Capstead operates a highly efficient, internally-managed investment platform, particularly compared to other mortgage REITs and has a competitive cost structure relative to a wide variety of high yielding investment vehicles. Operating costs expressed as an annualized percentage of long-term investment capital averaged 1.07% for the fourth quarter of 2019 and 1.10% for the year ended December 31, 2019. As an annualized percentage of total assets, operating costs averaged 0.11% during these periods.

Book value per share as of December 31, 2019 was $8.62, an increase of $0.02 or 0.2% from the September 30, 2019 book value of $8.60, primarily reflecting $0.19 in derivative-related increases in value, partially offset by $0.18 in portfolio-related declines in unrealized gains. Capstead's investment strategy attempts to mitigate risks to book value by focusing on investments in agency-guaranteed residential mortgage pass-through 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.

"Much of the improvement in our core earnings in the fourth quarter and for all of 2019 is attributable to lower funding costs as a result of the Federal Reserve's actions to reduce the Fed Funds rate and actions we took to lower fixed pay rates on swaps held for hedging purposes in response to significantly lower market interest rates. Core earnings also benefited from acquisitions of agency-guaranteed ARM securities at attractive levels. Hampering earnings throughout much of the year was an increase in market volatility that contributed to sharply lower longer-term rates, putting upward pressure on mortgage prepayment rates and negatively affecting mortgage security pricing relative to swap valuations. Additionally, rate pressures in short-term funding markets resulted in elevated borrowing rates relative to declines in the Fed Funds rate and other short-term rates. In response, we took a measured approach to deploying capital during the latter half of the year, with leverage declining in the third quarter and into the fourth quarter before ending the year relatively unchanged from September 30 levels. Future changes in leverage will depend on market conditions.

"Looking forward, we are encouraged by cycle-low unhedged borrowing rates presently available in the funding markets and the continued attractiveness of investment returns. Together with average fixed pay rates on our secured borrowings-related swaps now at or near 30-day borrowing rates, we anticipate showing further improvement in our financing spreads and net interest margins leading to higher earnings in the coming quarters.

"For the last 20 years, Capstead has operated as a cost-effective, internally managed REIT that invests in a leveraged portfolio of relatively short duration agency-guaranteed residential ARM securities with the goal of generating attractive risk-adjusted returns over the long-term. For investors seeking risk-adjusted levered returns with a comparably higher degree of safety from interest rate and credit risk, we believe Capstead represents a reasonably compelling opportunity that is difficult to find elsewhere in the markets."

Management believes the presentation of core earnings and core earnings per common share, both non-GAAP financial measures, when analyzed in conjunction with the Company's GAAP operating results, allows investors to more effectively evaluate the Company's performance and compare its performance to that of its peers. Prior to March 2019, the Company designated its secured borrowings-related swaps as hedges for GAAP accounting purposes, whereby changes in the swaps' fair values were recorded in Accumulated other comprehensive income (loss) ("AOCI"). Beginning in March 2019, for GAAP accounting purposes, related changes in the fair value of these derivatives are recorded in the Company's consolidated statements of operations. Also, for GAAP accounting purposes, related net unrealized gains recorded in AOCI through February 28, 2019 are being recognized as a component of interest expense in the Company's consolidated statements of operations over the remaining life of these swaps.

Management also believes that presenting financing spreads on residential mortgage investments, a non-GAAP financial measure, provides important information for evaluating the performance of the Company's portfolio as opposed to total financing spreads because the non-GAAP measure speaks specifically to the performance of the Company's investment portfolio. See the "Reconciliation of GAAP Measures to Non-GAAP Measures" section of this release.

An earnings conference call and live audio webcast will be hosted Thursday, January 30, 2020 at 9:00 a.m. ET. The conference call may be accessed by dialing toll free (877) 505-6547 in the U.S., (855) 669-9657 for Canada, or (412) 902-6660 for international callers. A live webcast of the conference call can be accessed via the investor relations section of the Company's website at www.capstead.com and an archive of the webcast will be available up to the date of our next earnings press release. An audio replay can be accessed one hour after the end of the conference call, also up to the date of our next earnings press release, by dialing toll free (877) 344-7529 in the U.S., (855) 669-9658 for Canada, or (412) 317-0088 for international callers and entering conference number 10138407.

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," "will be," "will likely continue," "will likely result," or words or phrases of similar meaning. Actual results could differ materially from those projected in these forward-looking statements due to a variety of factors, including without limitation, fluctuations in interest rates, the availability of suitable qualifying investments, changes in mortgage prepayments, the availability and terms of financing, changes in market conditions as a result of federal corporate and individual tax law changes, changes in legislation or regulation affecting the mortgage and banking industries or Fannie Mae, Freddie Mac or Ginnie Mae securities, the availability of new investment capital, the liquidity of secondary markets and funding markets, our ability to maintain our qualification as a REIT for U.S. federal tax purposes, our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended, and other changes in general economic conditions. These and other applicable uncertainties, factors and risks are described more fully in the Company's filings with the U.S. Securities and Exchange Commission.

The Company defines core earnings as GAAP net income (loss) excluding (a) unrealized (gain) loss on derivative instruments, (b) realized loss (gain) on termination of derivative instruments, (c) amortization of unrealized (gain) loss of derivative instruments held at the time of de-designation (March 1, 2019) and (d) realized loss (gain) on securities. The following reconciles GAAP net (loss) income and net (loss) income per diluted common share to core earnings and core earnings per common share:

After consideration of secured borrowings-related derivative instruments, Capstead's residential mortgage investments and related secured borrowings had durations as of December 31, 2019 of approximately 15 months and 14¼ months, respectively, for a net duration gap of approximately ¾ months. Duration is a measure of market price sensitivity to changes in interest rates. A shorter duration generally indicates less interest rate risk.