Edgar Filing: ANNALY CAPITAL MANAGEMENT INC

a6713400.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2011

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

EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _______________ TO _________________

COMMISSION FILE NUMBER: 1-13447

ANNALY CAPITAL MANAGEMENT, INC.

(Exact name of Registrant as specified in its Charter)

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

1211 AVENUE OF THE AMERICAS, SUITE 2902

NEW YORK, NEW YORK

(Address of principal executive offices)

10036

(Zip Code)

(212) 696-0100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yes X No___

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

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

Large accelerated filer þ Accelerated filer  Non-accelerated filer  Smaller reporting company 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No þ

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

Class	Outstanding at May 6, 2011
Common Stock, $.01 par value	813,263,525

ANNALY CAPITAL MANAGEMENT, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I

	PAGE
Part I. FINANCIAL INFORMATION

Item 1. Financial Statements:

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

Consolidated Statements of Operations and Comprehensive Income (Unaudited) for the quarters ended March 31, 2011 and 2010	2

Consolidated Statements of Stockholders’ Equity (Unaudited) for the quarters ended March 31, 2011 and 2010	3

Consolidated Statements of Cash Flows (Unaudited) for the quarters ended March 31, 2011 and 2010	4

Notes to Consolidated Financial Statements (Unaudited)	5

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk	37

Item 4. Controls and Procedures	38

Part II. OTHER INFORMATION

Item 1. Legal Proceedings	39

Item 1A. Risk Factors	39

Item 5. Other Information	39

Item 6. Exhibits	40

SIGNATURES	41

PART I

Part I

Item 1. Financial Statements

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

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

	March 31, 2011 (Unaudited)			December 31, 2010(1)
ASSETS
Cash and cash equivalents	$	357,012		$	282,626
U.S. Treasury Securities, at fair value (including pledged assets of $1,040,443 and $660,823, respectively)		1,088,657			1,100,447
Reverse repurchase agreements, at fair value		1,348,069			1,006,163
Securities borrowed, at fair value		368,714			216,676
Agency Mortgage-Backed Securities, at fair value (including pledged assets of $83,045,860 and $67,787,023, respectively)		93,644,409			78,440,330
Agency debentures, at fair value (including pledged assets of $332,323 and $1,068,869, respectively)		414,660			1,108,261
Corporate debt		21,224			21,683
Investments with affiliates		303,713			252,863
Receivable for Investment Securities sold		320,465			151,460
Accrued interest and dividends receivable		391,356			345,250
Receivable from Prime Broker		3,272			3,272
Receivable for advisory and service fees		16,631			16,172
Intangible for customer relationships, net		8,990			9,290
Goodwill		42,030			42,030
Interest rate swaps, at fair value		8,879			2,561
Other derivative contracts, at fair value		1,539			2,607
Other assets		87,988			24,899
Total assets	$	98,427,608		$	83,026,590
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
U.S. Treasury Securities sold, not yet purchased, at fair value	$	788,898		$	909,462
Repurchase agreements		79,983,914			65,533,537
Securities loaned, at fair value		359,852			217,841
Payable for Investments Securities purchased		2,476,409			4,575,026
Payable for Investments purchased with affiliate		57,500			-
Convertible Senior Notes		600,000			600,000
Accrued interest payable		113,101			115,766
Dividends payable		498,697			404,220
Interest rate swaps, at fair value		577,150			754,439
Other derivative contracts, at fair value		-			2,446
Accounts payable and other liabilities		79,087			8,921
Total liabilities		85,534,608			73,121,658

6.00% Series B Cumulative Convertible Preferred Stock: 4,600,000 shares authorized, 1,650,047 and 1,652,047 shares issued and outstanding, respectively		39,983			40,032

Stockholders’ Equity:
7.875% Series A Cumulative Redeemable Preferred Stock: 7,412,500 authorized, issued and outstanding		177,088			177,088
Common stock, par value $.01 per share, 987,987,500 authorized, 804,350,532 and 631,594,205 issued and outstanding, respectively		8,044			6,316
Additional paid-in capital		12,119,817			9,175,245
Accumulated other comprehensive income		1,009,528			1,164,642
Accumulated deficit		(461,460	)		(658,391	)
Total stockholders’ equity		12,853,017			9,864,900

Total liabilities, Series B Cumulative Convertible Preferred Stock and stockholders’ equity	$	98,427,608		$	83,026,590

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

See notes to consolidated financial statements.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

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

(Unaudited)

	For the Quarter Ended March 31, 2011			For the Quarter Ended March 31, 2010
Interest income
Investment securities	$	837,880		$	653,935
Securities loaned		1,343			454
U.S. Treasury Securities		4,825			-
Total interest income		844,048			654,389
Interest expense
Repurchase agreements		102,602			92,089
Interest rate swaps		206,148			180,838
Convertible Senior Notes		6,767			3,195
Securities borrowed		1,101			387
U.S. Treasury Securities sold, not yet purchased		4,986			-
Total interest expense		321,604			276,509

Net interest income		522,444			377,880
Other income (loss):
Investment advisory and service fees		17,207			12,546
Gains on sales of Mortgage-Backed Securities and agency debentures		27,185			46,962
Dividend income from available-for-sale equity securities		6,297			7,964
Unrealized gains (losses) on interest rate swaps		169,308			(116,732	)
Net gains on trading securities		18,812			-
Income from underwriting		2,904			-
Total other income (loss)		241,713			(49,260	)

Expenses:
Distribution fees		-			360
General and administrative expenses		51,827			40,021
Total expenses		51,827			40,381

Income before income taxes and income from equity method investment in affiliate		712,330			288,239

Income taxes		(13,575	)		(7,314	)

Income from equity method investment in affiliate		1,140			140

Net income		699,895			281,065

Dividends on preferred stock		4,267			4,625

Net income available to common shareholders		695,628			276,440

Net income available per share to common shareholders:
Basic	$	0.92		$	0.50
Diluted	$	0.89		$	0.49

Weighted average number of common shares outstanding:
Basic		752,413,605			554,995,092
Diluted		790,993,841			575,859,564

Net income	$	699,895		$	281,065
Other comprehensive loss:
Unrealized (losses) gains on available-for-sale securities		(142,227	)		7,416
Unrealized gains on interest rate swaps		14,298			36,081
Reclassification adjustment for net gains included in net income		(27,185	)		(46,962	)
Other comprehensive loss		(155,114	)		(3,465	)
Comprehensive income	$	544,781		$	277,600
See notes to consolidated financial statements.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(dollars in thousands, except per share data)

(Unaudited)

	Preferred Stock		Common Stock Par Value		Additional Paid-In Capital		Accumulated Other Comprehensive Income			Accumulated Deficit			Total
BALANCE, DECEMBER 31, 2009	$	177,088	$	5,531	$	7,817,454	$	1,891,317		$	(336,964	)	$	9,554,426

Net income		-		-		-		-			281,065			281,065
Other comprehensive loss		-		-		-		(3,465	)		-			(3,465	)
Exercise of stock options		-		1		1,057		-			-			1,058
Stock option expense and long-term compensation expense		-		-		1,171		-			-			1,171
Conversion of Series B cumulative preferred stock		-		-		16		-			-			16
Net proceeds from direct purchase and dividend reinvestment		-		65		115,453		-			-			115,518
Preferred Series A dividends declared $0.4925 per share		-		-		-		-			(3,648	)		(3,648	)
Preferred Series B dividends declared $0.375 per share		-		-		-		-			(977	)		(977	)
Common dividends declared, $0.65 per share		-		-		-		-			(363,778	)		(363,778	)

BALANCE, MARCH 31, 2010	$	177,088	$	5,597	$	7,935,151	$	1,887,852		$	(424,302	)	$	9,581,386

	Preferred Stock		Common Stock Par Value		Additional Paid-In Capital		Accumulated Other Comprehensive Income			Accumulated Deficit			Total
BALANCE, DECEMBER 31, 2010	$	177,088	$	6,316	$	9,175,245	$	1,164,642		$	(658,391	)	$	9,864,900

Net income		-		-		-		-			699,895			699,895
Other comprehensive loss		-		-		-		(155,114	)		-			(155,114	)
Exercise of stock options		-		2		2,435		-			-			2,437
Stock option expense and long-term compensation expense		-		-		1,262		-			-			1,262
Conversion of Series B cumulative preferred stock		-		-		48		-			-			48
Net proceeds from direct purchase and dividend reinvestment		-		1		1,141		-			-			1,142
Follow-on offering net proceeds		-		1,725		2,939,686		-			-			2,941,411
Preferred Series A dividends declared $0.4925 per share		-		-		-		-			(3,648	)		(3,648	)
Preferred Series B dividends declared $0.375 per share		-		-		-		-			(619	)		(619	)
Common dividends declared, $0.62 per share		-		-		-		-			(498,697	)		(498,697	)

BALANCE, MARCH 31, 2011	$	177,088	$	8,044	$	12,119,817	$	1,009,528		$	(461,460	)	$	12,853,017

See notes to consolidated financial statements.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(Unaudited)

	For the Quarter Ended March 31, 2011			For the Quarter Ended March 31, 2010
Cash flows from operating activities:
Net income	$	699,895		$	281,065
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of Mortgage Backed Securities premiums and discounts, net		174,743			164,007
Amortization of intangibles		366			407
Amortization on deferred expenses		900			450
Gains on sales of Mortgage-Backed Securities and Agency debentures		(27,185	)		(46,962	)
Stock option and long-term compensation expense		1,262			1,171
Unrealized (gains) losses on interest rate swaps		(169,308	)		116,732
Net gains on trading securities		(18,812	)		-
Gain on investment with affiliate, equity method		(98	)		(140	)
Proceeds from repurchase agreements from Broker Dealer		302,730,166			250,140,649
Payments on repurchase agreements from Broker Dealer		(297,961,656	)		(248,827,060	)
Proceeds from reverse repo to Broker Dealer		56,147,084			2,727,269
Payments on reverse repo to Broker Dealer		(56,488,990	)		(2,764,682	)
Proceeds from securities borrowed		993,039			476,309
Payments on securities borrowed		(1,145,077	)		(507,364	)
Proceeds from securities loaned		1,175,210			559,552
Payments on securities loaned		(1,033,199	)		(528,232	)
Payments on U.S. Treasury Securities		(8,198,723	)		-
Proceeds from U.S. Treasury Securities		8,123,321			-
Net payments on derivatives		(971	)		-
Increase in other assets		(64,055	)		(33,915	)
(Increase) decrease in accrued interest and dividend receivable		(48,671	)		1,746
(Increase) decrease in advisory and service fees receivable		(459	)		851
Decrease in interest payable		(2,665	)		(1,115	)
Increase in accounts payable and other liabilities		70,166			60,286
Net cash provided by operating activities		4,956,283			1,821,024
Cash flows from investing activities:
Payments on purchases of Mortgage-Backed Securities and agency debentures		(26,657,476	)		(8,995,583	)
Proceeds from sales of Mortgage-Backed Securities and agency debentures		3,397,846			1,974,280
Principal payments on Mortgage-Backed Securities		5,549,651			6,190,795
Proceeds from Agency debentures called		594,246			-
Proceeds from other derivative securities		14,998			-
Principal payments on corporate debt		468			-
Payments on reverse repurchase agreements		-			(4,032,426	)
Proceeds from reverse repurchase agreements		-			4,291,430
Net cash used in investing activities		(17,100,267	)		(571,504	)
Cash flows from financing activities:
Proceeds from repurchase agreements		65,447,646			57,522,092
Principal payments on repurchase agreements		(55,765,779	)		(59,649,330	)
Issuance of Convertible Senior Notes		-			582,000
Proceeds from exercise of stock options		2,437			1,058
Net proceeds from follow-on offerings		2,941,411			-
Proceeds from direct purchases and dividend reinvestments		1,142			115,518
Dividends paid		(408,487	)		(419,471	)
Net cash provided by (used in) financing activities		12,218,370			(1,848,133	)
Net increase (decrease) in cash and cash equivalents		74,386			(598,613	)
Cash and cash equivalents, beginning of period		282,626			1,504,568
Cash and cash equivalents, end of period	$	357,012		$	905,955
Supplemental disclosure of cash flow information:
Interest paid, including interest rate swaps	$	324,269		$	277,624
Taxes paid	$	22,401		$	5,232

Noncash investing activities:
Receivable for Investment securities sold	$	320,465		$	359,636
Payable for Investments Securities purchased		2,476,409		$	7,498,712
Payable for Investments purchased with affiliate	$	57,500			-
Net change in unrealized loss on available-for-sale securities and interest rate swaps, net of reclassification adjustment	$	(155,114	)	$	(3,465	)

Noncash financing activities:
Dividends declared, not yet paid	$	498,697		$	363,785
Conversion of Series B cumulative preferred stock	$	48		$	16

See notes to consolidated financial statements.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

Prior year amounts for interest expense on interest rate swaps were reclassified from interest expense to conform to the current year presentation on the Consolidated Statement of Operations and Comprehensive Income. Additionally, prior year amounts for Proceeds from sale of agency debentures and Payments on purchases of agency debentures were reclassified to Proceeds from sales of Mortgage-Backed Securities and agency debentures and Payments on purchases of Mortgage-Backed Securities and agency debentures, respectively, on the Consolidated Statement of Cash Flows.

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

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

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

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

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

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

The Company’s investment in Chimera Investment Corporation (“Chimera”) is accounted for as available-for-sale equity securities. The Company’s investment in CreXus Investment Corp. (“CreXus”) is accounted for under the equity method.

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 Company determines if it (1) has the intent to sell the Investment Securities, (2) is more likely than not that it will be required to sell the securities before recovery, or (3) does not expect to recover the entire amortized cost basis of the 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 consolidated statement of operations, while the balance of losses related to other factors will be recognized in other comprehensive income (“OCI”). There was no other-than-temporary impairment for the quarters ended March 31, 2011 and 2010.

The estimated fair value of available-for-sale debt and equity securities, U.S. Treasury securities, U.S. Treasury securities sold, not yet purchased, receivable from prime broker, interest rate swaps, and futures and options contracts is equal to their carrying value presented in the consolidated statements of financial condition. Cash and cash equivalents, reverse repurchase agreements, securities borrowed, receivable for Agency Mortgage-Backed Securities sold, accrued interest and dividends receivable, receivable for advisory and service fees, repurchase agreements with maturities shorter than one year, payable for investments purchased, securities loaned, dividends payable, accounts payable and other liabilities, and accrued interest payable, generally approximates fair value at March 31, 2011 due to the short term nature of these financial instruments. The estimated fair value of long term structured repurchase agreements is reflected in Note 9 to the consolidated financial statements. The estimated fair value of Convertible Senior Notes is reflected in Note 11 to the consolidated financial statements.

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

Derivative Financial Instruments/Hedging Activity - Prior to the fourth quarter of 2008, the Company designated interest rate swaps as cash flow hedges, whereby the swaps were recorded at fair value on the statements of financial condition 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 the Company 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 was no longer practical to match the pricing dates of both the swaps and the repurchase agreements.

As a result, the Company 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 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. The Company continues to hold repurchase agreements in excess of swap contracts and has 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 the Company’s statements of operations.

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

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

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

Repurchase Agreements - The Company finances the acquisition of its Agency Mortgage-Backed Securities and Agency debentures through the use of repurchase agreements. Repurchase agreements are treated as collateralized financing transactions and are carried at their contractual amounts, including accrued interest, as specified in the respective agreements. Reverse repurchase agreements and repurchase agreements with the same counterparty and the same maturity are presented net in the statements of financial condition when the terms of the agreements permit netting.

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

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

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

The provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740, Income Taxes, clarify the accounting for uncertainty in income taxes recognized in financial statements and prescribe a recognition threshold and measurement attribute for tax positions taken or expected to be taken on a tax return. FASB ASC 740 also requires that interest and penalties related to unrecognized tax benefits be recognized in financial statements. The Company does not have any unrecognized tax benefits that would affect its financial position. Thus, no accruals for penalties and interest were necessary as of March 31, 2011.

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

Goodwill and Intangible Assets - The Company’s acquisitions of FIDAC and Merganser were accounted for using the purchase method. Under the purchase method, net assets and results of operations of acquired companies are included in the consolidated financial statements from the date of acquisition. In addition, the costs of FIDAC and Merganser were allocated to the assets acquired, including identifiable intangible assets, and the liabilities assumed based on their estimated fair values at the date of acquisition. The excess of purchase price over the fair value of the net assets acquired was recognized as goodwill. Goodwill and intangible assets are periodically (but not less frequently than annually) reviewed for potential impairment. Intangible assets with an estimated useful life are expected to amortize over a 10.2 year weighted average time period. During the quarters ended March 31, 2011 and 2010, there were no impairment losses.

Stock Based Compensation - The Company is required to measure and recognize in the consolidated financial statements the compensation cost relating to share-based payment transactions. The compensation cost is reassessed based on the fair value of the equity instruments issued.

The Company recognizes compensation expense on a straight-line basis over the requisite service period for the entire award (that is, over the requisite service period of the last separately vesting portion of the award). The Company estimated fair value using the Black-Scholes valuation model.

A Summary of Recent Accounting Pronouncements Follows:

Assets

Receivables (ASC 310)

In July 2010, FASB released ASU 2010-20, which provides greater transparency and 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 debt securities; a transferor’s interest in securitization transactions accounted for as sales under ASC 860; and purchased beneficial interests in securitized financial assets. This update was effective for the Company for interim or annual periods ending on or after December 15, 2010. This update had no material effect on the Company’s consolidated financial statements.

Broad Transactions

Fair Value Measurements and Disclosures (ASC 820)

In January 2010, FASB issued guidance (ASU 2010-06) which increased disclosure regarding the fair value of assets. The key provisions of this guidance include the requirement to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 including a description of the reason for the transfers. Previously this was only required of transfers between Level 2 and Level 3 assets. Further, reporting entities are required to provide fair value measurement disclosures for each class of assets and liabilities; a class is potentially a subset of the assets or liabilities within a line item in the statement of financial position. Additionally, disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements are required for either Level 2 or Level 3 assets. This portion of the guidance was effective for the Company on January 1, 2010. The guidance also requires disclosure on any Level 3 assets presents 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. This last portion of the guidance was effective for the Company January 1, 2011. As this guidance solely relates to disclosures, adoption of this guidance had no effect on the Company’s consolidated financial statements.

Subsequent Events (ASC 855)

ASC 855 provides 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.

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 had no material effect on the Company’s consolidated financial statements.

Transfers and Servicing (ASC 860)

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

2.	MORTGAGE-BACKED SECURITIES

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

March 31, 2011	Freddie Mac			Fannie Mae			Ginnie Mae			Total Agency Mortgage-Backed Securities
	(dollars in thousands)
Mortgage-Backed
Securities, gross	$	24,841,332		$	63,995,911		$	933,685		$	89,770,928
Unamortized discount		(13,481	)		(17,900	)		(403	)		(31,784	)
Unamortized premium		630,435			2,269,137			32,462			2,932,034
Amortized cost		25,458,286			66,247,148			965,744			92,671,178

Gross unrealized gains		538,694			1,155,997			30,322			1,725,013
Gross unrealized losses		(147,971	)		(599,647	)		(4,164	)		(751,782	)

Estimated fair value	$	25,849,009		$	66,803,498		$	991,902		$	93,644,409

	Amortized Cost			Gross Unrealized Gain			Gross Unrealized Loss			Estimated Fair Value

Adjustable rate	$	10,449,351		$	358,251		$	(13,352	)	$	10,794,250

Fixed rate		82,221,827			1,366,762			(738,430	)		82,850,159

Total	$	92,671,178		$	1,725,013		$	(751,782	)	$	93,644,409

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

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

Estimated fair value	$	20,672,843		$	56,890,333		$	877,154		$	78,440,330

	Amortized Cost			Gross Unrealized Gain			Gross Unrealized Loss			Estimated Fair Value
	(dollars in thousands)
Adjustable rate	$	10,954,627		$	257,822		$	(75,440	)	$	11,137,009

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

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

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

	March 31, 2011				December 31, 2010
	Fair Value		Amortized Cost		Fair Value		Amortized Cost
Weighted-Average Life	(dollars in thousands)
Less than one year	$	858,543	$	850,274	$	915,398	$	901,824
Greater than one year and less than five years		66,646,319		65,137,843		59,732,123		58,321,570
Greater than or equal to five years		26,139,547		26,683,061		17,792,809		18,093,758

Total	$	93,644,409	$	92,671,178	$	78,440,330	$	77,317,152

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

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

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

March 31, 2011	$	42,331,688	$	(747,653	)	$	153,837	$	(4,129	)	$	42,485,525	$	(751,782	)

December 31, 2010	$	28,608,996	$	(577,096	)	$	166,481	$	(3,929	)	$	28,775,477	$	(581,025	)

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

During the quarter ended March 31, 2011, the Company sold $3.3 billion of Agency Mortgage-Backed Securities, resulting in a realized gain of $20.9 million. During the quarter ended March 31, 2010, the Company sold $1.6 billion of Agency Mortgage-Backed Securities, resulting in a realized gain of $47.0 million.

3.	AGENCY DEBENTURES

At March 31, 2011, the Company owned Agency debentures with a carrying value of $414.7 million, including an unrealized loss of $3.0 million.

For the quarter ended March 31, 2011, the Company sold or had called $821.8.0 million, of Agency debentures, resulting in realized gains of $6.3 million. For the quarter ended March 31, 2010, there were no Agency debentures sold or called.

4.	INVESTMENT WITH AFFILIATE, AVAILABLE FOR SALE EQUITY SECURITIES

All of the available-for-sale equity securities are shares of Chimera and are reported at fair value. Chimera is externally managed by FIDAC pursuant to a management agreement. The Company owned approximately 45.0 million shares of Chimera at a fair value of approximately $178.1 million at March 31, 2011 and approximately 45.0 million shares of Chimera at a fair value of approximately $184.9 million at December 31, 2010. At March 31, 2011 and December 31, 2010, the investment in Chimera had an unrealized gain of $39.3 million and $46.0 million, respectively.

5.	INVESTMENT IN AFFILIATE, EQUITY METHOD

At March 31, 2011 and December 31, 2010, the Company owned approximately 13% and 25%, respectively, of CreXus and accounts for its investment using the equity method. CreXus is externally managed by FIDAC pursuant to a management agreement. On March 29, 2011, the Company acquired an additional 5.0 million shares of CreXus, which settled on April 1, 2011. The quoted fair value of the Company’s investment in CreXus was $108.8 million at March 31, 2011 and $59.3 million at December 31, 2010.

6.	REVERSE REPURCHASE AGREEMENTS

At March 31, 2011, RCap had outstanding reverse repurchase agreements with non-affiliates of $1.3 billion. At December 31, 2010, RCap had outstanding reverse repurchase agreements with non-affiliates of $1.0 billion.

The Company reports cash flows on reverse repurchase agreements as investment activities in the Statements of Cash Flows. The Company reports cash flows on reverse repurchase agreements related to RCap as operating activities in the Statements of Cash Flows.

7.	RECEIVABLE FROM PRIME BROKER

The net assets of the Fund owned by the Company 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. The Company invested approximately $45.0 million in the Fund and has 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. The Company has entered into the Claims Resolution Agreement (the “CRA”) between LBIE and certain eligible offerees effective December 29, 2009 with respect to these assets.

Certain of the Company’s assets subject to the CRA are held directly at LBIE and the Company has 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 the Company’s 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 the Company’s 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, or $3.3 million. 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.

The Company can provide no assurance, however, that it 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).

8.	FAIR VALUE MEASUREMENTS

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

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

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

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

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

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

At March 31, 2011	4.80%	4.21%	4.19%	3.02%	10.09%	39 months

At December 31, 2010	4.92%	4.28%	4.00%	3.04%	10.16%	39 months

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

	Level 1		Level 2		Level 3
At March 31, 2011	(dollars in thousands)
Assets:
Mortgage-Backed Securities	$	-	$	93,644,409		-
Agency debentures		-		414,660		-
Available-for-sale-equity securities		178,132		-		-
U.S. Treasury Securities		1,088,657		-		-
Securities borrowed		-		368,714		-
Interest rate swaps		-		8,879		-
Other derivative contracts		-		1,539		-
Liabilities:
Interest Rate swaps		-		577,150		-
U.S. Treasury securities sold, not yet purchased		788,898		-		-
Securities loaned		-		359,852		-

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

9.	REPURCHASE AGREEMENTS

The Company had outstanding $80.0 billion and $65.5 billion of repurchase agreements with weighted average borrowing rates of 1.63% and 1.84%, after giving effect to the Company’s interest rate swaps, and weighted average remaining maturities of 120 days and 127 days as of March 31, 2011 and December 31, 2010, respectively. Investment Securities and U.S. Treasury Securities pledged as collateral under these repurchase agreements and interest rate swaps had an estimated fair value of $84.4 billion at March 31, 2011 and $69.5 billion at December 31, 2010.

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

	March 31, 2011		December 31, 2010
	(dollars in thousands)
1 day	$	11,227,191		-
2 to 29 days		21,973,216	$	32,669,341
30 to 59 days		15,136,294		13,767,522
60 to 89 days		4,504,540		4,776,597
90 to 119 days		12,921,297		6,068,376
Over 120 days		14,221,376		8,251,701
Total	$	79,983,914	$	65,533,537

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

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 $5.2 billion and the fair value of the option to call was ($256.5 million) at March 31, 2011. The repurchase agreements totaled $5.9 billion and the fair value of the option to call was ($313.2 million) at December 31, 2010. Management has determined that the call option is not required to be bifurcated as it is deemed clearly and closely related to the debt instrument, therefore the fair value of the option is not recorded in the consolidated financial statements.

The structured term repurchase agreements are modeled and priced as pay fixed versus receive floating interest rate swaps whereby the fixed receiver has the option to cancel the swap after an initial lockout period. Therefore, the structured term repurchase agreements are priced as a combination of an interest rate swaps with an embedded call options.

Additionally, as of March 31, 2011 and December 31, 2010, the Company has entered into a repurchase agreement with a term of over one year. The amount of the repurchase agreement is $700 million and $500 million and it has an estimated fair value of $710.7 and $513.3 million as of March 31, 2011 and December 31, 2010, respectively.

The Company reports cash flows on repurchase agreements as financing activities in the Statements of Cash Flows. RCap reports cash flows on repurchase agreements as financing activities in the Statements of Cash Flows.

10.	DERIVATIVE INSTRUMENTS

In connection with the Company’s interest rate risk management strategy, the Company economically hedges a portion of its interest rate risk by entering into derivative financial instrument contracts. As of March 31, 2011, such instruments are comprised of interest rate swaps, which in effect modify the cash flows on repurchase agreements. The use of interest rate swaps creates exposure to credit risk relating to potential losses that could be recognized if the counterparties to these instruments fail to perform their obligations under the contracts. In the event of a default by the counterparty, the Company could have difficulty obtaining its Agency Mortgage-Backed Securities pledged as collateral for swaps. The Company does not anticipate any defaults by its counterparties.

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

The location and fair value of the Company’s interest rate swaps reported in the Consolidated Statements of Financial Condition as of March 31, 2011 are as follows:

	Location on Statements of Financial Condition	Notional Amount	Net Estimated Fair Value/Carrying Value
		(dollars in thousands)
March 31, 2011	Assets	$1,350,000	$8,879
March 31, 2011	Liabilities	$32,079,350	($577,150)
December 31, 2010	Assets	$200,000	$2,561
December 31, 2010	Liabilities	$26,882,460	($754,439)

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

	Location on Statements of Operations and Comprehensive Income
	Interest Expense		Unrealized Gains (Losses) on Interest Rate Swaps
	(dollars in thousands)
For the Quarter Ended March 31, 2011	$	206,148	$	169,308
For the Quarter Ended March 31, 2010	$	180,838	$	(116,732)

The weighted average pay rate at March 31, 2011 was 2.92% and the weighted average receive rate was 0.28%. The weighted average pay rate at March 31, 2010 was 3.66% and the weighted average receive rate was 0.24%. Without netting the market value of the swaps by dealer at March 31, 2011, the gross unrealized loss on interest rate swaps was $687.2 million, with a notional amount of $24.2 billion, and the gross unrealized gain on interest rate swaps was $119.0 million, with a notional amount of $9.3 billion. Without netting the market value of the swaps by dealer at December 31, 2010, the gross unrealized loss on interest rate swaps was $820.0 million, with a notional amount of $23.2 billion, and the gross unrealized gain on interest rate swaps was $68.2 million, with a notional amount of $3.9 billion.

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

11.	CONVERTIBLE SENIOR NOTES

During the quarter ended March 31, 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 March 31, 2011 of 46.6070 and 56.0338 shares of Common Stock per $1,000 principal amount of Convertible Senior Notes, which is equivalent to an initial conversion price of approximately $21.4560 and $17.8464 per share of Common Stock, respectively, subject to adjustment in certain circumstances. The market value at March 31, 2011 and December 31, 2010 was $701.7 million and $699.2 million, respectively, based on closing price

12.	PREFERRED STOCK AND COMMON STOCK

(A) Common Stock Issuances

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

During the quarter ended March 31, 2011, 183,343 options were exercised for an aggregate exercise price of $2.5 million, and 3,876 shares were granted under the Long-Term Stock Incentive Plan, or Incentive Plan.

During the quarter ended March 31, 2011, 2,000 shares of Series B Preferred Stock were converted into 5,313 shares of common stock, respectively.

During the quarter ended March 31, 2011, the Company raised $1.1 million by issuing 63,795 shares through the Direct Purchase and Dividend Reinvestment Program.

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

(B) Preferred Stock

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

At March 31, 2011 and December 31, 2010, the Company had issued and outstanding 1,650,047 and 1,652,047, respectively, shares 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 March 31, 2011, the conversion ratio was 2.7329 shares of common stock per $25 liquidation preference. Commencing April 5, 2011, the Company has the right in certain circumstances to convert each Series B Preferred Stock into a number of common shares based upon the then prevailing conversion rate. The Series B Preferred Stock is also convertible into common shares at the option of the Series B preferred shareholder at anytime at the then prevailing conversion rate. The Series B Preferred Stock is senior to the Company's common stock and is on parity with the Series A Preferred Stock with respect to dividends and distributions, including distributions upon liquidation, dissolution or winding up. The Series B Preferred Stock generally does not have any voting rights, except if the Company fails to pay dividends on the Series B Preferred Stock for six or more quarterly periods (whether or not consecutive). Under such circumstances, the Series B Preferred Stock, together with the Series A Preferred Stock, will be entitled to vote to elect two additional directors to the Board, until all unpaid dividends have been paid or declared and set apart for payment. In addition, certain material and adverse changes to the terms of the Series B Preferred Stock cannot be made without the affirmative vote of holders of at least two-thirds of the outstanding shares of Series B Preferred Stock and Series A Preferred Stock. Through December 31, 2010, the Company had declared and paid all required quarterly dividends on the Series B Preferred Stock. During the quarter ended March 31, 2011, 2,000 shares of Series B Preferred Stock were converted into 5,313 shares of common stock.

During the quarter ended March 31, 2011, the Company declared dividends to common shareholders totaling $498.7 million or $0.62 per share, which were paid to shareholders on April 27, 2011. During the quarter ended March 31, 2011, the Company declared dividends to Series A Preferred shareholders totaling approximately $3.6 million or $0.4925 per share, and Series B shareholders totaling approximately $619 thousand or $0.375 per share, which were paid to preferred shareholders on March 31, 2011.

During the quarter ended March 31, 2010, the Company declared dividends to common shareholders totaling $363.8 million or $0.65 per share, which was paid to shareholders on April 29, 2010. During the quarter ended March 31, 2010, the Company declared dividends to Series A Preferred shareholders totaling approximately $3.6 million or $0.4925 per share, and Series B shareholders totaling approximately $1.0 million or $0.375 per share, which were paid to preferred shareholders on March 31, 2010.

13.	NET INCOME PER COMMON SHARE

The following table presents a reconciliation of the net income and shares used in calculating basic and diluted earnings per share for the quarters ended March 31, 2011 and 2010.


	For the Quarters Ended
	March 31, 2011		March 31, 2010
Net income	$	699,895	$	281,065
Less: Preferred stock dividends		4,267		4,625
Net income available to common shareholders, prior to adjustment for dilutive potential common shares, if necessary	$	695,628	$	276,440
Add: Preferred Series B dividends, if Series B shares are dilutive		619		976
Add: Interest on Convertible Senior Notes, if Notes are dilutive		6,000		3,195
Net income available to common shareholders, as adjusted	$	702,247	$	280,611

Weighted average shares of common stock outstanding-basic		752,414		554,995
Add: Effect of dilutive stock options		451		224
Add: Series B Cumulative Convertible Preferred Stock		4,509		6,293
Add: Convertible Senior Notes		33,620		14,347
Weighted average shares of common stock outstanding-diluted		790,994		575,859

Options to purchase 565,000 shares of common stock, were outstanding and considered anti-dilutive as their exercise price exceeded the average stock price for the quarter ended March 31, 2011. Options to purchase 566,000 shares of common stock, were outstanding and considered anti-dilutive as their exercise price exceeded the average stock price for the quarter ended March 31, 2010.

14.	LONG-TERM STOCK INCENTIVE PLANS

The Company had 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 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.

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 Quarter ended
	March 31, 2011					March 31, 2010
	Number of Shares			Weighted Average Exercise Price		Number of Shares			Weighted Average Exercise Price
Options outstanding at the beginning of quarter		6,891,975		$	15.20		7,271,503		$	15.20
Exercised		(183,343	)		13.29		(90,247	)		11.72
Forfeited		-			-		-			-
Expired		-			-		-			-
Options outstanding at the end of period		6,708,632		$	15.38		7,181,256		$	15.24
Options exercisable at the end of the period		3,639,501		$	16.30		1,769,180		$	17.23

The weighted average remaining contractual term was approximately 6.3 years for stock options outstanding and approximately 5.2 years for stock options exercisable as of March 31, 2011. As of March 31, 2011, there was approximately $7.6 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 1.8 years.

The weighted average remaining contractual term was approximately 7.4 years for stock options outstanding and approximately 4.3 years for stock options exercisable as of March 31, 2010. As of March 31, 2010, there was approximately $12.4 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 2.7 years.

15.	INCOME TAXES

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 ended March 31, 2011, the Company’s taxable REIT subsidiaries recorded $4.1 million 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 ended March 31, 2011, the Company recorded $9.5 million of income tax expense for a portion of earnings retained based on Section 162(m) limitations.

During the quarter ended March 31, 2010, the Company’s taxable REIT subsidiaries recorded $1.3 million 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 year ended March 31, 2010, the Company recorded $6.0 million of income tax expense for a portion of earnings retained based on Section 162(m) limitations.

The Company files tax returns in several U.S jurisdictions, including New York State and New York City. The 2010 tax year remains open to U.S. federal, state and local tax examinations.

The effective tax rates of 54% 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.

16.	LEASE COMMITMENTS AND CONTINGENCIES

Commitments

The Company has a non-cancelable lease for office space which commenced in May 2002 and expires in December 2015. Additionally, on January 1, 2011 the Company acquired additional office space. 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. FIDAC has a lease for office space which commenced in October 2010 and expires in February 2016. The Company’s aggregate future minimum lease payments total $10.6 million. The following table details the lease payments.

Year Ending December	Lease Commitment		Sublease Income		Net Amount
	(dollars in thousands)
2011 (remaining)	$	2,204	$	127	$	2,077
2012		2,939		70		2,869
2013		2,939		-		2,939
2014		2,510		-		2,510
2015		161		-		161
Later years		27		-		27
	$	10,780	$	197	$	10,583

Contingencies

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 March 31, 2011 and 2010.

Merganser’s prior owners may receive additional consideration under the merger agreement. The Company paid approximately $14.1 million of this earn-out during the fourth quarter of 2010. The Company cannot currently calculate how much additional 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. The additional earn-out consideration will be paid during 2012, if Merganser meets specific performance goals under the merger agreement. All amounts paid under this provision will be recorded as additional goodwill.

17.	INTEREST RATE RISK

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 interest earning assets and the Company’s ability to realize gains from the sale of these assets. A decline in the value of the interest earning assets 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 interest earning assets by entering into interest rate agreements such as interest rate caps and interest rate swaps. As of March 31, 2011 and December 31, 2010, 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 $33.4 billion and $27.1 billion, respectively.

Changes in interest rates may also have an effect on the rate of mortgage principal prepayments and, as a result, prepayments on Agency 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 Agency 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.

18.	RCAP REGULATORY REQUIREMENTS

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 March 31, 2011 RCap had a minimum net capital requirement of $250,000 and would be required to notify FINRA if capital was to fall below the early warning threshold of $300,000. 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 March 31, 2011 was $274.7 million with excess net capital of $274.4 million.

19.	SUBSEQUENT EVENTS

The Company has reviewed subsequent events occurring through the date that these consolidated financial statements were available to be issued, and determined that no subsequent events occurred that would require accrual or additional disclosure.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, our ability to maintain our classification as a REIT for federal income tax purposes, and risks associated with the business of our subsidiaries, including the investment advisory businesses 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.

All references to “we,” “us,” or “our” mean Annaly Capital Management, Inc. and all entities owned by us, except where it is made clear that the term means only the parent company. The following defines certain of the commonly used terms in this annual report on Form 10-K: Agency mortgage-backed securities refers to residential mortgage-backed securities that are issued or guaranteed by a federally chartered corporation, such as Fannie Mae or Freddie Mac, or an agency of the U.S. Government, such as Ginnie Mae; Investment Securities refers to Agency mortgage-backed securities, Agency debentures, corporate debt securities; and interest earning assets refers to Investment Securities, reverse repurchase agreements, securities borrowed and U.S. Treasury Securities.

Overview

We own, manage, and finance a portfolio of real estate related investments, 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 interest-earning assets and the costs of borrowing to finance our acquisition of interest-earning assets 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 also own an investment fund and subsidiaries engaged in corporate middle market lending transactions and proving warehouse financing to residential mortgage originators.

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 Freddie Mac, Fannie Mae and Ginnie Mae. We also invest in Federal Home Loan Bank (or FHLB), Freddie Mac and Fannie Mae debentures.

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 high-quality rated 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 (or 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 Agency 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 Agency 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 Agency mortgage-backed securities portfolio increase, related purchase premium amortization increases, thereby reducing the net yield on such assets. The CPR on our Agency mortgage-backed securities portfolio averaged 17%, and 34% for the quarters ended March 31, 2011 and 2010, 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, interest expense, cost of funds, net interest income and net interest rate spreads for the quarterly periods presented.

	Average Interest Earning Assets (1)		Total Interest Income		Yield on Average Interest Earning Assets			Average Interest- Bearing Liabilities		Interest Expense		Average Cost of Funds			Net Interest Income		Net Interest Rate Spread
	(ratios for the quarters have been annualized, dollars in thousands)
Quarter Ended March 31, 2011	$	89,190,290	$	844,048		3.79	%	$	79,235,324	$	321,604		1.62	%	$	522,444		2.17	%
Quarter Ended December 31, 2010	$	74,749,528	$	682,087		3.65	%	$	67,448,046	$	304,013		1.80	%	$	378,074		1.85	%
Quarter Ended September 30, 2010	$	69,242,085	$	702,976		4.06	%	$	62,034,137	$	302,568		1.95	%	$	400,408		2.11	%
Quarter Ended June 30, 2010	$	61,952,037	$	643,682		4.16	%	$	56,190,308	$	280,242		2.00	%	$	363,440		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	%

(1) Does not reflect unrealized gains/(losses).

The following table presents the CPR experienced on our Agency mortgage-backed securities portfolio, on an annualized basis, for the quarterly periods presented.

Quarter Ended	CPR
March 31, 2011	17%
December 31, 2010	23%
September 30, 2010	20%
June 30, 2010	32%
March 31, 2010	34%

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.

Recent Developments

During the period of market dislocation that began in August 2007, fiscal and monetary policymakers established new liquidity facilities for primary dealers and commercial banks, reduced short-term interest rates, and passed legislation intended to address the challenges of mortgage borrowers and lenders. 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. 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 Treasury amended the terms of the 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 Treasury also amended the PSPAs with respect to the requirements for Fannie Mae and Freddie Mac to reduce their portfolios.

In 2010, 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 March 31, 2011, we had net purchase premiums of $2.9 billion, or 3% of current par value, on our Agency mortgage-backed securities. In addition, the U.S. Government, the Board of Governors of the Federal Reserve System, or Federal Reserve, and other governmental and regulatory bodies may take other actions in the future to address the financial crisis and recovery from the crisis.

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. Because a significant number of regulations under the Dodd-Frank Act have either not yet been adopted in final form or only recently implemented, it is not possible for us to predict how the Dodd-Frank Act will impact our business.

On February 11, 2011, the U.S Department of the Treasury issued a White Paper titled “Reforming America's Housing Finance Market” that lays out, among other things, proposals to limit or potentially wind down the role that Fannie Mae and Freddie Mac play in the mortgage market. Any such proposals, if enacted, may have broad adverse implications for the mortgage-backed securities market and our business, operations and financial condition. We expect such proposals to be the subject of significant discussion and it is not yet possible to determine whether or when such proposals may be enacted, what form any final legislation or policies might take and how proposals, legislation or policies emanating from the White Paper may impact the mortgage-backed securities market and our business, operations and financial condition. We are evaluating the potential impact of the proposals set forth in the White Paper.

Market conditions are evolving on a number of fronts. Regulatory and technical dynamics continue to develop, and monetary policy initiatives, including additional large scale asset purchases by the Federal Reserve, continue to support asset prices and lower yields across a wide range of market sectors, including ours.

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 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.

Results of Operations:

Net Income Summary

For the quarter ended March 31, 2011, our net income was $699.9 million or $.92 basic income per average share related to common shareholders, as compared to $281.1 million net income or $0.50 basic net income per average share for the quarter ended March 31, 2010. Net income per average share increased by $0.42 per average share available to common shareholders and total net income increased $418.8 million for the quarter ended March 31, 2011, when compared to the quarter ended March 31, 2010. We attribute the increase in net income for the quarter ended March 31, 2011 from the quarter ended March 31, 2010 to the recording of unrealized gains on interest rate swaps of $169.3 million for the quarter ended March 31, 2011, as compared to an unrealized loss related to interest rate swaps of $116.7 million for the quarter ended March 31, 2010. Net income also increased due to a $144.5 million increase in net interest income. Net interest income for the quarter ended March 31, 2011 was $522.4 million as compared to $377.9 million for the quarter ended March 31, 2010.

The table below presents the net income summary for the quarters ended March 31, 2011, and 2010.

Net Income Summary

(dollars in thousands, except for per share data)

	Quarter Ended March 31, 2011			Quarter Ended March 31, 2010
Interest income:
Investment securities	$	837,880		$	653,935
Securities loaned		1,343			454
U.S. Treasury Securities		4,825			-
Total interest income		844,048			654,389

Interest expense: Repurchase agreements		102,602			92,089
Interest rate swaps		206,148			180,838
Convertible Senior Notes		6,767			3,195
Securities borrowed		1,101			387
U.S. Treasuries Sold, not yet purchased		4,986			-
Total interest expense		321,604			276,509

Net interest income		522,444			377,880

Other income (loss):
Investment advisory and service fees		17,207			12,546
Gain on sale of Mortgage-Backed Securities and agency debentures		27,185			46,962
Dividend income from available-for-sale equity securities		6,297			7,964
Unrealized gains (losses) on interest rate swaps		169,308			(116,732	)
Net gains on trading securities		18,812			-
Income from underwriting		2,904			-
Total other income (loss)		241,713			(49,260	)

Expenses:
Distribution fees		-			360
General and administrative expenses		51,827			40,021
Total expenses		51,827			40,381

Income before income taxes and income from equity method investment in affiliate		712,330			288,239

Income taxes		(13,575	)		(7,314	)

Income from equity method investment in affiliate		1,140			140

Net income		699,895			281,065

Dividends on preferred stock		4,267			4,625

Net income available to common shareholders	$	695,628		$	276,440

Weighted average number of basic common shares outstanding		752,413,605			554,995,092
Weighted average number of diluted common shares outstanding		790,993,841			575,859,564

Basic net income per average common share	$	0.92		$	0.50
Diluted net income per average common share	$	0.89		$	0.49

Average total assets	$	90,727,103		$	71,047,676
Average equity	$	11,398,966		$	9,631,012

Return on average total assets		3.09	%		1.58	%
Return on average equity		24.56	%		11.67	%

Interest Income and Average Earning Asset Yield

We had average interest earning assets of $89.1 billion and $62.0 billion for the quarters ended March 31, 2011 and March 31, 2010, respectively. While our average interest earning assets increased period-over-period by $27.1 million, the yield on our average interest earning assets decreased from 4.22% at March 31, 2010 to 3.79% at March 31, 2011. Additionally, the prepayment speeds decreased to an average of 17% CPR for the quarter ended March 31, 2011 from an average of 34% for the quarter ended March 31, 2010. The positive impact of the increase in average interest earning assets and decrease in prepayment speeds exceeded the negative impact of the 43 basis point decrease in yield on average interest earning assets, resulting in a $189.7 million increase in interest income.

Interest Expense and the Cost of Funds

Our largest expense is the cost of borrowed funds. We had average borrowed funds of $79.2 billion and total interest expense of $321.6 million for the quarter ended March 31, 2011. We had average borrowed funds of $55.3 billion and total interest expense, including interest rate swaps, of $276.5 million for the quarter ended March 31, 2010. Our average cost of funds was 1.62% for the quarter ended March 31, 2011 and 2.00% for the quarter ended March 31, 2010. The cost of funds rate decreased by 38 basis points and the average borrowed funds increased by $23.9 billion for the quarter ended March 31, 2011, when compared to the quarter ended March 31, 2010. Interest expense for the quarter ended March 31, 2011 increased by $45.1 million when compared to the quarter ended March 31, 2010, due to the increase in interest-bearing liabilities. Our average cost of funds was 1.36% above average one-month LIBOR and 1.16% above average six-month LIBOR for the quarter ended March 31, 2011.

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 March 31, 2011, the year ended December 31, 2010 and four quarters in 2010.

Average Cost of Funds

(Quarterly ratios 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

One-Month

LIBOR

Average

Cost of

Funds

Relative to

Average

Six-Month

LIBOR

For the Quarter Ended

March 31, 2011