The Company had outstanding $56.4 billion and $54.6 billion of repurchase agreements with weighted average borrowing rates of 2.09% and 2.11%, after giving effect to the Company’s interest rate swaps, and weighted average remaining maturities of 163 days and 170 days as of June 30, 2010 and December 31, 2009, respectively. Investment Securities pledged as collateral under these repurchase agreements and interest rate swaps had an estimated fair value of $60.7 billion at June 30, 2010 and $57.9 billion at December 31, 2009.
At June 30, 2010 and December 31, 2009, the repurchase agreements had the following remaining maturities:
| |
|
June 30,
2010
|
|
|
December 31, 2009
|
|
| |
|
(dollars in thousands)
|
|
|
1 day
|
|
$ |
6,686,939 |
|
|
$ |
- |
|
|
2 to 29 days
|
|
|
24,017,921 |
|
|
|
38,341,206 |
|
|
30 to 59 days
|
|
|
7,962,229 |
|
|
|
7,163,255 |
|
|
60 to 89 days
|
|
|
3,027,459 |
|
|
|
192,005 |
|
|
90 to 119 days
|
|
|
3,686,542 |
|
|
|
139,966 |
|
|
Over 120 days
|
|
|
11,005,745 |
|
|
|
8,761,696 |
|
|
Total
|
|
$ |
56,386,835 |
|
|
$ |
54,598,128 |
|
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, 2010 or December 31, 2009.
The Company has entered into structured term repurchase agreements which provide the counterparty with the right to call the balance prior to maturity date. These repurchase agreements totaled $7.0 billion and the fair value of the option to call was ($378.2 million) at June 30, 2010. The repurchase agreements totaled $7.0 billion and the fair value of the option to call was ($352.4 million) at December 31, 2009. 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 structured term repurchase agreements are modeled and priced such that the Company pays fixed interest rates to the counterparty and receives floating interest rates. The counterparty has the option to cancel the swap after an initial lockout period. Therefore the structured repurchase agreements are priced as a combination of an interest rate swap with an embedded call option.
Additionally, as of June 30, 2010 the Company has entered into a repurchase agreement with a term of over one year. The amount of the repurchase agreement is $300 million and it has an estimated fair value of ($8.0 million).
The Company reports cash flows from repurchase agreements as financing activities in the Statements of Cash Flows. RCap reports cash flows from repurchase agreements as operating activities in the Statements of Cash Flows.
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, 2010, 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 Mortgage-Backed Securities pledged as collateral for swaps. The Company does not anticipate any defaults by its counterparties.
The Company’s swaps are used to lock in the fixed rate related to a portion of its current and anticipated future 30-day term repurchase agreements.
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. This risk is minimized through RCap trading as a customer of an appropriately licensed futures and options broker dealer.
The location and fair value of derivative instruments reported in the Consolidated Statement of Financial Condition as of June 30, 2010 and December 31, 2009 are as follows:
| |
Location on
Statement of
Financial Condition
|
|
Notional Amount
|
|
|
Net Estimated Fair
Value/Carrying Value
|
|
| |
(dollars in thousands) |
|
|
Interest rate swaps
|
|
|
|
|
|
|
|
|
June 30, 2010
|
Liabilities
|
|
$ |
25,458,250 |
|
|
$ |
(1,174,788 |
) |
|
June 30, 2010
|
Assets
|
|
|
- |
|
|
|
- |
|
|
December 31, 2009
|
Liabilities
|
|
$ |
18,823,300 |
|
|
$ |
533,362 |
|
|
December 31, 2009
|
Assets
|
|
$ |
2,700,000 |
|
|
$ |
5,417 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Location on
Statement of
Financial Condition
|
|
Number of
Contracts
|
|
|
Net Estimated Fair
Value/Carrying Value
|
|
| |
(dollars in thousands) |
|
|
Other derivative contracts
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
Liabilities
|
|
|
2,726 |
|
|
$ |
216 |
|
|
June 30, 2010
|
Assets
|
|
|
- |
|
|
|
- |
|
The effect of derivatives on the Statement of Operations and Comprehensive Income is as follows:
| |
|
Interest Expense
|
|
|
Unrealized Gain (Loss)
|
|
| |
|
(dollars in thousands)
|
|
|
Interest rate swaps
|
|
|
|
|
|
|
|
For the Quarter Ended June 30, 2010
|
|
$ |
175,535 |
|
|
$ |
(593,038 |
) |
|
For the Quarter Ended June 30, 2009
|
|
$ |
175,080 |
|
|
$ |
230,207 |
|
|
For the Six Months Ended June 30, 2010
|
|
$ |
356,373 |
|
|
$ |
(709,770 |
) |
|
For the Six Months Ended June 30, 2009
|
|
$ |
351,639 |
|
|
$ |
265,752 |
|
| |
|
|
|
|
|
|
|
|
|
Other derivative contracts
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended June 30, 2010
|
|
$ |
- |
|
|
$ |
(216 |
) |
|
For the Six Months Ended June 30, 2010
|
|
$ |
- |
|
|
$ |
(216 |
) |
The weighted average pay rate on the Company’s interest rate swaps at June 30, 2010 was 3.48% and the weighted average receive rate was 0.38%. The weighted average pay rate at June 30, 2009 was 4.20% and the weighted average receive rate was 0.38%.
During the six months ended June 30, 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, 2010 of 46.6070 and 50.2726 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 a conversion price of June 30, 2010 of approximately $19.8915 per share of Common Stock, subject to adjustment in certain circumstances.
(A) Common Stock Issuances
During the quarter and six months ended June 30, 2010, 57,000 and 148,000 options were exercised under the Long-Term Stock Incentive Plan, or Incentive Plan, for an aggregate exercise price of $753,000 and $1.8 million, 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, 2010, the Company raised $640,000 and $116.2 million by issuing 38,000 and 6.5 million shares, through the Direct Purchase and Dividend Reinvestment Program.
During the year ended December 31, 2009, 423,160 options were exercised under the Incentive Plan for an aggregate exercise price of $4.9 million. During the year ended December 31, 2009, 7,550 shares of restricted stock were issued under the Incentive Plan.
During the year ended December 31, 2009, 1.4 million shares of Series B Preferred Stock were converted into 2.8 million shares of common stock.
During the year ended December 31, 2009, the Company raised $141.8 million by issuing 8.4 million shares, through the Direct Purchase and Dividend Reinvestment Program.
(B) Preferred Stock
At June 30, 2010 and December 31, 2009, 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 Preferred Stock. Through June 30, 2010, the Company had declared and paid all required quarterly dividends on the Series A Preferred Stock.
At June 30, 2010 and December 31, 2009, the Company had issued and outstanding 2,603,969 and 2,604,614 shares, respectively, of Series B Cumulative Convertible Preferred Stock (“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, 2010 and December 31, 2009, the conversion ratio was 2.4925 and 2.3449 shares of common stock per $25 liquidation preference, respectively. 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, 2010, the Company had declared and paid all required quarterly dividends on the Series B Preferred Stock. 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 year ended December 31, 2009, 1.4 million shares of Series B Preferred Stock were converted into 2.8 million shares of common stock.
(C) Distributions to Shareholders
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 $0.492188 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.
During the quarter and six months ended June 30, 2009, the Company declared dividends to common shareholders totaling $326.6 million or $0.60 per share and $598.8 million or $1.10 per share, respectively, which were paid to shareholders on July 29, 2009. During the quarter and six months ended June 30, 2009, the Company declared dividends to Series A Preferred shareholders totaling approximately $3.6 million or $0.492188 per share and $7.3 million or $0.9844, and Series B shareholders totaling approximately $977,000 or $0.375 per share and $2.0 million or $0.75 per share, respectively.
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, 2010 and 2009.
| |
|
For the Quarters Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
| |
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Net ( loss) income (related) attributable to controlling interest
|
|
$ |
(218,229 |
) |
|
$ |
597,054 |
|
|
$ |
62,836 |
|
|
$ |
946,947 |
|
|
Less: Preferred stock dividends
|
|
|
4,625 |
|
|
|
4,625 |
|
|
|
9,250 |
|
|
|
9,251 |
|
|
Net income available to common shareholders, prior to adjustment for Series B dividends and Convertible Senior Notes interest, if necessary
|
|
$ |
(222,854 |
) |
|
$ |
592,429 |
|
|
$ |
53,586 |
|
|
$ |
937,696 |
|
|
Add: Preferred Series B dividends, if Series B shares are dilutive
|
|
|
- |
|
|
|
977 |
|
|
|
- |
|
|
|
1,955 |
|
|
Add: Convertible Senior Notes interest, if Convertible Senior Notes are dilutive
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Net income available to common shareholders, as adjusted
|
|
$ |
(222,854 |
) |
|
$ |
593,406 |
|
|
$ |
53,586 |
|
|
$ |
939,651 |
|
|
Weighted average shares of common stock outstanding-basic
|
|
|
559,701 |
|
|
|
544,345 |
|
|
|
557,360 |
|
|
|
543,628 |
|
|
Add: Effect of dilutive stock options and
|
|
|
- |
|
|
|
38 |
|
|
|
58 |
|
|
|
50 |
|
|
Series B Cumulative Convertible Preferred Stock
|
|
|
- |
|
|
|
5,717 |
|
|
|
- |
|
|
|
5,717 |
|
|
Convertible Senior Notes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Weighted average shares of common stock outstanding-diluted
|
|
|
559,701 |
|
|
|
550,100 |
|
|
|
557,418 |
|
|
|
549,395 |
|
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. Options to purchase 4.5 million and 4.5 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, 2009, respectively.
The Company has adopted a long term stock incentive plan for executive officers, key employees and non-employee directors (the “Incentive Plan”). The Incentive 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 Incentive 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 Incentive Plan, although existing awards will remain effective. Stock options were issued at the current 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. The grant date fair value is calculated using the Black-Scholes option valuation model.
| |
|
For the Six Months Ended
|
|
| |
|
June 30, 2010
|
|
|
June 30, 2009
|
|
| |
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number of
Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Options outstanding at the beginning of period
|
|
|
7,271,503 |
|
|
$ |
15.20 |
|
|
|
5,180,164 |
|
|
$ |
15.87 |
|
|
Granted
|
|
|
- |
|
|
|
- |
|
|
|
2,537,000 |
|
|
|
13.26 |
|
|
Exercised
|
|
|
(147,579 |
) |
|
|
12.27 |
|
|
|
(64,262 |
) |
|
|
11.24 |
|
|
Forfeited
|
|
|
(7,725 |
) |
|
|
15.30 |
|
|
|
(10,000 |
) |
|
|
15.61 |
|
|
Expired
|
|
|
(6,250 |
) |
|
|
18.26 |
|
|
|
(11,250 |
) |
|
|
17.32 |
|
|
Options outstanding at the end of period
|
|
|
7,109,949 |
|
|
$ |
15.26 |
|
|
|
7,631,652 |
|
|
$ |
15.04 |
|
|
Options exercisable at the end of period
|
|
|
3,779,524 |
|
|
$ |
16.01 |
|
|
|
2,229,577 |
|
|
$ |
16.13 |
|
The weighted average remaining contractual term was approximately 7.1 years for stock options outstanding and approximately 6.0 years for stock options exercisable as of June 30, 2010. As of June 30, 2010, there was approximately $11.2 million of total unrecognized compensation cost related to nonvested share-based compensation awards. That cost is expected to be recognized over a weighted average period of 2.5 years.
The weighted average remaining contractual term was approximately 8.0 years for stock options outstanding and approximately 5.3 years for stock options exercisable as of June 30, 2009. As of June 30, 2009, there was approximately $15.6 million of total unrecognized compensation cost related to nonvested share-based compensation awards. That cost is expected to be recognized over a weighted average period of 3.4 years.
On May 27, 2010, at the 2010 Annual Meeting of Stockholders of the Company, the stockholders approved the 2010 Equity Incentive Plan. The 2010 Equity Incentive Plan 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 28, 2010, 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.
| |
|
For the Six Months Ended
|
|
| |
|
June 30, 2010
|
|
|
June 30, 2009
|
|
| |
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number of
Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Options outstanding at the beginning of period
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Granted
|
|
|
7,500 |
|
|
$ |
17.24 |
|
|
|
- |
|
|
|
- |
|
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Forfeited
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Expired
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Options outstanding at the end of period
|
|
|
7,500 |
|
|
$ |
17.24 |
|
|
|
- |
|
|
|
- |
|
|
Options exercisable at the end of period
|
|
|
7,500 |
|
|
$ |
17.24 |
|
|
|
- |
|
|
|
- |
|
As a REIT, the Company is not subject to federal income tax on earnings distributed to its shareholders. Most states recognize REIT status as well. The Company has decided to distribute the majority of its income and retain a portion of the permanent difference between book and taxable income arising from Section 162(m) of the Code pertaining to employee remuneration.
During the quarter and six months ended June 30, 2010, the Company’s taxable REIT subsidiaries recorded $1.7 million and $3.0 million, respectively, of income tax expense for income attributable to those subsidiaries, and the portion of earnings retained based on Code Section 162(m) limitations. During the quarter and six months ended June 30, 2010, the Company recorded $7.1 million and $13.2 million, respectively, of income tax expense for a portion of earnings retained based on Section 162(m) limitations. The effective tax rate was 51% for the six months ended June 30, 2010.
During the quarter and six months ended June 30, 2009, the Company’s taxable REIT subsidiaries recorded $1.6 million and $2.1 million, respectively, of income tax expense for income attributable to those subsidiaries, and the portion of earnings retained based on Code Section 162(m) limitations. During the quarter and six months ended June 30, 2009, the Company recorded $6.2 million and 12.1 million, respectively, of income tax expense for a portion of earnings retained based on Section 162(m) limitations. The effective tax rate was 54% for the six months ended June 30, 2009.
The effective tax rates were calculated based on the Company’s estimated taxable income after dividends paid deduction and differ from the federal statutory rate as a result of state and local taxes and permanent difference pertaining to employee remuneration as discussed above.
The statutory combined federal, state, and city corporate tax rate is 45%. This amount is applied to the amount of estimated REIT taxable income retained (if any, and only up to 10% of ordinary income as all capital gain income is distributed) and to taxable income earned at the taxable subsidiaries. Thus, as a REIT, the Company’s effective tax rate is significantly less as it is allowed to deduct dividend distributions.
The Company amended its lease to increase the amount of space it leases and extended it to December 2015. Merganser has a non-cancelable lease for office space, which commenced on May 2003 and expires in May 2014. Merganser subleases a portion of its leased space to a subtenant. The Company’s aggregate future minimum lease payments total $8.8 million. The following table details the lease payments.
|
Year Ending December
|
|
Lease Commitment
|
|
|
Sublease Income
|
|
|
Net Amount
|
|
| |
|
(dollars in thousands) |
|
|
2010 (remaining)
|
|
$ |
1,050 |
|
|
$ |
85 |
|
|
$ |
965 |
|
|
2011
|
|
|
2,120 |
|
|
|
169 |
|
|
|
1,951 |
|
|
2012
|
|
|
2,130 |
|
|
|
70 |
|
|
|
2,060 |
|
|
2013
|
|
|
2,170 |
|
|
|
- |
|
|
|
2,170 |
|
|
2014
|
|
|
1,677 |
|
|
|
- |
|
|
|
1,677 |
|
| |
|
$ |
9,147 |
|
|
$ |
324 |
|
|
$ |
8,823 |
|
From time to time, the Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Company’s consolidated financial statements and therefore no accrual is required as of June 30, 2010 and December 31, 2009.
Merganser’s prior owners may receive additional consideration as an earn-out during 2012 if Merganser meets specific performance goals under the merger agreement. The Company cannot currently calculate how much consideration will be paid under the earn-out provisions because the payment amount will vary depending upon whether and the extent to which Merganser achieves specific performance goals. Any amounts paid under this provision will be recorded as additional goodwill.
The primary market risk to the Company is interest rate risk. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond the Company’s control. Changes in the general level of interest rates can affect net interest income, which is the difference between the interest income earned on interest-earning assets and the interest expense incurred in connection with the interest-bearing liabilities, by affecting the spread between the interest-earning assets and interest-bearing liabilities. Changes in the level of interest rates also can affect the value of the Investment Securities and the Company’s ability to realize gains from the sale of these assets. A decline in the value of the Investment Securities pledged as collateral for borrowings under repurchase agreements could result in the counterparties demanding additional collateral pledges or liquidation of some of the existing collateral to reduce borrowing levels. Liquidation of collateral at losses could have an adverse accounting impact, as discussed in Note 1.
The Company seeks to manage the extent to which net income changes as a function of changes in interest rates by matching adjustable-rate assets with variable-rate borrowings. The Company may seek to mitigate the potential impact on net income of periodic and lifetime coupon adjustment restrictions in the portfolio of Investment Securities by entering into interest rate agreements such as interest rate caps and interest rate swaps. As of June 30, 2010 and December 31, 2009 the Company entered into interest rate swaps to pay a fixed rate and receive a floating rate of interest, with a total notional amount of $25.5 billion and $21.5 billion, respectively.
Changes in interest rates may also have an effect on the rate of mortgage principal prepayments and, as a result, prepayments on Mortgage-Backed Securities. The Company will seek to mitigate the effect of changes in the mortgage principal repayment rate by balancing assets purchased at a premium with assets purchased at a discount. To date, the aggregate premium exceeds the aggregate discount on the Mortgage-Backed Securities. As a result, prepayments, which result in the expensing of unamortized premium, will reduce net income compared to what net income would be absent such prepayments.
At June 30, 2010, the Company had $14.3 billion of repurchase agreements outstanding with RCap. The weighted average interest rate is 0.35% and the terms are one to two months. These agreements are collateralized by agency Mortgage Backed Securities, with an estimated market value of $14.9 billion. For the quarter ended June 30, 2010, RCap earned $11.1 million in interest income from the Company.
At December 31, 2009, the Company had lent $259.0 million to Chimera in a reverse repurchase agreement which was callable weekly. This amount is included in the principal amount which approximates fair value in the Company’s Statement of Financial Condition. The interest rate at December 31, 2009 was at the rate of 1.72%.
On April 15, 2009, the Company purchased approximately 25.0 million shares of Chimera common stock at a price of $3.00 for aggregate proceeds of approximately $74.9 million. On May 27, 2009, the Company purchased approximately 4.7 million shares of Chimera common stock at a price of $3.22 for aggregate proceeds of approximately $15.2 million. Chimera is managed by FIDAC, and the Company owed approximately 5.1% of Chimera's common stock at June 30, 2010.
On September 22, 2009, the Company acquired 4,527,778 shares of CreXus Investment Corp. (“CreXus”) common stock at a price of $15.00 per share. The Company owns approximately 25% of CreXus and accounts for its investment using the equity method.
RCap acted as a book-running manager in Chimera’s underwritten public offering of 115 million shares of its common stock. RCap recognized net income from the underwriting of $500,000.
RCap is subject to regulations of the securities business that include but are not limited to trade practices, use and safekeeping of funds and securities, capital structure, recordkeeping, and conduct of directors, officers and employees.
As a self clearing, registered broker dealer, RCap. is subject to the minimum net capital requirements of the Financial Industry Regulatory Authority (“FINRA”). As of June 30, 2010, RCap had a minimum net capital requirement of $253,000 and would be required to notify FINRA if capital was to fall below the early warning threshold of $304,000. RCap consistently operates with capital significantly in excess of its regulatory capital requirements. RCap’s regulatory net capital as defined by SEC Rule 15c3-1, as of June 30, 2010 was $176.9 million with excess net capital of $176.6 million.
Subsequent to the end of the second quarter 2010, the Company issued 60 million shares of its common stock in a public offering at a price of $17.46 per share, resulting in aggregate net proceeds to the Company of approximately $1.05 billion before expenses. The underwriters have an option to purchase a maximum of 9 million additional shares of the Company’s common stock to cover overallotments. RCap acted as a book-running manager in this public offering.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Special Note Regarding Forward-Looking Statements
Certain statements contained in this quarterly report, and certain statements contained in our future filings with the Securities and Exchange Commission (the "SEC" or the "Commission"), in our press releases or in our other public or shareholder communications may not be based on historical facts and are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements, which are based on various assumptions, (some of which are beyond our control) may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "anticipate," "continue," or similar terms or variations on those terms, or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, changes in interest rates, changes in the yield curve, changes in prepayment rates, the availability of mortgage-backed securities and other securities for purchase, the availability of financing, and, if available, the terms of any financings, changes in the market value of our assets, changes in business conditions and the general economy, changes in governmental regulations affecting our business, and our ability to maintain our classification as a REIT for federal income tax purposes, and risks associated with the investment advisory business of our subsidiaries, including the removal by their clients of assets they manage, their regulatory requirements, and competition in the investment advisory business, and risks associated with the broker dealer business of our subsidiary. For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see our most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q. We do not undertake and specifically disclaim any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
Overview
We are a real estate investment trust, or REIT, that owns, manages, and finances a portfolio of real estate related investment securities, including mortgage pass-through certificates, collateralized mortgage obligations (or CMOs), agency callable debentures, and other securities representing interests in or obligations backed by pools of mortgage loans. Our principal business objective is to generate net income for distribution to our stockholders from the spread between the interest income on our investment securities and the costs of borrowing to finance our acquisition of investment securities and from dividends we receive from our subsidiaries. Our wholly-owned subsidiaries offer diversified real estate, asset management and other financial services. FIDAC and Merganser are our wholly-owned taxable REIT subsidiaries that are registered investment advisors that generate advisory and service fee income. RCap is our wholly-owned broker dealer taxable REIT subsidiary which generates fee income.
We are primarily engaged in the business of investing, on a leveraged basis, in mortgage pass-through certificates, CMOs and other mortgage-backed securities representing interests in or obligations backed by pools of mortgage loans issued or guaranteed by Federal Home Loan Mortgage Corporation (“Freddie Mac”), Federal National Mortgage Association (“Fannie Mae”) and the Government National Mortgage Association (“Ginnie Mae” and together with Freddie Mac and Fannie Mae the “Agencies”) (collectively, “Mortgage-Backed Securities”). We also invest in Federal Home Loan Bank (“FHLB”), Freddie Mac and Fannie Mae debentures. The Mortgage-Backed Securities and agency debentures are collectively referred to herein as “Investment Securities.”
Under our capital investment policy, at least 75% of our total assets must be comprised of high-quality mortgage-backed securities and short-term investments. High quality securities means securities that (1) are rated within one of the two highest rating categories by at least one of the nationally recognized rating agencies, (2) are unrated but are guaranteed by the United States government or an agency of the United States government, or (3) are unrated but we determine them to be of comparable quality to rated high-quality mortgage-backed securities.
The remainder of our assets, comprising not more than 25% of our total assets, may consist of other qualified REIT real estate assets which are unrated or rated less than high quality, but which are at least “investment grade” (rated “BBB” or better by Standard & Poor’s Corporation (“S&P”) or the equivalent by another nationally recognized rating agency) or, if not rated, we determine them to be of comparable credit quality to an investment which is rated “BBB” or better. In addition, we may directly or indirectly invest part of this remaining 25% of our assets in other types of securities, including without limitation, unrated debt, equity or derivative securities, to the extent consistent with our REIT qualification requirements. The derivative securities in which we invest may include securities representing the right to receive interest only or a disproportionately large amount of interest, as well as inverse floaters, which may have imbedded leverage as part of their structural characteristics.
We may acquire Mortgage-Backed Securities backed by single-family residential mortgage loans as well as securities backed by loans on multi-family, commercial or other real estate related properties. To date, substantially all of the Mortgage-Backed Securities that we have acquired have been backed by single-family residential mortgage loans.
We have elected to be taxed as a REIT for federal income tax purposes. Pursuant to the current federal tax regulations, one of the requirements of maintaining our status as a REIT is that we must distribute at least 90% of our REIT taxable income (determined without regard to the deduction for dividends paid and by excluding any net capital gain) to our stockholders, subject to certain adjustments.
The results of our operations are affected by various factors, many of which are beyond our control. Our results of operations primarily depend on, among other things, our net interest income, the market value of our assets and the supply of and demand for such assets. Our net interest income, which reflects the amortization of purchase premiums and accretion of discounts, varies primarily as a result of changes in interest rates, borrowing costs and prepayment speeds, the behavior of which involves various risks and uncertainties. Prepayment speeds, as reflected by the Constant Prepayment Rate, or CPR, and interest rates vary according to the type of investment, conditions in financial markets, competition and other factors, none of which can be predicted with any certainty. In general, as prepayment speeds on our Mortgage-Backed Securities portfolio increase, related purchase premium amortization increases, thereby reducing the net yield on such assets. The CPR on our Mortgage-Backed Securities portfolio averaged 32%, and 19% for the quarters ended June 30, 2010 and 2009, respectively. Since changes in interest rates may significantly affect our activities, our operating results depend, in large part, upon our ability to effectively manage interest rate risks and prepayment risks while maintaining our status as a REIT.
The table below provides quarterly information regarding our average balances, interest income, yield on assets, average repurchase agreement balances, interest expense, cost of funds, net interest income and net interest rate spreads for the quarterly periods presented.
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|
Average
Investment
Securities
Held (1)
|
|
|
|
|
|
Yield on
Average
Investment
Securities
|
|
|
Average
Balance of
Repurchase
Agreements
|
|
|
Interest
Expense
|
|
|
Average
Cost of
Funds
|
|
|
Net Interest
Income
|
|
|
Net
Interest
Rate
Spread
|
|
| (ratios for the quarters have been annualized, dollars in thousands) |
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Quarter Ended
June 30, 2010
|
|
$ |
61,952,037 |
|
|
$ |
643,682 |
|
|
|
4.16% |
|
|
$ |
56,190,308 |
|
|
$ |
280,242 |
|
|
|
2.00% |
|
|
$ |
363,4340 |
|
|
|
2.16 |
% |
|
Quarter Ended
March 31, 2010
|
|
$ |
61,983,900 |
|
|
$ |
654,389 |
|
|
|
4.22% |
|
|
$ |
55,298,875 |
|
|
$ |
276,509 |
|
|
|
2.00% |
|
|
$ |
377,880 |
|
|
|
2.22 |
% |
|
Quarter Ended
December 31, 2009
|
|
$ |
62,128,320 |
|
|
$ |
751,663 |
|
|
|
4.84% |
|
|
$ |
55,919,885 |
|
|
$ |
286,764 |
|
|
|
2.05% |
|
|
$ |
464,899 |
|
|
|
2.79 |
% |
|
Quarter Ended
September 30, 2009
|
|
$ |
60,905,025 |
|
|
$ |
744,523 |
|
|
|
4.89% |
|
|
$ |
54,914,435 |
|
|
$ |
307,777 |
|
|
|
2.24% |
|
|
$ |
436,746 |
|
|
|
2.65 |
% |
|
Quarter Ended
June 30, 2009
|
|
$ |
56,420,189 |
|
|
$ |
710,401 |
|
|
|
5.04% |
|
|
$ |
50,114,663 |
|
|
$ |
322,596 |
|
|
|
2.57% |
|
|
$ |
387,805 |
|
|
|
2.47 |
% |
|
Quarter Ended
March 31, 2009
|
|
$ |
54,763,268 |
|
|
$ |
716,015 |
|
|
|
5.23% |
|
|
$ |
48,497,444 |
|
|
$ |
378,625 |
|
|
|
3.12% |
|
|
$ |
337,390 |
|
|
|
2.11 |
% |
(1) Does not reflect unrealized gains/(losses).
The following table presents the CPR experienced on our Mortgage-Backed Securities portfolio, on an annualized basis, for the quarterly periods presented.
|
Quarter Ended
|
CPR
|
|
June 30, 2010
|
32%
|
|
March 31, 2010
|
34%
|
|
December 31, 2009
|
19%
|
|
September 30, 2009
|
21%
|
|
June 30, 2009
|
19%
|
| |
|
We believe that the CPR in future periods will depend, in part, on changes in and the level of market interest rates across the yield curve, with higher CPRs expected during periods of declining interest rates and lower CPRs expected during periods of rising interest rates.
We continue to explore alternative business strategies, alternative investments and other strategic initiatives to complement our core business strategy of investing, on a leveraged basis, in high quality Investment Securities. No assurance, however, can be provided that any such strategic initiative will or will not be implemented in the future.
For the purposes of computing ratios relating to equity measures, throughout this report, equity includes Series B preferred stock, which has been treated under GAAP as temporary equity. In this “Management Discussion and Analysis of Financial Condition and Results of Operations”, net income attributable to controlling interest is referred to as net income.
Recent Developments
The credit crisis which commenced in August 2007 appears to have begun to recover through the second quarter of 2010. During this period of market dislocation, fiscal and monetary policymakers have established new liquidity facilities for primary dealers and commercial banks, reduced short-term interest rates, and passed legislation that is intended to address the challenges of mortgage borrowers and lenders. This legislation, the Housing and Economic Recovery Act of 2008, seeks to forestall home foreclosures for distressed borrowers and assist communities with foreclosure problems.
Subsequent to June 30, 2008, there were increased market concerns about Freddie Mac and Fannie Mae’s ability to withstand future credit losses associated with securities held in their investment portfolios, and on which they provide guarantees, without the direct support of the U.S. Government. In September 2008, Fannie Mae and Freddie Mac were placed into the conservatorship of the Federal Housing Finance Agency, or FHFA, their federal regulator, pursuant to its powers under The Federal Housing Finance Regulatory Reform Act of 2008, a part of the Housing and Economic Recovery Act of 2008. As the conservator of Fannie Mae and Freddie Mac, the FHFA controls and directs the operations of Fannie Mae and Freddie Mac and may (1) take over the assets of and operate Fannie Mae and Freddie Mac with all the powers of the shareholders, the directors, and the officers of Fannie Mae and Freddie Mac and conduct all business of Fannie Mae and Freddie Mac; (2) collect all obligations and money due to Fannie Mae and Freddie Mac; (3) perform all functions of Fannie Mae and Freddie Mac which are consistent with the conservator’s appointment; (4) preserve and conserve the assets and property of Fannie Mae and Freddie Mac; and (5) contract for assistance in fulfilling any function, activity, action or duty of the conservator.
In addition to FHFA becoming the conservator of Fannie Mae and Freddie Mac, the Treasury and FHFA entered into Preferred Stock Purchase Agreements (PSPAs) between the Treasury and Fannie Mae and Freddie Mac pursuant to which the Treasury will ensure that each of Fannie Mae and Freddie Mac maintains a positive net worth. On December 24, 2009, the U.S. Treasury amended the terms of the U.S. Treasury’s PSPAs with Fannie Mae and Freddie Mac to remove the $200 billion per institution limit established under the PSPAs until the end of 2012. The U.S. Treasury also amended the PSPAs with respect to the requirements for Fannie Mae and Freddie Mac to reduce their portfolios.
The Emergency Economic Stabilization Act of 2008, or EESA, was also enacted. The EESA provides the U.S. Secretary of the Treasury with the authority to establish a Troubled Asset Relief Program, or TARP, to purchase from financial institutions up to $700 billion of equity or preferred securities, residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, as well as any other financial instrument that the U.S. Secretary of the Treasury, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, upon transmittal of such determination, in writing, to the appropriate committees of the U.S. Congress. The EESA also provides for a program that would allow companies to insure their troubled assets.
In addition, the U.S. Government, the Board of Governors of the Federal Reserve System, or Federal Reserve, and other governmental and regulatory bodies have taken or are considering taking other actions to address the financial crisis. The Term Asset-Backed Securities Loan Facility, or TALF, was first announced by the U.S. Department of Treasury, or the Treasury, on November 25, 2008, and was expanded in size and scope since its initial announcement. Under the TALF, the Federal Reserve Bank of New York made non-recourse loans to borrowers to fund their purchase of eligible assets, currently certain asset-backed securities and commercial mortgage-backed securities but not residential mortgage-backed securities. The Federal Reserve Bank of New York has announced that it stopped accepting applications for credit under the TALF program on June 30, 2010.
In addition, on March 23, 2009 the government announced that the Treasury in conjunction with the Federal Deposit Insurance Corporation, or FDIC, and the Federal Reserve, would create the Public-Private Investment Program, or PPIP. The PPIP aims to recreate a market for specific illiquid residential and commercial loans and securities through a number of joint public and private investment funds. The PPIP is designed to draw new private capital into the market for these securities and loans by providing government equity co-investment and attractive public financing. It is not possible for us to assess how these programs impact our business.
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (or the Dodd-Frank Act). The Dodd-Frank Act provides for new regulations on financial institutions and creates new supervisory and advisory bodies, including the new Consumer Financial Protection Bureau. The Dodd-Frank Act tasks many agencies with issuing a variety of new regulations, including rules related to mortgage origination and servicing, securitization and derivatives. As the Dodd-Frank Act has only recently been enacted and because a significant number of regulations have yet to be proposed, it is not possible for us to predict how the Dodd-Frank Act will impact our business.
There can be no assurance that the EESA, TALF, PPIP, the Dodd-Frank Act or other policy initiatives will have a beneficial impact on the financial markets. We cannot predict whether or when such actions may occur or what impact, if any, such actions could have on our business, results of operations and financial condition.
Market conditions could adversely affect one or more of our lenders and could cause one or more of our lenders to be unwilling or unable to provide us with additional financing. This could potentially increase our financing costs and reduce liquidity. If one or more major market participants fails, it could negatively impact the marketability of all fixed income securities, including Agency mortgage-backed securities, and this could negatively impact the value of the securities in our portfolio, thus reducing its net book value. Furthermore, if many of our lenders are unwilling or unable to provide us with additional financing, we could be forced to sell our Investment Securities at an inopportune time when prices are depressed. We do not anticipate having difficulty converting our assets to cash or extending financing, due to the fact that our investment securities have an actual or implied “AAA” rating and principal payment is guaranteed.
Earlier this year, Freddie Mac and Fannie Mae began purchasing seriously delinquent mortgage loans out of securities that they currently guarantee. The loans which they consider seriously delinquent are those loans that are more than 120 days past due. The repurchases materially impacted the rate of principal prepayments on our Agency mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac because of higher premium amortization expense, a decline in higher yielding Agency mortgage-backed securities assets and an increase in lower yielding investments. As of June 30, 2010, we had net purchase premiums of $1.8 billion, or 2.7% of current par value, on our Agency mortgage-backed securities.
Critical Accounting Policies
Management’s discussion and analysis of financial condition and results of operations is based on the amounts reported in our financial statements. These financial statements are prepared in conformity with GAAP. In preparing the financial statements, management is required to make various judgments, estimates and assumptions that affect the reported amounts. Changes in these estimates and assumptions could have a material effect on our financial statements. The following is a summary of our policies most affected by management’s judgments, estimates and assumptions.
Fair Value of Investment Securities: All assets classified as available-for-sale are reported at fair value, based on market prices. Although we generally intend to hold most of our Investment Securities until maturity, we may, from time to time, sell any of our Investment Securities as part our overall management of our portfolio. Accordingly, we are required to classify all of our Investment Securities as available-for-sale. Our policy is to obtain fair values from independent sources. Fair values from independent sources are compared to internal prices for reasonableness. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. The determination of whether a security is other-than-temporarily impaired involves judgments and assumptions based on subjective and objective factors. Consideration is given to (1) our intent to sell the Investment Securities, (2) whether it is more likely than not that we will be required to sell the Investment Securities before recovery, or (3) whether we do not expect to recover the entire amortized cost basis of the Investment 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 statement of earnings, while the balance of impairment related to other factors will be recognized in other comprehensive income (“OCI”).
Interest Income: 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 or accreted into interest income over the projected lives of the securities using the interest method. Our policy for estimating prepayment speeds for calculating the effective yield is to evaluate historical performance, Wall Street consensus prepayment speeds, and current market conditions. If our estimate of prepayments is incorrect, we may be required to make an adjustment to the amortization or accretion of premiums and discounts that would have an impact on future income.
Derivative Financial Instruments/Hedging Activity: Prior to the fourth quarter of 2008, we designated interest rate swaps as cash flow hedges, whereby the swaps were recorded at fair value on our balance sheet as assets and liabilities with any changes in fair value recorded in OCI. In a cash flow hedge, a swap would exactly match the pricing date of the relevant repurchase agreement. Through the end of the third quarter of 2008 we continued to be able to effectively match the swaps with the repurchase agreements therefore entering into effective hedge transactions. However, due to the volatility of the credit markets, it is no longer practical to match the pricing dates of both the swaps and the repurchase agreements.
As a result, we voluntarily discontinued hedge accounting after the third quarter of 2008 through a combination of de-designating previously defined hedge relationships and not designating new contracts as cash flow hedges. The de-designation of cash flow hedges requires that the net derivative gain or loss related to the discontinued cash flow hedge should continue to be reported in accumulated OCI, unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter. We continue to hold repurchase agreements in excess of swap contracts and have no indication that interest payments on the hedged repurchase agreements are in jeopardy of discontinuing. Therefore, the deferred losses related to these derivatives that have been de-designated will not be recognized immediately and will remain in OCI. These losses are reclassified into earnings during the contractual terms of the swap agreements starting as of October 1, 2008. Changes in the unrealized gains or losses on the interest rate swaps subsequent to September 30, 2008 are reflected in our statement of operations.
Repurchase Agreements: We finance the acquisition of our Investment Securities through the use of repurchase agreements. Repurchase agreements are treated as collateralized financing transactions and are carried at their contractual amounts, including accrued interest, as specified in the respective agreements. Repurchase agreements entered into by RCap are matched with reverse repurchase agreements and are recorded on trade date with the duration of such repurchase agreements mirroring those of the matched reverse repurchase agreements. These repurchase agreements entered into by RCap are recorded at the contract amount and margin calls are filled by RCap as required based on any deficiencies in 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 repurchase agreements. Intercompany transactions are eliminated in the statement of financial condition, statement of operations, and statement of cash flows. Cash flows related to RCap’s repurchase agreements are included in cash flows from operating activity.
Income Taxes: We have elected to be taxed as a REIT and intend to comply with the provisions of the Internal Revenue Code of 1986, as amended (“Code”), with respect thereto. Accordingly, we will not be subjected to federal income tax to the extent of our distributions to shareholders and as long as certain asset, income and stock ownership tests are met. We, FIDAC, Merganser, and RCap have made separate joint elections to treat FIDAC, Merganser, and RCap as taxable REIT subsidiaries. As such, FIDAC, Merganser, and RCap are taxable as domestic C corporations and subject to federal and state and local income taxes based upon their taxable income.
Impairment of Goodwill and Intangibles: Our acquisition of FIDAC and Merganser were accounted for using the purchase method. The cost 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 cost over the fair value of the net assets acquired was recognized as goodwill. Goodwill and finite-lived intangible assets are periodically reviewed for potential impairment. This evaluation requires significant judgment.
Recent Accounting Pronouncements:
General Principles
Generally Accepted Accounting Principles (ASC 105)
In June 2009, the Financial Accounting Standards Board (“FASB”) issued The Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“Codification”) which revises the framework for selecting the accounting principles to be used in the preparation of financial statements that are presented in conformity with Generally Accepted Accounting Principles (“GAAP”). The objective of the Codification is to establish the FASB Accounting Standards Codification (“ASC”) as the source of authoritative accounting principles recognized by the FASB. Codification is effective September 30, 2009. In adopting the Codification, all non-grandfathered, non-SEC accounting literature not included in the Codification is superseded and deemed non-authoritative. Codification requires any references within the consolidated financial statements be modified from FASB issues to ASC. However, in accordance with the FASB Accounting Standards Codification Notice to Constituents (v 2.0), we will not reference specific sections of the ASC but will use broad topic references.
Our recent accounting pronouncements section is formatted to reflect the same organizational structure as the ASC. Broad topic references will be updated with pending content as they are released.
Assets
Receivables (ASC 310)
In July 2010, the FASB released ASU 2010-20, which addresses disclosures about the credit quality of financing receivables and the allowance for credit losses. The purpose of this update is to provide greater transparency regarding the allowance for credit losses and the credit quality of financing receivables as well as to assist in the assessment of credit risk exposures and evaluation of the adequacy of allowances for credit losses. Additional disclosures must be provided on a disaggregated basis. The update defines two levels of disaggregation – portfolio segment and class of financing receivable. Additionally, the update requires disclosure of credit quality indicators, past due information and modifications of financing receivables. The update is not applicable to mortgage banking activities (loans originated or purchased for resale to investors); derivative instruments such as repurchase agreements; debt securities; a transferors interest in securitization transactions accounted for as sales under ASC 860; and purchased beneficial interests in securitized financial assets. This update is effective for us for interim or annual periods ending on or after December 15, 2010. This update will have no material effect on our consolidated financial statements.
Investments in Debt and Equity Securities (ASC 320)
New guidance was provided to make impairment guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments (“OTTI”) on debt and equity securities in financial statements. This guidance was also the result of the Securities and Exchange Commission (“SEC”) mark-to-market study mandated under the Emergency Economic Stabilization Act of 2008 (“EESA”). The SEC’s recommendation was to “evaluate the need for modifications (or the elimination) of current OTTI guidance to provide for a more uniform system of impairment testing standards for financial instruments.” The guidance revises the OTTI evaluation methodology. Previously the analytical focus was on whether we had the “intent and ability to retain its investment in the debt security for a period of time sufficient to allow for any anticipated recovery in fair value.” Now the focus is on whether we have (1) the intent to sell the Investment Securities, (2) it is more likely than not that it will be required to sell the Investment Securities before recovery, or (3) it does not expect to recover the entire amortized cost basis of the Investment 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 statement of operations, while the balance of impairment related to other factors will be recognized in Other Comprehensive Income (“OCI”). This guidance became effective for all interim and annual reporting periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009 and we decided to early adopt. For the quarter and six months ended June 30, 2010 and 2009, we did not have unrealized losses in Investment Securities that were deemed other-than-temporary.
Broad Transactions
Business Combinations (ASC 805)
This guidance establishes principles and requirements for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed and any noncontrolling interest in a business combination at their fair value at acquisition date. ASC 805 alters the treatment of acquisition-related costs, business combinations achieved in stages (referred to as a step acquisition), the treatment of gains from a bargain purchase, the recognition of contingencies in business combinations, the treatment of in-process research and development in a business combination as well as the treatment of recognizable deferred tax benefits. ASC 805 is effective for business combinations closed in fiscal years beginning after December 15, 2008 and is applicable to business acquisitions completed after January 1, 2009. We did not make any business acquisitions during the year ended December 31, 2009 and quarter ended June 30, 2010. The adoption of ASC 805 did not have a material impact on our consolidated financial statements.
Consolidation (ASC 810)
On January 1, 2009, FASB amended the guidance concerning noncontrolling interests in consolidated financial statements, which requires us to make certain changes to the presentation of its financial statements. This guidance requires us to classify noncontrolling interests (previously referred to as “minority interest”) as part of consolidated net income and to include the accumulated amount of noncontrolling interests as part of stockholders’ equity. Similarly, in its presentation of stockholders’ equity, we distinguish between equity amounts attributable to controlling interest and amounts attributable to the noncontrolling interests – previously classified as minority interest outside of stockholders’ equity. In addition to these financial reporting changes, this guidance provides for significant changes in accounting related to noncontrolling interests; specifically, increases and decreases in its controlling financial interests in consolidated subsidiaries will be reported in equity similar to treasury stock transactions. If a change in ownership of a consolidated subsidiary results in loss of control and deconsolidation, any retained ownership interests are re-measured with the gain or loss reported in net earnings.
Effective January 1, 2010, the consolidation standards have been amended by ASU 2009-17. This amendment updates the existing standard and eliminates the exemption from consolidation of a Qualified Special Purpose Entity (“QSPE”). The update requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity (“VIE”). The analysis identifies the primary beneficiary of a VIE as the enterprise that has both: a) the power to direct the activities that most significantly impact the entity’s economic performance and b) the obligation to absorb losses of the entity or the right to receive benefits from the entity which could potentially be significant to the VIE. The update requires enhanced disclosures to provide users of financial statements with more transparent information about an enterprises involvement in a VIE. Further, ongoing assessments of whether an enterprise is the primary beneficiary on a VIE are required. At this time, the amendment has no material effect on our consolidated financial statements.
On January 27, 2010, the FASB voted to indefinitely defer the effective date of ASU 2009-17 for a reporting enterprises interest in entities for which it is industry practice to issue financial statements in accordance with investment company standards (ASC 946). This deferral is expected to most significantly affect reporting entities in the investment management industry. This amendment has no material effect on our consolidated financial statements.
Derivatives and Hedging (ASC 815)
Effective January 1, 2009 and adopted by us prospectively, the FASB issued additional guidance attempting to improve the transparency of financial reporting by mandating the provision of additional information about how derivative and hedging activities affect an entity’s financial position, financial performance and cash flows. This guidance changed the disclosure requirements for derivative instruments and hedging activities by requiring enhanced disclosure about (1) how and why an entity uses derivative instruments, (2) how derivative instruments and related hedged items are accounted for, and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. To adhere to this guidance, qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts, gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements must be made. This disclosure framework is intended to better convey the purpose of derivative use in terms of the risks that an entity is intending to manage. We discontinued hedge accounting as of September 30, 2008, and therefore the effect of the adoption of this guidance was an increase in note disclosures.
Fair Value Measurements and Disclosures (ASC 820)
In response to the deterioration of the credit markets, FASB issued guidance clarifying how Fair Value Measurements should be applied when valuing securities in markets that are not active. The guidance provides an illustrative example, utilizing management’s internal cash flow and discount rate assumptions when relevant observable data do not exist. It further clarifies how observable market information and market quotes should be considered when measuring fair value in an inactive market. It reaffirms the notion of fair value as an exit price as of the measurement date and that fair value analysis is a transactional process and should not be broadly applied to a group of assets. The guidance was effective upon issuance including prior periods for which financial statements had not been issued. The implementation of this guidance did not have a material effect on the fair value of the Company’s assets as the valuation methodologies utilized by us are consistent with the guidance.
In October 2008 the EESA was signed into law. Section 133 of the EESA mandated that the SEC conduct a study on mark-to-market accounting standards. The SEC provided its study to the U.S. Congress on December 30, 2008. Part of the recommendations within the study indicated that “fair value requirements should be improved through development of application and best practices guidance for determining fair value in illiquid or inactive markets.” As a result of this study and the recommendations therein, on April 9, 2009, the FASB issued additional guidance for determining fair value when the volume and level of activity for the asset or liability have significantly decreased when compared with normal market activity for the asset or liability (or similar assets or liabilities). The guidance gives specific factors to evaluate if there has been a decrease in normal market activity and if so, provides a methodology to analyze transactions or quoted prices and make necessary adjustments to fair value. The objective is to determine the point within a range of fair value estimates that is most representative of fair value under current market conditions. This guidance became effective for us June 30, 2009 with early adoption permitted for periods ending after March 31, 2009. The adoption does not have a major impact on the manner in which we estimate fair value, nor does it have any impact on our financial statement disclosures.
In August 2009, FASB provided further guidance (ASU 2009-05) regarding the fair value measurement of liabilities. The guidance states that a quoted price for the identical liability when traded as an asset in an active market is a Level 1 fair value measurement. If the value must be adjusted for factors specific to the liability, then the adjustment to the quoted price of the asset shall render the fair value measurement of the liability a lower level measurement. This guidance has no material effect on the fair valuation of our liabilities.
In September 2009, FASB issued guidance (ASU 2009-12) on measuring the fair value of certain alternative investments. This guidance offers investors a practical expedient for measuring the fair value of investments in certain entities that calculate net asset value (“NAV”) per share. If an investment falls within the scope of the ASU, the reporting entity is permitted, but not required to use the investment’s NAV to estimate its fair value. This guidance has no material effect on the fair valuation of our assets. We do not hold any assets qualifying under this guidance.
In January 2010, FASB issued guidance (ASU 2010-06) which increases 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 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 is effective for us on December 31, 2009. The guidance also requires that the disclosure on any Level 3 assets presents separately information about purchases, sales, issuances and settlements. In other words, Level 3 assets are presented on a gross basis rather than as one net number. However, this last portion of the guidance is not effective for us until December 31, 2010. Adoption of this guidance results in increased footnote disclosure.
Financial Instruments (ASC 825)
On April 9, 2009, the FASB issued guidance which requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. The guidance became effective for us on June 30, 2010. The adoption did not have any impact on financial reporting as all financial instruments are currently reported at fair value in both interim and annual periods.
Subsequent Events (ASC 855)
General standards governing accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. ASC 855 also provides guidance on the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions occurring after the balance sheet date. We adopted the guidance effective June 30, 2009, and adoption had no impact on our consolidated financial statements.
In February 2010, FASB issued ASU 2010-09 as an amendment to ASC 855. This update eliminates the requirement to provide a specific date through which subsequent events were evaluated. This update was issued to alleviate potential conflicts between ASC 855 and SEC reporting requirements. The update was effective upon issuance and has no impact on our consolidated financial statements.
Transfers and Servicing (ASC 860)
In February 2008 FASB issued guidance addressing whether transactions where assets purchased from a particular counterparty and financed through a repurchase agreement with the same counterparty can be considered and accounted for as separate transactions, or are required to be considered “linked” transactions and may be considered derivatives. This guidance requires purchases and subsequent financing through repurchase agreements be considered linked transactions unless all of the following conditions apply: (1) the initial purchase and the use of repurchase agreements to finance the purchase are not contractually contingent upon each other; (2) the repurchase financing entered into between the parties provides full recourse to the transferee and the repurchase price is fixed; (3) the financial assets are readily obtainable in the market; and (4) the financial instrument and the repurchase agreement are not coterminous. This guidance was effective January 1, 2009 and the implementation did not have a material effect on our consolidated financial statements.
On June 12, 2009, the FASB issued guidance an amendment update to the accounting standards governing the transfer and servicing of financial assets. This amendment updates the existing standard and eliminates the concept of a QSPE; clarifies the surrendering of control to effect sale treatment; and modifies the financial components approach – limiting the circumstances in which a financial asset or portion thereof should be derecognized when the transferor maintains continuing involvement. It defines the term “Participating Interest.” Under this standard update, the transferor must recognize and initially measure at fair value all assets obtained and liabilities incurred as a result of a transfer, including any retained beneficial interest. Additionally, the amendment requires enhanced disclosures regarding the transferors risk associated with continuing involvement in any transferred assets. The amendment is effective beginning January 1, 2010. We have determined the amendment has no material effect on our consolidated financial statements.
Results of Operations:
Net Income Summary
For the quarter ended June 30, 2010, our net loss was $218.2 million or $0.40 basic income per average share related to common shareholders, as compared to net income of $597.1 million or $1.09 basic net income per average share for the quarter ended June 30, 2009. Net income per average share decreased by $1.49 per average share available to common shareholders and total net income decreased $815.3 million for the quarter ended June 30, 2010, when compared to the quarter ended June 30, 2009. We attribute the decrease in net income for the quarter ended June 30, 2010 from the quarter ended June 30, 2009 to unrealized losses related to interest rate swaps of $593.0 million for the quarter ended June 30, 2010, as compared to an unrealized gain of $230.2 million for the quarter ended June 30, 2009.
For the six months ended June 30, 2010, our net income was $62.8 million, or $0.10 net income per average share available to common shareholders, as compared to net income of $946.9 million, or $1.72 net income per average share available to common shareholders for the six months ended June 30, 2009. We attribute the decrease in net income for the six months ended June 30, 2010 from the six months ended June 30, 2009 to unrealized loss related to interest rate swaps of $709.7 million, as compared to an unrealized gain related to interest rate swaps of $265.8 million for the six months ended June 30, 2009.
Net (Loss) Income Summary
(dollars in thousands, except for per share data)
| |
|
Quarter
Ended
June 30, 2010
|
|
|
Quarter
Ended
June 30, 2009
|
|
|
Six Months
Ended
June 30, 2010
|
|
|
Six Months
Ended
June 30, 2009
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$ |
642,822 |
|
|
$ |
710,401 |
|
|
$ |
1,296,757 |
|
|
$ |
1,426,416 |
|
|
Securities loaned
|
|
|
860 |
|
|
|
- |
|
|
|
1,314 |
|
|
|
|
|
|
Total interest income
|
|
|
643,682 |
|
|
|
710,401 |
|
|
|
1,298,071 |
|
|
|
1,426,416 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
|
96,999 |
|
|
|
147,516 |
|
|
|
189,088 |
|
|
|
349,582 |
|
| Interest rate swaps |
|
|
175,535 |
|
|
|
175,080 |
|
|
|
356,373 |
|
|
|
351,639 |
|
|
Securities borrowed
|
|
|
742 |
|
|
|
- |
|
|
|
1,129 |
|
|
|
- |
|
|
Convertible Senior Notes
|
|
|
6,966 |
|
|
|
- |
|
|
|
10,161 |
|
|
|
- |
|
|
Total interest expense
|
|
|
280,242 |
|
|
|
322,596 |
|
|
|
556,751 |
|
|
|
701,221 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
363,440 |
|
|
|
387,805 |
|
|
|
741,320 |
|
|
|
725,195 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment advisory and service fees
|
|
|
13,863 |
|
|
|
11,736 |
|
|
|
26,409 |
|
|
|
19,497 |
|
|
Gain on sale of Investment Securities
|
|
|
39,041 |
|
|
|
2,364 |
|
|
|
86,003 |
|
|
|
7,387 |
|
|
Dividend income
|
|
|
7,330 |
|
|
|
3,221 |
|
|
|
15,294 |
|
|
|
4,139 |
|
|
Unrealized (loss) gain on interest rate swaps
|
|
|
(593,038 |
) |
|
|
230,207 |
|
|
|
(709,770 |
) |
|
|
265,752 |
|
|
Realized and Unrealized gain on trading
|
|
|
77 |
|
|
|
- |
|
|
|
77 |
|
|
|
- |
|
|
Income from underwriting
|
|
|
500 |
|
|
|
- |
|
|
|
500 |
|
|
|
- |
|
|
Total other income
|
|
|
(532,227 |
) |
|
|
247,528 |
|
|
|
(581,487 |
) |
|
|
296,775 |
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution fees
|
|
|
- |
|
|
|
432 |
|
|
|
360 |
|
|
|
860 |
|
|
General and administrative expenses
|
|
|
41,540 |
|
|
|
30,046 |
|
|
|
81,561 |
|
|
|
59,928 |
|
|
Total expenses
|
|
|
41,540 |
|
|
|
30,478 |
|
|
|
81,921 |
|
|
|
60,788 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income before income from equity method and income taxes
|
|
|
(210,327 |
) |
|
|
604,855 |
|
|
|
77,912 |
|
|
|
961,182 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from equity method investment
|
|
|
935 |
|
|
|
- |
|
|
|
1,075 |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
8,837 |
|
|
|
7,801 |
|
|
|
16,151 |
|
|
|
14,235 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(218,229 |
) |
|
|
597,054 |
|
|
|
62,836 |
|
|
|
946,947 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on preferred stock
|
|
|
4,625 |
|
|
|
4,625 |
|
|
|
9,250 |
|
|
|
9,251 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income (related) available to common shareholders
|
|
$ |
(222,854 |
) |
|
$ |
592,429 |
|
|
$ |
53,586 |
|
|
$ |
937,696 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of basic common shares outstanding
|
|
|
559,700,836 |
|
|
|
544,344,844 |
|
|
|
557,360,358 |
|
|
|
543,627,960 |
|
|
Weighted average number of diluted common shares outstanding
|
|
|
559,700,836 |
|
|
|
550,099,709 |
|
|
|
557,418,175 |
|
|
|
549,394,817 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per average common share
|
|
$ |
(0.40 |
) |
|
$ |
1.09 |
|
|
$ |
0.10 |
|
|
$ |
1.72 |
|
|
Diluted net (loss) income per average common share
|
|
$ |
(0.40 |
) |
|
$ |
1.08 |
|
|
$ |
0.10 |
|
|
$ |
1.71 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average total assets
|
|
$ |
73,113,499 |
|
|
$ |
64,492,255 |
|
|
$ |
71,867,729 |
|
|
$ |
62,194,041 |
|
|
Average equity
|
|
$ |
9,670,184 |
|
|
$ |
8,477,014 |
|
|
$ |
9,652,841 |
|
|
$ |
8,077,780 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) return on average total assets
|
|
|
(1.19 |
%) |
|
|
3.70 |
% |
|
|
0.18 |
% |
|
|
3.05 |
% |
|
(Loss) return on average equity
|
|
|
(9.03 |
%) |
|
|
28.17 |
% |
|
|
0.65 |
% |
|
|
23.45 |
% |
Interest Income and Average Earning Asset Yield
We had average earning assets of $62.0 billion for the quarter ended June 30, 2010. We had average earning assets of $56.4 billion for the quarter ended June 30, 2009. Our primary source of income is interest income. Our interest income was $643.7 million for the quarter ended June 30, 2010 and $710.4 million for the quarter ended June 30, 2009. The yield on average investment securities was 4.16%, and 5.04% for the quarters ending June 30, 2010 and 2009, respectively. The prepayment speeds increased to an average of 32% CPR for the quarter ended June 30, 2010 from an average of 19% CPR for the quarter ended June 30, 2009. For the quarter ended June 30, 2010, as compared to the quarter ended June 30, 2009, interest income declined by $66.7 million due to the decline in yield on average investment securities of 88 basis points. The decline in yield was, in part, due to Fannie Mae purchasing seriously delinquent mortgage loans out of our investment securities, which resulted in prepayment speeds increasing to an average of 32% CPR for the quarter ended June 30, 2010 from an average of 19% CPR for the quarter ended June 30, 2009.
We had average earning assets of $62.0 billion and $55.6 billion for the six months ended June 30, 2010 and 2009, respectively. Our interest income was $1.3 billion for the six months ended June 30, 2010 and $1.4 billion for the six months ended June 30, 2009. The yield on average Investment Securities decreased from 5.13% for the six months ended June 30, 2009 to 4.19% for the six months ended June 30, 2010. Our average earning asset balance increased by $6.4 billion and interest income decreased by $128.3 million for the six months ended June 30, 2010 as compared to the six months ended June 30, 2009 due to the decline in yield on average investment securities of 94 basis points. The decline in yield was, in part, due to Freddie Mac and Fannie Mae purchasing seriously delinquent mortgage loans out of our investment securities, which resulted in prepayment speeds increasing to an average of 33% CPR for the six months ended June 30, 2010 from an average of 18% CPR for the six months ended June 30, 2009.
Interest Expense and the Cost of Funds
Our largest expense is the cost of borrowed funds. We had average borrowed funds of $56.2 billion and total interest expense of $280.2 million for the quarter ended June 30, 2010. We had average borrowed funds of $50.1 billion and total interest expense of $322.6 million for the quarter ended June 30, 2009. Our average cost of funds was 2.00% for the quarter ended June 30, 2010 and 2.57% for the quarter ended June 30, 2009. The cost of funds rate decreased by 57 basis points and the average borrowed funds increased by $6.1 billion for the quarter ended June 30, 2010, when compared to the quarter ended June 30, 2009. Interest expense for the quarter ended June 30, 2010 decreased by $42.4 million when compared to the quarter ended June 30, 2009, due to the substantial decrease in the average cost of funds rate.
We had average borrowed funds of $55.7 billion and interest expense of $556.8 million for the six months ended June 30, 2010. We had average borrowed funds of $49.3 billion and interest expense of $701.2 million for the six months ended June 30, 2009. Our average cost of funds was 2.00% for the six months ended June 30, 2010 and 2.84% for the six months ended June 30, 2009. Interest expense decreased by $144.4 million because the average cost of funds declined by 84 basis points. The table below shows our average borrowed funds and average cost of funds as compared to average one-month and average six-month LIBOR for the quarters ended June 30, 2010, March 31, 2010, the year ended December 31, 2009 and four quarters in 2009.
Average Cost of Funds
(Ratios for the quarters have been annualized, dollars in thousands)
| |
|
Average
Borrowed
Funds
|
|
|
Borrowed
Funds at
Period End
|
|
|
Interest
Expense
|
|
|
Average
Cost of
Funds
|
|
|
Average
One-
Month
LIBOR
|
|
|
Average
Six-
Month
LIBOR
|
|
|
Average
One-Month
LIBOR
relative to
Average Six-
Month LIBOR
|
|
|
Average Cost
of Funds
Relative to
Average Six-
Month LIBOR
|
|
|
Average Cost
of Funds
Relative to
Average Six-
Month LIBOR
|
|
|
For the Quarter Ended
June 30, 2010
|
|
$ |
56,190,308 |
|
|
$ |
56,986,835 |
|
|
$ |
280,242 |
|
|
|
2.00% |
|
|
|
0.32% |
|
|
|
0.63% |
|
|
|
(0.31%) |
|
|
|
1.68% |
|
|
|
1.37% |
|
|
For the Quarter Ended
March 31, 2010
|
|
$ |
55,298,875 |
|
|
$ |
54,384,480 |
|
|
$ |
276,509 |
|
|
|
2.00% |
|
|
|
0.23% |
|
|
|
0.40% |
|
|
|
(0.17%) |
|
|
|
1.77% |
|
|
|
1.60% |
|
|
For the Year Ended
December 31, 2009
|
|
$ |
52,361,607 |
|
|
$ |
54,598,129 |
|
|
$ |
1,295,762 |
|
|
|
2.47% |
|
|
|
0.33% |
|
|
|
1.11% |
|
|
|
(0.78%) |
|
|
|
2.14% |
|
|
|
1.36% |
|
|
For the Quarter Ended
December 31, 2009
|
|
$ |
55,919,885 |
|
|
$ |
54,598,129 |
|
|
$ |
286,764 |
|
|
|
2.05% |
|
|
|
0.24% |
|
|
|
0.52% |
|
|
|
(0.28%) |
|
|
|
1.81% |
|
|
|
1.53% |
|
|
For the Quarter Ended
September 30, 2009
|
|
$ |
54,914,435 |
|
|
$ |
55,842,840 |
|
|
$ |
307,777 |
|
|
|
2.24% |
|
|
|
0.27% |
|
|
|
0.84% |
|
|
|
(0.57%) |
|
|
|
1.97% |
|
|
|
1.40% |
|
|
For the Quarter Ended
June 30, 2009
|
|
$ |
50,114,663 |
|
|
$ |
51,326,930 |
|
|
$ |
322,596 |
|
|
|
2.57% |
|
|
|
0.37% |
|
|
|
1.39% |
|
|
|
(1.02%) |
|
|
|
2.20% |
|
|
|
1.18% |
|
|
For the Quarter Ended
March 31, 2009
|
|
$ |
48,497,444 |
|
|
$ |
48,951,178 |
|
|
$ |
378,625 |
|
|
|
3.12% |
|
|
|
0.46% |
|
|
|
1.74% |
|
|
|
(1.28%) |
|
|
|
2.66% |
|
|
|
1.38% |
|
Net Interest Income
Our net interest income, which equals interest income less interest expense, totaled $363.4 million for the quarter ended June 30, 2010, and $387.8 million for the quarter ended June 30, 2009. Our net interest income decreased by $24.4 million for the quarter ended June 30, 2010, as compared to the quarter ended June 30, 2009, because of the decline in interest rate spread. Our net interest rate spread, which equals the yield on our average assets for the period less the average cost of funds for the period, for the quarter ended June 30, 2010 was 2.16%, which was 31 basis points less than the interest rate spread of for the quarter ended June 30, 2009 of 2.47%. This 31 basis point decrease in interest rate spread for second quarter of 2010 over the spread for second quarter of 2009 was the result of the decrease in the average cost of funds of 57 basis points, which was only partially offset by a decrease in average yield on average interest earning assets of 88 basis points.
Our net interest income totaled $741.3 million for the six months ended June 30, 2010, and $725.2 million for the six months ended June 30, 2009. Our net interest income increased by $16.1 million for the six months ended June 30, 2010, as compared to the six months ended June 30, 2009, because of the increased interest rate spread. Even though our net interest rate spread for the six months ended June 30, 2010 was 2.19%, as compared to 2.29% for the six months ended June 30, 2009, our average assets and liabilities increased during the comparable periods, resulting in an increase in the net interest income.
The table below shows our interest income by average Investment Securities held, total interest income, yield on average interest earning assets, average balance of repurchase agreements, interest expense, average cost of funds, net interest income, and net interest rate spread for the quarter ended June 30, 2010, March 31, 2010, the year ended December 31, 2009 and four quarters in 2009.
Net Interest Income
(Ratios for the quarters have been annualized, dollars in thousands)
| |
|
Average
Investment
Securities
Held
|
|
|
Total
Interest
Income
|
|
|
Yield on
Average
Interest
Earning
Assets
|
|
|
Average
Balance of
Repurchase
Agreements
|
|
|
Interest
Expense
|
|
|
Average
Cost of
Funds
|
|
|
Net Interest
Income
|
|
|
Net Interest
Rate
Spread
|
|
|
For the Quarter Ended
June 30, 2010
|
|
$ |
61,952,037 |
|
|
$ |
643,682 |
|
|
|
4.16% |
|
|
$ |
56,190,308 |
|
|
$ |
280,242 |
|
|
|
2.00% |
|
|
$ |
363,440 |
|
|
|
2.16% |
|
|
For the Quarter Ended
March 31, 2010
|
|
$ |
61,983,900 |
|
|
$ |
654,389 |
|
|
|
4.22% |
|
|
$ |
55,298,875 |
|
|
$ |
276,509 |
|
|
|
2.00% |
|
|
$ |
377,880 |
|
|
|
2.22% |
|
|
For the Year Ended
December 31, 2009
|
|
$ |
58,554,200 |
|
|
$ |
2,922,602 |
|
|
|
4.99% |
|
|
$ |
52,361,607 |
|
|
$ |
1,295,762 |
|
|
|
2.47% |
|
|
$ |
1,626,840 |
|
|
|
2.52% |
|
|
For the Quarter Ended
December 31, 2009
|
|
$ |
62,128,320 |
|
|
$ |
751,663 |
|
|
|
4.84% |
|
|
$ |
55,919,885 |
|
|
$ |
286,764 |
|
|
|
2.05% |
|
|
$ |
464,899 |
|
|
|
2.79% |
|
|
For the Quarter Ended
September 30, 2009
|
|
$ |
60,905,025 |
|
|
$ |
744,523 |
|
|
|
4.89% |
|
|
$ |
54,914,435 |
|
|
$ |
307,777 |
|
|
|
2.24% |
|
|
$ |
436,746 |
|
|
|
2.65% |
|
|
For the Quarter Ended
June 30, 2009
|
|
$ |
56,420,189 |
|
|
$ |
710,401 |
|
|
|
5.04% |
|
|
$ |
50,114,663 |
|
|
$ |
322,596 |
|
|
|
2.57% |
|
|
$ |
387,805 |
|
|
|
2.47% |
|
|
For the Quarter Ended
March 31, 2009
|
|
$ |
54,763,268 |
|
|
$ |
716,015 |
|
|
|
5.23% |
|
|
$ |
48,497,444 |
|
|
$ |
378,625 |
|
|
|
3.12% |
|
|
$ |
337,390 |
|
|
|
2.11% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Advisory and Service Fees
FIDAC and Merganser are registered investment advisors specializing in managing fixed income securities. At June 30, 2010, FIDAC and Merganser had under management approximately $12.1 billion in net assets and $18.8 billion in gross assets, compared to $9.9 billion in net assets and $19.0 billion in gross assets at June 30, 2009. Net investment advisory and service fees for the quarters ended June 30, 2010 and 2009 totaled $13.9 million and $11.3 million, respectively, net of fees paid to third parties pursuant to distribution service agreements for facilitating and promoting distribution of shares or units to FIDAC’s clients. Net investment advisory and service fees for the six months ended June 30, 2010 and 2009 totaled $26.0 million and $18.6 million, respectively, net of fees paid to third parties pursuant to distribution service agreements for facilitating and promoting distribution of shares or units to FIDAC’s clients. Gross assets under management will vary from time to time because of changes in the amount of net assets FIDAC and Merganser manage as well as changes in the amount of leverage used by the various funds and accounts FIDAC manages.
Gains and Losses on Sales of Investment Securities and Interest Rate Swaps
For the quarter ended June 30, 2010, we sold Investment Securities with a carrying value of $1.9 billion for an aggregate net gain of $39.0 million. For the quarter ended June 30, 2009, we sold Investment Securities with a carrying value of $524.2 million for an aggregate net gain of $2.4 million. We do not expect to sell assets on a frequent basis, but may from time to time sell existing assets to move into new assets, which our management believes might have higher risk-adjusted returns, or to manage our balance sheet as part of our asset/liability management strategy.
For the six months ended June 30, 2010, we sold Investment Securities with a carrying value of $3.5 billion for an aggregate net gain of $86.0 million. For the six months ended June 30, 2009, we sold Investment Securities with a carrying value of $1.4 billion for an aggregate net gain of $7.4 million.
Dividend Income
Dividend income totaled $7.3 million for the quarter ended June 30, 2010 and $15.3 million for the six months ended June 30, 2010, as compared to $3.2 million for the quarter ended June 30, 2009 and $4.1 million for the six months ended June 30, 2009.
Loss on Other-Than-Temporarily Impaired Securities
At each quarter end, we review each of our securities to determine if an other-than-temporary impairment charge would be necessary. The charge is taken if we determine that we do not intend to hold securities that were in an unrealized loss position for a period of time, to maturity if necessary, sufficient for a forecasted market price recovery up to or beyond the cost of the investments or if we are required to sell for regulatory or other reasons. For the quarters and six months ended June 30, 2010 and 2009 there was no loss on other-than-temporarily impaired securities.
General and Administrative Expenses
General and administrative (“G&A”) expenses were $41.5 million for the quarter ended June 30, 2010 and $81.6 million for the six months ended June 30, 2010, compared to $30.0 million for the quarter ended June 30, 2009 and $59.9 million for the six months ended June 30, 2009. G&A expenses as a percentage of average total assets was 0.23% for the quarter and six months ended June 30, 2010, and 19% for the quarter and six months ended June 30, 2009. The increase in G&A expenses of $11.5 million for the quarter and $21.7 million for the six months ended June 30, 2010, was primarily the result of increased compensation costs as staff increased from 74 at June 30, 2009 to 96 at June 30, 2010.
The table below shows our total G&A expenses as compared to average total assets and average equity for the quarters ended June 30, 2010, March 31, 2010, the year ended December 31, 2009 and four quarters in 2009.
G&A Expenses and Operating Expense Ratios
(ratios for the quarters have been annualized, dollars in thousands)
| |
|
Total G&A Expenses
|
|
|
Total G&A
Expenses/Average Assets
|
|
|
Total G&A
Expenses/Average Equity
|
|
|
For the Quarter Ended June 30, 2010
|
|
$ |
41,540 |
|
|
|
0.23 |
% |
|
|
1.72 |
% |
|
|
For the Quarter Ended March 31, 2010
|
|
$ |
40,021 |
|
|
|
0.23 |
% |
|
|
1.66 |
% |
|
|
For the Year Ended December 31, 2009
|
|
$ |
130,152 |
|
|
|
0.20 |
% |
|
|
1.51 |
% |
|
|
For the Quarter Ended December 31, 2009
|
|
$ |
36,880 |
|
|
|
0.21 |
% |
|
|
1.55 |
% |
|
|
For the Quarter Ended September 30, 2009
|
|
$ |
33,344 |
|
|
|
0.19 |
% |
|
|
1.47 |
% |
|
|
For the Quarter Ended June 30, 2009
|
|
$ |
30,046 |
|
|
|
0.19 |
% |
|
|
1.41 |
% |
|
|
For the Quarter Ended March 31, 2009
|
|
$ |
29,882 |
|
|
|
0.20 |
% |
|
|
1.54 |
% |
|
Net Income and Return on Average Equity
Our net loss was $218.2 million for the quarter ended June 30, 2010 and our net income was $597.1 million for the quarter ended June 30, 2009. Our annualized loss on average equity was 9.03% for the quarter ended June 30, 2010, and our annualized return on average equity was 28.17% for the quarter ended June 30, 2009. Net income decreased by $815.3 million for the quarter ended June 30, 2010 as compared to the quarter ended June 30, 2009, primarily due the unrealized loss on interest rate swaps of $593.0 million for the quarter ended June 30, 2010 as compared to the unrealized gain on interest rate swaps of $230.2 million for the six months ended June 30, 2009.
Our net income was $62.8 million for the six months ended June 30, 2010 and $946.9 million for the six months ended June 30, 2009. Our annualized return on average equity was 0.65% for the six months ended June 30, 2010, and 23.45% for the six months ended June 30, 2009. Net income decreased by $884.1 million for the six months ended June 30, 2010 as compared to the quarter ended June 30, 2009, primarily due the unrealized loss on interest rate swaps of $709.8 million for the quarter ended June 30, 2010, as compared to an unrealized gain on interest rate swaps of $265.8 million for the six months ended June 30, 2009.
The table below shows our net interest income, net investment advisory and service fees, gain (loss) on sale of Mortgage-Backed Securities and termination of interest rate swaps, loss on other-than-temporarily impaired securities, income from trading securities, G&A expenses, income taxes, each as a percentage of average equity, and the return on average equity for the quarters ended June 30, 2010, March 31, 2010, the year ended December 31, 2009 and four quarters in 2009.
Components of Return on Average Equity
(Ratios for the quarters have been annualized)
| |
|
Net Interest Income/ Average Equity
|
|
Net Investment Advisory and Service Fees/ Average Equity
|
|
Gain/(Loss) on Sale of Mortgage-Backed Securities and Realized and Unrealized Gain/(Loss) Interest Rate Swaps and Trading Securities/ Average Equity
|
|
Loss on Other-than-Temporarily Impaired Securities/
Average Equity
|
|
Dividend Income from Available-for-Sale Equity Securities
|
|
Income from Underwriting
|
|
Income from Equity Method Investment
|
|
G&A Expenses/ Average Equity
|
|
Income
Taxes/ Average Equity
|
|
Return on Average Equity
|
|
|
For the Quarter Ended
June 30, 2010
|
|
15.03%
|
|
0.57%
|
|
(22.90%)
|
|
-
|
|
0.30%
|
|
0.02%
|
|
0.04%
|
|
(1.72%)
|
|
(0.37%)
|
|
(9.03%)
|
|
|
For the Quarter Ended
March 31, 2010
|
|
15.69%
|
|
0.51%
|
|
(2.90%)
|
|
-
|
|
0.33%
|
|
-
|
|
-
|
|
(1.66%)
|
|
(0.30%)
|
|
11.67%
|
|
|
For the Year Ended
December 31, 2009
|
|
18.82%
|
|
0.55%
|
|
5.19%
|
|
(0.16%)
|
|
0.20%
|
|
-
|
|
-
|
|
(1.51%)
|
|
(0.40%)
|
|
22.69%
|
|
|
For the Quarter Ended
December 31, 2009
|
|
19.58%
|
|
0.61%
|
|
12.79%
|
|
(0.57%)
|
|
0.31%
|
|
-
|
|
-
|
|
(1.55%)
|
|
(0.44%)
|
|
30.73%
|
|
|
For the Quarter Ended
September 30, 2009
|
|
19.30%
|
|
0.63%
|
|
(5.66%)
|
|
-
|
|
0.24%
|
|
-
|
|
-
|
|
(1.47%)
|
|
(0.42%)
|
|
12.60%
|
|
|
For the Quarter Ended
June 30, 2009
|
|
18.30%
|
|
0.53%
|
|
10.97%
|
|
-
|
|
0.15%
|
|
-
|
|
-
|
|
(1.41%)
|
|
(0.37%)
|
|
28.17%
|
|
|
For the Quarter Ended
March 31, 2009
|
|
17.41%
|
|
0.38%
|
|
2.09%
|
|
-
|
|
0.05%
|
|
-
|
|
-
|
|
(1.54%)
|
|
(0.33%)
|
|
18.06%
|
|
Financial Condition
Investment Securities, Available for Sale
All of our Mortgage-Backed Securities at June 30, 2010 and December 31, 2009 were adjustable-rate or fixed-rate mortgage-backed securities backed by single-family mortgage loans. Substantially all of the mortgage assets underlying these mortgage-backed securities were secured with a first lien position on the underlying single-family properties. Substantially all of our mortgage-backed securities were Freddie Mac, Fannie Mae or Ginnie Mae mortgage pass-through certificates or CMOs, which carry an implied “AAA” rating. All of our agency debentures are callable and carry an implied “AAA” rating. We carry all of our earning assets at fair value.
We accrete discount balances as an increase in interest income over the life of discount investment securities and we amortize premium balances as a decrease in interest income over the life of premium investment securities. At June 30, 2010 and December 31, 2009 we had on our balance sheet a total of $36.0 million and $49.2 million, respectively, of unamortized discount (which is the difference between the remaining principal value and current historical amortized cost of our investment securities acquired at a price below principal value) and a total of $1.9 billion and $1.3 billion, respectively, of unamortized premium (which is the difference between the remaining principal value and the current historical amortized cost of our investment securities acquired at a price above principal value).
We received mortgage principal repayments of $10.5 billion and $3.5 billion for the quarters ended June 30, 2010 and June 30, 2009, respectively. The average prepayment speed for the quarters ended June 30, 2010 and 2009 was 32% and 19%, respectively. During the quarter ended June 30, 2010, the average CPR increased to 32% from 19% during the quarter ended June 30, 2009, due to an increased return of principal from Fannie Mae purchasing seriously delinquent mortgage loans out of mortgage pools we own. Given our current portfolio composition, if mortgage principal prepayment rates were to increase over the life of our mortgage-backed securities, all other factors being equal, our net interest income would decrease during the life of these mortgage-backed securities as we would be required to amortize our net premium balance into income over a shorter time period. Similarly, if mortgage principal prepayment rates were to decrease over the life of our mortgage-backed securities, all other factors being equal, our net interest income would increase during the life of these mortgage-backed securities as we would amortize our net premium balance over a longer time period.
The table below summarizes certain characteristics of our Investment Securities at June 30, 2010, March 31, 2010, December 31, 2009, September 30, 2009, June 30, 2009, and March 31, 2009.
Investment Securities
(dollars in thousands)
| |
|
Principal Amount
|
|
|
Net Premium
|
|
|
Amortized Cost
|
|
|
Amortized Cost/Principal Amount
|
|
|
Fair Value
|
|
|
Fair Value/ Principal Amount
|
|
|
Weighted Average Yield
|
|
|
At June 30, 2010
|
|
$ |
67,400,316 |
|
|
$ |
1,849,585 |
|
|
$ |
69,249,901 |
|
|
|
102.74 |
% |
|
$ |
71,812,829 |
|
|
|
106.35 |
% |
|
|
3.69 |
% |
|
At March 31, 2010
|
|
$ |
66,937,615 |
|
|
$ |
1,309,423 |
|
|
$ |
68,247,038 |
|
|
|
101.96 |
% |
|
$ |
70,171,875 |
|
|
|
104.83 |
% |
|
|
3.87 |
% |
|
At December 31, 2009
|
|
$ |
62,508,927 |
|
|
$ |
1,247,717 |
|
|
$ |
63,756,644 |
|
|
|
102.00 |
% |
|
$ |
65,721,477 |
|
|
|
105.14 |
% |
|
|
4.51 |
% |
|
At September 30, 2009
|
|
$ |
64,253,006 |
|
|
$ |
1,126,493 |
|
|
$ |
65,379,499 |
|
|
|
101.75 |
% |
|
$ |
67,463,376 |
|
|
|
105.00 |
% |
|
|
4.70 |
% |
|
At June 30, 2009
|
|
$ |
63,300,232 |
|
|
$ |
924,873 |
|
|
$ |
64,225,105 |
|
|
|
101.46 |
% |
|
$ |
65,782,019 |
|
|
|
103.92 |
% |
|
|
4.75 |
% |
|
At March 31, 2009
|
|
$ |
56,718,404 |
|
|
$ |
668,295 |
|
|
$ |
57,386,699 |
|
|
|
101.18 |
% |
|
$ |
58,785,456 |
|
|
|
103.64 |
% |
|
|
4.98 |
% |
The table below summarizes certain characteristics of our Investment Securities at June 30, 2010, March 31, 2010, December 31, 2009, September 30, 2009, June 30, 2009, and March 31, 2009. The index level for adjustable-rate Investment Securities is the weighted average rate of the various short-term interest rate indices, which determine the coupon rate.
Adjustable-Rate Investment Security Characteristics
(dollars in thousands)
| |
|
Principal Amount
|
|
|
Weighted Average Coupon Rate
|
|
|
Weighted Average Term to Next Adjustment
|
|
Weighted Average Lifetime Cap
|
|
|
Weighted Average Asset Yield
|
|
|
Principal Amount at Period End as % of Total Investment Securities
|
|
|
At June 30, 2010
|
|
$ |
12,589,813 |
|
|
|
4.36 |
% |
|
33 months
|
|
|
10.00 |
% |
|
|
3.21 |
% |
|
|
18.68 |
% |
|
At March 31, 2010
|
|
$ |
15,366,206 |
|
|
|
4.55 |
% |
|
32 months
|
|
|
10.09 |
% |
|
|
2.92 |
% |
|
|
22.96 |
% |
|
At December 31, 2009
|
|
$ |
16,196,473 |
|
|
|
4.55 |
% |
|
33 months
|
|
|
10.09 |
% |
|
|
3.23 |
% |
|
|
25.91 |
% |
|
At September 30, 2009
|
|
$ |
18,561,525 |
|
|
|
4.59 |
% |
|
33 months
|
|
|
10.11 |
% |
|
|
3.37 |
% |
|
|
28.89 |
% |
|
At June 30, 2009
|
|
$ |
19,657,988 |
|
|
|
4.64 |
% |
|
34 months
|
|
|
10.12 |
% |
|
|
3.49 |
% |
|
|
31.06 |
% |
|
At March 31, 2009
|
|
$ |
19,558,480 |
|
|
|
4.66 |
% |
|
34 months
|
|
|
10.06 |
% |
|
|
3.74 |
% |
|
|
34.48 |
% |
Fixed-Rate Investment Security Characteristics
(dollars in thousands)
| |
|
Principal Amount
|
|
|
Weighted Average Coupon Rate
|
|
|
Weighted Average Asset Yield
|
|
|
Principal Amount at Period End as % of Total investment
|
|
|
At June 30, 2010
|
|
$ |
54,810,503 |
|
|
|
5.35 |
% |
|
|
4.40 |
% |
|
|
81.32 |
% |
|
At March 31, 2010
|
|
$ |
51,571,411 |
|
|
|
5.50 |
% |
|
|
4.16 |
% |
|
|
77.04 |
% |
|
At December 31, 2009
|
|
$ |
46,312,,455 |
|
|
|
5.78 |
% |
|
|
4.95 |
% |
|
|
74.09 |
% |
|
At September 30, 2009
|
|
$ |
45,691,481 |
|
|
|
5.89 |
% |
|
|
5.14 |
% |
|
|
71.11 |
% |
|
At June 30, 2009
|
|
$ |
43,642,244 |
|
|
|
5.94 |
% |
|
|
5.32 |
% |
|
|
68.94 |
% |
|
At March 31, 2009
|
|
$ |
37,159,924 |
|
|
|
6.08 |
% |
|
|
5.64 |
% |
|
|
65.52 |
% |
At June 30, 2010 and December 31, 2009, we held Investment Securities with coupons linked to various indices. The following tables detail the portfolio characteristics by index.
Adjustable-Rate Investment Securities by Index
June 30, 2010
| |
|
One-Month LIBOR
|
|
|
Six-Month LIBOR
|
|
|
Twelve-Month LIBOR
|
|
|
Twelve-Month Moving Average
|
|
|
11th District Cost of Funds
|
|
|
One-Year Treasury Index
|
|
|
Monthly Federal Cost of Funds
|
|
|
Other Indexes (1)
|
|
|
|
Weighted Average Term to Next Adjustment
|
|
1 mo.
|
|
13 mo.
|
|
44 mo.
|
|
1 mo.
|
|
7 mo.
|
|
43 mo.
|
|
1 mo.
|
|
13 mo.
|
|
|
Weighted Average Annual Period Cap
|
|
|
6.42 |
% |
|
|
1.57 |
% |
|
|
2.01 |
% |
|
|
0.39 |
% |
|
|
1.04 |
% |
|
|
1.97 |
% |
|
|
0.00 |
% |
|
|
1.86 |
% |
|
|
Weighted Average Lifetime Cap at June 30, 2010
|
|
|
7.06 |
% |
|
|
11.08 |
% |
|
|
10.46 |
% |
|
|
8.22 |
% |
|
|
10.50 |
% |
|
|
11.00 |
% |
|
|
13.43 |
% |
|
|
11.63 |
% |
|
|
Investment Principal Value as Percentage of Investment Securities at June 30, 2010
|
|
|
2.32 |
% |
|
|
0.93 |
% |
|
|
12.07 |
% |
|
|
1.04 |
% |
|
|
0.67 |
% |
|
|
1.53 |
% |
|
|
0.08 |
% |
|
|
0.04 |
% |
|
(1) Combination of indexes that account for less than 0.05% of total investment securities.
Adjustable-Rate Investment Securities by Index
December 31, 2009
| |
One-Month LIBOR
|
|
Six-Month LIBOR
|
|
Twelve-Month LIBOR
|
|
Twelve-Month Moving Average
|
|
11th District Cost of Funds
|
|
One-Year Treasury Index
|
|
Monthly Federal Cost of Funds
|
|
Other Indexes (1)
|
|
|
Weighted Average Term to Next Adjustment
|
1 mo.
|
|
16 mo.
|
|
45 mo.
|
|
1 mo.
|
|
7 mo.
|
|
50 mo.
|
|
1 mo.
|
|
12 mo.
|
|
|
Weighted Average Annual Period Cap
|
6.40%
|
|
1.58%
|
|
2.01%
|
|
0.42%
|
|
0.77%
|
|
1.95%
|
|
0.00%
|
|
1.82%
|
|
|
Weighted Average Lifetime Cap at
December 31, 2009
|
7.04%
|
|
11.20%
|
|
10.85%
|
|
8.12%
|
|
0.51%
|
|
10.98%
|
|
13.43%
|
|
11.71%
|
|
|
Investment Principal Value as Percentage of
Investment Securities at December 31, 2009
|
4.59%
|
|
1.40%
|
|
15.77%
|
|
1.10%
|
|
0.76%
|
|
2.15%
|
|
0.09%
|
|
0.05%
|
|
(1) Combination of indexes that account for less than 0.05% of total investment securities.
Reverse Repurchase Agreements
At June 30, 2010, we did not have any amounts outstanding under our reverse repurchase agreement with Chimera. At December 31, 2009, we lent $259.0 million to Chimera pursuant to our reverse repurchase agreement with Chimera. This amount was included in the principal amount which approximates fair value in our Statement of Financial Condition. The interest rate at December 31, 2009 was 1.72%. The collateral for this loan was mortgage-backed securities with a fair value of $314.3 million at December 31, 2009.
At June 30, 2010, RCap, in its ordinary course of business, financed though matched reverse repurchase agreements, at market rates, $82.7 million for a fund that is managed by FIDAC pursuant to a management agreement. At June 30, 2010, RCap had outstanding reverse repurchase agreements with a non-affiliates of $226.1 million. At December 31, 2009, RCap, in its ordinary course of business, financed though matched reverse repurchase agreements, at market rates, $69.7 million for a fund that is managed by FIDAC pursuant to a management agreement. At December 31, 2009, RCap had outstanding reverse repurchase agreements with non-affiliates of $425.0 million.
The table below shows the average daily reverse repurchase agreements balance for RCap and Annaly during the quarters ended and at period end June 30, 2010, March 31, 2010, December 31, 2009, September 30, 2009, June 30, 2009 and March 31, 2009.
| |
Reverse Repurchase Agreements
|
| |
(dollars in thousands)
|
| |
Average Daily Reverse Repurchase
Agreements for the Quarter Ended
|
Reverse Repurchase
Agreements at Period End
|
|
June 30, 2010
|
$422,891
|
$308,776
|
|
March 31, 2010
|
$620,781
|
$532,166
|
|
December 31, 2009
|
$685,507
|
$753,757
|
|
September 30, 2009
|
$458,029
|
$326,264
|
|
June 30, 2009
|
$255,539
|
$170,916
|
|
March 31, 2009
|
$513,529
|
$452,480
|
Receivable from Prime Broker on Equity Investment
The net assets of the investment fund we owned are subject to English bankruptcy law, which governs the administration of Lehman Brothers International (Europe) (in administration) (“LBIE”), as well as the law of New York, which governs the contractual documents. We invested approximately $45.0 million in the fund and have redeemed approximately $56.0 million. The current assets of the fund still remain at LBIE and affiliates of LBIE and the ultimate recovery of such amount remains uncertain. We have entered into the Claims Resolution Agreement between LBIE and certain eligible offerees effective December 29, 2009 with respect to these assets (the “CRA”).
Certain of our assets subject to the CRA are held directly at LBIE and we have valued such assets in accordance with the valuation date set forth in the CRA and the pricing information provided to the Company by LBIE. The valuation date with respect to these assets as set forth in the CRA is September 19, 2008.
Certain of our assets subject to the CRA are not held directly at LBIE and are believed to be held at affiliates of LBIE. Given the great degree of uncertainty as to the status of our assets that are not directly held by LBIE and are believed to be held at affiliates of LBIE, the Company has valued such assets at an 80% discount. The value of the net assets that are not directly held by LBIE and are believed to be held at affiliates of LBIE is determined on the basis of the best information available to us from time to time, legal and professional advice obtained for the purpose of determining the rights, and on the basis of a number of assumptions which we believe to be reasonable.
We can provide no assurance, however, that we will recover all or any portion of any of the net assets of the investment fund following completion of LBIE’s administration (and any subsequent liquidation).
Borrowings
As of June 30, 2010, our collateralized debt has consisted entirely of borrowings collateralized by a pledge of our Investment Securities. These borrowings appear on our balance sheet as repurchase agreements. At June 30, 2010, we had established uncommitted borrowing facilities in this market with 30 lenders in amounts which we believe are in excess of our needs. All of our Investment Securities are currently accepted as collateral for these borrowings. However, we limit our borrowings, and thus our potential asset growth, in order to maintain unused borrowing capacity and thus increase the liquidity and strength of our balance sheet. For the quarters ended June 30, 2010 and 2009, the term to maturity of our borrowings ranged from one day to 9 years. Additionally, we have entered into structured borrowings giving the counterparty the right to call the balance prior to maturity. At June 30, 2010 and 2009, the weighted average cost of funds for all of our borrowings was 2.09% and 2.54%, respectively, including the effect of the interest rate swaps, and the weighted average term to next rate adjustment was 163 days and 196 days, respectively.
During the six months ended June 30, 2010, we issued $600.0 million in aggregate principal amount of 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, 2010 of 46.6070 and 48.3595 shares of Common Stock per $1,000 principal amount of Convertible Senior Notes, which was equivalent to an initial conversion price of approximately $21.4560 and a conversion price at June 30, 2010 of $19.8915 per share of Common Stock, respectively, subject to adjustment in certain circumstances.
Liquidity
Liquidity, which is our ability to turn non-cash assets into cash, allows us to purchase additional investment securities and to pledge additional assets to secure existing borrowings should the value of our pledged assets decline. Potential immediate sources of liquidity for us include cash balances and unused borrowing capacity. Unused borrowing capacity will vary over time as the market value of our investment securities varies. Our non-cash assets are largely actual or implied AAA assets, and accordingly, we have not had, nor do we anticipate having, difficulty in converting our assets to cash. Our balance sheet also generates liquidity on an on-going basis through mortgage principal repayments and net earnings held prior to payment as dividends. Should our needs ever exceed these on-going sources of liquidity plus the immediate sources of liquidity discussed above, we believe that in most circumstances our investment securities could be sold to raise cash. The maintenance of liquidity is one of the goals of our capital investment policy. Under this policy, we limit asset growth in order to preserve unused borrowing capacity for liquidity management purposes.
Borrowings under our repurchase agreements increased by $1.8 billion to $56.4 billion at June 30, 2010, from $54.6 billion at December 31, 2009. Our leverage was 5.9:1 at June 30, 2010 and 5.7:1 at December 31, 2009.
We anticipate that, upon repayment of each borrowing under a repurchase agreement, we will use the collateral immediately for borrowing under a new repurchase agreement. We have not at the present time entered into any commitment agreements under which the lender would be required to enter into new repurchase agreements during a specified period of time, nor do we presently plan to have liquidity facilities with commercial banks.
Under our repurchase agreements, we may be required to pledge additional assets to our repurchase agreement counterparties (i.e., lenders) in the event the estimated fair value of the existing pledged collateral under such agreements declines and such lenders demand additional collateral (a “margin call”), which may take the form of additional securities or cash. Similarly, if the estimated fair value of investment securities increases due to changes in market interest rates of market factors, lenders may release collateral back to us. Specifically, margin calls result from a decline in the value of our Mortgage-Backed Securities securing our repurchase agreements, prepayments on the mortgages securing such Mortgage-Backed Securities and to changes in the estimated fair value of such Mortgage-Backed Securities generally due to principal reduction of such Mortgage-Backed Securities from scheduled amortization and resulting from changes in market interest rates and other market factors. Through June 30, 2010, we did not have any margin calls on our repurchase agreements that we were not able to satisfy with either cash or additional pledged collateral. However, should prepayment speeds on the mortgages underlying our Mortgage-Backed Securities and/or market interest rates suddenly increase, margin calls on our repurchase agreements could result, causing an adverse change in our liquidity position.
The following table summarizes the effect on our liquidity and cash flows from contractual obligations for repurchase agreements, interest expense on repurchase agreements, the maturing value and interest expense on the Convertible Senior Notes, assuming no conversion, the non-cancelable office lease and employment agreements at June 30, 2010. The table does not include the effect of net interest rate payments under our interest rate swap agreements. The net swap payments will fluctuate based on monthly changes in the receive rate. At June 30, 2010, the interest rate swaps had a net negative fair value of $1.2 billion.
| |
|
(dollars in thousands)
|
|
|
Contractual Obligations
|
|
Within One
Year
|
|
|
One to Three
Years
|
|
|
Three to Five
Years
|
|
|
More than
Five Years
|
|
|
Total
|
|
|
Repurchase agreements
|
|
$ |
50,906,835 |
|
|
$ |
3,380,000 |
|
|
$ |
700,000 |
|
|
$ |
1,400,000 |
|
|
$ |
56,386,835 |
|
|
Interest expense on repurchase agreements,
based on rates at June 30, 2010
|
|
|
228,184 |
|
|
|
229,156 |
|
|
|
137,279 |
|
|
|
118,469 |
|
|
|
713,088 |
|
|
Convertible Senior Notes
|
|
|
- |
|
|
|
- |
|
|
|
600,000 |
|
|
|
- |
|
|
|
600,000 |
|
|
Interest Expense on Convertible Senior Notes
|
|
|
27,867 |
|
|
|
55,733 |
|
|
|
31,639 |
|
|
|
|
|
|
|
115,239 |
|
|
Long-term operating lease obligations
|
|
|
1,941 |
|
|
|
4,120 |
|
|
|
2,762 |
|
|
|
- |
|
|
|
8,823 |
|
|
Employment contracts
|
|
|
80,428 |
|
|
|
3,759 |
|
|
|
|
|
|
|
|
|
|
|
84,187 |
|
|
Total
|
|
$ |
51,245,255 |
|
|
$ |
3,672,768 |
|
|
$ |
1,471,680 |
|
|
$ |
1,518,469 |
|
|
$ |
57,908,172 |
|
Stockholders’ Equity
During the quarter and six months ended June 30, 2010, 57,000 options and 148,000 options were exercised under the Long-Term Stock Incentive Plan, or Incentive Plan, for an aggregate exercise price of $753,000 and $1.8 million, 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, respectively. 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, 2010, we raised $640,000 and $116.2 million by issuing 38,000 and 6.5 million shares, respectively, through the Direct Purchase and Dividend Reinvestment Program.
During the year ended December 31, 2009, 423,160 options were exercised under the Incentive Plan for an aggregate exercise price of $4.9 million. During the year ended December 31, 2009, 7,550 shares of restricted stock were issued under the Incentive Plan.
During the year ended December 31, 2009, 1.4 million shares of Series B Preferred Stock were converted into 2.8 million shares of common stock, respectively.
During the year ended December 31, 2009, the Company raised $141.8 million by issuing 8.4 million shares, through the Direct Purchase and Dividend Reinvestment Program.
During the quarter and six months ended June 30, 2010, we declared dividends to common shareholders totaling $380.6 million or $0.68 per share and $744.4 million or $1.33 per share, respectively. During the quarter and six months ended June 30, 2010, we declared and paid dividends to Series A Preferred shareholders totaling $3.6 million or $0.492188 per share and $7.3 million or $0.984376 per share, respectively, and Series B Preferred shareholders totaling $976,000 or $0.375 per share and $2.0 million or $0.75 per share, respectively.
During the quarter and six months ended June 30, 2009, we declared dividends to common shareholders totaling $326.7 million or $0.60 per share and $598.8 million or $1.10 per share, respectively. During the quarter and six months ended June 30, 2009, we declared and paid dividends to Series A Preferred shareholders totaling $3.6 million or $0.492188 per share and $7.3 million or $0.984376 per share, respectively, and Series B Preferred shareholders totaling $977,000 or $0.375 per share and $2.0 million or $0.75 per share, respectively.
Unrealized Gains and Losses
With our “available-for-sale” accounting treatment, unrealized fluctuations in market values of assets do not impact our GAAP or taxable income but rather are reflected on our balance sheet by changing the carrying value of the asset and stockholders’ equity under “Accumulated Other Comprehensive Income (Loss).” As a result of the de-designation of interest rate swaps as cash flow hedges during the quarter ended December 31, 2009, unrealized gains and losses in our interest rate swaps impact our GAAP income.
As a result of this mark-to-market accounting treatment, our book value and book value per share are likely to fluctuate far more than if we used historical amortized cost accounting. As a result, comparisons with companies that use historical cost accounting for some or all of their balance sheet may not be meaningful.
The table below shows unrealized gains and losses on the Investment Securities, available-for-sale equity securities and interest rate swaps in our portfolio prior to de-designation.
| |
|
Unrealized Gains and Losses |
|
| |
|
(dollars in thousands) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
June 30,
2010
|
|
|
March 31,
2010
|
|
|
December 31, 2009
|
|
|
September 30, 2009
|
|
|
June 30,
2009
|
|
|
Unrealized gain
|
|
$ |
2,643,907 |
|
|
$ |
2,009,923 |
|
|
$ |
2,093,709 |
|
|
|
2,158,882 |
|
|
|
1,719,536 |
|
|
Unrealized loss
|
|
|
(103,707 |
) |
|
|
(122,071 |
) |
|
|
(202,392 |
) |
|
|
(198,888 |
) |
|
|
(357,402 |
) |
|
Net Unrealized (loss) gain
|
|
$ |
2,540,200 |
|
|
$ |
1,887,852 |
|
|
$ |
1,891,317 |
|
|
|
1,959,994 |
|
|
|
1,362,134 |
|
Unrealized changes in the estimated net fair value of investment securities have one direct effect on our potential earnings and dividends: positive changes increase our equity base and allow us to increase our borrowing capacity while negative changes tend to limit borrowing capacity under our capital investment policy. A very large negative change in the net fair value of our investment securities might impair our liquidity position, requiring us to sell assets with the likely result of realized losses upon sale.
Leverage
Our debt-to-equity ratio at June 30, 2010 and December 31, 2009 was 5.9:1 and 5.7:1, respectively. We generally expect to maintain a ratio of debt-to-equity of between 8:1 and 12:1, although the ratio may vary , as it currently does because of market conditions, from this range from time to time based upon various factors, including our management’s opinion of the level of risk of our assets and liabilities, our liquidity position, our level of unused borrowing capacity and over-collateralization levels required by lenders when we pledge assets to secure borrowings.
Our target debt-to-equity ratio is determined under our capital investment policy. Should our actual debt-to-equity ratio increase above the target level due to asset acquisition or market value fluctuations in assets, we would cease to acquire new assets. Our management will, at that time, present a plan to our board of directors to bring us back to our target debt-to-equity ratio; in many circumstances, this would be accomplished over time by the monthly reduction of the balance of our Mortgage-Backed Securities through principal repayments.
Asset/Liability Management and Effect of Changes in Interest Rates
We continually review our asset/liability management strategy with respect to interest rate risk, mortgage prepayment risk, credit risk and the related issues of capital adequacy and liquidity. Our goal is to provide attractive risk-adjusted stockholder returns while maintaining what we believe is a strong balance sheet.
We seek to manage the extent to which our net income changes as a function of changes in interest rates by matching adjustable-rate assets with variable-rate borrowings. In addition, we have attempted to mitigate the potential impact on net income of periodic and lifetime coupon adjustment restrictions in our portfolio of investment securities by entering into interest rate swaps. At June 30, 2010, we had entered into swap agreements with a total notional amount of $25.5 billion. We agreed to pay a weighted average pay rate of 3.48% and receive a floating rate based on one month LIBOR. At December 31, 2009, we had entered into swap agreements with a total notional amount of $21.5 billion. We agreed to pay a weighted average pay rate of 3.85% and receive a floating rate based on one month LIBOR. We may enter into similar derivative transactions in the future by entering into interest rate collars, caps or floors or purchasing interest only securities.
Changes in interest rates may also affect the rate of mortgage principal prepayments and, as a result, prepayments on mortgage-backed securities. We seek to mitigate the effect of changes in the mortgage principal repayment rate by balancing assets we purchase at a premium with assets we purchase at a discount. To date, the aggregate premium exceeds the aggregate discount on our mortgage-backed securities. As a result, prepayments, which result in the expensing of unamortized premium, will reduce our net income compared to what net income would be absent such prepayments.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities nor do we have any commitment or intent to provide funding to any such entities. As such, we are not materially exposed to any market, credit, liquidity or financing risk that could arise if we had engaged in such relationships.
Capital Resources
At June 30, 2010, we had no material commitments for capital expenditures.
Inflation
Virtually all of our assets and liabilities are financial in nature. As a result, interest rates and other factors drive our performance far more than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our financial statements are prepared in accordance with GAAP and our dividends are based upon our net income as calculated for tax purposes; in each case, our activities and balance sheet are measured with reference to historical cost or fair market value without considering inflation.
Other Matters
We calculate that at least 75% of our assets were qualified REIT assets, as defined in the Code for the quarters ended June 30, 2010 and 2009. We also calculate that our revenue qualifies for the 75% source of income test and for the 95% source of income test rules for the quarters ended June 30, 2010 and 2009. Consequently, we met the REIT income and asset test. We also met all REIT requirements regarding the ownership of our common stock and the distribution of our net income. Therefore, as of quarter ended of June 30, 2010 and December 31, 2009, we believe that we qualified as a REIT under the Code.
We at all times intend to conduct our business so as not to become required to register as an investment company under the Investment Company Act of 1940, or the Investment Company Act. If we were to become required to register as an investment company, then our use of leverage would be substantially reduced. The Investment Company Act exempts from registration as an investment company under the Investment Company Act entities that are “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate” (qualifying interests). Under current interpretation of the staff of the SEC, in order to qualify for this exemption, we must maintain at least 55% of our assets directly in qualifying interests and at least 80% of our assets in qualifying interests plus other real estate related assets. In addition, unless certain mortgage securities represent all the certificates issued with respect to an underlying pool of mortgages, the Mortgage-Backed Securities may be treated as securities separate from the underlying mortgage loans and, thus, may not be considered qualifying interests for purposes of the 55% requirement. We calculate that as of June 30, 2010 and December 31, 2009, we were in compliance with this requirement.
MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which we are exposed is interest rate risk, which is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Changes in the general level of interest rates can affect our net interest income, which is the difference between the interest income earned on interest-earning assets and the interest expense incurred in connection with our interest-bearing liabilities, by affecting the spread between our interest-earning assets and interest-bearing liabilities. Changes in the level of interest rates also can affect the value of our Mortgage-Backed Securities and our ability to realize gains from the sale of these assets. We may utilize a variety of financial instruments, including interest rate swaps, caps, floors, inverse floaters and other interest rate exchange contracts, in order to limit the effects of interest rates on our operations. When we use these types of derivatives to hedge the risk of interest-earning assets or interest-bearing liabilities, we may be subject to certain risks, including the risk that losses on a hedge position will reduce the funds available for payments to holders of securities and that the losses may exceed the amount we invested in the instruments.
Our profitability and the value of our portfolio (including interest rate swaps) may be adversely affected during any period as a result of changing interest rates. The following table quantifies the potential changes in net interest income and portfolio value, should interest rates go up or down 25, 50 and 75 basis points, assuming the yield curves of the rate shocks will be parallel to each other and the current yield curve. All changes in income and value are measured as percentage changes from the projected net interest income and portfolio value at the base interest rate scenario. The base interest rate scenario assumes interest rates at June 30, 2010 and various estimates regarding prepayment and all activities are made at each level of rate shock. Actual results could differ significantly from these estimates.
|
Change in Interest Rate
|
Projected Percentage Change in
Net Interest Income
|
Projected Percentage Change in
Portfolio Value, with Effect of Interest
Rate Swaps
|
| |
|
|
|
-75 Basis Points
|
5.57%
|
0.34%
|
|
-50 Basis Points
|
3.65%
|
0.26%
|
|
-25 Basis Points
|
1.79%
|
0.15%
|
|
Base Interest Rate
|
-
|
-
|
|
+25 Basis Points
|
(1.79%)
|
(0.21%)
|
|
+50 Basis Points
|
(3.58%)
|
(0.47%)
|
|
+75 Basis Points
|
(5.37%)
|
(0.81%)
|
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with the timing and magnitude of the repricing of assets and liabilities. We attempt to control risks associated with interest rate movements. Methods for evaluating interest rate risk include an analysis of our interest rate sensitivity "gap," which is the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities. A gap is considered negative when the amount of interest-rate sensitive liabilities exceeds interest-rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to adversely affect net interest income. Because different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market rates or conditions, changes in interest rates may affect net interest income positively or negatively even if an institution were perfectly matched in each maturity category.
The following table sets forth the estimated maturity or repricing of our interest-earning assets and interest-bearing liabilities at June 30, 2010. The amounts of assets and liabilities shown within a particular period were determined in accordance with the contractual terms of the assets and liabilities, except adjustable-rate loans, and securities are included in the period in which their interest rates are first scheduled to adjust and not in the period in which they mature and does include the effect of the interest rate swaps. The interest rate sensitivity of our assets and liabilities in the table could vary substantially based on actual prepayment experience.
| |
|
Within 3
Months
|
|
|
4-12 Months
|
|
|
More than 1
Year to 3 Years
|
|
|
3 Years and
Over
|
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(dollars in thousands) |
|
|
Rate Sensitive Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities (Principal)
|
|
$ |
3,585,246 |
|
|
$ |
1,563,358 |
|
|
$ |
2,050,128 |
|
|
$ |
60,201,584 |
|
|
$ |
67,400,316 |
|
|
Cash Equivalents
|
|
|
327,979 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
327,979 |
|
|
Reverse Repurchase Agreements
|
|
|
308,776 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
308,776 |
|
|
Securities Borrowed
|
|
|
242,242 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
242,242 |
|
|
U.S. Treasury Securities
|
|
|
87,352 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
87,352 |
|
|
Total Rate Sensitive Assets
|
|
|
4,551,595 |
|
|
|
1,563,358 |
|
|
|
2,050,128 |
|
|
|
60,201,584 |
|
|
|
68,366,665 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate Sensitive Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase Agreements, with the effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of swaps
|
|
|
21,146,740 |
|
|
|
9,043,245 |
|
|
|
11,950,750 |
|
|
|
14,246,100 |
|
|
|
56,386,835 |
|
|
Convertible Senior Notes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
600,000 |
|
|
|
600,000 |
|
|
Securities Loaned
|
|
|
242,242 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
242,242 |
|
|
Treasury Securities sold, not yet purchased
|
|
|
26,207 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
26,207 |
|
|
Total Rate Sensitive Liabilities
|
|
|
21,415,189 |
|
|
|
9,043,245 |
|
|
|
11,950,750 |
|
|
|
14,846,100 |
|
|
|
57,229,077 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate sensitivity gap
|
|
$ |
(16,863,594 |
) |
|
$ |
(7,479,887 |
) |
|
$ |
(9,900,622 |
) |
|
$ |
45,355,484 |
|
|
$ |
11,111,378 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative rate sensitivity gap
|
|
$ |
(16,863,594 |
) |
|
$ |
(24,343,485 |
) |
|
$ |
(34,244,103 |
) |
|
$ |
11,111,378 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest rate sensitivity gap as
a percentage of total rate-sensitive assets
|
|
|
(25 |
%) |
|
|
(36 |
%) |
|
|
(51 |
%) |
|
|
16 |
% |
|
|
|
|
Our analysis of risks is based on management’s experience, estimates, models and assumptions. These analyses rely on models which utilize estimates of fair value and interest rate sensitivity. Actual economic conditions or implementation of investment decisions by our management may produce results that differ significantly from the estimates and assumptions used in our models and the projected results shown in the above tables and in this report. These analyses contain certain forward-looking statements and are subject to the safe harbor statement set forth under the heading, “Special Note Regarding Forward-Looking Statements.”
Our management, including our Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act) as of the end of the period covered by this quarterly report. Based on that review and evaluation, the CEO and CFO have concluded that our current disclosure controls and procedures, as designed and implemented, (1) were effective in ensuring that information regarding the Company and its subsidiaries is accumulated and communicated to our management, including our CEO and CFO, by our employees, as appropriate to allow timely decisions regarding required disclosure and (2) were effective in providing reasonable assurance that information the Company must disclose in its periodic reports under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods prescribed by the SEC’s rules and forms.
There have been no changes in our internal controls over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.
From time to time, we are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on our consolidated financial statements.
There have been no material changes to the risk factors disclosed in Item 1A – Risk Factors of our annual report on Form 10-K for the year ended December 31, 2009 (the “Form 10-K”) or any subsequent Form 10-Q. The materialization of any risks and uncertainties identified in our Special Note Regarding Forward-Looking Statements contained in this report together with those previously disclosed in our Form 10-K or any subsequent Form 10-Q or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations and cash flows. See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Special Note Regarding Forward-Looking Statements” in this quarterly report on Form 10-Q.
On August 4, 2010, we entered into an amended and restated employment agreement with Matthew Lambiase, our Managing Director. The amended and restated employment agreement has a targeted aggregate cash compensation of 0.05% of our book value, with a base salary of $750,000. The annual bonus is payable subject to the discretion of the compensation committee. The compensation committee also has the right to increase a bonus beyond the targeted compensation contained in the amended and restated employment agreement. The amended and restated employment agreement has a one year term and is automatically renewed for one year periods thereafter. The foregoing summary of the amended and restated employment agreement is qualified by reference to the amended and restated employment agreement, a copy of which is attached hereto as Exhibit 10.1 and incorporated herein by reference.
Exhibits:
The exhibits required by this item are set forth on the Exhibit Index attached hereto.
EXHIBIT INDEX
|
3.1
|
Articles of Amendment and Restatement of the Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-11 (Registration No. 333-32913) filed with the Securities and Exchange Commission on August 5, 1997).
|
|
|
3.2
|
Articles of Amendment of the Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of the Registrant’s Registration Statement on Form S-3 (Registration Statement 333-74618) filed with the Securities and Exchange Commission on June 12, 2002).
|
|
|
3.3
|
Articles of Amendment of the Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of the Registrant's Form 8-K (filed with the Securities and Exchange Commission on August 3, 2006).
|
|
| 3.4 |
Articles of Amendment of the Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.4 of the Registrant's Form 10-Q filed with the Securities and Exchange Commission on May 7, 2008).
|
|
| 3.5 |
Form of Articles Supplementary designating the Registrant’s 7.875% Series A Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.3 to the Registrant’s 8-A filed with the Securities and Exchange Commission on April 1, 2004).
|
|