher mortgage interest rates can ease prepayment pressures by removing much of this incentive to refinance. Additionally, ARM loans with initial fixed-rate periods tend to prepay relatively quickly as the initial fixed-rate period approaches. Since the Company began significantly increasing the portfolio in late 2005, the overall focus has been on acquiring securities with relatively low investment premiums and limited prepay protection, when available at attractive pricing, which has helped lessen the Company’s exposure to higher levels of prepayments.

Commercial Real Estate-related Assets

Capstead seeks to eventually invest up to 20% of its long-term investment capital in credit-sensitive commercial real estate-related assets, which will typically consist of subordinate mortgage loans or mezzanine debt supported by interests in commercial real estate that have been prudently underwritten and have attractive risk-adjusted returns. This strategy is designed to augment the Company’s core portfolio of residential ARM securities by providing an additional earnings stream that can help support overall earnings during periods of rising short-term interest rates. As of March 31, 2007, the Company had committed less than 5% of its long-term investment capital to these assets and made no new commercial investments during the current quarter. This reflects management’s cautious approach to this sector and attractive opportunities that have been available to grow the Company’s core portfolio of residential ARM securities. Over the past year the Company made significant progress in developing and expanding its capabilities and opportunities to make these investments and the Company is now in a position to internally source, close and monitor these more complicated and labor-intensive investments.

Commercial mortgage investments as of March 31, 2007 consisted of $17 million invested in Redtail Capital Partners, L.P. (“Redtail Capital”), the Company’s 75%-owned limited partnership with Crescent Real Estate Equities Company (NYSE: CEI), and several loans totaling less than $3 million to a local developer. The investment in Redtail Capital is reflected as an unconsolidated affiliate and the commercial loans are included with mortgage securities and similar investments on the Company’s balance sheet.

Redtail Capital was formed to invest in a leveraged portfolio of subordinated commercial real estate loans that meet certain criteria over a two-year investment period ending in July 2007. CEI identifies investment opportunities and manages the loan portfolio earning management fees and incentives based on portfolio performance. Capstead must approve any investments made by Redtail Capital. Under an agreement with CEI, a follow-on partnership with similar terms may be formed to make additional investments over the following two-year period ending in July 2009. Redtail Capital finances up to 75% of the value of its investments using a committed master repurchase agreement with a major investment banking firm. Amounts available to be borrowed under this facility and related borrowing rates are dependent upon the characteristics of the pledged collateral and can change based on changes in the fair value of the pledged collateral with quarterly repayments of amounts drawn beginning in November 2007, unless the term of the agreement is extended. As of March 31, 2007, Redtail Capital had borrowed $41 million under this facility to fund investments totaling $63 million consisting of junior liens on two luxury full-service hospitality properties in Southern California and the Caribbean. Redtail Capital has been notified by one of its borrowers of their intent to payoff their $25 million loan in May 2007, which will result in a $13 million reduction of borrowings under the master repurchase agreement.

Mortgage Securities and Similar Investments Yield and Cost Analysis

The following yield and cost analysis illustrates results achieved during the first quarter of 2007 for components of the Company’s mortgage securities and similar investments and projected second quarter 2007 annualized portfolio yields, borrowing rates and financing spreads given the assumptions more fully described in the accompanying notes (dollars in thousands):

																						Projected				Lifetime
		1st Quarter Average												As of March 31, 2007								2nd Quarter				Runoff
		Basis (a)				Yield/Cost				Runoff				Premiums				Basis(a)				Yield/Cost (b)				Assumptions
Agency Securities:
Fannie Mae/Freddie Mac:
Fixed-rate		$	16,389				6.36	%			23	%		$	48			$	15,773				6.42	%			38	%
ARMs			4,454,025				5.49				28				63,443				4,570,074				5.61				31
Ginnie Mae ARMs			722,811				5.34				32				2,820				688,612				5.36				29
			5,193,225				5.48				28				66,311				5,274,459				5.58				31
Non-agency Securities:
Fixed-rate			17,217				6.92				23				34				16,599				6.96				37
ARMs			30,579				6.76				28				280				29,353				6.90				38
			47,796				6.82				26				314				45,952				6.92				38
Commercial loans			2,715				18.00				—				—				2,754				18.00				—
Collateral for structured financings			5,735				7.96				2				90				5,762				7.96				30
			5,249,471				5.50				28			$	66,715				5,328,927				5.59				31
Related borrowings:
30-day LIBOR			3,578,121				5.30												3,590,286				5.29
>30-day LIBOR			1,317,115				4.88												1,379,673				4.98
Structured financings			5,735				7.96												5,762				7.96
			4,900,971				5.19												4,975,721				5.21
Capital employed/ financing spread		$	348,500				0.31											$	353,206				0.38
Return on assets(c)							0.65																0.67

		Ending				Ending				Portfolio Averages
		Federal				One-Year								Borrowing				Financing				Runoff
		Funds Rates				Treasury Rate				Yields				Rates				Spreads				Rates
Second Quarter 2007			5.25%				5.07				5.59%				5.21%				0.38%				30%
Third Quarter 2007			5.25				5.17				5.71				5.20				0.51				31
Fourth Quarter 2007			5.25				5.30				5.91				5.19				0.72				29
First Quarter 2008			5.25				5.30				6.00				5.20				0.80				30

(c)

The Company generally uses its liquidity to pay down borrowings. Return on assets is calculated on an annualized basis assuming the use of this liquidity to reduce borrowing costs.

Yields on Capstead’s mortgage securities and similar investments improved during the three months ended March 31, 2007, primarily reflecting the benefits of higher coupon interest rates on current-reset ARM securities, which constituted approximately 70% of the portfolio as of March 31, 2007. These securities are expected to continue resetting higher in the coming quarters as the underlying mortgage loans reset to more current rates. Yields on current-reset ARM securities fluctuate with changes in mortgage prepayments and adjust to more current interest rates as coupon interest rates on the underlying mortgage loans reset periodically (typically once or twice a year to a margin over the corresponding six-month or one-year interest rate index or monthly based on a specified margin over an index such as one-year U.S. Treasury rates), subject to periodic and lifetime limits or caps. For example, based on expectations as of May 3, 2007 for relatively stable short-term interest rates, overall portfolio yields are expected to average 5.59% during the second quarter of 2007 (a nine basis point increase over average yields for the first quarter of 2007), and the average yield on the existing portfolio (unadjusted for expected acquisitions beyond June 30, 2007) could approximate 6.00% by the first quarter of 2008 (see footnote (b) on the prior page for assumptions used in this estimate). Actual yields will depend on portfolio composition as well as fluctuations in interest rates and mortgage prepayment rates.

Current-reset ARM securities totaled $3.74 billion as of March 31, 2007, and are generally supported by borrowings that are re-established monthly at current interest rates based on one-month LIBOR. One-month LIBOR, which can fluctuate on a daily basis due to market conditions such as actual and anticipated changes in the federal funds rate, has been relatively stable since the Federal Reserve stopped raising the federal funds rate last June. Interest rates on the Company’s one-month LIBOR-based borrowings averaged 5.30% for the first quarter of 2007 and should remain at these levels during most of 2007, reflecting expectations that one-month LIBOR will remain near current levels during most, if not all, of 2007.

Investments in longer-to-reset ARM securities totaled $1.58 billion as of March 31, 2007, constituting approximately 29% of Capstead’s mortgage securities and similar investments. Longer-to-reset ARM securities are primarily supported by longer-term borrowings that effectively lock-in financing spreads during a significant portion of these investments’ fixed-rate terms. As of March 31, 2007, such borrowings totaled $1.38 billion at a favorable rate of 4.99% with an average maturity of 23 months.

Overall financing spreads improved 14 basis points quarter over quarter to average 31 basis points during the first quarter of 2007 and it is anticipated that the current recovery in financing spreads will continue in the coming quarters as asset yields reset higher and borrowing rates remain relatively stable. As a result, financing spreads and financial results are expected to improve in future quarters. Should the Federal Reserve act to lower the federal funds rate sometime during 2007, one-month LIBOR-based borrowing rates should decline leading to correspondingly wider financing spreads on the Company’s current-reset ARM securities than currently anticipated.

Book Value per Common Share

As of March 31, 2007, Capstead’s book value per common share was $8.69, an increase of $0.56 from December 31, 2006, attributable primarily to higher valuations of the Company’s residential mortgage securities as a result of increased yields on current-reset ARM securities and lower prevailing interest rates. Increases in fair value of the Company’s residential mortgage securities (most of which are carried at fair value with changes in value reflected in stockholders’ equity) improved book value by $0.49 per share during the quarter while earnings for the quarter in excess of preferred and common dividend payments contributed to most of the remaining increase in book value.

The fair value of the Company’s residential mortgage securities can be expected to fluctuate with changes in portfolio size and composition as well as changes in interest rates and market liquidity, and such changes will largely be reflected in book value per common share. Because most of the Company’s

investments adjust to more current rates at least annually, declines in fair value caused by increases in interest rates can be largely recovered in a relatively short period of time. Book value will also be affected by other factors, including capital stock transactions and the level of dividend distributions relative to quarterly operating results; however, temporary changes in fair value of investments not held in the form of securities, such as commercial real estate loans, generally will not affect book value. Additionally, the fair value of the Company’s liabilities, such as its longer-term borrowings supporting investments in longer-to-reset ARM securities, are not reflected in book value. As of March 31, 2007, unrealized losses on these longer-term borrowings totaled $642,000, or $0.03 per share, representing an $0.19 per common share decline in value from year-end. The fair value of these liabilities tends to move in the opposite direction as the fair value of the related longer-to-reset ARM securities.

Utilization of Investment Capital and Potential Liquidity

Capstead can generally finance up to 97% of the fair value of its holdings of residential mortgage securities with well-established investment banking firms using repurchase arrangements with the balance supported by the Company’s long-term investment capital. Long-term investment capital includes preferred and common equity capital as well as unsecured borrowings, net of Capstead’s investment in related statutory trusts accounted for as unconsolidated affiliates. Assuming potential liquidity is available, borrowings can be increased or decreased on a daily basis to meet cash flow requirements and otherwise manage capital resources efficiently. Consequently, the actual level of cash and cash equivalents carried on Capstead’s balance sheet is significantly less important than the potential liquidity inherent in the Company’s investment portfolios. Potential liquidity is affected by, among other things, changes in market value of assets pledged; principal prepayments; contribution requirements to, or distributions from, Redtail Capital; and general conditions in the investment banking, mortgage finance and real estate industries. Future levels of financial leverage will be dependent upon many factors, including the size and composition of the Company’s investment portfolios (see “Liquidity and Capital Resources”). Capstead’s utilization of long-term investment capital and potential liquidity were as follows as of March 31, 2007 in comparison with December 31, 2006 (in thousands):

						Related				Capital				Potential
		Investments(a)				Borrowings				Employed(a)				Liquidity (a)
Residential mortgage securities		$	5,352,918			$	4,975,721			$	377,197			$	221,640
Commercial real estate-related assets:
Commercial loans			2,754				—				2,754				—
Investment in Redtail Capital			16,930				—				16,930				190
		$	5,372,602			$	4,975,721				396,881				221,830
Other assets, net of other liabilities											54,106				5,602
First quarter common dividend											(385	)			(385)	(b)
										$	450,602			$	227,047
Balances as of December 31, 2006		$	5,269,355			$	4,876,134			$	439,962			$	226,330

In order to prudently and efficiently manage its liquidity and capital resources, Capstead maintains sufficient liquidity reserves in the form of potential liquidity to fund margin calls (requirements to pledge additional collateral or pay down borrowings) required by monthly principal payments (that are not remitted to the Company for 20 to 45 days after any given month-end) and potential declines in the market value of pledged assets under stressed market conditions.

RESULTS OF OPERATIONS

Comparative income statement data (interest income, net of related interest expense, in thousands, except for per share data) and key portfolio statistics (dollars in millions) were as follows:

		Quarter Ended March 31
		2007				2006
Income statement data:
Mortgage securities and similar investments:
Agency Securities		$	8,267			$	5,203
Non-agency Securities			166				180
Commercial loans			120				—
			8,553				5,383
Other revenue (expense):
Other revenue			871				166
Interest on unsecured borrowings			(2,187	)			(1,587	)
Other operating expense			(1,674	)			(1,673	)
			(2,990	)			(3,094	)
Equity in earnings of unconsolidated affiliates			664				422
Net income		$	6,227			$	2,711
Diluted earnings (loss) per common share		$	0.06			$	(0.12	)
Key portfolio statistics:
Average yields:
Agency Securities			5.48	%			4.50	%
Non-agency Securities			6.82				5.74
Commercial loans			18.00				—
Collateral for structured financings			7.96				7.34
Total average yields			5.50				4.52
Average related borrowing rates:
30-day LIBOR			5.30				4.51
Greater than 30-day LIBOR			4.88				3.92
Structured financings			7.96				7.34
Total related borrowing rates			5.19				4.38
Average financing spreads			0.31				0.14
Average portfolio balances:
Agency Securities		$	5,193			$	4,605
Non-agency Securities			48				67
Commercial loans			3				—
Collateral for structured financings			6				9
			5,250				4,681
Related average borrowings			4,901				4,340
Average capital deployed		$	349			$	341
Average portfolio runoff rates:
Agency Securities			28	%			30	%
Total			28				30