Capstead Mortgage Corporation Announces Third Quarter 2008 Earnings

Third Quarter Highlights

-- Earnings totaled $34.7 million or $0.52 per diluted common
share on average financing spreads of 1.74%

-- Declared and paid dividend of $0.55 per common share

-- Book value per common share ended the third quarter at $10.02

-- Maintained portfolio of agency-guaranteed residential ARM
securities at $7.9 billion

-- Maintained portfolio leverage at approximately eight times
long-term investment capital
DALLAS--(Business Wire)--
Capstead Mortgage Corporation (NYSE: CMO) today reported net
income of $34,746,000 for the quarter ended September 30, 2008
compared to $36,728,000 for the second quarter of 2008. After
considering preferred share dividends, the Company earned $0.52 per
diluted common share for the third quarter of 2008 compared to $0.58
for the second quarter of 2008.

Third Quarter Earnings and Related Discussion

Capstead's third quarter 2008 earnings declined by $2.0 million
from the second quarter of 2008 due primarily to lower net interest
margins on the Company's core investment portfolio of residential
adjustable-rate mortgage, or 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. In July the Company
projected average financing spreads (the difference between yields on
the Company's investments and rates charged on related borrowings) to
decline by 20 basis points during the third quarter primarily as a
result of lower yields on acquisitions and lower coupon interest rates
on mortgage loans underlying the Company's current-reset ARM
securities that reset during the period. The actual decline of
31 basis points to an average of 174 basis points was exacerbated by
the recent deterioration in the global credit markets, which began to
increase borrowing costs late in the quarter.

Portfolio yields averaged 5.00% during the third quarter of 2008
compared to 5.30% during the second quarter 2008 and were 5 basis
points less than anticipated. Mortgage prepayments remained at
favorable levels, averaging an annualized runoff rate of 19% during
the current quarter compared to 20% during the second quarter of 2008,
reflecting continuing difficulties in the residential mortgage lending
markets. 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 related borrowings averaged 3.26% during the third quarter of
2008 compared to 3.25% during the second quarter of 2008 and were
6 basis points higher than anticipated.

Acquisitions of agency-guaranteed ARM securities during the third
quarter totaled $511 million in principal amount with a purchased
yield of 4.94% while portfolio runoff totaled $411 million. Portfolio
leverage (secured borrowings divided by long-term investment capital)
stood at 8.36 to one at the end of the quarter with a total investment
portfolio of $7.94 billion, supported by long-term investment capital
of $866 million and related borrowings totaling $7.24 billion.
Borrowings at quarter-end consisted of $5.83 billion of repurchase
arrangements with original maturities of 30 to 90 days at an average
rate of 3.24% and $1.41 billion of longer-term repurchase arrangements
entered into in prior years with an average rate of 5.01% that mature
over the next 11 months. Under the terms of interest rate swap
agreements held by Capstead as of September 30, 2008, the Company pays
fixed rates of interest averaging 3.44% on notional amounts totaling
$1.90 billion with an average maturity of 16 months. Variable payments
based on one- and three-month London Interbank Offer Rate (LIBOR)
received by the Company under these agreements tend to offset interest
owed on a like amount of the Company's 30-day borrowings. At
quarter-end, the Company had borrowings with 17 repurchase agreement
counterparties.

Third Quarter Common Equity Issuances

During the third quarter of 2008 Capstead raised $25.2 million in
new common equity capital, after underwriting discounts and offering
expenses, by issuing 2.2 million common shares at an average price of
$11.72 per share under the Company's continuous offering program.
These issuances were accretive to book value during the quarter by
$0.05 per common share. Subsequent to quarter-end, the Company further
increased its common equity capital by $5.6 million, after expenses,
through the issuance of 555,000 common shares at an average sales
price of $10.08 per share under the continuous offering program. The
Company may raise more capital in future periods, subject to market
conditions and blackout periods associated with the dissemination of
earnings and dividend announcements and other important
company-specific news. The accompanying September 30, 2008 financial
statements and related disclosures do not reflect the effects of
shares issued subsequent to quarter-end.

Book Value per Common Share

As of September 30, 2008, Capstead's book value per common share
was $10.02, a decline of $0.40 from June 30, 2008 and an increase of
$0.77 from December 31, 2007. The following table progresses book
value per common share during 2008:

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Quarter Ended Nine
------------------------- Months
Ended
March September September
31 June 30 30 30
-----------------------------------
Book value per common share,
beginning of period $ 9.25 $ 9.40 $ 10.42 $ 9.25
Accretion attributed to capital
transactions 0.95 0.35 0.05 1.27
Dividend distributions in excess
of earnings (0.02) (0.02) (0.04) (0.08)
Accumulated other comprehensive
income items:
Change in value of mortgage
securities (0.18) 0.20 (0.40) (0.37)
Change in value of interest
rate swap agreements held as
cash flow hedges (0.55) 0.49 (0.01) (0.01)
Termination of cash flow hedge (0.05) - - (0.04)
------- ------- --------- ---------
Book value per common share, end
of period $ 9.40 $10.42 $ 10.02 $ 10.02
======= ======= ========= =========
*T

With the deterioration of global credit market conditions late in
the third quarter, the fair value of Capstead's mortgage investments
declined by quarter-end as yields on agency-guaranteed mortgage
securities widened relative to benchmark interest rate swap yields.
This trend of wider spreads has continued into the fourth quarter.
Nearly all of the Company'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 credit market conditions, including changes in interest
rates and the availability of financing at reasonable rates and
leverage levels (i.e., credit market liquidity). The Company's
investment strategy attempts to mitigate these risks by focusing
almost exclusively on investments in agency-guaranteed residential
mortgage securities, which are considered to have little, if any,
credit risk and are collateralized by ARM loans that have 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 mortgage securities and/or
fixed-rate mortgage securities of any type, which generally results in
a more stable book value per common share.

Management Remarks

Commenting on current results and market conditions, Andrew F.
Jacobs, President and Chief Executive Officer, said, "Given the extent
of the deterioration of the global credit markets since the middle of
September, we are pleased with the overall performance of our
investment portfolio and our third quarter operating results. That
said, borrowing costs on $3.9 billion of our borrowings not hedged
through the use of interest rate swap agreements or longer term
repurchase arrangements may be higher during the fourth quarter as
30-day LIBOR interest rates remain high, reflecting the continuation
of stressed credit market conditions. While we are hopeful that the
coordinated efforts by the world central banks to inject liquidity
into the global credit markets will be successful in alleviating
market stresses, it remains unclear when these efforts will lead to a
meaningful improvement. As a result, we will not be providing our
usual forward-looking projection of portfolio yields and borrowing
rates at this time.

"During the third quarter we maintained our portfolio leverage at
the lower end of our traditional range of eight to twelve times our
long-term investment capital and maintained higher than usual cash
balances, which has provided us with financial flexibility to address
challenging credit market conditions. Given the high degree of
uncertainty in the credit markets today, we continue to believe it is
appropriate to maintain our leverage near the lower end of our
targeted range and intend, at least temporarily, to curtail replacing
portfolio runoff in the coming months.

"We remain confident that our core investment strategy of
conservatively managing a leveraged portfolio of agency-guaranteed
residential ARM securities 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 webcast will be hosted
Friday, October 24, 2008 at 11:00 a.m. EDT. The conference call may be
accessed by dialing toll free (877) 407-0778 in the U.S. and Canada or
(201) 689-8565 for international callers. A replay of the call can be
accessed 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 296893. 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. Prior to the call
a related presentation will be filed with the Securities and Exchange
Commission and posted to the Company's website.

About Capstead

Capstead Mortgage Corporation, formed in 1985 and based in Dallas,
Texas, is a self-managed real estate investment trust for federal
income tax purposes. Capstead's core strategy is managing a leveraged
portfolio of residential mortgage pass-through securities consisting
almost exclusively of residential 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. Agency-guaranteed
residential mortgage securities carry an implied AAA credit rating
with limited, if any, credit risk that has been enhanced by the recent
conservatorship of Fannie Mae and Freddie Mac by the federal
government.

Forward-looking Statements

This document contains "forward-looking statements" (within the
meaning of the Private Securities Litigation Reform Act of 1995) that
inherently involve risks and uncertainties. Capstead's actual results
and liquidity can differ materially from those anticipated in these
forward-looking statements because of changes in the level and
composition of the Company's investments and other factors. As
discussed in the Company's filings with the Securities and Exchange
Commission, these factors may include, but are not limited to, changes
in general economic conditions, the availability of suitable
qualifying investments from both an investment return and regulatory
perspective, the availability of new investment capital, the
availability of financing at reasonable levels and terms to support
investing on a leveraged basis, fluctuations in interest rates and
levels of mortgage prepayments, deterioration in credit quality and
ratings, the effectiveness of risk management strategies, the impact
of differing levels of leverage employed, liquidity of secondary
markets and credit markets, increases in costs and other general
competitive factors. In addition to the above considerations, actual
results and liquidity related to investments in loans secured by
commercial real estate are affected by borrower performance under
operating and/or development plans, lessee performance under lease
agreements, changes in general as well as local economic conditions
and real estate markets, increases in competition and inflationary
pressures, changes in the tax and regulatory environment including
zoning and environmental laws, uninsured losses or losses in excess of
insurance limits and the availability of adequate insurance coverage
at reasonable costs, among other factors.

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CAPSTEAD MORTGAGE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)

September December
30, 2008 31, 2007
----------- -----------
(unaudited)
Assets
Mortgage securities and similar investments
($7.7 billion pledged under repurchase
arrangements) $7,936,112 $7,108,719
Investments in unconsolidated affiliates 3,117 3,117
Interest rate swap agreements at fair value 5,202 -
Receivables and other assets 108,502 90,437
Cash and cash equivalents 137,475 6,653
----------- -----------
$8,190,408 $7,208,926
=========== ===========

Liabilities
Repurchase arrangements and similar
borrowings $7,242,848 $6,500,362
Unsecured borrowings 103,095 103,095
Interest rate swap agreements at fair value 8,867 2,384
Common stock dividend payable 32,024 9,786
Accounts payable and accrued expenses 37,171 32,382
----------- -----------
7,424,005 6,648,009
----------- -----------
Stockholders' equity
Preferred stock - $0.10 par value; 100,000
shares authorized:
$1.60 Cumulative Preferred Stock, Series
A,
197 and 202 shares issued and
outstanding at September 30, 2008 and
December 31, 2007, respectively
($3,232 aggregate liquidation
preference) 2,755 2,828
$1.26 Cumulative Convertible Preferred
Stock, Series B,
15,819 shares issued and outstanding at
September 30, 2008 and December 31,
2007
($180,025 aggregate liquidation
preference) 176,705 176,705
Common stock - $0.01 par value; 250,000
shares authorized:
58,226 and 40,819 shares issued and
outstanding at September 30, 2008 and
December 31, 2007, respectively 582 408
Paid-in capital 932,113 702,170
Accumulated deficit (358,155) (358,155)
Accumulated other comprehensive income 12,403 36,961
----------- -----------
766,403 560,917
----------- -----------
$8,190,408 $7,208,926
=========== ===========

Long-term investment capital (Stockholders'
equity and Unsecured borrowings, net of
related investments in statutory trusts)
(unaudited) $ 866,381 $ 660,895
Book value per common share (calculated
assuming liquidation preferences for the
Series A and B preferred shares and excluding
the benefit of accretion from common shares
issued subsequent to quarter-end) (unaudited) $ 10.02 $ 9.25
*T

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CAPSTEAD MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

Quarter Ended Nine Months Ended
September 30 September 30
------------------- ---------------------
2008 2007 2008 2007
----------------------------------------------------------------------
Mortgage securities and
similar investments:
Interest income $ 99,205 $ 74,949 $ 302,888 $ 222,886
Interest expense (60,032) (66,478) (184,357) (197,174)
--------- --------- ---------- ----------
39,173 8,471 118,531 25,712
--------- --------- ---------- ----------
Other revenue (expense):
Loss from portfolio
restructuring - (8,276) (1,408) (8,276)
Other revenue 301 274 1,871 1,382
Interest expense on
unsecured borrowings (2,186) (2,186) (6,560) (6,560)
Incentive compensation (300) - (4,820) -
Other operating expense (2,306) (1,678) (6,187) (4,891)
--------- --------- ---------- ----------
(4,491) (11,866) (17,104) (18,345)
--------- --------- ---------- ----------
Income (loss) before equity
in earnings of
unconsolidated affiliates 34,682 (3,395) 101,427 7,367
Equity in earnings of
unconsolidated affiliates 64 247 194 1,486
--------- --------- ---------- ----------
Net income (loss) $ 34,746 $ (3,148) $ 101,621 $ 8,853
========= ========= ========== ==========
Net income available (loss
attributable) to
common stockholders:
Net income $ 34,746 $ (3,148) $ 101,621 $ 8,853
Less cash dividends paid
on preferred stock (5,062) (5,064) (15,189) (15,192)
--------- --------- ---------- ----------
$ 29,684 $ (8,212) $ 86,432 $ (6,339)
========= ========= ========== ==========
Net income (loss) per common
share:
Basic $ 0.53 $ (0.43) $ 1.66 $ (0.33)
Diluted 0.52 (0.43) 1.64 (0.33)

Weighted average common
shares outstanding:
Basic 56,318 19,108 51,991 19,017
Diluted 66,352 19,108 62,137 19,017

Cash dividends declared per
share:
Common $ 0.550 $ 0.040 $ 1.660 $ 0.100
Series A Preferred 0.400 0.400 1.200 1.200
Series B Preferred 0.315 0.315 0.945 0.945
*T

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CAPSTEAD MORTGAGE CORPORATION
MARKET VALUE ANALYSIS
(in thousands, unaudited)

September 30, 2008
------------------------------------
Principal Basis/Notional
Balance Premiums Amount
----------------------------------------------------------------------
Mortgage securities held
available-for-sale: (a) (b)
Agency-guaranteed securities:
Fannie Mae/Freddie Mac:
Fixed-rate $ 234 $ 1 $ 235
Current-reset ARMs 4,095,488 47,566 4,143,054
Longer-to-reset ARMs 3,236,465 50,698 3,287,163
Ginnie Mae:
Current-reset ARMs 411,779 2,117 413,896
---------- -------- --------------
$7,743,966 $100,382 $ 7,844,348
========== ======== ==============

Interest rate swap positions
supporting investments in
longer-to-reset ARM securities
(c) $ 1,900,000
Longer-term borrowings supporting
investments in longer-to-reset
ARM securities (d) $ 1,406,114

December
September 30, 2008 31, 2007
----------------------- ----------
Unrealized Unrealized
Market Gains Gains
Value (Losses) (Losses)
----------------------------------------------------------------------
Mortgage securities held available-
for-sale: (a) (b)
Agency-guaranteed securities:
Fannie Mae/Freddie Mac:
Fixed-rate $ 256 $ 21 $ 23
Current-reset ARMs 4,137,908 (5,146) 10,515
Longer-to-reset ARMs 3,307,436 20,273 25,142
Ginnie Mae:
Current-reset ARMs 416,635 2,739 3,732
------------ ---------- ----------
$7,862,235 $ 17,887 $ 39,412
============ ========== ==========

Interest rate swap positions
supporting investments in longer-
to-reset ARM securities (c) $ (3,666) $ (3,849) $ (2,505)
Longer-term borrowings supporting
investments in longer-to-reset ARM
securities (d) $1,414,581 $ (8,467) $ (18,029)
*T

(a) Unrealized gains and losses on mortgage securities classified
as available-for-sale are recorded as a component of Accumulated other
comprehensive income in Stockholders' equity. Gains or losses are
generally recognized in earnings only if sold. Mortgage securities
classified as held-to-maturity with a cost basis of $15.4 million and
investments in unsecuritized loans with a cost basis of $58.5 million
are not subject to mark-to-market accounting and therefore have been
excluded from this analysis.

(b) Capstead classifies its ARM securities based on the average
length of time until the loans underlying each security reset to more
current rates ("months-to-roll") (18 months or less for
"current-reset" ARM securities, and greater than 18 months for
"longer-to-reset" ARM securities). As of September 30, 2008 average
months-to-roll for current-reset and longer-to-reset ARM securities
were four months and 37 months, respectively. Once an ARM loan reaches
its initial reset date, it will reset at least once a year to a margin
over a corresponding interest rate index, subject to periodic and
lifetime limits or caps.

(c) During the fourth quarter of 2007, the Company began using
two-year term, one- and three-month LIBOR-indexed, pay-fixed,
receive-variable, interest rate swap agreements in lieu of longer-term
committed borrowings to effectively lock in financing spreads on
investments in longer-to-reset ARM securities. Swap positions are
carried on the balance sheet at fair value with related unrealized
gains or losses arising while designated as cash flow hedges for
accounting purposes reflected as a component of Accumulated other
comprehensive income in Stockholders' equity. At September 30, 2008
these swap positions had an average maturity of 16 months and an
average fixed-rate of 3.44%.

In March 2008 a $100 million notional amount swap agreement also
designated as a cash flow hedge was terminated for a realized loss of
$2.3 million, which is being amortized to earnings over the remaining
15-month term of the derivative. At September 30, 2008 the amortized
balance included in Accumulated other comprehensive income for this
and certain other terminated hedge relationships totaled $1,635,000.

(d) Unrealized gains or losses on the Company's liabilities, such
as its longer-term committed borrowings supporting a portion of the
Company's investments in longer-to-reset ARM securities, are carried
on the balance sheet at amortized cost. At September 30, 2008 these
borrowings, which mature within the next two to 11 months, had an
average maturity of seven months and carried an average interest rate
of 5.01%.

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CAPSTEAD MORTGAGE CORPORATION
MORTGAGE SECURITIES AND SIMILAR INVESTMENTS
YIELD/COST ANALYSIS
(dollars in thousands)
(unaudited)

3rd Quarter 2008 Average As of September 30,
(a) 2008
--------------------------- ----------------------
Premiums
Basis Yield/Cost Runoff (Discounts) Basis (a)
----------------------------------------------------------------------

Agency-guaranteed
securities:
Fannie
Mae/Freddie Mac:
Fixed-rate $11,130 6.50% 18% $29 $10,791
ARMs 7,427,785 4.97 19 98,264 7,430,217
Ginnie Mae ARMs 425,650 5.04 19 2,117 413,896
--------- ------------ ---------
7,864,565 4.98 19 100,410 7,854,904
--------- ------------ ---------
Unsecuritized
residential
mortgage loans:
Fixed-rate 6,339 6.89 28 (8) 6,020
ARMs 9,391 5.79 18 80 9,256
--------- ------------ ---------
15,730 6.23 25 72 15,276
Commercial loans 43,124 9.48 1 (12) 43,221
Collateral for
structured
financings 4,851 7.82 16 78 4,824
--------- ------------ ---------
7,928,270 5.00 19 $100,548 7,918,225
--------- ============ ---------
Borrowings based
on:
30-day to 90-day
interest rates 5,700,863 2.80 5,831,910
Greater than 90-
day interest
rates 1,487,310 5.01 1,406,114
Commercial loan
financing 3,116 6.93 -
Structured
financings 4,851 7.82 4,824
--------- ---------
7,196,140 3.26 7,242,848
--------- ---------
Capital employed/
financing spread $732,130 1.74 $675,377
Return on assets 1.97
*T

(a) Basis represents the Company's investment before unrealized
gains and losses. Asset yields, runoff rates, borrowing rates and
resulting financing spread are presented on an annualized basis.

Capstead Mortgage Corporation
Stockholder Relations, 214-874-2354

Copyright Business Wire 2008