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www.annaly.com
Annaly Capital Management, Inc.
2010 Annual Report
209574_TI_CVR_R3.indd 1
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07
08
09
10
07
08
09
10
12
10
8
6
4
2
0
Shareholders’
Equity
(dollars in thousands)
Common and Preferred
Dividends Declared
(dollars in thousands)
$9,864,900
$9,554,426
$7,183,272
$5,204,938
$12,000,000
$10,000,000
$8,000,000
$6,000,000
$4,000,000
$2,000,000
$0
$1,588,707
$1,413,536
$1,109,186
$361,273
$1,800,000
12
$1,600,000
10
$1,400,000
$1,200,000
8
$1,000,000
$800,000
$600,000
$400,000
$200,000
$0
6
4
2
0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
‘07
‘08
‘09
‘10
‘07
‘08
‘09
‘10
During 2010, Annaly continued to meet its business objective of generating net income for distribution to shareholders.
We declared approximately $1.6 billion in total dividends, or $2.65 per common share, to our investors.
Corporate Profile
Annaly and its wholly-owned subsidiaries manage assets
for and provide services to institutional and individual
investors worldwide. Our principal business objective is
to generate net income for distribution to investors from
our mortgage-backed securities and from dividends we
receive from our subsidiaries. We have elected to be taxed
as a real estate investment trust (REIT). We trade on the
New York Stock Exchange under the ticker symbol NlY.
Annaly owns and manages a portfolio of primarily
mortgage-backed securities. Virtually all of the invest-
ment securities we own are issued and guaranteed by US
Government Agencies and carry an actual or implied AAA
rating. We employ leverage to enhance our returns. Our
leverage, measured as a ratio of debt-to-equity, typically is
no more than 12:1.
In addition to managing a portfolio of high-quality
mortgage-backed securities, we earn dividend income
from our subsidiaries. We have four wholly-owned subsidiar-
ies, Fixed Income Discount Advisory Company (FIDAC),
Merganser Capital Management, Inc. (Merganser), RCap
Securities, Inc. (RCap) and Shannon Funding llC
(Shannon). FIDAC, a SEC-registered investment advisor
acquired by Annaly in 2004, specializes in managing interest
rate and credit sensitive strategies and is a leading auction
agent for liquidating CDOs. It is the external manager
for Chimera Investment Corporation (NYSE: CIM) and
CreXus Investment Corp. (NYSE: CXS). Merganser, a
Boston-based SEC-registered investment advisor, was
acquired by Annaly in 2008 and extends Annaly’s platform
into traditional fixed income strategies for institutional
clients. RCap was formed by Annaly in 2008 and operates
as a self-clearing broker-dealer. Shannon was formed by
Annaly in 2010 and will provide mortgage warehouse
funding to mid-tier originators in the United States.
Annaly is experienced in managing real estate assets. Our
success and future growth prospects are based on the
proven ability of our strong and seasoned management
team to successfully take advantage of investment oppor-
tunities and deliver compelling returns in a wide range of
market environments.
l Gates llP
llP
lY).
lY-A).
lY, or by visiting our
209574_TI_CVR_R3.indd 2
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An Economic Engine
capiTal
invEsTmEnT
HousEHold
formaTion
dividEnds
sTimulaTE
Economic
acTiviTy
Tax
EfficiEncy
annaly capital management, inc. 2010 annual report
209574_TI_NAR_R3.indd 1
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Dear Fellow Shareholders,
as i’ve discussed
in some of my earnings call
remarks, annaly is like an economic engine. The most
important component of our shareholders’ total return
is our dividend – since 1997, we have declared $5.5
billion dollars in total dividends to our shareholders –
and these dividends are re-circulated back into the
economy, as part of our shareholders’ wealth formation
and consumption and as revenue in local, state and
federal tax coffers.
as a rEiT, annaly is a tax-efficient way for investors
to access the income-producing benefits of the residential
real estate market but, perhaps more importantly for
our country, annaly has become the largest pure play
public market financier of residential mortgages in the
united states, enabling almost a million households to
finance their homes.
2
annaly capital management, inc. 2010 annual report
209574_TI_NAR_R3.indd 2
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none of this happens by chance; it is the result of
preparation, experience and planning. Every day we are
reminded of how important these things are. as i
write my annual letter, all eyes are turned to Japan, a
country that was considered the best-prepared in
the world to contend with earthquakes or tsunamis.
in fact, every september 1, the anniversary of the great
Tokyo quake of 1923, the nation marks disaster
prevention day by practicing evacuation drills. and
then on friday march 11, 2011, an 8.9 magnitude
temblor hit the northeastern coastal areas, unleash-
ing an unprecedented combination of powerful natural
disasters. “Japan was ready for an earthquake, but not
this earthquake,” said the headline in the Washington
Post the next day. as Japan has grimly reminded us,
the best-laid plans can’t prevent certain disasters from
happening, but i believe that it will help that proud
nation recover.
With this in mind, i want to talk about how we
are preparing our company to compete
in the
years ahead. annaly may have managed through a
kitchen-sink’s worth of challenging market events, but
there is one thing you can be sure of – there will be more
to come. The family of companies that you see in the
organizational chart on the following page is a reflection
of how we are preparing for that. annaly’s subsidiaries –
fidac, merganser, rcap and, soon, shannon – make
us a stronger, smarter, more resourceful company. We
benefit from the business diversification and investment
opportunities in asset management and capital markets,
and we derive
invaluable perspective and market
intelligence from our subsidiaries and the businesses they
manage, which include chimera and crexus. We will
continue to grow and expand this platform for the
long-term benefit of our shareholders.
i started my career in the financial markets over
thirty years ago, and my experience ranges from
the back-office to the front-office to everything in
between. i’ve managed balance sheets and p&ls,
trade
serviced clients, negotiated contracts, filed
tickets and set up iT systems, everything from the
ridiculous to the sublime, and i’ve seen a lot of markets.
i’ve also learned from good people along the way. The
same can be said for each member of the team that
manages annaly. since our inception, we have had to
draw on every aspect of our collective experience in order
to navigate through often treacherous market conditions.
This experience and preparation is a critical component
of how we protect what makes annaly so special – the
impact we have on our shareholders’ lives. annaly, and
the rEiT model, is a shining example of the power of
dividends as a driver of economic activity and how the
private market is part of the solution to the future of
housing finance in america.
We are building a company that is designed to
perform in a wide range of market conditions and a
changing domestic mortgage finance system. fortune
favors the prepared.
Prodesse Non Nocere.
Michael A. J. Farrell
march 17, 2011
annaly capital management, inc. 2010 annual report
209574_TI_NAR_R3.indd 3
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The Annaly Family of Companies
NYSE:NLY (1997)
Mortgage Warehouse Lender
Formed 2010
FINRA Broker-Dealer
Formed 2008
SEC RIA
Formed 1994
SEC RIA
Institutional Money Manager
Formed 1985
FIDAC Serves as
External Manager to:
C R E
U S
NYSE:CIM (2007)
NYSE:CXS (2009)
annaly, its subsidiaries and affiliates are involved in
residential and commercial mortgages and securities,
government and corporate credit markets, structured
products, equity and debt capital markets and securities
lending. This diversity sets annaly apart in the mortgage
rEiT sector.
fidac is a sEc-registered investment advisor that
manages residential and commercial mortgage loans and
securities and provides other financial services. fidac
serves as the external manager for chimera and crexus.
merganser
investment advisor
serving the fixed-income needs of institutional clients
is a sEc-registered
including pension, public operating, Taft-Hartley and
endowment funds. in addition to offering cash enhance-
ment, short-term bond, intermediate bond and core
bond strategies, merganser develops customized product
portfolios for its clients.
rcap
is a finra-regulated self-clearing broker-
dealer operating a matched book, securities lending and
repurchase business of predominantly us agency
mortgage-backed securities and Treasury securities.
shannon is a wholly-owned subsidiary of annaly. it
intends to provide mortgage warehouse funding to mid-tier
originators in the united states.
4
Annaly Capital Management, Inc. 2010 Annual Report
209574_TI_NAR_R3.indd 4
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10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2010
OR
[ ] 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)
(State or other jurisdiction of incorporation of organization)
(I.R.S. Employer Identification Number)
MARYLAND
22-3479661
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, par value $.01 per share
New York Stock Exchange
7.875% Series A Cumulative Redeemable Preferred Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes X No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No X
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 (1) has filed all 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting
company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer X
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 Act). Yes __ No _X_.
At June 30, 2010, the aggregate market value of the voting stock held by non-affiliates of the Registrant was $9,536,990,800.
The number of shares of the Registrant’s Common Stock outstanding on February 24, 2011 was 804,165,257.
Documents Incorporated by Reference
The registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended
December 31, 2010. Portions of such proxy statement are incorporated by reference into Part III of this Form 10-K.
ANNALY CAPITAL MANAGEMENT, INC.
2010 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
ITEM 1.
BUSINESS
ITEM 1A.
RISK FACTORS
ITEM 1B.
UNRESOLVED STAFF COMMENTS
ITEM 2.
PROPERTIES
ITEM 3.
LEGAL PROCEEDINGS
ITEM 4.
(REMOVED AND RESERVED)
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6.
SELECTED FINANCIAL DATA
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A.
CONTROLS AND PROCEDURES
ITEM 9B.
OTHER INFORMATION
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11.
EXECUTIVE COMPENSATION
ITEM 12.
ITEM 13.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT INDEX
FINANCIAL STATEMENTS
SIGNATURES
PAGE
1
17
33
33
33
34
37
39
56
58
58
58
59
59
59
59
59
59
60
60
F-1
II-1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this annual 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 the Private Securities Litigation Reform Act of 1995. 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:
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
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 financing,
changes in the market value of our assets,
changes in business conditions and the general economy,
our ability to consummate any contemplated investment opportunities,
risks associated with the investment advisory business of our wholly owned subsidiaries, including:
o
o
o
the removal by clients of assets managed,
their regulatory requirements, and
competition in the investment advisory business,
risks associated with the broker-dealer business of our subsidiary,
changes in government regulations affecting our business, and
our ability to maintain our qualification as a REIT for federal income tax purposes.
No forward-looking statements can be guaranteed and actual future results may vary materially and we caution you not
to place undue reliance on these forward-looking statements. For a discussion of the risks and uncertainties which could
cause actual results to differ from those contained in the forward-looking statements, please see the information under
the caption “Risk Factors” described in this Form 10-K. 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.
ITEM 1. BUSINESS
PART I
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 reverse repurchase agreement loans; and Interest
Earning Assets refers to Investment Securities, securities borrowed and U.S. Treasury Securities.
Background
THE COMPANY
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 cost of borrowings 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. We are a Maryland corporation that commenced operations on February 18, 1997. We are self-
advised and self-managed. We acquired Fixed Income Discount Advisory Company (or FIDAC) on June 4, 2004 and
Merganser Capital Management, Inc. (or Merganser) on October 31, 2008. FIDAC and Merganser manage a number of
investment vehicles and separate accounts for which they earn fee income. Our subsidiary, RCap Securities Inc. (or
RCap), operates as a broker-dealer, and was granted membership in the Financial Industry Regulatory Authority (or
FINRA) in January 2009.
We have elected and believe that we are organized and have operated in a manner that qualifies us to be taxed
as a real estate investment trust (or REIT) under the Internal Revenue Code of 1986, as amended (or the Code). If we
qualify for taxation as a REIT, we generally will not be subject to federal income tax on our taxable income that is
distributed to our stockholders. Therefore, substantially all of our assets, other than FIDAC, Merganser and RCap,
which are our taxable REIT subsidiaries, consist of qualified REIT real estate assets (of the type described in Section
856(c)(5)(B) of the Code). We have financed our purchases of Agency mortgage-backed securities and Agency
debentures with the net proceeds of equity offerings and borrowings under repurchase agreements whose interest rates
adjust based on changes in short-term market interest rates.
Assets
Under our capital investment policy, at least 75% of our total assets must be comprised of high-quality
mortgage-backed securities and short-term investments. High quality securities means securities that (1) are rated within
one of the two highest rating categories by at least one of the nationally recognized rating agencies, (2) are unrated but
are guaranteed by the United States government or an agency of the United States government, or (3) are unrated but we
determine them to be of comparable quality to rated high-quality mortgage-backed securities.
The remainder of our assets, comprising not more than 25% of our total assets, may consist of other qualified
REIT real estate assets which are unrated or rated less than high quality, but which are at least “investment grade” (rated
“BBB” or better by Standard & Poor’s Corporation (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 but 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.
1
We may acquire mortgage-backed securities backed by single-family residential mortgage loans as well as
securities backed by loans on multi-family, commercial or other real estate related properties. To date, substantially all
of the mortgage-backed securities that we have acquired have been backed by single-family residential mortgage loans.
To date, substantially all of the mortgage-backed securities that we have acquired have been Agency mortgage-
backed securities which, although not rated, carry an implied “AAA” rating. Agency mortgage-backed securities consist
of agency pass-through certificates and CMOs issued or guaranteed by an Agency. Pass-through certificates provide for
a pass-through of the monthly interest and principal payments made by the borrowers on the underlying mortgage loans.
CMOs divide a pool of mortgage loans into multiple tranches with different principal and interest payment
characteristics.
At December 31, 2010, approximately 13% of our Investment Securities were adjustable-rate pass-through
certificates, approximately 86% of our Investment Securities were fixed-rate pass-through certificates, CMOs or fixed-
rate corporate loans, and approximately 1% of our Investment Securities were CMO floaters or floating-rate corporate
loans. Our adjustable-rate pass-through certificates are backed by adjustable-rate mortgage loans and have coupon rates
which adjust over time, subject to interest rate caps and lag periods, in conjunction with changes in short-term interest
rates. Our fixed-rate pass-through certificates are backed by fixed-rate mortgage loans and have coupon rates which do
not adjust over time. CMO floaters are tranches of mortgage-backed securities where the interest rate adjusts in
conjunction with changes in short-term interest rates. CMO floaters may be backed by fixed-rate mortgage loans or, less
often, by adjustable-rate mortgage loans. In this Form 10-K, except where the context indicates otherwise, we use the
term “adjustable-rate interest-earning assets” to refer to adjustable-rate pass-through certificates, CMO floaters, Agency
debentures and corporate debt. At December 31, 2010, the weighted average yield on our portfolio of earning assets was
3.80% and the weighted average term to next rate adjustment on adjustable rate securities was 39 months.
We may also invest in Agency debentures, which consist of debentures issued by the Federal Home Loan Bank
(FHLB), Freddie Mac and Freddie Mac. We intend to continue to invest in adjustable-rate pass-through certificates,
fixed-rate mortgage-backed securities, CMO floaters, and Agency debentures. We may also invest on a limited basis in
derivative securities which 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 have not and will not invest in real estate mortgage investment conduit (REMIC) residuals and other
CMO residuals.
Borrowings
We attempt to structure our collateralized borrowings to have interest rate adjustment indices and interest rate
adjustment periods that, on an aggregate basis, correspond generally to the interest rate adjustment indices and periods of
our adjustable-rate interest-earning assets. However, periodic rate adjustments on our collateralized borrowings are
generally more frequent than rate adjustments on our Investment Securities. At December 31, 2010, the weighted
average cost of funds for all of our collateralized borrowings was 1.84%, with the effect of swaps, the weighted average
original term to maturity was 253 days, and the weighted average term to next rate adjustment of these collateralized
borrowings was 127 days.
We generally expect to maintain a ratio of debt-to-equity of between 8:1 and 12:1, although the ratio may vary,
as it currently does because of market conditions, from this range from time to time based upon various factors,
including our management’s opinion of the level of risk of our assets and liabilities, our liquidity position, our level of
unused borrowing capacity and over-collateralization levels required by lenders when we pledge assets to secure
borrowings. For purposes of calculating this ratio, our equity is equal to the value of our investment portfolio on a mark-
to-market basis, less the book value of our obligations under repurchase agreements and other collateralized borrowings
and convertible senior notes. At December 31, 2010, our ratio of debt-to-equity was 6.7:1.
During the quarter ended March 31, 2010, we issued $600.0 million in aggregate principal amount of our 4%
convertible senior notes due 2015 (Convertible Senior Notes) for net proceeds following underwriting expenses of
approximately $582.0 million. Interest on the notes is paid semi-annually at a rate of 4% per year and the notes will
mature on February 15, 2015 unless earlier repurchased or converted. As of December 1, 2010 the notes were
convertible into shares of common stock at a conversion rate of 54.1089 shares of common stock per $1,000 principal
2
amount of notes, which is equivalent to an initial conversion price of approximately $18.4812 per share of common
stock, subject to adjustment in certain circumstances.
Hedging
To the extent consistent with our election to qualify as a REIT, we enter into hedging transactions to attempt to
protect our Agency mortgage-backed securities and Agency debentures and related borrowings against the effects of
major interest rate changes. This hedging is used to mitigate declines in the market value of our Agency mortgage-
backed securities and Agency debentures during periods of increasing or decreasing interest rates and to limit or cap the
interest rates on our borrowings. These transactions are entered into solely for the purpose of hedging interest rate or
prepayment risk and not for speculative purposes. In connection with our interest rate risk management strategy, we
hedge a portion of our interest rate risk by entering into derivative financial instrument contracts. As of December 31,
2010, we had $27.1 billion in interest rate swaps, which in effect modify the cash flows on repurchase agreements.
Our Subsidiaries
FIDAC, an investment advisor registered with the SEC, is a fixed-income investment management company
specializing in managing fixed income investments in residential mortgage-backed securities, commercial mortgage-
backed securities and collateralized debt obligations for various investment vehicles and separate accounts. FIDAC also
has experience in managing and structuring debt financing associated with various asset classes and serves as a
liquidation agent of collateralized debt obligations. FIDAC commenced active investment management operations in
1994. At December 31, 2010, FIDAC was the adviser or sub-adviser for investment vehicles and separate accounts. The
team managing Annaly perform the same roles at FIDAC.
Merganser, an investment advisor registered with the SEC, has expertise in a variety of fixed income strategies
and focuses on managing each portfolio based on each client’s specific investment principles. Merganser serves a
diverse group of clients in a variety of disciplines nationwide including pension, public, operating, Taft-Hartley and
endowment funds as well as defined contribution plans. Merganser’s investment team maintains a careful balance of risk
management and performance by employing fundamental security analysis and by trading in an environment supported
by state-of-the-art technology, infrastructure and operations.
RCap operates as a broker-dealer and was granted membership in the Financial Industry Regulatory Authority
(or FINRA) in January 2009.
Compliance with REIT and Investment Company Requirements
We constantly monitor our investments and the income from these investments and, to the extent we enter into
hedging transactions, we monitor income from our hedging transactions as well, so as to ensure at all times that we
maintain our qualification as a REIT and our exemption from registration under the Investment Company Act of 1940, as
amended.
Executive Officers of the Company
The following table sets forth certain information as of February 24, 2011 concerning our executive officers:
Name
Michael A.J. Farrell
Wellington J. Denahan-Norris
Age
59
47
Position held with the Company
Chairman of the Board, Chief Executive Officer and President
Vice Chairman of the Board, Chief Investment Officer and Chief
Operating Officer
Kathryn F. Fagan
44
Chief Financial Officer and Treasurer
3
R. Nicholas Singh
James P. Fortescue
Kristopher Konrad
Rose-Marie Lyght
Jeremy Diamond
Ronald Kazel
Matthew Lambiase
Kevin Keyes
51
37
36
37
47
43
44
43
Chief Legal Officer, Secretary and Chief Compliance Officer
Managing Director, Head of Liabilities and Chief of Staff
Managing Director and Head Portfolio Manager
Managing Director and Chief Investment Officer of FIDAC
Managing Director and Head of Research and Corporate
Communications
Managing Director and Head of Asset Management Group
Managing Director and Co-Head of Business Development
Managing Director and Chief Strategy Officer
Mr. Farrell and Ms. Denahan-Norris have had years of experience in the investment banking and investment
management industries where, in various capacities, they have each managed portfolios of mortgage-backed securities,
arranged collateralized borrowings and utilized hedging techniques to mitigate interest rate and other risk within fixed-
income portfolios. Ms. Fagan is a certified public accountant and, prior to becoming our Chief Financial Officer and
Treasurer, served as Chief Financial Officer and Controller of a publicly owned savings and loan association. Mr.
Singh joined Annaly in February 2005. Mr. Fortescue joined Annaly in 1997. Mr. Konrad joined Annaly in 1997. Ms.
Lyght joined Annaly in April 1999. Mr. Diamond joined Annaly in March 2002. Mr. Kazel joined Annaly in December
2001. Mr. Lambiase joined Annaly in 2004. Mr. Keyes joined Annaly in September 2009. Prior to that he was a
Managing Director at Merrill Lynch. We and our subsidiaries had 114 full-time employees at December 31, 2010.
Distributions
To maintain our qualification as a REIT, we must distribute substantially all of our taxable income to our
stockholders each year. We have done this in the past and intend to continue to do so in the future. We also have
declared and paid regular quarterly dividends in the past and intend to do so in the future. We have adopted a dividend
reinvestment plan to enable holders of common stock to reinvest dividends automatically in additional shares of common
stock.
General
BUSINESS STRATEGY
Our principal business objective is to generate income for distribution to our stockholders, primarily from the
net cash flows on our Investment Securities. Our net cash flows result primarily from the difference between the interest
income on our Investment Securities and borrowing costs of our repurchase agreements, and from dividends we receive
from our subsidiaries. To achieve our business objective and generate dividend yields, our strategy is:
(cid:2)
to acquire Investment Securities that we believe:
- we have the necessary expertise to evaluate and manage;
- we can readily finance;
-
-
are consistent with our balance sheet guidelines and risk management objectives; and
provide attractive investment returns in a range of scenarios;
4
(cid:2)
(cid:2)
(cid:2)
(cid:2)
to finance purchases of mortgage-backed securities with the proceeds of equity and debt offerings and, to
the extent permitted by our capital investment policy, to utilize leverage to increase potential returns to
stockholders through borrowings;
to attempt to structure our borrowings to have interest rate adjustment indices and interest rate adjustment
periods that, on an aggregate basis, generally correspond to the interest rate adjustment indices and interest
rate adjustment periods of our adjustable-rate mortgage-backed securities;
to seek to minimize prepayment risk by structuring a diversified portfolio with a variety of prepayment
characteristics and through other means; and
to issue new equity or debt and increase the size of our balance sheet when opportunities in the market for
mortgage-backed securities are likely to allow growth in earnings per share.
We believe we are able to obtain cost efficiencies through our facilities-sharing arrangement with FIDAC and
RCap and by virtue of our management’s experience in managing portfolios of mortgage-backed securities and arranging
collateralized borrowings. We will strive to become even more cost-efficient over time by:
(cid:2)
(cid:2)
(cid:2)
(cid:2)
seeking to raise additional capital from time to time in order to increase our ability to invest in mortgage-
backed securities;
striving to lower our effective borrowing costs by seeking direct funding with collateralized lenders, rather
than using financial intermediaries, and investigating the possibility of using commercial paper and
medium term note programs;
improving the efficiency of our balance sheet structure by investigating the issuance of uncollateralized
subordinated debt, preferred stock and other forms of capital; and
utilizing information technology in our business, including improving our ability to monitor the
performance of our Investment Securities and to lower our operating costs.
Mortgage-Backed Securities
General
To date, substantially all of the mortgage-backed securities that we have acquired have been Agency mortgage-
backed securities which, although not rated, carry an implied “AAA” rating. Agency mortgage-backed securities are
mortgage-backed securities where a government agency or federally chartered corporation, such as Freddie Mac, Fannie
Mae or Ginnie Mae, guarantees payments of principal or interest on the securities. Agency mortgage-backed securities
consist of agency pass-through certificates and CMOs issued or guaranteed by an agency.
Even though to date we have only acquired mortgage-backed securities with an implied “AAA” rating, under
our capital investment policy, we have the ability to acquire securities of lower quality. Under our policy, at least 75%
of our total assets must be high quality mortgage-backed securities and short-term investments. High quality securities
are securities (1) that are rated within one of the two highest rating categories by at least one of the nationally recognized
rating agencies, (2) that are unrated but are guaranteed by the United States government or an agency of the United
States government, or (3) that are unrated or whose ratings have not been updated but that our management determines
are of comparable quality to rated high quality mortgage-backed securities.
Under our capital investment policy, the remainder of our assets, comprising not more than 25% of total assets,
may consist of mortgage-backed securities and 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 S&P or the equivalent by another
nationally recognized rating organization) 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
5
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 intend to structure our
portfolio to maintain a minimum weighted average rating (including our deemed comparable ratings for unrated
mortgage-backed securities) of our mortgage-backed securities of at least single “A” under the S&P rating system and at
the comparable level under the other rating systems.
Our allocation of investments among the permitted investment types may vary from time-to-time based on the
evaluation by our board of directors of economic and market trends and our perception of the relative values available
from these types of investments, except that in no event will our investments that are not high quality exceed 25% of our
total assets.
We intend to acquire only those mortgage-backed securities that we believe we have the necessary expertise to
evaluate and manage, that are consistent with our balance sheet guidelines and risk management objectives and that we
believe we can readily finance. Since we generally hold the mortgage-backed securities we acquire until maturity, we
generally do not seek to acquire assets whose investment returns are attractive in only a limited range of scenarios. We
believe that future interest rates and mortgage prepayment rates are very difficult to predict. Therefore, we seek to
acquire mortgage-backed securities which we believe will provide acceptable returns over a broad range of interest rate
and prepayment scenarios.
At December 31, 2010, our mortgage-backed securities consisted of pass-through certificates and CMOs issued
or guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae. We have not, and will not, invest in REMIC residuals and
other CMO residuals.
Description of Mortgage-Backed Securities
The mortgage-backed securities that we acquire provide funds for mortgage loans made primarily to residential
homeowners. Our securities generally represent interests in pools of mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and other mortgage lenders. These pools of mortgage loans are
assembled for sale to investors (like us) by various government, government-related and private organizations.
Mortgage-backed securities differ from other forms of traditional debt securities, which normally provide for
periodic payments of interest in fixed amounts with principal payments at maturity or on specified call dates. Instead,
mortgage-backed securities provide for a monthly payment, which consists of both interest and principal. In effect, these
payments are a “pass-through” of the monthly interest and principal payments made by the individual borrower on the
mortgage loans, net of any fees paid to the issuer or guarantor of the securities. Additional payments result from
prepayments of principal upon the sale, refinancing or foreclosure of the underlying residential property, net of fees or
costs which may be incurred. Some mortgage-backed securities, such as securities issued by Ginnie Mae, are described
as “modified pass-through”. These securities entitle the holder to receive all interest and principal payments owed on the
mortgage pool, net of certain fees, regardless of whether the mortgagors actually make mortgage payments when due.
The investment characteristics of pass-through mortgage-backed securities differ from those of traditional fixed-
income securities. The major differences include the payment of interest and principal on the mortgage-backed
securities on a more frequent schedule, as described above, and the possibility that principal may be prepaid at any time
due to prepayments on the underlying mortgage loans or other assets. These differences can result in significantly
greater price and yield volatility than is the case with traditional fixed-income securities.
Various factors affect the rate at which mortgage prepayments occur, including changes in interest rates, general
economic conditions, the age of the mortgage loan, the location of the property and other social and demographic
conditions. Generally prepayments on mortgage-backed securities increase during periods of falling mortgage interest
rates and decrease during periods of rising mortgage interest rates. We may reinvest prepayments at a yield that is higher
or lower than the yield on the prepaid investment, thus affecting the weighted average yield of our investments.
To the extent mortgage-backed securities are purchased at a premium, faster than expected prepayments result
in a faster than expected amortization of the premium paid. Conversely, if these securities were purchased at a discount,
faster than expected prepayments accelerate our recognition of income.
6
CMOs may allow for shifting of prepayment risk from slower-paying tranches to faster-paying tranches. This is
in contrast to mortgage pass-through certificates where all investors share equally in all payments, including all
prepayments, on the underlying mortgages.
Freddie Mac Certificates
Freddie Mac is a privately-owned government-sponsored enterprise created pursuant to an Act of Congress on
July 24, 1970. The principal activity of Freddie Mac currently consists of the purchase of mortgage loans or
participation interests in mortgage loans and the resale of the loans and participations in the form of guaranteed
mortgage-backed securities. Freddie Mac guarantees to each holder of Freddie Mac certificates the timely payment of
interest at the applicable pass-through rate and ultimate collection of all principal on the holder’s pro rata share of the
unpaid principal balance of the related mortgage loans, but does not guarantee the timely payment of scheduled principal
of the underlying mortgage loans. The obligations of Freddie Mac under its guarantees are solely those of Freddie Mac
and are not backed by the full faith and credit of the United States. If Freddie Mac were unable to satisfy these
obligations, distributions to holders of Freddie Mac certificates would consist solely of payments and other recoveries on
the underlying mortgage loans and, accordingly, defaults and delinquencies on the underlying mortgage loans would
adversely affect monthly distributions to holders of Freddie Mac certificates.
Freddie Mac certificates may be backed by pools of single-family mortgage loans or multi-family mortgage
loans. These underlying mortgage loans may have original terms to maturity of up to 40 years. Freddie Mac certificates
may be issued under cash programs (composed of mortgage loans purchased from a number of sellers) or guarantor
programs (composed of mortgage loans acquired from one seller in exchange for certificates representing interests in the
mortgage loans purchased).
Freddie Mac certificates may pay interest at a fixed rate or an adjustable rate. The interest rate paid on
adjustable-rate Freddie Mac certificates (Freddie Mac ARMs) adjusts periodically within 60 days prior to the month in
which the interest rates on the underlying mortgage loans adjust. The interest rates paid on certificates issued under
Freddie Mac’s standard ARM programs adjust in relation to the Treasury index. Other specified indices used in Freddie
Mac ARM programs include the 11th District Cost of Funds Index published by the Federal Home Loan Bank of San
Francisco, LIBOR and other indices. Interest rates paid on fully-indexed Freddie Mac ARM certificates equal the
applicable index rate plus a specified number of basis points. The majority of the series of Freddie Mac ARM
certificates issued to date have evidenced pools of mortgage loans with monthly, semi-annual or annual interest
adjustments. Adjustments in the interest rates paid are generally limited to an annual increase or decrease of either 100
or 200 basis points and to a lifetime cap of 500 or 600 basis points over the initial interest rate. Certain Freddie Mac
programs include mortgage loans which allow the borrower to convert the adjustable mortgage interest rate to a fixed
rate. Adjustable-rate mortgages which are converted into fixed-rate mortgage loans are repurchased by Freddie Mac or
by the seller of the loan to Freddie Mac at the unpaid principal balance of the loan plus accrued interest to the due date of
the last adjustable rate interest payment.
Fannie Mae Certificates
Fannie Mae is a privately-owned, federally-chartered corporation organized and existing under the Federal
National Mortgage Association Charter Act. Fannie Mae provides funds to the mortgage market primarily by purchasing
home mortgage loans from local lenders, thereby replenishing their funds for additional lending. Fannie Mae guarantees
to the registered holder of a Fannie Mae certificate that it will distribute amounts representing scheduled principal and
interest on the mortgage loans in the pool underlying the Fannie Mae certificate, whether or not received, and the full
principal amount of any such mortgage loan foreclosed or otherwise finally liquidated, whether or not the principal
amount is actually received. The obligations of Fannie Mae under its guarantees are solely those of Fannie Mae and are
not backed by the full faith and credit of the United States. If Fannie Mae were unable to satisfy its obligations,
distributions to holders of Fannie Mae certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, defaults and delinquencies on the underlying mortgage loans would
adversely affect monthly distributions to holders of Fannie Mae.
Fannie Mae certificates may be backed by pools of single-family or multi-family mortgage loans. The original
term to maturity of any such mortgage loan generally does not exceed 40 years. Fannie Mae certificates may pay interest
at a fixed rate or an adjustable rate. Each series of Fannie Mae ARM certificates bears an initial interest rate and margin
7
tied to an index based on all loans in the related pool, less a fixed percentage representing servicing compensation and
Fannie Mae’s guarantee fee. The specified index used in different series has included the Treasury Index, the 11th
District Cost of Funds Index published by the Federal Home Loan Bank of San Francisco, LIBOR and other indices.
Interest rates paid on fully-indexed Fannie Mae ARM certificates equal the applicable index rate plus a specified number
of basis points. The majority of series of Fannie Mae ARM certificates issued to date have evidenced pools of mortgage
loans with monthly, semi-annual or annual interest rate adjustments. Adjustments in the interest rates paid are generally
limited to an annual increase or decrease of either 100 or 200 basis points and to a lifetime cap of 500 or 600 basis points
over the initial interest rate. Certain Fannie Mae programs include mortgage loans which allow the borrower to convert
the adjustable mortgage interest rate of the ARM to a fixed rate. Adjustable-rate mortgages which are converted into
fixed-rate mortgage loans are repurchased by Fannie Mae or by the seller of the loans to Fannie Mae at the unpaid
principal of the loan plus accrued interest to the due date of the last adjustable rate interest payment. Adjustments to the
interest rates on Fannie Mae ARM certificates are typically subject to lifetime caps and periodic rate or payment caps.
Ginnie Mae Certificates
Ginnie Mae is a wholly owned corporate instrumentality of the United States within the Department of Housing
and Urban Development (HUD). The National Housing Act of 1934 authorizes Ginnie Mae to guarantee the timely
payment of the principal and interest on certificates which represent an interest in a pool of mortgages insured by the
Federal Housing Administration (FHA) or partially guaranteed by the Department of Veterans Affairs and other loans
eligible for inclusion in mortgage pools underlying Ginnie Mae certificates. Section 306(g) of the Housing Act provides
that the full faith and credit of the United States is pledged to the payment of all amounts which may be required to be
paid under any guaranty by Ginnie Mae.
At present, most Ginnie Mae certificates are backed by single-family mortgage loans. The interest rate paid on
Ginnie Mae certificates may be a fixed rate or an adjustable rate. The interest rate on Ginnie Mae certificates issued
under Ginnie Mae’s standard ARM program adjusts annually in relation to the Treasury index. Adjustments in the
interest rate are generally limited to an annual increase or decrease of 100 basis points and to a lifetime cap of 500 basis
points over the initial coupon rate.
Single-Family and Multi-Family Privately-Issued Certificates
Single-family and multi-family privately-issued certificates are pass-through certificates that are not issued by
one of the agencies and that are backed by a pool of conventional single-family or multi-family mortgage loans. These
certificates are issued by originators of, investors in, and other owners of mortgage loans, including savings and loan
associations, savings banks, commercial banks, mortgage banks, investment banks and special purpose “conduit”
subsidiaries of these institutions.
While agency pass-through certificates are backed by the express obligation or guarantee of one of the agencies,
as described above, privately-issued certificates are generally covered by one or more forms of private (i.e., non-
governmental) credit enhancements. These credit enhancements provide an extra layer of loss coverage in the event that
losses are incurred upon foreclosure sales or other liquidations of underlying mortgaged properties in amounts that
exceed the equity holder’s equity interest in the property. Forms of credit enhancements include limited issuer
guarantees, reserve funds, private mortgage guaranty pool insurance, over-collateralization and subordination.
Subordination is a form of credit enhancement frequently used and involves the issuance of classes of senior
and subordinated mortgage-backed securities. These classes are structured into a hierarchy to allocate losses on the
underlying mortgage loans and also for defining priority of rights to payment of principal and interest. Typically, one or
more classes of senior securities are created which are rated in one of the two highest rating levels by one or more
nationally recognized rating agencies and which are supported by one or more classes of mezzanine securities and
subordinated securities that bear losses on the underlying loans prior to the classes of senior securities. Mezzanine
securities, as used in this Form 10-K, refers to classes that are rated below the two highest levels, but no lower than a
single “B” rating under the S&P rating system (or comparable level under other rating systems) and are supported by one
or more classes of subordinated securities which bear realized losses prior to the classes of mezzanine securities.
Subordinated securities, as used in this Form 10-K, refers to any class that bears the “first loss” from losses from
underlying mortgage loans or that is rated below a single “B” level (or, if unrated, we deem it to be below that level). In
some cases, only classes of senior securities and subordinated securities are issued. By adjusting the priority of interest
8
and principal payments on each class of a given series of senior-subordinated mortgage-backed securities, issuers are
able to create classes of mortgage-backed securities with varying degrees of credit exposure, prepayment exposure and
potential total return, tailored to meet the needs of sophisticated institutional investors.
Collateralized Mortgage Obligations and Multi-Class Pass-Through Securities
We may also invest in CMOs and multi-class pass-through securities. CMOs are debt obligations issued by
special purpose entities that are secured by mortgage loans or mortgage-backed certificates, including, in many cases,
certificates issued by government and government-related guarantors, including, Ginnie Mae, Fannie Mae and Freddie
Mac, together with certain funds and other collateral. Multi-class pass-through securities are equity interests in a trust
composed of mortgage loans or other mortgage-backed securities. Payments of principal and interest on underlying
collateral provide the funds to pay debt service on the CMO or make scheduled distributions on the multi-class pass-
through securities. CMOs and multi-class pass-through securities may be issued by agencies or instrumentalities of the
U.S. Government or by private organizations. The discussion of CMOs in the following paragraphs is similarly
applicable to multi-class pass-through securities.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each class of CMOs, often referred to
as a “tranche,” is issued at a specific coupon rate (which, as discussed below, may be an adjustable rate subject to a cap)
and has a stated maturity or final distribution date. Principal prepayments on collateral underlying a CMO may cause it
to be retired substantially earlier than the stated maturity or final distribution date. Interest is paid or accrues on all
classes of a CMO on a monthly, quarterly or semi-annual basis. The principal and interest on underlying mortgages may
be allocated among the several classes of a series of a CMO in many ways. In a common structure, payments of
principal, including any principal prepayments, on the underlying mortgages are applied to the classes of the series of a
CMO in the order of their respective stated maturities or final distribution dates, so that no payment of principal will be
made on any class of a CMO until all other classes having an earlier stated maturity or final distribution date have been
paid in full.
Other types of CMO issues include classes such as parallel pay CMOs, some of which, such as planned
amortization class CMOs (or PAC bonds), provide protection against prepayment uncertainty. Parallel pay CMOs are
structured to provide payments of principal on certain payment dates to more than one class. These simultaneous
payments are taken into account in calculating the stated maturity date or final distribution date of each class which, as
with other CMO structures, must be retired by its stated maturity date or final distribution date but may be retired earlier.
PAC bonds generally require payment of a specified amount of principal on each payment date so long as prepayment
speeds on the underlying collateral fall within a specified range.
Other types of CMO issues include targeted amortization class CMOs (or TAC bonds), which are similar to
PAC bonds. While PAC bonds maintain their amortization schedule within a specified range of prepayment speeds,
TAC bonds are generally targeted to a narrow range of prepayment speeds or a specified prepayment speed. TAC bonds
can provide protection against prepayment uncertainty since cash flows generated from higher prepayments of the
underlying mortgage-related assets are applied to the various other pass-through tranches so as to allow the TAC bonds
to maintain their amortization schedule.
A CMO may be subject to the issuer’s right to redeem the CMO prior to its stated maturity date, which may
diminish the anticipated return on our investment. Privately-issued CMOs are supported by private credit enhancements
similar to those used for privately-issued certificates and are often issued as senior-subordinated mortgage-backed
securities. We will only acquire CMOs or multi-class pass-through certificates that constitute debt obligations or
beneficial ownership in grantor trusts holding mortgage loans, or regular interests in REMICs, or that otherwise
constitute qualified REIT real estate assets under the Internal Revenue Code (provided that we have obtained a favorable
opinion of our tax advisor or a ruling from the IRS to that effect).
Adjustable-Rate Mortgage Pass-Through Certificates and Floating Rate Mortgage-Backed Securities
Some of the mortgage pass-through certificates we acquire are adjustable-rate mortgage pass-through
certificates. This means that their interest rates may vary over time based upon changes in an objective index, such as:
9
(cid:2) LIBOR or the London Interbank Offered Rate. The interest rate that banks in London offer for deposits
in London of U.S. dollars.
(cid:2) Treasury Index. A monthly or weekly average yield of benchmark U.S. Treasury securities, as published
by the Federal Reserve Board.
(cid:2) CD Rate. The weekly average of secondary market interest rates on six-month negotiable certificates of
deposit, as published by the Federal Reserve Board.
These indices generally reflect short-term interest rates. The underlying mortgages for adjustable-rate mortgage pass-
through certificates are adjustable-rate mortgage loans (or ARMs).
We also acquire CMO floaters. One or more tranches of a CMO may have coupon rates that reset periodically at
a specified increment over an index such as LIBOR. These adjustable-rate tranches are sometimes known as CMO
floaters and may be backed by fixed or adjustable-rate mortgages.
There are two main categories of indices for adjustable-rate mortgage pass-through certificates and floaters:
(1) those based on U.S. Treasury securities, and (2) those derived from calculated measures such as a cost of funds index
or a moving average of mortgage rates. Commonly utilized indices include the one-year Treasury note rate, the three-
month Treasury bill rate, the six-month Treasury bill rate, rates on long-term Treasury securities, the 11th District
Federal Home Loan Bank Costs of Funds Index, the National Median Cost of Funds Index, one-month or three-month
LIBOR, the prime rate of a specific bank, or commercial paper rates. Some indices, such as the one-year Treasury rate,
closely mirror changes in market interest rate levels. Others, such as the 11th District Home Loan Bank Cost of Funds
Index, tend to lag changes in market interest rate levels. We seek to diversify our investments in adjustable-rate
mortgage pass-through certificates and floaters among a variety of indices and reset periods so that we are not at any one
time unduly exposed to the risk of interest rate fluctuations. In selecting adjustable-rate mortgage pass-through
certificates and floaters for investment, we will also consider the liquidity of the market for the different mortgage-
backed securities.
We believe that adjustable-rate mortgage pass-through certificates and floaters are particularly well-suited to our
investment objective of high current income, consistent with modest volatility of net asset value, because the value of
adjustable-rate mortgage pass-through certificates and floaters generally remains relatively stable as compared to
traditional fixed-rate debt securities paying comparable rates of interest. While the value of adjustable-rate mortgage
pass-through certificates and floaters, like other debt securities, generally varies inversely with changes in market interest
rates (increasing in value during periods of declining interest rates and decreasing in value during periods of increasing
interest rates), the value of adjustable-rate mortgage pass-through certificates and floaters should generally be more
resistant to price swings than other debt securities because the interest rates on these securities move with market interest
rates.
Adjustable-rate mortgage pass-through certificates and floaters typically have caps, which limit the maximum
amount by which the interest rate may be increased or decreased at periodic intervals or over the life of the security. To
the extent that interest rates rise faster than the allowable caps on the adjustable-rate mortgage pass-through certificates
and floaters, these securities will behave more like fixed-rate securities. Consequently, interest rate increases in excess
of caps can be expected to cause these securities to behave more like traditional debt securities than adjustable-rate
interest-earning assets and, accordingly, to decline in value to a greater extent than would be the case in the absence of
these caps.
Adjustable-rate mortgage pass-through certificates and floaters, like other mortgage-backed securities, differ from
conventional bonds in that principal is to be paid back over the life of the security rather than at maturity. As a result, we
receive monthly scheduled payments of principal and interest on these securities and may receive unscheduled principal
payments representing prepayments on the underlying mortgages. When we reinvest the payments and any unscheduled
prepayments we receive, we may receive a rate of interest on the reinvestment which is lower than the rate on the
existing security. For this reason, adjustable-rate mortgage pass-through certificates and floaters are less effective than
longer-term debt securities as a means of “locking in” longer-term interest rates. Accordingly, adjustable-rate mortgage
pass-through certificates and floaters, while generally having less risk of price decline during periods of rapidly rising
interest rates than fixed-rate mortgage-backed securities of comparable maturities, have less potential for capital
appreciation than fixed-rate securities during periods of declining interest rates.
10
As in the case of fixed-rate mortgage-backed securities, to the extent these securities are purchased at a premium,
faster than expected prepayments would accelerate our amortization of the premium. Conversely, if these securities were
purchased at a discount, faster than expected prepayments would accelerate our recognition of income.
As in the case of fixed-rate CMOs, floating-rate CMOs may allow for shifting of prepayment risk from slower-
paying tranches to faster-paying tranches. This is in contrast to mortgage pass-through certificates where all investors
share equally in all payments, including all prepayments, on the underlying mortgages.
Other Floating Rate Instruments
We may also invest in structured floating-rate notes issued or guaranteed by government agencies, such as Fannie
Mae and Freddie Mac. These instruments are typically structured to reflect an interest rate arbitrage (i.e., the difference
between the agency’s cost of funds and the income stream from specified assets of the agency) and their reset formulas
may provide more attractive returns than other floating rate instruments. The indices used to determine resets are the
same as those described above.
Mortgage Loans
As of December 31, 2010, we have not invested directly in mortgage loans, but we may from time-to-time
invest a small percentage of our assets directly in single-family, multi-family or commercial mortgage loans. We expect
that the majority of these mortgage loans would be ARM pass-through certificates. The interest rate on an ARM pass-
through certificate is typically tied to an index (such as LIBOR or the interest rate on Treasury bills), and is adjustable
periodically at specified intervals. These mortgage loans are typically subject to lifetime interest rate caps and periodic
interest rate or payment caps. The acquisition of mortgage loans generally involves credit risk. We may obtain credit
enhancement to mitigate this risk; however, there can be no assurances that we will be able to obtain credit enhancement
or that credit enhancement would mitigate the credit risk of the underlying mortgage loans.
Capital Investment Policy
Asset Acquisitions
Our capital investment policy provides that at least 75% of our total assets will be comprised of high quality
mortgage-backed securities and short-term investments. The remainder of our assets (comprising not more than 25% of
total assets), may consist of mortgage-backed securities and 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) or, if not rated, are
determined by us 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.
Our capital investment policy requires that we structure our portfolio to maintain a minimum weighted average
rating (including our deemed comparable ratings for unrated mortgage-backed securities) of our mortgage-backed
securities of at least single “A” under the S&P rating system and at the comparable level under the other rating systems.
To date, substantially all of the mortgage-backed securities we have acquired have been pass-through certificates or
CMOs issued or guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae which, although not rated, have an implied
“AAA” rating.
We intend to acquire only those mortgage-backed securities that we believe we have the necessary expertise to
evaluate and manage, that we can readily finance and that are consistent with our balance sheet guidelines and risk
management objectives. Since we expect to hold our mortgage-backed securities until maturity, we generally do not
seek to acquire assets whose investment returns are only attractive in a limited range of scenarios. We believe that future
interest rates and mortgage prepayment rates are very difficult to predict and, as a result, we seek to acquire mortgage-
backed securities which we believe provide acceptable returns over a broad range of interest rate and prepayment
scenarios.
11
Among the asset choices available to us, our policy is to acquire those mortgage-backed securities which we
believe generate the highest returns on capital invested, after consideration of the following:
(cid:2)
(cid:2)
(cid:2)
(cid:2)
the amount and nature of anticipated cash flows from the asset;
our ability to pledge the asset to secure collateralized borrowings;
the increase in our capital requirement determined by our capital investment policy resulting from the
purchase and financing of the asset; and
the costs of financing, hedging and managing the asset.
Prior to acquisition, we assess potential returns on capital employed over the life of the asset and in a variety of interest
rate, yield spread, financing cost, credit loss and prepayment scenarios.
We also give consideration to balance sheet management and risk diversification issues. We deem a specific
asset which we are evaluating for potential acquisition as more or less valuable to the extent it serves to increase or
decrease certain interest rate or prepayment risks which may exist in the balance sheet, to diversify or concentrate credit
risk, and to meet the cash flow and liquidity objectives our management may establish for our balance sheet from time-
to-time. Accordingly, an important part of the asset evaluation process is a simulation, using risk management models,
of the addition of a potential asset and our associated borrowings and hedges to the balance sheet and an assessment of
the impact this potential asset acquisition would have on the risks in and returns generated by our balance sheet as a
whole over a variety of scenarios.
We believe that adjustable-rate mortgage pass-through certificates and floaters are particularly well-suited to
our investment objective of high current income, consistent with modest volatility of net asset value, because the value of
adjustable-rate mortgage pass-through certificates and floaters generally remains relatively stable as compared to
traditional fixed-rate debt securities paying comparable rates of interest. We have, however, purchased a significant
amount of fixed-rate mortgage-backed securities and may continue to do so in the future if, in our view, the potential
returns on capital invested, after hedging and all other costs, would exceed the returns available from other assets or if
the purchase of these assets would serve to reduce or diversify the risks of our balance sheet.
We may purchase the stock of mortgage REITs or similar companies when we believe that these purchases
would yield attractive returns on capital employed. We do not, however, presently intend to invest in the securities of
other issuers for the purpose of exercising control or to underwrite securities of other issuers.
We may acquire newly issued mortgage-backed securities, and also may seek to expand our capital base in
order to further increase our ability to acquire new assets, when the potential returns from new investments appears
attractive relative to the return expectations of stockholders. We may in the future acquire mortgage-backed securities
by offering our debt or equity securities in exchange for the mortgage-backed securities.
We generally intend to hold mortgage-backed securities for extended periods. In addition, the REIT provisions
of the Internal Revenue Code limit in certain respects our ability to sell mortgage-backed securities. We may decide
however to sell assets from time to time, for a number of reasons, including our desire to dispose of an asset as to which
credit risk concerns have arisen, to reduce interest rate risk, to substitute one type of mortgage-backed security for
another, to improve yield or to maintain compliance with the 55% requirement of Section 3(c)(5)(C) of the Investment
Company Act, or generally to re-structure the balance sheet when we deem advisable. Our board of directors has not
adopted any policy that would restrict management’s authority to determine the timing of sales or the selection of
mortgage-backed securities to be sold.
We do not invest in REMIC residuals or other CMO residuals.
As a requirement for maintaining REIT status, we will distribute to stockholders aggregate dividends equaling
at least 90% of our REIT taxable income (determined without regard to the deduction for dividends paid and by
excluding any net capital gain) for each taxable year. We will make additional distributions of capital when the return
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expectations of the stockholders appear to exceed returns potentially available to us through making new investments in
mortgage-backed securities. Subject to the limitations of applicable securities and state corporation laws, we can
distribute capital by making purchases of our own capital stock or through paying down or repurchasing any outstanding
uncollateralized debt obligations.
Our asset acquisition strategy may change over time as market conditions change and as we evolve.
Credit Risk Management
Although we do not expect to encounter credit risk in our Agency mortgage-backed securities and Agency
debentures, we face credit risk on the portions of our portfolio which are not mortgage-backed securities and Agency
debentures. In addition, our use of repurchase agreements and 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, we could have difficulty obtaining our Agency
mortgage-backed securities pledged as collateral for swaps. We review credit risk and other risk of loss associated with
each investment and determine the appropriate allocation of capital to apply to the investment under our capital
investment policy. Our management will monitor the overall portfolio risk and determine appropriate levels of provision
for loss.
Capital and Leverage
We expect generally to maintain a debt-to-equity ratio of between 8:1 and 12:1, although the ratio may vary, as
it currently does because of market conditions, from this range from time to time based upon various factors, including
our management’s opinion of the level of risk of our assets and liabilities, our liquidity position, our level of unused
borrowing capacity and over-collateralization levels required by lenders when we pledge assets to secure borrowings.
For purposes of calculating this ratio, our equity (or capital base) is equal to the value of our investment portfolio on a
mark-to-market basis less the book value of our obligations under repurchase agreements and other collateralized
borrowings. For the calculation of this ratio, equity includes the Series B Cumulative Convertible Preferred Stock,
which is not included in equity under Generally Accepted Accounting Principles.
Our goal is to strike a balance between the under-utilization of leverage, which reduces potential returns to
stockholders, and the over-utilization of leverage, which could reduce our ability to meet our obligations during adverse
market conditions. Our capital investment policy limits our ability to acquire additional assets during times when our
debt-to-equity ratio exceeds 12:1. At December 31, 2010, our ratio of debt-to-equity was 6.7:1. Our capital base
represents the approximate liquidation value of our investments and approximates the market value of assets that we can
pledge or sell to meet over-collateralization requirements for our borrowings. The unpledged portion of our capital base
is available for us to pledge or sell as necessary to maintain over-collateralization levels for our borrowings.
We are prohibited from acquiring additional assets during periods when our capital base is less than the
minimum amount required under our capital investment policy, except as may be necessary to maintain REIT status or
our exemption from the Investment Company Act of 1940, as amended (or the Investment Company Act). In addition,
when our capital base falls below our risk-managed capital requirement, our management is required to submit to our
board of directors a plan for bringing our capital base into compliance with our capital investment policy guidelines. We
anticipate that in most circumstances we can achieve this goal without overt management action through the natural
process of mortgage principal repayments. We anticipate that our capital base is likely to exceed our risk-managed
capital requirement during periods following new equity offerings and during periods of falling interest rates and that our
capital base could fall below the risk-managed capital requirement during periods of rising interest rates.
The first component of our capital requirement is the current aggregate over-collateralization amount or
“haircut” the lenders require us to hold as capital. The haircut for each mortgage-backed security is determined by our
lenders based on the risk characteristics and liquidity of the asset. Should the market value of our pledged assets decline,
we will be required to deliver additional collateral to our lenders to maintain a constant over-collateralization level on
our borrowings.
The second component of our capital requirement is the “excess capital cushion.” This is an amount of capital
in excess of the haircuts required by our lenders. We maintain the excess capital cushion to meet the demands of our
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lenders for additional collateral should the market value of our mortgage-backed securities decline. The aggregate
excess capital cushion equals the sum of liquidity cushion amounts assigned under our capital investment policy to each
of our mortgage-backed securities. We assign excess capital cushions to each mortgage-backed security based on our
assessment of the mortgage-backed security’s market price volatility, credit risk, liquidity and attractiveness for use as
collateral by lenders. The process of assigning excess capital cushions relies on our management’s ability to identify and
weigh the relative importance of these and other factors. In assigning excess capital cushions, we also give consideration
to hedges associated with the mortgage-backed security and any effect such hedges may have on reducing net market
price volatility, concentration or diversification of credit and other risks in the balance sheet as a whole and the net cash
flows that we can expect from the interaction of the various components of our balance sheet.
Our capital investment policy stipulates that at least 25% of the capital base maintained to satisfy the excess
capital cushion must be invested in AAA-rated adjustable-rate mortgage-backed securities or assets with similar or better
liquidity characteristics.
A substantial portion of our borrowings are short-term or variable-rate borrowings. Our borrowings are
implemented primarily through repurchase agreements, but in the future may also be obtained through loan agreements,
lines of credit, dollar-roll agreements (an agreement to sell a security for delivery on a specified future date and a
simultaneous agreement to repurchase the same or a substantially similar security on a specified future date) and other
credit facilities with institutional lenders and issuance of debt securities such as commercial paper, medium-term notes,
CMOs and senior or subordinated notes. We enter into financing transactions only with institutions that we believe are
sound credit risks and follow other internal policies designed to limit our credit and other exposure to financing
institutions.
We expect to continue to use repurchase agreements as our principal financing device to leverage our mortgage-
backed securities portfolio. We anticipate that, upon repayment of each borrowing under a repurchase agreement, we
will use the collateral immediately for borrowing under a new repurchase agreement. We have not at the present time
entered into any commitment agreements under which the lender would be required to enter into new repurchase
agreements during a specified period of time, nor do we presently plan to have liquidity facilities with commercial banks.
We may, however, enter into such commitment agreements in the future. We enter into repurchase agreements primarily
with national broker-dealers, commercial banks and other lenders which typically offer this type of financing. We enter
into collateralized borrowings only with financial institutions meeting credit standards approved by our board of
directors, and we monitor the financial condition of these institutions on a regular basis.
A repurchase agreement, although structured as a sale and repurchase obligation, acts as a financing under
which we effectively pledge our mortgage-backed securities as collateral to secure a short-term loan. Generally, the
other party to the agreement makes the loan in an amount equal to a percentage of the market value of the pledged
collateral. At the maturity of the repurchase agreement, we are required to repay the loan and correspondingly receive
back our collateral. While used as collateral, the mortgage-backed securities continue to pay principal and interest which
are for our benefit. In the event of our insolvency or bankruptcy, certain repurchase agreements may qualify for special
treatment under the Bankruptcy Code, the effect of which, among other things, would be to allow the creditor under the
agreement to avoid the automatic stay provisions of the Bankruptcy Code and to foreclose on the collateral without
delay. In the event of the insolvency or bankruptcy of a lender during the term of a repurchase agreement, the lender
may be permitted, under applicable insolvency laws, to repudiate the contract, and our claim against the lender for
damages may be treated simply as an unsecured creditor. In addition, if the lender is a broker or dealer subject to the
Securities Investor Protection Act of 1970, or an insured depository institution subject to the Federal Deposit Insurance
Act, our ability to exercise our rights to recover our securities under a repurchase agreement or to be compensated for
any damages resulting from the lender’s insolvency may be further limited by those statutes. These claims would be
subject to significant delay and, if and when received, may be substantially less than the damages we actually incur.
Substantially all of our collateralized borrowing agreements require us to deposit additional collateral in the
event the market value of existing collateral declines, which may require us to sell assets to reduce our borrowings. We
have designed our liquidity management policy to maintain a cushion of equity sufficient to provide required liquidity to
respond to the effects under our borrowing arrangements of interest rate movements and changes in market value of our
mortgage-backed securities, as described above. However, a major disruption of the repurchase or other market that we
rely on for short-term borrowings would have a material adverse effect on us unless we were able to arrange alternative
sources of financing on comparable terms.
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Our articles of incorporation and bylaws do not limit our ability to incur borrowings, whether secured or
unsecured.
Interest Rate Risk Management
To the extent consistent with our election to qualify as a REIT, we follow an interest rate risk management
program intended to protect our portfolio of mortgage-backed securities and related debt against the effects of major
interest rate changes. Specifically, our interest rate risk management program is formulated with the intent to offset the
potential adverse effects resulting from rate adjustment limitations on our mortgage-backed securities and the differences
between interest rate adjustment indices and interest rate adjustment periods of our adjustable-rate mortgage-backed
securities and related borrowings.
Our interest rate risk management program encompasses a number of procedures, including the following:
(cid:2)
(cid:2)
we attempt to structure our borrowings to have interest rate adjustment indices and interest rate
adjustment periods that, on an aggregate basis, generally correspond to the interest rate adjustment
indices and interest rate adjustment periods of our adjustable-rate mortgage-backed securities; and
we attempt to structure our borrowing agreements relating to adjustable-rate mortgage-backed
securities to have a range of different maturities and interest rate adjustment periods (although
substantially all will be less than one year).
We adjust the average maturity adjustment periods of our borrowings on an ongoing basis by changing the mix
of maturities and interest rate adjustment periods as borrowings come due and are renewed. Through use of these
procedures, we attempt to minimize the differences between the interest rate adjustment periods of our mortgage-backed
securities and related borrowings that may occur.
We enter into interest rate swaps. We may from time to time enter into interest rate collars, interest rate caps or
floors, and purchase interest-only mortgage-backed securities and similar instruments to attempt to mitigate the risk of
the cost of our variable rate liabilities increasing at a faster rate than the earnings on our assets during a period of rising
interest rates or to mitigate prepayment risk. We may hedge as much of the interest rate risk as our management
determines is in our best interests, given the cost of the hedging transactions and the need to maintain our status as a
REIT. This determination may result in our electing to bear a level of interest rate or prepayment risk that could
otherwise be hedged when management believes, based on all relevant facts, that bearing the risk is advisable.
We seek to build a balance sheet and undertake an interest rate risk management program which is likely to
generate positive earnings and maintain an equity liquidation value sufficient to maintain operations given a variety of
potentially adverse circumstances. Accordingly, our interest rate risk management program addresses both income
preservation, as discussed above, and capital preservation concerns. For capital preservation, we monitor our “duration.”
This is the expected percentage change in market value of our assets that would be caused by a 1% change in short and
long-term interest rates. To monitor weighted average duration and the related risks of fluctuations in the liquidation
value of our equity, we model the impact of various economic scenarios on the market value of our mortgage-backed
securities and liabilities. At December 31, 2010, we estimate that the duration of our assets was 3.41 years and giving
effect to the swap transactions, our weighted average duration was 0.74 years. We believe that our interest rate risk
management program will allow us to maintain operations throughout a wide variety of potentially adverse
circumstances. Nevertheless, in order to further preserve our capital base (and lower our duration) during periods when
we believe a trend of rapidly rising interest rates has been established, we may decide to increase hedging activities or to
sell assets. Each of these actions may lower our earnings and dividends in the short term to further our objective of
maintaining attractive levels of earnings and dividends over the long term.
We may elect to conduct a portion of our hedging operations through one or more subsidiary corporations, each
of which we would elect to treat as a “taxable REIT subsidiary.” To comply with the asset tests applicable to us as a
REIT, we could own 100% of the voting stock of such subsidiary, provided that the value of the stock that we own in all
such taxable REIT subsidiaries does not exceed 25% of the value of our total assets at the close of any calendar quarter.
A taxable subsidiary, such as FIDAC, Merganser, and RCap, would not elect REIT status and would distribute any net
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profit after taxes to us. Any dividend income we receive from the taxable subsidiaries (combined with all other income
generated from our assets, other than qualified REIT real estate assets) must not exceed 25% of our gross income.
We believe that we have developed a cost-effective asset/liability management program to provide a level of
protection against interest rate and prepayment risks. However, no strategy can completely insulate us from interest rate
changes and prepayment risks. Further, as noted above, the federal income tax requirements that we must satisfy to
qualify as a REIT limit our ability to hedge our interest rate and prepayment risks. We monitor carefully, and may have
to limit, our asset/liability management program to assure that we do not realize excessive hedging income, or hold
hedging assets having excess value in relation to total assets, which could result in our disqualification as a REIT, the
payment of a penalty tax for failure to satisfy certain REIT tests under the Internal Revenue Code, provided the failure
was for reasonable cause. In addition, asset/liability management involves transaction costs which increase dramatically
as the period covered by the hedging protection increases. Therefore, we may be unable to hedge effectively our interest
rate and prepayment risks.
Prepayment Risk Management
We seek to minimize the effects of faster or slower than anticipated prepayment rates through structuring a
diversified portfolio with a variety of prepayment characteristics, investing in mortgage-backed securities with
prepayment prohibitions and penalties, investing in certain mortgage-backed security structures which have prepayment
protections, and balancing assets purchased at a premium with assets purchased at a discount. We monitor prepayment
risk through periodic review of the impact of a variety of prepayment scenarios on our revenues, net earnings, dividends,
cash flow and net balance sheet market value.
Future Revisions in Policies and Strategies
Our board of directors has established the investment policies and operating policies and strategies set forth in
this Form 10-K. The board of directors has the power to modify or waive these policies and strategies without the
consent of the stockholders to the extent that the board of directors determines that the modification or waiver is in the
best interests of our stockholders. Among other factors, developments in the market which affect our policies and
strategies or which change our assessment of the market may cause our board of directors to revise our policies and
strategies.
Potential Acquisitions, Strategic Alliances and Other Investments
From time-to-time we have explored possible transactions to enhance our operations and growth, including
entering into new businesses, acquisitions of other businesses or assets, investments in other entities, joint venture
arrangements, or strategic alliances. We entered into the broker-dealer business during the first quarter of January 2009,
through our subsidiary RCap, which was granted membership in FINRA in January 2009. On October 31, 2008 we
consummated our acquisition of Merganser which is a registered investment advisor. We own approximately 45.0
million shares of common stock of Chimera Investment Corporation, or Chimera. Chimera is a publicly traded, specialty
finance company that acquires, manages, and finances, directly or through its subsidiaries, residential mortgage loans,
residential mortgage-backed securities, real estate related securities and various other asset classes. Chimera is
externally managed by FIDAC and has elected and qualifies to be taxed as a REIT for federal income tax purposes. We
own approximately 4.5 million shares of common stock of CreXus Investment Corp., or CreXus. CreXus is a publicly
traded, specialty finance company that acquires, manages, and finances, directly or through its subsidiaries, commercial
mortgage loans and other commercial real estate debt, commercial mortgage-backed securities, or CMBS, and other
commercial real estate-related assets. CreXus is externally managed by FIDAC and has elected and qualifies to be taxed
as a REIT for federal income tax purposes.
We may, from time-to-time, continue to explore possible new businesses, acquisitions, investments, joint
venture arrangements and strategic alliances which may enhance our operations and assist our and our subsidiaries’
growth. These transactions could be material to our financial condition and results of operations. The process of
integrating an acquired company or business, will likely create, unforeseen operating difficulties and expenditures. Our
failure to address these risks or other problems encountered in connection with our past or future acquisitions and
investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur
unanticipated liabilities, and harm our business generally. Future acquisitions could also result in dilutive issuances of
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our equity securities, the incurrence of debt, contingent liabilities, or amortization expenses, or write-offs of goodwill,
any of which could harm our financial condition. Also, the anticipated benefit of many of our acquisitions or
investments may not materialize.
Dividend Reinvestment and Share Purchase Plan
We have adopted a dividend reinvestment and share purchase plan. Under the dividend reinvestment feature of
the plan, existing shareholders can reinvest their dividends in additional shares of our common stock. Under the share
purchase feature of the plan, new and existing shareholders can purchase shares of our common stock. We have an
effective shelf registration statement on Form S-3 which registered 100,000,000 shares that could be issued under the
plan. We still sell shares covered by this registration statement under the plan.
Legal Proceedings
From time-to-time, we are involved in various claims and legal actions arising in the ordinary course of
business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect
on our consolidated financial statements.
Employees
As of December 31, 2010, we and our subsidiaries had 114 full time employees. None of our employees are
subject to any collective bargaining agreements. We believe we have good relations with our employees.
Available Information
Our investor relations website is www.annaly.com. We make available on this website under “SEC filings,”
free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the
SEC.
COMPETITION
We believe that our principal competition in the acquisition and holding of the types of mortgage-backed
securities we purchase are financial institutions such as banks, savings and loans, life insurance companies, institutional
investors such as mutual funds and pension funds, and certain other mortgage REITs. Some of our competitors have
greater financial resources and access to capital than we do. Our competitors, as well as additional competitors which
may emerge in the future, may increase the competition for the acquisition of mortgage-backed securities, which in turn
may result in higher prices and lower yields on assets.
ITEM 1A. RISK FACTORS
An investment in our stock involves a number of risks. Before making an investment decision, you should
carefully consider all of the risks described in this Form 10-K. If any of the risks discussed in this Form 10-K actually
occur, our business, financial condition and results of operations could be materially adversely affected. If this were to
occur, the trading price of our stock could decline significantly and you may lose all or part of your investment.
Risks Associated with Recent Adverse Developments in the Mortgage Finance and Credit Markets
Volatile market conditions for mortgages and mortgage-related assets as well as the broader financial markets
have resulted in a significant contraction in liquidity for mortgages and mortgage-related assets, which may
adversely affect the value of the assets in which we invest.
Our results of operations are materially affected by conditions in the markets for mortgages and mortgage-
related assets, including Agency mortgage-backed securities, as well as the broader financial markets and the economy
generally. Beginning in the summer of 2007, significant adverse changes in financial market conditions resulted in a
deleveraging of the entire global financial system and the forced sale of large quantities of mortgage-related and other
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financial assets. Concerns over economic recession, geopolitical issues, unemployment, the availability and cost of
financing, the mortgage market and a declining real estate market contributed to increased volatility and diminished
expectations for the economy and markets. As a result of these conditions, many traditional mortgage investors suffered
severe losses in their residential mortgage portfolios and several major market participants failed or have been impaired,
resulting in a significant contraction in market liquidity for mortgage-related assets. This illiquidity negatively affected
both the terms and availability of financing for all mortgage-related assets. Further increased volatility and deterioration
in the markets for mortgages and mortgage-related assets as well as the broader financial markets may adversely affect
the performance and market value of our Agency mortgage-backed securities. If these conditions persist, institutions
from which we seek financing for our investments may tighten their lending standards or become insolvent, which could
make it more difficult for us to obtain financing on favorable terms or at all. Our profitability may be adversely affected
if we are unable to obtain cost-effective financing for our investments. Continued adverse developments in the broader
residential mortgage market may adversely affect the value of the assets in which we invest.
Since the summer of 2007, the residential mortgage market in the United States experienced a variety of
difficulties and changed economic conditions, including defaults, credit losses and liquidity concerns. Certain
commercial banks, investment banks and insurance companies have announced extensive losses from exposure to the
residential mortgage market. These losses have reduced financial industry capital, leading to reduced liquidity for some
institutions. These factors have impacted investor perception of the risk associated with Agency mortgage-backed
securities in which we invest. As a result, values for Agency mortgage-backed securities in which we invest have
experienced a certain amount of volatility. Further increased volatility and deterioration in the broader residential
mortgage and Agency mortgage-backed securities markets may adversely affect the performance and market value of
our investments. Any decline in the value of our investments, or perceived market uncertainty about their value, would
likely make it difficult for us to obtain financing on favorable terms or at all, or maintain our compliance with terms of
any financing arrangements already in place.
The Agency mortgage-backed securities in which we invest are classified for accounting purposes as available-
for-sale. All assets classified as available-for-sale are reported at fair value with unrealized gains and losses excluded
from earnings and reported as a separate component of stockholders' equity. As a result, a decline in fair values may
reduce the book value of our assets. Moreover, if the decline in fair value of an available-for-sale security is other-than-
temporarily impaired, such decline will reduce earnings. If market conditions result in a decline in the fair value of our
Agency mortgage-backed securities, our financial position and results of operations could be adversely affected.
The potential limit or wind down of the role Fannie Mae and Freddie Mac play in the mortgage-backed securities
market may adversely affect our business, operations and financial condition.
On February 11, 2011, the U.S Department of the Treasury (or Treasury) issued a White Paper titled
“Reforming America's Housing Finance Market” (or the White Paper) 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 economy, 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 economy,
the mortgage-backed securities market and our business, operations and financial condition. We are evaluating, and will
continue to evaluate, the potential impact of the proposals set forth in the White Paper.
The conservatorship of Fannie Mae and Freddie Mac, their reliance upon the U.S. Government for solvency, and
related efforts that may significantly affect Fannie Mae and Freddie Mac and their relationship with the U.S.
Government, may adversely affect our business, operations and financial condition.
Due to increased market concerns about Fannie Mae and Freddie Mac’s ability to withstand future credit losses
associated with securities held in their investment portfolios, and on which they provide guarantees, without the direct
support of the U.S. Government Congress passed the Housing and Economic Recovery Act of 2008, or the HERA.
Among other things, the HERA established the Federal Housing Finance Agency, or FHFA, which has broad regulatory
powers over Fannie Mae and Freddie Mac. On September 6, 2008, the FHFA placed Fannie Mae and Freddie Mac into
conservatorship and, together with the Treasury, established a program designed to boost investor confidence in Fannie
Mae’s and Freddie Mac’s debt and mortgage-backed securities. As the conservator of Fannie Mae and Freddie Mac, the
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FHFA controls and directs their operations and may (1) take over the assets of and operate Fannie Mae and Freddie Mac
with all the powers of their shareholders, directors and officers of Fannie Mae and Freddie Mac and conduct all business
of Fannie Mae and Freddie Mac; (2) collect all obligations and money due to Fannie Mae and Freddie Mac; (3) perform
all functions of Fannie Mae and Freddie Mac which are consistent with the conservator’s appointment; (4) preserve and
conserve the assets and property of Fannie Mae and Freddie Mac; and (5) contract for assistance in fulfilling any
function, activity, action or duty of the conservator.
In addition to FHFA becoming the conservator of Fannie Mae and Freddie Mac, the Treasury and Fannie Mae
and Freddie Mac have entered into Preferred Stock Purchase Agreements (or PSPAs) pursuant to which the Treasury has
ensured 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 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 addition, in 2008 the Federal Reserve established a program to purchase $100 billion in direct obligations of
Fannie Mae, Freddie Mac and the Federal Home Loan Bank and $500 billion in Agency mortgage-backed securities.
These targets were increased in March 2009 to $200 billion and $1.25 trillion of Agency debentures and Agency
mortgage-backed securities, respectively. The Federal Reserve stated that its actions were intended to reduce the cost and
increase the availability of credit for the purchase of houses, and were meant to support housing markets and foster
improved conditions in financial markets more generally. The Federal Reserve completed this program in March 2010.
The problems faced by Fannie Mae and Freddie Mac resulting in their placement into federal conservatorship
and receipt of significant U.S. Government support have sparked debate among some federal policy makers regarding
the continued role of the U.S. Government in providing liquidity for mortgage loans and mortgage-backed securities.
With Fannie Mae’s and Freddie Mac’s future under debate, the nature of their guarantee obligations could be
considerably limited relative to historical measurements. Any changes to the nature of their guarantee obligations could
redefine what constitutes an Agency mortgage-backed security and could have broad adverse implications for the market
and our business, operations and financial condition. If Fannie Mae or Freddie Mac are eliminated, or their structures
change radically (i.e., limitation or removal of the guarantee obligation), we may be unable to acquire additional Agency
mortgage-backed securities. A reduction in the supply of Agency mortgage-backed securities could negatively affect the
pricing of Agency mortgage-backed securities by reducing the spread between the interest we earn on our portfolio of
Agency mortgage-backed securities and our cost of financing that portfolio.
Although the Treasury previously committed capital to Fannie Mae and Freddie Mac through 2012, and in the
White Paper the Treasury committed to providing sufficient capital to enable Fannie Mae and Freddie Mac to meet their
current and future guarantee obligations, there can be no assurance that these actions will be adequate for their needs. If
these actions are inadequate, Fannie Mae and Freddie Mac could continue to suffer losses and could fail to honor their
guarantees and other obligations. Furthermore, the current credit support provided by the Treasury to Fannie Mae and
Freddie Mac, and any additional credit support it may provide in the future, could have the effect of lowering the interest
rates we expect to receive from mortgage-backed securities, and tightening the spread between the interest we earn on
our mortgage-backed securities and the cost of financing those assets.
In addition, our existing Agency mortgage-backed securities could be materially and adversely impacted. We
rely on our Agency mortgage-backed securities as collateral for our financings under our repurchase agreements. Any
decline in their value, or perceived market uncertainty about their value, would make it more difficult for us to obtain
financing on acceptable terms or at all, or to maintain our compliance with the terms of any financing transactions.
Future policies that change the relationship between Fannie Mae and Freddie Mac and the U.S. Government,
including those that result in their winding down, nationalization, privatization, or elimination, may create market
uncertainty and have the effect of reducing the actual or perceived credit quality of securities issued or guaranteed by
Fannie Mae or Freddie Mac. As a result, such policies could increase the risk of loss on investments in Agency
mortgage-backed securities guaranteed by Fannie Mae and/or Freddie Mac. It also is possible that such policies could
adversely impact the market for such securities and spreads at which they trade. All of the foregoing could materially
and adversely affect our business, operations and financial condition.
Mortgage loan modification programs, future legislative action and changes in the requirements necessary to
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qualify for refinancing a mortgage with Fannie Mae, Freddie Mac or Ginnie Mae may adversely affect the value
of, and the returns on, the assets in which we invest.
The U.S. government, through the Federal Housing Administration, or FHA, and the FDIC, has implemented
programs designed to provide homeowners with assistance in avoiding residential mortgage loan foreclosures including
the Hope for Homeowners Act of 2008, which allows certain distressed borrowers to refinance their mortgages into
FHA-insured loans. The programs may also involve, among other things, the modification of mortgage loans to reduce
the principal amount of the loans or the rate of interest payable on the loans, or to extend the payment terms of the loans.
Members of the U.S. Congress have indicated support for additional legislative relief for homeowners, including an
amendment of the bankruptcy laws to permit the modification of mortgage loans in bankruptcy proceedings. These loan
modification programs, future legislative or regulatory actions, including amendments to the bankruptcy laws, that result
in the modification of outstanding mortgage loans, as well as changes in the requirements necessary to qualify for
refinancing a mortgage with Fannie Mae, Freddie Mac or Ginnie Mae may adversely affect the value of, and the returns
on, our Agency mortgage-backed securities and Agency debentures. Depending on whether or not we purchased an
instrument at a premium or discount, the yield we receive may be positively or negatively impacted by any modification.
The U.S. Government's pressing for refinancing of certain loans may affect prepayment rates for mortgage loans
in Mortgage-Backed Securities.
In addition to the increased pressure upon residential mortgage loan investors and servicers to engage in loss
mitigation activities, the U.S. Government is pressing for refinancing of certain loans, and this encouragement may affect
prepayment rates for mortgage loans in Agency mortgage-backed securities. To the extent these and other economic
stabilization or stimulus efforts are successful in increasing prepayment speeds for residential mortgage loans, such as
those in Agency mortgage-backed securities, that could potentially harm our income and operating results, particularly in
connection with loans or Agency mortgage-backed securities purchased at a premium or our interest-only securities.
There can be no assurance that the actions of the U.S. Government, the Federal Reserve, the Treasury and other
governmental and regulatory bodies for the purpose of stabilizing the financial markets will achieve the intended
effect, that our business will benefit from these actions or that further government or market developments will
not adversely impact us.
In response to the financial issues affecting the banking system and the financial markets and going concern
threats to investment banks and other financial institutions, the U.S. Government, the Federal Reserve, the Treasury and
other governmental and regulatory bodies have taken action to attempt to stabilize the financial markets.
There can be no assurance that the actions of the U.S. Government will have a beneficial impact on the financial
markets, including on current levels of volatility. To the extent the market does not respond favorably to these initiatives
or these initiatives do not function as intended, our business may not receive the anticipated positive impact from the
legislation. There can also be no assurance that we will be eligible to participate in any programs established by the U.S.
Government, if we are eligible, that we will be able to utilize them successfully or at all. In addition, because the
programs are designed, in part, to provide liquidity to restart the market for certain of our targeted assets, the
establishment of these programs may result in increased competition for attractive opportunities in our targeted assets. It
is also possible that our competitors may utilize the programs which would provide them with attractive debt and equity
capital funding from the U.S. Government. In addition, the U.S. Government, the Federal Reserve, the Treasury and
other governmental and regulatory bodies have taken or are considering taking other actions to address the financial
crisis. We cannot predict whether or when such actions may occur, and such actions could have a dramatic impact on
our business, results of operations and financial condition.
We operate in a highly competitive market for investment opportunities and competition may limit our ability to
acquire desirable investments in our target assets and could also affect the pricing of these securities.
We operate in a highly competitive market for investment opportunities. Our profitability depends, in large
part, on our ability to acquire our target assets at attractive prices. In acquiring our target assets, we will compete with a
variety of institutional investors, including other REITs, specialty finance companies, public and private funds (including
other funds managed by FIDAC), commercial and investment banks, commercial finance and insurance companies and
20
other financial institutions. Many of our competitors are substantially larger and have considerably greater financial,
technical, marketing and other resources than we do. Several other REITs have recently raised, or are expected to raise,
significant amounts of capital, and may have investment objectives that overlap with ours, which may create additional
competition for investment opportunities. Some competitors may have a lower cost of funds and access to funding
sources that may not be available to us, such as funding from the U.S. Government, if we are not eligible to participate in
programs established by the U.S. Government. Many of our competitors are not subject to the operating constraints
associated with REIT tax compliance or maintenance of an exemption from the Investment Company Act. In addition,
some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to
consider a wider variety of investments and establish more relationships than us. Furthermore, competition for
investments in our target assets may lead to the price of such assets increasing, which may further limit our ability to
generate desired returns. We cannot assure you that the competitive pressures we face will not have a material adverse
effect on our business, financial condition and results of operations. Also, as a result of this competition, desirable
investments in our target assets may be limited in the future and we may not be able to take advantage of attractive
investment opportunities from time to time, as we can provide no assurance that we will be able to identify and make
investments that are consistent with our investment objectives.
Risks Related to Our Business
An increase in the interest payments on our borrowings relative to the interest we earn on our Investment
Securities may adversely affect our profitability.
We earn money based upon the spread between the interest payments we earn on our Investment Securities and
the interest payments we must make on our borrowings. If the interest payments on our borrowings increase relative to
the interest we earn on our Investment Securities, our profitability may be adversely affected. The interest payments on
our borrowings may increase relative to the interest we earn on our adjustable-rate interest-earning assets for various
reasons discussed in this section.
(cid:2) Differences in timing of interest rate adjustments on our Investment Securities and our borrowings may
adversely affect our profitability
We rely primarily on short-term borrowings to acquire Investment Securities with long-term maturities.
Accordingly, if short-term interest rates increase, this may adversely affect our profitability.
Some of the Investment Securities we acquire are adjustable-rate interest-earning assets. This means that their
interest rates may vary over time based upon changes in an objective index, such as:
(cid:2) LIBOR. The interest rate that banks in London offer for deposits in London of U.S. dollars.
(cid:2) Treasury Rate. A monthly or weekly average yield of benchmark U.S. Treasury securities, as published by
the Federal Reserve Board.
(cid:2) CD Rate. The weekly average of secondary market interest rates on six-month negotiable certificates of
deposit, as published by the Federal Reserve Board.
These indices generally reflect short-term interest rates. On December 31, 2010, approximately 13% of our
Investment Securities were adjustable-rate interest-earning assets.
The interest rates on our borrowings similarly vary with changes in an objective index. Nevertheless, the
interest rates on our borrowings generally adjust more frequently than the interest rates on our adjustable-rate interest-
earning assets. For example, on December 31, 2010, our adjustable-rate interest-earning assets had a weighted average
term to next rate adjustment of 39 months, while our borrowings had a weighted average term of 127 days. Accordingly,
in a period of rising interest rates, we could experience a decrease in net income or a net loss because the interest rates on
our borrowings adjust faster than the interest rates on our adjustable-rate interest-earning assets.
21
(cid:2)
Interest rate caps on our Agency mortgage-backed securities and Agency debentures may adversely affect
our profitability
Our adjustable-rate interest-earning assets are typically subject to periodic and lifetime interest rate caps.
Periodic interest rate caps limit the amount an interest rate can increase during any given period. Lifetime interest rate
caps limit the amount an interest rate can increase through maturity of Agency mortgage-backed securities and Agency
debentures. Our borrowings are not subject to similar restrictions. Accordingly, in a period of rapidly increasing interest
rates, we could experience a decrease in net income or experience a net loss because the interest rates on our borrowings
could increase without limitation while the interest rates on our adjustable-rate interest-earning assets would be limited
by caps.
(cid:2) Because we acquire fixed-rate securities, an increase in interest rates may adversely affect our profitability
In a period of rising interest rates, our interest payments could increase while the interest we earn on our fixed-
rate mortgage-backed securities would not change. This would adversely affect our profitability. On December 31,
2010, approximately 86% of our Investment Securities were fixed-rate investments.
An increase in prepayment rates may adversely affect our profitability.
The Agency mortgage-backed securities we acquire are backed by pools of mortgage loans. We receive
payments, generally, from the payments that are made on these underlying mortgage loans. When borrowers prepay
their mortgage loans at rates that are faster-than-expected, this results in prepayments on mortgage-backed securities that
are faster than expected. These faster than expected prepayments may adversely affect our profitability. We often
purchase mortgage-backed securities that have a higher interest rate than the market interest rate at the time. In exchange
for this higher interest rate, we must pay a premium over the market value to acquire the security. In accordance with
accounting rules, we amortize this premium over the term of the mortgage-backed security. If the mortgage-backed
security is prepaid in whole or in part prior to its maturity date, however, we must expense all or a part of the remaining
unamortized portion of the premium that was prepaid at the time of the prepayment. This adversely affects our
profitability.
Prepayment rates generally increase when interest rates fall and decrease when interest rates rise, but changes in
prepayment rates are difficult to predict. Prepayment rates also may be affected by conditions in the housing and
financial markets, general economic conditions and the relative interest rates on fixed-rate and adjustable-rate mortgage
loans.
We often purchase mortgage-backed securities that have a higher coupon rate than the prevailing market
interest rates. In exchange for a higher coupon rate, we typically pay a premium over par value to acquire these
mortgage-backed securities. In accordance with generally accepted accounting principles (or GAAP), we amortize the
premiums on our mortgage-backed securities over the life of the related mortgage-backed securities. If the mortgage
loans securing these mortgage-backed securities prepay at a more rapid rate than anticipated, we will have to amortize
our premiums on an accelerated basis which may adversely affect our profitability. Defaults on mortgage loans
underlying Agency mortgage-backed securities typically have the same effect as prepayments because of the underlying
Agency guarantee. Fannie Mae and Freddie Mac significantly increased their purchases of delinquent loans from the
pools of mortgages collateralizing their Agency mortgage-backed securities beginning in March 2010. As of December
31, 2010, we had net purchase premiums of $2.3 billion, or 3.0% of current par value, on our Agency mortgage-backed
securities, Agency debentures, and corporate debt.
We may seek to reduce prepayment risk by acquiring mortgage-backed securities at a discount. If a discounted
security is prepaid in whole or in part prior to its maturity date, we will earn income equal to the amount of the remaining
discount. This will improve our profitability if the discounted securities are prepaid faster than expected.
We also can acquire mortgage-backed securities that are less affected by prepayments. For example, we can
acquire CMOs, a type of mortgage-backed security. CMOs divide a pool of mortgage loans into multiple tranches that
allow for shifting of prepayment risks from slower-paying tranches to faster-paying tranches. This is in contrast to pass-
through or pay-through mortgage-backed securities, where all investors share equally in all payments, including all
22
prepayments. As discussed below, the Investment Company Act of 1940 imposes restrictions on our purchase of CMOs.
As of December 31, 2010, approximately 19% of our Investment Securities were CMOs and approximately 81% of our
Investment Securities were pass-through or pay-through securities.
While we seek to minimize prepayment risk to the extent practical, in selecting investments we must balance
prepayment risk against other risks and the potential returns of each investment. No strategy can completely insulate us
from prepayment risk.
An increase in interest rates may adversely affect our book value.
Increases in interest rates may negatively affect the market value of our investment securities. Our fixed-rate
securities, generally, are more negatively affected by these increases. In accordance with accounting rules, we reduce
our book value by the amount of any decrease in the market value of our investment securities.
Failure to procure funding on favorable terms, or at all, would adversely affect our results and may, in turn,
negatively affect the market price of shares of our common stock.
The current dislocation and weakness in the broader mortgage markets could adversely affect one or more of
our potential lenders and could cause one or more of our potential lenders to be unwilling or unable to provide us with
financing. This could potentially increase our financing costs and reduce our liquidity. If one or more major market
participants fails or otherwise experiences a major liquidity crisis, as was the case for Bear Stearns & Co. in March 2008
and Lehman Brothers Holdings Inc. in September 2008, it could negatively impact the marketability of all fixed income
securities, including Agency RMBS, and this could negatively impact the value of the securities we acquire, thus
reducing our net book value. Furthermore, if any of our potential lenders or any of our lenders are unwilling or unable to
provide us with financing, we could be forced to sell our assets at an inopportune time when prices are depressed.
Our strategy involves significant leverage.
We incur this leverage by borrowing against a substantial portion of the market value of our investment
securities. By incurring this leverage, we can enhance our returns. Nevertheless, this leverage, which is fundamental to
our investment strategy, also creates significant risks.
(cid:2) Our leverage may cause substantial losses
Because of our significant leverage, we may incur substantial losses if our borrowing costs increase. Our
borrowing costs may increase for any of the following reasons:
(cid:2)
(cid:2)
(cid:2)
(cid:2)
short-term interest rates increase;
the market value of our Investment Securities decreases;
interest rate volatility increases; or
the availability of financing in the market decreases.
(cid:2) Our leverage may cause margin calls and defaults and force us to sell assets under adverse market
conditions
Because of our leverage, a decline in the value of our investment securities may result in our lenders initiating
margin calls. A margin call means that the lender requires us to pledge additional collateral to re-establish the ratio
of the value of the collateral to the amount of the borrowing. Our fixed-rate mortgage-backed securities generally
are more susceptible to margin calls as increases in interest rates tend to more negatively affect the market value of
fixed-rate securities.
If we are unable to satisfy margin calls, our lenders may foreclose on our collateral. This could force us to sell
23
our investment securities under adverse market conditions. Additionally, in the event of our bankruptcy, our
borrowings, which are generally made under repurchase agreements, may qualify for special treatment under the
Bankruptcy Code. This special treatment would allow the lenders under these agreements to avoid the automatic
stay provisions of the Bankruptcy Code and to liquidate the collateral under these agreements without delay.
(cid:2) Liquidation of collateral may jeopardize our REIT status
To continue to qualify as a REIT, we must comply with requirements regarding our assets and our sources of
income. If we are compelled to liquidate our Agency mortgage-backed securities and Agency debentures, we may
be unable to comply with these requirements, ultimately jeopardizing our status as a REIT and our failure to qualify
as a REIT will have adverse tax consequences.
(cid:2) We may exceed our target leverage ratios
We seek to maintain a ratio of debt-to-equity of between 8:1 and 12:1. However, we are not required to stay
within this leverage ratio. If we exceed this ratio, the adverse impact on our financial condition and results of
operations from the types of risks described in this section would likely be more severe.
(cid:2) We may not be able to achieve our optimal leverage
We use leverage as a strategy to increase the return to our investors. However, we may not be able to achieve
our desired leverage for any of the following reasons:
(cid:2) we determine that the leverage would expose us to excessive risk;
(cid:2)
(cid:2)
our lenders do not make funding available to us at acceptable rates; or
our lenders require that we provide additional collateral to cover our borrowings.
(cid:2) We may incur increased borrowing costs which would adversely affect our profitability
Currently, all of our collateralized borrowings are in the form of repurchase agreements. If the interest rates on
these repurchase agreements increase, it would adversely affect our profitability.
Our borrowing costs under repurchase agreements generally correspond to short-term interest rates such as
LIBOR or a short-term Treasury index, plus or minus a margin. The margins on these borrowings over or under
short-term interest rates may vary depending upon:
(cid:2)
(cid:2)
(cid:2)
the movement of interest rates;
the availability of financing in the market; or
the value and liquidity of our Investment Securities.
If we are unable to renew our borrowings at favorable rates, our profitability may be adversely affected.
Since we rely primarily on short-term borrowings, our ability to achieve our investment objectives depends not
only on our ability to borrow money in sufficient amounts and on favorable terms, but also on our ability to renew or
replace on a continuous basis our maturing short-term borrowings. If we are not able to renew or replace maturing
borrowings, we would have to sell our assets under possibly adverse market conditions.
If a counterparty to our repurchase transactions defaults on its obligation to resell the underlying security back to
us at the end of the transaction term, or if the value of the underlying security has declined as of the end of that
term, or if we default on our obligations under the repurchase agreement, we will lose money on our repurchase
24
transactions.
When we engage in repurchase transactions, we generally sell securities to lenders (repurchase agreement
counterparties) and receive cash from these lenders. The lenders are obligated to resell the same securities back to us at
the end of the term of the transaction. Because the cash we receive from the lender when we initially sell the securities
to the lender is less than the value of those securities (this difference is the haircut), if the lender defaults on its obligation
to resell the same securities back to us, we may incur a loss on the transaction equal to the amount of the haircut
(assuming there was no change in the value of the securities). We would also lose money on a repurchase transaction if
the value of the underlying securities has declined as of the end of the transaction term, as we would have to repurchase
the securities for their initial value but would receive securities worth less than that amount. Further, if we default on
one of our obligations under a repurchase transaction, the lender can terminate the transaction and cease entering into
any other repurchase transactions with us. Repurchase agreements generally contain cross-default provisions, so that if a
default occurs under any one agreement, the lenders under our other agreements could also declare a default. Any losses
we incur on our repurchase transactions could adversely affect our earnings and thus our cash available for distribution to
shareholders.
Any repurchase agreements that we use to finance our assets may require us to provide additional collateral or
pay down debt.
Our repurchase agreements involve the risk that the market value of the securities pledged or sold by us to the
repurchase agreement counterparty may decline in value, in which case the counterparty may require us to provide
additional collateral or to repay all or a portion of the funds advanced. We may not have additional collateral or the
funds available to repay our debt at that time, which would likely result in defaults unless we are able to raise the funds
from alternative sources, which we may not be able to achieve on favorable terms or at all. Posting additional collateral
would reduce our liquidity and limit our ability to leverage our assets. If we cannot meet these requirements, the
counterparty could accelerate its indebtedness, increase the interest rate on advanced funds and terminate our ability to
borrow funds from them, which could materially and adversely affect our financial condition and ability to implement
our investment strategy. In addition, in the event that the counterparty files for bankruptcy or becomes insolvent, our
securities may become subject to bankruptcy or insolvency proceedings, thus depriving us, at least temporarily, of the
benefit of these assets. Such an event could restrict our access to bank credit facilities and increase its cost of capital.
Repurchase agreement counterparties may also require us to maintain a certain amount of cash or set aside assets
sufficient to maintain a specified liquidity position that would enhance our ability to satisfy its collateral obligations. As
a result, we may not be able to leverage our assets as fully as we would choose, which could reduce our return on assets.
In the event that we are unable to meet these collateral obligations, our financial condition and prospects could
deteriorate rapidly.
Our hedging strategies expose us to risks.
Our policies permit us to enter into interest rate swaps, caps and floors and other derivative transactions to help
us mitigate our interest rate and prepayment risks described above. We have used interest rate swaps and interest rate
caps to provide a level of protection against interest rate risks, but no hedging strategy can protect us completely.
Interest rate hedging may fail to protect or could adversely affect us because, among other things: interest rate hedging
can be expensive, particularly during periods of rising and volatile interest rates; available interest rate hedges may not
correspond directly with the interest rate risk for which protection is sought; and the duration of the hedge may not match
the duration of the related liability.
(cid:2) Our hedging strategies may not be successful in mitigating the risks associated with interest rates
We cannot assure you that our use of derivatives will offset the risks related to changes in interest rates. It is
likely that there will be periods in the future during which we will incur losses on our derivative financial instruments
that will not be fully offset by gains on our portfolio. The derivative financial instruments we select may not have the
effect of reducing our interest rate risk. In addition, the nature and timing of hedging transactions may influence the
effectiveness of these strategies. Poorly designed strategies or improperly executed transactions could significantly
increase our risk and lead to material losses. In addition, hedging strategies involve transaction and other costs. Our
hedging strategy and the derivatives that we use may not adequately offset the risk of interest rate volatility or that our
hedging transactions may not result in losses.
25
(cid:2) Our use of derivatives may expose us to counterparty risks
We enter into interest rate swap and cap agreements to hedge risks associated with movements in interest rates.
If a swap counterparty cannot perform under the terms of an interest rate swap, we would not receive payments due
under that agreement, we may lose any unrealized gain associated with the interest rate swap, and the hedged liability
would cease to be hedged by the interest rate swap. We may also be at risk for any collateral we have pledged to secure
our obligations under the interest rate swap if the counterparty become insolvent or file for bankruptcy. Similarly, if a
cap counterparty fails to perform under the terms of the cap agreement, in addition to not receiving payments due under
that agreement that would off-sets our interest expense, we would also incur a loss for all remaining unamortized
premium paid for that agreement.
.
We may face risks of investing in inverse floating rate securities.
We may invest in inverse floaters. The returns on inverse floaters are inversely related to changes in an interest
rate. Generally, income on inverse floaters will decrease when interest rates increase and increase when interest rates
decrease. Investments in inverse floaters may subject us to the risks of reduced or eliminated interest payments and
losses of principal. In addition, certain indexed securities and inverse floaters may increase or decrease in value at a
greater rate than the underlying interest rate, which effectively leverages our investment in such securities. As a result,
the market value of such securities will generally be more volatile than that of fixed rate securities.
Our investment strategy may involve credit risk.
We may incur losses if there are payment defaults under our Investment Securities.
To date, substantially all of our mortgage-backed securities have been agency certificates and Agency
debentures which, although not rated, carry an implied “AAA” rating. Agency certificates are mortgage pass-through
certificates where Freddie Mac, Fannie Mae or Ginnie Mae guarantees payments of principal and interest on the
certificates. Agency debentures are debt instruments issued by Freddie Mac, Fannie Mae, or the FHLB.
Even though our Agency mortgage-backed securities and Agency debentures acquired thus far have been
“AAA”, pursuant to our capital investment policy, we have the ability to acquire securities of lower credit quality.
Under our policy:
(cid:2)
(cid:2)
75% of our total assets must be high quality mortgage-backed securities and short-term investments. High
quality securities are securities (1) that are rated within one of the two highest rating categories by at least
one of the nationally recognized rating agencies, (2) that are unrated but are guaranteed by the United
States government or an agency of the United States government, or (3) that are unrated or whose ratings
have not been updated but that our management determines are of comparable quality to high quality rated
mortgage-backed securities;
the remaining 25% of total assets, may consist of mortgage-backed securities and 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; and
(cid:2) we seek to structure our portfolio to maintain a minimum weighted average rating (including our deemed
comparable ratings for unrated mortgage-backed securities) of our mortgage-backed securities of at least
single “A” under the S&P rating system and at the comparable level under the other rating systems.
26
If we acquire securities of lower credit quality, we may incur losses if there are defaults under those securities
or if the rating agencies downgrade the credit quality of those securities.
We have not established a minimum dividend payment level.
We intend to pay quarterly dividends and to make distributions to our stockholders in amounts such that all or
substantially all of our taxable income in each year (subject to certain adjustments) is distributed. This enables us to
qualify for the tax benefits accorded to a REIT under the Code. We have not established a minimum dividend payment
level and our ability to pay dividends may be adversely affected for the reasons described in this section. All
distributions will be made at the discretion of our board of directors and will depend on our earnings, our financial
condition, maintenance of our REIT status and such other factors as our board of directors may deem relevant from time
to time.
Because of competition, we may not be able to acquire mortgage-backed securities at favorable yields.
Our net income depends, in large part, on our ability to acquire mortgage-backed securities at favorable spreads
over our borrowing costs. In acquiring mortgage-backed securities, we compete with other REITs, investment banking
firms, savings and loan associations, banks, insurance companies, mutual funds, other lenders and other entities that
purchase mortgage-backed securities, many of which have greater financial resources than us. As a result, in the future,
we may not be able to acquire sufficient mortgage-backed securities at favorable spreads over our borrowing costs.
We are dependent on our key personnel
We are dependent on the efforts of our key officers and employees, including Michael A. J. Farrell, our
Chairman of the board of directors, Chief Executive Officer and President, Wellington J. Denahan-Norris, our Vice
Chairman, Chief Operating Officer and Chief Investment Officer, and Kathryn F. Fagan, our Chief Financial Officer and
Treasurer. The loss of any of their services could have an adverse effect on our operations. Although we have
employment agreements with each of them, we cannot assure you they will remain employed with us.
We and our shareholders are subject to certain tax risks
(cid:2) Our failure to qualify as a REIT would have adverse tax consequences
We believe that since 1997 we have qualified for taxation as a REIT for federal income tax purposes. We
plan to continue to meet the requirements for taxation as a REIT. The determination that we are a REIT
requires an analysis of various factual matters and circumstances that may not be totally within our control. For
example, to qualify as a REIT, at least 75% of our gross income must come from real estate sources and 95% of
our gross income must come from real estate sources and certain other sources that are itemized in the REIT tax
laws. We are also required to distribute to stockholders at least 90% of our REIT taxable income (determined
without regard to the deduction for dividends paid and by excluding any net capital gain). Even a technical or
inadvertent mistake could jeopardize our REIT status. Furthermore, Congress and the Internal Revenue Service
(or IRS) might make changes to the tax laws and regulations, and the courts might issue new rulings that make
it more difficult or impossible for us to remain qualified as a REIT.
If we fail to qualify as a REIT, we would be subject to federal income tax at regular corporate rates.
Also, unless the IRS granted us relief under certain statutory provisions, we would remain disqualified as a
REIT for four years following the year we first fail to qualify. If we fail to qualify as a REIT, we would have to
pay significant income taxes and would therefore have less money available for investments or for distributions
to our stockholders. This would likely have a significant adverse effect on the value of our securities. In
addition, the tax law would no longer require us to make distributions to our stockholders.
A REIT that fails the quarterly asset tests for one or more quarters will not lose its REIT status as a
result of such failure if either (i) the failure is regarded as a de minimis failure under standards set out in the
Internal Revenue Code, or (ii) the failure is greater than a de minimis failure but is attributable to reasonable
cause and not willful neglect. In the case of a greater than de minimis failure, however, the REIT must pay a
27
tax and must remedy the failure within 6 months of the close of the quarter in which the failure was identified.
In addition, the Internal Revenue Code provides relief for failures of other tests imposed as a condition of REIT
qualification, as long as the failures are attributable to reasonable cause and not willful neglect. A REIT would
be required to pay a penalty of $50,000, however, in the case of each failure.
(cid:2) We have certain distribution requirements
As a REIT, 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). The required distribution limits the amount
we have available for other business purposes, including amounts to fund our growth. Also, it is possible that
because of the differences between the time we actually receive revenue or pay expenses and the period we
report those items for distribution purposes, we may have to borrow funds on a short-term basis to meet the
90% distribution requirement.
(cid:2) We are also subject to other tax liabilities
Even if we qualify as a REIT, we may be subject to certain federal, state and local taxes on our income and
property. Any of these taxes would reduce our operating cash flow.
(cid:2) Limits on ownership of our common stock could have adverse consequences to you and could limit your
opportunity to receive a premium on our stock
To maintain our qualification as a REIT for federal income tax purposes, not more than 50% in value of the
outstanding shares of our capital stock may be owned, directly or indirectly, by five or fewer individuals (as
defined in the federal tax laws to include certain entities). Primarily to facilitate maintenance of our
qualification as a REIT for federal income tax purposes, our charter will prohibit ownership, directly or by the
attribution provisions of the federal tax laws, by any person of more than 9.8% of the lesser of the number or
value of the issued and outstanding shares of our common stock and will prohibit ownership, directly or by the
attribution provisions of the federal tax laws, by any person of more than 9.8% of the lesser of the number or
value of the issued and outstanding shares of any class or series of our preferred stock. Our board of directors,
in its sole and absolute discretion, may waive or modify the ownership limit with respect to one or more persons
who would not be treated as “individuals” for purposes of the federal tax laws if it is satisfied, based upon
information required to be provided by the party seeking the waiver and upon an opinion of counsel satisfactory
to the board of directors, that ownership in excess of this limit will not otherwise jeopardize our status as a
REIT for federal income tax purposes.
The ownership limit may have the effect of delaying, deferring or preventing a change in control and,
therefore, could adversely affect our shareholders’ ability to realize a premium over the then-prevailing market
price for our common stock in connection with a change in control.
(cid:2) A REIT cannot invest more than 25% of its total assets in the stock or securities of one or more taxable
REIT subsidiaries; therefore, our taxable subsidiaries cannot constitute more than 25% of our total
assets
A taxable REIT subsidiary is a corporation, other than a REIT or a qualified REIT subsidiary, in which a
REIT owns stock and which elects taxable REIT subsidiary status. The term also includes a corporate
subsidiary in which the taxable REIT subsidiary owns more than a 35% interest. A REIT may own up to 100%
of the stock of one or more taxable REIT subsidiaries. A taxable REIT subsidiary may earn income that would
not be qualifying income if earned directly by the parent REIT. Overall, at the close of any calendar quarter, no
more than 25% of the value of a REIT’s assets may consist of stock or securities of one or more taxable REIT
subsidiaries.
The stock and securities of our taxable REIT subsidiaries are expected to represent less than 25% of the
value of our total assets. Furthermore, we intend to monitor the value of our investments in the stock and
securities of our taxable REIT subsidiaries to ensure compliance with the above-described 25% limitation. We
28
cannot assure you, however, that we will always be able to comply with the 25% limitation so as to maintain
REIT status.
(cid:2) Taxable REIT subsidiaries are subject to tax at the regular corporate rates, are not required to distribute
dividends, and the amount of dividends a taxable REIT subsidiary can pay to its parent REIT may be
limited by REIT gross income tests
A taxable REIT subsidiary must pay income tax at regular corporate rates on any income that it earns. Our
taxable REIT subsidiaries will pay corporate income tax on their taxable income, and their after-tax net income
will be available for distribution to us. Such income, however, is not required to be distributed.
Moreover, the annual gross income tests that must be satisfied to ensure REIT qualification may limit the
amount of dividends that we can receive from our taxable REIT subsidiaries and still maintain our REIT status.
Generally, not more than 25% of our gross income can be derived from non-real estate related sources, such as
dividends from a taxable REIT subsidiary. If, for any taxable year, the dividends we received from our taxable
REIT subsidiaries, when added to our other items of non-real estate related income, represented more than 25%
of our total gross income for the year, we could be denied REIT status, unless we were able to demonstrate,
among other things, that our failure of the gross income test was due to reasonable cause and not willful neglect.
The limitations imposed by the REIT gross income tests may impede our ability to distribute assets from
our taxable REIT subsidiaries to us in the form of dividends. Certain asset transfers may, therefore, have to be
structured as purchase and sale transactions upon which our taxable REIT subsidiaries recognize taxable gain.
(cid:2)
If interest accrues on indebtedness owed by a taxable REIT subsidiary to its parent REIT at a rate in
excess of a commercially reasonable rate, or if transactions between a REIT and a taxable REIT
subsidiary are entered into on other than arm’s-length terms, the REIT may be subject to a penalty tax
If interest accrues on an indebtedness owed by a taxable REIT subsidiary to its parent REIT at a rate in
excess of a commercially reasonable rate, the REIT is subject to tax at a rate of 100% on the excess of (i)
interest payments made by a taxable REIT subsidiary to its parent REIT over (ii) the amount of interest that
would have been payable had interest accrued on the indebtedness at a commercially reasonable rate. A tax at a
rate of 100% is also imposed on any transaction between a taxable REIT subsidiary and its parent REIT to the
extent the transaction gives rise to deductions to the taxable REIT subsidiary that are in excess of the deductions
that would have been allowable had the transaction been entered into on arm’s-length terms. We will scrutinize
all of our transactions with our taxable REIT subsidiaries in an effort to ensure that we do not become subject to
these taxes. We may not be able to avoid application of these taxes.
Risks of Ownership of Our Common Stock
We may change our policies without stockholder approval.
Our board of directors and management determine all of our policies, including our investment, financing and
distribution policies. They may amend or revise these policies at any time without a vote of our stockholders. Policy
changes could adversely affect our financial condition, results of operations, the market price of our common stock or
our ability to pay dividends or distributions.
Our governing documents and Maryland law impose limitations on the acquisition of our common stock and
changes in control that could make it more difficult for a third party to acquire us.
Maryland Business Combination Act
The Maryland General Corporation Law establishes special requirements for “business combinations” between
a Maryland corporation and “interested stockholders” unless exemptions are applicable. An interested stockholder is any
person who beneficially owns 10% or more of the voting power of our then-outstanding voting stock. Among other
things, the law prohibits for a period of five years a merger and other similar transactions between us and an interested
29
stockholder unless the board of directors approved the transaction prior to the party’s becoming an interested
stockholder. The five-year period runs from the most recent date on which the interested stockholder became an
interested stockholder. The law also requires a super majority stockholder vote for such transactions after the end of the
five-year period. This means that the transaction must be approved by at least:
(cid:2)
(cid:2)
80% of the votes entitled to be cast by holders of outstanding voting shares; and
two-thirds of the votes entitled to be cast by holders of outstanding voting shares other than shares held
by the interested stockholder or an affiliate of the interested stockholder with whom the business
combination is to be effected.
As permitted by the Maryland General Corporation Law, we have elected not to be governed by the Maryland
business combination statute. We made this election by opting out of this statute in our articles of incorporation. If,
however, we amend our articles of incorporation to opt back in to the statute, the business combination statute could
have the effect of discouraging offers to acquire us and of increasing the difficulty of consummating any such offers,
even if our acquisition would be in our stockholders’ best interests.
Maryland Control Share Acquisition Act
Maryland law provides that “control shares” of a Maryland corporation acquired in a “control share acquisition”
have no voting rights except to the extent approved by a vote of the stockholders. Two-thirds of the shares eligible to
vote must vote in favor of granting the “control shares” voting rights. “Control shares” are shares of stock that, taken
together with all other shares of stock the acquirer previously acquired, would entitle the acquirer to exercise voting
power in electing directors within one of the following ranges of voting power:
(cid:2)
(cid:2)
(cid:2)
one-tenth or more but less than one third of all voting power;
one-third or more but less than a majority of all voting power; or
a majority or more of all voting power.
Control shares do not include shares of stock the acquiring person is entitled to vote as a result of having
previously obtained stockholder approval. A “control share acquisition” means the acquisition of control shares, subject
to certain exceptions.
If a person who has made (or proposes to make) a control share acquisition satisfies certain conditions
(including agreeing to pay expenses), he may compel our board of directors to call a special meeting of stockholders to
consider the voting rights of the shares. If such a person makes no request for a meeting, we have the option to present
the question at any stockholders’ meeting.
If voting rights are not approved at a meeting of stockholders then, subject to certain conditions and limitations,
we may redeem any or all of the control shares (except those for which voting rights have previously been approved) for
fair value. We will determine the fair value of the shares, without regard to voting rights, as of the date of either:
(cid:2)
(cid:2)
the last control share acquisition; or
the meeting where stockholders considered and did not approve voting rights of the control shares.
If voting rights for control shares are approved at a stockholders’ meeting and the acquirer becomes entitled to
vote a majority of the shares of stock entitled to vote, all other stockholders may obtain rights as objecting stockholders
and, thereunder, exercise appraisal rights. This means that you would be able to force us to redeem your stock for fair
value. Under Maryland law, the fair value may not be less than the highest price per share paid in the control share
acquisition. Furthermore, certain limitations otherwise applicable to the exercise of dissenters’ rights would not apply in
the context of a control share acquisition. The control share acquisition statute would not apply to shares acquired in a
merger, consolidation or share exchange if we were a party to the transaction. The control share acquisition statute could
30
have the effect of discouraging offers to acquire us and of increasing the difficulty of consummating any such offers,
even if our acquisition would be in our stockholders’ best interests.
The market price and trading volume of our shares of common stock may be volatile and issuances of large
amounts of shares of our common stock could cause the market price of our common stock to decline.
As of February 24, 2011, 804,165,257 shares of our common stock were outstanding. If we issue a significant
number of shares of common stock or securities convertible into common stock in a short period of time, there could be a
dilution of the existing common stock and a decrease in the market price of the common stock.
The market price of our shares of common stock may be highly volatile and could be subject to wide
fluctuations. In addition, the trading volume in our shares of common stock may fluctuate and cause significant price
variations to occur. We cannot assure you that the market price of our shares of common stock will not fluctuate or
decline significantly in the future. Some of the factors that could negatively affect our share price or result in fluctuations
in the price or trading volume of our shares of common stock include those set forth under “Special Note Regarding
Forward-Looking Statements” as well as:
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
actual or anticipated variations in our quarterly operating results or business prospects;
changes in our earnings estimates or publication of research reports about us or the real estate industry;
an inability to meet or exceed securities analysts' estimates or expectations;
increases in market interest rates;
hedging or arbitrage trading activity in our shares of common stock;
capital commitments;
changes in market valuations of similar companies;
adverse market reaction to any increased indebtedness we incur in the future;
additions or departures of management personnel;
actions by institutional shareholders;
speculation in the press or investment community;
changes in our distribution policy;
general market and economic conditions; and
future sales of our shares of common stock or securities convertible into, or exchangeable or
exercisable for, our shares of common stock.
Holders of our shares of common stock will be subject to the risk of volatile market prices and wide fluctuations
in the market price of our shares of common stock. In addition, many of the factors listed above are beyond our control.
These factors may cause the market price of our shares of common stock to decline, regardless of our financial condition,
results of operations, business or prospects. It is impossible to assure you that the market prices of our shares of common
stock will not fall in the future.
The repurchase right in our Convertible Senior Notes triggered by a fundamental change could discourage a
potential acquiror.
31
If we undergo certain fundamental changes, such as the acquisition of 50% of the voting power of all shares of
our common equity entitled to vote generally in the election of directors, holders of our Convertible Senior Notes may
require us to repurchase all or a portion of their notes at a price equal to 100% of the principal amount of the notes to be
purchased plus any accrued and unpaid interest up to, but excluding, the repurchase date. We will pay for all notes so
repurchased with shares of our common stock using a price per share equal to the average daily volume-weighted
average price of our common stock for the 20 consecutive trading days ending on the trading day immediately prior to
the occurrence of the fundamental change. The issuance of these shares of common stock upon certain fundamental
changes could discourage a potential acquiror.
Broad market fluctuations could negatively impact the market price of our shares of common stock.
The stock market has experienced extreme price and volume fluctuations that have affected the market price of
many companies in industries similar or related to ours and that have been unrelated to these companies' operating
performance. These broad market fluctuations could reduce the market price of our shares of common stock.
Furthermore, our operating results and prospects may be below the expectations of public market analysts and investors
or may be lower than those of companies with comparable market capitalizations, which could lead to a material decline
in the market price of our shares of common stock.
Regulatory Risks
Loss of Investment Company Act exemption would adversely affect us.
We intend to conduct our business so as not to become regulated as an investment company under the
Investment Company Act. If we fail to qualify for this exemption, our ability to use leverage would be substantially
reduced, and we would be unable to conduct our business as described in this Form 10-K.
We currently rely on the exemption from registration provided by Section 3(c)(5)(C) of the Investment
Company Act. Section 3(c)(5)(C) as interpreted by the staff of the SEC, requires us to invest at least 55% of our assets
in “mortgages and other liens on and interest in real estate” (or Qualifying Real Estate Assets) and at least 80% of our
assets in Qualifying Real Estate Assets plus real estate related assets. The assets that we acquire, therefore, are limited
by the provisions of the Investment Company Act and the rules and regulations promulgated under the Investment
Company Act. If the SEC determines that any of these securities are not qualifying interests in real estate or real estate
related assets, adopts a contrary interpretation with respect to these securities or otherwise believes we do not satisfy the
above exceptions, we could be required to restructure our activities or sell certain of our assets. We may be required at
times to adopt less efficient methods of financing certain of our mortgage assets and we may be precluded from
acquiring certain types of higher yielding mortgage assets. The net effect of these factors will be to lower our net interest
income. If we fail to qualify for exemption from registration as an investment company, our ability to use leverage
would be substantially reduced, and we would not be able to conduct our business as described. Our business will be
materially and adversely affected if we fail to qualify for this exemption.
Compliance with proposed and recently enacted changes in securities laws and regulations increases our costs.
The Sarbanes-Oxley Act of 2002 and rules and regulations promulgated by the SEC and the New York Stock
Exchange have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices.
We believe that these rules and regulations will make it more costly for us to obtain director and officer liability
insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage.
These rules and regulations could also make it more difficult for us to attract and retain qualified members of
management and our board of directors, particularly to serve on our audit committee.
The Dodd-Frank Act contains many regulatory changes and calls for future rulemaking that may affect our
business, including, but not limited to resolutions involving derivatives, risk-retention in securitizations and short-term
financings. We are evaluating, and will continue to evaluate the potential impact of regulatory change under the Dodd-
Frank Act.
32
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
Our executive and administrative office is located at 1211 Avenue of the Americas, Suite 2902 New York, New
York 10036, telephone 212-696-0100. This office is leased under a non-cancelable lease expiring December 31, 2015.
ITEM 3.
LEGAL PROCEEDINGS
From time to time, we are involved in various claims and legal actions arising in the ordinary course of
business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on our
consolidated financial statements.
ITEM 4.
(REMOVED AND RESERVED)
33
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our common stock began trading publicly on October 8, 1997 and is traded on the New York Stock Exchange under
the trading symbol “NLY.” As of February 16, 2011, we had 717,915,257 shares of common stock issued and
outstanding which were held by approximately 473,679 beneficial holders.
The following table sets forth, for the periods indicated, the high, low, and closing sales prices per share of our
common stock as reported on the New York Stock Exchange composite tape and the cash dividends declared per share
of our common stock.
First Quarter ended March 31, 2010
Second Quarter ended June 30, 2010
Third Quarter ended September 30, 2010
Fourth Quarter ended December 31, 2010
First Quarter ended March 31, 2009
Second Quarter ended June 30, 2009
Third Quarter ended September 30, 2009
Fourth Quarter ended December 31, 2009
First Quarter ended March 31, 2010
Second Quarter ended June 30, 2010
Third Quarter ended September 30, 2010
Fourth Quarter ended December 31, 2010
First Quarter ended March 31, 2009
Second Quarter ended June 30, 2009
Third Quarter ended September 30, 2009
Fourth Quarter ended December 31, 2009
Stock Prices
High
Low
$18.75
$18.10
$18.54
$18.37
$16.96
$14.09
$16.73
$17.25
High
Low
$16.29
$15.56
$19.74
$18.99
$12.07
$13.21
$14.96
$16.74
Common Dividends
Declared Per Share
Close
$17.18
$17.15
$17.60
$17.92
Close
$13.87
$15.14
$18.14
$17.35
$0.65
$0.68
$0.68
$0.64
$0.50
$0.60
$0.69
$0.75
We intend to pay quarterly dividends and to distribute to our stockholders all or substantially all of our taxable
income in each year (subject to certain adjustments). This will enable us to qualify for the tax benefits accorded to a
REIT under the Code. We have not established a minimum dividend payment level and our ability to pay dividends may
be adversely affected for the reasons described under the caption “Risk Factors.” All distributions will be made at the
discretion of our board of directors and will depend on our earnings, our financial condition, maintenance of our REIT
status and such other factors as our board of directors may deem relevant from time to time. No dividends can be paid
on our common stock unless we have paid full cumulative dividends on our preferred stock. From the date of issuance
of our preferred stock through December 31, 2010, we have paid full cumulative dividends on our preferred stock.
34
SHARE PERFORMANCE GRAPH
The following graph and table set forth certain information comparing the yearly percentage change in
cumulative total return on our common stock to the cumulative total return of the Standard & Poor’s Composite 500
stock Index or S&P 500 Index, and the Bloomberg REIT Mortgage Index, or BBG REIT index, an industry index of
mortgage REITs. The comparison is for the period from December 31, 2005 to December 31, 2010 and assumes the
reinvestment of dividends. The graph and table assume that $100 was invested in our common stock and the two other
indices on December 31, 2005. Upon written request we will provide stockholders with a list of the REITs included in
the BBG REIT Index.
130
117
115
100
100
174
172
121
74
79
55
206
98
61
232
111
67
250
225
200
175
150
125
100
75
50
25
0
12/31/05
12/31/06
12/31/07
12/31/08
12/31/09
12/31/10
Annaly Capital Management
S&P 500 Index
BBG Reit Index
Annaly Capital
Management, Inc.
S&P 500 Index
BBG Reit Index
12/31/2005
12/31/2006
12/31/2007
12/31/2008
12/31/2009
12/31/2010
100
100
100
130
115
117
174
121
74
172
79
55
206
98
61
232
111
67
The information in the share performance graph and table has been obtained from sources believed to be
reliable, but neither its accuracy nor its completeness can be guaranteed. The historical information set forth above is not
necessarily indicative of future performance. Accordingly, we do not make or endorse any predictions as to future share
performance.
35
EQUITY COMPENSATION PLAN INFORMATION
On May 27, 2010, at our 2010 Annual Meeting of Stockholders, our 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, we granted to each non-management director of the Company options to purchase 1,250 shares of our
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.
We had previously adopted a long term stock incentive plan for executive officers, key employees and
nonemployee directors (the Incentive Plan). The Incentive Plan authorizes the Compensation Committee of the board of
directors to grant awards, including incentive stock options as defined under Section 422 of the Code (ISOs) and options
not so qualified (NQSOs). The Incentive Plan authorizes the granting of options or other awards for an aggregate of the
greater of 500,000 shares or 9.5% of the outstanding shares of our common stock up to a ceiling of 8,932,921 shares. No
further awards will be made under the Incentive Plan, although existing awards will remain effective. Stock options
were issued at the current market price on the date of grant, subject to an immediate or four year vesting in four equal
installments with a contractual term of 5 or 10 years. The grant date fair value is calculated using the Black-Scholes
option valuation model. For a description of our Incentive Plan, see Note 14 to the Financial Statements.
The following table provides information as of December 31, 2010 concerning shares of our common stock
authorized for issuance under the 2010 Incentive Plan and Incentive Plan (the Incentive Plans).
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
Weighted-average exercise
price of outstanding
options, warrants and
rights
Number of securities
remaining available for
future issuance under the
Incentive Plans (excluding
previously issued)
6,891,975
-
6,891,975
$15.33
-
$15.33
25,181,850
-
25,181,850
Plan Category
Equity compensation plans
approved by security
holders
Equity compensation plans
not approved by security
holders
Total
36
ITEM 6.
SELECTED FINANCIAL DATA
The following selected financial data are derived from our audited financial statements for the years ended
December 31, 2010, 2009, 2008, 2007, and 2006. The selected financial data should be read in conjunction with the
more detailed information contained in the Financial Statements and Notes thereto and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K.
SELECTED FINANCIAL DATA
(dollars in thousands, except for per share data)
Statement of Operations Data
Interest income:
Investment securities
Securities loaned
U.S. Treasury Securities
Total interest income
Interest expense:
Repurchase agreements
Interest rate swaps
Convertible Senior Notes
Securities borrowed
U.S. Treasury Securities sold, not yet purchased
Total interest expense
For the Year
Ended
December 31,
2010
For the Year
Ended
December 31,
2009
For the Year
Ended
December 31,
2008
For the Year
Ended
December 31,
2007
For the Year
Ended
December 31,
2006
$2,676,307
3,997
2,830
2,683,134
$2,922,499
103
-
2,922,602
$3,115,428
-
-
3,115,428
$2,355,447
-
-
2,355,447
$1,221,882
-
-
1,221,882
397,971
735,107
24,228
3,377
2,649
1,163,332
575,867
719,803
-
92
-
1,295,762
1,560,976
327,936
-
-
-
1,888,912
1,892,372
34,093
-
-
-
1,926,465
1,043,898
11,115
-
-
-
1,055,013
Net interest income
1,519,802
1,626,840
1,226,516
428,982
166,869
Other (loss) income:
Investment advisory and service fees
Gain (loss) on sale of Mortgage-Backed Securities
and Agency debentures
Gain on termination of interest rate swaps
Income from trading securities
Dividend income
Loss on other-than-temporarily impaired securities
Loss on receivable from Prime Broker
Unrealized gain (loss) on interest rate swaps
Net loss on trading securities
Income from underwriting
Total other (loss) income
Expenses:
Distribution fees
General and administrative expenses
Total Expenses
58,073
48,952
27,891
22,028
22,351
181,791
-
-
31,038
-
-
(318,832)
(2,351)
2,095
(48,186)
360
171,487
171,847
99,128
-
-
17,184
-
(13,613)
349,521
-
-
501,172
1,756
130,152
131,908
10,713
-
9,695
2,713
(31,834)
-
(768,268)
-
-
(749,090)
1,589
103,622
105,211
19,062
2,096
19,147
91
(1,189)
-
-
-
-
61,235
3,647
62,666
66,313
(3,862)
10,674
3,994
-
(52,348)
-
-
-
-
(19,191)
3,444
40,063
43,507
Impairment of intangible for customer relationships
-
-
-
-
2,493
Income before income (loss) on equity method
investment, income taxes and noncontrolling
interest
1,299,769
1,996,104
372,215
423,904
101,678
Income (loss) on equity method investment
2,945
(252)
-
-
-
37
Income taxes
(35,434)
(34,381)
(25,977)
( 8,870)
(7,538)
Income before noncontrolling interest
1,267,280
1,961,471
346,238
415,034
94,140
Noncontrolling interest
Net income
-
-
58
650
324
1,267,280
1,961,471
346,180
414,384
93,816
Dividends on preferred stock
18,033
18,501
21,177
21,493
19,557
Net income available to common shareholders
$1,249,247
$1,942,970
$325,003
$392,891
$74,259
Total assets
6.00% Series B Cumulative Convertible Preferred Stock
Basic net income per average common share
Diluted net income per average common share
Dividends declared per common share
$83,026,590
$40,032
$2.12
$2.04
$2.65
$69,376,190
$63,114
$3.55
$3.52
$2.54
$57,597,615 $54,002,514 $30,715,980
$111,466
$111,466
$0.44
$1.32
$0.44
$1.31
$0.57
$1.04
$96,042
$0.64
$0.64
$2.08
38
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We own, manage, and finance a portfolio of real estate related investments, including mortgage pass-through
certificates, 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.
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 27%, 19%
39
and 13% for the years ended December 31, 2010, 2009 and 2008, respectively. Since changes in interest rates may
significantly affect our activities, our operating results depend, in large part, upon our ability to effectively manage
interest rate risks and prepayment risks while maintaining our status as a REIT.
The table below provides quarterly information regarding our average balances, interest income, yield on
assets, average repurchase agreement balances, interest expense, cost of funds, net interest income and net interest rate
spreads for the quarterly periods presented.
Average
Investment
Securities
Held (1)
Yield on
Average
Investment
Securities
Average
Balance of
Repurchase
Agreements
Interest
Expense
(ratios for the quarters have been annualized, dollars in thousands)
Total
Interest
Income
Average
Cost of
Funds
Net Interest
Income
Net
Interest
Rate
Spread
Quarter Ended
December 31, 2010
Quarter Ended
September 30, 2010
Quarter Ended
June 30, 2010
Quarter Ended
March 31, 2010
$74,749,528
$682,087
3.65%
$67,448,046
$304,013
1.80%
$378,074
1.85%
$69,242,085
$702,976
4.06%
$62,034,137
$302,568
1.95%
$400,408
2.11%
$61,952,037
$643,682
4.16%
$56,190,308
$280,242
2.00%
$363,440
2.16%
$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
December 31, 2010
September 30, 2010
June 30, 2010
March 31, 2010
CPR
23%
20%
32%
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. In this “Management Discussion and
Analysis of Financial Condition and Results of Operations”, net income attributable to controlling interest is referred to
as net income.
Recent Developments
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
40
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
December 31, 2010, we had net purchase premiums of $2.3 billion, or 3.0% 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 proposed or not yet been adopted in final form, 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: Investment Securities 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 determine
fair values from internal sources and compare them to independent sources. Fair values from internal prices are
compared to independent sources 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 (or OCI).
41
Interest Income: Interest income is accrued based on the outstanding principal amount of the Investment
Securities and their contractual terms. Premiums and discounts associated with the purchase of the Investment Securities
are amortized or accreted into interest income over the projected lives of the securities using the interest method. Our
policy for estimating prepayment speeds for calculating the effective yield is to evaluate historical performance, Wall
Street consensus prepayment speeds, and current market conditions. If our estimate of prepayments is incorrect, we may
be required to make an adjustment to the amortization or accretion of premiums and discounts that would have an impact
on future income.
Derivative Financial Instruments/Hedging Activity: Prior to the fourth quarter of 2008, we designated interest
rate swaps as cash flow hedges, whereby the swaps were recorded at fair value on our balance sheet as assets and
liabilities with any changes in fair value recorded in OCI. In a cash flow hedge, a swap would exactly match the pricing
date of the relevant repurchase agreement. Through the end of the third quarter of 2008 we continued to be able to
effectively match the swaps with the repurchase agreements therefore entering into effective hedge transactions.
However, due to the volatility of the credit markets, it is no longer practical to match the pricing dates of both the swaps
and the repurchase agreements.
As a result, we voluntarily discontinued hedge accounting after the third quarter of 2008 through a combination
of de-designating previously defined hedge relationships and not designating new contracts as cash flow hedges. The de-
designation of cash flow hedges requires that the net derivative gain or loss related to the discontinued cash flow hedge
should continue to be reported in accumulated OCI, unless it is probable that the forecasted transaction will not occur by
the end of the originally specified time period or within an additional two-month period of time thereafter. We continue
to hold repurchase agreements in excess of swap contracts and have no indication that interest payments on the hedged
repurchase agreements are in jeopardy of discontinuing. Therefore, the deferred losses related to these derivatives that
have been de-designated will not be recognized immediately and will remain in OCI. These losses are reclassified into
earnings during the contractual terms of the swap agreements starting as of October 1, 2008. Changes in the unrealized
gains or losses on the interest rate swaps subsequent to September 30, 2008 are reflected in our statement of operations.
Results of Operations:
Net Income Summary
For the year ended December 31, 2010, our net income was $1.3 billion or $2.12 basic net income per average
share available to common shareholders, as compared to $2.0 billion net income or $3.55 basic net income per average
share related to common shareholders for the year ended December 31, 2009, and net income was $346.2 million or
$0.64 basic net income per average share related to common shareholders for the year ended December 31, 2008. Net
income per average share decreased by $1.43 per average share available to common shareholders and total net income
decreased $694.2 million for the year ended December 31, 2010, when compared to the year ended December 31, 2009.
We attribute the decrease in total net income for the year ended December 31, 2010 from the year ended December 31,
2009 in part to recording of unrealized loss related to interest rate swaps of $318.8 million for the year ended December
31, 2010, compared to an unrealized gain of $349.5 million which was recorded in for the year ended December 31,
2009. Net income for the year ended December 31, 2010, also decreased due to net interest income decreasing by
$107.0 million for the year ended December 31, 2010, as compared to the year ended December 31, 2009, due to the
decline in the interest rate spread.
We attribute the increase in total net income for the year ended December 31, 2009 from the year ended
December 31, 2008 in part to recording of unrealized gains related to interest rate swaps of $349.5 million for the year
ended December 31, 2009, comparison to an unrealized loss of $768.3 million which was recorded in for the year ended
December 31, 2008. Net income for the year ended December 31, 2009, also increased due to net interest income
increasing by $400.3 million for the year ended December 31, 2009, as compared to the year ended December 31, 2008,
due to the improved interest rate spread. For the year ended December 31, 2009, net gain on sale of Agency mortgage-
backed securities was $99.1 million, as compared to a net gain of $10.7 million for the year ended December 31, 2008.
42
Net Income Summary
(dollars in thousands, except for per share data)
For the Years Ended December 31,
2009
2008
2010
Interest income
Investment Securities
Securities loaned
U.S Treasury Securities
Total interest income
Interest expense
Repurchase agreements
Interest rate swaps
Convertible Notes
Securities borrowed
U.S Treasuries Sold, not yet purchased
Total interest expense
$2,676,307
3,997
2,830
2,683,134
$2,922,499
103
-
2,922,602
$3,115,428
-
-
3,115,428
397,971
735,107
24,228
3,377
2,649
1,163,332
575,867
719,803
-
-
92
1,295,762
1,560,976
327,936
-
-
-
1,888,912
Net interest income
1,519,802
1,626,840
1,226,516
Other (loss) income:
Investment advisory and service fees
Gain on sale of Mortgage-Backed Securities and agency debentures
Income from trading securities
Dividend income
Loss on other-than-temporarily impaired securities
Loss on receivable from Prime Broker
Unrealized (loss) gain on interest rate swaps
Net Loss on trading securities
Income from underwriting
Total other (loss) income
Expenses:
Distribution fees
General and administrative expenses
Total expenses
58,073
181,791
-
31,038
-
-
(318,832)
(2,351)
2,095
(48,186)
360
171,487
171,847
48,952
99,128
-
17,184
-
(13,613)
349,521
-
-
501,172
1,756
130,152
131,908
27,891
10,713
9,695
2,713
(31,834)
-
(768,268)
-
-
(749,090)
1,589
103,622
105,211
Income before income on equity method investment, income taxes
and noncontrolling interest
1,299,769
1,996,104
372,215
Income on equity method investment
2,945
(252)
-
Income taxes
Net income
Noncontrolling interest
(35,434)
(34,381)
(25,977)
1,267,280
1,961,471
346,238
-
-
58
Net income attributable to controlling interest
1,267,280
1,961,471
346,180
Dividends on preferred stock
18,033
18,501
21,177
Net income available to common shareholders
$1,249,247
$1,942,970
$325,003
Weighted average number of basic common shares outstanding
Weighted average number of diluted common shares outstanding
588,192,659
625,307,174
546,973,036
553,129,907
507,024,596
507,024,596
43
Basic net income per average common share
Diluted net income per average common share
$2.12
$2.04
$3.55
$3.52
$0.64
$0.64
Average total assets
Average equity
Return on average total assets
Return on average equity
$76,242,938
$9,701,233
$65,224,198
$8,644,228
$58,540,508
$6,679,431
1.66%
13.06%
3.01
%
22.69%
0.59%
5.18%
Interest Income and Average Earning Asset Yield
We had average earning assets of $67.0 billion, $58.6 billion, and $56.0 billion for the years ended December
31, 2010, 2009 and 2008, respectively. Our primary source of income is interest income. Our interest income was $2.7
billion, $2.9 billion and $3.1 billion for the years ended December 31, 2010, 2009, and 2008, respectively. The yield on
average Interest Earning Assets was 4.01%, 4.99%, and 5.57% for the respective years. The prepayment speeds
increased to an average of 27% CPR for the year ended December 31, 2010 from an average of 19% CPR for the year
ended December 31, 2009. For the year ended December 31, 2010, as compared to the year ended December 31, 2009,
interest income declined by $239.5 million, due to the decline in yield on average Interest Earning Assets of 98 basis
points. Interest income decreased by $193.0 million for the year ended December 31, 2009, as compared to the year
ended December 31, 2008, due to the decrease in yield on interest earning assets of 58 basis points.
Interest Expense and the Cost of Funds
Our largest expense is the cost of borrowed funds. We had average borrowed funds of $60.2 billion and total
interest expense of $1.2 billion for the year ended December 31, 2010. We had average borrowed funds of $52.4 billion
and total interest expense of $1.3 billion for the year ended December 31, 2009. We had average borrowed funds of
$50.3 billion and total interest expense of $1.9 billion for the year ended December 31, 2008. Our average cost of funds
was 1.93%, 2.47% and 3.76% for the years ended December 31, 2010, 2009 and 2008, respectively. The cost of funds
rate decreased by 54 basis points and the average borrowed funds increased by $7.8 billion for the year ended December
31, 2010 when compared to the year ended December 31, 2009. The cost of funds rate decreased by 129 basis points
and the average borrowed funds increased by $2.1 billion for the year ended December 31, 2009 when compared to the
year ended December 31, 2008. Interest expense for the year ended December 31, 2010 decreased by $132.4 million
over the prior year due to the substantial decrease in the average cost of funds rate. Interest expense for the year-ended
December 31, 2009 decreased by $593.1 million when compared to interest expense for the year ended December 31,
2008. Our average cost of funds was 1.66% above average one-month LIBOR and 1.41% above average six-month
LIBOR for the year ended December 31, 2010. Our average cost of funds was 2.14% above average one-month LIBOR
and 1.36% above average six-month LIBOR for the year ended December 31, 2009. Our average cost of funds was
1.08% above average one-month LIBOR and 0.70% above average six-month LIBOR for the year ended December 31,
2008.
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 years ended December 31, 2010, 2009, 2008, 2007, and 2006 and the four
quarters in 2010.
44
Average Cost of Funds
(Ratios for the four quarters in 2009 have been annualized, dollars in thousands)
Interest-
Bearing
Liabilities
at Period
End
Average
Borrowed
Funds
Interest
Expense
Average
Cost of
Funds
Average
One-
Month
LIBOR
Average
Six-
Month
LIBOR
Average
Cost of
Funds
Relative to
Average
One-Month
LIBOR
Average
Cost of
Funds
Relative to
Average
Six-Month
LIBOR
Average
One-Month
LIBOR
Relative to
Average Six-
Month
LIBOR
For the Year Ended
December 31, 2010
For the Year Ended
December 31, 2009
For the Year Ended
December 31, 2008
For the Year Ended
December 31, 2007
For the Year Ended
December 31, 2006
For the Quarter Ended
December 31, 2010
For the Quarter Ended
September 30, 2010
For the Quarter Ended
June 30, 2010
For the Quarter Ended
March 31, 2010
$60,242,842
$67,260,840
$1,163,332
1.93%
0.27%
0.52%
(0.25%)
1.66%
$52,361,607
$54,627,186
$1,295,762
2.47%
0.33%
1.11%
(0.78%)
2.14%
$50,270,226
$46,674,885
$1,888,912
3.76%
2.68%
3.06%
(0.38%)
1.08%
1.41%
1.36%
0.70%
$37,967,215
$46,079,395
$1,926,465
5.07%
5.19%
5.19%
(0.00%)
(0.12%)
(0.12%)
$21,399,130
$27,555,968
$1,055,013
4.93%
5.03%
5.21%
(0.18%)
(0.10%)
(0.28%)
$67,448,046 $67,260,840
$304,013
1.80%
0.26%
0.45%
(0.19%)
1.54%
1.35%
$62,034,137
$62,583,593
$302,568
1.95%
0.29%
0.59%
(0.30%)
1.66%
$56,190,308
$57,255,284
$280,242
2.00%
0.32%
0.63%
(0.31%)
1.68%
$55,298,875
$54,444,857
$276,509
2.00%
0.23%
0.40%
(0.17%)
1.77%
1.36%
1.37%
1.60%
Net Interest Income
Our net interest income, which equals interest income less interest expense, totaled $1.5 billion. $1.6 billion and
$1.2 billion for the years ended December 31, 2010, 2009 and 2008, respectively. Our net interest income decreased by
$107.0 million for the year ended December 31, 2010, as compared to the year ended December 31, 2009 because of the
decreased interest rate spread. Our net interest rate spread for the year ended December 31, 2010 was 2.08%, or 44 basis
points less than the interest rate spread of for the year ended December 31, 2009 of 2.52%. This 44 basis point decrease
in interest rate spread for 2010 over the spread for 2009 was the result of the a decrease in average yield on average
interest earning assets of 98 basis points which was only partially offset by the decrease in the average cost of funds of
54 basis points. Our net interest income increased for the year ended December 31, 2009, as compared to the year ended
December 31, 2008, because of the increased average asset base of $12.2 billion in 2009 and the increased interest rate
spread of 111 basis points.
45
The table below shows our interest income by average Interest Earning Assets held, total interest income, yield
on average interest earning assets, average balance of repurchase agreements, interest expense, average cost of funds, net
interest income, and net interest rate spread for the years ended December 31, 2010, 2009, 2008, 2007, and 2006 and the
four quarters in 2010.
Net Interest Income
(Ratios for the four quarters in 2010 have been annualized, dollars in thousands)
Average
Interest
Earning
Assets
Held
Total
Interest
Income
Yield on
Average
Interest
Earning
Assets
Average
Balance of
Repurchase
Agreements
Interest
Expense
Average
Cost of
Funds
Net Interest
Income
Net
Interest
Rate
Spread
$66,981,887
$2,683,134
4.01%
$60,242,842
$1,163,332
1.93%
$1,519,802
2.08%
$58,554,200
$2,922,602
4.99%
$52,361,607
$1,295,762
2.47%
$1,626,840
2.52%
$55,962,519
$3,115,428
5.57%
$50,270,226
$1,888,912
3.76%
$1,226,516
1.81%
$40,800,148
$2,355,447
5.77%
$37,967,215
$1,926,465
5.07%
$428,982
0.70%
$23,029,195
$1,221,882
5.31%
$21,399,130
$1,055,013
4.93%
$166,869
0.38%
$74,749,528
$682,087
3.65%
$67,448,046
$304,013
1.80%
$378,074
1.85%
$69,242,085
$702,976
4.06%
$62,034,137
$302,568
1.95%
$400,408
2.11%
$61,952,037
$643,682
4.16%
$56,190,308
$280,242
2.00%
$363,440
2.16%
$61,983,900
$654,389
4.22%
$55,298,875
$276,509
2.00%
$377,880
2.22%
For the Year Ended
December 31, 2010
For the Year Ended
December 31, 2009
For the Year Ended
December 31, 2008
For the Year Ended
December 31, 2007
For the Year Ended
December 31, 2006
For the Quarter Ended
December 31, 2010
For the Quarter Ended
September 30, 2010
For the Quarter Ended
June 30, 2010
For the Quarter Ended
March 31, 2010
Investment Advisory and Service Fees
FIDAC and Merganser are registered investment advisors specializing in managing fixed income securities. At
December 31, 2010, FIDAC and Merganser had under management approximately $12.4 billion in net assets and $20.1
billion in gross assets, compared to $11.5 billion in net assets and $19.1 billion in gross assets at December 31, 2009.
FIDAC had $7.0 billion in net assets and $15.3 billion in gross assets at December 31, 2008. Net investment advisory
and service fees for the years ended December 31, 2010, 2009, and 2008 totaled $57.7 million, $47.2 million, and $26.3
million, respectively, net of fees paid to third parties pursuant to distribution service agreements for facilitating and
promoting distribution of shares or units to clients. Gross assets under management will vary from time to time because
of changes in the amount of net assets FIDAC and Merganser manage as well as changes in the amount of leverage used
by the various funds and accounts FIDAC manages.
Gains and Losses on Sales of Interest Earning Assets and Interest Rate Swaps
For the year ended December 31, 2010, we disposed of Interest Earning Assets with a carrying value of $10.6
billion for aggregate net gain of $181.8 million. For the year ended December 31, 2009 we disposed of Interest Earning
Assets with a carrying value of $4.6 billion for an aggregate net gain of $99.1 million. For the year ended December 31,
2008, disposed of Interest Earning Assets with a carrying value of $15.2 billion for a net gain of $10.7 million. We do
not expect to sell assets on a frequent basis, but may from time to time sell existing assets to move into new assets, which
our management believes might have higher risk-adjusted returns, or to manage our balance sheet as part of our
asset/liability management strategy.
Dividend Income from Available-For-Sale Equity Securities
Dividend income from our investment in Chimera Investment Corporation (or Chimera) totaled $31.0 million
for the year ended December 31, 2010, $17.2 million for the year ended December 31, 2009 and $2.7 million for the year
ended December 31, 2008.
46
Loss on Other-Than-Temporarily Impaired Securities
At each quarter end, we review each of our securities to determine if an other-than-temporary impairment
charge would be necessary. We will take these charges if we determine that we do not intend to hold securities that were
in an unrealized loss position for a period of time, to maturity if necessary, sufficient for a forecasted market price
recovery up to or beyond the cost of the investments or we are required to sell for regulatory or other reasons. For the
years ended December 31, 2010 and 2009 there was no loss on other-than-temporarily impaired securities. For the year
ended December 31, 2008 the loss on other-than-temporarily impaired securities totaled $31.8 million.
General and Administrative Expenses
General and administrative (or G&A) expenses were $171.5 million for the year ended December 31, 2010,
$130.2 million for the year ended December 31, 2009, and $103.6 million for the year ended December 31, 2008. G&A
expenses as a percentage of average total assets was 0.22%, 0.20%, and 0.18% for the years ended December 31, 2010,
2009, and 2008, respectively. The increase in G&A expenses of $41.3 million for the year December 31, 2010 was
primarily the result of increased compensation costs related to us and our subsidiaries. Staff increased from 65 at the end
of 2008 to 87 at the end of 2009 and 114 at the end of 2010.
The table below shows our total G&A expenses as compared to average total assets and average equity for the
years ended December 31, 2010, 2009, 2008, 2007, and 2006 and the four quarters in 2010.
G&A Expenses and Operating Expense Ratios
(ratios for the quarters have been annualized, dollars in thousands)
For the Year Ended December 31, 2010
For the Year Ended December 31, 2009
For the Year Ended December 31, 2008
For the Year Ended December 31, 2007
For the Year Ended December 31, 2006
For the Quarter Ended December 31, 2010
For the Quarter Ended September 30, 2010
For the Quarter Ended June 30, 2010
For the Quarter Ended March 31, 2010
Total G&A Expenses
$171,487
$130,152
$103,622
$62,666
$40,063
$46,496
$43,430
$41,540
$40,021
Total G&A Expenses/Average
Assets
0.22%
0.20%
0.18%
0.15%
0.17%
0.22%
0.22%
0.23%
0.23%
Total G&A Expenses/Average
Equity
1.76%
1.51%
1.55%
1.69%
2.00%
1.90%
1.80%
1.72%
1.66%
Net Income and Return on Average Equity
Our net income was $1.3 billion, $2.0 billion and $346.2 million for the years ended December 31, 2010, 2009
and 2008, respectively. Our return on average equity was 13.06%, 22.69% and 5.18% for the respective years. Net
income decreased by $694.2 million for the year ended December 31, 2010, as compared to the year ended December
31, 2009, due to the unrealized loss on interest rate swaps was $318.9 million for the year ended December 31, 2010, as
compared to the unrealized gain on interest rate swaps of $349.5 million for the year ended December 31, 2009.
Additionally, the net interest income for the year ended December 31, 2010 declined by $107.0 million, when compared
to the previous year. We attribute the increase in total net income for the year ended December 31, 2009 from the year
ended December 31, 2008 primarily due to the improved interest rate spread, resulting in an increase in net interest
income of $400.3 million, the unrealized gain on interest rate swaps of $349.5 million, and the gain on sale of Agency
mortgage-backed securities of $99.1 million.
The table below shows our net interest income, net investment advisory and service fees, gain (loss) on sale of
Agency mortgage-backed securities and termination of interest rate swaps, loss on other-than-temporarily impaired
securities, income from trading securities, G&A expenses, income taxes, impairment of intangibles for customer
relationships, noncontrolling interest, each as a percentage of average equity, and the return on average equity for the
years ended December 31, 2010, 2009, 2008, 2007, and 2006, and the four quarters in 2010.
47
For the Year Ended
December 31, 2010
For the Year Ended
December 31, 2009
For the Year Ended
December 31, 2008
For the Year Ended
December 31, 2007
For the Year Ended
December 31, 2006
For the Quarter Ended
December 31, 2010
For the Quarter Ended
September 30, 2010
For the Quarter Ended
June 30, 2010
For the Quarter Ended
March 31, 2010
Components of Return on Average Equity
(Ratios for the quarters have been annualized)
Gain/(Loss) on
Sale of
Mortgage-
Backed
Securities and
Realized and
Unrealized
Gain/(Loss)
Interest Rate
Swaps and
Trading
Securities/
Average Equity
Loss on other-
than-
temporarily
impaired
securities or
Loss on
Receivable
from Prime
Broker or
Impairment of
Intangibles/
Average
Equity
Dividend
Income
from
Available-
for-Sale
Equity
Securities
Net
Investment
Advisory
and
Service
Fees/
Average
Equity
Net
Interest
Income/
Average
Equity
Income
from
Under-
writing
Income from
Equity
Method
Investment
G&A
Expenses/
Average
Equity
Income
Taxes/
Average
Equity
15.67%
0.59%
(1.44%)
-
0.32%
0.02%
0.03%
(1.76%)
(0.37%)
18.82%
0.55%
5.19%
(0.16%)
0.20%
18.36%
0.39%
(11.19%)
(0.48%)
0.04%
11.56%
0.50%
8.32%
0.94%
1.09%
0.42%
(0.03%)
0.00%
(2.61%)
-
-
-
-
-
Noncon-
trolling
interest/
Average
Equity
-
-
-
Return on
Average
Equity
13.06%
22.69%
5.18%
(1.51%)
(0.40%)
(1.55%)
(0.39%)
(1.69%)
(0.24%)
(0.02%)
11.17%
(2.00%)
(0.38%)
(0.01%)
4.68%
15.47%
0.67%
35.58%
16.57%
0.63%
(15.93%)
15.03%
0.57%
(22.90%)
15.69%
0.51%
(2.90%)
-
-
-
-
0.31%
0.03%
0.04%
(1.90%)
(0.33%)
0.33%
0.04%
0.04%
(1.80%)
(0.46%)
0.30%
0.02%
0.04%
(1.72%)
(0.37%)
0.33%
-
-
(1.66%)
(0.30%)
-
-
-
-
49.87%
(0.58%)
(9.03%)
11.67%
Financial Condition
Interest-Earning Assets, Available for Sale
Substantially all of our Agency mortgage-backed securities at December 31, 2010, 2009, and 2008 were
adjustable-rate or fixed-rate mortgage-backed securities backed by single-family mortgage loans. Substantially all of the
mortgage assets underlying these mortgage-backed securities were secured with a first lien position on the underlying
single-family properties. Substantially all of our mortgage-backed securities were Freddie Mac, Fannie Mae or Ginnie
Mae mortgage pass-through certificates or CMOs, which carry an implied “AAA” rating. All of our Agency debentures
are callable and carry an implied “AAA” rating. We carry all of our Agency mortgage-backed securities and Agency
debentures at fair value. We carry our corporate debt at amortized cost.
We accrete discount balances as an increase in interest income over the life of discount on Interest Earning
Assets and we amortize premium balances as a decrease in interest income over the life of premium on Interest Earning
Assets. At December 31, 2010, 2009, and 2008 we had on our balance sheet a total of $35.6 million, $49.2 million and
$64.4 million, respectively, of unamortized discount (which is the difference between the remaining principal value and
current historical amortized cost of our on Interest Earning Assets acquired at a price below principal value) and a total
of $2.3 billion, $1.3 billion and $619.5 million, respectively, of unamortized premium (which is the difference between
the remaining principal value and the current historical amortized cost of our on Interest Earning Assets acquired at a
price above principal value).
We received mortgage principal repayments of $29.0 billion, $13.8 billion and $8.6 billion for the years ended
December 31, 2010, 2009 and 2008, respectively. The average prepayment speed for the year ended December 31,
2010, 2009 and 2008 was 27%, 19%, and 13%, respectively. Given our current portfolio composition, if mortgage
principal prepayment rates were to increase over the life of our mortgage-backed securities, all other factors being equal,
our net interest income would decrease during the life of these mortgage-backed securities as we would be required to
amortize our net premium balance into income over a shorter time period. Similarly, if mortgage principal prepayment
rates were to decrease over the life of our mortgage-backed securities, all other factors being equal, our net interest
income would increase during the life of these mortgage-backed securities as we would amortize our net premium
balance over a longer time period.
48
The table summarizes certain characteristics of our Interest Earning Assets at December 31, 2010, 2009, 2008,
2007, and 2006 and September 30, 2010, June 30, 2010, and March 31, 2010.
Mortgage-Backed Securities, Agency Debentures and Corporate Debt
(dollars in thousands)
Principal Amount
$76,129,522
$62,508,927
$54,508,672
$52,569,598
$30,134,791
$74,084,239
$67,400,316
$66,937,615
Net
Premium
$2,307,839
$1,247,717
$555,043
$328,376
$140,709
$2,269,697
$1,849,585
$1,309,423
Amortized
Cost
$78,437,361
$63,756,644
$55,063,715
$52,897,974
$30,275,500
$76,353,936
$69,249,901
$68,247,038
Amortized
Cost/Principal
Amount
103.03%
102.00%
101.02%
100.62%
100.47%
103.06%
102.74%
101.96%
Fair Value
$79,570,274
$65,721,477
$55,645,940
$53,133,443
$30,217,009
$78,220,512
$71,812,829
$70,171,875
Fair
Value/Principal
Amount
104.52%
105.14%
102.09%
101.07%
100.27%
105.58%
106.55%
104.83%
Weighted
Average
Yield
3.88%
4.51%
5.15%
5.75%
5.63%
3.93%
3.69%
3.87%
At December 31, 2010
At December 31, 2009
At December 31, 2008
At December 31, 2007
At December 31, 2006
At September 30, 2010
At June 30, 2010
At March 31, 2010
The tables below summarizes certain characteristics of our Investment Securities at December 31, 2010, 2009,
2008, 2007, and 2006 and September 30, 2010, June 30, 2010, and March 31, 2010. The index level for adjustable-rate
Agency mortgage-backed securities, Agency debentures and corporate debt is the weighted average rate of the various
short-term interest rate indices, which determine the coupon rate.
Adjustable-Rate Mortgage-Backed Securities, Agency Debentures and Corporate Debt
Characteristics
(dollars in thousands)
Weighted
Average
Coupon
Rate
4.28%
4.55%
4.75%
5.90%
5.72%
4.33%
4.36%
4.55%
Weighted
Average Term to
Next Adjustment
39 months
33 months
36 months
39 months
19 months
38 months
33 months
32 months
Principal Amount
$11,011,839
$16,196,473
$19,540,152
$15,331,447
$8,493,242
$11,658,943
$12,589,813
$15,366,206
Weighted
Average Lifetime
Cap
Weighted
Average
Asset
Yield
Principal Amount at
Period End as % of
Total Interest-
Earning Assets
10.16%
10.09%
10.00%
9.89%
9.76%
10.04%
10.00%
10.09%
3.04%
3.23%
3.93%
5.63%
5.57%
3.03%
3.21%
2.92%
14.46%
25.91%
35.85%
29.16%
28.18%
15.74%
18.68%
22.96%
At December 31, 2010
At December 31, 2009
At December 31, 2008
At December 31, 2007
At December 31, 2006
At September 30, 2010
At June 30, 2010
At March 31, 2010
Fixed-Rate Rate Mortgage-Backed Securities, Agency Debentures and Corporate Debt Characteristics
(dollars in thousands)
At December 31, 2010
At December 31, 2009
At December 31, 2008
At December 31, 2007
At December 31, 2007
At December 31, 2006
At September 30, 2010
At June 30, 2010
At March 31, 2010
Principal
Amount
$65,117,683
$46,312,455
$34,968,520
$37,238,151
$21,641,549
$6,216,668
$62,425,285
$54,810,503
$51,571,411
Weighted Average
Coupon Rate
4.92%
5.78%
6.13%
6.00%
5.83%
5.37%
5.06%
5.35%
5.50%
Weighted Average
Asset Yield
4.00%
4.95%
5.84%
5.80%
5.65%
4.60%
4.10%
4.40%
4.16%
Principal Amount at Period
End as % of Total Interest-
Earning Assets
85.54%
74.09%
64.15%
70.84%
71.82%
39.06%
84.26%
81.32%
77.04%
At December 31, 2010 and 2009, we held Agency mortgage-backed securities, Agency debentures and
corporate debt with coupons linked to various indices. The following tables detail the portfolio characteristics by index.
49
Adjustable-Rate Mortgage-Backed Securities, Agency Debentures and Corporate Debt by Index
December 31, 2010
One-
Month
Libor
Six-
Month
Libor
Twelve
Month
Libor
12-
Month
Moving
Average
11th
District
Cost of
Funds
1-Year
Treasur
y Index
Monthly
Federal
Cost of
Funds
Other
Indexes(1)
1 mo.
6.41%
10 mo.
1.60%
50 mo.
1.99%
2 mo.
0.03%
7 mo.
41 mo.
0.01% 1.91%
1 mo.
0.00%
39 mo.
9.32%
7.03%
11.09%
10.23%
9.46%
10.58%
11.06%
13.43%
15.77%
Weighted Average Term to Next Adjustment
Weighted Average Annual Period Cap
Weighted Average Lifetime Cap at
December 31, 2010
Investment Principal Value as Percentage of
Mortgage-Backed Securities, Agency
debentures and corporate debt at December
31, 2010
(1)
9.97%
Combination of indexes that account for less than 0.05% of total Mortgage-Backed Securities, Agency debentures and corporate debt.
1.06%
0.06%
0.52%
0.59%
0.29%
1.28%
0.69%
Adjustable-Rate Mortgage-Backed Securities, Agency Debentures and Corporate Debt by Index
December 31, 2009
One-
Month
Libor
Six-
Month
Libor
Twelve
Month
Libor
12-Month
Moving
Average
11th
District
Cost of
Funds
1-Year
Treasury
Index
Monthly
Federal
Cost of
Funds
Other
Indexes(1)
1 mo.
6.40%
Weighted Average Term to Next Adjustment
Weighted Average Annual Period Cap
Weighted Average Lifetime Cap at
December 31, 2009
Investment Principal Value as Percentage of
Mortgage-Backed Securities, Agency
debentures and corporate debt at December
31, 2010
0.05%
(1) Combination of indexes that account for less than 0.05% of total Mortgage-Backed Securities, Agency debentures and corporate debt.
7.04% 11.20%
50 mo.
1.95%
12 mo.
1.82%
16 mo.
1.58%
45 mo.
2.01%
1 mo.
0.42%
1 mo.
0.00%
10.98%
15.77%
13.43%
10.85%
11.71%
2.15%
0.76%
1.10%
4.59%
0.51%
0.09%
8.12%
0.77%
1.40%
7 mo.
Reverse Repurchase Agreements
At December 31, 2010, we did not have any amounts outstanding under our reverse repurchase agreement with
Chimera. At December 31, 2009, we lent $259.0 million to Chimera in a weekly reverse repurchase agreement. This
amount is included in the principal amount which approximates fair value in our Statement of Financial Condition. The
interest rate at December 31, 2009 was 1.72%. The collateral for this loan was mortgage-backed securities with a fair
value of $314.3 million at December 31, 2009.
At December 31, 2010, RCap had outstanding reverse repurchase agreements with non-affiliates of $1.0 billion.
At December 31, 2009, RCap, in its ordinary course of business, financed though matched reverse repurchase
agreements, at market rates, $69.7 million for a fund that is managed by FIDAC. At December 31, 2009, RCap had
outstanding reverse repurchase agreements with non-affiliates of $425.0 million.
The table below shows the average daily reverse repurchase agreements balance for RCap and Annaly during
the years ended December 31, 2010, 2009 and 2008 and the four quarters in 2010.
Reverse Repurchase Agreements
(dollars in thousands)
Average Daily Reverse Repurchase
Agreements
Reverse Repurchase Agreements at
Period End
For the Year Ended
December 31, 2010
For the Year Ended
December 31, 2009
For the Year Ended
December 31, 2008
For the Quarter Ended
December 31, 2010
$900,994
$478,151
$513,243
$1,596,494
$1,006,163
$757,993
$598,945
$1,006,163
50
For the Quarter Ended
September 30, 2010
For the Quarter Ended
June 30, 2010
For the Quarter Ended
March 31, 2010
$963,808
$422,891
$620,781
Receivable from Prime Broker on Equity Investment
$757,722
$308,776
$532,166
The net assets of the investment fund we owned are subject to English bankruptcy law, which governs the
administration of Lehman Brothers International (Europe) (in administration) (or LBIE), as well as the law of New York,
which governs the contractual documents. We invested approximately $45.0 million in the fund and have redeemed
approximately $56.0 million. The current assets of the fund still remain at LBIE and affiliates of LBIE and the ultimate
recovery of such amount remains uncertain. We have entered into the Claims Resolution Agreement between LBIE and
certain eligible offerees effective December 29, 2009 with respect to these assets (or the CRA).
Certain of our assets subject to the CRA are held directly at LBIE and we have valued such assets in accordance
with the valuation date set forth in the CRA and the pricing information provided to us by LBIE. The valuation date
with respect to these assets as set forth in the CRA is September 19, 2008.
Certain of our assets subject to the CRA are not held directly at LBIE and are believed to be held at affiliates of
LBIE. Given the great degree of uncertainty as to the status of our assets that are not directly held by LBIE and are
believed to be held at affiliates of LBIE, we have valued such assets at an 80% discount. The value of the net assets that
are not directly held by LBIE and are believed to be held at affiliates of LBIE is determined on the basis of the best
information available to us from time to time, legal and professional advice obtained for the purpose of determining the
rights, and on the basis of a number of assumptions which we believe to be reasonable.
We can provide no assurance, however, that we will recover all or any portion of any of the net assets of the
investment fund following completion of LBIE’s administration (and any subsequent liquidation).
Borrowings
As of December 31, 2010, our collateralized debt has consisted entirely of borrowings collateralized by a pledge
of our interest-earning assets. These borrowings appear on our balance sheet as repurchase agreements. At December
31, 2010, we had established uncommitted borrowing facilities in this market with 30 lenders in amounts which we
believe are in excess of our needs. All of our interest-earning assets are currently accepted as collateral for these
borrowings. However, we limit our borrowings, and thus our potential asset growth, in order to maintain unused
borrowing capacity and thus increase the liquidity and strength of our balance sheet. For the year ended December 31,
2010, the term to maturity of our borrowings ranged from one day to 10 years. Additionally, we have entered into
structured borrowings giving the counterparty the right to call the balance prior to maturity. For the year ended
December 31, 2009, the term to maturity of our borrowings ranged from one day to 10 years. Additionally, we have
entered into structured borrowings giving the counterparty the right to call the balance prior to maturity. At December
31, 2010, the weighted average cost of funds for all of our borrowings was 1.84%, with the effect of the interest rate
swaps, and the weighted average term to next rate adjustment was 127 days. At December 31, 2009, the weighted
average cost of funds for all of our borrowings was 2.11%, with the effect of the interest rate swaps, and the weighted
average term to next rate adjustment was 170 days.
During the year ended December 31, 2010, we issued $600.0 million in aggregate principal amount of 4%
Convertible Senior Notes due 2015 (or the 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 a conversion rate at December 31, 2010 of
54.1089 shares of Common Stock per $1,000 principal amount of Convertible Senior Notes, which was equivalent to a
conversion price at December 31, 2010 of $18.4812 per share of Common Stock subject to adjustment in certain
circumstances.
51
Liquidity
Liquidity, which is our ability to turn non-cash assets into cash, allows us to purchase additional Interest
Earning Assets and to pledge additional assets to secure existing borrowings should the value of our pledged assets
decline. Potential immediate sources of liquidity for us include cash balances and unused borrowing capacity. Unused
borrowing capacity will vary over time as the market value of our Interest Earning Assets varies. Our non-cash assets
are largely actual or implied AAA assets, and accordingly, we have not had, nor do we anticipate having, difficulty in
converting our assets to cash. Our balance sheet also generates liquidity on an on-going basis through mortgage
principal repayments and net earnings held prior to payment as dividends. Should our needs ever exceed these on-going
sources of liquidity plus the immediate sources of liquidity discussed above, we believe that in most circumstances our
Interest Earning Assets could be sold to raise cash. The maintenance of liquidity is one of the goals of our capital
investment policy. Under this policy, we limit asset growth in order to preserve unused borrowing capacity for liquidity
management purposes.
Borrowings under our repurchase agreements increased by $10.9 billion to $65.5 billion at December 31, 2010,
from $54.6 billion at December 31, 2009. Convertible Senior Notes totaled $600.0 million at December 31, 2010 and
there were no Convertible Senior Notes outstanding at December 31, 2009.
We anticipate that, upon repayment of each borrowing under a repurchase agreement, we will use the collateral
immediately for borrowing under a new repurchase agreement. We have not at the present time entered into any
commitment agreements under which the lender would be required to enter into new repurchase agreements during a
specified period of time, nor do we presently plan to have liquidity facilities with commercial banks.
Under our repurchase agreements, we may be required to pledge additional assets to our repurchase agreement
counterparties (i.e., lenders) in the event the estimated fair value of the existing pledged collateral under such agreements
declines and such lenders demand additional collateral (a “margin call”), which may take the form of additional
securities or cash. Similarly, if the estimated fair value of Interest Earning Assets increases due to changes in market
interest rates of market factors, lenders may release collateral back to us. Specifically, margin calls result from a decline
in the value of our Agency mortgage-backed securities securing our repurchase agreements, prepayments on the
mortgages securing such Agency mortgage-backed securities and to changes in the estimated fair value of such Agency
mortgage-backed securities generally due to principal reduction of such Agency mortgage-backed securities from
scheduled amortization and resulting from changes in market interest rates and other market factors. Through December
31, 2010, we did not have any margin calls on our repurchase agreements that we were not able to satisfy with either
cash or additional pledged collateral. However, should prepayment speeds on the mortgages underlying our Agency
mortgage-backed securities and/or market interest rates suddenly increase, margin calls on our repurchase agreements
could result, causing an adverse change in our liquidity position.
The following table summarizes the effect on our liquidity and cash flows from contractual obligations for
repurchase agreements, interest expense on repurchase agreements, the non-cancelable office lease and employment
agreements at December 31, 2010. The table does not include the effect of net interest rate payments under our interest
rate swap agreements. The net swap payments will fluctuate based on monthly changes in the receive rate. At
December 31, 2010, the interest rate swaps had a net negative fair value of $751.9 million.
Contractual Obligations
Repurchase agreements
Interest expense on repurchase
agreements, based on rates at 12-31-10
Convertible Senior Notes
Interest Expense in Convertible Senior
Notes
Long-term operating lease obligations
Employment contracts
Total
(dollars in thousands)
Within One
Year
$61,183,537
One to
Three Years
$2,250,000
Three to Five
Years
$700,000
More than
Five Years
$1,400,000
Total
$65,533,537
201,959
-
191,957
-
130,265
600,000
88,191
-
612,372
600,000
24,333
1,945
54,532
$61,466,306
48,733
4,497
950
$2,496,137
27,400
2,201
-
$1,459,866
-
40
-
$1,488,231
100,466
8,683
55,482
$66,910,540
52
Stockholders’ Equity
On July 13, 2010 we entered into an underwriting agreement pursuant to which we sold 60,000,000 shares of
our common stock for net proceeds following underwriting expenses of approximately $1.0 billion. This transaction
settled on July 19, 2010.
During the year ended December 31, 2010, 363,528 options were exercised under Incentive Plan, for an
aggregate exercise price of $4.6 million.
During the year ended December 31, 2010, 953,000 shares of Series B Preferred Stock were converted into 2.4
million shares of common stock.
During the year ended December 31, 2010, we raised $278.8 million by issuing 15.7 million shares through the
Direct Purchase and Dividend Reinvestment Program.
During the year ended December 31, 2009, 423,160 options were exercised under Incentive Plan, for an
aggregate exercise price of $4.9 million.
During the year ended December 31, 2009, we raised $141.8 million by issuing 8.4 million shares through our
Direct Purchase and Dividend Reinvestment Program.
During the year ended December 31, 2009, 1.4 million shares of Series B Preferred Stock converted into 2.8
million shares of common stock.
Unrealized Gains and Losses
With our “available-for-sale” accounting treatment, unrealized fluctuations in market values of assets do not
impact our GAAP or taxable income but rather are reflected on our balance sheet by changing the carrying value of the
asset and stockholders’ equity under “Accumulated Other Comprehensive Income (Loss).” As a result of the de-
designation of interest rate swaps as cash flow hedges during the quarter ended December 31, 2008, unrealized gains and
losses in our interest rate swaps impact our GAAP income.
As a result of this mark-to-market accounting treatment, our book value and book value per share are likely to
fluctuate far more than if we used historical amortized cost accounting. As a result, comparisons with companies that
use historical cost accounting for some or all of their balance sheet may not be meaningful.
The table below shows unrealized gains and losses on the Investment Securities and interest rate swaps in our
portfolio prior to de-designation.
Unrealized Gains and Losses
(dollars in thousands)
At December 31,
Unrealized gain
Unrealized loss
Net Unrealized (loss) gain
2010
$1,764,182
(599,540)
$1,164,642
2009
$2,093,709
(202,392)
$1,891,317
2008
$785,087
(532,857)
$252,230
2007
$379,348
(531,545)
($152,197)
2006
$112,596
(188,708)
($76,112)
Unrealized changes in the estimated net fair value of available-for-sale investments have one direct effect on
our potential earnings and dividends: positive changes increase our equity base and allow us to increase our borrowing
capacity while negative changes tend to limit borrowing capacity under our capital investment policy. A very large
negative change in the net fair value of our available-for-sale investments securities might impair our liquidity position,
requiring us to sell assets with the likely result of realized losses upon sale.
53
Leverage
Our debt-to-equity ratio at December 31, 2010, 2009 and 2008 was 6.7:1, 5.7:1 and 6.4:1, respectively. We
generally expect to maintain a ratio of debt-to-equity of between 8:1 and 12:1, although the ratio may vary, as it currently
does because of market conditions, from this range from time to time based upon various factors, including our
management’s opinion market conditions of the level of risk of our assets and liabilities, our liquidity position, our level
of unused borrowing capacity and over-collateralization levels required by lenders when we pledge assets to secure
borrowings.
Our target debt-to-equity ratio is determined under our capital investment policy. Should our actual debt-to-
equity ratio increase above the target level due to asset acquisition or market value fluctuations in assets, we would cease
to acquire new assets. Our management will, at that time, present a plan to our board of directors to bring us back to our
target debt-to-equity ratio; in many circumstances, this would be accomplished over time by the monthly reduction of the
balance of our Agency mortgage-backed securities through principal repayments.
Asset/Liability Management and Effect of Changes in Interest Rates
We continually review our asset/liability management strategy with respect to interest rate risk, mortgage
prepayment risk, credit risk and the related issues of capital adequacy and liquidity. Our goal is to provide attractive
risk-adjusted stockholder returns while maintaining what we believe is a strong balance sheet.
We seek to manage the extent to which our net income changes as a function of changes in interest rates by
matching adjustable-rate assets with variable-rate borrowings. In addition, we have attempted to mitigate the potential
impact on net income of periodic and lifetime coupon adjustment restrictions in our portfolio of Agency mortgage-
backed securities and Agency debentures by entering into interest rate swaps. At December 31, 2010, we had entered
into swap agreements with a total notional amount of $27.1 billion. We agreed to pay a weighted average pay rate of
3.21% and receive a floating rate based on one month LIBOR. At December 31, 2009, we had entered into swap
agreements with a total notional amount of $21.5 billion. We agreed to pay a weighted average pay rate of 3.85% and
receive a floating rate based on one month LIBOR. We may enter into similar derivative transactions in the future by
entering into interest rate collars, caps or floors or purchasing interest only securities.
Changes in interest rates may also affect the rate of mortgage principal prepayments and, as a result,
prepayments on mortgage-backed securities. We seek to mitigate the effect of changes in the mortgage principal
repayment rate by balancing assets we purchase at a premium with assets we purchase at a discount. To date, the
aggregate premium exceeds the aggregate discount on our mortgage-backed securities. As a result, prepayments, which
result in the expensing of unamortized premium, will reduce our net income compared to what net income would be
absent such prepayments.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not
guaranteed any obligations of unconsolidated entities nor do we have any commitment or intent to provide funding to
any such entities. As such, we are not materially exposed to any market, credit, liquidity or financing risk that could
arise if we had engaged in such relationships.
Capital Resources
At December 31, 2010, we had no material commitments for capital expenditures.
54
Inflation
Virtually all of our assets and liabilities are financial in nature. As a result, interest rates and other factors drive
our performance far more than does inflation. Changes in interest rates do not necessarily correlate with inflation rates
or changes in inflation rates. Our financial statements are prepared in accordance with GAAP and our dividends are
based upon our net income as calculated for tax purposes; in each case, our activities and balance sheet are measured
with reference to historical cost or fair market value without considering inflation.
Other Matters
We calculate that at least 75% of our assets were qualified REIT assets, as defined in the Code for the years
ended December 31, 2010 and 2009. We also calculate that our revenue qualifies for the 75% source of income test and
for the 95% source of income test rules for the years ended December 31, 2010, 2009 and 2008 and for each quarter
therein. Consequently, we met the REIT income and asset test. We also met all REIT requirements regarding the
ownership of our common stock and the distribution of our net income. Therefore, for the years ended of December 31,
2010, 2009, and 2008, we believe that we qualified as a REIT under the Code.
We at all times intend to conduct our business so as not to become regulated as an investment company under
the Investment Company Act of 1940, or the Investment Company Act. If we were to become regulated as an
investment company, then our use of leverage would be substantially reduced. The Investment Company Act exempts
entities that are “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on
and interests in real estate” (qualifying interests). Under current interpretation of the staff of the SEC, in order to qualify
for this exemption, we must maintain at least 55% of our assets directly in qualifying interests and at least 80% of our
assets in qualifying interests plus other real estate related assets. In addition, unless certain mortgage securities represent
all the certificates issued with respect to an underlying pool of mortgages, the Agency mortgage-backed securities may
be treated as securities separate from the underlying mortgage loans and, thus, may not be considered qualifying interests
for purposes of the 55% requirement. We calculate that as of December 31, 2010 and December 31, 2009, we were in
compliance with this requirement.
55
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates,
commodity prices and equity prices. The primary market risk to which we are exposed is interest rate risk, which is
highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic
and political considerations and other factors beyond our control. Changes in the general level of interest rates can affect
our net interest income, which is the difference between the interest income earned on interest-earning assets and the
interest expense incurred in connection with our interest-bearing liabilities, by affecting the spread between our interest-
earning assets and interest-bearing liabilities. Changes in the level of interest rates also can affect the value of our
Agency mortgage-backed securities and our ability to realize gains from the sale of these assets. We may utilize a
variety of financial instruments, including interest rate swaps, caps, floors, inverse floaters and other interest rate
exchange contracts, in order to limit the effects of interest rates on our operations. When we use these types of
derivatives to hedge the risk of interest-earning assets or interest-bearing liabilities, we may be subject to certain risks,
including the risk that losses on a hedge position will reduce the funds available for payments to holders of securities and
that the losses may exceed the amount we invested in the instruments.
Our profitability and the value of our portfolio (including interest rate swaps) may be adversely affected during
any period as a result of changing interest rates. The following table quantifies the potential changes in net interest
income and portfolio value, should interest rates go up or down 25, 50 and 75 basis points, assuming the yield curves of
the rate shocks will be parallel to each other and the current yield curve. All changes in income and value are measured
as percentage changes from the projected net interest income and portfolio value at the base interest rate scenario. The
base interest rate scenario assumes interest rates at December 31, 2010 and various estimates regarding prepayment and
all activities are made at each level of rate shock. Actual results could differ significantly from these estimates.
Change in Interest Rate
Projected Percentage Change in
Net Interest Income
Projected Percentage Change in
Portfolio Value, with Effect of
Interest Rate Swaps
-75 Basis Points
-50 Basis Points
-25 Basis Points
Base Interest Rate
+25 Basis Points
+50 Basis Points
+75 Basis Points
6.40%
4.35%
1.94%
-
(0.65%)
(2.16%)
(4.11%)
1.62%
1.24%
0.82%
-
(0.23%)
(0.87%)
(1.58%)
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with the timing and magnitude of the repricing of assets and
liabilities. We attempt to control risks associated with interest rate movements. Methods for evaluating interest rate risk
include an analysis of our interest rate sensitivity "gap," which is the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities. A gap is considered
negative when the amount of interest-rate sensitive liabilities exceeds interest-rate sensitive assets. During a period of
rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to
result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result
in an increase in net interest income, while a positive gap would tend to affect net interest income adversely. Because
different types of assets and liabilities with the same or similar maturities may react differently to changes in overall
market rates or conditions, changes in interest rates may affect net interest income positively or negatively even if an
institution were perfectly matched in each maturity category.
56
The following table sets forth the estimated maturity or repricing of our interest-earning assets and interest-
bearing liabilities at December 31, 2010. The amounts of assets and liabilities shown within a particular period were
determined in accordance with the contractual terms of the assets and liabilities, except adjustable-rate loans, and
securities are included in the period in which their interest rates are first scheduled to adjust and not in the period in
which they mature and does include the effect of the interest rate swaps. The interest rate sensitivity of our assets and
liabilities in the table could vary substantially based on actual prepayment experience.
Within 3
Months
4-12 Months
More than 1
Year to 3
Years
(dollars in thousands)
3 Years and
Over
Total
Rate Sensitive Assets:
Mortgage-backed Securities and
Agency debentures (Principal)
Cash Equivalents
Reverse Repurchase
Agreements
U.S. Treasury Securities
Securities Borrowed
Corporate debt
Total Rate Sensitive Assets
Rate Sensitive Liabilities:
Repurchase Agreements,
with the effect of swaps
Convertible Senior Notes
U.S. Treasury Securities sold,
not yet purchased
Securities Loaned
Total Rate Sensitive Liabilities
$ 1,935,670
-
282,626
$ 2,394,754
-
-
$ 1,502,028
-
-
$69,179,260
1,095,810
-
$75,011,712
1,095,810
282,626
1,006,163
1,100,447
216,676
22,000
4,563,582
-
-
-
-
2,394,754
-
-
-
-
1,502,028
-
-
-
-
70,275,070
1,006,163
1,100,447
216,676
22,000
78,735,434
31,103,486
-
909,462
217,841
32,230,789
7,128,771
-
13,068,170
-
14,233,110
600,000
65,533,537
600,000
-
-
7,128,771
-
-
13,068,170
-
-
14,833,110
909,462
217,841
67,260,840
Interest rate sensitivity gap
($27,667,207)
($4,734,017)
($11,566,142)
$55,441,960
$11,474,594
Cumulative rate sensitivity gap
($27,667,207)
($32,401,224)
($43,967,366)
$11,474,594
Cumulative interest rate
sensitivity gap as a percentage of
total rate-sensitive assets
(35%)
(41%)
(56%)
15%
Our analysis of risks is based on management’s experience, estimates, models and assumptions. These analyses
rely on models which utilize estimates of fair value and interest rate sensitivity. Actual economic conditions or
implementation of investment decisions by our management may produce results that differ significantly from the
estimates and assumptions used in our models and the projected results shown in the above tables and in this report.
These analyses contain certain forward-looking statements and are subject to the safe harbor statement set forth under the
heading, “Special Note Regarding Forward-Looking Statements.”
57
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements and the related notes, together with the Report of Independent Registered Public
Accounting Firm thereon, are set forth on pages F-1 through F-28 of this Form 10-K.
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A CONTROLS AND PROCEDURES
Our management, including our Chief Executive Officer (the CEO) and Chief Financial Officer (the CFO),
reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as
defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act) as of the end of the period covered by this
annual report. Based on that review and evaluation, the CEO and CFO have concluded that our current disclosure
controls and procedures, as designed and implemented, (1) were effective in ensuring that information regarding the
Company and its subsidiaries is accumulated and communicated to our management, including our CEO and CFO, by
our employees, as appropriate to allow timely decisions regarding required disclosure and (2) were effective in providing
reasonable assurance that information the Company must disclose in its periodic reports under the Securities Exchange
Act is recorded, processed, summarized and reported within the time periods prescribed by the SEC’s rules and forms.
There have been no changes in the Company’s internal controls over financial reporting that occurred during the
quarter ended December 31, 2010 that have materially affected, or are reasonably likely to affect its internal control over
financial reporting.
Management Report On Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) under the Securities Exchange
Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial
officers and effected by the Company’s board of directors, management and other personnel to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles and includes those policies and procedures that:
•
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management and directors of the Company;
and
•
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. As a result, even systems determined to be effective can provide only reasonable assurance regarding the
preparation and presentation of financial statements. Moreover, projections of any evaluation of effectiveness to future
periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree
of compliance with the policies or procedures may deteriorate.
58
The Company’s management assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2010. In making this assessment, the Company’s management used criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework.
Based on management’s assessment, the Company’s management believes that, as of December 31, 2010, the
Company’s internal control over financial reporting was effective based on those criteria. The Company’s independent
registered public accounting firm, Deloitte & Touche LLP, has issued an attestation report on the Company’s internal
control over financial reporting. This report appears on page F-1 of this annual report on Form 10-K.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 as to our directors is incorporated herein by reference to the proxy
statement to be filed with the SEC within 120 days after December 31, 2010. The information regarding our executive
officers required by Item 10 appears in Part I of this Form 10-K. The information required by Item 10 as to our
compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the proxy
statement to be filed with the SEC within 120 days after December 31, 2010.
We have adopted a Code of Business Conduct and Ethics within the meaning of Item 406(b) of Regulation S-K.
This Code of Business Conduct and Ethics applies to our principal executive officer, principal financial officer and
principal accounting officer. This Code of Business Conduct and Ethics is publicly available on our website at
www.annaly.com. If we make substantive amendments to this Code of Business Conduct and Ethics or grant any
waiver, including any implicit waiver, we intend to disclose these events on our website.
The information regarding certain matters pertaining to our corporate governance required by Item 407(c)(3),
(d)(4) and (d)(5) of Regulation S-K is incorporated by reference to the Proxy Statement to be filed with the SEC within
120 days after December 31, 2010.
ITEM 11
EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to the proxy statement to be filed with
the SEC within 120 days after December 31, 2010.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by Item 12 is incorporated herein by reference to the proxy statement to be filed with
the SEC within 120 days after December 31, 2010.
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 is incorporated herein by reference to the proxy statement to be filed with
the SEC within 120 days after December 31, 2010.
ITEM 14
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 is incorporated herein by reference to the proxy statement to be filed with
the SEC within 120 days after December 31, 2010.
59
ITEM 15
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
PART IV
(a) Documents filed as part of this report:
1.
2.
Financial Statements.
Schedules to Financial Statements:
All financial statement schedules not included have been omitted because they are either inapplicable or the
information required is provided in our Financial Statements and Notes thereto, included in Part II, Item 8, of this
Annual Report on Form 10-K.
3.
Exhibits:
Exhibit
Number
Exhibit Description
EXHIBIT INDEX
3.1
3.2
3.3
3.4
3.5
3.6
3.7
4.1
4.2
4.3
4.4
Articles of Amendment and Restatement of the Articles of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-
11 (Registration No. 333-32913) filed with the Securities and Exchange Commission on
August 5, 1997).
Articles of Amendment of the Articles of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 of the Registrant’s Registration Statement on Form S-3 (Registration
Statement 333-74618) filed with the Securities and Exchange Commission on June 12, 2002).
Articles of Amendment of the Articles of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 of the Registrant's Form 8-K (filed with the Securities and Exchange
Commission on August 3, 2006).
Form of Articles Supplementary designating the Registrant’s 7.875% Series A Cumulative
Redeemable Preferred Stock, liquidation preference $25.00 per share (incorporated by
reference to Exhibit 3.3 to the Registrant’s 8-A filed April 1, 2004).
Articles Supplementary of the Registrant’s designating an additional 2,750,000 shares of the
Company’s 7.875% Series A Cumulative Redeemable Preferred Stock, as filed with the State
Department of Assessments and Taxation of Maryland on October 15, 2004 (incorporated by
reference to Exhibit 3.2 to the Registrant’s 8-K filed October 4, 2004).
Articles Supplementary designating the Registrant’s 6% Series B Cumulative Convertible
Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit
3.1 to the Registrant’s 8-K filed April 10, 2006).
Bylaws of the Registrant, as amended (incorporated by reference to Exhibit 3.3 of the
Registrant’s Registration Statement on Form S-11 (Registration Number 333-32913) filed with
the Securities and Exchange Commission on August 5, 1997).
Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Amendment
No. 1 to the Registrant’s Registration Statement on Form S-11 (Registration No. 333-32913)
filed with the Securities and Exchange Commission on September 17, 1997).
Specimen Preferred Stock Certificate (incorporated by reference to Exhibit 4.2 to the
Registrant’s Registration Statement on Form S-3 (Registration No. 333-74618) filed with the
Securities and Exchange Commission on December 5, 2001).
Specimen Series A Preferred Stock Certificate (incorporated by reference to Exhibit 4.1 of the
Registrant's Registration Statement on Form 8-A filed with the SEC on April 1, 2004).
Specimen Series B Preferred Stock Certificate (incorporated by reference to Exhibit 4.1 to the
Registrant’s Form 8-K filed with the Securities and Exchange Commission on April 10, 2006).
60
4.5
4.6
4.7
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
12.1
21.1
23.1
31.1
Indenture, dated as of February 12, 2010, between the Registrant and Wells Fargo Bank,
National Association (incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-K
filed with the Securities and Exchange Commission on February 12, 2010).
Supplemental Indenture, dated as of February 12, 2010, between the Registrant and Wells
Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 to the Registrant’s
Form 8-K filed with the Securities and Exchange Commission on February 12, 2010).
Form of 4.00% Convertible Senior Note due 2015 (included in Exhibit 4.6).
Long-Term Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s
Registration Statement on Form S-11 (Registration No. 333-32913) filed with the Securities
and Exchange Commission on August 5, 1997).*
Form of Master Repurchase Agreement (incorporated by reference to Exhibit 10.7 to the
Registrant’s Registration Statement on Form S-11 (Registration No. 333-32913) filed with the
Securities and Exchange Commission on August 5, 1997).
Amended and Restated Employment Agreement, effective as of June 4, 2004, between the
Registrant and Michael A.J. Farrell (incorporated by reference to Exhibit 10.3 of the
Registrant’s Form 10-K filed with the Securities and Exchange Commission on March 10,
2005).*
Amended and Restated Employment Agreement, dated as of February 25, 2008, between the
Registrant and Wellington J. Denahan (incorporated by reference to Exhibit 10.4 of the
Registrant’s Form 10-K filed with the Securities and Exchange Commission on February 26,
2008).*
Amended and Restated Employment Agreement, effective as of June 4, 2004,between the
Registrant and Kathryn F. Fagan (incorporated by reference to Exhibit 10.5 of the Registrant’s
Form 10-K filed with the Securities and Exchange Commission on March 10, 2005).*
Amended and Restated Employment Agreement, effective as of June 4, 2004, between the
Registrant and James P. Fortescue (incorporated by reference to Exhibit 10.7 of the Registrant’s
Form 10-K filed with the Securities and Exchange Commission on March 10, 2005).*
Amended and Restated Employment Agreement, dated as of January 23, 2006, between the
Registrant and Jeremy Diamond (incorporated by reference to Exhibit 10.7 of the Registrant’s
Form 10-K filed with the Securities and Exchange Commission on March 13, 2006).*
Amended and Restated Employment Agreement, dated as of January 23, 2006, between the
Registrant and Ronald D. Kazel (incorporated by reference to Exhibit 10.7 of the Registrant’s
Form 10-K filed with the Securities and Exchange Commission on March 13, 2006).*
Amended and Restated Employment Agreement, dated as of April 21, 2006, between the
Registrant and Rose-Marie Lyght (incorporated by reference to Exhibit 10.9 of the Registrant’s
Form 10-Q filed with the Securities and Exchange Commission on May 9, 2006).*
Amended and Restated Employment Agreement, effective as of June 4, 2004, between the
Registrant and Kristopher R. Konrad (incorporated by reference to Exhibit 10.11 of the
Registrant’s Form 10-K filed with the Securities and Exchange Commission on March 10,
2005).*
Amended and Restated Employment Agreement, dated January 23, 2006, between the
Registrant and R. Nicholas Singh (incorporated by reference to Exhibit 10.7 of the Registrant’s
Form 10-K filed with the Securities and Exchange Commission on March 13, 2006).*
Amended and Restated Employment Agreement, dated August 4, 2010, between the Registrant
and Matthew Lambiase (incorporated by reference to Exhibit 10.1 of the Registrant’s Form 10-
Q filed with the Securities and Exchange Commission August 6, 2010).*
Employment Agreement, dated July 1, 2010, between the Registrant and Kevin Keyes.*
Registrant’s 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report Form 8-K filed with the SEC on June 1, 2010).*
Computation of ratio of earnings to combined fixed charges and preferred stock dividends.
Subsidiaries of Registrant.
Consent of Independent Registered Public Accounting Firm.
Certification of Michael A.J. Farrell, Chairman, Chief Executive Officer, and President of the
Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the
61
31.2
32.1
32.2
Sarbanes-Oxley Act of 2002.
Certification of Kathryn F. Fagan, Chief Financial Officer and Treasurer of the Registrant,
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Certification of Michael A.J. Farrell, Chairman, Chief Executive Officer, and President of the
Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Certification of Kathryn F. Fagan, Chief Financial Officer and Treasurer of the Registrant,
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Instance Document †
Exhibit 101.INS XBRL
Exhibit 101.SCH XBRL Taxonomy Extension Schema Document †
Exhibit 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document †
Exhibit 101.DEF XBRL Additional Taxonomy Extension Definition Linkbase Document Created†
Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase Document †
Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document †
*
Exhibits to this Form 10-K.
Exhibit Numbers 10.1 and 10.3-10.14 are management contracts or compensatory plans required to be filed as
Submitted electronically herewith. Attached as Exhibit 101 to this report are the following documents
†
formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Financial Condition at
December 31, 2010 and December 31,2009; (ii) Consolidated Statements of Operations and Comprehensive Income
(Loss) for the years ended December 31, 2010, 2009 and 2008; (iii) Consolidated Statement of Stockholders' Equity for
the years ended December 31, 2010, 2009 and 2008; (iv) Consolidated Statements of Cash Flows for the years ended
December 31, 2010, 2009 and 2008; and (v) Notes to Consolidated Financial Statements. Users of this data are advised
pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration
statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes
of section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under these sections.
62
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2010 and 2009:
Consolidated Statements of Financial Condition
Consolidated Statements of Operations and Comprehensive Income (Loss)
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
F-1
F-2
F-3
F-5
F-6
F-8
63
(This page intentionally left blank.)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Annaly Capital Management, Inc.
New York, New York
We have audited the accompanying consolidated statements of financial condition of Annaly Capital Management, Inc. and subsidiaries
(the "Company") as of December 31, 2010 and 2009, and the related consolidated statements of operations and comprehensive income,
stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2010. We also have audited the
Company's internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's
management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report On
Internal Control Over Financial Reporting at Item 9A. Our responsibility is to express an opinion on these financial statements and an
opinion on the Company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits
of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal
executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors,
management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use,
or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also,
projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk
that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Annaly Capital Management, Inc. and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2010, based on the criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
/s/ Deloitte & Touche LLP
New York, New York
February 25, 2011
F-1
Part I
Item1. Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2010 AND 2009
(dollars in thousands)
ASSETS
Cash and cash equivalents
U.S. Treasury Securities, at fair value (including pledged assets of
$660,823 and $0, respectively)
Reverse repurchase agreements with affiliate
Reverse repurchase agreements
Securities borrowed, at fair value
Mortgage-Backed Securities, at fair value (including pledged assets of
$67,787,023 and $57,047,750, respectively)
Agency debentures, at fair value (including pledged assets of $1,068,869
and $871,318, respectively)
Corporate debt
Investments with affiliates
Receivable for Mortgage-Backed Securities sold
Accrued interest and dividends receivable
Receivable from Prime Broker
Receivable for advisory and service fees
Intangible for customer relationships, net
Goodwill
Interest rate swaps, at fair value
Other derivative contracts, at fair value
Other assets
December 31, 2010
December 31, 2009
$ 282,626
$ 1,504,568
1,100,447
-
1,006,163
216,676
-
328,757
425,000
29,077
78,440,330
64,805,725
1,108,261
21,683
252,863
151,460
345,250
3,272
16,172
9,290
42,030
2,561
2,607
24,899
915,752
-
242,198
732,134
318,919
3,272
12,566
10,491
27,917
5,417
-
14,397
Total assets
$83,026,590
$69,376,190
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
U.S. Treasury Securities sold, not yet purchased, at fair value
Repurchase agreements
Securities loaned, at fair value
Payable for Mortgage-Backed Securities and Agency debentures
purchased
Convertible Senior Notes
Accrued interest payable
Dividends payable
Interest rate swaps, at fair value
Other derivative contracts, at fair value
Accounts payable and other liabilities
$ 909,462
65,533,537
217,841
4,575,026
600,000
115,766
404,220
754,439
2,446
8,921
-
$54,598,129
29,057
4,083,786
-
89,460
414,851
533,362
-
10,005
Total liabilities
73,121,658
59,758,650
6.00% Series B Cumulative Convertible Preferred Stock:
4,600,000 shares authorized 1,652,047 and 2,604,614 shares issued
and outstanding, respectively.
Commitments and contingencies
Stockholders’ Equity:
7.875% Series A Cumulative Redeemable Preferred Stock:
7,412,500 shares authorized, issued and outstanding
Common stock: par value $.01 per share; 987,987,500 shares
authorized, 631,594,205 and, 553,134,877 issued and outstanding,
respectively
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
F-2
40,032
-
63,114
-
177,088
177,088
6,316
9,175,245
1,164,642
(658,391)
5,531
7,817,454
1,891,317
(336,964)
Total stockholders’ equity
9,864,900
9,554,426
Total liabilities, Series B Cumulative Convertible Preferred Stock
and stockholders’ equity
$83,026,590
$69,376,190
See notes to consolidated financial statements.
F-3
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
(dollars in thousands, except per share amounts)
Interest income
Investment securities
Securities loaned
U.S. Treasury Securities
Total interest income
Interests expense
Repurchase agreements
Interest rate swaps
Convertible Senior Notes
Securities borrowed
U.S. Treasury Securities sold, not yet purchased
Total interest expense
For the Years ended December 31,
2010
2009
2008
$2,676,307
3,997
2,830
2,683,134
$2,922,499
103
-
2,922,602
$3,115,428
-
-
$3,115,428
397,971
735,107
24,228
3,377
2,649
1,163,332
575,867
719,803
-
92
-
1,295,762
1,560,976
327,936
-
-
-
1,888,912
Net interest income
1,519,802
1,626,840
1,226,516
Other (loss) income:
Investment advisory and service fees
Gain on sale of Mortgage-Backed Securities and Agency
debentures
Dividend income
Loss on other-than-temporarily impaired securities
Loss on receivable from Prime Broker
Unrealized gain (loss) on interest rate swaps
Net (loss) gain on trading securities
Income from underwriting
Total other (loss) income
Expenses:
Distribution fees
General and administrative expenses
Total expenses
58,073
48,952
27,891
181,791
31,038
-
-
(318,832)
(2,351)
2,095
(48,186)
360
171,487
171,847
99,128
17,184
-
(13,613)
349,521
-
-
501,172
1,756
130,152
131,908
10,713
2,713
(31,834)
-
(768,268)
9,695
-
(749,090)
1,589
103,622
105,211
Income before income from equity method investment and
1,299,769
1,996,104
372,215
income taxes
Income (loss) from equity method investment
2,945
(252)
-
Income taxes
Net income
(35,434)
(34,381)
(25,977)
1,267,280
1,961,471
346,238
Noncontrolling interest
-
-
58
Net income attributable to controlling interest
1,267,280
1,961,471
346,180
Dividends on preferred stock
18,033
18,501
21,177
Net income available to common shareholders
$1,249,247
$1,942,970
$325,003
Net income available per share to common shareholders:
Basic
Diluted
Weighted average number of common shares outstanding:
Basic
Diluted
$2.12
$2.04
$3.55
$3.52
$0.64
$0.64
588,192,659
546,973,036
625,307,174
553,130,643
507,024,596
507,024,596
F-4
Net income attributable to controlling interest
Other comprehensive income (loss):
Unrealized (loss) gain on available-for-sale securities
Unrealized gain on interest rate swaps
Reclassification adjustment for net (gains) losses included
in net income
Other comprehensive (loss) income
Comprehensive income attributable to controlling interest
$1,267,280
$1,961,471
$346,180
(639,783)
94,899
(181,791)
(726,675)
$540,605
1,513,397
224,818
319,226
64,080
(99,128)
1,639,087
$3,600,558
21,121
404,427
$750,607
See notes to consolidated financial statements.
F-5
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N
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
(dollars in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Net income attributable to non controlling interest
Amortization of Investment Securities premiums and discounts, net
Amortization of intangibles
Amortization on deferred
Amortization of trading securities premiums and discounts
Gain on sale of Mortgage-Backed Securities and Agency debentures
Stock option and long-term compensation expense
Unrealized loss (gain) on interest rate swaps
Realized loss on futures
Realized gain on treasuries
Unrealized loss on treasuries
Unrealized loss on options
(Gain) loss on investment with affiliate, equity method
Net realized gain on trading investments
Unrealized depreciation on trading investments
Loss on other-than-temporarily impaired securities
Increase in accrued interest and dividend receivable
(Increase) decrease in advisory and service fees receivable
Decrease (increase) in other assets
Increase (decrease) in interest payable
(Decrease) increase in accounts payable and other liabilities
Purchase of trading securities
Proceeds from sale of trading securities
Purchase of equity trading securities sold, not yet purchased
Proceeds from equity trading securities sold, not yet purchased
Decrease (increase) in receivable from Prime Broker
Reduction of net assets in the fund
Proceeds from repurchase agreements from Broker Dealer
Payments on repurchase agreements from Broker Dealer
Proceeds from reverse repo from Broker Dealer
Payments on reverse repo from Broker Dealer
Proceeds from securities borrowed
Payments on securities borrowed
Proceeds from securities loaned
Payments on securities loaned
Payments on treasuries
Proceeds from treasuries
Payments on future contract
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of Mortgage-Backed Securities
Proceeds from sale of Mortgage-Backed Securities and Agency debentures
Principal payments of Mortgage-Backed Securities
Agency debentures called
Purchase of Agency debentures
Purchase of Corporate Debt
Investment in affiliates
Payments on reverse repurchase agreements
Proceeds from reverse repurchase agreements
Earn out payment
Investment to purchase subsidiary
Net cash used in investing activities
F-7
For the Years Ended December 31,
2010
2009
2008
$1,267,280
$1,961,471
$346,238
-
664,429
1,600
3,150
-
(181,791)
4,757
318,832
3,168
(4,144)
3,200
127
(318)
-
-
-
(27,125)
(3,606)
3,950
26,306
(1,084)
-
-
-
-
-
-
1,268,429,168
(1,258,941,064)
87,968,002
(88,479,412)
2,924,082
(3,111,681)
3,231,198
(3,042,414)
(9,521,134)
9,331,089
(3,455)
10,863,110
(51,422,692)
9,262,772
28,961,203
2,132,002
(3,002,259)
(21,670)
-
(4,032,426)
4,291,430
(14,113)
-
(13,845,753)
-
253,683
2,316
-
-
(99,128)
4,514
(349,521)
-
-
-
-
252
-
-
-
(35,574)
(6,462)
(8,780)
(110,524)
1,624
-
-
-
-
13,613
-
301,505,728
(291,820,728)
3,100,827
(3,595,580)
152,027
(181,104)
197,100
(168,043)
-
-
-
10,817,711
(24,992,434)
4,029,801
13,796,269
602,000
(918,765)
-
(157,995)
(10,051,980)
10,355,095
(58)
99,603
4,133
-
(3)
(10,713)
2,534
768,268
-
-
-
-
-
(12,578)
2,994
31,834
(8,405)
345
340
(57,623)
(28,867)
(13,048)
30,986
(22,290)
21,483
(16,886)
(28,704)
-
-
-
-
-
-
-
-
-
-
-
1,109,583
(25,281,183)
15,491,408
8,619,102
-
(500,000)
-
(26,283)
(562,119)
-
-
(7,338,009)
(12,628)
(2,271,703)
Cash flows from financing activities:
Proceeds from repurchase agreements
Principal payments on repurchase agreements
Proceeds from exercise of stock options
Issuance of convertible notes
Proceeds from direct purchase and dividend reinvestment
Net proceeds from follow-on offerings
Net proceeds from ATM programs
Noncontrolling interest
Dividends paid
Net cash provided (used) by financing activities
224,789,731
(223,342,427)
4,598
582,000
278,784
1,047,354
-
-
(1,599,339)
1,760,701
327,758,745
(329,520,501)
4,914
-
141,775
-
-
-
(1,269,420)
(2,884,487)
434,042,799
(433,414,474)
2,780
-
93,675
2,147,543
71,832
(1,574)
(975,068)
1,967,513
Net (decrease) increase in cash and cash equivalents
(1,221,942)
595,215
805,393
Cash and cash equivalents, beginning of period
1,504,568
909,353
103,960
Cash and cash equivalents, end of period
$282,626
$1,504,568
$909,353
Supplemental disclosure of cash flow information:
Interest paid
Taxes paid
$1,137,026
$36,742
$1,406,287
$42,268
$1,946,535
$18,866
Noncash investing activities:
Receivable for Mortgage-Backed Securities sold
Payable for Mortgage-Backed Securities and Agency debentures purchased
Net change in unrealized gain (loss) on available-for-sale securities and
interest rate swaps, net of reclassification adjustment
$151,460
$4,575,026
$732,134
$4,083,786
$75,546
$2,062,030
($726,675)
$1,639,087
$404,427
Noncash financing activities:
Dividends declared, not yet paid
Conversion of Series B cumulative preferred stock
See notes to consolidated financial statements
$404,220
$23,081
$414,851
$32,928
$270,736
$15,424
F-8
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
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 intends to provide warehouse financing and other services 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:
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. The noncontrolling interest
in the earnings of the Fund is reflected as noncontrolling interest in the consolidated financial statements.
Prior year numbers for interest expense on interest rate swaps were reclassified in the financial statements to
conform with current year presentation.
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 activity. Reverse repurchase
agreements entered into by Annaly 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
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
F-9
reflected in the Company’s statement 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 statement
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 the Government National Mortgage
Association (“Ginnie Mae”) , the Federal Home Loan Mortgage Corporation (“Freddie Mac”) or the Federal National
Mortgage Association (“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 – The Agency Mortgage-Backed Securities, Agency debentures, corporate debt and reverse
repurchase agreements are referred to herein as “Investment Securities.” The Company is required to classify 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 assets
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 on 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 statement of earnings, while the balance of
impairment related to other factors will be recognized in other comprehensive income (“OCI”). There were no losses on
other-than-temporarily impaired securities for the years ended December 31, 2010 and 2009, and there was $31.8 million
loss on other-than-temporary impaired securities for the year ended December 31, 2008.
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 Investment Securities purchased, securities loaned, dividends payable, accounts payable and
other liabilities, and accrued interest payable, generally approximates fair value at December 31, 2010 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 financial statements. The estimated fair value of Convertible Senior Notes is reflected in Note
11 to the 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
announcement date on an accrual basis.
F-10
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 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 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 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. 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 statement 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
statement 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 statement 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
F-11
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 FASB 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 December 31, 2010.
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 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 years ended December 31, 2010, and 2009, there were no
impairment losses. Goodwill was increased during the year ended December 31, 2011due to an a earn-out payment of
$14.1 million from the Merganser acquisition.
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, the Financial Accounting Standards Board (“the 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. In addition, 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
F-12
disaggregation – portfolio segment and class of financing receivable. Additionally, the update requires disclosure of
credit quality indicators, past due information and modifications of financing receivables. The update is not applicable
to mortgage banking activities (loans originated or purchased for resale to investors); derivative instruments such as
repurchase agreements; debt securities; a transferor’s interest in securitization transactions accounted for as sales under
ASC 860; and purchased beneficial interests in securitized financial assets. This update is effective for the Company for
interim or annual periods ending on or after December 15, 2010. This update has no material effect on the Company’s
consolidated financial statements.
Broad Transactions
Consolidation (ASC 810)
Effective January 1, 2010, the consolidation standards have been amended by ASU 2009-17. This amendment
updates the existing standard and eliminates the exemption from consolidation of a Qualified Special Purpose Entity
(“QSPE”). The update requires an enterprise to perform an analysis to determine whether the enterprise’s variable
interest or interests give it a controlling financial interest in a variable interest entity (“VIE”). The analysis identifies the
primary beneficiary of a VIE as the enterprise that has both: a) the power to direct the activities that most significantly
impact the entity’s economic performance and b) the obligation to absorb losses or the right to receive benefits from the
entity which could potentially be significant to the VIE. The update requires enhanced disclosures to provide users of
financial statements with more transparent information about an enterprises involvement in a VIE. Further, ongoing
assessments of whether an enterprise is the primary beneficiary of a VIE are required. At this time, the amendment has
no material effect on the Company’s consolidated financial statements.
Effective January 1, 2010, FASB amended the consolidation standard with ASU 2010-10 which indefinitely defers
the effective date of ASU 2009-17 for a reporting enterprises interest in entities for which it is industry practice to issue
financial statements in accordance with investment company standards (ASC 946). This deferral is expected to most
significantly affect reporting entities in the investment management industry. This amendment has no material effect on
the Company’s consolidated financial statements.
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 that the disclosure on any Level 3 assets presents separately information about
purchases, sales, issuances and settlements. In other words, Level 3 assets are presented on a gross basis rather than as
one net number. However, this last portion of the guidance was not effective for the Company until January 1, 2011.
Adoption of this guidance has no material 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 has no impact on the Company’s consolidated financial statements.
F-13
Transfers and Servicing (ASC 860)
On June 12, 2009, the FASB issued ASU 2009-16, which amended the accounting standards governing the transfer
and servicing of financial assets. This amendment updates the existing standard and eliminates the concept of a
Qualified Special Purpose Entity (“QSPE”); clarifies the surrendering of control to effect sale treatment; and modifies
the financial components approach – limiting the circumstances in which a financial asset or portion thereof should be
derecognized when the transferor maintains continuing involvement. It defines the term “Participating Interest”. Under
this standard update, the transferor must recognize and initially measure at fair value all assets obtained and liabilities
incurred as a result of a transfer, including any retained beneficial interest. Additionally, the amendment requires
enhanced disclosures regarding the transferors risk associated with continuing involvement in any transferred assets.
The amendment was effective beginning January 1, 2010. The amendment has no material effect on the Company’s
consolidated financial statements.
F-14
2.
MORTGAGE-BACKED SECURITIES
The following tables present the Company’s available-for-sale Agency Mortgage-Backed Securities portfolio as
of December 31, 2010 and 2009 which were carried at their fair value:
December 31, 2010
Mortgage-Backed Securities,
par value
Unamortized discount
Unamortized premium
Amortized cost
Gross unrealized gains
Gross unrealized losses
Federal Home Loan
Mortgage
Corporation
Federal National
Mortgage
Association
Government
National Mortgage
Association
Total Mortgage-
Backed Securities
(dollars in thousands)
$19,846,543
(14,651)
517,507
20,349,399
463,471
(140,027)
$54,341,140
(18,329)
1,795,116
56,117,927
1,211,324
(438,918)
$824,029
(403)
26,200
849,826
29,408
(2,080)
$75,011,712
(33,383)
2,338,823
77,317,152
1,704,203
(581,025)
Estimated fair value
$20,672,843
$56,890,333
$877,154
$78,440,330
Adjustable rate
$10,954,627
(dollars in thousands)
$257,822
($75,440)
$11,137,009
Amortized Cost
Gross Unrealized
Gain
Gross Unrealized
Loss
Estimated Fair
Value
Fixed rate
Total
66,362,525
1,446,381
(505,585)
67,303,321
$77,317,152
$1,704,203
($581,025)
$78,440,330
December 31, 2009
Mortgage-Backed Securities,
par value
Unamortized discount
Unamortized premium
Amortized cost
Gross unrealized gains
Gross unrealized losses
Federal Home Loan
Mortgage
Corporation
Federal National
Mortgage
Association
Government
National Mortgage
Association
Total Mortgage-
Backed Securities
(dollars in thousands)
$18,973,616
(20,210)
301,700
19,255,106
717,749
(27,368)
$41,836,554
(28,167)
974,861
42,783,248
1,318,066
(61,739)
$779,109
-
20,382
799,491
21,944
(772)
$61,589,279
(48,377)
1,296,943
62,837,845
2,057,759
(89,879)
Estimated fair value
$19,945,487
$44,039,575
$820,663
$64,805,725
Amortized Cost
Gross Unrealized
Gain
Gross Unrealized
Loss
Estimated Fair
Value
Adjustable rate
$16,345,988
(dollars in thousands)
$513,820
($68,488)
$16,791,320
Fixed rate
Total
46,491,857
1,543,939
(21,391)
48,014,405
$62, 837,845
$2,057,759
($89,879)
$64,805,725
F-15
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 December 31, 2010 and 2009, according to their estimated
weighted-average life classifications:
Weighted-Average Life
Fair Value
Amortized
Cost
(dollars in thousands)
Fair Value
Amortized
Cost
December 31, 2010
December 31, 2009
Less than one year
Greater than one year and less than five years
Greater than or equal to five years
$ 915,398
59,732,123
17,792,809
$ 901,824
58,321,570
18,093,758
$ 2,796,707
55,780,372
6,228,646
$ 2,762,873
54,070,493
6,004,479
Total
$78,440,330
$77,317,152
$64,805,725
$62,837,845
The weighted-average lives of the Agency Mortgage-Backed Securities at December 31, 2010 and 2009 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
December 31, 2010 and December 31, 2009.
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
December 31, 2010
$28,608,996
($577,096)
$166,481
($3,929)
$28,775,477
($581,025)
December 31, 2009
$4,818,239
($22,869)
$2,802,920
($67,010)
$7,621,159
($89,879)
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 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 year ended December 31, 2010, the Company sold $7.8 billion of Agency Mortgage-Backed
Securities, resulting in a realized gain of $171.6 million. During the year ended December 31, 2009, the Company sold
$4.6 billion of Agency Mortgage-Backed Securities, resulting in a realized gain of $99.1 million.
3.
AGENCY DEBENTURES
At December 31, 2010, the Company owned Agency debentures with a carrying value of $1.1 billion, including
an unrealized gain of $9.7 million. At December 31, 2009, the Company owned Agency debentures with a carrying
value of $915.8 million including an unrealized loss of $3.0 million.
F-16
During the year ended December 31, 2010, the Company sold or had called $2.8 billion of Agency debentures,
resulting in realized gains of $10.2 million. The Company had no sales of Agency debentures for the year ended
December 31, 2009.
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 $184.9 million at December 31, 2010 and approximately 45.0 million
shares of Chimera at fair value of approximately $174.5 million at December 31, 2009. At December 31, 2010 and
December 31, 2009, the investment in Chimera had an unrealized gain of $46.0 million and $35.7 million, respectively.
Chimera is externally managed by FIDAC pursuant to a management agreement.
5.
INVESTMENT IN AFFILIATE, EQUITY METHOD
The Company owns approximately 25% of CreXus and accounts for its investment using the equity method.
CreXus is externally managed by FIDAC pursuant to a management agreement. The quoted fair value of the Company’s
investment in CreXus was $59.3 million at December 31, 2010 and $63.2 million at December 31,2009.
6.
REVERSE REPURCHASE AGREEMENT
At December 31, 2010, the Company did not have any amounts outstanding under its reverse repurchase
agreement with Chimera. At December 31, 2009, the Company had lent $259.0 million to Chimera in a reverse
repurchase agreement which was callable weekly. This amount was included in the principal amount which
approximates fair value in the Company’s Statements of Financial Condition. The interest rate at December 31, 2009
was at the rate of 1.72%. The collateral for this loan was mortgage-backed securities with a fair value of $314.3 million
at December 31, 2009.
At December 31, 2010 RCap had outstanding reverse repurchase agreements with non-affiliates of $1.0 billion.
At December 31, 2009, RCap, in its ordinary course of business, financed through matched reverse repurchase
agreements, at market rates, $69.7 million for an entity that is managed by FIDAC pursuant to a management agreement.
At December 31, 2009, RCap had an outstanding reverse repurchase agreement with non-affiliates of $425.0 million.
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 investment 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 fund’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 fund’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 fund’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
F-17
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 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 December 31, 2010
At December 31, 2009
4.92%
5.78%
4.28%
4.00%
3.04%
10.16%
39 months
4.55%
4.95%
3.23%
10.09%
33 months
The Company’s financial assets and liabilities carried at fair value on a recurring basis are valued as follows:
F-18
The classification of assets and liabilities by level remains unchanged at December 31, 2010, when compared to
the previous year.
At December 31, 2010
Assets:
Mortgage-Backed Securities
Agency debentures
Available for sale equity securities
U.S. Treasury securities
Securities borrowed
Interest rate swaps
Other derivative contracts
Liabilities:
Interest rate swaps
U.S. Treasury securities sold, not yet purchased
Securities loaned
Other derivative contracts
At December 31, 2009
Assets:
Mortgage-Backed Securities
Agency debentures
Available for sale equity securities
Interest rate swaps
Liabilities:
Interest rate swaps
U.S. Treasury securities sold, not yet purchased
Securities loaned
9.
REPURCHASE AGREEMENTS
Level 1
Level 2
Level 3
(dollars in thousands)
$ -
-
184,879
1,100,447
--
2,607
-
909,462
-
-
$ -
-
174,533
-
$78,440,330
1,108,261
-
-
216,676
2,561
-
$ -
-
-
-
-
-
-
754,439
-
217,841
2,446
-
-
-
-
$64,805,725
915,752
-
5,417
$ -
-
-
-
-
-
533,362
-
-
-
The Company had outstanding $65.5 billion and $54.6 billion of repurchase agreements with weighted average
borrowing rates of 1.84% and 2.11%, after giving effect to the Company’s interest rate swaps, and weighted average
remaining maturities of 127 days and 170 days as of December 31, 2010 and December 31, 2009, respectively.
Investment Securities pledged as collateral under these repurchase agreements and interest rate swaps had an estimated
fair value of $69.5 billion at December 31, 2010 and $57.9 billion at December 31, 2009.
At December 31, 2010 and 2009, the repurchase agreements had the following remaining maturities:
1 day
Within 30 days
30 to 59 days
60 to 89 days
90 to 119 days
Over 120 days
Total
December 31, 2010
December 31, 2009
(dollars in thousands)
-
$32,669,341
13,767,522
4,776,597
6,068,376
8,251,701
$65,533,537
-
$ 38,341,206
7,163,255
192,005
139,966
8,761,697
$54,598,129
The Company did not have an amount at risk greater than 10% of the equity of the Company with any
counterparty as of December 31, 2010 or December 31, 2009.
The Company has entered into repurchase agreements which provide the counterparty with the right to call the
balance prior to maturity date. These repurchase agreements totaled $5.9 billion and the fair value of the option to call
F-19
was ($313.2 million) at December 31, 2010. The repurchase agreements totaled $7.0 billion and the fair value of the
option to call was ($352.4) at December 31, 2009. Management has determined that the call option is not required to be
bifurcated as it is deemed clearly and closely related to the debt instrument, therefore the fair value of the option is not
recorded in the consolidated financial statements.
The structured 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 repurchase agreements are priced as a combination of an interest rate swaps with an embedded call options.
Additionally, as of 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 $500 million and it has an estimated fair value of $513.3
million.
The Company reports cash flows 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 December 31, 2010, such
instruments are comprised of interest rate swaps, which in effect modify the cash flows on repurchase agreements. The
use of interest rate swaps creates exposure to credit risk relating to potential losses that could be recognized if the
counterparties to these instruments fail to perform their obligations under the contracts. In the event of a default by the
counterparty, the Company could have difficulty obtaining its Agency Mortgage-Backed Securities pledged as collateral
for swaps. The Company does not anticipate any defaults by its counterparties.
The Company’s swaps are used to lock in the fixed rate related to a portion of its current and anticipated future
30-day term repurchase agreements.
In connection with RCap’s proprietary trading activities, it has entered into U.S. Treasury, Eurodollar, and
federal funds futures and options contracts for speculative or hedging purposes. RCap invests in futures and options
contracts for economic hedging purposes to reduce exposure to changes in yields of its U.S Treasury securities and for
speculative purposes to achieve capital appreciation. The use of futures and options contracts creates exposure to credit
risk relating to potential losses that could be recognized if the counterparties to these instruments fail to perform their
obligations under the contracts. RCap executes these trades as a customer of an appropriately licensed futures and
options broker dealer.
The location and fair value of derivative instruments reported in the Consolidated Statement of Financial Position
as of December 31, 2010 and 2009 are as follows:
Location on Statement
of Financial Condition
Notional Amount
(dollars in thousands)
Net Estimated Fair
Value/Carrying Value
Interest rate swaps
December 31, 2010
December 31, 2010
December 31, 2009
December 31, 2009
Liabilities
Assets
Liabilities
Assets
Other derivative contracts
December 31, 2010
December 31, 2010
Liabilities
Assets
$26,882,460
$200,000
$18,823,300
$2,700,000
Net Estimated Fair
Value/Carrying Value
(dollars in thousands)
($2,446)
$2,607
($754,439)
$2,561
($533,362)
$5,417
The effect of derivatives on the Statement of Operations and Comprehensive Income is as follows:
F-20
Location on Statement of Operations and Comprehensive Income
Unrealized Gain (Loss) on
Interest Rate Swaps
Interest Expense
(dollars in thousands)
For the Year Ended December 31, 2010
For the Year Ended December 31, 2009
For the Year Ended December 31, 2008
$735,107
$719,803
$327,936
($318,832)
$349,521
($768,268)
The weighted average pay rate at December 31, 2010 was 3.21% and the weighted average receive rate was
0.28%. The weighted average pay rate at December 31, 2009 was 3.85% and the weighted average receive rate was
0.25%.
Other derivative contracts
For the Year Ended December 31, 2010
11. CONVERTIBLE SENIOR NOTES
Realized Loss
Unrealized Loss
(dollars in thousands)
($3,168)
($127)
During the year ended December 31, 2010, the Company issued $600.0 million in aggregate principal amount
of its 4% Convertible Senior Notes due 2015 (“Convertible Senior Notes”) for net proceeds following 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 December 31, 2010 of 46.6070 and 54.1089, respectively, shares of Common Stock per $1,000 principal amount of
Convertible Senior Notes, which is equivalent to an initial conversion price of approximately $21.4560 and a conversion
price at December 31, 2010 of approximately $18.4812 per share of Common Stock, subject to adjustment in certain
circumstances. The market value at December 31, 2010 was $699.2 million, based on closing price.
12. PREFERRED STOCK AND COMMON STOCK
(A) Common Stock Issuances
On July 13, 2010 the Company entered into an agreement pursuant to which it sold 60,000,000 shares of its
common stock for net proceeds following expenses of approximately $1.0 billion. This transaction settled on July 19,
2010.
During the year ended December 31, 2010, 363,528 options were exercised under the Long-Term Stock
Incentive Plan, or Incentive Plan, for an aggregate exercise price of $4.6 million
During the year ended December 31, 2010, 953,000 shares of Series B Preferred Stock were converted into 2.4
million shares of common stock, respectively.
During the year ended December 31, 2010, the Company raised $278.8 million by issuing 15.7 million shares,
through the Direct Purchase and Dividend Reinvestment Program.
During the year ended December 31, 2009, 423,160 options were exercised under the Long-Term Stock
Incentive Plan, or Incentive Plan, for an aggregate exercise price of $4.9 million. During the year ended December 31,
2009, 7,550 shares of restricted stock were issued under the Incentive Plan.
During the year ended December 31, 2009, 1.4 million shares of Series B Preferred Stock were converted into
2.8 million shares of common stock, respectively.
During the year ended December 31, 2009, the Company raised $141.8 million by issuing 8.4 million shares,
through the Direct Purchase and Dividend Reinvestment Program.
F-21
(B) Preferred Stock
At December 31, 2010 and 2009, the Company had issued and outstanding 7,412,500 shares of Series A
Cumulative Redeemable Preferred Stock (“Series A Preferred Stock”), with a par value $0.01 per share and a liquidation
preference of $25.00 per share plus accrued and unpaid dividends (whether or not declared). The Series A Preferred
Stock must be paid a dividend at a rate of 7.875% per year on the $25.00 liquidation preference before the common stock
is entitled to receive any dividends. The Series A Preferred Stock is redeemable at $25.00 per share plus accrued and
unpaid dividends (whether or not declared) exclusively at the Company's option commencing on April 5, 2009 (subject
to the Company's right under limited circumstances to redeem the Series A Preferred Stock earlier in order to preserve its
qualification as a REIT). The Series A Preferred Stock is senior to the Company's common stock and is on parity with
the Series B Preferred Stock with respect to dividends and distributions, including distributions upon liquidation,
dissolution or winding up. The Series A Preferred Stock generally does not have any voting rights, except if the
Company fails to pay dividends on the Series A Preferred Stock for six or more quarterly periods (whether or not
consecutive). Under such circumstances, the Series A Preferred Stock, together with the Series B Preferred Stock, will be
entitled to vote to elect two additional directors to the Board, until all unpaid dividends have been paid or declared and
set apart for payment. In addition, certain material and adverse changes to the terms of the Series A Preferred Stock
cannot be made without the affirmative vote of holders of at least two-thirds of the outstanding shares of Series A
Preferred Stock and Series B Preferred Stock. Through December 31, 2010, the Company had declared and paid all
required quarterly dividends on the Series A Preferred Stock.
At December 31, 2010 and 2009, the Company had issued and outstanding 1,652,047 and 2,604,614,
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 December 31,
2010, the conversion ratio was 2.6571 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 year ended December 31, 2010, 953,000 shares of Series B Preferred Stock were converted
into 2.4 million shares of common stock. During the year ended December 31, 2009, 1.4 million shares of Series B
Preferred Stock were converted into 2.8 million shares of common stock.
(C) Distributions to Shareholders
During the year ended December 31, 2010, the Company declared dividends to common shareholders totaling
$1.6 billion or $2.65 per share, of which $404.2 million were paid to shareholders on January 27, 2011. Dividend
distributions for the year ended December 31, 2010, were characterized, for Federal income tax purposes, as 94.3%
ordinary income, 5.7% long-term capital. During the year ended December 31, 2010, the Company declared dividends
to Series A Preferred shareholders totaling approximately $14.6 million or $1.97 per share, and Series B shareholders
totaling approximately $3.4 million or $1.50 per share, which were paid to shareholders on December 31, 2010.
F-22
During the year ended December 31, 2009, the Company declared dividends to common shareholders totaling $1.4
billion or $2.54 per share, of which $414.9 million were paid to shareholders on January 28, 2010. Dividend
distributions for the year ended December 31, 2009, were characterized, for Federal income tax purposes as ordinary
income. During the year ended December 31, 2009, the Company declared dividends to Series A Preferred shareholders
totaling approximately $14.6 million or $1.97 per share, and Series B shareholders totaling approximately $3.9 million
or $1.50 per share, which were paid to shareholders on December 31, 2009.
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 years ended December 31, 2010, 2009, and 2008.
Net income attributable to controlling interest
Less: Preferred stock dividends
Net income available to common shareholders, prior to
adjustment for Series B dividends, if necessary
Add: Preferred Series B dividends, if dilutive
Add: Interest on Convertible Senior Note, if dilutive
Net income available to common shareholders, as adjusted
Weighted average shares of common stock
outstanding-basic
Add: Effect of dilutive stock options and Series
B Cumulative Convertible Preferred Stock, and Convertible
Senior Notes
Weighted average shares of common
stock outstanding-diluted
For the years ended
(amounts in thousands)
December 31,
2009
$1,961,471
18,501
December 31,
2010
$1,267,280
18,033
1,249,247
3,440
21,333
$1,274,020
1,942,970
3,908
-
$1,946,878
December 31,
2008
$346,180
21,177
325,003
-
-
$325,003
588,193
546,973
507,025
37,114
6,158
-
625,307
553,131
507,025
Options to purchase 565,000 shares of common stock, were outstanding and considered anti-dilutive as their
exercise price and option expense exceeded the average stock price for the year ended December 31, 2010. Options to
purchase 2.8 million shares of common stock, were outstanding and considered anti-dilutive as their exercise price and
option expense exceeded the average stock price for the year ended December 31, 2009. The Series B Cumulative
Convertible Preferred Stock was anti-dilutive for the year ended December 31, 2008.
14.
LONG-TERM STOCK INCENTIVE PLAN
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.
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 current market price on the date of grant, subject to an immediate or four year vesting in four
F-23
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.
Options outstanding at the beginning of
year
Granted
Exercised
Forfeited
Expired
Options outstanding at the end of period
Options exercisable at the end of the period
For the year ended
December 31, 2010
December 31, 2009
Number of
Shares
7,271,503
8,750
(363,528)
(18,500)
(6,250)
6,891,975
3,822,844
Weighted
Average
Exercise
Price
$15.20
17.24
12.65
15.21
18.26
$15.33
$16.16
Number of
Shares
5,180,164
2,535,750
(423,161)
(10,000)
(11,250)
7,271,503
1,869,678
Weighted
Average
Exercise Price
$15.87
13.26
11.72
15.61
17.32
$15.20
$16.96
The weighted average remaining contractual term was approximately 6.6 years for stock options outstanding
and approximately 5.6 years for stock options exercisable as of December 31, 2010. As of December 31, 2010, there
was approximately $8.8 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 2.0 years.
The weighted average remaining contractual term was approximately 7.6 years for stock options outstanding
and approximately 4.7 years for stock options exercisable as of December 31, 2009. As of December 31, 2009, there
was approximately $13.1 million of total unrecognized compensation cost related to nonvested share-based
compensation awards. That cost is expected to be recognized over a weighted average period of 3.0 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 year ended December 31, 2010, the Company’s taxable REIT subsidiaries recorded $6.8 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 December 31, 2010, the Company recorded $28.6 million of income
tax expense for a portion of earnings retained based on Section 162(m) limitations.
During the year ended December 31, 2009, the Company’s taxable REIT subsidiaries recorded $9.7 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 December 31, 2009, the Company recorded $24.7 million of income
tax expense for a portion of earnings retained based on Section 162(m) limitations.
During the year ended December 31, 2008, FIDAC recorded $4.0 million of income tax expense for income
attributable to FIDAC, and the portion of earnings retained based on Code Section 162(m) limitations. During the year
ended December 31, 2008, Merganser recorded $94,000 of income tax expense for income attributable to Merganser.
During the year ended December 31, 2008, the Company recorded $21.9 million of income tax expense for a portion of
earnings retained based on Section 162(m) limitations.
The Company’s effective tax rate was 53%, 52%, and 53%, for the years ended December 31, 2010, 2009, and
2008, respectively. These rates were calculated based on the Companies 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.
F-24
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. 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 $8.7 million. The following table details the lease payments.
Year Ending December
Lease Commitment
Sublease Income
(dollars in thousands)
Net Amount
2011
2012
2013
2014
2015
Later years
Contingencies
2,291
2,291
2,291
1,863
161
27
$8,924
169
70
-
-
-
-
$239
2,122
2,221
2,291
1,863
161
27
$8,685
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 December 31, 2010 and 2009.
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 December 31, 2010 and
2009, the Company entered into interest rate swaps to pay a fixed rate and receive a floating rate of interest, with a total
notional amount of $27.1 billion and $21.5 billion, respectively.
F-25
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.
RELATED PARTY TRANSACTIONS
At December 31, 2009, the Company had lent $259.0 million to Chimera in a reverse repurchase agreement
which was callable weekly. This amount is included in the principal amount which approximates fair value in the
Company’s Statement of Financial Condition. The interest rate at December 31, 2009 was at the rate of 1.72%.
On April 15, 2009, the Company purchased approximately 25.0 million shares of Chimera common stock at a
price of $3.00 for aggregate proceeds of approximately $74.9 million. On May 27, 2009, the Company purchased
approximately 4.7 million shares of Chimera common stock at a price of $3.22 for aggregate proceeds of approximately
$15.2 million. Chimera is managed by FIDAC, and the Company owned approximately 4.4% of Chimera's common
stock at December 31, 2010.
On September 22, 2009, the Company acquired 4,527,778 shares of CreXus’s common stock at a price of
$15.00 per share. The Company owns approximately 25% of CreXus at December 31, 2010 and accounts for its
investment using the equity method.
RCap acted as a book-running manager in Chimera’s underwritten public offering of 115 million shares of its
common stock, which was completed on June 28, 2010. In connection with this offering, RCap recognized income from
underwriting of $500,000.
RCap acted as a book-running manager in Chimera’s underwritten public offering of 125 million shares of its
common stock, which was completed on November 5, 2010. In connection with this offering, RCap recognized income
from underwriting of $680,000.
19. 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 December 31, 2010 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 December 31, 2010 was $168.5 million with excess
net capital of $168.3 million.
20.
SUBSEQUENT EVENTS
On January 4, 2011, the Company entered into an underwriting agreement pursuant to which it sold 86,250,000
shares of its common stock for net proceeds following expenses of approximately $1.5 billion. This transaction settled on
January 7, 2011.
On February 15, 2011, the Company entered into an underwriting agreement pursuant to which it sold
86,250,000 shares of its common stock for net proceeds following expenses of approximately $1.5 billion. This
transaction settled on February 18, 2011.
F-26
21.
SUMMARIZED QUARTERLY RESULTS (UNAUDITED)
The following is a presentation of the quarterly results of operations for the year ended December 31, 2010.
Interest income
Investment securities
Securities loaned
U.S. Treasury Securities
Total interest income
Interest expense
Repurchase agreements
Interest rate swaps
Convertible Senior Notes
Securities borrowed
U.S. Treasury Securities sold, not yet purchased
Total interest expense
March 31,
2010
June 30,
2010
September 30, December 31,
2010
2010
(dollars in thousands, expect per share data)
$653,935
454
-
654,389
$642,782
860
40
643,682
92,089
180,838
3,195
387
-
276,509
96,975
175,535
6,966
742
24
280,242
$700,964
1,261
751
702,976
105,393
188,636
7,033
1,047
459
302,568
$678,626
1,422
2,039
682,087
103,514
190,098
7,034
1,201
2,166
304,013
Net interest income
377,880
363,440
400,408
378,074
Other (loss) income
Investment advisory and service fees
Gain on sale of Mortgage-Backed Securities
Dividend income from available-for-sale equity securities
Unrealized (loss) gain on interest rate swaps
Net gain (loss) on trading securities
Income from underwriting
Total other (loss) income
Expenses
Distribution fees
General and administrative expenses
Total expenses
12,546
46,962
7,964
(116,732)
-
-
(49,260)
13,863
39,041
7,330
(593,038)
77
500
(532,227)
360
40,021
40,381
-
41,540
41,540
15,343
61,986
8,097
(448,253)
1,082
915
(360,830)
-
43,430
43,430
16,321
33,802
7,647
839,191
(3,510)
680
894,131
-
46,496
46,496
Income (loss) before loss on equity method investments
and income taxes
288,239
(210,327)
(3,852)
1,225,709
Income on equity method investment
140
935
868
1,002
Income taxes (loss)
Net income
(7,314)
(8,837)
(11,076)
(8,207)
281,065
(218,229)
(14,060)
1,218,504
Dividends on preferred stock
4,625
4,625
4,515
4,268
Net income (loss) available (related) to common
shareholders
Net income (loss) available (related) per share to common
shareholders:
Basic
Diluted
Weighted average number of common shares
outstanding:
Basic
Diluted
$276,440
($222,854)
($18,575)
$1,214,236
$0.50
$0.49
$0.40
$0.40
($0.03)
($0.03)
$1.94
$1.84
554,995,092
575,859,564
559,700,836
559,700,836
611,904,518
611,904,518
625,138,510
662,476,638
F-27
The following is a presentation of the quarterly results of operations for the year ended December 31, 2009.
Interest income
Investment securities
Securities loaned
Total interest income
Interest expense
Repurchase agreements
Interest rate swaps
Securities borrowed
Total interest expense
March 31,
2009
June 30,
2009
September
2009
December
2009
(dollars in thousands, expect per share data)
$716,015
-
716,015
$710,401
-
710,401
$744,523
-
744,523
$751,560
103
751,663
202,066
176,559
-
378,625
147,516
175,080
-
322,596
124,653
183,124
-
307,777
101,632
185,040
92
286,764
Net interest income
337,390
387,805
436,746
464,899
Other income (loss)
Investment advisory and service fees
Gain on sale of Mortgage-Backed Securities
Dividend income from available-for-sale equity securities
Loss from Prime Broker
Unrealized gain (loss) on interest rate swaps
Total other income (loss)
Expenses
Distribution fees
General and administrative expenses
Total expenses
7,761
5,023
918
-
35,545
49,247
428
29,882
30,310
11,736
2,364
3,221
-
230,207
247,528
432
30,046
30,478
14,620
591
5,398
-
(128,687)
(108,078)
14,835
91,150
7,647
(13,613)
212,456
312,475
478
33,344
33,822
418
36,880
37,298
Income before loss on equity method investments and
income taxes
356,327
604,855
294,846
740,076
Loss on equity method investment
-
-
-
252
Income taxes
Net income
6,434
7,801
9,657
10,489
349,893
597,054
285,189
729,335
Dividends on preferred stock
4,626
4,625
4,625
4,625
Net income available to common shareholders
$345,267
$592,429
$280,564
$724,710
Net income available per share to common shareholders:
Basic
Diluted
$0.64
$0.63
$1.09
$1.08
$0.51
$0.51
$1.31
$1.30
Weighted average number of common shares
outstanding:
Basic
Diluted
542,903,110
548,551,328
544,344,844
550,099,709
547,611,480
553,376,285
552,917,499
559,332,320
F-28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of New York, State
of New York.
Date: February 25, 2011
By:
ANNALY CAPITAL MANAGEMENT, INC.
/s/ Michael A. J. Farrell
Michael A. J. Farrell
Chairman, Chief Executive Officer, and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the date indicated.
Signature
/s/ KEVIN P. BRADY
Kevin P. Brady
/s/ KATHRYN F. FAGAN
Kathryn F. Fagan
/s/ MICHAEL A.J. FARRELL
Michael A. J. Farrell
/s/ JONATHAN D. GREEN
Jonathan D. Green
Title
Director
Chief Financial Officer and Treasurer
(principal financial and accounting
officer)
Date
February 25, 2011
February 25, 2011
Chairman of the Board, Chief Executive
Officer, President and Director (principal
executive officer)
Director
February 25, 2011
February 25, 2011
/s/ MICHAEL E. HAYLON
Director
February 25, 2011
Michael E. Haylon
/s/ JOHN A. LAMBIASE
John A. Lambiase
Director
February 25, 2011
/s/ E. WAYNE NORDBERG
Director
February 25, 2011
E. Wayne Nordberg
/s/ DONNELL A. SEGALAS
Director
February 25, 2011
Donnell A. Segalas
/s/ WELLINGTON DENAHAN-NORRIS
Wellington Denahan-Norris
Vice Chairman of the Board, Chief
Investment Officer, Chief Operating
Officer and Director
February 25, 2011
II-1
Exhibit 12.1
Ratio of Earnings To Combined Fixed Charges And Preferred Stock Dividends
The following table sets forth the calculation of our ratio of earnings to combined fixed charges and preferred stock
dividends for the periods shown (dollars in thousands):
For the Year Ended December 31,
2010
2009
2008
2007
2006
Net income
1,267,280
1,961,471
346,238
414,384
93,016
Add: Fixed charges (Interest expense)
1,163,332
1,295,762
1,888,912
1,926,465
1,055,013
Earnings as adjusted
2,430,612
3,257,233
2,261,069
2,349,719
1,156,367
Fixed charges (interest expense) + preferred
stock dividend
Ratio of earnings to combined fixed charges
and preferred stock dividends
1,181,365
1,314,263
1,910,089
1,947,958
1,074,570
2.06
2.48
1.17
1.20
1.07
EMPLOYMENT AGREEMENT
Exhibit 10.13
THIS EMPLOYMENT AGREEMENT (“Agreement”), dated as of July 1, 2010 (the “Effective
Date”), is entered into by and between Kevin Keyes (the “Executive”) and Annaly Capital Management, Inc., a
Maryland corporation (the “Company”).
WHEREAS, the Company desires to establish its right to the continued services of the Executive upon
the Effective Date, in the capacity described below, on the terms and conditions and subject to the rights of termination
hereinafter set forth, and the Executive is willing to accept such employment on such terms and conditions.
and the Company have agreed and do hereby agree as follows:
NOW, THEREFORE, in consideration of the mutual agreements hereinafter set forth, the Executive
assigned to them below:
1.
Definitions. Capitalized terms used in this Agreement shall have the respective meanings
1.1
“Book Value” of the Company shall be equal to the aggregate amounts reported as
Stockholders Equity on the Company’s balance sheet as of the end of each fiscal year determined in accordance with
generally accepted accounting principles (GAAP) but without taking into account any valuation reserves (i.e., changes in
the value of the Company’s portfolio of investments as a result of mark-to-market valuation changes, referred to in the
financial statements as “Accumulated Other Comprehensive Gain or Loss”).
1.2
“Code” shall mean the Internal Revenue Code of 1986, as amended.
1.3
of Directors of the Company.
“Compensation Committee” shall mean the Compensation Committee of the Board
1.4
“Good Reason” shall mean the occurrence of one or more of the following without
the Executive’s written consent: (i) a material breach of this Agreement by the Company, or (ii) a materially significant
change in the Executive’s duties, authorities or responsibilities, or (iii) the relocation of the Executive’s principal place
of employment more than 60 miles from New York, New York, or (iv) the failure of the Company to obtain the
assumption in writing of its obligations to perform this Agreement by any successor to all or substantially all of the
assets or business of the Company within fifteen (15) days upon a merger, consolidation, sale or similar transaction,
provided however that none of the events specified in (i), (ii) or (iii) shall constitute Good Reason unless the Executive
shall have notified the Company in writing describing the events which constitute Good Reason and the Company shall
have failed to cure such event within a reasonable period, not to exceed thirty (30) days, after the Company’s actual
receipt of such written notice.
2.
Employment as Managing Director of the Company. The Company hereby employs and
engages the Executive as Managing Director of the Company, and the Executive does hereby accept and agree to such
employment and engagement. The Executive’s duties as Managing Director shall be such duties typically required of a
managing director, and as shall from time to time be agreed upon by the Executive and the Board of Directors of the
Company. The Executive shall report solely and directly to the Company’s Chief Operating Officer. The Executive’s
services shall be performed in the Company’s offices in New York, New York or such other location as the Company
and Executive shall agree. Except for periods of Disability (as defined below), during the Term, the Executive shall
devote substantially all of his business time, attention and energies to the performance of his duties under this
Agreement; provided, however, that the Executive shall be allowed, to the extent such activities do not substantially
interfere with the performance by the Executive of his duties and responsibilities hereunder, (a) to manage the
Executive’s personal, financial and legal affairs, and (b) serve on civic or charitable boards or committees. Furthermore,
the Executive shall exercise due diligence and care in the performance of his duties to the Company under this
Agreement.
3.
Term of Agreement.
(a)
Effective Date. The term (“Term”) of this Agreement shall commence as of the
Effective Date and shall continue through the first anniversary of the Effective Date. From and after such first
anniversary and upon each anniversary thereafter, the Term of the Agreement shall automatically be extended for
successive one-year periods unless, not later than three months prior to such first anniversary or any subsequent
anniversary, as applicable, either party shall have given written notice to the other that it does not wish to extend the
Term of the Agreement.
4.
Compensation.
(a)
Base Salary. The Company shall pay the Executive, and the Executive agrees to
accept from the Company, in payment for his services to the Company, a base salary equal to a per annum amount of
$750,000 (“Base Salary”), payable in equal biweekly installments or at such other time or times as the Executive and the
Company shall agree. The Base Salary can be increased (but not decreased) at any time by the Compensation
Committee or the Board of Directors of the Company, as the case may be. The Executive’s salary as increased shall be
deemed to be the Base Salary for all purposes under this Agreement.
(b)
Performance Bonus. With respect to each fiscal year, the Executive shall be eligible
to receive an amount equal to the sum of: (A) the excess, if any, of (i) 0.040% of the Book Value of the Company for
such fiscal year over (ii) the Executive’s Base Salary as of the last day of such fiscal year; provided, however, that the
Compensation Committee must approve such amount, plus (B) additional amounts as may be recommended by
management and approved by the Compensation Committee (such sum being the “Performance Bonus”).
Notwithstanding the foregoing, for the fiscal year ending December 31, 2010, the parties agree that the Performance
Bonus that the Executive shall be eligible to receive shall be (x) a pro rata amount of the Performance Bonus, as
calculated by the Company, based on the period from the Effective Date through December 31, 2010 plus (y) any other
additional bonus amount as may be approved by the Compensation Committee.
Executive’s entire compensation package to determine if it should be increased (but not decreased) in order for it to
continue to meet the Company’s compensation objectives.
(c)
Annual Review. The Board of Directors shall, at least annually, review the
5.
Fringe Benefits. The Executive shall be entitled to participate in any benefit programs
adopted from time to time by the Company for the benefit of its senior executive employees, and the Executive shall be
entitled to receive such other fringe benefits as may be granted to his from time to time by the Compensation Committee
or the Board of Directors of the Company, as the case may be.
(a)
Benefit Plans. The Executive shall be entitled to participate in any benefit plans
relating to stock options, stock purchases, awards, pension, thrift, profit sharing, life insurance, medical coverage,
education, or other retirement or employee benefits available to other senior executive employees of the Company,
subject to any restrictions (including waiting periods) specified in such plans.
Vacation. The Executive shall be entitled to such number of weeks of paid vacation
per calendar year as determined by the Board of Directors of the Company after review of industry standards, but shall in
no event be entitled to fewer than four weeks of paid vacation per calendar year.
(b)
6.
Business Expenses. The Company shall reimburse the Executive for any and all necessary,
customary and usual expenses, properly receipted in accordance with Company policies, incurred by Executive on behalf
of the Company.
7.
Termination of Executive’s Employment.
(a)
Death. If the Executive dies while employed by the Company, his employment shall
immediately terminate. The Company’s obligation to pay the Executive’s Base Salary shall cease as of the date of
Executive’s death, except that any earned, but unpaid Base Salary and Performance Bonus shall be paid to the
Executive’s beneficiaries as soon as practicable after his death. In addition, the Executive’s beneficiaries shall receive
the pro rata portion of the Performance Bonus for the year of the Executive’s death, which shall be equal to the
Performance Bonus (as determined at the end of the year of the Executive’s death) multiplied by a ratio equal to (A) the
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number of days the Executive was employed in the year of his death, divided by (B) 365. The Performance Bonus shall
be paid to the Executive’s beneficiaries at the same time and in the same manner as such Performance Bonus would have
been paid to the Executive had the Executive not died or been terminated. Thereafter, Executive’s beneficiaries or his
estate shall receive benefits in accordance with the Company’s retirement, insurance and other applicable programs and
plans then in effect.
(b)
Disability. If, as a result of the Executive’s incapacity due to physical or mental
illness (“Disability”), Executive shall have been absent from the full-time performance of his duties with the Company
for six (6) consecutive months, and, within thirty (30) days after written notice is provided to him by the Company, the
Executive shall not have returned to the full-time performance of his duties, the Executive’s employment under this
Agreement may be terminated by the Company for Disability. With respect to the period during which begins when the
Executive is first absent from the full-time performance of his duties with the Company due to Disability and ends upon
the later of (i) the date he is terminated from employment in accordance with the foregoing sentence, or, (ii) the date he
begins receiving long-term disability payments under the Company’s long term disability plan for senior executives
(“Salary Continuation Period”), the Company shall continue to pay the Executive his Base Salary at the rate in effect at
the commencement of such period of Disability. In addition, the Executive shall receive the pro rata portion of the
Performance Bonus for the year of the Executive’s termination due to Disability, which shall be equal to the
Performance Bonus (as determined at the end of the year in which the Executive is terminated by reason of Disability)
multiplied by a ratio equal to (A) the number of days the Executive was employed in the year of his termination for
Disability, divided by (B) 365. The Performance Bonus shall be paid to the Executive at the same time and in the same
manner as such Performance Bonus would have been paid had the Executive not been terminated by reason of Disability.
Upon the end of the Salary Continuation Period, the Executive’s benefits shall be determined under the Company’s
retirement, insurance and other compensation programs then in effect in accordance with the terms of such programs
(c)
Termination by the Company for Cause. The Company may terminate the
Executive’s employment under this Agreement for “Cause,” at any time prior to expiration of the Term of the
Agreement, only in the event of (i) the Executive’s failure to substantially perform the duties described in this
Agreement, (ii) acts or omissions constituting recklessness or willful misconduct on the part of the Executive in respect
of his fiduciary obligations to the Company which is materially and demonstrably injurious to the Company, or (iii) the
Executive’s conviction for fraud, misappropriation or embezzlement in connection with the assets of the Company. In
the case of clause (i) only, it shall also be a condition precedent to the Company’s right to terminate the Executive’s
employment for Cause that (1) the Company shall first have given the Executive written notice stating with specificity
the reason for the termination (“breach”) at least 60 days before the meeting of the Board of Directors called to make
such determination and the Executive and his counsel are given the opportunity to answer such grounds for termination
in person, at a hearing or in writing delivered to the Chairman of the Board, in the Executive’s discretion, before a vote
by the Board of Directors on the existence of Cause; and (2) if such breach is susceptible to cure or remedy, a period of
60 days from and after the giving of the notice described in (1) shall have elapsed without the Executive having
effectively cured or remedied such breach during such 30-day period, unless such breach cannot be cured or remedied
within 60 days, in which case the period for remedy or cure shall be extended for a reasonable time (not to exceed an
additional 30 days), provided the Executive has made and continues to make a diligent effort to effect such remedy or
cure. In the case of clause (iii) above, the Executive’s employment under this Agreement may be terminated
immediately without any advance written notice. Upon a determination that grounds exist for a termination for Cause by
the Board of Directors and that the breach cannot be cured, or immediately in the case of clause (iii) above, the
Company’s obligation to pay the Executive’s Base Salary, any Performance Bonus and benefits shall immediately cease,
except to the extent any Base Salary or Performance Bonus has been earned but has not yet been paid.
7.2
Termination by the Executive. The Executive may at any time during the Term of
this Agreement terminate his employment hereunder for any reason or no reason by giving the Company notice in
writing not less 90 days in advance of such termination. The Executive shall have no further obligations to the Company
after the effective date of his termination, as set forth in the notice. In the event of a termination by the Executive under
this Section, the Company will pay only the portion of Base Salary or previously awarded Performance Bonus unpaid as
of the termination date. Benefits which have accrued and/or vested on the termination date will continue in effect
according to their terms, but no additional accrual or vesting will take place. Notwithstanding the foregoing, if the
Executive terminates his employment for Good Reason, the notice period provided in Section 7.2 above shall not apply
and the Executive will be entitled to the severance detailed in Section 8.
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8.
Compensation Upon Termination by the Company Other Than for Cause or Upon
Termination by the Executive for Good Reason. If the Executive’s employment shall be terminated by the Company
other than for Cause or by the Executive for Good Reason, the Executive shall be entitled to the following benefits:
any portion of the Executive’s Base Salary or previously awarded Performance Bonus not paid prior to the termination
date.
(a)
Payment of Unpaid Base Salary. The Company shall immediately pay the Executive
(b)
Severance Payment. The Company shall pay the Executive an amount (the
“Severance Amount”) equal to three (3) times the greater of (i) the Executive’s combined Base Salary and actual
Performance Bonus for the preceding fiscal year or (ii) the average for the three preceding years of the Executive’s
combined actual Base Salary and Performance Bonus. Fifty percent of the Severance Amount shall be paid within five
(5) days after the date the Executive terminates for Good Reason or is terminated by the Company for any reason other
than Cause, and the remaining 50% of the Severance Amount shall be paid in three equal monthly installments beginning
on the first business day of the month following the month of such termination.
(c)
Immediate Vesting of Stock Options. The Company shall take all appropriate action
to ensure that all stock options on the Company’s stock owned by the Executive as of his termination date, and which
have not been exercised prior to the termination date become immediately exercisable by the Executive, whether or not
the right to exercise such stock options would otherwise then be vested in the Executive, provided, however, an option
that is an incentive stock option within the meaning of Code Section 422(b) (“ISO”) shall not be exercisable for the first
time in a calendar year to the extent that the aggregate fair market value of stock (as determined under Code Section
422(b)(3)) with respect to which ISO’s are exercisable by the Executive during such calendar year exceeds $100,000.
The provisions of this Section 7(c) shall constitute an amendment to any existing stock option agreements (including
award certificates) of the Company as of the termination date.
(d)
Maximization of Payment in the Event of a Change in Control. The Company shall
make the payments and provide the benefits to be paid and provided under this Agreement; provided, however, that if all
or any portion of the payments and benefits provided under this Agreement, either alone or together with other payments
and benefits which the Executive receives or is then entitled to receive from the Company or otherwise, would constitute
a “parachute payment” within the meaning of Section 280G of the Code (or a similar or successor provision), the
Company shall reduce such payments hereunder and such other payments to the extent necessary so that no portion
thereof shall be subject to the excise tax imposed by Section 4999 of the Code (or a similar or successor provision); but
only if, by reason of such reduction, the net after-tax benefit to the Executive shall exceed the net after-tax benefit if such
reduction were not made. The payments or benefits shall be reduced in the manner and order determined by the
Executive, subject to the consent of the Company, which consent shall not be unreasonably withheld. The determination
of whether the payments shall be reduced as provided in this Section 8(d) and the amount of such reduction shall be
made at the Company’s expense by a public accounting firm retained by the Company at the time the calculation is to be
performed, or one selected by the Company from among the four (4) largest public accounting firms in the United States
(the “Accounting Firm”). The Accounting Firm shall provide its determination, together with detailed supporting
calculations and documentation to the Company and the Executive within twenty (20) business days of the payment of
the initial installment of the Severance Amount. The Executive may review these calculations for a period of twenty
days and may retain another accounting firm (at his own expense) for such review and submit objections during such
twenty-day review period.
(e)
No Other Entitlement to Benefits Under Agreement. Except as set forth in Section 7
or Section 8 of this Agreement, following a termination governed by Section 7 or Section 8, the Executive shall not be
entitled to any other compensation or benefits, except as may be separately negotiated by the parties and approved by the
Board of Directors of the Company in writing in conjunction with the termination of Executive's employment.
9.
Noncompetition Provisions.
(a)
Noncompetition. The Executive agrees that during the Term of employment under
this Agreement prior to any termination of his employment hereunder and, in the event of termination of the Executive’s
employment by the Company for Cause or voluntary termination of employment by the Executive (other than for Good
Reason), for a period of one year following such termination, the Executive will not, directly or indirectly, without the
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prior written consent of the Company, manage, operate, join, control, participate in, or be connected as a stockholder
(other than as a holder of shares publicly traded on a stock exchange or the NASDAQ National Market System), partner,
or other equity holder with, or as an officer, director or employee of, any private or public investment firm, broker dealer
or real estate investment trust whose business strategy is based on or who engages in the trading, sales or management of
mortgage-backed securities (the “Business”) in any geographical region in which the Company engages in the Business
(a “Competitor”). It is further expressly agreed that the Company will or would suffer irreparable injury of the Company
in violation of the preceding sentence of this Agreement and that the Company would by reason of such competition be
entitled to injunctive relief in a court of appropriate jurisdiction, and the Executive further consents and stipulates to the
entry of such injunctive relief in such a court prohibiting the Executive from competing with the Company or any
subsidiary or affiliate of the Company, in the areas of business set forth above, in violation of this Agreement.
(b)
Right to Company Materials. The Executive agrees that all styles, designs, lists,
materials, books, files, reports, correspondence, records, and other documents (“Company Materials”) used, prepared, or
made available to the Executive in connection with his employment by the Company shall be and shall remain the
property of the Company. Upon the termination of employment or the expiration of the Term of employment under this
Agreement, all Company Materials shall be returned immediately to the Company, and the Executive shall not make or
retain any copies thereof.
(c)
Soliciting Executives. The Executive promises and agrees that he will not directly or
indirectly solicit any of the Company Executives to work for any Competitor during the one-year period following his
termination of employment unless such termination is by the Company for reasons other than Cause or by the Executive
for Good Reason.
to first offer to the Company corporate opportunities learned of solely as a result of his service as an officer of the
Company.
(d)
Corporate Opportunities. The Executive agrees, in accordance with Maryland law,
10.
Notices. All notices and other communications under this Agreement shall be in writing and
shall be given by fax or first class mail, certified or registered with return receipt requested, and shall be deemed to have
been duly given three (3) days after mailing or twenty-four (24) hours after transmission of a fax to the respective
persons named below:
If to the Company:
Michael A. J. Farrell
Chairman and Chief Executive Officer
Annaly Capital Management, Inc.
1211 Avenue of the Americas
Suite 2902
New York, NY 10036
Phone: (212) 696-0100
Fax: (212) 696-9809
If to the Executive:
Kevin Keyes
320 N. Murray Avenue
Ridgewood, NJ 07450
Either party may change such party’s address for notices by notice duly given pursuant hereto.
11.
Attorneys’ Fees. In the event judicial determination or arbitration (as provided in Section 22)
is necessary for any dispute arising as to the parties’ rights and obligations hereunder, the Company shall pay to the
Executive his costs incurred (including attorney’s fees) in deciding such dispute provided that he has substantially
prevailed.
12.
No Mitigation or Offset. The Executive shall not be required to mitigate the amount of any
payment provided for in this Agreement by seeking other employment or otherwise. The Company shall not be entitled
to set off against the amounts payable to the Executive under this Agreement any amounts earned by the Executive in
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other employment after termination of employment with the Company, or any amounts which might have been earned by
the Executive in other employment had such other employment been sought.
13.
Termination of Prior Agreements. This Agreement terminates and supersedes any and all
prior agreements and understandings between the parties with respect to employment or with respect to the compensation
of the Executive by the Company.
14.
Assignment; Successors. This Agreement is personal in its nature and neither of the parties
hereto shall, without the consent of the other, assign or transfer this Agreement or any rights or obligations hereunder;
provided that, in the event of the merger, consolidation, transfer, or sale of all or substantially all of the assets of the
Company with or to any other individual or entity, this Agreement shall, subject to the provisions hereof, be binding
upon and inure to the benefit of such successor and such successor shall discharge and perform all the promises,
covenants, duties, and obligations of the Company hereunder.
hereto shall be governed by and construed under and in accordance with the laws of the State of New York.
15.
Governing Law. This Agreement and the legal relations thus created between the parties
16.
Entire Agreement; Headings. This Agreement embodies the entire agreement of the parties
respecting the matters within its scope and may be modified only in writing. Section headings in this Agreement are
included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose.
17.
Waiver; Modification. Failure to insist upon strict compliance with any of the terms,
covenants, or conditions hereof shall not be deemed a waiver of such term, covenant, or condition, nor shall any waiver
or relinquishment of, or failure to insist upon strict compliance with, any right or power hereunder at any one or more
times be deemed a waiver or relinquishment of such right or power at any other time or times. This Agreement shall not
be modified in any respect except by a writing executed by each party hereto.
18.
Severability. In the event that a court of competent jurisdiction determines that any portion of
this Agreement is in violation of any statute or public policy, only the portions of this Agreement that violate such statute
or public policy shall be stricken. All portions of this Agreement that do not violate any statute or public policy shall
continue in full force and effect. Further, any court order striking any portion of this Agreement shall modify the
stricken terms as narrowly as possible to give as much effect as possible to the intentions of the parties under this
Agreement.
19.
Indemnification; Directors and Officers Insurance. The Company shall indemnify and hold
Executive harmless to the maximum extent permitted by Section 2-418 of the Maryland General Corporations Law or its
successor statute. During the Term and for six years following the date of the Executive’s termination as an officer of
the Company, the Company (or any successor thereto) shall provide comprehensive coverage under the Company’s
officers and directors insurance policy (or policies) on substantially the same terms and levels that it provides to its
senior executive officers, at the Company’s sole cost.
be deemed to be an original but all of which together will constitute one and the same instrument.
20.
Counterparts. This Agreement may be executed in several counterparts, each of which shall
applicable law shall be deemed to include any successor sections, rules or regulations.
21.
Successor Sections. References herein to sections, rules or regulations of the Code or other
22.
Arbitration. Any dispute, claim or controversy arising out of or in relation to this Agreement,
which the Executive and the Company are unable to resolve shall be determined by the decision of a board of arbitration
consisting of three (3) members (the “Board of Arbitration”) selected by the American Arbitration Association upon
application made to it for such purpose by either the Company or the Executive. The arbitration proceedings shall take
place in New York, New York or such other place as shall be agreed to by the parties. The Board of Arbitration shall
reach and render a decision in writing. In connection with rendering its decision, the Board of Arbitration shall adopt
and follow such rules and procedures as a majority of the members of the Board of Arbitration deems necessary or
appropriate. Any award shall be rendered on the basis of the substantive law governing this Agreement and shall be
- 6 -
concurred in by a majority of the arbitrators. To the extent practical, decisions of the arbitrators shall be rendered no
more than thirty (30) calendar days following commencement of the arbitration proceedings with respect thereto.
Any decision made by the Board of Arbitration (either prior to or after the expiration of such thirty
(30) calendar day period) shall be final, binding and conclusive on the Executive and the Company and entitled to be
enforced to the fullest extent permitted by law and entered in any court of competent jurisdiction. The Company shall
bear all of the costs of arbitration, except for the attorneys’ fees incurred by the Executive, which fees shall be subject to
Section 11 hereof.
[REMAINDER OF THE PAGE LEFT INTENTIONALLY BLANK]
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authorized officer, and the Executive has hereunto signed this Agreement, as of the date first above written.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly
ANNALY CAPITAL MANAGEMENT, INC.
By: /s/ Michael A.J. Farrell
Michael A.J. Farrell
By: /s/ Kevin Keyes
Kevin Keyes
- 8 -
Subsidiaries of Registrant
Exhibit 21.1
Fixed Income Discount Advisory Company, Delaware corporation
RCap Securities Inc, Maryland corporation
Merganser Capital Management, Inc., Delaware corporation
FIDAC Housing Cycle Fund, LLC, Delaware limited liability company
FHC Master Fund, Ltd., a Cayman Islands exempted company (wholly owned subsidiary of FIDAC Housing Cycle
Fund, LLC)
Shannon Funding LLC, Delaware limited liability company
Charlesfort Capital Management LLC, Delaware limited liability company
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements No. 333-151069 and No. 333-
164783 on Forms S-3 and Registration Statement No. 333-169923 on Form S-8 of our report dated February 25,
2011, relating to the consolidated financial statements of Annaly Capital Management, Inc., and the effectiveness of
Annaly Capital Management, Inc.’s internal control over financial reporting, appearing in this Annual Report on
Form 10-K of Annaly Capital Management, Inc. for the year ended December 31, 2010.
/s/ Deloitte & Touche LLP
New York, New York
February 25, 2011
CERTIFICATIONS
Exhibit 31.1
I, Michael A.J. Farrell, certify that:
1. (cid:3)
I have reviewed this annual report on Form 10-K of Annaly Capital Management, Inc.;
2. (cid:3) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. (cid:3) Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. (cid:3) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a)(cid:3) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c)(cid:3)
d)(cid:3)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. (cid:3) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board
of directors (or persons performing the equivalent functions):
a)(cid:3) (cid:3) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
b)(cid:3) (cid:3) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: February 25, 2011
/s/Michael A.J. Farrell
Chairman of the Board of Directors, Chief Executive Officer,
President and principal executive officer
CERTIFICATIONS
Exhibit 31.2
I, Kathryn Fagan, certify that:
1. (cid:3)
I have reviewed this annual report on Form 10-K of Annaly Capital Management, Inc.;
2. (cid:3) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. (cid:3) Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. (cid:3) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a)(cid:3) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c)(cid:3)
d)(cid:3)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. (cid:3) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board
of directors (or persons performing the equivalent functions):
a)(cid:3) (cid:3) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
b)(cid:3) (cid:3) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: February 25, 2011
/s/Kathryn Fagan
Chief Financial Officer and Treasurer
Exhibit 32.1
ANNALY CAPITAL MANAGEMENT, INC.
1211 AVENUE OF THE AMERICAS
SUITE 2902
NEW YORK, NEW YORK 10036
CERTIFICATION
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002, 10 U.S.C. SECTION 1350
In connection with the annual report on Form 10-K of Annaly Capital Management, Inc. (the “Company”) for the
period ended December 31, 2010 to be filed with Securities and Exchange Commission on or about the date hereof
(the “Report”), I, Michael A.J. Farrell, Chairman of the Board, President, and Chief Executive Officer of the
Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company at the dates of, and for the periods covered by,
the Report.
It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934.
/s/ Michael A.J. Farrell
Michael A.J. Farrell
Chairman of the Board of Directors, Chief
Executive Officer and President
February 25, 2011
Exhibit 32.2
ANNALY CAPITAL MANAGEMENT, INC.
1211 AVENUE OF THE AMERICAS
SUITE 2902
NEW YORK, NEW YORK 10036
CERTIFICATION
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002, 10 U.S.C. SECTION 1350
In connection with the annual report on Form 10-K of Annaly Capital Management, Inc. (the “Company”) for the
period ended December 31, 2010 to be filed Kathryn F. Fagan, Chief Financial Officer of the Company, certify,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company at the dates of, and for the periods covered by,
the Report.
It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934.
/s/ Kathryn F. Fagan
Kathryn F. Fagan
Chief Financial Officer and Treasurer
February 25, 2011
07
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09
10
07
08
09
10
Shareholders’
Equity
(dollars in thousands)
$12,000,000
$10,000,000
$8,000,000
$6,000,000
$4,000,000
$2,000,000
$0
$9,864,900
$9,554,426
$7,183,272
$5,204,938
12
10
8
6
4
2
0
Shareholders’
Equity
(dollars in thousands)
Common and Preferred
Dividends Declared
(dollars in thousands)
$9,864,900
$9,554,426
$7,183,272
$5,204,938
$12,000,000
$10,000,000
$8,000,000
$6,000,000
$4,000,000
$2,000,000
$0
$1,588,707
$1,413,536
$1,109,186
$361,273
$1,800,000
12
$1,600,000
10
$1,400,000
$1,200,000
8
$1,000,000
$800,000
$600,000
$400,000
$200,000
$0
6
4
2
0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
‘07
‘08
‘09
‘10
‘07
‘08
‘09
‘10
‘07
‘08
‘09
‘10
During 2010, Annaly continued to meet its business objective of generating net income for distribution to shareholders.
We declared approximately $1.6 billion in total dividends, or $2.65 per common share, to our investors.
Corporate Profile
Annaly and its wholly-owned subsidiaries manage assets
for and provide services to institutional and individual
investors worldwide. Our principal business objective is
to generate net income for distribution to investors from
our mortgage-backed securities and from dividends we
receive from our subsidiaries. We have elected to be taxed
as a real estate investment trust (REIT). We trade on the
New York Stock Exchange under the ticker symbol NlY.
Annaly owns and manages a portfolio of primarily
mortgage-backed securities. Virtually all of the invest-
ment securities we own are issued and guaranteed by US
Government Agencies and carry an actual or implied AAA
rating. We employ leverage to enhance our returns. Our
leverage, measured as a ratio of debt-to-equity, typically is
no more than 12:1.
In addition to managing a portfolio of high-quality
mortgage-backed securities, we earn dividend income
from our subsidiaries. We have four wholly-owned subsidiar-
ies, Fixed Income Discount Advisory Company (FIDAC),
Merganser Capital Management, Inc. (Merganser), RCap
Securities, Inc. (RCap) and Shannon Funding llC
(Shannon). FIDAC, a SEC-registered investment advisor
acquired by Annaly in 2004, specializes in managing interest
rate and credit sensitive strategies and is a leading auction
agent for liquidating CDOs. It is the external manager
for Chimera Investment Corporation (NYSE: CIM) and
CreXus Investment Corp. (NYSE: CXS). Merganser, a
Boston-based SEC-registered investment advisor, was
acquired by Annaly in 2008 and extends Annaly’s platform
into traditional fixed income strategies for institutional
clients. RCap was formed by Annaly in 2008 and operates
as a self-clearing broker-dealer. Shannon was formed by
Annaly in 2010 and will provide mortgage warehouse
funding to mid-tier originators in the United States.
Annaly is experienced in managing real estate assets. Our
success and future growth prospects are based on the
proven ability of our strong and seasoned management
team to successfully take advantage of investment oppor-
tunities and deliver compelling returns in a wide range of
market environments.
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Common and Preferred
Dividends Declared
(dollars in thousands)
Kevin Keyes
Chief Strategic Officer, Head of
Capital Markets Group
Corporate Officers
Michael A. J. Farrell
Chairman, President and
Chief Executive Officer
Wellington J. Denahan-Norris
Vice Chairman,
Chief Investment Officer and
Chief Operating Officer
$1,800,000
$1,600,000
$1,400,000
$1,200,000
Kathryn F. Fagan
Chief Financial Officer and Treasurer
$1,000,000
Jeremy Diamond
Managing Director, Head of Research
and Corporate Communications
$600,000
$800,000
James P. Fortescue
Managing Director, Head of
liabilities and Chief of Staff
Ronald D. Kazel
Managing Director, Head of
Asset Management Group
$400,000
$200,000
$0
Board Of Directors
Michael A. J. Farrell
Chairman, President and
Chief Executive Officer
Wellington J. Denahan-Norris
Vice Chairman,
Chief Investment Officer and
Chief Operating Officer
Kevin P. Brady
Chief Executive Officer
ARMtech, llC
Jonathan D. Green
Former Vice Chairman,
President and CEO
Rockefeller Group International, Inc.
Additional Information
Kristopher R. Konrad
Managing Director,
Head Portfolio Manager
$1,413,536
$1,588,707
Matthew Lambiase
Managing Director,
Head of Business Development
$1,109,186
Rose-Marie Lyght
Managing Director,
Chief Investment Officer-FIDAC
$361,273
R. Nicholas Singh
Chief legal Officer, Chief
Compliance Officer and Secretary
‘07
‘08
‘09
‘10
Michael Haylon
Head of Investment
Product Management
General RE-New England
Asset Management, Inc.
John A. Lambiase
Former Managing Director
Salomon Brothers, Inc.
E. Wayne Nordberg
Chairman and Chief
Executive Officer
Hollow Brook Associates, llC
Donnell A. Segalas
Managing Partner and
Chief Executive Officer
Pinnacle Asset Management, l.P.
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
Corporate Information
Corporate Headquarters
Annaly Capital Management, Inc.
1211 Avenue of the Americas
Suite 2902
New York, NY 10036
Legal Counsel
K&l Gates llP
1601 K Street, N.W.
Washington, DC 20006
Independent Registered
Public Accounting Firm
Deloitte & Touche llP
Two World Financial Center
New York, NY 10281
Stock Transfer Agent
Shareholder inquiries concerning
dividend payments, lost certificates and
change of address should be directed to:
BNY Mellon
480 Washington Boulevard
Jersey City, NJ 07310
1-800-301-5234
www.bnymellon.com/shareowner/equityaccess
Stock Exchange Listing
The common stock is listed on the
New York Stock Exchange (symbol: NlY).
The Series A preferred stock is listed on
the New York Stock Exchange
(symbol: NlY-A).
Shareholder Communications
Copies of the Company’s Annual
Report and 2010 Form 10-K may be
obtained by writing the Secretary, by
calling the investor relations hotline at
1–888–8ANNAlY, or by visiting our
website at www.annaly.com.
The Company has included as exhibits to its Annual Report on Form 10-K for fiscal year ended 2010 certificates of the
Company’s Chief Executive Officer and Chief Financial Officer certifying the quality of the Company’s public disclosure
controls, and the Company has submitted to the New York Stock Exchange (NYSE) in 2010, a certificate of the Company’s
Chief Executive Officer certifying that he is not aware of any violations by the Company of the NYSE corporate governance
listing standards.
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Annaly Capital Management, Inc.
1211 Avenue of the Americas, Suite 2902
New York, New York 10036
1-888-8ANNAlY
www.annaly.com
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