Edgar Filing: ANNALY CAPITAL MANAGEMENT INC

a6819691.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2011

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

FOR THE TRANSITION PERIOD FROM _______________ TO _________________

COMMISSION FILE NUMBER: 1-13447

ANNALY CAPITAL MANAGEMENT, INC.

(Exact name of Registrant as specified in its Charter)

MARYLAND	22-3479661
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

1211 AVENUE OF THE AMERICAS, SUITE 2902

NEW YORK, NEW YORK

(Address of principal executive offices)

10036

(Zip Code)

(212) 696-0100

(Registrant’s telephone number, including area code)

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 X No___

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes _X_ No __

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.

Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company 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:

	Class		Outstanding at August 5, 2011
	Common Stock, $.01 par value		969,071,443

ANNALY CAPITAL MANAGEMENT, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I

Part I.	FINANCIAL INFORMATION	PAGE

	Item 1. Financial Statements:

	Consolidated Statements of Financial Condition at June 30, 2011 (Unaudited) and December 31, 2010
	(Derived from the audited consolidated statement of financial condition at December 31, 2010)	1

	Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) for the quarters and six months
	ended June 30, 2011 and 2010	2

	Consolidated Statements of Stockholders’ Equity (Unaudited) for the six months ended June 30, 2011 and 2010	3

	Consolidated Statements of Cash Flows (Unaudited) for the quarters and six months ended June 30, 2011 and 2010	4

	Notes to Consolidated Financial Statements (Unaudited)	5

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

	Item 3. Quantitative and Qualitative Disclosures about Market Risk	36

	Item 4. Controls and Procedures	38

Part II.	OTHER INFORMATION

	Item 1. Legal Proceedings	39

	Item 1A. Risk Factors	39

	Item 6. Exhibits	40

	SIGNATURES	41

PART I

Part I

Item 1. Financial Statements

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(dollars in thousands, except share and per share amounts)

	June 30, 2011 (Unaudited)			December 31, 2010(1)
ASSETS
Cash and cash equivalents	$	401,844		$	282,626
Reverse repurchase agreements		593,865			1,006,163
Investments, at fair value:
U.S. Treasury Securities (including pledged assets of $476,863 and $660,823, respectively)		748,118			1,100,447
Securities borrowed		519,929			216,676
Agency Mortgage-Backed Securities (including pledged assets of $82,193,414 and $67,787,023, respectively)		96,773,448			78,440,330
Agency debentures (including pledged assets of $459,283 and $1,068,869, respectively)		703,093			1,108,261
Investments with affiliates		261,659			252,863
Corporate debt, held for investment		27,982			21,683
Receivable for Investment sold		40,751			151,460
Accrued interest and dividends receivable		386,160			345,250
Receivable from Prime Broker		3,272			3,272
Receivable for advisory and service fees		19,666			16,172
Intangible for customer relationships, net		12,141			9,290
Goodwill		42,030			42,030
Interest rate swaps, at fair value		-			2,561
Other derivative contracts, at fair value		767			2,607
Other assets		22,282			24,899
Total assets	$	100,557,007		$	83,026,590

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
U.S. Treasury Securities sold, not yet purchased, at fair value	$	491,740		$	909,462
Repurchase agreements		78,447,165			65,533,537
Securities loaned, at fair value		447,330			217,841
Payable for Investments purchased		4,824,618			4,575,026
Convertible Senior Notes		600,000			600,000
Accrued interest payable		122,753			115,766
Dividends payable		539,970			404,220
Interest rate swaps, at fair value		1,035,215			754,439
Other derivative contracts, at fair value		-			2,446
Accounts payable and other liabilities		78,895			8,921
Total liabilities		86,587,686			73,121,658

6.00% Series B Cumulative Convertible Preferred Stock: 4,600,000 shares authorized, 1,649,047 and 1,652,047 shares issued and outstanding, respectively		39,959			40,032

Stockholders’ Equity:
7.875% Series A Cumulative Redeemable Preferred Stock: 7,412,500 authorized, issued and outstanding		177,088			177,088
Common stock, par value $.01 per share, 1,987,987,500 authorized, 831,047,443 and 631,594,205 issued and outstanding, respectively		8,310			6,316
Additional paid-in capital		12,579,012			9,175,245
Accumulated other comprehensive income (loss)		2,049,831			1,164,642
Accumulated deficit		(884,879	)		(658,391	)
Total stockholders’ equity		13,929,362			9,864,900

Total liabilities, Series B Cumulative Convertible Preferred Stock and stockholders’ equity	$	100,557,007		$	83,026,590

(1)	Derived from the audited consolidated financial statements at December 31, 2010.
See notes to consolidated financial statements.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(dollars in thousands, except share and per share amounts)

(Unaudited)

	For the Quarters Ended						For the Six Months Ended
	June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
Interest income:
Investments	$	948,703		$	642,782		$	1,786,583		$	1,296,717
U.S. Treasury Securities		6,497			40			11,322			40
Securities loaned		1,868			860			3,211			1,314
Total interest income		957,068			643,682			1,801,116			1,298,071

Interest expense:
Repurchase agreements		100,164			96,975			202,766			189,064
Convertible Senior Notes		6,900			6,966			13,667			10,161
U.S. Treasury Securities sold, not yet purchased		4,772			24			9,758			24
Securities borrowed		1,484			742			2,585			1,129
Total interest expense		113,320			104,707			228,776			200,378

Net interest income		843,748			538,975			1,572,340			1,097,693
Other income (loss):
Investment advisory and other fee income		20,710			13,863			37,917			26,409
Net gains (losses) on sales of Mortgage-Backed Securities and agency debentures		7,336			39,041			34,521			86,003
Dividend income		8,230			7,330			14,527			15,294
Net gains (losses) on trading assets		(5,712	)		77			13,100			77
Net gain (losses) on interest-only Mortgage-Backed Securities		276			-			276			-
Income (expense) from underwriting		(77	)		500			2,827			500
Subtotal		30,763			60,811			103,168			128,283
Realized gains (losses) on interest rate swaps(1)		(216,760	)		(175,535	)		(422,908	)		(356,373	)
Unrealized gains (losses) on interest rate swaps		(466,943	)		(593,038	)		(297,635	)		(709,770	)
Subtotal		(683,703	)		(768,573	)		(720,543	)		(1,066,143	)
Total other (loss) income		(652,940	)		(707,762	)		(617,375	)		(937,860	)
Expenses:
Distribution fees		-			-			-			360
General and administrative expenses		57,229			41,540			109,056			81,561
Total expenses		57,229			41,540			109,056			81,921

Income (loss) before income taxes and income from equity method investment in affiliate		133,579			(210,327	)		845,909			77,912

Income taxes		(12,762	)		(8,837	)		(26,337	)		(16,151	)
Income (loss) from equity method investment in affiliate		-			935			1,140			1,075

Net income (loss)		120,817			(218,229	)		820,712			62,836

Dividends on preferred stock		4,267			4,625			8,534			9,250

Net income (loss) available (related) to common shareholders	$	116,550		$	(222,854	)	$	812,178		$	53,586

Net income (loss) available (related) per share to common shareholders:
Basic	$	0.14		$	(0.40	)	$	1.03		$	0.10
Diluted	$	0.14		$	(0.40	)	$	1.00		$	0.10

Weighted average number of common shares outstanding:
Basic		822,623,370			559,700,836			787,712,527			557,360,358
Diluted		827,754,731			559,700,836			827,622,301			557,418,175

Net income (loss)	$	120,817		$	(218,229	)	$	820,712			62,836
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale securities		1,047,639			664,544			905,412			671,960
Unrealized losses on interest rate swaps		-			26,846			14,298			62,927
Reclassification adjustment for net (gains) losses included in net income (loss)		(7,336	)		(39,041	)		(34,521	)		(86,003	)
Other comprehensive income (loss)		1,040,303			652,349			885,189			648,884
Comprehensive income (loss)	$	1,161,120		$	434,120		$	1,705,901		$	711,720

(1)	Interest expense related to the Company’s interest rate swaps is recorded in Realized losses on interest rate swaps on the Consolidated Statements of Operations and Comprehensive Income.

See notes to consolidated financial statements.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(dollars in thousands, except per share data)

(Unaudited)

	Preferred Stock		Common Stock Par Value		Additional Paid-In Capital		Accumulated Other Comprehensive Income		Accumulated Deficit			Total

BALANCE, DECEMBER 31, 2009	$	177,088	$	5,531	$	7,817,454	$	1,891,317	$	(336,964	)	$	9,554,426

Net income		-		-		-		-		62,836			62,836
Other comprehensive income		-		-		-		648,884		-			648,884
Exercise of stock options		-		1		1,810		-		-			1,811
Stock option expense and long-term compensation expense		-		-		2,366		-		-			2,366
Conversion of Series B cumulative preferred stock		-		-		16		-		-			16
Net proceeds from direct purchase and dividend reinvestment		-		66		116,092		-		-			116,158
Preferred Series A dividends declared $0.9844 per share		-		-		-		-		(7,297	)		(7,297	)
Preferred Series B dividends declared $0.750 per share		-		-		-		-		(1,953	)		(1,953	)
Common dividends declared, $1.33 per share		-		-		-		-		(744,411	)		(744,411	)
BALANCE, JUNE 30, 2010	$	177,088	$	5,598	$	7,937,738	$	2,540,201	$	(1,027,789	)	$	9,632,836
BALANCE, DECEMBER 31, 2010	$	177,088	$	6,316	$	9,175,245	$	1,164,642	$	(658,391	)	$	9,864,900

Net income		-		-		-		-		820,712			820,712
Other comprehensive income		-		-		-		885,189		-			885,189
Exercise of stock options		-		5		6,107		-		-			6,112
Stock option expense and long-term compensation expense		-		3		2,456		-		-			2,459
Conversion of Series B cumulative preferred stock		-		-		73		-		-			73
Net proceeds from direct purchase and dividend reinvestment		-		261		455,445		-		-			455,706
Follow-on offering net proceeds		-		1,725		2,939,686		-		-			2,941,411
Preferred Series A dividends declared $0.9844 per share		-		-		-		-		(7,298	)		(7,298	)
Preferred Series B dividends declared $0.750 per share		-		-		-		-		(1,237	)		(1,237	)
Common dividends declared, $1.27 per share		-		-		-		-		(1,038,665	)		(1,038,665	)

BALANCE, JUNE 30, 2011	$	177,088	$	8,310	$	12,579,012	$	2,049,831	$	(884,879	)	$	13,929,362

See notes to consolidated financial statements.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(Unaudited)

	For the Quarters Ended						For the Six Months Ended
	June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
Cash flows from operating activities:
Net income (loss)	$	120,817		$	(218,229	)	$	820,712		$	62,836
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Amortization of Investment premiums and discounts, net		126,501			137,177			301,244			301,184
Amortization of intangibles		469			406			835			813
Amortization of deferred expenses		900			900			1,800			1,350
(Gains) losses on sales of Mortgage-Backed Securities and Agency debentures		(7,336	)		(39,041	)		(34,521	)		(86,003	)
Stock option and long-term compensation expense		1,197			1,195			2,459			2,366
Unrealized (gains) losses on interest rate swaps		466,943			593,038			297,635			709,770
Unrealized (gains) losses on interest-only Mortgage-Backed Securities		(276	)		-			(276	)		-
Net (gains) losses on trading securities		5,712			(77	)		(13,100	)		(77	)
Gain on investment with affiliate, equity method		-			(75	)		(98	)		(215	)
Proceeds from repurchase agreements from Broker Dealer		260,778,820			321,240,241			563,508,986			571,380,890
Payments on repurchase agreements from Broker Dealer		(264,821,370	)		(317,501,255	)		(562,783,026	)		(566,328,315	)
Proceeds from reverse repurchase agreements to Broker Dealer		48,545,230			6,235,790			104,692,314			8,963,059
Payments on reverse repurchase agreements to Broker Dealer		(47,785,998	)		(6,012,400	)		(104,274,988	)		(8,777,082	)
Proceeds from reverse repurchase agreements to Shannon		7,045			-			7,045			-
Payments on reverse repurchase agreements to Shannon		(12,073	)		-			(12,073	)		-
Proceeds from securities borrowed		1,459,729			635,782			2,452,768			1,112,091
Payments on securities borrowed		(1,610,944	)		(817,892	)		(2,756,021	)		(1,325,256	)
Proceeds from securities loaned		1,328,957			810,273			2,504,167			1,369,825
Payments on securities loaned		(1,241,479	)		(628,408	)		(2,274,678	)		(1,156,640	)
Payments on U.S. Treasury Securities		(4,691,219	)		(436,433	)		(12,889,942	)		(436,433	)
Proceeds from U.S. Treasury Securities		4,674,592			376,600			12,797,913			376,600
Net payments on derivatives		(1,803	)		(1,018	)		(2,774	)		(1,018	)
Net change in:
Other assets		64,740			22,084			685			(11,831	)
Accrued interest and dividend receivable		8,027			(3,777	)		(40,644	)		(2,031	)
Advisory and service fees receivable		(3,035	)		(1,645	)		(3,494	)		(794	)
Interest payable		9,652			11,020			6,987			9,905
Accounts payable and other liabilities		(192	)		(36,475	)		69,974			23,811
Net cash provided by (used in) operating activities		(2,576,394	)		4,367,781			2,379,889			6,188,805
Cash flows from investing activities:
Payments on purchases of Mortgage-Backed Securities and agency debentures		(5,632,236	)		(17,120,818	)		(32,289,712	)		(26,116,401	)
Proceeds from sales of Mortgage-Backed Securities and agency debentures		2,035,385			2,257,455			5,433,231			4,231,735
Principal payments on Mortgage-Backed Securities		3,804,919			10,547,250			9,354,570			16,738,045
Proceeds from Agency debentures called		23,352			874,000			617,598			874,000
Payments on purchase of corporate debt		(7,425	)		-			(7,425	)		-
Net gains (losses) on other derivative securities		(3,480	)		-			11,518			-
Principal payments on corporate debt		687			-			1,155			-
Purchase of investment in affiliate		(57,500	)		-			(57,500	)		-
Purchase of customer relationships		(3,555	)		-			(3,555	)		-
Payments on reverse repurchase agreements		-			-			-			(4,032,426	)
Proceeds from reverse repurchase agreements		-			-			-			4,291,430
Net cash provided by (used in) investing activities		160,147			(3,442,113	)		(16,940,120	)		(4,013,617	)
Cash flows from financing activities:
Proceeds from repurchase agreements		62,388,848			53,484,381			127,836,494			111,006,473
Principal payments on repurchase agreements		(59,883,047	)		(54,621,012	)		(115,648,826	)		(114,270,342	)
Issuance of Convertible Senior Notes		-			-			-			582,000
Proceeds from exercise of stock options		3,675			753			6,112			1,811
Net proceeds from follow-on offerings		-			-			2,941,411			-
Proceeds from direct purchases and dividend reinvestments		454,564			640			455,706			116,158
Dividends paid		(502,961	)		(368,406	)		(911,448	)		(787,877	)
Net cash provided by (used in) financing activities		2,461,079			(1,503,644	)		14,679,449			(3,351,777	)
Net increase (decrease) in cash and cash equivalents		44,832			(577,976	)		119,218			(1,176,589	)
Cash and cash equivalents, beginning of period		357,012			905,955			282,626			1,504,568
Cash and cash equivalents, end of period	$	401,844		$	327,979		$	401,844		$	327,979

Interest paid	$	320,428		$	269,222		$	644,697		$	546,846
Taxes paid	$	3,275		$	6,985		$	25,676		$	16,608

Noncash investing activities:
Receivable for Investments sold	$	40,751		$	78,581		$	40,751		$	78,581
Payable for Investments purchased	$	4,824,618		$	4,867,945		$	4,824,618		$	4,867,945
Net change in unrealized loss on available-for-sale securities and interest rate
swaps, net of reclassification adjustment	$	1,040,303		$	652,349		$	885,189		$	648,884

Noncash financing activities:
Dividends declared, not yet paid	$	539,970		$	380,636		$	539,970		$	380,636
Conversion of Series B cumulative preferred stock	$	24			-		$	73		$	16

See notes to consolidated financial statements.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Annaly Capital Management, Inc. (“Annaly” or the “Company”) was incorporated in Maryland on November 25, 1996. The Company commenced its operations of purchasing and managing an investment portfolio of mortgage-backed securities on February 18, 1997, upon receipt of the net proceeds from the private placement of equity capital, and completed its initial public offering on October 14, 1997. The Company is a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended. Fixed Income Discount Advisory Company (“FIDAC”) is a registered investment advisor and is a wholly owned taxable REIT subsidiary of the Company. On June 27, 2006, the Company made a majority equity investment in an affiliated investment fund (the “Fund”), which is now wholly owned by the Company. During the third quarter of 2008, the Company formed RCap Securities, Inc. (“RCap”). RCap was granted membership in the Financial Industry Regulatory Authority (“FINRA”) on January 26, 2009, and operates as a broker-dealer. RCap is a wholly owned taxable REIT subsidiary of the Company. On October 31, 2008, the Company acquired Merganser Capital Management, Inc. (“Merganser”). Merganser is a registered investment advisor and is a wholly owned taxable REIT subsidiary of the Company. In 2010, the Company established Shannon Funding LLC (“Shannon”), which provides warehouse financing to residential mortgage originators in the United States. In 2010, the Company also established Charlesfort Capital Management LLC (“Charlesfort”), which engages in corporate middle market lending transactions. In 2011, the Company established FIDAC UK Limited (“FIDAC UK”), which provides advice on commercial real estate transactions, including sale-leaseback and single tenant net leased properties across Europe. FIDAC UK is owned by FIDAC.

A summary of the Company’s significant accounting policies follows:

Basis of Presentation - The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, they may not include all of the information and footnotes required by accounting principles generally accepted in the United States of America ("GAAP").

The consolidated financial statements include the accounts of the Company, FIDAC, FIDAC UK, Merganser, RCap, Shannon, Charlesfort and the Fund. All intercompany balances and transactions have been eliminated.

Beginning with our consolidated financial statements for the six month period ending June 30, 2011, the Company reclassified previously presented financial information so that amounts previously presented in the Consolidated Statements of Operations and Comprehensive Income (Loss) as interest expense on swaps are presented in Other income (loss) as Realized gains (losses) on interest rate swaps. Consolidated financial statements for periods prior to June 30, 2011 will be conformed to the restated presentation. Interest expense for the quarter and six months ended June 30, 2010 decreased by $175.5 million and $356.4 million and Other income (loss) decreased by the same amounts, respectively. Additionally, in the Consolidated Statements of Operations and Comprehensive Income (Loss), prior year amounts from interest income on investments were separated into interest income on investments and interest income on U.S. Treasury Securities. Interest expense on Convertible Senior Notes and Securities borrowed for the prior period were placed on the incorrect line in the Consolidated Statements of Operations and Comprehensive Income (Loss) and have been corrected in the current period. In the Consolidated Statements of Cash Flows, prior amounts for Proceeds from sale of agency debentures and Payments on purchases of agency debentures were reclassified to Proceeds from sales of Mortgage-Backed Securities and agency debentures and Payments on purchases of Mortgage-Backed Securities and agency debentures, respectively. Additionally, in the Consolidated Statements of Cash Flows, Purchases of trading securities and Proceeds from sales of trading securities for the quarter and six months ended June 30, 2011 have been separated into Payments on U.S. Treasury Securities, Proceeds from U.S. Treasury Securities and Net payments on derivatives.

Cash and Cash Equivalents - Cash and cash equivalents include cash on hand and cash held in money market funds on an overnight basis.

Reverse Repurchase Agreements - The Company may invest its daily available cash balances via reverse repurchase agreements to provide additional yield on its assets. These investments will typically be recorded as short term investments and will generally mature daily. Reverse repurchase agreements are recorded at cost and are collateralized by mortgage-backed securities pledged by the counterparty to the agreement. Reverse repurchase agreements entered into by Rcap are recorded on trade date at the contract amount, are collateralized by mortgage-backed securities and generally mature within 90 days. Margin calls are made by RCap as appropriate based on the daily valuation of the underlying collateral versus the contract price. RCap generates income from the spread between what is earned on the reverse repurchase agreements and what is paid on the matched repurchase agreements. Cash flows related to RCap’s matched book activity are included in cash flows from operating activities. Reverse repurchase agreements entered into by the Company are included in cash flows from investing activities.

Securities borrowed and loaned transactions – RCap records securities borrowed and loaned transactions at fair value. Securities borrowed transactions require RCap to provide the counterparty with collateral in the form of cash or other securities. RCap receives collateral in the form of cash or other securities for securities loaned transactions. For these transactions, the fees received or paid by RCap are recorded as interest income or expense. On a daily basis, market value changes of securities borrowed or loaned against may require counterparties to deposit additional collateral or RCap to return collateral pledged, when appropriate.

U.S. Treasury Securities - During the second quarter 2010, RCap commenced trading U.S. Treasury securities for its proprietary portfolio, which consists of long and short positions on U.S. Treasury bills, notes, and bonds. U.S. Treasury securities are classified as trading investments and are recorded on trade date at cost. Changes in fair value are reflected in the Company’s consolidated statements of operations. U.S. Treasury bills trade at a discount to par with the difference between proceeds received upon maturity and purchase price recognized as interest income in the Company’s consolidated statements of operations. Interest income on U.S. Treasury notes and bonds is accrued based on the outstanding principal amount of those investments and their contractual terms. Premiums and discounts associated with the purchase of the U.S. Treasury notes and bonds are amortized into interest income over the projected lives of the securities using the interest method.

Investment Securities –Agency mortgage-backed securities, Agency debentures, and corporate debt are referred to herein as “Investment Securities.” Although the Company generally intends to hold most of its mortgage-backed securities and Agency debentures until maturity, it may, from time to time, sell any of its mortgage-backed securities and Agency debentures as part of its overall management of its portfolio. Investment Securities classified as available-for-sale are reported at estimated fair value, based on fair values obtained and compared to independent sources, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity. Investment Securities transactions are recorded on the trade date. Realized gains and losses on sales of Investment Securities are determined using the specific identification method.

On April 1, 2011, the Company elected the fair value option for interest-only mortgage-backed securities acquired on or after such date. These interest-only mortgage-backed securities represent the Company’s right to receive a specified proportion of the contractual interest flows of specific agency securities. Interest-only securities acquired on or after April 1, 2011 are measured at fair value through earnings in the Company’s consolidated statements of operations and comprehensive income. The interest-only securities are included in Mortgage-Backed Securities, at fair value on the accompanying consolidated statements of financial condition.

Agency Mortgage-Backed Securities and Agency Debentures – The Company invests primarily in mortgage pass-through certificates, collateralized mortgage obligations and other mortgage-backed securities representing interests in or obligations backed by pools of mortgage loans, and certificates guaranteed by Ginnie Mae, Freddie Mac or Fannie Mae (collectively, “Agency Mortgage-Backed Securities”). The Company also invests in Agency debentures issued by Federal Home Loan Bank (“FHLB”), Freddie Mac, and Fannie Mae.

Management evaluates available-for-sale securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. The Company determines if it (1) has the intent to sell the securities, (2) is more likely than not that it will be required to sell the securities before recovery, or (3) does not expect to recover the entire amortized cost basis of the securities. Further, the security is analyzed for credit loss (the difference between the present value of cash flows expected to be collected and the amortized cost basis). The credit loss, if any, will then be recognized in the consolidated statement of operations, while the balance of losses related to other factors will be recognized in other comprehensive income (“OCI”). There was no other-than-temporary impairment for the quarters and six months ended June 30, 2011 and 2010.

Interest income is accrued based on the outstanding principal amount of the Investment Securities and their contractual terms. Premiums and discounts associated with the purchase of the Investment Securities are amortized into interest income over the projected lives of the securities using the interest method. The Company’s policy for estimating prepayment speeds for calculating the effective yield is to evaluate historical performance, consensus prepayment speeds, and current market conditions. Dividend income on available-for-sale equity securities is recorded on the ex-dividend date on an accrual basis.

Derivative Instruments – The Company accounts for interest rate swaps at fair value as either assets or liabilities on the consolidated statement of financial condition. The changes in the fair value of the interest rate swaps are recognized in earnings. The Company uses interest rate swaps to manage its exposure to changing interest rates on its repurchase agreements. Net payments on interest rate swaps are included in the consolidated statement of cash flows as a component of net income (loss). Unrealized gains (losses) on interest rate swaps are removed from net income (loss) as an adjustment to cash flows from operating activities.

The Company elects to net by counterparty the fair value of interest rate swap contracts. These contracts contain legally enforceable provisions that allow for netting or setting off of all individual swap receivables and payables with each counterparty and, therefore, the fair value of those swap contracts are netted by counterparty. The credit support annex provisions of the Company’s interest rate swap contracts allow the parties to mitigate their credit risk by requiring the party which is out of the money to post collateral. As the Company elects to net by counterparty the fair value of interest rate swap contracts, it also nets by counterparty any collateral exchanged as part of the interest rate swap contracts. Substantially all collateral is non-cash.

In addition, the Company’s agreements with certain of its counterparties with whom it has both interest rate swap contracts and master repurchase agreements contain legally enforceable provisions that allow for netting or setting off of on an aggregate basis all receivables, payables and collateral postings required under both the interest rate swap contract and the master repurchase agreement with respect to each such counterparty.

RCap enters into U.S Treasury, Eurodollar, and federal funds futures and options contracts for speculative or hedging purposes. RCap maintains a margin account which is settled daily with futures and options commission merchants. Changes in the unrealized gains or losses on the futures and options contracts are reflected in the Company’s statements of operations.

Credit Risk – The Company has limited its exposure to credit losses on its portfolio of Agency Mortgage-Backed Securities by only purchasing securities issued by Freddie Mac, Fannie Mae or Ginnie Mae and Agency debentures issued by the FHLB, Freddie Mac and Fannie Mae. The payment of principal and interest on the Freddie Mac and Fannie Mae Agency Mortgage-Backed Securities are guaranteed by those respective agencies, and the payment of principal and interest on the Ginnie Mae Agency Mortgage-Backed Securities are backed by the full faith and credit of the U.S. government. Principal and interest on Agency debentures are guaranteed by the agency issuing the debenture. Substantially all of the Company’s Investment Securities have an actual or implied “AAA” rating. The Company faces credit risk on the portions of its portfolio which are not Agency Mortgage-Backed Securities and Agency debentures.

Market Risk - Weakness in the mortgage market may adversely affect the performance and market value of the Company’s investments. This could negatively impact the Company’s net book value. Furthermore, if many of the Company’s lenders are unwilling or unable to provide additional financing, the Company could be forced to sell its Investment Securities at an inopportune time when prices are depressed. The Company does not anticipate having difficulty converting its assets to cash or extending financing terms due to the fact that its Agency Mortgage-Backed Securities and Agency debentures have an actual or implied “AAA” rating and principal payment is guaranteed by Freddie Mac, Fannie Mae, or Ginnie Mae.

Repurchase Agreements - The Company finances the acquisition of its Agency Mortgage-Backed Securities and Agency debentures through the use of repurchase agreements. Repurchase agreements are treated as collateralized financing transactions and are presented at their contractual principal amounts as specified in the respective agreements. Reverse repurchase agreements and repurchase agreements with the same counterparty and the same maturity are presented net in the consolidated statements of financial condition when the terms of the agreements permit netting. The Company reports cash flows on repurchase agreements as financing activities in the Consolidated Statements of Cash Flows. Rcap and Shannon reports cash flows on repurchase agreements as operating activities in the Consolidated Statements of Cash Flows.

Convertible Senior Notes – The Company records the notes at their contractual amounts, including accrued interest. The Company has analyzed whether the embedded conversion option should be bifurcated and has determined that bifurcation is not necessary.

Cumulative Convertible Preferred Stock - The Series B Cumulative Convertible Preferred Stock (the “Series B Preferred Stock”) contains fundamental change provisions that allow the holder to redeem the Series B Preferred Stock for cash if certain events occur. As redemption under these provisions is not solely within the Company’s control, the Company has classified the Series B Preferred Stock as temporary equity in the accompanying consolidated statements of financial condition. The Company has analyzed whether the embedded conversion option should be bifurcated and has determined that bifurcation is not necessary.

Income Taxes - The Company has elected to be taxed as a REIT and intends to comply with the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), with respect thereto. Accordingly, the Company will not be subjected to federal income tax to the extent of its distributions to shareholders and as long as certain asset, income and stock ownership tests are met. The Company and its direct and indirect subsidiaries, FIDAC, FIDAC UK, Merganser and RCap, have made separate joint elections to treat these subsidiaries as taxable REIT subsidiaries. As such, each of the taxable REIT subsidiaries are taxable as a domestic C corporation and subject to federal, state, and local income taxes based upon its taxable income.

The provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740, Income Taxes, clarify the accounting for uncertainty in income taxes recognized in financial statements and prescribe a recognition threshold and measurement attribute for tax positions taken or expected to be taken on a tax return. FASB ASC 740 also requires that interest and penalties related to unrecognized tax benefits be recognized in financial statements. The Company does not have any unrecognized tax benefits that would affect its financial position. Thus, no accruals for penalties and interest were necessary as of June 30, 2011.

Goodwill and Intangible Assets - The Company’s acquisitions of FIDAC and Merganser were accounted for using the purchase method. Under the purchase method, net assets and results of operations of acquired companies are included in the consolidated financial statements from the date of acquisition. The costs of FIDAC and Merganser were allocated to the assets acquired, including identifiable intangible assets, and the liabilities assumed based on their estimated fair values at the date of acquisition. The excess of purchase price over the fair value of the net assets acquired was recognized as goodwill. In addition, FIDAC UK acquired a customer relationship after its formation. Goodwill and intangible assets are periodically (but not less frequently than annually) reviewed for potential impairment. Intangible assets with an estimated useful life are expected to amortize over a 7.8 year weighted average time period. During the quarters and six months ended June 30, 2011 and 2010, there were no impairment losses.

Stock Based Compensation - The Company is required to measure and recognize in the consolidated financial statements the compensation cost relating to share-based payment transactions.

Use of Estimates - The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. All assets classified as trading or available-for-sale and interest rate swaps are reported at their estimated fair value, based on market prices. The Company’s policy is to obtain fair values from one or more independent sources. Fair values from independent sources are compared to internal prices for reasonableness. Actual results could differ from those estimates.

The Company recognizes compensation expense on a straight-line basis over the requisite service period for the entire award (that is, over the requisite service period of the last separately vesting portion of the award).

A Summary of Recent Accounting Pronouncements Follows:

Presentation

Comprehensive Income (ASC 220)

In June 2011, FASB released ASU 2011-05, which attempts to improve the comparability, consistency, and transparency of financial reporting and increase the prominence of items reported in other comprehensive income (OCI). The amendment requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of net income and comprehensive income or two separate consecutive statements. Either presentation requires the presentation on the face of the financial statements any reclassification adjustments for items that are reclassified from OCI to net income in the statements. There is no change in what must be reported in OCI or when an item of OCI must be reclassified to net income. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. This update will result in additional disclosure, but has no material effect on the Company’s consolidated financial statements.

Broad Transactions

Fair Value Measurements and Disclosures (ASC 820)

In January 2010, FASB issued guidance (ASU 2010-06) which increased disclosure regarding the fair value of assets. The key provisions of this guidance include the requirement to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 including a description of the reason for the transfers. Previously this was only required of transfers between Level 2 and Level 3 assets. Further, reporting entities are required to provide fair value measurement disclosures for each class of assets and liabilities; a class is potentially a subset of the assets or liabilities within a line item in the consolidated statement of financial position. Additionally, disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements are required for either Level 2 or Level 3 assets. This portion of the guidance was effective for the Company on January 1, 2010. The guidance also requires disclosure on purchases, sales, issuances and settlements on any Level 3 asset. In other words, Level 3 assets are presented on a gross basis rather than as one net number. This last portion of the guidance was effective for the Company January 1, 2011. Adoption of this portion of the guidance results in increased footnote disclosure to the extent the Company owns Level 3 assets.

In May 2011, FASB release ASU 2011-04 further converging US GAAP and IFRS by providing common fair value measurement and disclosure requirements. The amendments in this Update change the wording used to describe the requirements in US GAAP for measuring fair value and for disclosing information about fair value measurements. These include those that clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements and those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. This guidance is effective for interim and annual reporting periods beginning after December 15, 2011. This update may result in additional disclosure and the Company is evaluating the effect on the Company’s consolidated financial statements.

Transfers and Servicing (ASC 860)

In April 2011, FASB issued ASU 2011-03 regarding repurchase agreements. In a typical repurchase agreement transaction, an entity transfers financial assets to the counterparty in exchange for cash with an agreement for the counterparty to return the same or equivalent financial assets for a fixed price in the future. Previous to this update, one of the factors in determining whether sale treatment could be used was whether the transferor maintained effective control of the transferred assets and in order to do so, the transferor must have the ability to repurchase such assets. Based on this update, the Board concluded that the assessment of effective control should focus on a transferor’s contractual rights and obligations with respect to transferred financial assets, rather than whether the transferor has the practical ability to perform in accordance with those rights or obligations. Therefore, this update removes the transferor’s ability criterion from consideration of effective control. This update is effective for the first interim or annual period beginning on or after December 15, 2011. As the Company records repurchase agreements as secured borrowings and not sales, this update will have no effect on the Company’s consolidated financial statements.

2. AGENCY MORTGAGE-BACKED SECURITIES

The following tables present the Company’s available-for-sale Agency Mortgage-Backed Securities portfolio as of June 30, 2011 and December 31, 2010 which were carried at their fair value:

June 30, 2011	Freddie Mac			Fannie Mae			Ginnie Mae			Total Agency Mortgage-Backed Securities
	(dollars in thousands)
Mortgage-Backed
Securities, gross	$	25,057,495		$	65,731,429		$	943,757		$	91,732,681
Unamortized discount		(12,488	)		(16,848	)		(401	)		(29,737	)
Unamortized premium		660,423			2,323,888			33,454			3,017,765
Amortized cost		25,705,430			68,038,469			976,810			94,720,709

Gross unrealized gains		693,858			1,629,067			37,683			2,360,608
Gross unrealized losses		(38,608	)		(267,619	)		(1,642	)		(307,869	)

Estimated fair value	$	26,360,680		$	69,399,917		$	1,012,851		$	96,773,448

	Amortized Cost			Gross Unrealized Gain			Gross Unrealized Loss			Estimated Fair Value
	(dollars in thousands)
Adjustable rate	$	9,712,428		$	345,634		$	(9,086	)	$	10,048,976

Fixed rate		85,008,281			2,014,974			(298,783	)		86,724,472

Total	$	94,720,709		$	2,360,608		$	(307,869	)	$	96,773,448

December 31, 2010	Freddie Mac			Fannie Mae			Ginnie Mae			Total Agency Mortgage-Backed Securities
	(dollars in thousands)
Mortgage-Backed
Securities, gross	$	19,846,543		$	54,341,140		$	824,029		$	75,011,712
Unamortized discount		(14,651	)		(18,329	)		(403	)		(33,383	)
Unamortized premium		517,507			1,795,116			26,200			2,338,823
Amortized cost		20,349,399			56,117,927			849,826			77,317,152

Gross unrealized gains		463,471			1,211,324			29,408			1,704,203
Gross unrealized losses		(140,027	)		(438,918	)		(2,080	)		(581,025	)

Estimated fair value	$	20,672,843		$	56,890,333		$	877,154		$	78,440,330
	Amortized Cost			Gross Unrealized Gain			Gross Unrealized Loss			Estimated Fair Value
	(dollars in thousands)
Adjustable rate	$	10,954,627		$	257,822		$	(75,440	)	$	11,137,009

Fixed rate		66,362,525			1,446,381			(505,585	)		67,303,321

Total	$	77,317,152		$	1,704,203		$	(581,025	)	$	78,440,330

Actual maturities of Agency Mortgage-Backed Securities are generally shorter than stated contractual maturities because actual maturities of Agency Mortgage-Backed Securities are affected by the contractual lives of the underlying mortgages, periodic payments of principal, and prepayments of principal. The following table summarizes the Company’s Agency Mortgage-Backed Securities on June 30, 2011 and December 31, 2010 according to their estimated weighted-average life classifications:

	June 30, 2011				December 31, 2010
	Fair Value		Amortized Cost		Fair Value		Amortized Cost
Weighted-Average Life	(dollars in thousands)

Less than one year	$	780,883	$	771,339	$	915,398	$	901,824
Greater than one year and less than five years		71,716,641		69,613,658		59,732,123		58,321,570
Greater than or equal to five years		24,275,924		24,335,712		17,792,809		18,093,758

Total	$	96,773,448	$	94,720,709	$	78,440,330	$	77,317,152

The weighted-average lives of the Agency Mortgage-Backed Securities at June 30, 2011 and December 31, 2010 in the table above are based upon data provided through subscription-based financial information services, assuming constant principal prepayment rates to the reset date of each security. The prepayment model considers current yield, forward yield, steepness of the yield curve, current mortgage rates, mortgage rate of the outstanding loans, loan age, margin and volatility. The actual weighted average lives of the Agency Mortgage-Backed Securities could be longer or shorter than estimated.

The following table presents the gross unrealized losses, and estimated fair value of the Company’s Agency Mortgage-Backed Securities by length of time that such securities have been in a continuous unrealized loss position at June 30, 2011 and December 31, 2010.

	Unrealized Loss Position For: (dollars in thousands)
	Less than 12 Months					12 Months or More					Total
	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses

June 30, 2011	$	20,911,053	$	(302,761	)	$	172,421	$	(5,108	)	$	21,083,474	$	(307,869	)
December 31, 2010	$	28,608,996	$	(577,096	)	$	166,481	$	(3,929	)	$	28,775,477	$	(581,025	)

The decline in value of these securities is solely due to market conditions and not the quality of the assets. Substantially all of the Agency Mortgage-Backed Securities are “AAA” rated or carry an implied “AAA” rating. The investments are not considered other-than-temporarily impaired because the Company currently has the ability and intent to hold the investments to maturity or for a period of time sufficient for a forecasted market price recovery up to or beyond the cost of the investments or we are not required to sell for regulatory or other reasons. Also, the Company is guaranteed payment of the principal amount of the securities by the government agency which created them.

During the quarter and six months ended June 30, 2011, the Company sold $1.6 billion and $4.6 billion of Agency Mortgage-Backed Securities, resulting in a realized gain of $5.9 million and $26.8 million, respectively. During the quarter and six months ended June 30, 2010, the Company sold $1.4 billion and $3.0 billon of Agency Mortgage-Backed Securities, resulting in a realized gain of $37.8 million and $84.8 million respectively.

Interest-only securities represent the right to receive a specified portion of the contractual interest flows of the underlying unamortized principal balance of specific Agency securities. As of June 30, 2011, interest-only securities accounted for under the fair value option had unrealized gains of $276,000 and an amortized cost of $46.5 million.

3. AGENCY DEBENTURES

At June 30, 2011, the Company owned Agency debentures with a carrying value of $703.1 million, including an unrealized gain of $141 thousand. At December 31, 2010, the Company owned Agency debentures with a carrying value of $1.1 billion, including an unrealized gain of $9.7 million.

For the quarter and six months ended June 30, 2011, the Company sold or had called $125.8 million and $947.6 million, of Agency debentures, resulting in realized gains of $1.4 million and $7.7 million, respectively. For the quarter and six months ended June 30, 2010, the Company sold or had called $1.2 billion and $1.4 billion of agency debentures, resulting in a realized gain of $1.2 million.

4. INVESTMENT WITH AFFILIATES, AVAILABLE FOR SALE EQUITY SECURITIES

All of the Company’s available-for-sale equity securities are shares of Chimera and CreXus and are reported at fair value. The Company owned approximately 45.0 million shares of Chimera at a fair value of approximately $155.6 million at June 30, 2011 and approximately 45.0 million shares of Chimera at a fair value of approximately $184.9 million at December 31, 2010. At June 30, 2011, the investment in Chimera had an unrealized gain of $16.8 million.

On March 29, 2011, the Company acquired an additional 5.0 million shares of CreXus, which settled on April 1, 2011 . The Company owned approximately 9.5 million shares of CreXus at a fair value of approximately $105.9 million at June 30, 2011 and approximately 4.5 million shares of CreXus at a fair value of approximately $59.3 million at December 31, 2010. At June 30, 2011, the investment in CreXus had an unrealized loss of $19.6 million.

5. REVERSE REPURCHASE AGREEMENTS

At June 30, 2011, RCap had outstanding reverse repurchase agreements with non-affiliates of $593.9 million. At December 31, 2010, RCap had outstanding reverse repurchase agreements with non-affiliates of $1.0 billion. At June 30, 2011, Shannon had outstanding reverse repurchase agreements with non-affiliates of $5.0 million.

6. FAIR VALUE MEASUREMENTS

The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

Level 1– inputs to the valuation methodology are quoted prices (unadjusted) for identical assets and liabilities in active markets.

Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 – inputs to the valuation methodology are unobservable and significant to overall fair value.

Available-for-sale-equity securities are valued based on quoted prices (unadjusted) in an active market. Agency Mortgage-Backed Securities and interest rate swaps are valued using quoted prices for similar assets and dealer quotes. The dealer will incorporate common market pricing methods, including a spread measurement to the Treasury curve or interest rate swap curve as well as underlying characteristics of the particular security including coupon, periodic and life caps, rate reset period and expected life of the security. Management ensures that current market conditions are represented. Management compares similar market transactions and comparisons to a pricing model. The Company’s Investment Securities characteristics are as follows:

	Weighted Average Coupon on Fixed Rate Investments			Weighted Average Coupon on Adjustable Rate Investments			Weighted Average Yield on Fixed Rate Investments			Weighted Average Yield on Adjustable Rate Investments			Weighted Average Lifetime Cap on Adjustable Investments			Weighted Average Term to Next Adjustment on Adjustable Rate Investments

At June 30, 2011		4.74	%		4.12	%		3.83	%		3.22	%		10.08	%	42 months
At December 31, 2010		4.92	%		4.28	%		4.00	%		3.04	%		10.16	%	39 months

The estimated fair value of available-for-sale debt and equity securities, U.S. Treasury securities, U.S. Treasury securities sold, not yet purchased, securities borrowed, securities loaned, receivable from prime broker, interest rate swaps, and futures and options contracts is equal to their carrying value presented in the consolidated statements of financial condition. Cash and cash equivalents, reverse repurchase agreements, receivable for Agency Mortgage-Backed Securities sold, accrued interest and dividends receivable, receivable for advisory and service fees, repurchase agreements with maturities shorter than one year, payable for investments purchased, dividends payable, accounts payable and other liabilities, and accrued interest payable, generally approximates fair value at June 30, 2011 due to the short term nature of these financial instruments.

The classification of assets and liabilities by level remains unchanged at June 30, 2011, when compared to the year ended December 31, 2010. The Company’s financial assets and liabilities carried at fair value on a recurring basis are valued as follows:

	Level 1		Level 2		Level 3
At June 30, 2011	(dollars in thousands)
Assets:
Mortgage-Backed Securities	$	-	$	96,773,448	$	-
Agency debentures		-		703,093		-
Available-for-sale-equity securities		261,659		-		-
U.S. Treasury Securities		748,118		-		-
Securities borrowed		-		519,929		-
Other derivative contracts		-		767		-
Liabilities:
Interest rate swaps		-		1,035,215		-
U.S. Treasury securities sold, not yet purchased		491,740		-		-
Securities loaned		-		447,330		-

	Level 1		Level 2		Level 3
At December 31, 2010	(dollars in thousands)
Assets:
Mortgage-Backed Securities	$	-	$	78,440,330	$	-
Agency debentures		-		1,108,261		-
Available-for-sale equity securities		184,879		-		-
U.S. Treasury securities		1,100,447		-		-
Securities borrowed		-		216,676		-
Interest rate swaps		-		2,561		-
Other derivative contracts		2,607		-		-
Liabilities:
Interest rate swaps		-		754,439		-
U.S. Treasury securities sold, not yet purchased		909,462		-		-
Securities loaned		-		217,841		-
Other derivative contracts		-		2,446		-

7. REPURCHASE AGREEMENTS

The Company had outstanding $78.4 billion and $65.5 billion of repurchase agreements with weighted average borrowing rates of 1.68% and 1.84%, after giving effect to the Company’s interest rate swaps, and weighted average remaining maturities of 130 days and 127 days as of June 30, 2011 and December 31, 2010, respectively. Investment Securities and U.S. Treasury Securities pledged as collateral under these repurchase agreements and interest rate swaps had an estimated fair value of $83.1 billion at June 30, 2011 and $69.5 billion at December 31, 2010.

At June 30, 2011 and December 31, 2010, the repurchase agreements had the following remaining maturities:

	June 30, 2011		December 31, 2010
	(dollars in thousands)
1 day	$	6,751,759	$	-
2 to 29 days		29,838,769		32,669,341
30 to 59 days		13,627,318		13,767,522
60 to 89 days		5,269,428		4,776,597
90 to 119 days		6,413,382		6,068,376
Over 120 days		16,546,509		8,251,701
Total	$	78,447,165	$	65,533,537

The Company did not have an amount at risk greater than 10% of the equity of the Company with any counterparty as of June 30, 2011 or December 31, 2010.

The Company has entered into long term repurchase agreements which provide the counterparty with the right to call the balance prior to maturity date. These repurchase agreements totaled $5.2 billion and the fair value of the option to call was ($263.8 million) at June 30, 2011. The repurchase agreements totaled $5.9 billion and the fair value of the option to call was ($313.2 million) at December 31, 2010. Management has determined that the call option is not required to be bifurcated as it is deemed clearly and closely related to the debt instrument, therefore the fair value of the option is not recorded in the consolidated financial statements. The long term repurchase agreements are modeled and priced as pay fixed versus receive floating interest rate swaps whereby the fixed receiver has the option to cancel the swap after an initial lockout period.

Additionally, as of June 30, 2011 and December 31, 2010, the Company has entered into repurchase agreements with a term of over one year. The amount of the repurchase agreements is $1.0 billion and $500 million and they have an estimated fair value of $1.0 billion and $513.3 million as of June 30, 2011 and December 31, 2010, respectively.

8. DERIVATIVE INSTRUMENTS

In connection with the Company’s interest rate risk management strategy, the Company economically hedges a portion of its interest rate risk by entering into derivative financial instrument contracts. As of June 30, 2011, such instruments are comprised of interest rate swaps, which in effect modify the cash flows on repurchase agreements. The use of interest rate swaps creates exposure to credit risk relating to potential losses that could be recognized if the counterparties to these instruments fail to perform their obligations under the contracts. In the event of a default by the counterparty, the Company could have difficulty obtaining its Investment Securities pledged as collateral for swaps. The Company does not anticipate any defaults by its counterparties

The purpose of the swaps is to mitigate the risk of rising interest rates that affect the Company’s cost of funds.

The location and fair value of the Company’s interest rate swaps reported in the Consolidated Statements of Financial Condition as of June 30, 2011 are as follows:

	Location on Consolidated Statements of Financial Condition	Notional Amount		Net Estimated Fair Value/Carrying Value
	(dollars in thousands)
June 30, 2011	Assets	$	-	$	-
June 30, 2011	Liabilities	$	35,525,230	$	(1,035,215	)
December 31, 2010	Assets	$	200,000	$	2,561
December 31, 2010	Liabilities	$	26,882,460	$	(754,439	)

The effect of the Company’s interest rate swaps on the Consolidated Statements of Operations and Comprehensive Income is as follows:

	Location on Consolidated Statements of Operations and Comprehensive Income
	Realized Gains (Loss) Recognized on Interest Rate Swaps*			Unrealized Gains (Losses) on Interest Rate Swaps
	(dollars in thousands)
For the Quarter Ended June 30, 2011		($216,760	)		($466,943	)
For the Quarter Ended June 30, 2010		($175,535	)		($593,038	)
For the Six Months Ended June 30, 2011		($422,908	)		($297,635	)
For the Six Months Ended June 30, 2010		($356,373	)		($709,770	)

* Net interest payments on interest rate swaps is presented in the Company’s consolidated statement of operations as realized gains (losses) on interest rate swaps.

The weighted average pay rate at June 30, 2011 was 2.79% and the weighted average receive rate was 0.21%. The weighted average pay rate at June 30, 2010 was 3.48% and the weighted average receive rate was 0.38%. Without netting the market value of the swaps by dealer at June 30, 2011, the gross unrealized loss on interest rate swaps was $1.0 billion, with a notional amount of $32.4 billion, and the gross unrealized gain on interest rate swaps was $23.2 million, with a notional amount of $3.2 billion. Without netting the market value of the swaps by dealer at June 30, 2010, the gross unrealized loss on interest rate swaps was $820.0 million, with a notional amount of $23.2 billion, and the gross unrealized gain on interest rate swaps was $68.2 million, with a notional amount of $3.9 billion.

In connection with RCap’s proprietary trading activities, it has entered into U.S. Treasury, Eurodollar, and federal funds futures and options contracts for speculative or hedging purposes. RCap invests in futures and options contracts for economic hedging purposes to reduce exposure to changes in yields of its U.S Treasury securities and for speculative purposes to achieve capital appreciation. The use of futures and options contracts creates exposure to credit risk relating to potential losses that could be recognized if the counterparties to these instruments fail to perform their obligations under the contracts. RCap executes these trades through an independent futures and options broker dealer.

9. CONVERTIBLE SENIOR NOTES

In 2010, Company issued $600.0 million in aggregate principal amount of its 4% convertible senior notes due 2015 (“Convertible Senior Notes”) for net proceeds following underwriting expenses of approximately $582.0 million. Interest on the Convertible Senior Notes is paid semi-annually at a rate of 4% per year and the Convertible Senior Notes will mature on February 15, 2015 unless earlier repurchased or converted. The Convertible Senior Notes are convertible into shares of Common Stock at an initial conversion rate and conversion rate at June 30, 2011 of 46.6070 and 58.0576 shares of Common Stock per $1,000 principal amount of Convertible Senior Notes, which is equivalent to an initial conversion price of approximately $21.4560 and $17.2243 per share of Common Stock, respectively, subject to adjustment in certain circumstances. The market value at June 30, 2011 and December 31, 2010 was $710.4 million and $699.2 million, respectively, based on closing price.

10. PREFERRED STOCK AND COMMON STOCK

(A) Common Stock Issuances

The Company amended its charter to increase the number of authorized shares of capital stock, par value $0.01 per share, from 1,000,000,000 shares to 2,000,000,000 shares, consisting of 1,987,987,500 shares classified as “Common Stock,” 7,412,500 shares classified as “7.875% Series A Cumulative Redeemable Preferred Stock,” and 4,600,000 shares classified as “6.00% Series B Cumulative Convertible Preferred Stock” (the “Charter Amendment”). The Charter Amendment became effective June 23, 2011.

On January 4, 2011 the Company entered into an agreement pursuant to which it sold 86,250,000 shares of its common stock for net proceeds following expenses of approximately $1.47 billion. This transaction settled on January 7, 2011. On February 15, 2011 the Company entered into an agreement pursuant to which it sold 86,250,000 shares of its common stock for net proceeds following expenses of approximately $1.47 billion. This transaction settled on February 18, 2011.

On July 13, 2010, the Company entered into an agreement pursuant to which it sold 60,000,000 shares of its common stock for net proceeds following expenses of approximately $1.0 billion. This transaction settled on July 19, 2010.

During the quarter and six months ended June 30, 2011, 279,127 options and 462,470 options were exercised for an aggregate exercise price of $3.7 million and $6.1 million, respectively, and 324,674 shares and 328,550 shares were granted under the Long-Term Stock Incentive Plan (“Incentive Plan”), respectively. During the quarter and six months ended June 30, 2010, 57,000 options and 148,000 options were exercised under the Incentive Plan for an aggregate exercise price of $753,000 and $1.8 million, respectively.

During the quarter and six months ended June 30, 2011, 1,000 shares and 3,000 shares of Series B Preferred Stock were converted into 2,732 shares and 8,045 shares of common stock, respectively. During the six months ended June 30, 2010, 645 shares of Series B Preferred Stock were converted into 1,511 shares of common stock. There were no conversions of Series B Preferred Stock into shares of common stock during the quarter ended June 30, 2010.

During the quarter and six months ended June 30, 2011, the Company raised $454.6 million and $455.7 million by issuing 26,090,380 shares and 26,154,175 shares through the Direct Purchase and Dividend Reinvestment Program, respectively. During the quarter and six months ended June 30, 2010, the Company raised $640,000 and $116.2 million by issuing 38,000 shares and 6.5 million shares, through the Direct Purchase and Dividend Reinvestment Program.

(B) Preferred Stock

At June 30, 2011 and December 31, 2010, the Company had issued and outstanding 7,412,500 shares of Series A Cumulative Redeemable Preferred Stock (“Series A Preferred Stock”), with a par value $0.01 per share and a liquidation preference of $25.00 per share plus accrued and unpaid dividends (whether or not declared). The Series A Preferred Stock must be paid a dividend at a rate of 7.875% per year on the $25.00 liquidation preference before the common stock is entitled to receive any dividends. The Series A Preferred Stock is redeemable at $25.00 per share plus accrued and unpaid dividends (whether or not declared) exclusively at the Company's option commencing on April 5, 2009 (subject to the Company's right under limited circumstances to redeem the Series A Preferred Stock earlier in order to preserve its qualification as a REIT). The Series A Preferred Stock is senior to the Company's common stock and is on parity with the Series B Preferred Stock with respect to dividends and distributions, including distributions upon liquidation, dissolution or winding up. The Series A Preferred Stock generally does not have any voting rights, except if the Company fails to pay dividends on the Series A Preferred Stock for six or more quarterly periods (whether or not consecutive). Under such circumstances, the Series A Preferred Stock, together with the Series B Preferred Stock, will be entitled to vote to elect two additional directors to the Board, until all unpaid dividends have been paid or declared and set apart for payment. In addition, certain material and adverse changes to the terms of the Series A Preferred Stock cannot be made without the affirmative vote of holders of at least two-thirds of the outstanding shares of Series A Preferred Stock and Series B Cumulative Convertible Preferred Stock (“Series B Preferred Stock”). Through June 30, 2011, the Company had declared and paid all required quarterly dividends on the Series A Preferred Stock.

At June 30, 2011 and December 31, 2010, the Company had issued and outstanding 1,649,047 and 1,652,047, respectively, shares of Series B Preferred Stock, with a par value $0.01 per share and a liquidation preference of $25.00 per share plus accrued and unpaid dividends (whether or not declared). The Series B Preferred Stock must be paid a dividend at a rate of 6% per year on the $25.00 liquidation preference before the common stock is entitled to receive any dividends.

The Series B Preferred Stock is not redeemable. The Series B Preferred Stock is convertible into shares of common stock at a conversion rate that adjusts from time to time upon the occurrence of certain events, including if the Company distributes to its common shareholders in any calendar quarter cash dividends in excess of $0.11 per share. Initially, the conversion rate was 1.7730 shares of common shares per $25 liquidation preference. At June 30, 2011, the conversion ratio was 2.8152 shares of common stock per $25 liquidation preference. Commencing April 5, 2011, the Company has the right in certain circumstances to convert each Series B Preferred Stock into a number of common shares based upon the then prevailing conversion rate. The Series B Preferred Stock is also convertible into common shares at the option of the Series B preferred shareholder at anytime at the then prevailing conversion rate. The Series B Preferred Stock is senior to the Company's common stock and is on parity with the Series A Preferred Stock with respect to dividends and distributions, including distributions upon liquidation, dissolution or winding up. The Series B Preferred Stock generally does not have any voting rights, except if the Company fails to pay dividends on the Series B Preferred Stock for six or more quarterly periods (whether or not consecutive). Under such circumstances, the Series B Preferred Stock, together with the Series A Preferred Stock, will be entitled to vote to elect two additional directors to the Board, until all unpaid dividends have been paid or declared and set apart for payment. In addition, certain material and adverse changes to the terms of the Series B Preferred Stock cannot be made without the affirmative vote of holders of at least two-thirds of the outstanding shares of Series B Preferred Stock and Series A Preferred Stock. Through June 30, 2011, the Company had declared and paid all required quarterly dividends on the Series B Preferred Stock. During the quarter and six months ended June 30, 2011, 1,000 and 3,000 shares of Series B Preferred Stock were converted into 2,732 and 8,045 shares of common stock, respectively. During the six months ended June 30, 2010, 645 shares of Series B Preferred Stock were converted into 1,511 shares of common stock. There were no conversions of Series B Preferred Stock into shares of common stock during the quarter ended June 30, 2010.

During the quarter and six months ended June 30, 2011, the Company declared dividends to common shareholders totaling $540.0 million or $0.65 per share and $1.0 billion or $1.27 per share, respectively, which $540.0 million was paid to shareholders on July 28, 2011. During the quarter and six months ended June 30, 2011, the Company declared dividends to Series A Preferred shareholders totaling approximately $3.6 million or $0.4922 per share and $7.3 million or $0.9844 per share, and Series B shareholders totaling approximately $618 thousand or $0.375 per share and approximately $1.2 million or $0.750 per share, respectively.

During the quarter and six months ended June 30, 2010, the Company declared dividends to common shareholders totaling $380.6 million or $0.68 per share and $744.4 million or $1.33 per share, respectively, of which $380.6 million was paid to shareholders on July 29, 2010. During the quarter and six months ended June 30, 2010, the Company declared dividends to Series A Preferred shareholders totaling approximately $3.6 million or $0.4922 per share and $7.3 million or $0.9844 per share and Series B shareholders totaling approximately $976,000 or $0.375 per share and $2.0 million or $0.75, respectively.

11. NET INCOME PER COMMON SHARE

The following table presents a reconciliation of the net income and shares used in calculating basic and diluted earnings per share for the quarters and six months ended June 30, 2011 and 2010.

	For the Quarters Ended					For the Six Months Ended
	June 30, 2011		June 30, 2010			June 30, 2011		June 30, 2010
Net income	$	120,817	$	(218,229	)	$	820,712	$	62,836
Less: Preferred stock dividends		4,267		4,625			8,534		9,250
Net income available to common shareholders, prior to adjustment for dilutive potential common shares, if necessary	$	116,550	$	(222,854	)	$	812,178	$	53,586
Add: Preferred Series B dividends, if Series B shares are dilutive		618		-			1,237		-
Add: Interest on Convertible Senior Notes, if Notes are dilutive		-		-			12,000		-
Net income available to common shareholders, as adjusted	$	117,168	$	(222,854	)	$	825,415	$	53,586

Weighted average shares of common stock outstanding-basic		822,623		559,701			787,713		557,360
Add: Effect of dilutive stock options		490		-			432		58
Add: Series B Cumulative Convertible Preferred Stock, if dilutive		4,642		-			4,642		-
Add: Convertible Senior Notes, if dilutive		-		-			34,835		-
Weighted average shares of common stock outstanding-diluted		827,755		559,701			827,622		557,418

Options to purchase 572,000 and 572,000 shares of common stock, were outstanding and considered anti-dilutive as their exercise price exceeded the average stock price for the quarter and six months ended June 30, 2011. Options to purchase 1.8 million and 1.1 million shares of common stock were outstanding and considered anti-dilutive as their exercise price exceeded the average stock price for the quarter and six months ended June 30, 2010, respectively.

12. LONG-TERM STOCK INCENTIVE PLANS

The Company has adopted the 2010 Equity Incentive Plan, which authorizes the Compensation Committee of the board of directors to grant options, stock appreciation rights, dividend equivalent rights, or other share-based award, including restricted shares up to an aggregate of 25,000,000 shares, subject to adjustments as provided in the 2010 Equity Incentive Plan. On June 27, 2011 the Company granted to each non-management director of the Company options to purchase 1,250 shares of the Company’s common stock under the 2010 Equity Incentive Plan. The stock options were issued at the current market price on the date of grant and immediately vested with a contractual term of 5 years. The grant date fair value is calculated using the Black-Scholes option valuation model. The Company had adopted a long term stock incentive plan for executive officers, key employees and non-employee directors (the “Prior Plan”). The Prior Plan authorized the Compensation Committee of the board of directors to grant awards, including non-qualified options as well as incentive stock options as defined under Section 422 of the Code. The Prior Plan authorized the granting of options or other awards for an aggregate of the greater of 500,000 shares or 9.5% of the diluted outstanding shares of the Company’s common stock, up to ceiling of 8,932,921 shares. No further awards will be made under the Prior Plan, although existing awards will remain effective.

Stock options were issued at the market price on the date of grant, subject to an immediate or four year vesting in four equal installments with a contractual term of 5 or 10 years. During the quarter ended June 30, 2011, the Company granted 325,000 restricted shares that vest over four years. The grant date fair value was calculated using the Black-Scholes option valuation model for options and stock grants.

	For the Six Months Ended
	June 30, 2011					June 30, 2010
	Number of Shares			Weighted Average Exercise Price		Number of Shares			Weighted Average Exercise Price
Options outstanding at the beginning of period		6,891,975		$	15.20		7,271,503		$	15.20
Granted		7,500			18.67		7,500			17.24
Exercised		(462,470	)		13.22		(147,579	)		12.27
Forfeited		-			-		(7,725	)		15.30
Expired		(3,750	)		12.15		(6,250	)		18.26
Options outstanding at the end of period		6,433,255		$	15.49		7,117,449		$	15.25
Options exercisable at the end of the period		4,411,630		$	16.06		3,785,774		$	16.01