Anworth Mortgage Asset Corporation Annual Report 2013

FY2013 Annual Report · Anworth Mortgage Asset Corporation

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Anworth Mortgage Asset Corporation

Annual Report

2013

SELECTED FINANCIAL DATA

The selected financial data as of December 31, 2013 and 2012 and for the years ended December 31, 2013,
2012 and 2011 are derived from our audited financial statements included in this Annual Report on Form 10-K.
The selected financial data as of December 31, 2011, 2010 and 2009 and for the years ended December 31, 2010
and 2009 are derived from audited financial statements not included in this Annual Report on Form 10-K. You
should read these selected financial data together with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our audited financial statements and notes thereto that are included in
this Annual Report on Form 10-K beginning on page F-1.

Statements of Income Data
Days in period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income net of amortization of premium and

For the Years Ended December 31,

2013

2012

2011

2010

2009

(amounts in thousands, except per share data and days)

365

366

365

discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$174,784
(92,970)

$195,853
(86,073)

$224,180
(89,265)

$219,803
(95,830)

$ 262,029
(115,707)

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sales of assets . . . . . . . . . . . . . . . . . . . . .
Net gain on derivative instruments . . . . . . . . . . . . . . .
Recovery on Non-Agency MBS . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 81,814
9,237
—
397
(15,728)

$109,780
4,434
—
1,426
(15,422)

$134,915
—
—
2,225
(14,264)

$123,973
—
—
270
(13,744)

$ 146,322

—
107
—
(16,195)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 75,720

$100,218

$122,876

$110,499

$ 130,234

Dividends on preferred stock . . . . . . . . . . . . . . . . . . .

(5,736)

(5,773)

(5,885)

(5,764)

(5,906)

Net income available to common stockholders . . . . .

$ 69,984

$ 94,445

$116,991

$104,735

$ 124,328

Basic earnings per common share . . . . . . . . . . . . . . .
Diluted earnings per common share . . . . . . . . . . . . . .
Average number of shares outstanding . . . . . . . . . . . .
Average number of diluted shares outstanding . . . . . .

$
$

0.49
0.49
142,455
146,400

$
$

0.68
0.67
138,382
142,485

$
$

0.91
0.90
128,601
132,759

$
$

0.89
0.87
118,164
121,919

$
$

1.18
1.16
105,413
108,905

As of December 31,

2013

2012

2011

2010

2009

(amounts in thousands, except per share data )

Balance Sheets Data
Agency MBS . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase agreements . . . . . . . . . . . . . . . . .
Junior subordinated notes . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . .
Series B Preferred Stock . . . . . . . . . . . . . . . .
Stockholders’ equity (common and Series A
Preferred) . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of common shares outstanding . . . .
Book value per common share . . . . . . . . . . .

$8,556,446
$8,619,491
$7,580,000
$
37,380
$7,717,305
23,924
$

$9,244,693
$9,285,105
$8,020,000
$
37,380
$8,197,388
25,222
$

$8,763,479
$8,813,769
$7,595,000
$
37,380
$7,804,243
27,239
$

$7,739,052
$7,790,215
$6,375,000
$
37,380
$6,896,304
25,630
$

$6,490,543
$6,526,648
$5,359,000
$
37,380
$5,597,337
25,803
$

$ 878,262
138,717
5.98

$1,062,495
142,013
7.14

$ 982,287
134,115
6.96

$ 868,281
120,901
6.78

$ 903,508
115,563
7.40

(1)

Includes Non-Agency MBS of $79, $360, $1,585, $4,394 and $4,742 at each respective period (in
thousands).

Anworth Mortgage Asset Corporation

2013 Annual Report

Dear Fellow Stockholders,

I am writing to update you about our Company activities during 2013.

During our fiscal year ended December 31, 2013, our net income available to our common stockholders was

approximately $70 million, or $0.49 basic earnings per common share. Dividends declared during 2013 were
$0.50 per common share.

Our Business Strategy

As described in our audited financial statements in the attached Form 10-K, the calculation of our business’
profitability has five basic components that together produce our net income available to common stockholders.
A simplified formula that can be used to calculate our net income per share is:

Interest Income minus Interest Expense minus Amortization of Premium minus Operating Costs
plus Realized Gains Net of Losses equals our Net Income.

During 2013, these amounts per common share were as follows:

Interest Income—The interest we receive from our investments in residential Agency mortgage-backed
securities (“MBS”). During 2013, this amount was $236.8 million and, with an average of 142.5 million shares
outstanding during the year, was also $1.66 per share.

Interest Expense—The interest we pay on the MBS collateralized short-term borrowings that we use to
finance the ownership of our residential Agency MBS issued by Fannie Mae and Freddie Mac. During 2013, this
amount was $93 million, or $0.65 per share.

Amortization of Premium—The Agency MBS that we purchase usually have coupon rates that are higher
than the yields on comparable quality bonds selling at par. To offset the higher coupon rate, we usually pay a
premium above the par value of these higher coupon rate Agency MBS. We expense the premium we paid to
purchase these mortgage assets during the life of these assets. During 2013, this expense was $62 million, or
$0.44 per share.

Operating Costs—These costs include all of the expenses normally associated with managing a business.
We pay a fee that is a percentage of our equity capital to our Manager to provide compensation and benefits to its
employees who manage our business. We pay for computers and software and we paid the rent for our offices.
We also retained lawyers, accountants and other advisers to assist us in the operations of our business. During
2013, these operating costs were $15.7 million, or $0.11 per share, and represented an expense of approximately
18 basis points of the Company’s $8.6 billion of total assets.

Realized Gains/Losses—Whenever we sell an asset, we will recognize either a gain or loss. During 2013, we
sold Agency MBS, received proceeds of approximately $637 million and recognized a net gain of approximately
$9.2 million, or $0.06 per share. There were no realized gains or losses on derivative instruments. There were
recoveries on Non-Agency MBS of approximately $397 thousand, or $0.003 per share.

Net Income—Our Interest Income minus each of these costs equals our Net Income, which was $75.7
million. During 2013, we paid dividends to our preferred stockholders in the amount of $5.7 million, or $0.04 per
common share, leaving approximately $70 million, or basic earnings of $0.49 per common share available to our
common stockholders.

In summary, these per common share amounts of income and expense were as follows:

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1.66

Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred Stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

($0.65)
($0.44)
($0.11)
$ 0.07
($0.04)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 0.49

Interest Rate Swap Agreements

Interest rate swap agreements (“Interest Rate Swaps”) are an important component of our Business Strategy
and an important tool which we use to help manage the interest rate risks inherent in our MBS portfolio. The type
of Interest Rate Swaps that we use is one where, for stated periods such as one, two or more years, we agree to
pay to a third party a fixed-rate of interest on a notional amount of money and the same party agrees to pay us a
LIBOR-based floating-rate on the same notional amount of money.

At December 31, 2013, the notional balance of our Interest Rate Swaps was $5.375 billion, which also
represented 71% of the amount of our repurchase agreements. The Interest Rate Swaps had an average term to
maturity of approximately 3.9 years.

Since we tend to finance our MBS using shorter-term repurchase agreements whose terms are one, three or

more months, the effect of the Interest Rate Swaps is to provide us with financing with a fixed-rate of interest
over a term that is longer than our repurchase agreements.

Economic and Interest Rate Outlook

As we have reported here for several years, we continue to believe that prospective homeowners believing
that the purchase of a house will be a safe investment is a key requirement for a return to economic stability in
the U.S. and acceptable growth thereafter. The housing market remains constrained by the declining but still
large number of residential properties which are either in foreclosure or are financed by non-performing
mortgages owned by financial institutions. However, the 13% appreciation of single-family houses in 2013
clearly indicates that increasing numbers of home buyers will be more comfortable in making the decision to buy
a house which, for many, will be their largest ever purchase.

While there remain other significant headwinds to the U.S. economy, this uptick in housing prices bodes

very well for a lower likelihood of a return to a recessionary environment and the accompanying lesser demand
for credit and the need for lower interest rates.

We will be watching for signs that investors who are currently risk-averse hoarders of money release and
redeploy their capital into riskier and presumably higher returning investments. The large increase in the broad
stock market in 2013 is an early sign of this development. If this trend continues, the U.S. government, to
preserve the value of the Dollar and keep demand-based inflation at bay, may soon need to have the political will
to first eliminate the quantitative easing programs and then begin to shrink the recently expanded quantity of
Dollars in circulation worldwide as the U.S. economy gains momentum.

Another first time event will also challenge the country’s policy makers. The effect of quantitative easing by

the FED has been the FED now owns about $4 trillion of the debt of the United States up from about $1 trillion
in early 2009. A question of the day will soon become how do U.S. taxpayers get the money to repay the FED
which is basically a bank-owned non-profit private corporation which after giving a 6% return to the bank-
owners, distributes any profit (after costs) to the U.S. Treasury and in 2013 also celebrated its 100th anniversary.

Lastly, the U.S. Dollar has been weakening relative to other major currencies. This has not been a material
issue for foreign investors who participated in the significantly appreciating U.S. stock market and the housing
market in 2013. But many foreign investors in treasury bonds did not fare so well. Even if a modest number of
these foreign investors withdraw from the treasury markets, it could easily have a material impact on interest
rates as the FED is also reducing its government bond purchases through the quantitative easing program

Without the political will to control the growth of money, high inflation and a declining dollar value may be

chosen as a solution to the national debt problem. If this occurs, interest rates should increase, thereby making
owning mortgage assets more challenging. However, we expect that the adjustable-rate portion of our portfolio
and the availability of interest rate hedging strategies and Other Investment Opportunities as described below
will make our task somewhat easier.

Our Stock’s Long-Term Return

Anworth’s 2013 year-end closing common stock price on the New York Stock Exchange was $4.21 and was

$5.78 at the beginning of 2013. This change in our common stock price, along with the common dividends paid,
resulted in a rate of return of approximately -19.7% during 2013. During this same period, the S&P 500 Index
provided a rate of return of approximately 32.4% for the year.

During the first quarter of 2014, the rate of return of our common stock was 21.2% while the S&P 500

Index provided a rate of return of 1.8%.

Since our initial public offering in March 1998 at $9.00 per share, our common shares, along with dividends

reinvested, have provided investors with a compounded positive rate of return of 8.0% per year between March
1998 and March 2014, while the S&P 500 Index provided a return of 5.4% per year during the same period.
Also, the NAREIT Mortgage REIT Index produced a positive return of 3.1% per year during this same period.

Other Investment Opportunities

In February of 2014, we incorporated Anworth Properties, Inc., a Qualified REIT Subsidiary (“QRS”) that is

wholly- owned by us. In March 2014, we incorporated Anworth Property Services, Inc., a Taxable REIT
Subsidiary (“TRS”) that is also wholly-owned by us.

Our QRS will provide the entity through which we may own REIT-qualified real estate assets such as other

types of mortgages, from which we can receive interest income, and real estate assets, from which we can receive
rental income and potential price appreciation.

Our TRS will provide the entity through which we may participate in various real estate-related activities

which can earn profits that the IRS considers to be taxable income. Unlike a REIT, a TRS pays standard
corporate taxes on its income earned in these other areas of the mortgage and real estate markets. These other
areas include almost everything other than receiving rent on properties owned and collecting interest on real
estate mortgages owned. Examples of these other areas include: the securitization of mortgage loans; mortgage
origination; leasing and managing rental properties; and property renovation or owning properties acquired
through the foreclosure process.

While there is no assurance that these subsidiaries will earn any meaningful income during 2014, we intend

to thoroughly analyze these and other similar opportunities to determine which, if any, have attractive potential
for us.

Form 10-K

As you read the attached Form 10-K, which is on file with the United States Securities and Exchange

Commission, or the SEC, you will observe that our book value per share at December 31, 2013 decreased to
$5.98 per common share from a book value per share of $7.14 per common share on December 31, 2012. This
decrease was due primarily to the decrease in “Accumulated Other Comprehensive Income,” which decreased
from unrealized gains of $79.8 million at December 31, 2012 to unrealized losses of $92 million at December 31,
2013.

Our portfolio consists of Agency MBS issued by Fannie Mae, Freddie Mac or Ginnie Mae. At December 31,

2013, our total assets, the fair value of our Agency MBS portfolio and its allocation were approximately as
follows:

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$8,619,491

Fair value of Agency MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$8,556,446

Adjustable-rate Agency MBS (less than 1 year reset)
. . . . . . . . . . . .
Adjustable-rate Agency MBS (1-2 year reset) . . . . . . . . . . . . . . . . . .
Adjustable-rate Agency MBS (2-3 year reset) . . . . . . . . . . . . . . . . . .
Adjustable-rate Agency MBS (3-4 year reset) . . . . . . . . . . . . . . . . . .
Adjustable-rate Agency MBS (4-5 year reset) . . . . . . . . . . . . . . . . . .
Adjustable-rate Agency MBS (5-7 year reset) . . . . . . . . . . . . . . . . . .
Adjustable-rate Agency MBS (>7 year reset) . . . . . . . . . . . . . . . . . . .
15-year fixed-rate Agency MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30-year fixed-rate Agency MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19%
9%
15%
10%
3%
15%
8%
20%
1%

100%

Accumulated Other Comprehensive Income

Listed in our balance sheets, which you can find on page F-3 of our Form 10-K, is a line item named
“Accumulated other comprehensive income consisting of unrealized losses and gains,” or AOCI, which accounts
for unrealized losses or gains in our portfolio. At December 31, 2013, AOCI was approximately $92 million, or
$0.66 per outstanding share.

Our MBS usually have an unrealized gain relative to their cost whenever mortgage rates have declined after
we purchased the MBS. Conversely, our Interest Rate Swaps usually have an unrealized loss relative to their cost
whenever interest rates have declined after we entered into the floating-rate to fixed-rate Interest Rate Swaps.

The negative AOCI of approximately $92 million reflects an unrealized loss on our MBS of approximately

$58.6 million and an unrealized loss on our Interest Rate Swaps of approximately $33.4 million.

Issuance of Common Stock

During 2013, we sold approximately 3.92 million new shares of our common stock through our Dividend

Reinvestment and Stock Purchase Plan, which provided net proceeds to us in the aggregate of approximately
$22.9 million at a weighted average price of $5.84 per common share.

Common Stock Repurchase Program

On December 13, 2013, our Board of Directors authorized us to acquire up to an additional 5,000,000 shares

of our common stock. Since our common stock has been trading below its book value, the objective of the share
purchase program is to increase the book value per share and the income per share. During the year ended
December 31, 2013, we repurchased an aggregate of 7,646,429 shares of our common stock at a weighted
average price of $4.95 per share under our share repurchase program.

Dividend Reinvestment and Stock Purchase Plan

We believe that our Dividend Reinvestment and Stock Purchase Plan (the “Plan”) continues to provide two

attractive benefits of common stock ownership. Common stockholders can, without brokerage commissions,
reinvest their dividends into additional shares of Anworth’s common stock at currently a 0% discount to the
average market price. Also, the Plan offers our stockholders and investors the ability to make monthly purchases
of up to $10,000 in Anworth’s common stock at currently a 0% discount to the market price without brokerage
commissions.

During most periods in the past when our stock’s market price traded near or above the Company’s book

value per share, we offered our stockholders the opportunity to reinvest their dividends and make periodic
purchases at a price which was at a discount of between 1% and 5% to the market price. We hope that we will
soon be able to again offer this discount to our stockholders.

On a personal note, and as a fellow stockholder, I have always reinvested a portion of my Anworth

dividends in the Plan since the Plan’s beginning, which was approximately 15 years ago.

Please call or e-mail us to receive a prospectus that describes the details of the Plan so you can join and

invest with us.

Our Series A Cumulative Preferred Stock

Our 8.625% Series A Cumulative Preferred Stock (the “Series A Preferred Stock”) also trades on the New
York Stock Exchange. The issue price and liquidation preference are $25.00 per share and the annual dividend
rate is $2.15625 per share. At March 31, 2014, there were 1,919,378 shares of Series A Preferred Stock issued
and outstanding. The dividend is routinely scheduled to be paid on the 15th of the first month in each calendar
quarter. If you are interested in more details about our Series A Preferred Stock, a copy of the prospectus is
available on the www.sec.gov website.

Our Series A Preferred Stock is currently callable on one month’s notice at $25.00 per share. The closing

price of our Series A Preferred Stock on December, 31, 2013 was $24.58.

Our Series B Cumulative Convertible Preferred Stock

Our 6.25% Series B Cumulative Convertible Preferred Stock (the “Series B Preferred Stock”) also trades on

the New York Stock Exchange. The issue price and liquidation preference are $25.00 per share and the annual
dividend rate is $1.5625 per share. At March 31, 2014, there were 1,009,640 shares of Series B Preferred Stock
issued and outstanding. The $25.00 par value Series B Preferred Stock conversion rate into shares of our
common stock increased, effective December 24, 2013, to 3.9881 common shares for each Series B Preferred
share from a conversion rate of 3.8370 at December 31, 2012. Also, if our common stock dividend yield exceeds
6.25%, this conversion rate can increase as it did throughout 2013. If you are interested in more details about our
Series B Preferred Stock, a copy of the prospectus is available on the www.sec.gov website.

The closing price of our Series B Preferred Stock on December 31, 2013 was $20.25, which provided a cash

dividend yield of approximately 7.71%.

Anworth.com

The size of our investor e-mail list continues to grow and we are always pleased to add interested investors

to the distribution list for news releases and other items. You can register for e-mail notifications and alerts at our
website, http://www.anworth.com, where you may also obtain information about our corporate governance
procedures, listen to webcasts of presentations that the Company has made to investor groups, and obtain other
statistical information. Our web site has been optimized for viewing on your iPhone and other mobile devices.

Our Philosophy

We continue to believe that our Company is well suited to be a long-term participant in the mortgage
finance industry and to provide a valuable service to residential homeowners. Many financial institutions that
originate mortgage loans no longer keep these loans in their portfolios. Therefore, these originators often
promptly securitize their residential mortgage loans through Fannie Mae and Freddie Mac.

As the long-term beneficial owner of approximately $8.6 billion of residential mortgages, Anworth

continues to be a significant financial participant in the U.S. mortgage industry.

We believe that many large institutional investors tend to speculate in mortgage rates, thereby adding to

homeowner mortgage rate volatility. We also believe that our long-term commitment to owning residential
mortgages in a very capital-efficient and tax-efficient manner can improve mortgage interest rate stability.

Annual Meeting of Stockholders

We invite you to attend our 2014 Annual Meeting of Stockholders in Santa Monica. I am confident that

those of you who have attended in the past will agree that we provide good weather and an interesting and
informative experience. If you need information regarding directions, hotels, or nearby restaurants, etc., please
give us a call.

As always, I thank you for your continued support.

Lloyd McAdams, CFA
Chairman and Chief Executive Officer

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013

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

FOR THE TRANSITION PERIOD FROM

COMMISSION FILE NUMBER 001-13709
ANWORTH MORTGAGE ASSET CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

MARYLAND
(State or Other Jurisdiction of incorporation or organization)
1299 OCEAN AVENUE, SECOND FLOOR
SANTA MONICA, CALIFORNIA
(Address of Principal Executive Offices)

52-2059785
(I.R.S. Employer Identification No.)

90401
(Zip Code)

Registrant’s telephone number, including area code: (310) 255-4493
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange on Which Registered

Series A Cumulative Preferred Stock, $0.01 Par Value
Series B Cumulative Convertible Preferred
Stock, $0.01 Par Value
Common Stock, $0.01 Par Value

New York Stock Exchange
New York Stock Exchange

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Act. Yes È 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 È

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 È No ‘

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

Indicate by check mark that 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. È

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act. (check one):

Large Accelerated Filer È 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 È
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, computed by reference

to the closing price of such stock on the New York Stock Exchange, as of June 28, 2013 was approximately $788,889,511.

As of February 21, 2014, the registrant had 136,543,235 shares of common stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Form 10-K incorporates by reference certain portions of the registrant’s proxy statement for its 2014 annual meeting of

stockholders to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this report.

ANWORTH MORTGAGE ASSET CORPORATION

FORM 10-K ANNUAL REPORT

FISCAL YEAR ENDED DECEMBER 31, 2013

TABLE OF CONTENTS

Item

PART I

1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART II

5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of

Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . .
7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . .
9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART III

10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . .
14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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F-1

PART IV

CAUTIONARY STATEMENT

This Annual Report on Form 10-K contains or incorporates by reference certain forward-looking statements

within the meaning of Section 27A of the 1933 Act and Section 21E of the Securities Exchange Act of 1934, as
amended, and, as such, may involve known and unknown risks, uncertainties and assumptions. Forward-looking
statements are based upon our current expectations and speak only as of the date hereof. Forward-looking
statements are those that predict or describe future events or trends and that do not relate solely to historical
matters. You can generally identify forward-looking statements as statements containing the words “may,”
“will,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume” or other similar expressions. You should
not rely on our forward-looking statements because the matters they describe are subject to assumptions, known
and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control.
Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking
statements as a result of various factors, some of which are listed under the section “Risk Factors,” Item 1A of
this Annual Report on Form 10-K.

Statements regarding the following subjects, among others, may be forward-looking: changes in interest

rates and the market value of our mortgage-backed securities, or MBS; risks associated with investing in
mortgage-related assets; changes in the yield curve; the availability of MBS for purchase; changes in the
prepayment rates on the mortgage loans securing our MBS; our ability to borrow to finance our assets and, if
available, the terms of any financing; implementation of or changes in government regulations or programs
affecting our business; changes in business conditions and the general economy, including the consequences of
actions by the U.S. government and other foreign governments to address the global financial crisis; our ability to
maintain our qualification as a real estate investment trust, or REIT, for federal income tax purposes; our ability
to maintain our exemption from registration under the Investment Company Act of 1940, as amended; and our
ability to manage our growth. New risks and uncertainties arise over time and it is not possible to predict those
events or how they may affect us. Except as required by law, we do not intend to update or revise any forward-
looking statements, whether as a result of new information, future events or otherwise.

As used in this Annual Report on Form 10-K, “Company,” “we,” “us,” “our” and “Anworth” refer to

Anworth Mortgage Asset Corporation.

Item 1.

BUSINESS

Overview

PART I

We were incorporated in Maryland on October 20, 1997 and we commenced operations on March 17, 1998.

We are in the business of investing primarily in United States, or U.S., agency mortgage-backed securities, or
Agency MBS, which are securities representing obligations guaranteed by the U.S. government, such as Ginnie
Mae, or guaranteed by federally sponsored enterprises, such as Fannie Mae or Freddie Mac. Our principal
business objective is to generate net income for distribution to our stockholders primarily based upon the spread
between the interest income on our mortgage assets and the costs of borrowing to finance our acquisition of those
assets.

We have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of
1986, or the Code, As a REIT, we routinely distribute substantially all of the taxable income generated from our
operations to our stockholders. As long as we retain our REIT status, we generally will not be subject to federal
or state taxes on our income to the extent that we distribute our taxable net income to our stockholders. At
December 31, 2013, our qualified REIT assets (real estate assets, as defined under the Code, cash and cash items
and government securities) were greater than 99% of our total assets, as compared to the Code requirement that
at least 75% of our total assets must be qualified REIT assets. Greater than 99% of our 2013 revenue qualified
for both the 75% source of income test and the 95% source of income test under the REIT rules. At

December 31, 2013, we believe we met all REIT requirements regarding the ownership of our common stock and
the distributions of our taxable net income. Therefore, we believe that we continue to qualify as a REIT under the
provisions of the Code.

Pursuant to a Management Agreement, or the Management Agreement (a copy of which is included as
Exhibit 10.1 to our Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission, or the
SEC, on January 3, 2012), between us and Anworth Management, LLC, or the Manager, effective as of
December 31, 2011, our day-to-day operations are conducted by the Manager. The Manager is supervised and
directed by our board of directors and is responsible for (i) the selection, purchase and sale of our investment
portfolio; (ii) our financing and hedging activities; and (iii) providing us with management services. The
Manager will also perform such other services and activities relating to our assets and operations as may be
appropriate. In exchange for these services, the Manager receives a management fee paid monthly in arrears in an
amount equal to one-twelfth of 1.20% of our Equity (as defined in the Management Agreement). Our board of
directors affirmatively elected to renew the Management Agreement for another one-year term expiring on
December 31, 2014 and the Management Agreement will automatically renew for successive one-year terms
unless either party elects not to renew. If we terminate the Management Agreement, or elect not to renew without
cause, then we will be required to pay a termination fee equal to three times the average annual management fee
earned during the prior 24-month period.

Government Activity

On September 13, 2012, the Federal Reserve announced its intention to purchase additional Agency MBS at

a pace of $40 billion per month. These purchases were open-ended, meaning they would continue until the
Federal Reserve was satisfied that economic conditions, primarily in unemployment, improve. The Federal
Reserve also announced its projection that the federal funds rate would likely remain at exceptionally low levels
until at least mid-2015. In May 2013, upon the release of minutes of the Fed Open Market Committee (FOMC)
meeting, Federal Reserve Chairman Ben Bernanke stated that if there was continued improvement in the U.S.
economy, the pace of purchases could be slowed down. After this statement, the rate on the 10-Year Treasury
rose above 2%. In addition, following the June 2013 FOMC meeting, Chairman Bernanke commented that if the
U.S. economy continued to improve, the Federal Reserve would probably slow or moderate its MBS purchases
sometime later in 2013 and possibly ending them sometime in the middle of 2014. This comment had an even
greater effect on the bond market, as longer-term interest rates rose while short-term interest rates remained
constant. In the second quarter of 2013, the resulting steepened yield curve caused a decline in the value of MBS
in general and in the value of our portfolio, which declined by approximately $191 million. At December 31,
2013, the fair value adjustment of our portfolio decreased from December 31, 2012 by approximately $234.5
million, much of it caused by the events that transpired during the second quarter of 2013. In December 2013 and
January 2014, the Federal Reserve reduced its bond buying program from $85 billion per month down to $65
billion per month.

Although the U.S. government and other foreign governments have taken various actions (including placing

Fannie Mae and Freddie Mac in conservatorship) intended to protect financial institutions, their respective
economies and their respective housing and mortgage markets, we continue to operate under very difficult
market conditions. There can be no assurance that these various actions will have a beneficial impact on the
global financial markets and, more specifically, the market for the securities we currently own in our portfolio.
We cannot predict what, if any, impact these actions or future actions by either the U.S. government or foreign
governments could have on our business, results of operations and financial condition. These events may impact
the availability of financing generally in the marketplace and also may impact the market value of MBS
generally, including the securities we currently own in our portfolio.

Mac if it was to change its rating on the U.S. government. In June 2013, Standard & Poor’s affirmed its AA+
long-term sovereign credit rating on the United States and revised the outlook from negative to stable, and in July
2013, Moody’s affirmed its Aaa government bond rating of the United States and revised the outlook from
negative to stable. We do not know what effect any changes in the ratings of U.S. sovereign debt, Fannie Mae
and Freddie Mac will ultimately have on the U.S. economy, the value of our securities or the ability of Fannie
Mae and Freddie Mac to satisfy its guarantees of Agency MBS if necessary.

On January 2, 2013, the U.S. Congress passed the American Taxpayer Relief Act of 2012, or the Taxpayer

Relief Act, which extended, for most Americans, tax cuts implemented under President George W. Bush’s
administration. However, the Taxpayer Relief Act delayed the implementation of the budget sequestration
provisions of the Budget Control Act of 2011, which provided for automatic federal spending cuts, from
January 2, 2013 to March 1, 2013. The automatic spending cuts required under the Budget Control Act of 2011
went into effect on March 1, 2013. At the end of January 2013, Congress temporarily increased the debt ceiling
amount and deferred any further decision on how to resolve the debt ceiling issue until May 19, 2013. This was
again temporarily delayed due to government tax revenues being greater than anticipated and Congress passing
temporary funding measures until mid-October 2013. On October 1, 2013, the U.S. government was partially
shut-down due to the inability of the U.S. Congress to pass a continuous funding resolution to provide funding
for most government agencies and functions. On October 17, 2013, President Obama signed into law a bill
passed by the U.S. Congress that funds the government through January 15, 2014, extends the debt ceiling
through February 7, 2014, calls for a Congressional agreement on a long-term budget by mid-December 2013,
and continues the budget sequestration provisions of the Budget Control Act of 2011. In January 2014, Congress
passed a $1.1 trillion spending bill that will fund the U.S. government through September 30, 2014. On
February 12, 2014, the Senate approved the debt ceiling legislation (previously approved by the House of
Representatives), which suspended the debt ceiling until March 2015. The bill was signed into law by President
Obama on February 15, 2014. A failure by the U.S. government to reach agreement on future budgets and debt
ceilings, reduce its budget deficit or a further downgrade of U.S. sovereign debt and government-sponsored
agencies debt could have a material adverse effect on the U.S. economy and on the global economy. These events
could have a material adverse effect on our borrowing costs, the availability of financing and the liquidity and
valuation of securities in general and particularly the securities in our portfolio.

Our Portfolio

Our investment portfolio consists primarily of Agency MBS and also includes a small amount of Non-

Agency MBS (approximately $79 thousand) which are now included with the Agency MBS. Prior period
balances have been presented consistent with this treatment. At December 31, 2013 and December 31, 2012, our
total assets, the fair value of our Agency MBS portfolio and its allocation were approximately as follows:

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,
2013

December 31,
2012

(dollar amounts in thousands)
$9,285,105
$8,619,491

Fair value of Agency MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$8,556,446

$9,244,333

Adjustable-rate Agency MBS (less than 1 year reset) . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustable-rate Agency MBS (1-2 year reset)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustable-rate Agency MBS (2-3 year reset)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustable-rate Agency MBS (3-4 year reset)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustable-rate Agency MBS (4-5 year reset)
Adjustable-rate Agency MBS (5-7 year reset)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustable-rate Agency MBS (>7 year reset) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15-year fixed-rate Agency MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30-year fixed-rate Agency MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19%
9%
15%
10%
3%
15%
8%
20%
1%

21%
2%
12%
20%
13%
9%
1%
18%
4%

100%

Stockholders’ equity available to common stockholders at December 31, 2013 was approximately $829
million, or $5.98 per share. The $829 million equals total stockholders’ equity of $878.3 million less the Series A
Cumulative Preferred Stock, or Series A Preferred Stock, liquidating value of approximately $48 million and less
the difference between the Series B Cumulative Convertible Preferred Stock, or Series B Preferred Stock,
liquidating value of $25.2 million and the proceeds from its sale of $23.9 million. For the year ended
December 31, 2013, we reported net income of approximately $75.7 million. Net income to common
stockholders was approximately $70 million, or net income of $0.49 per diluted share, based on a weighted
average of 146.4 million fully diluted shares outstanding, which consisted of net income of $75.7 million minus
payment of preferred dividends of $5.7 million.

Our Strategy

Investment Strategy

Our strategy is to invest primarily in Agency MBS. We seek to acquire assets that will produce competitive
returns after considering the amount and nature of the investment’s anticipated returns, our ability to pledge the
investment to secure collateralized borrowings and the costs associated with financing, managing and reserving
for these investments. We do not currently originate mortgage loans or provide other types of financing to the
owners of real estate.

Financing Strategy

We acquire MBS by primarily using short-term borrowings and, to a lesser extent, equity capital. We
employ short-term borrowing to attempt to increase potential returns to our stockholders. Pursuant to our Capital
and Leverage Policy, we seek 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.

We usually borrow at short-term rates using repurchase agreements. Repurchase agreements are generally
short-term in nature (less than or equal to twelve months). We actively manage the adjustment periods and the
selection of the interest rate indices of our borrowings against the adjustment periods and the selection of the
interest rate indices on our mortgage-related assets in order to lessen the liquidity and interest rate-related risks.
We generally seek to diversify our exposure by entering into repurchase agreements with multiple lenders which
are approved by our board of directors.

Growth Strategy

It is our long-term objective to grow our earnings and our dividends per common share by increasing our

paid-in capital and book value per share.

Our Operating Policies and Programs

We have established the following four primary operating policies to implement our business strategies:

•

our Asset Acquisition Policy;

our Capital and Leverage Policy;

our Credit Risk Management Policy; and

our Asset/Liability Management Policy.

Asset Acquisition Policy

Our Asset Acquisition Policy provides that we will invest primarily in U.S. Agency MBS and other

mortgage assets rated within one of the two highest rating categories by at least one nationally recognized
statistical rating organization.

Our Asset Acquisition Policy provides guidelines for acquiring investments and contemplates that we will
acquire a portfolio of investments that can be grouped into specific categories. Each category and our respective
investment guidelines are as follows:

•

Category I—At least 60% of our total assets will generally be adjustable- or fixed-rate MBS and short-
term investments. Assets in this category will be rated within one of the two highest rating categories
by at least one nationally recognized statistical rating organization or, if not rated, will be obligations
guaranteed by the U.S. government or its agencies, such as Fannie Mae or Freddie Mac. Also included
in Category I are the portion of real estate mortgage loans that have been deposited into a trust and
have received a rating within one of the two highest rating categories by at least one nationally
recognized statistical rating organization.

Category II—At least 90% of our total assets will generally consist of Category I investments plus
unsecuritized mortgage loans, mortgage securities rated at least “investment grade” by at least one
nationally recognized statistical rating organization, or shares of other REITs or mortgage-related
companies and the portion of real estate mortgage loans that have been deposited into a trust and have
received an investment grade rating by at least one nationally recognized statistical rating organization.

Category III—No more than 10% of our total assets may be of a type not meeting any of the above
criteria. Among the types of assets generally assigned to this category are mortgage securities rated
below investment grade and leveraged mortgage derivative securities. Under our Category III
investment criteria, we may acquire other types of mortgage derivative securities including, but not
limited to, interest-only, principal-only or other types of MBS that receive a disproportionate share of
interest income or principal.

Capital and Leverage Policy

We employ a leverage strategy to increase our investment assets by borrowing against existing mortgage-
related assets and using the proceeds to acquire additional mortgage-related assets. Relative to our investments in
investment grade Agency MBS, we have generally borrowed, on a short-term basis, between seven to twelve
times the amount of our equity allocated to these investments. During the past several years, we have borrowed,
on a short-term basis, between five to nine times the amount of our equity allocated to these investments, as
management believed it to be appropriate to lower our leverage due to the uncertainty in the financial
marketplace and the broader problems in the economy. Our borrowings may vary from time to time depending
on market conditions and other factors deemed relevant by our management and our board of directors. We
believe that this will leave an adequate capital base to protect against interest rate environments in which our
borrowing costs might exceed our interest income from mortgage-related assets. At December 31, 2013, our
leverage on capital (including common stockholders’ equity, all preferred stock and junior subordinated notes)
was 8.1x.

Depending on the different costs of borrowing funds at different maturities, we may vary the maturities of

our borrowed funds in an attempt to produce lower borrowing costs. Our borrowings are short-term and we
manage actively, on an aggregate basis, both the interest rate indices and interest rate adjustment periods of our
borrowings against the interest rate indices and interest rate adjustment periods on our mortgage-related assets.

Our mortgage-related assets are financed primarily at short-term borrowing rates through repurchase

agreements. In the future, we may also employ borrowings under lines of credit and other collateralized
financings that we may establish with approved institutional lenders.

Credit Risk Management Policy

We review credit risk and other risks of loss associated with each of our potential investments. In addition,

we may diversify our portfolio of mortgage-related assets to avoid undue geographic, insurer, industry and
certain other types of concentrations.

Compliance with our Credit Risk Management Policy guidelines is determined at the time of purchase of

mortgage-related assets based upon the most recent valuation utilized by us. Such compliance is not affected by
events subsequent to such purchase including, without limitation, changes in characterization, value or rating of
any specific mortgage assets or economic conditions or events generally affecting any mortgage-related assets of
the type held by us.

Asset/Liability Management Policy

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-related assets and related
debt against the effects of major interest rate changes. Specifically, our interest rate management program is
formulated with the intent to offset, to some extent, the potential adverse effects resulting from rate adjustment
limitations on our mortgage-related assets and the differences between interest rate adjustment indices and
interest rate adjustment periods of our adjustable-rate mortgage-related assets and related borrowings.

Our interest rate risk management program encompasses a number of procedures including the following:

•

monitoring and adjusting, if necessary, the interest rate sensitivity of our mortgage-related assets
compared with the interest rate sensitivities of our borrowings;

attempting to structure our borrowing agreements relating to adjustable-rate mortgage-related assets to
have a range of different maturities and interest rate adjustment periods (although substantially all will
be less than one year); and

actively managing, on an aggregate basis, the interest rate indices and interest rate adjustment periods
of our mortgage-related assets compared to the interest rate indices and adjustment periods of our
borrowings.

We expect to be able to adjust the average maturity/adjustment period of our borrowings on an ongoing

basis by changing the mix of maturities and interest rate adjustment periods as borrowings come due or are
renewed. Through the use of these procedures, we attempt to reduce the risk of differences between interest rate
adjustment periods of our adjustable-rate mortgage-related assets and our related borrowings.

Depending on market conditions and the cost of the transactions, we may conduct certain hedging activities

in connection with the management of our portfolio. To the extent consistent with our election to qualify as a
REIT, we may adopt a hedging strategy intended to lessen the effects of interest rate changes and to enable us to
earn net interest income in periods of generally rising, as well as declining or static, interest rates. Specifically,
hedging programs are formulated with the intent to offset some of the potential adverse effects of changes in
interest rate levels relative to the interest rates on the mortgage-related assets held in our investment portfolio and
differences between the interest rate adjustment indices and periods of our mortgage-related assets and our
borrowings. We monitor carefully, and may have to limit, our hedging activity to assure that we do not realize
excessive hedging income or hold hedges having excess value in relation to our mortgage-related assets, which
could result in our disqualification as a REIT or, in the case of excess hedging income, if the excess is due to
reasonable cause and not willful neglect, the payment of a penalty tax for failure to satisfy certain REIT income
tests under the Code. In addition, hedging activity involves transaction costs that increase dramatically as the
period covered by hedging protection increases and that may increase during periods of fluctuating interest rates.

Prepayment Risk Management. We also seek to lessen the effects of prepayment of mortgage loans

underlying our securities at a faster or slower rate than anticipated. We accomplish this by structuring a
diversified portfolio with a variety of prepayment characteristics, investing in mortgage-related assets with
prepayment prohibitions and penalties, investing in certain mortgage security structures that have prepayment
protections and purchasing mortgage-related assets at a premium or at a discount. Under normal market
conditions, we generally seek to maintain the aggregate capitalized purchase premium of the portfolio at 3.5% or

less. In addition, we can purchase principal-only derivatives to a limited extent as a hedge against prepayment
risks. 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 sheets market value.

We believe that we have developed cost-effective asset/liability management policies to mitigate
prepayment risks. However, no strategy can completely insulate us from prepayment risks. Further, as noted
above, certain of the federal income tax requirements that we must satisfy to qualify as a REIT limit our ability to
fully hedge our prepayment risks. Therefore, we could be prevented from effectively hedging our prepayment
risks.

Our Investments

Mortgage-Backed Securities (MBS)

Pass-Through Certificates. We principally invest in pass-through certificates, which are securities
representing interests in pools of mortgage loans secured by residential real property in which payments of both
interest and principal on the securities are generally made monthly, in effect, “passing through” monthly
payments made by the individual borrowers on the mortgage loans which underlie the securities, net of fees paid
to the issuer or guarantor of the securities. Early repayment of principal on some MBS, arising from prepayments
of principal due to sale of the underlying property, refinancing or foreclosure, net of fees and costs which may be
incurred, may expose us to a lower rate of return upon reinvestment of principal. This is generally referred to as
“prepayment risk.” Additionally, if a security subject to prepayment has been purchased at a premium, the
unamortized value of the premium would be lost in the event of prepayment.

Like other fixed-income securities, when interest rates rise, the value of a mortgage-backed security
generally will decline. When interest rates are declining, however, the value of MBS with prepayment features
may not increase as much as other fixed-income securities. The rate of prepayments on underlying mortgages
will affect the price and volatility of MBS and may have the effect of shortening or extending the effective
maturity of the security beyond what was anticipated at the time of purchase. When interest rates rise, our
holdings of MBS may experience reduced returns if the owners of the underlying mortgages pay off their
mortgages later than anticipated. This is generally referred to as “extension risk.”

Payment of principal and interest on some mortgage pass-through securities, though not the market value of

the securities themselves, may be guaranteed by the full faith and credit of the federal government, including
securities backed by Ginnie Mae, or by agencies or instrumentalities of the federal government, including Fannie
Mae and Freddie Mac. MBS created by non-governmental issuers, including commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers, may
be supported by various forms of insurance or guarantees including individual loan, title, pool and hazard
insurance and letters of credit which may be issued by governmental entities, private insurers or the mortgage
poolers. Essentially our entire portfolio is comprised of Agency MBS.

Collateralized Mortgage Obligations. Collateralized mortgage obligations, or CMOs, are MBS. Interest

and principal on CMOs are paid, in most cases, on a monthly basis. CMOs may be collateralized by whole
mortgage loans, but are more typically collateralized by portfolios of mortgage pass-through securities. CMOs
are structured into multiple classes with each class bearing a different stated maturity. Monthly payments of
principal, including prepayments, are first returned to investors holding the shortest maturity class; investors
holding the longer maturity classes receive principal only after the first class has been retired. We will typically
consider investments in CMOs that are issued or guaranteed by the federal government, or by any of its agencies
or instrumentalities, to be U.S. government securities.

Other Types of MBS

Mortgage Derivative Securities. We may acquire mortgage derivative securities in an amount not to

exceed 10% of our total assets. Mortgage derivative securities provide for the holder to receive interest-only,

principal-only or interest and principal in amounts that are disproportionate to those payable on the underlying
mortgage loans. Payments on mortgage derivative securities are highly sensitive to the rate of prepayments on
the underlying mortgage loans. In the event of faster or slower than anticipated prepayments on these mortgage
loans, the rates of return on interests in mortgage derivative securities, representing the right to receive interest-
only or a disproportionately large amount of interest or interest-only derivatives, would be likely to decline or
increase, respectively. Conversely, the rates of return on mortgage derivative securities, representing the right to
receive principal-only or a disproportionate amount of principal or principal-only derivatives, would be likely to
increase or decrease in the event of faster or slower prepayments, respectively.

We may invest in inverse floaters, a class of CMOs with a coupon rate that resets in the opposite direction

from the market rate of interest to which it is indexed, including LIBOR or the 11th District Cost of Funds Index,
or COFI. Any rise in the index rate, which can be caused by an increase in interest rates, causes a drop in the
coupon rate of an inverse floater, while any drop in the index rate causes an increase in the coupon of an inverse
floater. An inverse floater may behave like a leveraged security since its interest rate usually varies by a
magnitude much greater than the magnitude of the index rate of interest. The leverage-like characteristics
inherent in inverse floaters result in a greater volatility of their market prices.

We may invest in other mortgage derivative securities that may be developed in the future.

Mortgage Warehouse Participations. We may occasionally acquire mortgage warehouse participations as

an additional means of diversifying our sources of income. We anticipate that these investments, together with
our investments in other Category III assets, will not, in the aggregate, exceed 10% of our total mortgage-related
assets. These investments are participations in lines of credit to mortgage loan originators secured by recently
originated mortgage loans that are in the process of being sold to investors. Our investments in mortgage
warehouse participations are limited because they are not qualified REIT assets under the Code.

Other Mortgage-Related Assets

We may acquire other investments that include equity and debt securities issued by other primarily
mortgage-related finance companies, interests in mortgage-related collateralized bond obligations, other
subordinated interests in pools of mortgage-related assets, commercial mortgage loans and securities and
residential mortgage loans other than high-credit quality mortgage loans.

We expect that our other investments in Category 3 assets under our Asset Acquisition Policy will be less
than 10% of total assets. However, there is no stated limit as to how much these investments will be allocated
related to our stockholders’ equity. There may be periods in which other investments represent a large portion of
our stockholders’ equity.

Competition

When we invest in Agency MBS, we compete with a variety of institutional investors including other
REITs, insurance companies, mutual funds, pension funds, investment banking firms, banks and other financial
institutions that invest in the same or similar types of assets. Many of these investors have greater financial
resources and access to lower costs of capital than we do.

Employees

Effective December 31, 2011, in accordance with the Management Agreement, all of our employees at the

Company were terminated and are now employed by the Manager.

Company Information

We were incorporated in Maryland on October 20, 1997 and commenced our operations on March 17, 1998.

Our principal executive offices are located at 1299 Ocean Avenue, Second Floor, Santa Monica, California,
90401. Our telephone number is (310) 255-4493 and our fax number is (310) 434-0070.

Information on our Company Website

The Company maintains a website, http://www.anworth.com. We make our Annual Reports on Form 10-K,

Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, or the Exchange Act,
available, free of charge, on our website as soon as reasonably practicable after we file or furnish these reports
with the United States Securities and Exchange Commission, or the SEC. In addition, we post the following
information on our website (the Company does not intend to and does not hereby incorporate by reference the
information on our website as a part of this Annual Report on Form 10-K):

•

our corporate code of conduct, which qualifies as a “code of ethics” as defined by Item 406 of
Regulation S-K of the Exchange Act;

our corporate governance guidelines; and

charters for our Audit Committee, Nominating and Corporate Governance Committee and
Compensation Committee.

All of the above information is also available in print upon request to our secretary at the address listed

under the heading “Company Information” above.

CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

The following discussion summarizes particular U.S. federal income tax considerations regarding our
qualification and taxation as a REIT and particular U.S. federal income tax consequences resulting from the
acquisition, ownership and disposition of our capital stock. This discussion is based on current law and assumes
that we have qualified at all times throughout our existence, and will continue to qualify, as a REIT for U.S.
federal income tax purposes. The tax law upon which this discussion is based could be changed and any such
change could have a retroactive effect. The following discussion is not exhaustive of all possible tax
considerations. This summary neither gives a detailed discussion of any state, local or foreign tax considerations
nor discusses all of the aspects of U.S. federal income taxation that may be relevant to you in light of your
particular circumstances or to particular types of stockholders which are subject to special tax rules, such as
insurance companies, tax-exempt entities, financial institutions or broker-dealers, foreign corporations or
partnerships and persons who are not citizens or residents of the U.S., stockholders that hold our stock as a
hedge, part of a straddle, conversion transaction or other arrangement involving more than one position, or
stockholders whose functional currency is not the U.S. dollar. This discussion assumes that you will hold our
capital stock as a “capital asset,” generally property held for investment, under the Code.

We urge you to consult with your own tax advisor regarding the specific consequences to you of the
acquisition, ownership and disposition of stock in an entity electing to be taxed as a REIT, including the federal,
state, local, foreign and other tax considerations of such acquisition, ownership, disposition and election and the
potential changes in applicable tax laws.

General

Our qualification and taxation as a REIT depends upon our ability to continue to meet the various

qualification tests, imposed under the Code and discussed below, relating to our actual annual operating results,
asset diversification, distribution levels and diversity of stock ownership. Accordingly, the actual results of our
operations for any particular taxable year may not satisfy these requirements.

We have made an election to be taxed as a REIT under the Code commencing with our taxable year ended
December 31, 1998. We currently expect to continue operating in a manner that will permit us to maintain our
qualification as a REIT. All qualification requirements for maintaining our REIT status, however, may not have
been, or might not continue to be, met.

So long as we qualify for taxation as a REIT, we generally will be permitted a deduction for dividends we
pay to our stockholders. As a result, we generally will not be required to pay federal corporate income taxes on
our net income that is currently distributed to our stockholders. This treatment substantially eliminates the
“double taxation” that ordinarily results from investment in a corporation. Double taxation means taxation once
at the corporate level when income is earned and once again at the stockholder level when this income is
distributed. We will be required to pay federal income tax, however, as follows:

•

we will be required to pay tax at regular corporate rates on any undistributed “real estate investment
trust taxable income,” including undistributed net capital gains;

we may be required to pay the “alternative minimum tax” on our items of tax preference; and

if we have (a) net income from the sale or other disposition of “foreclosure property” which is held
primarily for sale to customers in the ordinary course of business, or (b) other non-qualifying income
from foreclosure property, we will be required to pay tax at the highest corporate rate on this income.
Foreclosure property is generally defined as property acquired through foreclosure or after a default on
a loan secured by the property or on a lease of the property.

To the extent that distributions exceed current and accumulated earnings and profits, they will constitute a

return of capital, rather than dividend or capital gain income, and will reduce the basis for the stockholder’s stock
with respect to which the distributions are paid or, to the extent that they exceed such basis, will be taxed in the
same manner as gain from the sale of that stock. For purposes of determining whether distributions are out of
current or accumulated earnings and profits, our earnings and profits will be allocated first to our preferred stock
(as compared to distributions with respect to our common stock) so that distributions with respect to our
preferred stock are more likely to be treated as dividends than as return of capital or a distribution in excess of
basis. Calculations of corporate earnings and profits are complex and it is possible that distributions expected to
be a return of capital may subsequently be determined to be taxable distributions of earnings and profits.

Currently, dividends paid by regular C corporations to stockholders other than corporations are generally
taxed at the rate applicable to long-term capital gains, which is currently a maximum of 20%, subject to certain
limitations. Because we are a REIT, however, our dividends, including dividends paid on our Series A Preferred
Stock and Series B Preferred Stock, generally will continue to be taxed at regular ordinary income tax rates,
except in limited circumstances.

We will be required to pay a 100% tax on any net income from prohibited transactions. Prohibited
transactions are, in general, sales or other taxable dispositions of property other than foreclosure property held
primarily for sale to customers in the ordinary course of business. While the Code contains certain safe harbors
provisions to avoid the application of this 100% tax, outside of the safe harbor, the determination of whether
property is held as inventory or primarily for sale to customers in the ordinary course of a trade or business
depends on all the facts and circumstances surrounding the particular transaction. No assurance can be given that
any particular property in which we hold a direct or indirect interest will not be treated as property held for sale
to customers, or that we can comply with certain safe harbor provisions of the Code that would prevent such
treatment. The 100% tax will not apply to gains from the sale of property that is held through a taxable REIT
subsidiary or other taxable corporation, although such income will be taxed to the corporation at regular
corporate tax rates.

If we fail to satisfy the 75% gross income test or the 95% gross income test discussed below but nonetheless
maintain our qualification as a REIT because certain other requirements are met, we will be subject to a tax equal
to the greater of (i) the amount by which 75% of our gross income exceeds the amount qualifying under the 75%

gross income test described below, and (ii) the amount by which 95% of our gross income exceeds the amount
qualifying under the 95% gross income test described below, multiplied by a fraction intended to reflect our
profitability.

In the event of more than de minimis failure of any of the asset tests occurs in a taxable year, as long as the
failure was due to reasonable cause and not to willful neglect and we dispose of the assets or otherwise comply
with the asset tests within six months after the last day of the quarter in which we identify such failure, we will
pay a tax equal to the greater of $50 thousand or 35% of the net income from the non-qualifying assets during the
period in which we failed to satisfy any of the asset tests.

In the event of a failure to satisfy one or more requirements for REIT qualification occurring in a taxable
year, other than the gross income tests and the asset tests, as long as such failure was due to reasonable cause and
not to willful neglect, we will be required to pay a penalty of $50 thousand for each such failure.

We will be required to pay a nondeductible 4% excise tax on the excess of the required distribution over the

amounts actually distributed if we fail to distribute during each calendar year at least the sum of:

•

85% of our real estate investment trust ordinary income for the year;

95% of our real estate investment trust capital gain net income for the year; and

any undistributed taxable income from prior periods.

This distribution requirement is in addition to, and different from, the distribution requirements discussed

below in the section entitled “Annual Distribution Requirements.”

We may elect to retain and pay income tax on our net long-term capital gain. In that case, a U.S. stockholder
would be taxed on its proportionate share of our undistributed long-term capital gain (to the extent that we make
a timely designation of such gain to the stockholder) and would receive a credit or refund of its proportionate
share of the tax we paid. The basis of the stockholder’s shares is increased by the amount of the undistributed
long-term capital gain (less the amount of capital gains tax paid by the REIT) included in the stockholder’s long-
term capital gains.

If we own a residual interest in a REMIC, we will be taxable at the highest corporate rate on the portion of

any excess inclusion income that we derive from the REMIC residual interests equal to the percentage of our
stock that is held by “disqualified” organizations. Although the law is unclear, similar rules may apply if we own
an equity interest in a taxable mortgage pool. To the extent that we own a REMIC residual interest in a taxable
mortgage pool through a taxable REIT subsidiary, we will not be subject to tax. A “disqualified organization”
includes:

•

the United States of America;

any state or political subdivision of the United States of America;

any foreign government;

any international organization;

any agency or instrumentality of any of the foregoing;

any other tax-exempt organization other than a farmers’ cooperative described in Section 521 of the
Code that is exempt both from income taxation and from taxation under the unrelated business taxable
income provisions of the Code; and

any rural electrical or telephone cooperative.

If we acquire any asset from a corporation which is or has been taxed as a C corporation under the Code in a

transaction in which the basis of the asset in our hands is determined by reference to the basis of the asset in the
hands of the C corporation and we subsequently recognize gain on the disposition of the asset during the ten-year
period beginning on the date on which we acquired the asset, then we will be required to pay tax at the highest
regular corporate tax rate on this gain to the extent of the excess of:

•

the fair market value of the asset, over

our adjusted basis in the asset,

in each case determined as of the date on which we acquired the asset.

A C corporation is generally defined as a corporation required to pay full corporate-level tax. The results

described in the preceding paragraph with respect to the recognition of gain will apply unless we make an
election under Treasury Regulation Section 1.337(d)-7(c). If such an election were made, the C corporation
would recognize taxable gain or loss as if it had sold the assets we acquired from the C corporation to an
unrelated third party at fair market value on the acquisition date.

We will be subject to a 100% excise tax if our dealings with any taxable REIT subsidiaries (defined below)

are not at arm’s length.

In addition, notwithstanding our REIT status, we may also have to pay certain state and local income taxes,

because not all states and localities treat REITs in the same manner as they are treated for federal income tax
purposes.

Requirements for Qualification as a REIT

The Code defines a REIT as a corporation, trust or association:

that is managed by one or more trustees or directors;

that issues transferable shares or transferable certificates to evidence beneficial ownership;

that would be taxable as a domestic corporation but for Code Sections 856 through 859;

that is not a financial institution or an insurance company within the meaning of the Code;

that is beneficially owned by 100 or more persons;

that not more than 50% in value of the outstanding stock of which is owned, actually or constructively,
by five or fewer individuals, including specified entities, during the last half of each taxable year;

that meets other tests, described below, regarding the nature of its income and assets and the amount of
its distributions; and

that elects to be a REIT or has made such election for a previous taxable year and satisfies all relevant
filing and other administrative requirements established by the Internal Revenue Service, or the IRS,
that must be met to elect and retain REIT status.

The Code provides that all of the first four conditions stated above must be met during the entire taxable

year and that the fifth condition must be met during at least 335 days of a taxable year of twelve months, or
during a proportionate part of a taxable year of less than twelve months. The fifth and sixth conditions do not
apply until after the first taxable year for which an election is made to be taxed as a REIT.

For purposes of the sixth condition, pension trusts and other specified tax-exempt entities generally are

treated as individuals, except that a “look-through” exception generally applies with respect to pension funds.

Stock Ownership Tests

Our stock must be beneficially held by at least 100 persons, the “100 Stockholder Rule,” and no more than

50% of the value of our stock may be owned, directly or indirectly, by five or fewer individuals at any time
during the last half of the taxable year, the “5/50 Rule.” For purposes of the 100 Stockholder Rule only, trusts
described in Section 401(a) of the Code and exempt under Section 501(a) of the Code are generally treated as
persons. These stock ownership requirements must be satisfied in each taxable year other than the first taxable
year for which an election is made to be taxed as a REIT. We are required to solicit information from certain of
our record stockholders to verify actual stock ownership levels and our charter provides for restrictions regarding
the transfer of our stock in order to aid in meeting the stock ownership requirements. If we were to fail either of
the stock ownership tests, we would generally be disqualified from our REIT status. However, if we comply with
regulatory rules pursuant to which we are required to send annual letters to holders of our stock requesting
information regarding the actual ownership of our stock, and we do not know, or exercising reasonable diligence
would not have known, whether we failed to meet the 5/50 Rule, we will be treated as having met the 5/50 Rule.

Income Tests

We must satisfy two gross income requirements annually to maintain our qualification as a REIT:

• We must derive, directly or indirectly, at least 75% of our gross income, excluding gross income from

prohibited transactions, from specified real estate sources, including rental income, interest on
obligations secured by mortgages on real property or on interests in real property, gain from the
disposition of “qualified real estate assets,” i.e., interests in real property, mortgages secured by real
property or interests in real property, and some other assets, income from certain types of temporary
investments, amounts, such as commitment fees, received in consideration for entering into an
agreement to make a loan secured by real property, unless such amounts are determined by income and
profits, and income derived from a REMIC in proportion to the real estate assets held by the REMIC,
unless at least 95% of the REMIC’s assets are real estate assets (in which case, all of the income
derived from the REMIC), or the “75% gross income test;” and

• We must derive at least 95% of our gross income, excluding gross income from prohibited

transactions, from (a) the sources of income that satisfy the 75% gross income test, (b) dividends,
interest and gain from the sale or disposition of stock or securities, or (c) any combination of the
foregoing, or the “95% gross income test.”

Gross income from servicing loans for third parties and loan origination fees is not qualifying income for
purposes of either gross income test. Gross income from our sale of property that we hold primarily for sale to
customers in the ordinary course of business is excluded from both the numerator and the denominator in both
income tests. Income and gain from certain transactions that we enter into to hedge indebtedness incurred or to
be incurred to acquire or carry real estate assets, and that are clearly and timely identified as such, are excluded
from both the numerator and denominator for purposes of the 95% gross income test and, for certain hedging
transactions entered into after July 30, 2008, the 75% gross income test.

For purposes of the 75% and 95% gross income tests, a REIT is deemed to have earned a proportionate
share of the income earned by any partnership, or any limited liability company treated as a partnership for
federal income tax purposes, in which it owns an interest, which share is determined by reference to its capital
interest in such entity, and is deemed to have earned the income earned by any qualified REIT subsidiary (in
general, a 100%-owned corporate subsidiary of a REIT). Interest earned by a REIT ordinarily does not qualify as
income meeting the 75% or 95% gross income tests if the determination of all or some of the amount of interest
depends in any way on the income or profits of any person. Interest will not be disqualified from meeting such
tests, however, solely by reason of being based on a fixed percentage or percentages of receipts or sales.

The following paragraphs discuss in more detail the specific application of the gross income tests to us.

Interest. The term “interest,” as defined for purposes of both gross income tests, generally excludes any

amount that is based in whole or in part on the income or profits of any person. However, interest generally
includes the following:

•

an amount that is based on a fixed percentage or percentages of receipts or sales; and

an amount that is based on the income or profits of a debtor as long as the debtor derives substantially
all of its income from the real property securing the debt from leasing substantially all of its interest in
the property and only to the extent that the amounts received by the debtor would be qualifying “rents
from real property” if received directly by a REIT.

If a loan contains a provision that entitles a REIT to a percentage of the borrower’s gain upon the sale of the

real property securing the loan or a percentage of the appreciation in the property’s value as of a specific date,
income attributable to that loan provision will generally be treated as gain from the sale of the property securing
the loan, which normally constitutes qualifying income for purposes of both gross income tests.

Interest on debt secured by a mortgage on real property or on interests in real property, including, for this

purpose, discount points, prepayment penalties, loan assumption fees and late payment charges that are not
compensation for services, generally is qualifying income for purposes of the 75% gross income test. However, if
the highest principal amount of a loan outstanding during a taxable year exceeds the fair market value of the real
property securing the loan as of the date the REIT agreed to originate or acquire the loan, a portion of the interest
income from such loan will not be qualifying income for purposes of the 75% gross income test but will be
qualifying income for purposes of the 95% gross income test. The portion of the interest income that will not be
qualifying income for purposes of the 75% gross income test will be equal to the portion of the principal amount
of the loan that is not secured by real property—that is, the amount by which the loan exceeds the value of the
real estate that is security for the loan.

The interest, original issue discount and market discount income that we receive from our mortgage loans
and MBS generally will be qualifying income for purposes of both gross income tests. However, as discussed
above, if the fair market value of the real estate securing any of our loans is less than the principal amount of the
loan, a portion of the income from that loan will be qualifying income for purposes of the 95% gross income test
but not the 75% gross income test.

Fee Income. We may receive various fees in connection with originating mortgage loans. The fees will be

qualifying income for purposes of both the 75% and 95% income tests if they are received in consideration for
entering into an agreement to make a loan secured by real property and the fees are not determined based on the
borrower’s income or profits. Therefore, commitment fees will generally be qualifying income for purposes of
the income tests. Other fees, such as fees received for servicing loans for third parties and origination fees, are
not qualifying income for purposes of either income test.

Dividends. Our share of any dividends received from any corporation (including any of our taxable REIT

subsidiaries, but excluding any REIT) in which we own an equity interest will qualify for purposes of the 95%
gross income test but not for purposes of the 75% gross income test. Our share of any dividends received from
any other REIT in which we own an equity interest will be qualifying income for purposes of both gross income
tests.

Rents from Real Property. To the extent that we acquire real property or an interest therein, rents we

receive will qualify as “rents from real property” in satisfying the gross income requirements for a REIT
described above only if the following conditions are met:

•

First, the amount of rent must not be based, in whole or in part, on the income or profits of any person.
However, an amount received or accrued generally will not be excluded from rents from real property
solely by reason of being based on fixed percentages of receipts or sales.

•

Second, rents we receive from a “related party tenant” will not qualify as rents from real property in
satisfying the gross income tests unless the tenant is a taxable REIT subsidiary, at least 90% of the
property is leased to unrelated tenants and the rent paid by the taxable REIT subsidiary is substantially
comparable to the rent paid by the unrelated tenants for comparable space. A tenant is a related party
tenant if the REIT, or an actual or constructive owner of 10% or more of the REIT, actually or
constructively owns 10% or more of the tenant.

Third, if rent attributable to personal property leased in connection with a lease of real property is
greater than 15% of the total rent received under the lease, then the portion of rent attributable to the
personal property will not qualify as rents from real property.

Fourth, we generally must not operate or manage our real property or furnish or render services to our
tenants, other than through an “independent contractor” who is adequately compensated and from
whom we do not derive revenue. However, we may provide services directly to tenants if the services
are “usually or customarily rendered” in connection with the rental of space for occupancy only and are
not considered to be provided for the tenants’ convenience. In addition, we may provide a minimal
amount of “non-customary” services to the tenants of a property, other than through an independent
contractor, as long as our income from the services does not exceed 1% of our income from the related
property. Furthermore, we may own up to 100% of the stock of a taxable REIT subsidiary, which may
provide customary and non-customary services to tenants without tainting its rental income from the
related properties.

Hedging Transactions. From time to time, we may enter into hedging transactions with respect to one or

more of our assets or liabilities. Our hedging activities may include entering into interest rate swaps, caps and
floors, options to purchase these items and futures and forward contracts. Income and gain from “hedging
transactions” will be excluded from gross income for purposes of the 95% gross income test and, for certain
hedging transactions entered into after July 30, 2008, the 75% gross income test. A “hedging transaction”
includes any transaction entered into in the normal course of our trade or business primarily to manage the risk of
interest rate, price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary
obligations incurred or to be incurred, to acquire or carry real estate assets. We will be required to clearly identify
any such hedging transaction before the close of the day on which it was acquired, originated or entered into. To
the extent that we hedge for other purposes, or to the extent that a portion of our mortgage loans is not secured by
“real estate assets” (as described below under “Asset Tests”), or in other situations, the income from those
transactions is not likely to be treated as qualifying income for purposes of the 95% gross income test. We intend
to structure any hedging transactions in a manner that does not jeopardize our status as a REIT.

Prohibited Transactions. As discussed above, a REIT will incur a 100% tax on the net income derived

from any sale or other disposition of property other than foreclosure property that the REIT holds primarily for
sale to customers in the ordinary course of a trade or business. We believe that none of our assets will be held
primarily for sale to customers and that a sale of any of our assets will not be in the ordinary course of our
business. Whether a REIT holds an asset “primarily for sale to customers in the ordinary course of a trade or
business” depends, however, on the facts and circumstances in effect from time to time, including those related to
a particular asset. Nevertheless, we will attempt to comply with the terms of safe-harbor provisions in the federal
income tax laws prescribing when an asset sale will not be characterized as a prohibited transaction.

Foreign currency gain or loss that is attributable to any prohibited transaction is taken into account in

determining the amount of prohibited transaction net income subject to the 100% tax.

Foreclosure Property. We will be subject to tax at the maximum corporate rate on any income from
foreclosure property other than income that otherwise would be qualifying income for purposes of the 75% gross
income test, less expenses directly connected with the production of that income. However, gross income from
foreclosure property will qualify under the 75% and 95% gross income tests. Foreclosure property is any real
property, including interests in real property, and any personal property incident to such real property:

•

that is acquired by a REIT as the result of the REIT having bid on such property at foreclosure, or
having otherwise reduced such property to ownership or possession by agreement or process of law,
after there was a default or default was imminent on a lease of such property or on indebtedness that
such property secured;

for which the related loan or lease was acquired by the REIT at a time when the default was not
imminent or anticipated; and

for which the REIT makes a proper election to treat the property as foreclosure property.

Permitted foreclosure property income also includes foreign currency gain that is attributable to otherwise
permitted income from foreclosure property. Such foreign currency gain also is included as foreclosure property
income for purposes of any tax on such income.

However, a REIT will not be considered to have foreclosed on a property where the REIT takes control of
the property as a mortgagee-in-possession and cannot receive any profit or sustain any loss except as a creditor of
the mortgagor. Property generally ceases to be foreclosure property at the end of the third taxable year following
the taxable year in which the REIT acquired the property or longer if an extension is granted by the Secretary of
the Treasury. This grace period terminates and foreclosure property ceases to be foreclosure property on the first
day:

•

on which a lease is entered into for the property that, by its terms, will give rise to income that does not
qualify for purposes of the 75% gross income test or any amount is received or accrued, directly or
indirectly, pursuant to a lease entered into on or after such day that will give rise to income that does
not qualify for purposes of the 75% gross income test;

on which any construction takes place on the property, other than completion of a building or any other
improvement, where more than 10% of the construction was completed before default became
imminent; or

which is more than 90 days after the day on which the REIT acquired the property and the property is
used in a trade or business which is conducted by the REIT other than through an independent
contractor from whom the REIT itself does not derive or receive any income.

Failure to Satisfy Gross Income Tests.

If we fail to satisfy one or both of the gross income tests for any

taxable year, we nevertheless may qualify as a REIT for that year if we qualify for relief under certain provisions
of the federal income tax laws. Those relief provisions will be available if:

•

our failure to meet those tests is due to reasonable cause and not to willful neglect, and

following such failure for any taxable year, a schedule of the sources of our income is filed in
accordance with regulations prescribed by the Secretary of the Treasury.

We cannot predict, however, whether in all circumstances we would qualify for the relief provisions. In
addition, as discussed above, even if the relief provisions apply, we would incur a 100% tax on the gross income
attributable to the greater of (i) the amount by which we fail the 75% gross income test or (ii) the amount by
which 95% of our gross income exceeds the amount of our income qualifying under the 95% gross income test,
multiplied, in either case, by a fraction intended to reflect our profitability.

Foreign Investment and Exchange Gains

A REIT must be a U.S. domestic entity, but it is permitted to hold foreign real estate or other foreign-based
assets, provided the 75% and 95% income tests and other requirements for REIT qualification are met. A REIT
that holds foreign real estate or other foreign-based assets may have foreign currency exchange gain under the
foreign currency transaction tax rules. Foreign currency exchange gain was not explicitly included in the
statutory definitions of qualifying income for purposes of the 75% and 95% income tests until a statutory change,
although the IRS issued guidance that allowed foreign currency gain to be treated as qualified income in certain
circumstances.

For transactions occurring after July 30, 2008, the provision excludes certain foreign currency gain from the
computation of qualifying income for purposes of the 75% income test or the 95% income test, respectively. The
exclusion is solely for purposes of the computations under these tests.

The statutory change defines two new categories of income for purposes of the exclusion rules: “real estate
foreign exchange gain” and “passive foreign exchange gain.” Real estate foreign exchange gain is excluded from
gross income for purposes of both the 75% and the 95% income tests. Passive foreign exchange gain is excluded
for purposes of the 95% income test but is included in gross income and treated as non-qualifying income, to the
extent that it is not real estate foreign exchange gain, for purposes of the 75% income test.

Real estate foreign exchange gain is foreign currency gain which is attributable to: (i) any item of income

qualifying for the numerator for the 75% income test; (ii) the acquisition or ownership of obligations secured by
mortgages on real property or interests in real property; or (iii) becoming or being the obligor under obligations
secured by mortgages on real property or interests in real property. Real estate foreign exchange gain also
includes certain foreign currency gains attributable to certain “qualified business units” of the REIT.

Passive foreign exchange gain includes all real estate foreign exchange and, in addition, includes foreign

currency gain which is attributable to: (i) any item of income or gain included in the numerator for the 95%
income test, (ii) acquisition or ownership of obligations other than described in the preceding paragraph;
(iii) becoming the obligor under obligations other than described in the preceding paragraph; and (iv) any other
foreign currency gain to be determined by the IRS.

Notwithstanding the foregoing rules, except in the case of certain income excluded under the hedging rules,

foreign currency exchange gain derived from engaging in dealing, or substantial and regular trading, in certain
securities shall constitute gross income that does not qualify under either the 75% or 95% income test.

Asset Tests

To qualify as a REIT, we also must satisfy the following asset tests at the end of each quarter of each

taxable year:

First, at least 75% of the value of our total assets must consist of:

•

cash or cash items, including certain receivables;

government securities;

interests in real property, including leaseholds and options to acquire real property and leaseholds;

interests in mortgage loans secured by real property;

stock in other REITs;

investments in stock or debt instruments during the one-year period following our receipt of new
capital that we raise through equity offerings or public offerings of debt with at least a five-year term;
and

•

regular or residual interests in a REMIC. However, if less than 95% of the assets of a REMIC consist
of assets that are qualifying real estate-related assets under the federal income tax laws, determined as
if we held such assets, we will be treated as holding directly our proportionate share of the assets of
such REMIC.

The term “cash” for purposes of the REIT asset qualification rules is defined to include foreign currency if

the REIT or its “qualified business unit” uses such foreign currency as its functional currency, but only to the
extent such foreign currency is held for use in the normal course of the activities of the REIT or the “qualified
business unit” giving rise to income in the numerator for the 75% or 95% income tests, or directly related to
acquiring or holding assets qualifying for the numerator in the 75% assets test, and is not held in connection with
a trade or business of trading or dealing in certain securities.

Second, not more than 25% of the value of our total assets may be represented by securities (other than

those included in the preceding category).

Third, not more than 25% of the value of our total assets may be represented by securities of one or more

taxable REIT subsidiaries.

Fourth, except with respect to a taxable REIT subsidiary and securities includible in the first category above,

(a) not more than 5% of the value of our total assets may be represented by securities of any one issuer, (b) we
may not hold securities possessing more than 10% of the total voting power of the outstanding securities of any
one issuer and (c) we may not hold securities having a value of more than 10% of the total value of the
outstanding securities of any one issuer.

For purposes of the second and third asset tests, the term “securities” does not include stock in another
REIT, equity or debt securities of a qualified REIT subsidiary or taxable REIT subsidiary, mortgage loans that
constitute real estate assets, or equity interests in a partnership.

For purposes of the 10% value test, the term “securities” does not include:

•

“Straight debt” securities, which is defined as a written unconditional promise to pay on demand or on
a specified date a sum certain in money if (i) the debt is not convertible, directly or indirectly, into
stock, and (ii) the interest rate and interest payment dates are not contingent on profits, the borrower’s
discretion, or similar factors. “Straight debt” securities do not include any securities issued by a
partnership or a corporation in which we or any controlled taxable REIT subsidiary (i.e., a taxable
REIT subsidiary in which we own directly or indirectly more than 50% of the voting power or value of
the stock) hold non-“straight debt” securities that have aggregate value of more than 1% of the issuer’s
outstanding securities. However, “straight debt” securities include debt subject to the following
contingencies:

•

a contingency relating to the time of payment of interest or principal, as long as either (i) there is
no change to the effective yield of the debt obligation other than a change to the annual yield that
does not exceed the greater of 0.25% or 5% of the annual yield, or (ii) neither the aggregate issue
price nor the aggregate face amount of the issuer’s debt obligations held by us exceeds $1 million
and no more than 12 months of unaccrued interest on the debt obligations can be required to be
prepaid; and

a contingency relating to the time or amount of payment upon a default or prepayment of a debt
obligation, as long as the contingency is consistent with customary commercial practice.

Any loan to an individual or an estate.

Any “section 467 rental agreement” other than an agreement with a related party tenant.

Any obligation to pay “rents from real property.”

•

Certain securities issued by governmental entities.

Any security issued by a REIT.

Any debt instrument of an entity treated as a partnership for federal income tax purposes to the extent
of our interest as a partner in the partnership.

Any debt instrument of an entity treated as a partnership for federal income tax purposes not described
in the preceding bullet points if at least 75% of the partnership’s gross income, excluding income from
prohibited transaction, is qualifying income for purposes of the 75% gross income test described above
in “Income Tests.”

The asset tests described above are based on our gross assets. For federal income tax purposes, we will be

treated as owning both the loans we hold directly and the loans that we have securitized through non-REMIC
debt securitizations. Although we will have a partially offsetting obligation with respect to the securities issued
pursuant to the securitizations, these offsetting obligations will not reduce the gross assets we are considered to
own for purposes of the asset tests.

We believe that all or substantially all of the mortgage loans and MBS that we will own will be qualifying

assets for purposes of the 75% asset test. For purposes of these rules, however, if the outstanding principal
balance of a mortgage loan exceeds the fair market value of the real property securing the loan, a portion of such
loan likely will not be a qualifying real estate asset under the federal income tax laws. Although the law on the
matter is not entirely clear, it appears that the non-qualifying portion of that mortgage loan will be equal to the
portion of the loan amount that exceeds the value of the associated real property that is security for that loan. To
the extent that we own debt securities issued by other REITs or C corporations that are not secured by a mortgage
on real property, those debt securities will not be qualifying assets for purposes of the 75% asset test. Instead, we
would be subject to the second, third and fourth asset tests with respect to those debt securities.

Revenue Procedure 2011-16 discusses the modification of a mortgage loan (or an interest therein) that is
held by a REIT in which the modification was occasioned by either a default on the loan or a modification that
satisfies both of the following conditions: (a) based on all the facts and circumstances, the REIT or servicer of the
loan (the “pre-modified loan”) reasonably believes that there is a significant risk of default of the pre-modified
loan upon maturity of the loan or at an earlier date, and (b) based on all the facts and circumstances, the REIT or
servicer reasonably believes that the modified loan presents a substantially reduced risk of default, as compared
with the pre-modified loan. Revenue Procedure 2011-16 provides that a REIT may treat a modification of a
mortgage loan described therein as not being a new commitment to make or purchase a loan for purposes of
apportioning interest on that loan between interest with respect to real property or other interest. The
modification will also not be treated as a prohibited transaction. Further, with respect to the REIT asset test, the
IRS will not challenge the REIT’s treatment of a loan as being in part a “real estate asset” if the REIT treats the
loan as being a real estate asset in an amount equal to the lesser of (a) the value of the loan as determined under
Treasury Regulations Section 1.856-3(a), or (b) the loan value of the real property securing the loan as
determined under Treasury Regulations Section 1.856-5(c) and Revenue Procedure 2011-16.

We will monitor the status of our assets for purposes of the various asset tests and will seek to manage our
investment portfolio to comply at all times with such tests. There can be no assurance, however, that we will be
successful in this effort. In this regard, to determine our compliance with these requirements, we will need to
estimate the value of the real estate securing our mortgage loans at various times. Although we will seek to be
prudent in making these estimates, there can be no assurances that the IRS might not disagree with these
determinations and assert that a lower value is applicable. If we fail to satisfy the asset tests at the end of a
calendar quarter, we will not lose our REIT status if:

•

we satisfied the asset tests at the end of the preceding calendar quarter; and

•

the discrepancy between the value of our assets and the asset test requirements arose from changes in
the market values of our assets and was not wholly or partly caused by the acquisition of one or more
non-qualifying assets, or solely by a change in the foreign currency exchange rate used to value a
foreign asset.

If we did not satisfy the condition described in the second item, above, we still could avoid disqualification

by eliminating any discrepancy within 30 days after the close of the calendar quarter in which it arose.

In the event that, at the end of any calendar quarter, we violate the second or third asset tests described
above, we will not lose our REIT status if (i) the failure is de minimis (up to the lesser of 1% of our assets or
$10 million) and (ii) we dispose of assets or otherwise comply with the asset tests within six months after the last
day of the quarter in which we identify such failure. In the event of a more than de minimis failure of any of the
asset tests, as long as the failure was due to reasonable cause and not to willful neglect, we will not lose our REIT
status if (i) we dispose of assets or otherwise comply with the asset tests within six months after the last day of
the quarter in which we identify such failure and (ii) pay a tax equal to the greater of $50 thousand or 35% of the
net income from the non-qualifying assets during the period in which we failed to satisfy the asset tests.

We currently believe that the securities and other assets that we expect to hold will satisfy the foregoing
asset test requirements. However, no independent appraisals will be obtained to support our conclusions as to the
value of our assets and securities, or in many cases, the real estate collateral for the mortgage loans that we hold.
Moreover, the values of some assets may not be susceptible to a precise determination. As a result, there can be
no assurance that the IRS will not contend that our ownership of securities and other assets violates one or more
of the asset tests applicable to REITs.

Annual Distribution Requirements

Each taxable year, we must distribute dividends, other than capital gain dividends and deemed distributions

of retained capital gain, to our stockholders in an aggregate amount at least equal to:

•

the sum of:

•

90% of our “REIT taxable income,” computed without regard to the dividends paid deduction and
our net capital gain or loss, and

90% of our after-tax net income, if any, from foreclosure property, minus

the sum of certain items of excess non-cash income.

We must pay such distributions in the taxable year to which they relate or in the following taxable year if we

declare the distribution before we timely file our federal income tax return for the year and pay the distribution
on or before the first regular dividend payment date after such declaration. In addition, dividends declared in
October, November or December payable to stockholders of record in such month are deemed received by
stockholders on December 31 and to have been paid on December 31 if actually paid in January of the following
year. See below under “Distributions Generally.”

We will pay the federal income tax on taxable income, including net capital gain, which we do not distribute

to stockholders. Furthermore, if we fail to distribute during a calendar year, or by the end of January following
the calendar year in the case of distributions with declaration and record dates falling in the last three months of
the calendar year, at least the sum of:

•

85% of our REIT ordinary income for such year,

95% of our REIT capital gain income for such year, and

any undistributed taxable income from prior periods,

we will incur a 4% nondeductible excise tax on the excess of such required distribution over the amounts we
actually distribute. We may elect to retain and pay income tax on the net long-term capital gain we receive in a
taxable year. See “Taxation of Taxable U.S. Stockholders.” If we so elect, we will be treated as having
distributed any such retained amount for purposes of the 4% nondeductible excise tax described above. We
intend to make timely distributions sufficient to satisfy the annual distribution requirements and to avoid
corporate income tax and the 4% nondeductible excise tax.

It is possible that, from time to time, we may experience timing differences between the actual receipt of

income and actual payment of deductible expenses and the inclusion of that income and deduction of such
expenses in arriving at our REIT taxable income. Possible examples of those timing differences include the
following:

•

Because we may deduct capital losses only to the extent of our capital gains, we may have taxable
income that exceeds our economic income.

• We will recognize taxable income in advance of the related cash flow if any of our mortgage loans or
MBS are deemed to have original issue discount. We generally must accrue original issue discount
based on a constant yield method that takes into account projected prepayments but that defers taking
into account credit losses until they are actually incurred.

• We may recognize taxable market discount income when we receive the proceeds from the disposition

of, or principal payments on, loans that have a stated redemption price at maturity that is greater than
our tax basis in those loans, although such proceeds often will be used to make non-deductible
principal payments on related borrowings.

• We may recognize taxable income without receiving a corresponding cash distribution if we foreclose

on or make a significant modification to a loan to the extent that the fair market value of the underlying
property or the principal amount of the modified loan, as applicable, exceeds our basis in the original
loan.

• We may recognize phantom taxable income from any residual interests in REMICs or retained
ownership interests in mortgage loans subject to collateralized mortgage obligation debt.

Although several types of non-cash income are excluded in determining the annual distribution requirement,

we will incur corporate income tax and the 4% nondeductible excise tax with respect to those non-cash income
items if we do not distribute those items on a current basis. As a result of the foregoing, we may have less cash
than is necessary to distribute all of our taxable income and thereby avoid corporate income tax and the excise
tax imposed on certain undistributed income. In such a situation, we may need to borrow funds or issue
additional common stock or preferred stock.

Under certain circumstances, we may be able to correct a failure to meet the distribution requirement for a

year by paying “deficiency dividends” to our stockholders in a later year. We may include such deficiency
dividends in our deduction for dividends paid for the earlier year. Although we may be able to avoid income tax
on amounts distributed as deficiency dividends, we will be required to pay interest to the IRS based upon the
amount of any deduction we take for deficiency dividends.

The IRS has provided temporary assistance to REITs that wish to preserve cash, but that also must meet
their minimum distribution requirements. Under certain circumstances, the distribution requirements can be met
through a distribution of the REIT’s own stock. We have not declared such a distribution and do not anticipate
doing so.

Recordkeeping Requirements

We must maintain certain records in order to qualify as a REIT. In addition, to avoid a monetary penalty, we
must request, on an annual basis, information from our stockholders designed to disclose the actual ownership of
our outstanding stock. We intend to comply with these requirements.

Failure to Qualify

If we fail to satisfy one or more requirements for REIT qualification, other than the gross income tests and
the asset tests, we could avoid disqualification if our failure is due to reasonable cause and not to willful neglect
and we pay a penalty of $50 thousand for each such failure. In addition, there are relief provisions for a failure of
the gross income tests and asset tests as described in “Income Tests” and “Asset Tests.”

If we fail to qualify as a REIT in any taxable year and no relief provision applies, we would be subject to

federal income tax and any applicable alternative minimum tax on our taxable income at regular corporate rates.
In calculating our taxable income in a year in which we fail to qualify as a REIT, we would not be able to deduct
amounts paid out to stockholders. In fact, we would not be required to distribute any amounts to stockholders in
that year. In such event, to the extent of our current and accumulated earnings and profits, all distributions to
stockholders would be taxable as ordinary income. Subject to certain limitations of the federal income tax laws,
corporate stockholders might be eligible for the dividends received deduction and domestic non-corporate
stockholders may be eligible for the reduced federal income tax rate of 20% on qualified dividends. Unless we
qualified for relief under specific statutory provisions, we also would be disqualified from taxation as a REIT for
the four taxable years following the year during which we ceased to qualify as a REIT. We cannot predict
whether, in all circumstances, we would qualify for such statutory relief.

Qualified REIT Subsidiaries

A qualified REIT subsidiary is any corporation in which we own 100% of such corporation’s outstanding
stock and for which no election has been made to classify it as a taxable REIT subsidiary. As such, their assets,
liabilities and income would generally be treated as our assets, liabilities and income for purposes of each of the
above REIT qualification tests. We currently have no qualified REIT subsidiaries.

Taxable REIT Subsidiaries

A taxable REIT subsidiary is any corporation in which we own stock (directly or indirectly) and which we
and such corporation elect to classify as a taxable REIT subsidiary. A taxable REIT subsidiary is not subject to
the REIT asset, income and distribution requirements, nor are its assets, liabilities or income treated as our assets,
liabilities or income for purposes of each of the above REIT qualification tests. We currently have no taxable
REIT subsidiaries. We generally intend to make a taxable REIT subsidiary election with respect to any other
corporation in which we acquire securities constituting more than 10% by vote or value of such corporation and
that is not a qualified REIT subsidiary. However, the aggregate value of all of our taxable REIT subsidiaries must
be limited to 25% of the total value of our assets.

We will be subject to a 100% penalty tax on any rent, interest or other charges that we impose on any
taxable REIT subsidiary in excess of an arm’s length price for comparable services. We expect that any rents,
interest or other charges imposed on any taxable REIT subsidiary will be at arm’s length prices.

We generally expect to derive income from our taxable REIT subsidiaries by way of dividends in the event
that we establish any taxable REIT subsidiaries. Such dividends are not real estate source income for purposes of
the 75% income test, although they are included for purposes of the 95% test. Therefore, when aggregated with
our non-real estate source income, such dividends must be limited to 25% of our gross income each year. We
will monitor the value of our investment in, and the distributions from, our taxable REIT subsidiaries to ensure
compliance with all applicable REIT income and asset tests in the event that we establish any taxable REIT
subsidiaries.

Taxable REIT subsidiaries are generally subject to corporate level tax on their net income and will generally

be able to distribute only net after-tax earnings to its stockholders, including us, as dividend distributions.
Dividends sourced from dividends received from taxable REIT subsidiaries (if any) can qualify for the 20% tax
rate on qualified dividends. We currently have no taxable REIT subsidiaries.

Taxation of Taxable U.S. Stockholders

For purposes of the discussion in this Annual Report on Form 10-K, the term “U.S. stockholder” means a

holder of our stock that is, for U.S. federal income tax purposes:

•

a citizen or resident of the U.S.;

a corporation (including an entity treated as a corporation for federal income tax purposes), partnership
or other entity created or organized in or under the laws of the U.S. or of any state thereof or in the
District of Columbia, unless Treasury regulations provide otherwise;

an estate the income of which is subject to U.S. federal income taxation regardless of its source; or

a trust (i) whose administration is subject to the primary supervision of a U.S. court and which has one
or more U.S. persons who have the authority to control all substantial decisions of the trust or (ii) that
has a valid election in place to be treated as a U.S. person.

Distributions Generally

Distributions out of our current or accumulated earnings and profits, other than capital gain dividends, will

generally be taxable to U.S. stockholders as ordinary income. Provided that we continue to qualify as a REIT,
dividends paid by us will not be eligible for the dividends received deduction generally available to U.S.
stockholders that are corporations. To the extent that we make distributions in excess of current and accumulated
earnings and profits, the distributions will be treated as a tax-free return of capital to each U.S. stockholder and
will reduce the adjusted tax basis which each U.S. stockholder has in our stock by the amount of the distribution,
but not below zero. Distributions in excess of a U.S. stockholder’s adjusted tax basis in its stock will be taxable
as capital gain and will be taxable as long-term capital gain if the stock has been held for more than one year. If
we declare a dividend in October, November, or December of any calendar year which is payable to stockholders
of record on a specified date in such a month and actually pay the dividend during January of the following
calendar year, the dividend is deemed to be paid by us and received by the stockholder on December 31st of the
previous year, but only to the extent we have any remaining undistributed earnings and profits (as computed
under the Code) as of December 31st. Any portion of this distribution in excess of our previously undistributed
earnings and profits as of December 31st should be treated as a distribution to our stockholders in the following
calendar year for U.S. federal income tax purposes. Stockholders may not include in their own income tax returns
any of our net operating losses or capital losses. Ordinary dividends to a U.S. stockholder generally will not
qualify for the 20% tax rate for “qualified dividend income.” However, the 20% tax rate for “qualified dividend
income” will apply to our ordinary REIT dividends (i) attributable to dividends received by us from non-REIT
corporations such as a taxable REIT subsidiary, and (ii) any income on which we have paid a corporate income
tax.

Cost Basis Reporting

New federal income tax information reporting rules may apply to certain transactions in our shares acquired
through the Dividend Reinvestment and Stock Purchase Plan. Where such rules apply, the “cost basis” calculated
for the shares involved will be reported to the IRS and to you. Generally these rules apply to all shares purchased
after December 31, 2010 including those purchased through the Dividend Reinvestment and Stock Purchase
Plan. For “cost basis” reporting purposes, you may identify by lot the shares that you transfer or that are
redeemed, but if you do not timely notify us of your election, we will identify the shares that are transferred or
redeemed on a “first in/first out” basis. The shares in the Dividend Reinvestment and Stock Purchase Plan are
also eligible for the “average cost” basis method, should you so elect.

Information reporting (transfer statements) on other transactions may also be required under these new tax

rules. Generally, these reports are made for certain transactions other than purchases in shares acquired before
January 1, 2011. Transfer statements are issued between “brokers” and are not issued to the IRS or to you.

Stockholders should consult their tax advisors regarding the consequences to of these new tax rules.

Capital Gain Distributions

Distributions designated by us as capital gain dividends will be taxable to U.S. stockholders as capital gain

income. We can designate distributions as capital gain dividends to the extent of our net capital gain for the
taxable year of the distribution. This capital gain income will generally be taxable to non-corporate U.S.
stockholders at a 20% or 25% rate based on the characteristics of the asset we sold that produced the gain. U.S.
stockholders that are corporations may be required to treat up to 20% of certain capital gain dividends as ordinary
income.

Retention of Net Capital Gains

We may elect to retain, rather than distribute as a capital gain dividend, our net capital gains. If we were to

make this election, we would pay tax on such retained capital gains. In such a case, our stockholders would
generally:

•

include their proportionate share of our undistributed net capital gains in their taxable income;

receive a credit for their proportionate share of the tax paid by us in respect of such net capital gain;
and

increase the adjusted basis of their stock by the difference between the amount of their share of our
undistributed net capital gain and their share of the tax paid by us.

Passive Activity Losses, Investment Interest Limitations and Other Considerations of Holding Our Stock

Distributions we make and gains arising from the sale or exchange of our stock by a U.S. stockholder will

not be treated as passive activity income. As a result, U.S. stockholders will not be able to apply any “passive
losses” against income or gains relating to our stock. Distributions by us, to the extent they do not constitute a
return of capital, generally will be treated as investment income for purposes of computing the investment
interest limitation under the Code. Further, if we, or a portion of our assets, were to be treated as a taxable
mortgage pool, any excess inclusion income that is allocated to you could not be offset by any losses or other
deductions you may have.

Dispositions of Stock and Warrants

A U.S. stockholder or U.S. warrant holder that sells or disposes of our stock or warrants will recognize gain

or loss for federal income tax purposes in an amount equal to the difference between the amount of cash or the
fair market value of any property the stockholder or warrant holder receives on the sale or other disposition and
the stockholder’s or warrant holder’s adjusted tax basis in the stock or warrants, as applicable. This gain or loss
will be capital gain or loss and will be long-term capital gain or loss if the stockholder or warrant holder has held
the stock or warrants for more than one year. In general, any loss recognized by a U.S. stockholder or warrant
holder upon the sale or other disposition of our stock or warrants that the stockholder or warrant holder has held
for six months or less will be treated as long-term capital loss to the extent the stockholder or warrant holder
received distributions from us which were required to be treated as long-term capital gains. All or a portion of
any loss that a U.S. stockholder or warrant holder realizes upon a taxable disposition of our stock or warrants
may be disallowed if the stockholder purchases other stock within 30 days before or after the disposition.

Information Reporting and Backup Withholding

We report to our U.S. stockholders and the IRS the amount of dividends paid during each calendar year and

the amount of any tax withheld. Under the backup withholding rules, a stockholder may be subject to backup
withholding with respect to dividends paid and redemption proceeds unless the holder is a corporation or comes

within other exempt categories and, when required, demonstrates this fact or provides a taxpayer identification
number or social security number certifying as to no loss of exemption from backup withholding and otherwise
complies with applicable requirements of the backup withholding rules. A U.S. stockholder that does not provide
us with its correct taxpayer identification number or social security number may also be subject to penalties
imposed by the IRS. A U.S. stockholder can meet this requirement by providing us with a correct, properly
completed and executed copy of IRS Form W-9 or a substantially similar form. Backup withholding is not an
additional tax. Any amount paid as backup withholding will be creditable against the stockholder’s income tax
liability, if any, and otherwise be refundable. In addition, we may be required to withhold a portion of capital
gain distributions made to any stockholders who fail to certify their non-foreign status.

Taxation of Tax-Exempt Stockholders

The IRS has ruled that amounts distributed as a dividend by a REIT will be treated as a dividend by the
recipient and excluded from the calculation of unrelated business taxable income, or UBTI, when received by a
tax-exempt entity. Based on that ruling, provided that a tax-exempt stockholder has not held our stock as “debt
financed property” within the meaning of the Code, i.e., property, the acquisition, or holding of which is financed
through a borrowing by the tax-exempt U.S. stockholder, the stock is not otherwise used in an unrelated trade or
business, and we do not hold a residual interest in a REMIC that gives rise to “excess inclusion” income, as
defined in Section 860E of the Code, dividend income on our stock and income from the sale of our stock should
not be unrelated business taxable income to a tax-exempt stockholder. However, if we or a pool of our assets
were to be treated as a “taxable mortgage pool,” a portion of the dividends paid to a tax-exempt stockholder may
be subject to tax as unrelated business taxable income. Although we do not believe that we, or any portion of our
assets, will be treated as a taxable mortgage pool, no assurance can be given that the IRS might not successfully
maintain that such a taxable mortgage pool exists.

For tax-exempt stockholders that are social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts, and qualified group legal services plans exempt from federal income taxation under
Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code, respectively, income from an investment in our stock
will constitute unrelated business taxable income unless the organization is able to properly claim a deduction for
amounts set aside or placed in reserve for certain purposes so as to offset the income generated by its investment
in our stock. Any prospective and current investors should consult their tax advisors concerning these “set aside”
and reserve requirements.

Notwithstanding the above, however, a substantial portion of the dividends a tax-exempt stockholder
receives may constitute UBTI if we are treated as a “pension-held REIT” and the stockholder is a pension trust
which:

•

is described in Section 401(a) of the Code; and

holds more than 10%, by value, of the interests in the REIT.

Tax-exempt pension funds that are described in Section 401(a) of the Code and exempt from tax under

Section 501(a) of the Code are referred to below as “qualified trusts.”

A REIT is a “pension-held REIT” if:

•

it would not have qualified as a REIT but for the fact that Section 856(h)(3) of the Code provides that
stock owned by a qualified trust shall be treated, for purposes of the 5/50 Rule, described above, as
owned by the beneficiaries of the trust, rather than by the trust itself; and

either at least one qualified trust holds more than 25%, by value, of the interests in the REIT, or one or
more qualified trusts, each of which owns more than 10%, by value, of the interests in the REIT, holds
in the aggregate more than 50%, by value, of the interests in the REIT.

The percentage of any REIT dividend treated as unrelated business taxable income is equal to the ratio of:

•

the unrelated business taxable income earned by the REIT, less directly related expenses, treating the
REIT as if it were a qualified trust and therefore subject to tax on unrelated business taxable income, to

the total gross income, less directly related expenses, of the REIT.

A de minimis exception applies where the percentage is less than 5% for any year. As a result of the
limitations on the transfer and ownership of stock contained in our charter, we do not expect to be classified as a
“pension-held REIT.”

Taxation of Non-U.S. Stockholders

The rules governing federal income taxation of “non-U.S. stockholders” are complex and no attempt will be
made herein to provide more than a summary of these rules. “Non-U.S. stockholders” means beneficial owners of
shares of our stock that are not U.S. stockholders (as such term is defined in the discussion above under the
heading entitled “Taxation of Taxable U.S. Stockholders”).

PROSPECTIVE AND CURRENT NON-U.S. STOCKHOLDERS SHOULD CONSULT THEIR TAX

ADVISORS TO DETERMINE THE IMPACT OF FOREIGN, FEDERAL, STATE AND LOCAL
INCOME TAX LAWS WITH REGARD TO AN INVESTMENT IN OUR STOCK AND OF OUR
ELECTION TO BE TAXED AS A REAL ESTATE INVESTMENT TRUST, INCLUDING ANY
REPORTING REQUIREMENTS.

Distributions to non-U.S. stockholders that are not attributable to gain from our sale or exchange of U.S. real

property interests, and that are not designated by us as capital gain dividends or retained capital gains, will be
treated as dividends of ordinary income to the extent that they are made out of our current or accumulated
earnings and profits. These distributions will generally be subject to a withholding tax equal to 30% of the
distribution unless an applicable tax treaty reduces or eliminates that tax. However, if income from an investment
in our stock is treated as effectively connected with the non-U.S. stockholder’s conduct of a U.S. trade or
business, the non-U.S. stockholder generally will be subject to federal income tax at graduated rates on a net
basis in the same manner as U.S. stockholders are taxed with respect to those distributions and also may be
subject to the 30% branch profits tax in the case of a non-U.S. stockholder that is a corporation. We expect to
withhold tax at the rate of 30% on the gross amount of any distributions made to a non-U.S. stockholder unless:

•

a lower treaty rate applies and any required form, for example IRS Form W-8BEN, evidencing
eligibility for that reduced rate is filed by the non-U.S. stockholder with us; or

the non-U.S. stockholder files an IRS Form W-8ECI with us claiming that the distribution is effectively
connected income.

Any portion of the dividends paid to non-U.S. stockholders that is treated as excess inclusion income will

not be eligible for exemption from the 30% withholding tax or a reduced treaty rate.

Distributions in excess of our current and accumulated earnings and profits will not be taxable to non-U.S.
stockholders to the extent that these distributions do not exceed the adjusted basis of the stockholder’s stock, but
rather will reduce the adjusted basis of that stock. To the extent that distributions in excess of current and
accumulated earnings and profits exceed the adjusted basis of a non-U.S. stockholder’s stock, these distributions
will give rise to tax liability if the non-U.S. stockholder would otherwise be subject to tax on any gain from the
sale or disposition of its stock, as described below. Because it generally cannot be determined at the time a
distribution is made whether or not such distribution may be in excess of current and accumulated earnings and
profits, the entire amount of any distribution normally will be subject to withholding at the same rate as a
dividend. However, amounts so withheld are creditable against U.S. tax liability, if any, or refundable by the IRS
to the extent the distribution is subsequently determined to be in excess of our current and accumulated earnings

and profits. We are also required to withhold 10% of any distribution in excess of our current and accumulated
earnings and profits if our stock is a U.S. real property interest and if we are not a domestically controlled REIT,
as discussed below. Consequently, although we intend to withhold at a rate of 30% on the entire amount of any
distribution, to the extent that we do not do so, any portion of a distribution not subject to withholding at a rate of
30% may be subject to withholding at a rate of 10%.

Distributions attributable to our capital gains which are not attributable to gain from the sale or exchange of
a U.S. real property interest generally will not be subject to income taxation unless (1) investment in our stock is
effectively connected with the non-U.S. stockholder’s U.S. trade or business (or, if an income tax treaty applies,
is attributable to a U.S. permanent establishment of the non-U.S. stockholder), in which case the non-U.S.
stockholder will be subject to the same treatment as U.S. stockholders with respect to such gain (except that a
corporate non-U.S. stockholder may also be subject to the 30% branch profits tax), or (2) the non-U.S.
stockholder is a non-resident alien individual who is present in the U.S. for 183 days or more during the taxable
year and certain other conditions are satisfied, in which case the non-resident alien individual will be subject to a
30% tax on the individual’s capital gains.

For any year in which we qualify as a REIT, distributions that are attributable to gain from the sale or
exchange of a U.S. real property interest, which includes some interests in real property, but generally does not
include an interest solely as a creditor in mortgage loans or MBS, will be taxed to a non-U.S. stockholder under
the provisions of the Foreign Investment in Real Property Tax Act of 1980, or FIRPTA. Under FIRPTA,
distributions attributable to gain from sales of U.S. real property interests are taxed to a non-U.S. stockholder as
if that gain were effectively connected with the stockholder’s conduct of a U.S. trade or business. Non-U.S.
stockholders thus would be taxed at the normal capital gain rates applicable to stockholders, subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals.
Distributions subject to FIRPTA also may be subject to the 30% branch profits tax in the hands of a non-U.S.
corporate stockholder. We are required to withhold 35% of any distribution that we designate (or, if greater, the
amount that we could designate) as a capital gains dividend. The amount withheld is creditable against the non-
U.S. stockholder’s FIRPTA tax liability.

A capital gain distribution from a REIT to a foreign investor has been removed from the category of
effectively connected income, provided that (i) the distribution is received with respect to a class of stock that is
regularly traded on an established securities market located in the U.S. (our stock currently is so traded) and
(ii) the foreign investor does not own more than 5% of the class of stock at any time during the taxable year
within which the distribution is received. In that case, the foreign investor is not required to file a U.S. federal
income tax return by reason of receiving such a distribution. The distribution is to be treated as a REIT dividend
to that investor, taxed as a REIT dividend that is not a capital gain. Also, the branch profits tax does not apply to
such a distribution.

Gains recognized by a non-U.S. stockholder upon a sale of our stock generally will not be taxed under
FIRPTA if we are a domestically-controlled REIT, which is a REIT in which at all times during a specified
testing period less than 50% in value of the stock was held directly or indirectly by non-U.S. stockholders.
Because our stock is publicly traded, we cannot assure our investors that we are or will remain a domestically-
controlled REIT. Even if we are not a domestically-controlled REIT, however, a non-U.S. stockholder that owns,
actually or constructively, 5% or less of our stock throughout a specified testing period will not recognize taxable
gain on the sale of our stock under FIRPTA if the shares are traded on an established securities market.

If gain from the sale of the stock were subject to taxation under FIRPTA, the non-U.S. stockholder would be

subject to the same treatment as U.S. stockholders with respect to that gain, subject to applicable alternative
minimum tax, a special alternative minimum tax in the case of nonresident alien individuals, and the possible
application of the 30% branch profits tax in the case of non-U.S. corporations. In addition, the purchaser of the
stock could be required to withhold 10% of the purchase price and remit such amount to the IRS.

Gains not subject to FIRPTA will be taxable to a non-U.S. stockholder if:

•

the non-U.S. stockholder’s investment in the stock is effectively connected with a trade or business in
the U.S., in which case the non-U.S. stockholder will be subject to the same treatment as U.S.
stockholders with respect to that gain; or

the non-U.S. stockholder is a nonresident alien individual who was present in the U.S. for 183 days or
more during the taxable year and other conditions are met, in which case the nonresident alien
individual will be subject to a 30% tax on the individual’s capital gains.

Information Reporting and Backup Withholding

If the proceeds of a disposition of our stock are paid by or through a U.S. office of a broker-dealer, the
payment is generally subject to information reporting and to backup withholding (currently at a rate of 28%)
unless the disposing non-U.S. stockholder certifies as to his name, address and non-U.S. status or otherwise
establishes an exemption. Generally, U.S. information reporting and backup withholding will not apply to a
payment of disposition proceeds if the payment is made outside the U.S. through a foreign office of a foreign
broker-dealer. If the proceeds from a disposition of our stock are paid to or through a foreign office of a U.S.
broker-dealer or a non-U.S. office of a foreign broker-dealer that is (i) a “controlled foreign corporation” for
federal income tax purposes, (ii) a foreign person 50% or more of whose gross income from all sources for a
three-year period was effectively connected with a U.S. trade or business, (iii) a foreign partnership with one or
more partners who are U.S. persons and who in the aggregate hold more than 50% of the income or capital
interest in the partnership, or (iv) a foreign partnership engaged in the conduct of a trade or business in the U.S.,
then (i) backup withholding will not apply unless the broker-dealer has actual knowledge that the owner is not a
foreign stockholder, and (ii) information reporting will not apply if the non-U.S. stockholder satisfies
certification requirements regarding its status as a foreign stockholder.

Recently Enacted Withholding Legislation

Shareholders that acquire our stock through an account maintained at a non-U.S. financial institution should

be aware that the Foreign Account Tax Compliance Act (“FATCA”), enacted in 2010 provides that a 30%
withholding tax will be imposed on certain payments made to a foreign entity if such entity fails to satisfy certain
new disclosure and reporting rules. FATCA generally requires that (i) in the case of shareholder that is foreign
financial institution (defined broadly to include a hedge fund, a private equity fund, a mutual fund, a
securitization vehicle or other investment vehicle), the entity identify and provide information with respect to
financial accounts with such entity held (directly or indirectly) by U.S. persons and U.S.-owned foreign entities
and (ii) in the case of a shareholder that is a non-financial foreign entity, the entity identify and provide
information with respect to substantial U.S. owners of such entity.

The IRS has released final regulations generally providing that FATCA withholding will not apply with
respect to payments made prior to January 1, 2014 and that FATCA withholding tax on gross proceeds from the
disposition of stock will not be imposed with respect to payments made prior to January 1, 2017. The U.S.
Treasury is also in the process of signing Intergovernmental Agreements with other countries to implement the
exchange of information required under FATCA. Shareholders that invest in the Company through an account
maintained at a non-U.S. financial institution are strongly encouraged to consult with their own tax advisors
regarding the potential application and impact of FATCA and any Intergovernmental Agreement between the
United States and their home jurisdiction in connection with FATCA compliance.

State, Local and Foreign Taxation

We may be required to pay state, local and foreign taxes in various state, local and foreign jurisdictions,
including those in which we transact business or make investments, and our stockholders may be required to pay
state, local and foreign taxes in various state, local and foreign jurisdictions, including those in which they reside.
Our state, local and foreign tax treatment may not conform to the federal income tax consequences summarized

above. In addition, a stockholder’s state, local and foreign tax treatment may not conform to the federal income
tax consequences summarized above. Consequently, prospective investors should consult their tax advisors
regarding the effect of state, local and foreign tax laws on an investment in our stock.

Possible Legislative or Other Actions Affecting Tax Considerations

Prospective investors and stockholders should recognize that the present U.S. federal income tax treatment

of an investment in our stock may be modified by legislative, judicial or administrative action at any time and
that any such action may affect investments and commitments previously made. The rules dealing with U.S.
federal income taxation are constantly under review by persons involved in the legislative process and by the IRS
and the U.S. Treasury Department, resulting in revisions of regulations and revised interpretations of established
concepts as well as statutory changes. Revisions in U.S. federal tax laws and interpretations thereof could
adversely affect the tax consequences of an investment in our stock.

Item 1A. RISK FACTORS

Our business routinely encounters and attempts to address risks, some of which will cause our future results

to differ, sometimes materially, from those originally anticipated. Below, we have described our present view of
the most significant risks facing the Company. The risk factors set forth below are not the only risks that we may
face or that could adversely affect us. If any of the circumstances described in the risk factors discussed in this
Annual Report on 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 securities could decline significantly
and shareholders may lose all or part of their investment.

The following discussion of risk factors contains “forward-looking statements,” which may be important to
understanding any statement in this Annual Report on Form 10-K or in our other filings and public disclosures.
In particular, the following information should be read in conjunction with Item 7 – Management’s Discussion
and Analysis of Financial Condition and Results of Operations and Item 8 – Financial Statements and
Supplementary Data of this Annual Report on Form 10-K.

Risks Related to Our Business

Continued adverse developments in the global capital markets, including recent defaults, credit losses and
liquidity concerns, as well as recent mergers, acquisitions and bankruptcies of potential repurchase agreement
counterparties, could make it difficult for us to borrow money to acquire Agency MBS on a leveraged basis,
on favorable terms or at all, which could adversely affect our profitability.

We rely on the availability of financing to acquire Agency MBS on a leveraged basis. Institutions from
which we obtain financing may have owned or financed MBS and other assets, which have declined in value and
caused them to suffer losses as a result of the downturn in the residential mortgage market. As these conditions
persist, institutions may be forced to exit the repurchase agreement market, become insolvent or further tighten
their lending standards or increase the amount of equity capital or haircut required to obtain financing and, in
such event, could make it more difficult for us to obtain financing on favorable terms or at all.

During the past few years, there have been several proposed or completed mergers, acquisitions and
bankruptcies of investment banks and commercial banks that have historically acted as repurchase agreement
counterparties. This has resulted in a fewer number of potential repurchase agreement counterparties operating in
the market. Fewer potential counterparties may reduce our ability to diversify and thereby attempt to minimize
risk of counterparty default. In addition, many 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. As a result of these difficulties, there

has been an increased focus by U.S. and international regulators and banking groups (such as from the Dodd-
Frank legislation and Basel III accord) on increasing capital requirements for financial institutions and on greater
restrictions on lending. This may have an adverse impact on the supply of MBS and could also make it more
difficult for us as well as others in the marketplace 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.

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, Series A Preferred Stock or Series B
Preferred Stock.

The current weakness in the mortgage market could cause one or more of our lenders to be unwilling or
unable to provide us with financing. This could potentially increase our financing costs and reduce liquidity.
Furthermore, if many of our lenders are unwilling or unable to provide us with additional financing, we could be
forced to sell our assets at an inopportune time when prices are depressed. If one or more major market
participants fail, it could negatively impact the marketability of all fixed income securities, including Agency
MBS, and this could negatively impact the value of the securities in our portfolio, thus reducing our net book
value.

If we are unable to negotiate favorable terms and conditions on future repurchase arrangements with one or
more of our lenders, our financial condition and earnings could be negatively impacted.

The terms and conditions of each repurchase arrangement with our lenders are negotiated on a transaction-

by-transaction basis. Key terms and conditions of each transaction include interest rates, maturity dates, asset
pricing procedures and margin requirements. We cannot assure you that we will be able to continue to negotiate
favorable terms and conditions on our future repurchase arrangements.

Also, during periods of market illiquidity or due to perceived credit quality deterioration of the collateral

pledged, a lender may require that less favorable asset pricing procedures be employed or the margin
requirements be increased. Possible market developments, including a sharp rise in interest rates, a change in
prepayment rates or increasing market concern about the value or liquidity of Agency MBS, may reduce the
market value of our portfolio, which may cause our lenders to require additional collateral. Under these
conditions, we may determine it is prudent to sell assets to improve our ability to pledge sufficient collateral to
support our remaining borrowings. Such sales may be at disadvantageous times, which may harm our operating
results and net profitability.

Continued adverse developments in the residential mortgage market may adversely affect the value of the
Agency MBS in which we invest.

During the past several years, the residential mortgage market in the U.S. has experienced a variety of

difficulties and changing economic conditions including recent defaults, credit losses and liquidity concerns.
News of actual and potential security liquidations has increased the volatility of many financial assets including
Agency MBS. Further increased volatility and deterioration in the broader residential mortgage and MBS
markets may adversely affect the performance and market value of the Agency MBS in which we invest.

Our investments serve as collateral for our financings. Any decline in their value, 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. If market conditions
result in a decline in the value of our Agency MBS, our financial position and results of operations could be
adversely affected.

New laws may be passed affecting the relationship between Fannie Mae and Freddie Mac, on the one hand,
and the federal government, on the other, which could adversely affect the price of Agency MBS.

The interest and principal payments we expect to receive on the Agency MBS in which we invest will be

guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. Unlike the Ginnie Mae certificates in which we invest,
the principal and interest on securities issued by Fannie Mae and Freddie Mac are not guaranteed by the U.S.
government. All the Agency MBS in which we invest depend on a steady stream of payments on the mortgages
underlying the securities.

Since September 2008, there have been increased market concerns about Fannie Mae’s 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 federal government. 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 U.S. Department of the
Treasury has taken various actions intended to provide Fannie Mae and Freddie Mac with additional liquidity and
ensure their financial stability. The U.S. Treasury can hold its portfolio of Agency MBS to maturity and, based
on mortgage market conditions, may make adjustments to the portfolio. This flexibility may adversely affect the
pricing and availability for our target assets. It is also possible that if and when the U.S. Treasury commits to
purchase Agency MBS in the future, it could create additional demand that would increase the pricing of Agency
MBS that we seek to acquire.

Shortly after Fannie Mae and Freddie Mac were placed in federal conservatorship, the Secretary of the U.S.
Treasury suggested that the guarantee payment structure of Fannie Mae and Freddie Mac should be re-examined.
The future roles of Fannie Mae and Freddie Mac could be significantly reduced and the nature of their guarantees
could be eliminated or considerably limited relative to historical measurements. The U.S. Treasury could also
stop providing credit support to Fannie Mae and Freddie Mac in the future. Any changes to the nature of the
guarantees provided by Fannie Mae and Freddie Mac could redefine what constitutes an Agency MBS and could
have broad adverse market implications. In addition, if Fannie Mae or Freddie Mac were eliminated, or their
structures were to change radically, we would not be able to acquire Agency MBS from these companies, which
would eliminate the major component of our business model.

Our income could be negatively affected in a number of ways depending on the manner in which related
events unfold. For example, the current credit support provided by the U.S. 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
rate we expect to receive from Agency MBS that we seek to acquire, thereby tightening the spread between the
interest we earn on our portfolio of targeted assets and our cost of financing that portfolio. A reduction in the
supply of Agency MBS could also negatively affect the pricing of Agency MBS we seek to acquire by reducing
the spread between the interest we earn on our portfolio of targeted assets and our cost of financing that portfolio.

Any law affecting these government-sponsored enterprises 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 laws could increase the risk of loss on investments in Fannie Mae and/or Freddie
Mac Agency MBS. It also is possible that such laws could adversely impact the market for such securities and
spreads at which they trade. All of the foregoing could materially adversely affect our business, operations and
financial condition.

Separate legislation has been introduced in both houses of the U.S. Congress, which would, among other
things, wind down Fannie Mae and Freddie Mac, and we could be materially adversely affected if these
proposed laws were enacted.

On June 25, 2013, a bipartisan group of U.S. Senators introduced a draft bill to the U.S. Senate titled,

“Housing Finance Reform and Taxpayer Protection Act of 2013,” which may serve as a catalyst for
congressional discussion on the reform of Fannie Mae and Freddie Mac. Also, on July 11, 2013, members of the
House Committee on Financial Services introduced a draft bill to the U.S. House of Representatives titled,
“Protecting American Taxpayers and Homeowners Act.” Both bills call for the winding down of Fannie Mae and
Freddie Mac and seek to increase the opportunities for private capital to participate in, and consequently bear the
risk of loss in connection with, government-guaranteed MBS. Both bills also have considerable support in their
respective houses of Congress, which suggests that efforts to reform and possibly eliminate Fannie Mae and
Freddie Mac may be gaining momentum.

The passage of any new legislation affecting Fannie Mae and Freddie Mac may create market uncertainty

and reduce the actual or perceived credit quality of securities issued or guaranteed by the U.S. government
through a new or existing successor entity to Fannie Mae and Freddie Mac. If Fannie Mae and Freddie Mac were
reformed or wound down, it is unclear what effect, if any, this would have on the value of the existing securities
guaranteed by Fannie Mae or Freddie Mac. It is also possible that the above-referenced proposed legislation, if
enacted into law, could adversely impact the market for securities guaranteed by the U.S. government and the
spreads at which they trade. The foregoing could materially adversely affect the pricing, supply, liquidity and
value of the MBS in which we invest and otherwise materially adversely affect our business operations and
financial condition.

Certain actions taken or that may be taken in the future by the U.S. government to address the financial crisis
could negatively affect the availability of financing, the quantity and quality of available products, cause
changes in interest rates and the yield curve, any and each of which could materially adversely affect our
business, results of operations and financial condition.

The U.S. government, including the Board of Governors of the Federal Reserve System, the Department of
Treasury and other governmental and regulatory bodies, have taken and are considering taking actions to address
the U.S. financial crisis. During 2011 and 2012, the Federal Reserve increased its holdings of U.S. Treasury
securities and, as of January 30, 2013, owned approximately $1.7 trillion of such securities. In September 2011,
the Open Market Committee of the Federal Reserve announced the launching of “Operation Twist,” in which the
Federal Reserve would be buying approximately $400 billion of longer-term treasury securities financed by the
sale of an equal amount of the Federal Reserve’s shorter-term treasury securities. These acquisitions occurred
during 2012. In June 2012, the Federal Reserve announced that it extended its “Operation Twist” bond swap
program by buying through year-end 2012 another $267 billion worth of securities whose maturities would range
between six to thirty years and selling a similar amount of securities with durations of three years or less.
Operation Twist ended on December 31, 2012. At its December 2012 meeting, the members of the Federal
Reserve Board were divided on how long to continue its bond-buying program, with some wanting to continue
the program through the end of 2013 and others wanting to end it well before then. A decision not to continue
buying long-term Treasury securities may push long-term rates up, which could be less supportive of economic
growth. On September 13, 2012, the Federal Reserve announced its intention to purchase additional Agency
MBS at a pace of $40 billion per month. These purchases were open-ended, meaning they would continue until
the Federal Reserve was satisfied that economic conditions, primarily in unemployment, improve. The Federal
Reserve also announced its projection that the federal funds rate would likely remain at exceptionally low levels
until at least mid-2015. In May 2013, upon the release of minutes of the Fed Open Market Committee (FOMC)
meeting, Federal Reserve Chairman Ben Bernanke stated that if there was a continued improvement in the U.S.
economy, the pace of purchases could be slowed down. After this statement, the rate on the 10-Year Treasury
rose above 2%. In addition, following the June 2013 FOMC meeting, Chairman Bernanke commented that if the
U.S. economy continued to improve, the Federal Reserve would probably slow or moderate its MBS purchases
sometime later in 2013 and possibly ending them sometime in the middle of 2014. This comment had an even

greater effect on the bond market, as longer-term interest rates rose while short-term interest rates remained
constant. The resulting steepened yield curve caused a decline in the second quarter of 2013 in the value of MBS
in general and in the value of our portfolio. In December 2013 and January 2014, the Federal Reserve reduced its
bond buying program from $85 billion per month down to $65 billion per month. In the future, the Federal
Reserve may continue these actions or may take other similar actions, including the slowing down or tapering of
the pace of its MBS purchases. We cannot predict whether or when such other actions may occur or what impact,
if any, such actions could have on our business, results of operations and financial condition. While such
programs are intended to aid economic activity, there are no assurances that this will occur. In fact, these actions
could negatively affect the availability of financing, the quantity and quality of available products, cause changes
in interest rates and the yield curve, any and each of which could materially adversely affect our business, results
of operations and financial condition, as well as those of the entire mortgage sector in general.

A failure by the U.S. government to meet the conditions of the Budget Control Act of 2011 or to reduce its
budget deficit or a further downgrade of U.S. sovereign debt and government-sponsored agency debt could
have a material adverse impact on our borrowings and the valuations of our securities and may have a
material adverse impact on our financial condition and results of operations.

As widely reported, there continues to be concerns over the ability of the U.S. government to reduce its
budget deficit and resolve its debt crisis. The U.S. sovereign debt and government-sponsored agency debt were
downgraded from AAA to AA+ in August 2011 and continues to be on review for a downgrade of their
respective credit ratings to account for the risk that U.S. lawmakers fail to meet the conditions of the Budget
Control Act of 2011 and/or reduce its overall debt. Such failures could have a material adverse effect both on the
U.S. economy and on the global economy. In particular, this could cause disruption in the capital markets and
impact the stability of future U.S. treasury auctions and the trading market for U.S. government securities,
resulting in increased interest rates and impaired access to credit. These factors could negatively impact our
borrowing costs, our liquidity and the valuation of the securities we currently own in our portfolio, which could
have a material adverse impact on our financial condition and our results of operations.

The consequences of the American Taxpayer Relief Act of 2012 or a failure or delay by the U.S. government
to resolve the 2013 debt ceiling could materially adversely affect our stock price, our business, results of
operations and financial condition.

On January 2, 2013, the U.S. Congress passed the American Taxpayer Relief Act of 2012, or the Taxpayer

Relief Act, to avert the “fiscal cliff.” The Taxpayer Relief Act left current income tax rates in place for all
taxpayers except for individuals making more than $400,000 in taxable income or married couples making more
than $450,000 in taxable income, who will see their top tax rate increase from 35% to 39.6%. The long term
capital gains rate was also increased from 15% to 20% for those same taxable income thresholds. The Taxpayer
Relief Act also phased out the personal exemption and itemized deductions for individuals with adjusted gross
income over $250,000 and married couples with adjusted gross income over $300,000. The employee share of
the Social Security payroll tax reverted back to 6.2% from the 4.2% rate. Additionally, the Unemployment
Insurance Reauthorization Act, which increased the number of weeks a person eligible to receive unemployment
insurance to ninety-nine weeks, was extended for another year. However, the Taxpayer Relief Act delayed
implementation, from January 2, 2013 to March 1, 2013, of the budget sequestration provisions of the Budget
Control Act of 2011, which mandated approximately $1.2 trillion in automatic spending cuts in the years 2013 to
2021 (in the event Congress failed to propose spending cuts in an equal amount over the same period). The
Taxpayer Relief Act also did not substantially address any major spending cuts. Additionally, the Taxpayer
Relief Act did not address or resolve the U.S. government again reaching the debt ceiling, which is anticipated to
occur sometime during 2013. At the end of January 2013, Congress temporarily increased the debt ceiling
amount and deferred any further decision on how to resolve the debt ceiling impasse until May 19, 2013. This
was again temporarily delayed due to government tax revenues being greater than anticipated and the U.S.
Congress passing temporary funding measures until mid-October 2013. On October 1, 2013, the U.S.
government was partially shut-down due to the inability of the U.S. Congress to pass a continuous funding

resolution to provide funding for most government agencies and functions. On October 17, 2013, President
Obama signed into law a bill passed by the U.S. Congress that funds the government through January 15, 2014,
extends the debt ceiling through February 7, 2014, calls for a Congressional agreement on a long-term budget by
mid-December 2013, and continues the budget sequestration provisions of the Budget Control Act of 2011. In
January 2014, Congress passed a $1.1 trillion spending bill which funds the U.S. government through
September 30, 2014. On February 12, 2014, the Senate approved the debt ceiling legislation (previously
approved by the House of Representatives), which suspended the debt ceiling until March 2015. The bill was
signed into law by President Obama on February 15, 2014.

The consequences of the Taxpayer Relief Act in increasing income tax rates, payroll tax rates, and dividend

and capital gains rates may materially affect our stock price. Also, delays in implementing the budget
sequestration, substantially addressing spending cuts, or resolving the impending debt ceiling, could have
unintended consequences on the U.S. economy and could materially affect not only our stock price but our
business, results of operations and financial condition.

Mortgage loan modification programs and future legislative action may adversely affect the value of, and the
returns on, the Agency MBS in which we invest.

The U.S. government, through the Federal Housing Authority and the Federal Deposit Insurance

Corporation, has commenced implementation of programs designed to provide homeowners with assistance in
avoiding residential mortgage loan foreclosures. The programs may 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 extending the payment terms of the loans. In addition, members of the U.S. Congress have indicated
support for additional legislative relief for homeowners. These loan modification programs, as well as future
legislative or regulatory actions that result in the modification of outstanding mortgage loans, may adversely
affect the value of, and the returns on, the Agency MBS in which we invest.

We are subject to the risk that the global credit crisis, despite efforts by global governments to halt that crisis,
may affect interest rates and the availability of financing in general, which could adversely affect our
financing and our operating results.

During the past several years, several large European banks experienced financial difficulty and were either

rescued by government assistance or by other large European banks. Several European governments have
coordinated plans to attempt to shore up their financial sectors through loans, credit guarantees, capital infusions,
promises of continued liquidity funding and interest rate cuts. Additionally, other governments of the world’s
largest economic countries also implemented interest rate cuts. There is no assurance that these and other plans
and programs will be successful in halting the global credit crisis or in preventing other banks from failing. If
unsuccessful, this could adversely affect our financing and operations as well as those of the entire mortgage
sector in general.

As the European credit crisis continues, with the bailout of Greece, and problems in other countries such as

Italy and Spain, there is a growing risk to the financial condition and stability of major European banks. In the
fourth quarter of 2012, France’s government bond rating was lowered one grade by Moody’s Investor Service.
Many of the European banks have U.S. banking subsidiaries, which have provided financing to us, particularly
repurchase agreement financing for the acquisition of various investments, including MBS investments. During
2011, the U.S. government placed many of the U.S. banking subsidiaries of these major European banks on
credit watch. In June 2012, Moody’s downgraded the credit ratings of 15 global banks. If the European credit
crisis continues to impact these major European banks, there is the possibility that it will also impact the
operations of their U.S. banking subsidiaries. This could adversely affect our financing and operations as well as
those of the entire mortgage sector in general.

Our leveraging strategy increases the risks of our operations.

Relative to our investment grade Agency MBS, we have generally borrowed, on a short-term basis, between

seven to twelve times the amount of our equity, although our borrowings may at times be above or below this
amount. During the past several years, we have reduced our borrowings to a range of five to nine times the
amount of our equity due to the uncertainty in the marketplace and the broader problems in the economy. We
incur this leverage by borrowing against a substantial portion of the market value of our mortgage-related assets.
Use of leverage can enhance our investment returns (and at times when we reduce our leverage, our profitability
may be reduced as a result). Leverage, however, also increases risks. In the following ways, the use of leverage
increases our risk of loss and may reduce our net income by increasing the risks associated with other risk factors
including a decline in the market value of our MBS or a default of a mortgage-related asset:

•

The use of leverage increases our risk of loss resulting from various factors including rising interest
rates, increased interest rate volatility, downturns in the economy and reductions in the availability of
financing or deterioration in the conditions of any of our mortgage-related assets.

Substantially all of our borrowings are secured by our Agency MBS, generally under repurchase
agreements. A decline in the market value of the Agency MBS used to secure these debt obligations
could limit our ability to borrow or result in lenders requiring us to pledge additional collateral to
secure our borrowings. In that situation, we could be required to sell Agency MBS under adverse
market conditions in order to obtain the additional collateral required by the lender. If these sales are
made at prices lower than the carrying value of the Agency MBS, we would experience losses.

A default of a mortgage-related asset that constitutes collateral for a repurchase agreement could also
result in an involuntary liquidation of the mortgage-related asset. This would result in a loss to us of the
difference between the value of the mortgage-related asset upon liquidation and the amount borrowed
against the mortgage-related asset.

To the extent we are compelled to liquidate qualified REIT assets to repay debts, our compliance with
the REIT rules regarding our assets and our sources of income could be affected, which could
jeopardize our status as a REIT. Losing our REIT status would cause us to lose tax advantages
applicable to REITs and may decrease our overall profitability and distributions to our stockholders.

We may incur increased borrowing costs related to repurchase agreements and that would adversely affect our
profitability.

Substantially all of our borrowings are collateralized borrowings in the form of repurchase agreements. If

the interest rates on these agreements increase, that would harm 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:

•

the movement of interest rates;

the availability of financing in the market; and

the value and liquidity of our mortgage-related assets.

An increase in interest rates may harm our book value, which could adversely affect the cash available for
distribution to you and could cause the price of our securities to decline.

Increases in interest rates may harm the market value of our mortgage-related assets. Our hybrid adjustable-

rate mortgage-related assets (during the fixed-rate component of the mortgages underlying such assets) and our
fixed-rate securities are generally more harmed by these increases. In accordance with generally accepted
accounting principles utilized in the United States of America, or GAAP, we reduce our book value by the

amount of any decrease in the market value of our mortgage-related assets. Losses on securities classified as
available-for-sale, which are determined by management to be other-than-temporary in nature, are reclassified
from “Accumulated other comprehensive income” (“AOCI”) to current operations.

An increase in interest rates may cause a decrease in the volume of newly issued, or investor demand for,
MBS and other mortgage-related assets, which could adversely affect our ability to acquire MBS and other
mortgage-related assets that satisfy our investment objectives and to generate income and pay dividends.

Rising interest rates generally reduce the demand for consumer credit, including mortgage loans, due to the
higher cost of borrowing. A reduction in the volume of mortgage loans originated may affect the volume of MBS
and other mortgage-related assets available to us, which could affect our ability to acquire MBS and other
mortgage-related assets that satisfy our investment objectives. Rising interest rates may also cause MBS and
other mortgage-related assets that were issued prior to an interest rate increase to provide yields that exceed
prevailing market interest rates. If rising interest rates cause us to be unable to acquire a sufficient volume of
MBS or mortgage-related assets or MBS or mortgage-related assets with a yield that exceeds the borrowing cost
we will incur to purchase MBS or mortgage-related assets, our ability to satisfy our investment objectives and to
generate income and pay dividends in the amount expected, or at all, may be materially and adversely affected.

A change in the LIBOR setting process could affect the interest rates that repurchase agreement
counterparties charge on borrowings in general. Any such change could affect our borrowing agreements and
could have an adverse impact on our net interest income.

LIBOR is an unregulated rate based on estimates that lenders submit to the British Bankers’ Association, a

trade group that compiles this information and publishes daily the LIBOR rate. A settlement in the second quarter
of 2012 between Barclays PLC and British and U.S. banking authorities requires Barclays PLC to base its
LIBOR submissions on market prices rather than estimates of its borrowing costs. The settlement also requires an
independent auditor to review this process and report back to the Commodities Futures Trading Commission. In
the fourth quarter of 2012, U.S. and British financial regulators fined the Swiss banking firm, UBS AG, $1.5
billion for LIBOR manipulation. Additionally, in the first quarter of 2013, the Royal Bank of Scotland agreed to
pay more than $780 million to British and U.S. banking authorities for LIBOR manipulation. In September 2013,
oversight of LIBOR was transferred over to United Kingdom regulators, the Financial Conduct Authority. In
December 2013, the European Union regulators fined six financial institutions (including Deutsche Bank, Royal
Bank of Scotland, Société Générale S.A., JPMorgan Chase and Citigroup) approximately $2.32 billion relating to
the LIBOR rate scandal. In early 2014, administration of LIBOR will be transferred from the British Bankers
Association to NYSE Euronext. If there are other settlements with other financial institutions over the LIBOR
setting process, the process may become subject to even greater regulation and review by British and U.S.
banking authorities, and the method of calculating LIBOR may change. A change in the LIBOR setting process
could affect the interest rates that repurchase agreement counterparties charge on borrowings in general and
could affect our borrowing agreements, which could have an adverse impact on our net interest income.

A flat or inverted yield curve may negatively affect our operations, book value and profitability due to its
potential impact on investment yields and the supply of adjustable-rate mortgage, or ARM, products.

A flat yield curve occurs when there is little difference between short-term and long-term interest rates. An

inverted yield curve occurs when short-term interest rates are higher than long-term interest rates. A flat or
inverted yield curve may be an adverse environment for ARM product volume, as there may be little incentive
for borrowers to choose an ARM product over a longer-term fixed-rate loan. If the supply of ARM product
decreases, yields may decline due to market forces.

Our borrowing costs under repurchase agreements generally correspond to short-term interest rates such as

LIBOR. A flat or inverted yield curve will likely result in lower profits.

Additionally, a flat or inverted yield curve may negatively impact the pricing of our securities. According to

GAAP, if the values of our securities decrease, we reduce our book value by the amount of any decrease in the
market value of our mortgage-related assets.

We depend on short-term borrowings to purchase mortgage-related assets and reach our desired amount of
leverage. If we fail to obtain or renew sufficient funding on favorable terms, we will be limited in our ability to
acquire mortgage-related assets and our earnings and profitability would decline.

We depend on short-term borrowings to fund acquisitions of mortgage-related assets and reach our desired
amount of leverage. Accordingly, our ability to achieve our investment and leverage objectives depends on our
ability to borrow money in sufficient amounts and on favorable terms. In addition, we must be able to renew or
replace our maturing short-term borrowings on a continuous basis. Moreover, we depend on a limited number of
lenders to provide the primary credit facilities for our purchases of mortgage-related assets.

If we cannot renew or replace maturing borrowings, we may have to sell our mortgage-related assets under

adverse market conditions and may incur permanent capital losses as a result. Any number of these factors in
combination may cause difficulties for us, including a possible liquidation of a major portion of our portfolio at
disadvantageous prices with consequent losses, which may render us insolvent.

Any repurchase agreements that we use to finance our assets may require us to provide additional collateral or
pay down debt, and if these requirements are not met, our financial condition and prospects could deteriorate
rapidly.

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 of the benefit of these assets. In the event that we are unable to meet
these collateral obligations, our financial condition and prospects could deteriorate rapidly.

Our use of repurchase agreements to borrow funds may give our lenders greater rights in the event that either
we or a lender files for bankruptcy.

Our borrowings under repurchase agreements may qualify for special treatment under the bankruptcy code,

giving our lenders the ability to avoid the automatic stay provisions of the bankruptcy code and to take
possession of and liquidate our collateral under the repurchase agreements without delay in the event that we file
for bankruptcy. Furthermore, the special treatment of repurchase agreements under the bankruptcy code may
make it difficult for us to recover our pledged assets in the event that a lender files for bankruptcy. Thus, the use
of repurchase agreements exposes our pledged assets to risk in the event of a bankruptcy filing by either a lender
or us.

Because assets we acquire may experience periods of illiquidity, we may lose profits or be prevented from
earning gains if we cannot sell mortgage-related assets at an opportune time.

We bear the risk of being unable to dispose of our mortgage-related assets at advantageous times or in a
timely manner because mortgage-related assets generally experience periods of illiquidity. The lack of liquidity

may result from the absence of a willing buyer or an established market for these assets, as well as legal or
contractual restrictions on resale. As a result, the illiquidity of mortgage-related assets may cause us to lose
profits and lose the ability to earn gains.

A decrease or lack of liquidity in our investments may adversely affect our business, including our ability to
value and sell our assets.

We invest in certain MBS or other investment securities that are not publicly traded in liquid markets.
Moreover, turbulent market conditions, such as those currently in effect, could significantly and negatively
impact the liquidity of our assets. In some cases, it may be difficult to obtain third-party pricing on certain of our
investment securities. Illiquid investments typically experience greater price volatility, as a ready market does
not exist, and can be more difficult to value. In addition, third-party pricing for illiquid investments may be more
subjective than for more liquid investments. The illiquidity of certain investment securities may make it difficult
for us to sell such investments if the need or desire arises. In addition, if we are required to liquidate all or a
portion of our portfolio quickly, we may realize significantly less than the value at which we have previously
recorded certain of our investment securities. As a result, our ability to vary our portfolio in response to changes
in economic and other conditions may be relatively limited, which could adversely affect our results of
operations and financial condition.

We may not have the benefit of repurchase rights or indemnification upon the breach of broad representations
and warranties for all of the assets we acquire, which could increase the risk that we suffer losses on such
assets.

We may acquire assets from counterparties that are not able or willing to provide broad representations and
warranties on such assets. Even if such counterparties provide representations and warranties on the assets, they
may not be contractually required to repurchase the assets or indemnify us if there are defaults with respect to the
representations and warranties on the assets. To the extent that our counterparties are not contractually obligated
to repurchase the assets or are unable to fulfill their indemnification obligations, we will bear the same risks with
respect to such assets as if such representations and warranties were not made. If we do not have the benefit of
repurchase rights or indemnification upon the breach of broad representations and warranties on our assets, we
may lose money on our investments in such assets that we otherwise would not lose had such repurchase rights or
indemnification been available.

Our hedging strategies may not be successful in mitigating our risks associated with interest rates.

We engage in hedging activity from time to time. As such, we use various derivative financial instruments

to provide a level of protection against interest rate risks, but no hedging strategy can protect us completely.
When interest rates change, we expect to record a gain or loss on derivatives, which would be offset by an
inverse change in the value of loans or residual interests. Additionally, from time to time, we may enter into
hedging transactions in connection with our holdings of MBS and government securities with respect to one or
more of our assets or liabilities. Our hedging activities may include entering into interest rate swaps, caps and
floors, options to purchase these items and futures and forward contracts. Our actual hedging decisions will be
determined in light of the facts and circumstances existing at the time and may differ from our currently
anticipated hedging strategy. 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 after
accounting for our derivative financial instruments. 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 actually increase our risk and losses. In addition, hedging strategies involve transaction and other costs. We
cannot assure you that our hedging strategy and the derivatives that we use will adequately offset the risk of
interest rate volatility or that our hedging transactions will not result in losses.

The characteristics of hedging instruments present various concerns, including illiquidity, enforceability, and
counterparty risks, which could adversely affect our business and results of operations.

From time to time, we enter into interest rate swap agreements to hedge risks associated with movements in
interest rates. Entities entering into interest rate swap agreements are exposed to credit losses in the event of non-
performance by counterparties to these transactions. Effective October 12, 2012, the Commodities Futures
Trading Commission, or CFTC, issued new rules regarding swaps under the authority granted to it pursuant to
the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act. Although the new
rules do not directly affect the negotiations and terms of individual swap transactions between counterparties,
they do require that by no later than September 9, 2013, the clearing of all swap transactions through registered
derivatives clearing organizations, or swap execution facilities, through standardized documents under which
each swap counterparty transfers its position to another entity whereby the centralized clearinghouse effectively
becomes the counterparty to each side of the swap. It is the intent of the Dodd-Frank Act that the clearing of
swaps in this manner is designed to avoid concentration of swap risk in any single entity by spreading and
centralizing the risk in the clearinghouse and its members. In addition to greater initial and periodic margin
(collateral) requirements and additional transaction fees both by the swap execution facility and the
clearinghouse, the swap transactions are now subjected to greater regulation by both the CFTC and the SEC.
These additional fees, costs, margin requirements, documentation, and regulation could adversely affect our
business and results of operations. Additionally, for all swaps we entered into prior to September 9, 2013, we are
not required to clear them through the central clearinghouse and these swaps are still subject to the risks of
nonperformance by any of the individual counterparties with whom we entered into these transactions. If the
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 obligation under the interest rate swap if the counterparty becomes insolvent or files for
bankruptcy. Default by a party with whom we enter into a hedging transaction may result in a loss and force us to
cover our commitments, if any, at the then-current market price. Although generally we will seek to reserve the
right to terminate our hedging positions, it may not always be possible to dispose of or close out a hedging
position without the consent of the hedging counterparty and we may not be able to enter into an offsetting
contract in order to cover our risk. There may not always be a liquid secondary market that will exist for hedging
instruments purchased or sold and we may be required to maintain a position until exercise or expiration, which
could result in losses.

Competition may prevent us from acquiring mortgage-related assets at favorable yields and that would
negatively impact our profitability.

Our net income largely depends on our ability to acquire mortgage-related assets at favorable spreads over

our borrowing costs. In acquiring mortgage-related assets, 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-related assets, many of which have greater financial resources than us. As a result, we
may not in the future be able to acquire sufficient mortgage-related assets at favorable spreads over our
borrowing costs. If that occurs, our profitability will be harmed.

Interest rate mismatches between our adjustable-rate MBS and our borrowings used to fund our purchases of
these assets may reduce our income during periods of changing interest rates.

We fund most of our acquisitions of adjustable-rate MBS (including hybrid adjustable-rate MBS) with
borrowings that have interest rates based on indices and repricing terms similar to, but of shorter maturities than,
the interest rate indices and repricing terms of our MBS. Accordingly, if short-term interest rates increase, this
may harm our profitability.

Most of the MBS we acquire are adjustable-rate securities. This means that their interest rates may vary over
time based upon changes in a short-term interest rate index. Therefore, in most cases, the interest rate indices and

repricing terms of the MBS that we acquire and their funding sources will not be identical, thereby creating an
interest rate mismatch between our assets and liabilities. While the historical spread between relevant short-term
interest rate indices has been relatively stable, there have been periods when the spread between these indices
was volatile. During periods of changing interest rates, these mismatches could reduce our net income, dividend
yield and the market price of our stock.

The interest rates on our borrowings generally adjust more frequently than the interest rates on our
adjustable-rate MBS. For example, at December 31, 2013, our Agency MBS and Non-Agency adjustable-rate
MBS had a weighted average term to next rate adjustment of approximately 42 months, while our borrowings
had a weighted average term to next rate adjustment of 38 days. After adjusting for interest rate swap
transactions, the weighted average term to next rate adjustment was 1,010 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 MBS.

The MBS in which we invest and the mortgage loans underlying the MBS in which we invest are subject to
delinquency, foreclosure and loss, which could result in losses to us.

Residential mortgage loans are secured by single-family residential property and are subject to risks of loss,

delinquency and foreclosure. The ability of a borrower to repay a loan secured by a residential property is
dependent upon the income or assets of the borrower. A number of factors, including a general economic
downturn, acts of God, terrorism, social unrest and civil disturbances, may impair borrowers’ abilities to repay
their loans.

Residential MBS evidence interests in or are secured by pools of residential mortgage loans and
collateralized MBS evidence interests in or are secured by a single commercial mortgage loan or a pool of
commercial mortgage loans. Accordingly, the MBS we invest in are subject to all of the risks of the underlying
mortgage loans. In the event of defaults with respect to the mortgage loans that underlie our MBS investments
and the exhaustion of any underlying or additional credit support, we may not realize our anticipated return on
these investments and we may incur a loss on these investments.

Increased levels of prepayments from MBS may decrease our net interest income.

Pools of mortgage loans underlie the MBS that we acquire. We generally receive payments from principal

payments that are made on these underlying mortgage loans. When borrowers prepay their mortgage loans faster
than expected, this results in prepayments that are faster than expected on the MBS. Faster than expected
prepayments could harm our profitability as follows:

• We usually purchase MBS that have a higher interest rate than the market interest rate at the time. In
exchange for this higher interest rate, we pay a premium over the par 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 expense the premium that was prepaid at the time of the prepayment. At December 31,
2013, substantially all of our MBS had been acquired at a premium.

• We anticipate that a substantial portion of our adjustable-rate MBS may bear interest rates that are

lower than their fully indexed rates, which are equivalent to the applicable index rate plus a margin. If
an adjustable-rate mortgage-backed security is prepaid prior to or soon after the time of adjustment to a
fully indexed rate, we will have held that mortgage-backed security while it was less profitable and lost
the opportunity to receive interest at the fully indexed rate over the remainder of its expected life.

•

If we are unable to acquire new MBS similar to the prepaid MBS, our financial condition, results of
operation and cash flow would suffer.

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, actions by the federal government and the relative
interest rates on fixed-rate and adjustable-rate mortgage loans.

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.

The timing and amount of prepayments could adversely affect our liquidity and our profitability.

Prepayments may be difficult to predict and can vary significantly over time. As a holder of MBS, on a
monthly basis, we receive a payment equal to a portion of our investment principal as the underlying mortgages
are prepaid. With respect to our Agency MBS, we typically receive notice of monthly principal prepayments on
the fifth business day of each month (more commonly referred to as “factor day”) and receive the related
scheduled payment on a specified later date, which for (a) Agency MBS guaranteed by Fannie Mae is the 25th
day of that month (or the next business day thereafter); (b) Agency MBS guaranteed by Freddie Mac is the 15th
day of the following month (or the next business day thereafter); and (c) Agency MBS guaranteed by Ginnie Mae
is the 20th day of that month (or the next business day thereafter). This delay between factor day and receipt of
payment creates a short-term receivable for us in the amount of any such principal prepayments. In general, on
the date each month that the principal prepayments are announced (factor day), the value of our MBS pledged as
collateral is reduced by the amount of the prepaid principal and, as a result, our repurchase agreement
counterparties will typically initiate a margin call requiring the pledge of additional collateral or cash, in an
amount equal to such prepaid principal, in order to re-establish the required ratio of borrowing to collateral value
under such repurchase agreements. As the posting of such additional collateral or payment of cash to our
counterparties is on or about factor day and is prior to the receipt of the payment to us by the agencies, this would
reduce and, depending on the magnitude of such principal prepayments, could be material to, our liquidity. As a
result, in order to meet such margin calls, we could be forced to sell assets or take other actions in order to
maintain liquidity. If we were required to sell Agency MBS under adverse market conditions, we may receive
sale prices lower than we might have received if we sold those securities under normal market conditions and, if
these prices were lower than the amortized cost of the Agency MBS, we would incur losses. An increase in
prepayment rates could have a material adverse effect on our business, financial condition and results of
operations.

We may experience reduced net interest income from holding fixed-rate investments during periods of rising
interest rates.

We generally fund our acquisition of fixed-rate MBS with short-term borrowings. During periods of rising

interest rates, our costs associated with borrowings used to fund acquisition of fixed-rate assets are subject to
increases while the income we earn from these assets remains substantially fixed. This reduces or could eliminate
the net interest spread between the fixed-rate MBS that we purchase and our borrowings used to purchase them,
which could lower our net interest income or cause us to suffer a loss. At December 31, 2013, 20% of our
Agency MBS were 15-year fixed-rate securities and 1% of our Agency MBS were 30-year fixed-rate securities.

Interest rate caps on our adjustable-rate MBS may reduce our income or cause us to suffer a loss during
periods of rising interest rates.

Our adjustable-rate MBS are 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 a mortgage-backed security. Our borrowings are not
subject to similar restrictions. Accordingly, in a period of rapidly increasing interest rates, the interest rates paid
on our borrowings could increase without limitation while interest rate caps would limit the interest rates on our
adjustable-rate MBS. This problem is magnified for our adjustable-rate MBS that are not fully indexed. Further,
some adjustable-rate MBS may be subject to periodic payment caps that result in a portion of the interest being

deferred and added to the principal outstanding. As a result, we could receive less cash income on adjustable-rate
MBS than we need to pay interest on our related borrowings. These factors could lower our net interest income
or cause us to suffer a loss during periods of rising interest rates. At December 31, 2013, approximately 79% of
our Agency MBS were adjustable-rate securities.

We may invest in leveraged mortgage derivative securities that generally experience greater volatility in
market prices, thus exposing us to greater risk with respect to their rate of return.

We may acquire leveraged mortgage derivative securities that may expose us to a high level of interest rate

risk. The characteristics of leveraged mortgage derivative securities result in greater volatility in their market
prices. Thus, acquisition of leveraged mortgage derivative securities would expose us to the risk of greater price
volatility in our portfolio and that could harm our net income and overall profitability.

New assets we acquire may not generate yields as attractive or be as accretive to book value as have been
experienced historically.

We may acquire new assets as we receive principal and interest payments and prepayments from our

existing assets. We also sell assets from time to time as part of our portfolio and asset/liability management
programs. We may invest these proceeds into new earning assets.

New assets may not generate yields as attractive as we have experienced historically. Business conditions,

including credit results, prepayment patterns and interest rate trends in the future, may not be as favorable as they
have been during the periods we held the replaced assets.

New assets may not be as accretive to book value as existing assets. The market value of our assets is
sensitive to interest rate fluctuations. In the past as short-term interest rates increased, the market value of our
existing assets has declined. As we classify our Agency MBS and Non-Agency MBS as available-for-sale,
accounting regulations require that any unrealized losses from the decline in market value that are not considered
to be an other-than-temporary impairment be carried as “accumulated other comprehensive loss” in the
“Stockholders’ equity” section of the balance sheets. When short-term interest rates stop increasing, or start
declining, or when the interest rates on these securities reset, the market value of these assets may increase. This
may be more accretive to book value than the new assets that we acquire to replace existing assets.

If we are unable to find suitable investments, we may not be able to achieve our investment objectives or pay
dividends.

The availability of mortgage-related assets meeting our criteria depends upon, among other things, the level

of activity and quality of and demand for securities in the mortgage securitization and secondary markets. The
market for agency securities depends upon various factors including the level of activity in the residential real
estate market, the level of and difference between short-term and long-term interest rates, incentives for issuers to
securitize mortgage loans and demand for agency securities by institutional investors. The size and level of
activity in the residential real estate lending market depends upon various factors, including the level of interest
rates, regional and national economic conditions and real estate values. To the extent we are unable to acquire a
sufficient volume of mortgage-related assets meeting our criteria, our results of operations would be adversely
affected. Furthermore, we cannot assure you that we will be able to acquire sufficient mortgage-related assets at
spreads above our costs of funds.

We are dependent on information and communications systems and such systems’ failures could significantly
disrupt our business.

Our business is highly dependent on our information and communications systems. Any failure or

interruption of our systems, such as caused by earthquake, fire, flood or terrorist act or by issues such as power
outages, telephone or internet disconnections (not withstanding any of our back-up systems, which could also be

subject to failure), could cause delays or other problems in our securities trading activities or in our repurchase
agreement transactions, which would materially adversely affect our operations and performance.

Risks Related to Our Management

We have no employees and the Manager is responsible for making all of our investment decisions. The
employees of the Manager are not required to devote any specific amount of time to our business.

Effective December 31, 2011, in accordance with the Management Agreement, we have no employees and
all our prior employees became employees of the Manager. The Manager is responsible for conducting our day-
to-day operations and is responsible for the selection, purchase and sale of our investment portfolio; our
financing and hedging activities; providing us with management services; and such other services and activities
relating to our assets and operations as may be appropriate.

Messrs. Lloyd McAdams, Joseph E. McAdams, Thad M. Brown, Ms. Bistra Pashamova and others are
officers and employees of our Manager and are also officers and employees of Pacific Income Advisers, or PIA,
where they devote a portion of their time. These officers and employees are under no contractual obligations
mandating minimum amounts of time to be devoted to our Company. In addition, a trust controlled by Mr. Lloyd
McAdams is the principal stockholder of PIA.

These officers and employees are involved in investing both our assets and approximately $3.21 billion in

MBS and other fixed income assets for institutional clients and individual investors through PIA. These multiple
responsibilities and ownerships may create conflicts of interest if these officers and employees of our Company
are presented with opportunities that may benefit both us and the clients of PIA. These officers allocate
investments among our portfolio and the clients of PIA by determining the entity or account for which the
investment is most suitable. In making this determination, these officers consider the investment strategy and
guidelines of each entity or account with respect to acquisition of assets, leverage, liquidity and other factors that
our officers determine appropriate. These officers, however, have no obligation to make any specific investment
opportunities available to us and the above-mentioned conflicts of interest may result in decisions or allocations
of securities that are not in our best interests.

Additionally, there is nothing in the Management Agreement that prevents the Manager or any of its
Affiliates, officers, directors or employees from engaging in other businesses or from rendering services of any
kind to any other Person or entity, whether or not the investment objectives or policies of any such other Person
or entity are similar to those of the Company or in any way binds or restricts the Manager or any of its Affiliates,
officers, directors or employees from buying, selling or trading any securities or commodities for their own
accounts or for the accounts of others for whom the Manager or any of its Affiliates, officers, directors or
employees may be acting.

Mr. Lloyd McAdams is also an owner and Chairman of Syndicated Capital, Inc., a registered broker-dealer.

Syndicated Capital, Inc. has been authorized by our board of directors to act as an authorized broker on any
buyback of the Company’s common stock. The service to PIA and Syndicated Capital, Inc. by the officers and
employees of the Manager allow them to spend only part of their time and effort managing our Company, as they
are required to devote a portion of their time and effort to the management of other companies, and this may
harm our overall management and operating results.

Messrs. Lloyd McAdams, Joseph E. McAdams, Charles J. Siegel and John T. Hillman and Ms. Heather U.
Baines and others are officers and employees of PIA Farmland, Inc. and its external manager, PIA, where they
devote a portion of their time. PIA Farmland, Inc., a privately-held real estate investment trust investing in U.S.
farmland properties leased to independent farm operators, was incorporated in February 2013 and acquired its
first farm property in October 2013. These officers and employees are under no contractual obligations to PIA
Farmland, Inc., its external manager, PIA, or to Anworth or its external manager, Anworth Management, LLC, as

to their time commitment. To the extent that significant time is devoted to PIA Farmland, Inc. and its external
manager, this could harm our overall management and operating results. Mr. Steven Koomar, the Chief
Executive Officer of PIA Farmland, Inc., has no involvement with either Anworth or its external manager,
Anworth Management, LLC.

We are completely dependent upon the Manager, who provides services to us through the Management
Agreement, and we may not find suitable replacements for our Manager if the Management Agreement is
terminated or such key personnel are no longer available to us. The loss of any key personnel of the Manager
could harm our operations.

We no longer have any employees and are completely dependent on the Manager to conduct our operations

pursuant to the Management Agreement. The Manager has its own employees, which conduct its day-to-day
operations. The Management Agreement does not require the Manager to dedicate specific personnel to our
operations.

If we terminate the Management Agreement without cause, we may not, without the consent of the Manager,

employ any employee of the Manager or any of its Affiliates, or any Person who has been employed by the
Manager or any of its Affiliates at any time within the two year period immediately preceding the date on which the
Person commences employment with us for two years after such termination of the Management Agreement. We
will not have retention agreements with any of our officers. We believe that the successful implementation of our
investment and financing strategies will depend upon the experience of certain of the Manager’s officers and
employees. None of these individuals’ continued service is guaranteed. If the Management Agreement is terminated
or these individuals leave the Manager, the Manager may be unable to replace them with persons with appropriate
experience, or at all, and we may not be able to execute our business plan.

We depend on the diligence, experience and skill of the officers and employees of the manager for the
selection, structuring and monitoring of our mortgage-related assets and associated borrowings. The key officers
of the Manager include Mr. Lloyd McAdams, President and Chief Executive Officer; Mr. Joseph E. McAdams,
Chief Investment Officer and Executive Vice President; Mr. Thad M. Brown, Chief Financial Officer, Treasurer
and Secretary; Mr. Charles J. Siegel, Senior Vice President-Finance and Assistant Secretary; Ms. Bistra
Pashamova, Senior Vice President; and Mr. Evangelos Karagiannis, Vice President. Our dependence on the
Manager is heightened by the fact that they have a relatively small number of employees and the loss of any key
person could harm our entire business, financial condition, cash flow and results of operations. In particular, the
loss of the services of Messrs. Lloyd McAdams or Joseph E. McAdams could seriously harm our business.

The Management Agreement was not negotiated on an arm’s-length basis and the terms, including fees
payable, may not be as favorable to us as if it were negotiated with an unaffiliated third party.

Effective as of December 31, 2011, we entered into the Management Agreement, which effected the
externalization of our management function. The Management Agreement was negotiated between related
parties, and we did not have the benefit of arm’s-length negotiations of the type normally conducted with an
unaffiliated third party. The terms of the Management Agreement, including fees payable, may not reflect the
terms we may have received if it was negotiated with an unrelated third party. In addition, as a result of this
relationship, we may choose not to enforce, or to enforce less vigorously, our rights under the Management
Agreement because of our desire to maintain our ongoing relationship with our Manager.

If we elect to not renew the Management Agreement without cause, we would be required to pay the Manager
a substantial termination fee. These and other provisions in the Management Agreement make non-renewal of
the Management Agreement difficult and costly.

Electing not to renew the Management Agreement without cause would be difficult and costly for us. With
the consent of the majority of our independent directors, we may elect not to renew our Management Agreement
upon the expiration of any automatic renewal term, both upon 180-days prior written notice. In addition, if we

elect to not renew the Management Agreement because of a decision by our board that the management fee is
unfair, the Manager has the right to renegotiate a mutually agreeable management fee. If we elect to not renew
the Management Agreement without cause, we are required to pay the Manager a termination fee equal to three
times the average annual management fee earned by the Manager during the prior 24-month period immediately
preceding the most recently completed month prior to the effective date of termination. These provisions may
increase the effective cost to us of electing to not renew the Management Agreement.

The management fee is payable regardless of our performance.

The Manager is entitled to receive a management fee from us that is based on 1.20% of our Equity (as
defined in our Management Agreement), regardless of the performance of our investment portfolio. For example,
we would pay our Manager a management fee for a specific period even if we experienced a net loss during the
same period. The Manager’s entitlement to substantial nonperformance-based compensation may reduce its
incentive to devote sufficient time and effort to seeking investments that provide attractive risk-adjusted returns
for our investment portfolio. This in turn could harm our ability to make distributions to our stockholders and the
market price of our common stock.

The fee structure of the Management Agreement may limit the Manager’s ability to retain access to its key
personnel.

Under the terms of the Management Agreement, we are required to pay the Manager a base management fee

payable monthly in arrears in an amount equal to one twelfth of 1.20% of our Equity. Our Equity is defined as
our month-end stockholders’ equity, adjusted to exclude the effect of any unrealized gains or losses included in
either retained earnings or other comprehensive income, each as computed in accordance with GAAP. The
Management Agreement does not provide the Manager with an incentive management fee that would pay the
Manager additional compensation as a result of meeting performance targets. Some of our externally-managed
competitors pay their managers an incentive management fee, which enables them to provide additional
compensation to their key personnel. Thus, the lack of an incentive fee in the Management Agreement may limit
the ability of the Manager to provide key personnel with additional compensation for strong performance, which
could adversely affect the Manager’s ability to retain these key personnel. If the Manager were not able to retain
any of the key personnel providing services to the Manager, it would have to find replacement personnel to
provide those services. Those replacement key personnel may not be able to produce the same operating results
as the current key personnel.

Some investors may not view our external management in a positive light, which may affect the market price
of our common stock and may make it more difficult for future offerings of our stock.

Although there are currently other mortgage REITs that are externally-managed, there may be times in the
future when some investors may have a preference for internally-managed companies. There may also be times,
if there are low returns from our portfolio, when our external management is not viewed in a positive light. In
either of these cases, there may be a negative effect on the market price of our common stock and this may make
it difficult for future offerings of our common stock.

Potential conflicts of interest could arise if the Manager were to take greater risk for the purpose of increasing
our equity in order to earn a greater management fee.

The Management Agreement does not contain an incentive fee. The Manager is paid a base management fee

payable monthly in arrears in an amount equal to one twelfth of 1.20% of our Equity, as defined in the
Management Agreement. As the Management Agreement does not contain an incentive fee, the Manager may
take greater risk in our investment portfolio to increase our equity in order to earn a greater management fee.

Our Manager’s liability is limited under the Management Agreement, and we have agreed to indemnify our
Manager against certain liabilities.

Pursuant to the Management Agreement, our Manager does not assume any responsibility other than to

render the services called for thereunder and is not responsible for any action of our board of directors in
following or declining to follow any advice or recommendation of the Manager. The Manager and its Affiliates,
and the directors, officers, employees and stockholders of the Manager and its Affiliates, are not liable to us, any
subsidiary of ours, our board of directors or our stockholders for any acts or omissions by the Manager, its
officers, employees or its Affiliates, performed in accordance with and pursuant to our Management Agreement,
except by reason of acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of their
respective duties under this Management Agreement. We have agreed to indemnify our Manager and its
Affiliates, its directors, officers, employees and stockholders of the Manager and its Affiliates (each a “Manager
Indemnified Party”) of and from any and all expenses, losses, damages, liabilities, demands, charges and claims
of any nature whatsoever (including reasonable attorneys’ fees) in respect of or arising from any acts or
omissions of such Manager Indemnified Party, not constituting bad faith, willful misconduct, gross negligence or
reckless disregard of duties of such Manager Indemnified Party under this Management Agreement.

Our Manager has limited resources and may not be able to defend itself in litigation.

The only fee that our Manager receives from us is the base management fee, as previously described. It is

anticipated that most, if not all, of this fee will be used by the Manager for compensation to its employees and to
pay for its other administrative expenses. Our Manager has limited resources. If our Manager were to be involved
in litigation not related to our operations, it may not be able to defend itself and it may be forced to declare
bankruptcy or go out of business and we would have to find another Manager. This could have a material adverse
impact on our business and our operations.

Failure of our Manager to comply with SEC rules and regulations could cause various disciplinary actions
which could cause a disruption in services provided to us and may impact our business operations and our
profitability.

Under recent rules promulgated under Dodd-Frank, the Manager is considered an investment adviser. In
reliance upon the no-action letter issued by the SEC to the American Bar Association on January 18, 2012, we
consider Anworth Management, LLC to be a “relying adviser,” which means that its registration as an investment
adviser is integrated into the existing registration of PIA, its “filing adviser.” Anworth Management, LLC and
PIA are both subject to the Investment Advisers Act of 1940 and the rules and regulations of the SEC and also
are subject to examination by the SEC. Any failure by Anworth Management, LLC, PIA, or any of their
respective employees to comply with such rules and regulations could cause various disciplinary actions, up to
and including loss of registration status as investment advisers. Such disciplinary actions could lead to
disruptions in the services provided to us which may impact our business operations and our profitability.

Our board of directors may change our operating policies and strategies without prior notice or stockholder
approval and such changes could harm our business, results of operation and stock price.

Our board of directors can modify or waive our current operating policies and our strategies without prior

notice and without stockholder approval. We cannot predict the effect any changes to our current operating
policies and strategies may have on our business, operating results and stock price, however, the effects may be
adverse.

Risks Related to REIT Compliance and Other Tax Matters

If we are disqualified as a REIT, we will be subject to tax as a regular corporation and face substantial tax
liability.

We believe that, since our initial public offering in 1998, we have operated so as to qualify as a REIT under

the Code and we intend to continue to meet the requirements for taxation as a REIT. Nevertheless, we may not
remain qualified as a REIT in the future. Qualification as a REIT involves the application of highly technical and
complex Code provisions for which only a limited number of judicial or administrative interpretations exist.
Even a technical or inadvertent mistake could require us to pay a penalty or jeopardize our REIT status.
Furthermore, Congress or the IRS might change tax laws or regulations and the courts might issue new rulings, in
each case potentially having retroactive effects that could make it more difficult or impossible for us to qualify as
a REIT. If we fail to qualify as a REIT in any tax year, then:

•

we would be taxed as a regular domestic corporation, which, among other things, means being unable
to deduct distributions to stockholders in computing taxable income and being subject to federal
income tax on our taxable income at regular corporate rates;

any resulting tax liability could be substantial and would reduce the amount of cash available for
distribution to stockholders;

we would no longer be required to make distributions to our stockholders; and

unless we were entitled to relief under applicable statutory provisions, we could be disqualified from
treatment as a REIT for the subsequent four taxable years following the year during which we lost our
qualification and thus our cash available for distribution to stockholders would be reduced for each of
the years during which we do not qualify as a REIT.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities.

In order to qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning,

among other things, our sources of income, the nature and diversification of our MBS and other assets, the
amounts we distribute to our stockholders and the ownership of our stock. We may also be required to make
distributions to stockholders at disadvantageous times or when we do not have funds readily available for
distribution. Thus, compliance with REIT requirements may hinder our ability to operate solely on the basis of
maximizing profits.

Complying with REIT requirements may limit our ability to hedge effectively.

Compliance with the REIT provisions of the Code may limit our ability to hedge our assets and operations.

Under these provisions, any income that is generated from transactions intended to hedge our interest rate,
inflation and/or currency risks will be excluded from gross income for purposes of the REIT 75% and 95% gross
income tests if the instrument hedges (1) interest rate risk on liabilities incurred to carry or acquire real estate or
(2) risk of currency fluctuations with respect to any item of income or gain that would be qualifying income
under the REIT 75% or 95% gross income tests, and such instrument is properly identified under applicable
Treasury Regulations. Income from hedging transactions that does not meet these requirements will generally
constitute non-qualifying income for purposes of both the REIT 75% and 95% gross income tests. As a result of
these rules, we may have to limit its use of hedging techniques that might otherwise be advantageous, which
could result in greater risks associated with interest rate or other changes than we would otherwise incur.

Complying with REIT requirements may force us to liquidate otherwise attractive investments or to make
investments inconsistent with our business plan.

In order to qualify as a REIT, we must also determine that at the end of each calendar quarter at least 75% of

the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets.

The remainder of our investment in securities generally cannot include more than 10% of the outstanding voting
securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In
addition, in general, no more than 5% of the value of our assets can consist of the securities of any one issuer. No
more than 25% of the total value of our assets can be stock in taxable REIT subsidiaries. If we fail to comply
with these requirements, we must dispose of a portion of our assets within 30 days after the end of the calendar
quarter in order to avoid losing our REIT status and suffering adverse tax consequences. The need to comply
with these gross income and asset tests may cause us to acquire other assets that are qualifying real estate assets
for purposes of the REIT requirements that are not part of our overall business strategy and might not otherwise
be the best investment alternative for us.

Complying with REIT requirements may force us to borrow to make distributions to stockholders.

As a REIT, we must distribute 90% of our annual taxable income (subject to certain adjustments) to our

stockholders. At the time when we are required to make previously declared dividend distributions, declines in
the value of our portfolio holdings and the resulting subsequent margins calls may have depleted most or all of
our cash and cash equivalents. If this were to occur and if market conditions allowed us to do so, we would sell
some of our portfolio holdings to generate sufficient funds to make the dividend payments. If market conditions
did not allow us to sell portfolio holdings, we would be required to borrow funds on an unsecured basis to make
the previously declared dividend payments.

Dividends payable by REITs do not qualify for the reduced tax rates.

Tax legislation enacted in 2003 and extended in 2010 to be effective through December 31, 2012,
temporarily reduced the maximum U.S. federal tax rate on certain corporate dividends paid to individuals and
other non-corporate taxpayers to 15%. In January 2013, the Taxpayer Relief Act permanently extended these
rates except for individuals with taxable income over $400,000 and married couples with taxable income over
$450,000. For those taxpayers, the long-term capital gains rate was increased to 20%. Dividends paid by REITs
to these stockholders are generally not eligible for these reduced rates. Although this legislation does not
adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to non-
REIT corporate dividends could cause investors who are individuals, trusts and estates to perceive investments in
REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends,
which could adversely affect the value of the stock of REITs, including our common stock.

The tax imposed on REITs engaging in “prohibited transactions” will limit our ability to engage in
transactions, including certain methods of securitizing loans, which would be treated as sales for federal
income tax purposes.

A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited

transactions are sales or other dispositions of property, other than foreclosure property but including any
mortgage loans, held in inventory primarily for sale to customers in the ordinary course of business. We might be
subject to this tax if we were to sell a loan or securitize loans in a manner that was treated as a sale of such
inventory for federal income tax purposes. Therefore, in order to avoid the prohibited transactions tax, we may
choose not to engage in certain sales of loans other than through a taxable REIT subsidiary and may limit the
structures we utilize for our securitization transactions even though such sales or structures might otherwise be
beneficial for us. In addition, this prohibition may limit our ability to restructure our investment portfolio of
mortgage loans from time to time, even if we believe that it would be in our best interest to do so.

We may incur excess inclusion income that would increase the tax liability of our stockholders.

In general, dividend income that a tax-exempt entity receives from us should not constitute unrelated

business taxable income as defined in Section 512 of the Code. If we realize excess inclusion income and allocate
it to stockholders, however, then this income would be fully taxable as unrelated business taxable income under

Section 512 of the Code. If the stockholder is foreign, it would generally be subject to U.S. federal income tax
withholding on this income without reduction pursuant to any otherwise applicable income tax treaty. U.S.
stockholders would not be able to offset such income with their operating losses.

We generally structure our borrowing arrangements in a manner designed to avoid generating significant
amounts of excess inclusion income. However, excess inclusion income could result if we held a residual interest
in a REMIC. Excess inclusion income also may be generated if we were to issue debt obligations with two or
more maturities and the terms of the payments on these obligations bore a relationship to the payments that we
received on our mortgage loans or MBS securing those debt obligations. For example, we may engage in non-
REMIC CMO securitizations. We also enter into various repurchase agreements that have differing maturity
dates and afford the lender the right to sell any pledged mortgage securities if we default on our obligations. The
IRS may determine that these transactions give rise to excess inclusion income that should be allocated among
our stockholders. We may invest in equity securities of other REITs and it is possible that we might receive
excess inclusion income from those investments. Some types of entities, including, without limitation,
voluntarily employee benefit associations and entities that have borrowed funds to acquire their shares of our
stock, may be required to treat a portion of or all of the dividends they receive from us as unrelated business
taxable income.

Misplaced reliance on legal opinions or statements by issuers of MBS and government securities could result
in a failure to comply with REIT gross income or asset tests.

When purchasing MBS and government securities, we may rely on opinions of counsel for the issuer or

sponsor of such securities, or statements made in related offering documents, for purposes of determining
whether and to what extent those securities constitute “real estate assets” for purposes of the REIT asset tests and
produce income that qualifies under the REIT income tests. The inaccuracy of any such opinions or statements
may harm our REIT qualification and result in significant corporate level tax.

Additional Risk Factors

Failure to maintain an exemption from the Investment Company Act would materially harm our results of
operations.

We believe that we conduct our business in a manner that results in our not being regulated as an investment
company under the Investment Company Act of 1940, as amended, or the Investment Company Act. If we fail to
continue to qualify for an exemption from registration as an investment company, our ability to use leverage
would be substantially reduced and we would be unable to conduct our business as we presently do. The
Investment Company Act has an exemption for entities that are primarily engaged in the business of purchasing
or otherwise acquiring “mortgages and other liens on and interests in real estate.” Under the SEC’s current
interpretation, we qualify for this exemption if we maintain at least 55% of our assets directly in qualifying real
estate interests. In meeting the 55% requirement under the Investment Company Act, we treat MBS issued with
respect to an underlying pool for which we hold all issued certificates as qualifying interests. If the SEC or its
staff adopts a contrary interpretation, we could be required to sell a substantial amount of our MBS under
potentially adverse market conditions. Further, in order to maintain our exemption from registration as an
investment company by acquiring “mortgages and other liens on and interests in real estate”, we may be
precluded from acquiring MBS whose yield is somewhat higher than the yield on “mortgages and other liens on
and interests in real estate” that could be purchased in a manner consistent with the exemption.

On August 31, 2011, the SEC issued a release soliciting comments on the mortgage REIT exemption under

the Investment Company Act. The SEC indicated in its release that it is concerned that some mortgage
companies may be subject to the kinds of abuses that the Investment Company Act was intended to address, such
as misvaluations of a company’s investment portfolio and excessive leveraging. The release asked for comments
on or before November 7, 2011 on whether the exclusion should be narrowed or changed in such a way that these
potential abuses can be curtailed. The SEC also asked whether there are existing safeguards in the structure and

operations of REITs and other mortgage companies that would address these or similar concerns. Although we
believe that we have conducted our operations in a manner that would not be of the types of concerns addressed
in the SEC’s release, we could be subject to any rules or regulations that the SEC could propose in changing or
narrowing the current exclusion that mortgage REITs rely on to maintain an exemption from the Investment
Company Act. If the SEC or its staff changes or narrows this exemption, we could be required to sell a
substantial amount of our MBS under potentially adverse market conditions. Although, at the present time, it is
unknown whether the SEC or its staff will make any changes to this exclusion or the nature of any such changes,
it is possible that any such changes could impact our Asset Acquisition Policy, our leverage, our liquidity, the
size of our investment portfolio, our ability to use interest rate swap agreements, our ability to borrow, and could
have a material adverse effect on our business and results of operations.

We presently are not, nor do we intend to be, regulated as an investment company. Fluctuations in our net
income and in our book value will likely be greater than those of investment companies. This may affect
investors or potential investors as to the appropriateness of our stock as compared to that of an investment
company.

While presently our assets are similar to those owned by some investment companies, we are not regulated
as an investment company. Regulation as an investment company entails all investment companies maintaining
significantly lower levels of financial leverage than we have employed since our organization in 1998. Because
of the differences in our leverage from that of investment companies, this results in the fluctuation in net income
and in book value by us to likely be greater than that experienced by investment companies. Therefore, investors
and potential investors in our company should, on an ongoing basis, carefully determine if this greater level of
income fluctuation and book value fluctuation is appropriate for them as compared to whether the less volatile
results of investment companies are more appropriate for them.

The market price of our common stock may fluctuate significantly.

The market price and marketability of shares of our securities may, from time to time, be significantly
affected by numerous factors, including many over which we have no control and that may not be directly related
to us. These factors including the following:

•

price and volume fluctuations in the stock market from time to time, which are often unrelated to the
operating performance of particular companies;

significant volatility in the market price and trading volume of securities of REITs or other companies
in our sector, which is not necessarily related to the operating performance of these securities;

changes in regulatory policies, tax guidelines and financial accounting and reporting standards,
particularly with respect to REITs;

changes in business conditions and the general economy, including the consequences of actions by the
U.S. government and other foreign governments to address the global financial crisis;

changes in our dividend policy and earnings or variations in operating results;

any shortfall in revenue or net income or any increase in losses from levels expected by securities
analysts;

general economic trends and other external factors; and

loss of major repurchase agreement providers.

Fluctuations in the trading price of our common stock may adversely affect the liquidity of the trading
market for our common stock and, in the event that we seek to raise capital through future equity financings, our
ability to raise such equity capital.

We may not be able to use the money we raise from time to time to acquire investments at favorable prices.

We intend to seek to raise additional capital from time to time if we determine that it is in our best interests

and the best interests of our stockholders, including through public offerings of our stock. The net proceeds of
any offering could represent a significant increase in our equity. Depending on the amount of leverage that we
use, the full investment of the net proceeds of any offering might result in a substantial increase in our total
assets. There can be no assurance that we will be able to invest all of such additional funds in mortgage-related
assets at favorable prices. We may not be able to acquire enough mortgage-related assets to become fully
invested after an offering, or we may have to pay more for MBS than we have historically. In either case, the
return that we earn on stockholders’ equity may be reduced.

We have not established a minimum dividend payment level for our common stockholders and there are no
assurances of our ability to pay dividends to them in the future.

We intend to pay quarterly dividends and to make distributions to our common stockholders in amounts
such that all or substantially all of our taxable income in each year, subject to certain adjustments, is distributed.
This, along with other factors, should enable us to qualify for the tax benefits accorded to a REIT under the Code.
We have not established a minimum dividend payment level for our common stockholders and our ability to pay
dividends may be harmed by the risk factors described in this Annual Report on Form 10-K. All distributions to
our common stockholders 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. There are no assurances of our ability to pay dividends in the future.

If we raise additional capital, our earnings per share and dividends per share may decline since we may not

be able to invest all of the new capital during the quarter in which additional shares are sold and possibly the
entire following calendar quarter.

Our charter does not permit ownership of over 9.8% of our common or preferred stock and attempts to acquire
our common or preferred stock in excess of the 9.8% limit are void without prior approval from our board of
directors.

For the purpose of preserving our REIT qualification and for other reasons, our charter prohibits direct or

constructive ownership by any person of more than 9.8% of the lesser of the total number or value of the
outstanding shares of our common stock or more than 9.8% of the outstanding shares of our preferred stock. Our
charter’s constructive ownership rules are complex and may cause the outstanding stock owned by a group of
related individuals or entities to be deemed to be constructively owned by one individual or entity. As a result,
the acquisition of less than 9.8% of the outstanding stock by an individual or entity could cause that individual or
entity to own constructively in excess of 9.8% of the outstanding stock and thus be subject to our charter’s
ownership limit. Any attempt to own or transfer shares of our common or preferred stock in excess of the
ownership limit without the consent of the board of directors shall be void and will result in the shares being
transferred by operation of law to a charitable trust. Our board of directors has granted one third party
institutional investor an exemption from the 9.8% ownership limitation as set forth in our charter documents.
This exemption permitted the third party institutional investor to hold up to 20.0% of our Series A Preferred
Stock.

Because provisions contained in Maryland law, our charter and our bylaws may have an anti-takeover effect,
investors may be prevented from receiving a “control premium” for their shares.

Provisions contained in our charter and bylaws, as well as Maryland corporate law, may have anti-takeover
effects that delay, defer or prevent a takeover attempt, which may prevent stockholders from receiving a “control
premium” for their shares. For example, these provisions may defer or prevent tender offers for our common

stock or purchases of large blocks of our common stock, thereby limiting the opportunities for our stockholders
to receive a premium for their common stock over then-prevailing market prices. These provisions include the
following:

•

Ownership limit.
things, any voting group, from acquiring over 9.8% of our common stock or more than 9.8% of our
preferred stock without our permission.

The ownership limit in our charter limits related investors including, among other

Preferred Stock. Our charter authorizes our board of directors to issue preferred stock in one or more
classes and to establish the preferences and rights of any class of preferred stock issued. These actions
can be taken without soliciting stockholder approval.

• Maryland business combination statute. Maryland law restricts the ability of holders of more than
10% of the voting power of a corporation’s shares to engage in a business combination with the
corporation.

• Maryland control share acquisition statute. Maryland law limits the voting rights of “control shares”

of a corporation in the event of a “control share acquisition.”

Future offerings of debt securities, which would be senior to our common stock, Series A Preferred Stock and
Series B Preferred Stock upon liquidation, or other equity securities, which would dilute our existing
stockholders and may be senior to our common stock, Series A Preferred Stock and Series B Preferred Stock
for the purposes of dividend distributions, may harm the market price of our common stock, Series A
Preferred Stock or Series B Preferred Stock.

In the future, we may attempt to increase our capital resources by making additional offerings of debt or

equity securities, including commercial paper, medium-term notes, senior or subordinated notes and classes of
preferred stock or common stock. Upon liquidation, holders of our debt securities and shares of preferred stock
and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders
of our common stock. Our preferred stock may have a preference on dividend payments that could limit our
ability to make a dividend distribution to the holders of our common stock. Because our decision to issue
securities in any future offering will depend on market conditions and other factors beyond our control, we
cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our common stockholders
bear the risk of our future offerings reducing the market price of our common stock.

Our charter provides that we may issue up to 20 million shares of preferred stock in one or more series. The

issuance of additional preferred stock on parity with or senior to the Series A Preferred Stock or Series B
Preferred Stock could have the effect of diluting the amounts we may have available for distribution to holders of
the Series A Preferred Stock or Series B Preferred Stock. The Series A Preferred Stock and Series B Preferred
Stock will be subordinated to all our existing and future debt. Thus, our Series A Preferred Stockholders and our
Series B Preferred Stockholders bear the risk of our future offerings reducing the market price of our Series A
Preferred Stock or Series B Preferred Stock.

We may issue additional shares of common stock or shares of preferred stock that are convertible into
common stock. If we issue a significant number of shares of common stock or convertible preferred 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.

Item 1B. UNRESOLVED STAFF COMMENTS

None.

Item 2.

PROPERTIES

In February 2012, we signed a new sublease agreement with PIA that expires on June 30, 2022 for

approximately 7,300 square feet of office space at our existing location in Santa Monica, California. We believe
this facility is adequate for our intended level of operations.

Item 3.

LEGAL PROCEEDINGS

We are not a party to any material pending legal proceedings.

Item 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER

MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock began trading under the symbol ANH on the New York Stock Exchange on May 9,

2003. Our common stock previously traded under the symbol ANH on the American Stock Exchange. Prior to
March 17, 1998, there had been no public market for our common stock. The high and low sale prices for our
common stock, as reported by the New York Stock Exchange, for the periods indicated are as follows:

2013

2012

High

Low

High

Low

First Quarter
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$6.38
$6.33
$5.65
$5.11

$5.90
$5.45
$4.35
$4.14

$6.66
$7.05
$7.01
$6.58

$6.20
$6.22
$6.49
$5.54

Holders

As of February 21, 2014, there were approximately 854 record holders of our common stock. On

February 21, 2014, the last reported sale price of our common stock on the New York Stock Exchange was $5.03
per share.

Dividends

We pay cash dividends on a quarterly basis. The following table lists the cash dividends declared on each
share of our common stock for our most recent two fiscal years. The dividends listed below were based primarily
on the board of directors’ evaluation of earnings and consideration of actions necessary to maintain our REIT
status for each listed quarter and were declared on the date indicated:

Cash
Dividends
Per Common
Share

Date
Dividends
Declared

2013

2012

First quarter ended March 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter ended June 30, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter ended September 30, 2013 . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter ended December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . .

First quarter ended March 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter ended June 30, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter ended September 30, 2012 . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter ended December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . .

$0.15
$0.15
$0.12
$0.08

$0.21
$0.18
$0.15
$0.15

March 28, 2013
June 28, 2013
September 30, 2013
December 13, 2013

March 30, 2012
June 29, 2012
September 28, 2012
December 14, 2012

Issuer Purchase of Equity Securities

Period

Shares purchased previously under this program . . . .

Total Number of
Shares Purchased

Average Price
Paid per
Share

Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs

Maximum
Number of
Shares
That May
Yet Be
Purchased
Under the
Plans or
Programs(1)

6,243,498

5,000,000

Month #1 (October 1-31) . . . . . . . . . . . . . . . . . . . . . . .
Month #2 (November 1-30) . . . . . . . . . . . . . . . . . . . . .
Month #3 (December 1-31) . . . . . . . . . . . . . . . . . . . . .

730,700
1,300,000
940,974

$4.52
$4.47
$4.23

6,974,198
8,274,198
9,215,172

Total shares purchased this quarter . . . . . . . . . . . . . . .

2,971,674

5,000,000
5,000,000
5,000,000

5,000,000

(1) On October 3, 2011, we announced that our board of directors had authorized a share repurchase program

which permits us to acquire up to 2,000,000 shares of our common stock. The shares are expected to be
acquired at prevailing prices through open market transactions. Our board of directors also authorized the
Company to purchase an amount of our common stock up to the amount of common stock sold through our
2012 Dividend Reinvestment and Stock Purchase Plan. On December 13, 2013, we announced that our
board of directors had authorized us to acquire up to an additional 5,000,000 shares of our common stock
under our share repurchase program.

Total Return Comparison

The following graph presents a cumulative total shareholder return comparison of our common stock with
the Standard & Poor’s 500 Index and the National Association of Real Estate Investment Trusts, Inc. Mortgage
REIT Index:

Total Return Performance

Anworth Mortgage Asset Corporation
S&P 500 Index

NAREIT Mortgage REIT Index

250

225

200

175

150

125

100

e
u
a
V
x
e
d
n
I

75
12/31/2008

12/31/2009

12/31/2010

12/31/2011

12/31/2012

12/31/2013

Index

12/31/08

12/31/09

12/31/10

12/31/11

12/31/12

12/31/13

Anworth Mortgage Asset Corporation . . . . . . . . . . . . . .
S&P 500 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NAREIT Mortgage REIT Index . . . . . . . . . . . . . . . . . . .

100.00
100.00
100.00

128.64
126.46
124.63

147.43
145.51
152.79

151.33
148.59
149.10

155.08
172.37
178.75

124.49
228.19
175.25

Period Ending

The cumulative total shareholder return reflects stock price appreciation, if any, and the value of dividends

for our common stock and for each of the comparative indices. The graph assumes that $100 was invested on
December 31, 2008 in our common stock, that $100 was invested in each of the indices on December 31, 2008
and that all dividends were reinvested into additional shares of common stock at the frequency with which
dividends are paid on the common stock during the applicable fiscal year. The total return performance shown in
this graph is not necessarily indicative of and is not intended to suggest future total return performance.
Measurement points are at the last trading day of the fiscal years represented above.

Item 6.

SELECTED FINANCIAL DATA

Statements of Income Data
Days in period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income net of amortization of premium and

discount

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sales of assets . . . . . . . . . . . . . . . . . . . . . . .
Net gain on derivative instruments . . . . . . . . . . . . . . . . .
Recovery on Non-Agency MBS . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends on preferred stock . . . . . . . . . . . . . . . . . . . . .
Net income available to common stockholders . . . . . . .

Basic earnings per common share . . . . . . . . . . . . . . . . .
Diluted earnings per common share . . . . . . . . . . . . . . . .
Average number of shares outstanding . . . . . . . . . . . . .
Average number of diluted shares outstanding . . . . . . .

For the Years Ended December 31,

2013

2012

2011

2010

2009

(amounts in thousands, except per share data and days)

365

366

365

$174,784
(92,970)
$ 81,814
9,237
—
397
(15,728)
$ 75,720
(5,736)
$ 69,984

$
$

0.49
0.49
142,455
146,400

$195,853
(86,073)
$109,780
4,434
—
1,426
(15,422)
$100,218
(5,773)
$ 94,445

$
$

0.68
0.67
138,382
142,485

$224,180
(89,265)
$134,915

—
—
2,225
(14,264)
$122,876
(5,885)
$116,991

$
$

0.91
0.90
128,601
132,759

$219,803
(95,830)
$123,973

—
—
270
(13,744)
$110,499
(5,764)
$104,735

$
$

0.89
0.87
118,164
121,919

$ 262,029
(115,707)
$ 146,322

—
107
—
(16,195)
$ 130,234
(5,906)
$ 124,328

$
$

1.18
1.16
105,413
108,905

As of December 31,

2013

2012

2011

2010

2009

(amounts in thousands, except per share data)

Balance Sheets Data
Agency MBS(1) . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase agreements . . . . . . . . . . . . . . . . . .
Junior subordinated notes . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . .
Series B Preferred Stock . . . . . . . . . . . . . . . . . .
Stockholders’ equity (common and Series A

Preferred) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of common shares outstanding . . . . . .
Book value per common share . . . . . . . . . . . . .

$8,556,446
$8,619,491
$7,580,000
$
37,380
$7,717,305
23,924
$

$9,244,693
$9,285,105
$8,020,000
$
37,380
$8,197,388
25,222
$

$8,763,479
$8,813,769
$7,595,000
$
37,380
$7,804,243
27,239
$

$7,739,052
$7,790,215
$6,375,000
$
37,380
$6,896,304
25,630
$

$6,490,543
$6,526,648
$5,359,000
$
37,380
$5,597,337
25,803
$

$ 878,262
138,717
5.98

$1,062,495
142,013
7.14

$ 982,287
134,115
6.96

$ 868,281
120,901
6.78

$ 903,508
115,563
7.40

(1)

Includes Non-Agency MBS of $79, $360, $1,585, $4,394 and $4,742 at each respective period (in
thousands).

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

This Annual Report on Form 10-K contains or incorporates by reference certain forward-looking statements

within the meaning of Section 27A of the 1933 Act and Section 21E of the Securities Exchange Act of 1934, as
amended, and, as such, may involve known and unknown risks, uncertainties and assumptions. Forward-looking
statements are those that predict or describe future events or trends and that do not relate solely to historical
matters. You can generally identify forward-looking statements as statements containing the words “will,”
“believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume” or other similar expressions. You should not
rely on our forward-looking statements because the matters they describe are subject to assumptions, known and
unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Therefore,
our actual results could differ materially and adversely from those expressed in any forward-looking statements
as a result of various factors, some of which are listed under the section “Risk Factors,” Item 1A of this Annual
Report on Form 10-K.

Statements regarding the following subjects, among others, may be forward-looking: changes in interest

rates and the market value of our mortgage-backed securities, or MBS; risks associated with investing in
mortgage-related assets; changes in the yield curve; the availability of MBS for purchase; changes in the
prepayment rates on the mortgage loans securing our MBS; our ability to borrow to finance our assets and, if
available, the terms of any financing; implementation of or changes in government regulations or programs
affecting our business; changes in business conditions and the general economy, including the consequences of
actions by the U.S. government and other foreign governments to address the global financial crisis; our ability
to maintain our qualification as a real estate investment trust, or REIT, for federal income tax purposes; our
ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended; and
our ability to manage our growth. New risks and uncertainties arise over time and it is not possible to predict
those events or how they may affect us. Except as required by law, we do not intend to update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise.

General

The Company

We were incorporated in Maryland on October 20, 1997 and we commenced operations on March 17, 1998.

We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, or the Code. As a REIT,

we routinely distribute substantially all of the taxable income generated from our operations to our stockholders.
As long as we retain our REIT status, we generally will not be subject to federal or state taxes on our income to
the extent that we distribute our taxable net income to our stockholders. At December 31, 2013, our qualified
REIT assets (real estate assets, as defined under the Code, cash and cash items and government securities) were
greater than 99% of our total assets, as compared to the Code requirement that at least 75% of our total assets
must be qualified REIT assets. Greater than 99% of our 2013 revenue qualified for both the 75% source of
income test and the 95% source of income test under the REIT rules. At December 31, 2013, we believe we met
all REIT requirements regarding the ownership of our common stock and the distributions of our taxable net
income. Therefore, we believe that we continue to qualify as a REIT under the provisions of the Code.

Pursuant to a Management Agreement, or the Management Agreement, between us and Anworth

Management, LLC, or the Manager, effective as of December 31, 2011, our day-to-day operations are conducted
by the Manager. The Manager is supervised and directed by our board of directors and is responsible for (i) the

selection, purchase and sale of our investment portfolio; (ii) our financing and hedging activities; and
(iii) providing us with management services. The Manager will also perform such other services and activities
relating to our assets and operations as may be appropriate. In exchange for these services, the Manager receives
a management fee paid monthly in arrears in an amount equal to one-twelfth of 1.20% of our Equity (as defined
in the Management Agreement). Our board of directors affirmatively elected to renew the Management
Agreement for another one-year term expiring on December 31, 2014. The Management Agreement will
automatically renew for successive one-year terms unless either party elects not to renew. If we terminate the
Management Agreement or elect not to renew without cause, then we will be required to pay a termination fee
equal to three times the average annual management fee earned during the prior 24-month period.

Government Activity

On September 13, 2012, the Federal Reserve announced its intention to purchase additional Agency MBS at

a pace of $40 billion per month. These purchases were open-ended, meaning they would continue until the
Federal Reserve was satisfied that economic conditions, primarily in unemployment, improve. The Federal
Reserve also announced its projection that the federal funds rate would likely remain at exceptionally low levels
until at least mid-2015. In May 2013, upon the release of minutes of the Fed Open Market Committee (FOMC)
meeting, Federal Reserve Chairman Ben Bernanke stated that if there was continued improvement in the U.S.
economy, the pace of purchases could be slowed down. After this statement, the rate on the 10-Year Treasury
rose above 2%. In addition, following the June 2013 FOMC meeting, Chairman Bernanke commented that if the
U.S. economy continued to improve, the Federal Reserve would probably slow or moderate its MBS purchases
sometime later in 2013 and possibly ending them sometime in the middle of 2014. This comment had an even
greater effect on the bond market, as longer-term interest rates rose while short-term interest rates remained
constant. The resulting steepened yield curve caused a decline in the second quarter of 2013 in the value of MBS
in general and in the value of our portfolio. At December 31, 2013, the fair value adjustment of our portfolio
declined from December 31, 2012 by approximately $234.5 million, due primarily to the events that transpired
during the second quarter of 2013. In December 2013 and January 2014, the Federal Reserve reduced its bond
buying program from $85 billion per month down to $65 billion per month.

Although the U.S. government and other foreign governments have taken various actions (including placing

In August 2011, the ratings of each of U.S. sovereign debt, Fannie Mae and Freddie Mac were downgraded
from AAA to AA+ by Standard & Poor’s, and affirmed at Aaa by Moody’s, with each of Standard & Poor’s and
Moody’s revising the outlook on U.S. sovereign debt, Fannie Mae and Freddie Mac to negative. Each of
Standard & Poor’s and Moody’s has indicated that it would likely change its ratings on Fannie Mae and Freddie
Mac if it was to change its rating on the U.S. government. In June 2013, Standard & Poor’s affirmed its AA+
long-term sovereign credit rating on the United States and revised the outlook from negative to stable, and in July
2013, Moody’s affirmed its Aaa government bond rating of the United States and revised the outlook from
negative to stable. We do not know what effect any changes in the ratings of U.S. sovereign debt, Fannie Mae
and Freddie Mac will ultimately have on the U.S. economy, the value of our securities or the ability of Fannie
Mae and Freddie Mac to satisfy its guarantees of Agency MBS if necessary.

On January 2, 2013, the U.S. Congress passed the American Taxpayer Relief Act of 2012, or the Taxpayer

provisions of the Budget Control Act of 2011, which provided for automatic federal spending cuts, from
January 2, 2013 to March 1, 2013. The automatic spending cuts required under the Budget Control Act of 2011
went into effect on March 1, 2013. At the end of January 2013, Congress temporarily increased the debt ceiling
amount and deferred any further decision on how to resolve the debt ceiling issue until May 19, 2013. This was
again temporarily delayed due to government tax revenues being greater than anticipated and Congress passing
temporary funding measures until mid-October 2013. On October 1, 2013, the U.S. government was partially
shut-down due to the inability of the U.S. Congress to pass a continuous funding resolution to provide funding
for most government agencies and functions. On October 17, 2013, President Obama signed into law a bill
passed by the U.S. Congress that funds the government through January 15, 2014, extends the debt ceiling
through February 7, 2014, calls for a Congressional agreement on a long-term budget by mid-December 2013,
and continues the budget sequestration provisions of the Budget Control Act of 2011. In January 2014, Congress
passed a $1.1 trillion spending bill that will fund the U.S. government through September 30, 2014. On
February 12, 2014, the Senate approved the debt ceiling legislation (previously approved by the House of
Representatives), which suspended the debt ceiling until March 2015. The bill was signed into law by President
Obama on February 15, 2014. A failure by the U.S. government to reach agreement on future budgets and debt
ceilings, reduce its budget deficit or a further downgrade of U.S. sovereign debt and government-sponsored
agencies debt could have a material adverse effect on the U.S. economy and on the global economy. These events
could have a material adverse effect on our borrowing costs, the availability of financing and the liquidity and
valuation of securities in general and particularly the securities in our portfolio.

Our Portfolio

At December 31, 2013 and December 31, 2012, our total assets, the fair value of our Agency MBS portfolio

and its allocation were approximately as follows:

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,
2013

December 31,
2012

(dollar amounts in thousands)
$9,285,105
$8,619,491

Fair value of Agency MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$8,556,446

$9,244,333

19%
9%
15%
10%
3%
15%
8%
20%
1%

21%
2%
12%
20%
13%
9%
1%
18%
4%

100%

Results of Operations

Years Ended December 31, 2013 and 2012

For the year ended December 31, 2013, our net income available to common stockholders was

approximately $70 million, or $0.49 per diluted share, based on a weighted average of 146.4 million fully diluted
shares outstanding. This includes net income of $75.7 million minus the payment of preferred dividends of $5.7

million. For the year ended December 31, 2012, our net income available to common stockholders was
approximately $94.4 million, or $0.67 per diluted share, based on a weighted average of 142.5 million fully
diluted shares outstanding. This included net income of $100.2 million minus the payment of preferred dividends
of $5.8 million.

Net interest income for the year ended December 31, 2013 totaled $81.8 million, or 34.5% of gross income,

compared to $109.8 million, or 40.9% of gross income, for the year ended December 31, 2012. Net interest
income is comprised of the interest income earned on mortgage investments (net of premium amortization
expense) less interest expense from borrowings. Interest income net of premium amortization expense for the
year ended December 31, 2013 was $174.8 million, compared to $195.9 million for the year ended December 31,
2012, a decrease of 10.8%, due primarily to a decrease in the weighted average coupons on Agency MBS (from
3.10% in 2012 to 2.67% in 2013), partially offset by an increase in the weighted average portfolio outstanding,
from approximately $8.7 billion in 2012 to approximately $8.86 billion in 2013, and a decrease in premium
amortization expense of $10.7 million. Interest expense for the year ended December 31, 2013 was $93 million,
compared to $86.1 million for the year ended December 31, 2012, an increase of approximately 8%, which
resulted primarily from an increase in the weighted average interest rates, after giving effect to the swap
agreements, from 1.08% in 2012 to 1.15% in 2013, and an increase in the average borrowings outstanding, from
$7.88 billion in 2012 to $8.01 billion in 2013.

Recoveries on Non-Agency MBS were approximately $397 thousand for the year ended December 31, 2013

compared to $1.4 million for the year ended December 31, 2012.

The results of our operations are affected by a number of factors, many of which are beyond our control, and

primarily depend on, among other things, the level of our net interest income, the market value of our MBS, the
supply of, and demand for, MBS in the marketplace, and the terms and availability of financing. Our net interest
income varies primarily as a result from changes in interest rates, the slope of the yield curve (the differential
between long-term and short-term interest rates), borrowing costs (our interest expense) and prepayment speeds
on our MBS portfolios, the behavior of which involves various risks and uncertainties. Interest rates and
prepayment speeds, as measured by the constant prepayment rate, vary according to the type of investment,
conditions in the financial markets, competition and other factors, none of which can be predicted with any
certainty. With respect to our business operations, increases in interest rates, in general, may, over time, cause:
(i) the interest expense associated with our borrowings, which are primarily comprised of repurchase agreements,
to increase; (ii) the value of our MBS portfolios and, correspondingly, our stockholders’ equity to decline;
(iii) coupons on our MBS to reset, although on a delayed basis, to higher interest rates; (iv) prepayments on our
MBS portfolios to slow, thereby slowing the amortization of our MBS purchase premiums; and (v) the value of
our interest rate swap agreements and, correspondingly, our stockholders’ equity to increase. Conversely,
decreases in interest rates, in general, may, over time, cause: (i) prepayments on our MBS portfolios to increase,
thereby accelerating the amortization of our MBS purchase premiums; (ii) the interest expense associated with
our borrowings to decrease; (iii) the value of our MBS portfolios and, correspondingly, our stockholders’ equity
to increase; (iv) the value of our interest rate swap agreements and, correspondingly, our stockholders’ equity to
decrease; and (v) coupons on our MBS to reset, although on a delayed basis, to lower interest rates. In addition,
our borrowing costs and credit lines are further affected by the type of collateral pledged and general conditions
in the credit markets.

During the year ended December 31, 2013, premium amortization expense decreased $10.7 million, or
14.8%, to $62 million from $72.8 million during the year ended December 31, 2012, due primarily to a decrease
in lower future CPR projections, partially offset by an increase in the amortization of unearned premium on
securities acquired in 2013 and 2012 at higher premiums.

The table below shows the approximate constant prepayment rate of our Agency MBS and Non-Agency

MBS:

Portfolio

Year Ended December 31, 2013

Year Ended December 31, 2012

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Agency MBS and Non-Agency

MBS . . . . . . . . . . . . . . . . . . . . . . . .

24%

23%

15%

22%

24%

26%

During the years ended December 31, 2013 and December 31, 2012, there was no gain or loss recognized in

earnings due to hedge ineffectiveness. We have determined that our hedges are still considered “highly
effective.” There were no components of the derivative instruments’ gain or loss excluded from the assessment
of hedge effectiveness.

During the year ended December 31, 2013, we received proceeds of approximately $637 million from the

sales of Agency MBS and recognized a net gain of approximately $9.2 million. During the year ended
December 31, 2012, we received proceeds of approximately $141 million from the sales of Agency MBS and
recognized a net gain on sales of approximately $4.4 million.

Total expenses were approximately $15.7 million for the year ended December 31, 2013, compared to
approximately $15.4 million for the year ended December 31, 2012. For the year ended December 31, 2013, we
incurred management fees of approximately $12 million, which is based on a percentage of our equity (see Note
10 to the accompanying audited financial statements) compared to management fees of approximately $11.6
million for the year ended December 31, 2012. “Other expenses” (as detailed in Note 14 to the accompanying
audited financial statements) decreased by $70 thousand.

Years Ended December 31, 2012 and 2011

For the year ended December 31, 2012, our net income available to common stockholders was

approximately $94.4 million, or $0.67 per diluted share, based on a weighted average of 142.5 million fully
diluted shares outstanding. This included net income of $100.2 million minus the payment of preferred dividends
of $5.8 million. For the year ended December 31, 2011, our net income available to common stockholders was
approximately $117 million, or $0.90 per diluted share, based on a weighted average of 132.8 million fully
diluted shares outstanding. This included net income of $122.9 million minus the payment of preferred dividends
of $5.9 million.

Net interest income for the year ended December 31, 2012 totaled $109.8 million, or 40.9% of gross

income, compared to $134.9 million, or 47.7% of gross income, for the year ended December 31, 2011. Net
interest income is comprised of the interest income earned on mortgage investments (net of premium
amortization expense) less interest expense from borrowings. Interest income net of premium amortization
expense for the year ended December 31, 2012 was $195.9 million, compared to $224.2 million for the year
ended December 31, 2011, a decrease of 12.6%, due primarily to an increase in premium amortization expense of
$14.2 million and a decrease in the weighted average coupons on Agency MBS (from 3.59% in 2011 to 3.10% in
2012), partially offset by an increase in the weighted average portfolio outstanding from approximately $7.9
billion in 2011 to approximately $8.7 billion in 2012. Interest expense for the year ended December 31, 2012 was
$86.1 million, compared to $89.3 million for the year ended December 31, 2011, a decrease of 3.6%, which
resulted from a decline in weighted average short-term interest rates, after giving effect to the swap agreements,
from 1.24% in 2011 to 1.08% in 2012, partially offset by an increase in the average borrowings outstanding from
$7.1 billion in 2011 to $7.88 billion in 2012.

Recoveries on Non-Agency MBS were approximately $1.4 million for the year ended December 31, 2012

compared to $2.2 million for the year ended December 31, 2011.

During the year ended December 31, 2012, premium amortization expense increased $14.2 million, or
24.3%, from $58.6 million during the year ended December 31, 2011 to $72.8 million, due primarily to an
increase in the amortization of unearned premium on securities acquired in 2012 and 2011 at higher premiums.

The table below shows the approximate constant prepayment rate of our Agency MBS and Non-Agency

MBS:

Portfolio

Year Ended December 31, 2012

Year Ended December 31, 2011

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Agency MBS and Non-Agency MBS . . .

22%

24%

26%

21%

22%

28%

25%

During the years ended December 31, 2012 and December 31, 2011, there was no gain or loss recognized in

During the year ended December 31, 2012, we received proceeds of approximately $141 million on the sale

of Agency MBS and recognized a gain on sales of approximately $4.4 million. During the year ended
December 31, 2011, we did not sell any MBS.

Total expenses were approximately $15.4 million for the year ended December 31, 2012, compared to
approximately $14.3 million for the year ended December 31, 2011. For the year ended December 31, 2012, we
incurred management fees of approximately $11.6 million, which is based on a percentage of our equity (see
Note 10 to the accompanying audited financial statements). For the year ended December 31, 2012, our average
stockholders’ equity (based on a simple average of the stockholders’ equity at January 1 and December 31 of that
year), excluding other comprehensive income, was approximately $957 million. In contrast, our average
stockholders’ equity for the year ended December 31, 2011 was approximately $889 million. This increase in
average stockholders’ equity of approximately $68 million had the effect of an increase in the management fee of
approximately $816 thousand.

Financial Condition

MBS Portfolio

At December 31, 2013, we held agency mortgage assets which had an amortized cost of approximately

$8.58 billion, consisting primarily of approximately $6.76 billion of adjustable-rate Agency MBS and
approximately $1.82 billion of fixed-rate Agency MBS. This amount represents an approximate 4.8% decrease
from the $9.02 billion held at December 31, 2012. Of the adjustable-rate Agency MBS owned by us, 23% were
adjustable-rate pass-through certificates whose coupons reset within one year. The remaining 77% consisted of
hybrid adjustable-rate Agency MBS whose coupons will reset between one year and ten years. Hybrid
adjustable-rate Agency MBS have an initial interest rate that is fixed for a certain period, usually three to ten
years, and thereafter adjust annually for the remainder of the term of the loan.

The following table presents a schedule of our MBS at fair value owned at December 31, 2013 and

December 31, 2012, classified by type of issuer (dollar amounts in thousands):

Type of Issuer

December 31, 2013

December 31, 2012

Fair
Value

Portfolio
Percentage

Fair
Value

Portfolio
Percentage

Fannie Mae (FNM) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Freddie Mac (FHLMC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ginnie Mae (GNMA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Agency MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$4,962,273
3,580,834
13,260
79

58.0% $5,993,700
3,235,166
41.8%
15,467
0.2%
360
0.0%

64.8%
35.0%
0.2%
0.0%

Total MBS: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$8,556,446

100.0% $9,244,693

100.0%

The following table classifies our portfolio of MBS owned at December 31, 2013 and December 31, 2012

by type of interest rate index (dollar amounts in thousands):

Interest Rate Index

December 31, 2013

December 31, 2012

Fair
Value

Portfolio
Percentage

Fair
Value

Portfolio
Percentage

One-month LIBOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Six-month LIBOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
One-year LIBOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Six-month certificate of deposit
. . . . . . . . . . . . . . . . . . . . . . . .
Six-month constant maturity treasury . . . . . . . . . . . . . . . . . . . .
One-year constant maturity treasury . . . . . . . . . . . . . . . . . . . . .
Cost of Funds Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15-year fixed-rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30-year fixed-rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,532
51,301
6,488,980
992
227
227,805
16,223
1,658,348
111,038

2,582
0.0% $
63,100
0.6%
75.8% 6,882,732
1,100
0.0%
0.0%
307
277,668
2.7%
20,798
0.2%
19.4% 1,655,195
341,211
1.3%

0.0%
0.7%
74.5%
0.0%
0.0%
3.0%
0.2%
17.9%
3.7%

Total Agency MBS:

. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$8,556,446

100.0% $9,244,693

100.0%

The fair values indicated do not include interest earned but not yet paid. With respect to our hybrid

adjustable-rate Agency MBS, the fair value of these securities appears on the line associated with the index based
on which the security will eventually reset once the initial fixed interest rate period has expired. The fair value of
our Agency MBS is reported to us independently from dealers who are major financial institutions and are
considered to be market makers for these types of instruments. For more detail on the fair value of our Agency
MBS, see Note 6 to the accompanying audited financial statements.

The weighted average coupon and average amortized cost of our Agency MBS at December 31,
2013, September 30, 2013, June 30, 2013, March 31, 2013, and December 31, 2012 were as follows:

December 31,
2013

September 30,
2013

June 30,
2013

March 31,
2013

December 31,
2012

Weighted Average Coupon

Adjustable-rate Agency MBS . . . . . . . . . . . .
Hybrid adjustable-rate Agency MBS . . . . . .
15-year fixed-rate Agency MBS . . . . . . . . . .
30-year fixed-rate Agency MBS . . . . . . . . . .
CMOs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total Agency MBS:

. . . . . . . . . . . . . . .

2.52%
2.62
2.66
5.71
0.97

2.65%

2.52%
2.66
2.64
5.74
0.99

2.67%

2.61% 2.70%
2.67
2.61
5.55
1.00

2.74
2.74
5.57
1.01

2.72% 2.82%

2.98%
2.82
2.97
5.56
1.01

2.98%

Average Amortized Cost

Adjustable-rate and hybrid adjustable-rate

Agency MBS . . . . . . . . . . . . . . . . . . . . . . .
15-year fixed-rate Agency MBS . . . . . . . . . .
30-year fixed-rate Agency MBS . . . . . . . . . .

103.21%
103.39
101.31

103.25% 103.20% 103.13% 103.08%
103.47
101.28

103.31
100.98

103.46
100.88

103.27
100.92

Total Agency MBS:

. . . . . . . . . . . . . . .

103.23%

103.26% 103.16% 103.08% 103.07%

Current yield (weighted average coupon divided

by average amortized cost) . . . . . . . . . . . . . . . .

2.57%

2.59%

2.64% 2.74%

2.89%

The following information pertains to our repurchase agreement borrowings at December 31, 2013,

September 30, 2013, June 30, 2013, March 31, 2013, and December 31, 2012:

December 31,
2013

September 30,
2013

June 30,
2013

March 31,
2013

December 31,
2012

Repurchase agreements outstanding . . . . . . $7,580,000
Average repurchase agreements

(dollar amounts in thousands)
$8,405,000

$7,575,000

$8,025,000

$8,020,000

outstanding . . . . . . . . . . . . . . . . . . . . . . . . $7,644,822

$8,052,629

$8,310,932

$8,038,393

$8,069,889

Average interest rate on outstanding

repurchase agreements . . . . . . . . . . . . . . .
Average days to maturity . . . . . . . . . . . . . . .
Average interest rate on outstanding

repurchase agreements after adjusting for
interest rate swap transactions . . . . . . . . .

Weighted average term to next rate

0.39%

0.37%

0.39%

0.41%

0.47%

38 days

37 days

34 days

1.50%

1.44%

0.95%

1.00%

1.12%

adjustment after adjusting for interest rate
swap transactions . . . . . . . . . . . . . . . . . . . 1,010 days

1,024 days

471 days

489 days

420 days

Weighted average haircuts(1) . . . . . . . . . . . .

5.05%

4.92%

4.83%

4.88%

4.86%

(1) A haircut represents the reduction of value to securities used as collateral in a lending arrangement so as to

provide the lender with a cushion in case the market value of the securities decreases.

At December 31, 2013 and December 31, 2012, the unamortized net premium paid for our Agency MBS

was approximately $268.1 million and $268.7 million, respectively.

At December 31, 2013, the current yield declined to 2.57% from 2.89% at December 31, 2012. This was due

primarily to the decline in the weighted average coupon. As portions of our portfolio reset, and as older assets
mature or payoff and are replaced with newer lower-yielding assets, the weighted average coupon will continue
to decline. As noted in the trend above, the weighted average coupon has declined by an average of
approximately 8 basis points per quarter. For the three months ended December 31, 2013, the weighted average
coupon for our total Agency MBS declined by 2 basis points. One of the factors that also impacts the reported
yield on our MBS portfolio is the actual prepayment rate on the underlying mortgages. We analyze our MBS and
the extent to which prepayments impact the yield. When the rate of prepayments exceeds expectations, we
amortize the premiums paid on mortgage assets over a shorter time period, resulting in a reduced yield to
maturity on our mortgage assets. Conversely, if actual prepayments are less than the assumed constant
prepayment rate, the premium would be amortized over a longer time period, resulting in a higher yield to
maturity.

The average interest rate on outstanding repurchase agreements after adjusting for interest rate swap
transactions increased from 1.12% at December 31, 2012 to 1.50% at December 31, 2013. The increase was due
primarily to an increase in the amount of outstanding swap agreements, from $3.16 billion at December 31, 2012
to $5.375 billion at December 31, 2013. The weighted average term to next rate adjustment after adjusting for
interest rate swap transactions increased from 420 days at December 31, 2012 to 1,010 days at December, 31,
2013. This was due to the increase in the notional amount and average maturity of our swap agreements. Please
see the discussion on this in the section entitled “Hedging” which follows below.

Non-Agency MBS are included with our Agency MBS. The balance of Non-Agency MBS at December 31,

2013 was approximately $79 thousand. The balance of Non-Agency MBS at December 31, 2012 was
approximately $360 thousand.

Hedging

We periodically enter into derivative transactions, in the form of interest rate swaps, which are intended to

hedge our exposure to rising rates on funds borrowed to finance our investments in securities. We designate
interest rate swap transactions as cash flow hedges. To the extent that we enter into hedging transactions to
reduce our interest rate risk on indebtedness incurred to acquire or carry real estate assets, any income or gain
from the disposition of hedging transactions should be qualifying income under the REIT rules for purposes of
the 95% gross income test. The hedging rules that exclude certain hedging income from the computation of the
95% income test have been extended to exclusion under the 75% income test as well. To qualify for this
exclusion, the hedging transaction must be clearly identified as such before the close of the day on which it was
acquired, originated or entered into. The transaction must hedge indebtedness incurred or to be incurred by us to
acquire or carry real estate assets.

As part of our asset/liability management policy, we may enter into hedging agreements such as interest rate

caps, floors or swaps. These agreements are entered into to try to reduce interest rate risk and are designed to
provide us with income and capital appreciation in the event of certain changes in interest rates. We review the
need for hedging agreements on a regular basis consistent with our capital investment policy. At December 31,
2013, we were a counter-party to swap agreements, which are derivative instruments as defined by the Financial
Accounting Standards Board in Accounting Standards Classification, or ASC, No. 815-10, with an aggregate
notional amount of $5.375 billion and an average maturity of approximately 3.9 years. We utilize swap
agreements to manage interest rate risk and do not anticipate entering into derivative transactions for speculative
or trading purposes. In accordance with the swap agreements, we pay a fixed rate of interest during the term of
the swap agreements and receive a payment that varies with the three-month LIBOR rate. For more information
on our accounting policies, the objectives and risk exposures relating to derivatives and hedging instruments, see
the section on “Derivative Financial Instruments” in Note 1 of our audited financial statements.

The following table pertains to our interest rate swap agreements at December 31, 2013, September 30,

2013, June 30, 2013, March 31, 2013, and December 31, 2012:

December 31,
2013

September 30,
2013

June 30,
2013

March 31,
2013

December 31,
2012

Aggregate notional amount of swap

agreements . . . . . . . . . . . . . . . . . . $ 5.375 billion $ 5.185 billion $ 3.435 billion $ 3.30 billion $ 3.16 billion

Average maturity of swap

agreements . . . . . . . . . . . . . . . . . .

3.9 years

4.1 years

3.0 years

3.2 years

2.8 years

Weighted average interest rate paid

on swap agreements . . . . . . . . . . .
Swap agreements as a percentage of

outstanding repurchase
agreements . . . . . . . . . . . . . . . . . .

1.81%

1.82%

1.64%

1.72%

1.98%

71%

68%

41%

39%

The decrease in the weighted average interest rate that we paid on our swap agreements during the year

ended December 31, 2013 was due primarily to the addition of 38 swap agreements with an aggregate notional
amount of $2.59 billion and a weighted average interest rate of 1.83% and the maturing of 6 swap agreements
with an aggregate notional amount of $375 million and a weighted average interest rate of 3.32%. At
December 31, 2013, there were unrealized losses of approximately $33 million on our swap agreements. At
December 31, 2012, there were unrealized losses of approximately $96 million on our swap agreements.

For more information on the amounts, policies, objectives and other qualitative data on our hedge

agreements, see Notes 1, 6 and 12 to the accompanying audited financial statements.

Liquidity and Capital Resources

Agency MBS and Non-Agency MBS Portfolios

Our primary source of funds consists of repurchase agreements which totaled $7.58 billion at December 31,

2013. As collateral for these repurchase agreements, we have pledged approximately $8.06 billion in Agency
MBS. Our other significant source of funds for the year ended December 31, 2013 consisted of payments of
principal from our Agency MBS portfolio in the amount of $2.36 billion.

For the year ended December 31, 2013, there was a net increase in cash and cash equivalents of

approximately $4.5 million. This consisted of the following components:

•

Net cash provided by operating activities for the year ended December 31, 2013 was approximately
$143 million. This is comprised primarily of net income of $75.7 million, adding back the following
non-cash items: the amortization of premium and discounts of approximately $62 million and the
amortization of restricted stock of $202 thousand, partially offset by gains on the sale of Agency MBS
of approximately $9.2 million and recoveries on Non-Agency MBS of approximately $397 thousand.
Net cash provided by operating activities also included an increase in accrued expenses of
approximately $607 thousand, an increase in accrued interest payable of approximately $9.7 million, a
decrease in interest receivable of approximately $2.5 million and a decrease in prepaid expense of
approximately $1.7 million;

Net cash provided by investing activities for the year ended December 31, 2013 was approximately
$401 million, which consisted of $2.36 billion from principal payments on Agency MBS and proceeds
from sales of Agency MBS of approximately $637 million, partially offset by purchases of Agency
MBS of $2.59 billion; and

Net cash used in financing activities for the year ended December 31, 2013 was approximately $540
million. This consisted of borrowings on repurchase agreements of approximately $42.83 billion,
partially offset by repayments on repurchase agreements of approximately $43.27 billion, proceeds
from common stock issued net of common stock repurchased of approximately $15.3 million,
dividends paid of $81.3 million on common stock and dividends paid of approximately $5.7 million on
preferred stock, less net proceeds from Series A Preferred Stock issued of approximately $1.3 million,
and net proceeds from Series B Preferred Stock issued of approximately $1.1 million,.

Relative to our MBS portfolio at December 31, 2013, all of our repurchase agreements were fixed-rate term
repurchase agreements with original maturities ranging from 31 days to three months. At December 31, 2013, we
had borrowed funds under repurchase agreements with 23 different financial institutions. As the repurchase
agreements mature, we enter into new repurchase agreements to take their place. Because we borrow money
based on the fair value of our MBS and because increases in short-term interest rates or increasing market
concern about the liquidity or value of our MBS can negatively impact the valuation of MBS, our borrowing
ability could be reduced and lenders may initiate margin calls in the event short-term interest rates increase or the
value of our MBS declines for other reasons. We had adequate cash flow, liquid assets and unpledged collateral
with which to meet our margin requirements during the year ended December 31, 2013 but there can be no
assurance we will have adequate cash flow, liquid assets and unpledged collateral with which to meet our margin
requirements in the future.

Our leverage on capital (including all preferred stock and junior subordinated notes) increased from 7.13x at

December 31, 2012 to 8.1x at December 31, 2013. The increase in leverage was due primarily to a decrease in
total stockholders’ equity of approximately $184 million, resulting primarily from a decrease in accumulated
other comprehensive income of approximately $172 million which occurred primarily during the second quarter
of 2013.

In the future, we expect that our primary sources of funds will continue to consist of borrowed funds under

repurchase agreement transactions and of monthly payments of principal and interest on our MBS portfolios. Our

liquid assets generally consist of unpledged MBS, cash and cash equivalents. A large negative change in the
market value of our MBS might reduce our liquidity, requiring us to sell assets with the likely result of realized
losses upon sale.

During the year ended December 31, 2013, we raised approximately $22.9 million in capital under our 2012

Dividend Reinvestment and Stock Purchase Plan.

At December 31, 2013, our authorized capital included 20 million shares of $0.01 par value preferred stock,

which we have classified as Series A Cumulative Preferred Stock, or Series A Preferred Stock, and Series B
Cumulative Convertible Preferred Stock, or Series B Preferred Stock.

On May 27, 2011, we entered into a Controlled Equity Offering Sales Agreement, or the 2011 Sales
Agreement, with Cantor to sell up to 20,000,000 shares of our common stock, 1,000,000 shares of our Series A
Preferred Stock and 1,000,000 shares of our Series B Preferred Stock. During the year ended December 31, 2013,
we issued an aggregate of 41,978 shares of Series A Preferred Stock under the 2011 Sales Agreement at a
weighted average price of $26.08 per share, which provided net proceeds to us of approximately $1.09 million,
net of sales commissions less reimbursement of fees. During the year ended December 31, 2013, we issued an
aggregate of 54,566 shares of our Series B Preferred Stock under the 2011 Sales Agreement at a weighted
average price of $24.50 per share, which provided net proceeds to us of approximately $1.34 million, net of sales
commissions less reimbursement of fees. During the year ended December 31, 2013, we did not issue any shares
of common stock under the 2011 Sales Agreement. At December 31, 2013, there were 19,409,400 shares of
common stock, 956,122 shares of Series A Preferred Stock and 894,518 shares of Series B Preferred Stock,
respectively, available for sale under the 2011 Sales Agreement.

On October 3, 2011, we announced that our board of directors had authorized a share repurchase program

which permits us to acquire up to 2,000,000 shares of our common stock. The shares are expected to be acquired
at prevailing prices through open market transactions. The manner, price, number and timing of share
repurchases will be subject to market conditions and applicable SEC rules. Our board of directors also authorized
the Company to purchase an amount of our common stock up to the amount of common stock sold through our
2012 Dividend Reinvestment and Stock Purchase Plan. On December 13, 2013, we announced that our board of
directors had authorized us to acquire up to an additional 5,000,000 shares of our common stock under our share
repurchase program. During the year ended December 31, 2013, we repurchased an aggregate of 7,646,429
shares at a weighted average price of $4.95 per share under our share repurchase program.

Disclosure of Contractual Obligations

The following table represents our contractual obligations at December 31, 2013 (in thousands):

Repurchase agreements(1) . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated notes(2) . . . . . . . . . . . . . . . . . . . .
Lease commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$7,580,000
37,380
4,222

Total

Less Than 1
Year

$7,580,000

—
444

Total:

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$7,621,602

$7,580,444

1-3 Years

3-5 Years

$—
—
928

$928

$—
—
984

$984

More
Than 5
Years

$ —
37,380
1,866

$39,246

(1) These represent amounts due by maturity.
(2) These represent amounts due by contractual maturity. However, we do have the option to redeem these after
March 30, 2010 and April 30, 2010 as more fully described in Note 5 to the accompanying audited financial
statements.

Stockholders’ Equity

We use available-for-sale treatment for our Agency MBS and Non-Agency MBS, which are carried on our

balance sheet at fair value rather than historical cost. Based upon these treatments, our total equity base at
December 31, 2013 was $878.3 million. Common stockholders’ equity was approximately $829 million, or a
book value of $5.98 per share.

Under our available-for-sale accounting treatment, unrealized fluctuations in fair values of assets are
assessed to determine whether they are other-than-temporary. To the extent we determine that these unrealized
fluctuations are not other-than-temporary, they do not impact GAAP income or taxable income but rather are
reflected on the balance sheet by changing the carrying value of the assets and reflecting the change in
stockholders’ equity under “Accumulated other comprehensive income, unrealized gain (loss) on available-for-
sale securities.”

As a result of this fair value accounting treatment, our book value and book value per share are likely to
fluctuate far more than if we used historical amortized cost accounting on all of our assets. As a result, comparisons
with some companies that use historical cost accounting for all of their balance sheet may not be meaningful.

Unrealized changes in the fair value of MBS have one significant and direct effect on our potential earnings

and dividends: positive fair value changes will increase our equity base and allow us to increase our borrowing
capacity, while negative changes will tend to reduce borrowing capacity under our capital investment policy. A
very large negative change in the net market value of our MBS might reduce our liquidity, requiring us to sell
assets with the likely result of realized losses upon sale. “Accumulated other comprehensive income, unrealized
loss” on available-for-sale Agency MBS was approximately $58.6 million, or 0.68% of the amortized cost of our
Agency MBS, at December 31, 2013. This, along with “Accumulated other comprehensive loss, derivatives” of
approximately $33.4 million, constitutes the total “Accumulated other comprehensive income” of approximately
$92 million.

The following table represents our common stockholders’ equity with and without accumulated other

comprehensive income, or AOCI, which is a non-GAAP financial measure, at December 31, 2013 and
December 31, 2012, respectively. The Company’s management believes that this financial measure, when
considered together with our GAAP financial measures, provides information that is useful to investors in
understanding the differences between our common stockholders’ equity including AOCI and our common
stockholders’ equity without AOCI and the effect of each on our book value per share. This financial measure
should not be used as a substitute in assessing the Company’s financial condition at December 31, 2013 and
December 31, 2012, respectively. An analysis of any non-GAAP financial measure should be used in conjunction
with results presented in accordance with GAAP.

Common stockholders’ equity without AOCI
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AOCI – unrealized (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Common stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Series A Preferred Stock liquidation value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Series B Preferred Stock liquidation value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Series B Preferred Stock proceeds from issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,
2013

December 31,
2012

(in thousands)

$920,969
(92,008)

$828,961
47,984
25,241
(23,924)

$ 934,354
79,776

$1,014,130
46,935
26,652
(25,222)

Total stockholders’ equity per balance sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$878,262

$1,062,495

Common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Per Share Amounts
Common stockholders’ equity without AOCI
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AOCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Common stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

138,717

142,013

6.64
(0.66)

5.98

6.58
0.56

7.14

Critical Accounting Policies and Estimates

Management has the obligation to ensure that its policies and methodologies are in accordance with GAAP.

Management has reviewed and evaluated its critical accounting policies and believes them to be appropriate.

The preparation of financial statements in accordance with GAAP requires management to make estimates

and assumptions in certain circumstances that affect amounts reported in the accompanying audited financial
statements. In preparing these audited financial statements, management has made its best estimates and
judgments on the basis of information then readily available to it of certain amounts included in the audited
financial statements, giving due consideration to materiality. Application of these accounting policies involves
the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could
differ materially and adversely from these estimates.

Our accounting policies are described in Note 1 to the accompanying audited financial statements.

Management believes the more significant of our accounting policies are the following:

Revenue Recognition

The most significant source of our revenue is derived from our investments in MBS. We reflect income

using the effective yield method which, through amortization of premiums and accretion of discounts at an
effective yield, recognizes periodic income over the estimated life of the investment on a constant yield basis, as
adjusted for actual prepayment activity and estimated prepayments. Management believes our revenue
recognition policies are appropriate to reflect the substance of the underlying transactions.

Interest income on our MBS is accrued based on the actual coupon rate and the outstanding principal
amounts of the underlying mortgages. Premiums and discounts are amortized or accreted into interest income
over the expected lives of the securities using the effective interest yield method, adjusted for the effects of actual
prepayments and estimated prepayments based on ASC 320-10. Our policy for estimating prepayment speeds for
calculating the effective yield is to evaluate historical performance, 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, which
could be material and adverse.

Valuation and Classification of Investment Securities

We carry our investment securities on our balance sheet at fair value. The fair values of our Agency MBS
are generally based on third party bid price indications provided by certain dealers who make markets in such
securities. If, in the opinion of management, one or more securities prices reported to us are not reliable or
unavailable, management reviews the fair value based on characteristics of the security it receives from the issuer
and available market information. The fair values reported reflect estimates and may not necessarily be indicative
of the amounts we could realize in a current market exchange. We review various factors (i.e., expected cash
flows, changes in interest rates, credit protection, etc.) in determining whether and to what extent an other-than-
temporary impairment exists. To the extent that unrealized losses on our Agency MBS are attributable to changes
in interest rates and not credit quality, and because we did not have the intent at December 31, 2013 to sell these
investments, nor is it not more likely than not that we will be required to sell these investments before recovery
of their amortized cost bases, which may be at maturity, we do not consider these investments to be other-than-
temporarily impaired. Losses (that are related to credit quality) on securities classified as available-for-sale,
which are determined by management to be other-than-temporary in nature, are reclassified from “Accumulated
other comprehensive income (loss)” to current-period income (loss). For more detail on the fair value of our
securities, see Note 6 to the accompanying audited financial statements.

Accounting for Derivatives and Hedging Activities

In accordance with ASC 815-10, a derivative that is designated as a hedge is recognized as an asset/liability

and measured at estimated fair value. In order for our interest rate swap agreements to qualify for hedge
accounting, upon entering into the swap agreement, we must anticipate that the hedge will be highly “effective,”
as defined by ASC 815-10.

On the date we enter into a derivative contract, we designate the derivative as a hedge of the variability of

cash flows that are to be received or paid in connection with a recognized asset or liability (a “cash flow” hedge).
Changes in the fair value of a derivative that are highly effective and that are designated and qualify as a cash
flow hedge, to the extent that the hedge is effective, are recorded in “Other comprehensive income” and
reclassified to income when the forecasted transaction affects income (e.g., when periodic settlement interest
payments are due on repurchase agreements). The swap agreements are carried on our balance sheets at their fair
value based on values obtained from large financial institutions, who are market makers for these types of
instruments. Hedge ineffectiveness, if any, is recorded in current-period income.

We formally assess, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are
used in hedging transactions have been highly effective in offsetting changes in the cash flows of hedged items
and whether those derivatives may be expected to remain highly effective in future periods. If it is determined
that a derivative is not (or has ceased to be) highly effective as a hedge, we discontinue hedge accounting.

When we discontinue hedge accounting, the gain or loss on the derivative remains in “Accumulated other

comprehensive income (loss)” and is reclassified into income when the forecasted transaction affects income. In
all situations in which hedge accounting is discontinued and the derivative remains outstanding, we will carry the
derivative at its fair value on the balance sheet, recognizing changes in the fair value in current-period income.

For purposes of the cash flow statement, cash flows from derivative instruments are classified with the cash

flows from the hedged item. For more detail on our derivative instruments, see Notes 1, 6 and 12 to the
accompanying audited financial statements.

Income Taxes

Our financial results do not reflect provisions for current or deferred income taxes. Management believes

that we have and intend to continue to operate in a manner that will allow us to be taxed as a REIT and, as a
result, management does not expect to pay substantial, if any, corporate level taxes. Many of these requirements,
however, are highly technical and complex. If we were to fail to meet these requirements, we would be subject to
federal income tax.

Recent Accounting Pronouncements

A description of recent accounting pronouncements, the date adoption is required and the impact on our

financial statements is contained in Note 1 to the accompanying audited financial statements.

Subsequent Events

On January 27, 2014, we declared a Series A Preferred Stock dividend of $0.539063 per share and a Series
B Preferred Stock dividend of $0.390625 per share, each of which is payable on April 15, 2014 to our holders of
record of Series A Preferred Stock and Series B Preferred Stock, respectively, as of the close of business on
March 31, 2014.

From January 1, 2014 through February 21, 2014, we issued an aggregate of 49,230 shares of our common
stock at a weighted average price of $4.55 per share under our 2012 Dividend Reinvestment and Stock Purchase
Plan, resulting in net proceeds to us of approximately $224 thousand.

From January 1, 2014 through February 21, 2014, we repurchased an aggregate of 2,223,414 shares of our

common stock at a weighted average price of $4.76 per share under our share repurchase program.

From January 1, 2014 through February 21, 2014, we entered into two new swap agreements with an

aggregate notional amount of $75 million and terms of up to six years. From January 1, 2014 through
February 21, 2014, two swap agreements with an aggregate notional amount of $150 million matured.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We seek to manage the interest rate, market value, liquidity, prepayment and credit risks inherent in all

financial instruments in a prudent manner designed to insure our longevity while, at the same time, seeking to
provide an opportunity for stockholders to realize attractive total rates of return through ownership of our
common stock. While we do not seek to avoid risk completely, we do seek, to the best of our ability, to assume
risk that can be quantified from historical experience, to actively manage that risk, to earn sufficient
compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake.

Interest Rate Risk

We primarily invest in adjustable-rate, hybrid and fixed-rate mortgage-related assets. Hybrid mortgages are

ARMs that have a fixed interest rate for an initial period of time (typically three years or greater) and then
convert to an adjustable-rate for the remaining loan term. Our debt obligations are generally repurchase
agreements of limited duration that are periodically refinanced at current market rates.

ARM-related assets are typically subject to periodic and lifetime interest rate caps that limit the amount an
ARM-related asset’s interest rate can change during any given period. ARM securities are also typically subject
to a minimum interest rate payable. Our borrowings are not subject to similar restrictions. Hence, in a period of
increasing interest rates, interest rates on our borrowings could increase without limitation, while the interest
rates on our mortgage-related assets could be limited. This problem would be magnified to the extent we acquire
mortgage-related assets that are not fully indexed. Further, some ARM-related assets may be subject to periodic
payment caps that result in some portion of the interest being deferred and added to the principal outstanding.
These factors could lower our net interest income or cause a net loss during periods of rising interest rates, which
would negatively impact our liquidity, net income and our ability to make distributions to stockholders.

We fund the purchase of a substantial portion of our ARM-related assets with borrowings that have interest

rates based on indices and repricing terms similar to, but of shorter maturities than, the interest rate indices and
repricing terms of our mortgage assets. Thus, we anticipate that in most cases the interest rate indices and
repricing terms of our mortgage assets and our funding sources will not be identical, thereby creating an interest
rate mismatch between assets and liabilities. During periods of changing interest rates, such interest rate
mismatches could negatively impact our net interest income, dividend yield and the market price of our common
stock.

Most of our adjustable-rate assets are based on the one-year constant maturity treasury rate and the one-year

LIBOR rate and our debt obligations are generally based on LIBOR. These indices generally move in the same
direction, but there can be no assurance that this will continue to occur.

Our ARM-related assets and borrowings reset at various different dates for the specific asset or obligation.
In general, the repricing of our debt obligations occurs more quickly than on our assets. Therefore, on average,
our cost of funds may rise or fall more quickly than does our earnings rate on the assets.

Further, our net income may vary somewhat as the spread between one-month interest rates and six- and

twelve-month interest rates varies.

At December 31, 2013, our MBS and related borrowings will prospectively reprice based on the following

time frames (dollar amounts in thousands):

Investment Type/Rate Reset Dates
15-year fixed-rate investments . . . . . . . . . . . . . . . . . . . . . . . .
30-year fixed-rate investments . . . . . . . . . . . . . . . . . . . . . . . .

Adjustable-Rate Investments/Obligations
Less than 3 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Greater than 3 months and less than 1 year . . . . . . . . . . . . . .
Greater than 1 year and less than 2 years . . . . . . . . . . . . . . . .
Greater than 2 years and less than 3 years . . . . . . . . . . . . . . .
Greater than 3 years and less than 4 years . . . . . . . . . . . . . . .
Greater than 4 years and less than 5 years . . . . . . . . . . . . . . .
Greater than 5 years and less than 7 years . . . . . . . . . . . . . . .
Greater than 7 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Investments(1)(2)

Borrowings

Percentage
of Total
Investments

Amount

Percentage
of Total
Borrowings

Amount

$1,658,348
111,038

19.4% $
1.3%

—
—

0.0%
0.0%

528,776
1,113,514
730,340
1,273,775
873,407
293,402
1,305,608
668,238

6.2% 7,580,000
—
13.0%
—
8.5%
—
14.9%
—
10.2%
—
3.4%
—
15.3%
—
7.8%

100.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%

100.0%

Total: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$8,556,446

100.0% $7,580,000

(1) Based on when they contractually reprice and do not reflect the effect of any prepayments.
(2) We assume that if the repricing of the investment is just beyond 3 months but less than 4 months, it is

included in the “Less than 3 months” category.

At December 31, 2012, our MBS and related borrowings will prospectively reprice based on the following

time frames (dollar amounts in thousands):

Investment Type/Rate Reset Dates
15-year fixed-rate investments . . . . . . . . . . . . . . . . . . . . . . . .
30-year fixed-rate investments . . . . . . . . . . . . . . . . . . . . . . . .

Investments(1)(2)

Borrowings

Percentage
of Total
Investments

Amount

Percentage
of Total
Borrowings

Amount

$1,655,195
341,211

17.9% $
3.7

0
0

0.0%
0.0%

621,929
1,314,385
185,590
1,104,770
1,876,203
1,168,752
824,078
152,580

6.7
14.2
2.0
12.0
20.3
12.6
8.9
1.7

8,020,000
0
0
0
0
0
0
0

100.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%

100.0%

Total: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$9,244,693

100.0% $8,020,000

included in the “Less than 3 months” category.

Market Value Risk

All of our MBS are classified as available-for-sale assets. As such, they are reflected at fair value (i.e., market
value) with the periodic adjustment to fair value (that is not considered to be an other-than-temporary impairment)
reflected as part of “Accumulated other comprehensive income” that is included in the equity section of our balance
sheet. The market value of our assets can fluctuate due to changes in interest rates and other factors. At
December 31, 2013, the fair value adjustment of our MBS reflected in AOCI declined to a negative adjustment
(other comprehensive loss) of approximately $58.6 million from a positive adjustment (other comprehensive
income) at December 31, 2012 of approximately $175.8 million, due primarily to the events that transpired during
the second quarter 2013 (see general discussion section of Management’s Discussion and Analysis).

Liquidity Risk

Our primary liquidity risk arises from financing long-maturity MBS with short-term debt. The interest rates

on our borrowings generally adjust more frequently than the interest rates on our adjustable-rate MBS. For
example, at December 31, 2013, our Agency MBS had a weighted average term to next rate adjustment of
approximately 42 months while our borrowings had a weighted average term to next rate adjustment of 38 days.
After adjusting for interest rate swap transactions, the weighted average term to next rate adjustment was 1,010
days. Accordingly, in a period of rising interest rates, our borrowing costs will usually increase faster than our
interest earnings from MBS. As a result, we could experience a decrease in net income or a net loss during these
periods. Our assets that are pledged to secure short-term borrowings are high-quality liquid assets. As a result, we
have been able to roll over our short-term borrowings as they mature. There can be no assurance that we will
always be able to roll over our short-term debt.

During the past few years, there have been continuing liquidity and credit concerns surrounding the
mortgage markets and the general global economy. While the U.S. government and other foreign governments
have taken various actions to address these concerns, there are also concerns about the ability of the U.S.
government to meet the obligations of the Budget Control Act of 2011 and to reduce its budget deficit and about
possible future rating downgrades of U.S. sovereign debt and government-sponsored agency debt. On
October 17, 2013, President Obama signed into law a bill passed by the U.S. Congress that funds the government
through January 15, 2014, extends the debt ceiling through February 7, 2014, calls for a Congressional agreement
on a long-term budget by mid-December 2013, and continues the budget sequestration provisions of the Budget
Control Act of 2011. In January 2014, Congress passed a $1.1 trillion spending bill that will fund the U.S.
government through September 30, 2014. On February 12, 2014, the Senate approved the debt ceiling legislation
(previously approved by the House of Representatives), which suspended the debt ceiling until March 2015. The
bill was sent to President Obama, who is expected to sign it into law. A failure by the U.S. government to reach
agreement on future budget and debt ceilings, or reduce its budget deficit or a further downgrade of U.S.
sovereign debt and government-sponsored agencies debt, could have a material adverse effect on the U.S.
economy and on the global economy. This could have the effect of reducing the availability of financing in
general or lead to changes in credit terms such as collateral requirements or length of financing. As a result, there
continues to be concerns about the potential impact on product availability, liquidity, interest rates and changes in
the yield curve. While we have been able to meet all of our liquidity needs to date, there are still concerns in the
mortgage sector about the availability of financing generally.

At December 31, 2013, we had unrestricted cash of $7.4 million and $462 million in unpledged MBS
available to meet margin calls on short-term borrowings that could be caused by asset value declines or changes
in lender collateralization requirements.

Prepayment Risk

Prepayments are the full or partial repayment of principal prior to the original term to maturity of a
mortgage loan and typically occur due to refinancing of mortgage loans. Prepayment rates on mortgage-related
securities and mortgage loans vary from time to time and may cause changes in the amount of our net interest

income. Prepayments of ARM loans usually can be expected to increase when mortgage interest rates fall below
the then-current interest rates on such loans and decrease when mortgage interest rates exceed the then-current
interest rate on such loans, although such effects are not entirely predictable. Prepayment rates may also be
affected by the conditions in the housing and financial markets, general economic conditions and the relative
interest rates on fixed-rate loans and ARM loans underlying MBS. The purchase prices of MBS are generally
based upon assumptions regarding the expected amounts and rates of prepayments. Where slow prepayment
assumptions are made, we may pay a premium for MBS. To the extent such assumptions differ from the actual
amounts of prepayments, we could experience reduced earnings or losses. The total prepayment of any MBS
purchased at a premium by us would result in the immediate write-off of any remaining capitalized premium
amount and a reduction of our net interest income by such amount. In addition, in the event that we are unable to
acquire new MBS to replace the prepaid MBS, our financial condition, cash flows and results of operations could
be harmed.

We often purchase mortgage-related assets 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 par value to acquire these assets. In
accordance with accounting rules, we amortize this premium over the term of the MBS. As we receive
repayments of mortgage principal, we amortize the premium balances as a reduction to our income. If the
mortgage loans underlying MBS were prepaid at a faster rate than we anticipate, we would amortize the premium
at a faster rate. This would reduce our income.

General

Many assumptions are made to present the information in the tables below and, as such, there can be no
assurance that assumed events will occur, or that other events that could affect the outcomes will not occur;
therefore, the tables below and all related disclosures constitute forward-looking statements.

The analyses presented utilize assumptions and estimates based on management’s judgment and experience.
Furthermore, future sales, acquisitions and restructuring could materially change the interest rate risk profile for
us. The tables quantify the potential changes in net income and portfolio value should interest rates immediately
change (are “shocked”) and remain at the new level for the next twelve months. The results of interest rate
shocks of plus and minus 100 and 200 basis points are presented. The cash flows from our portfolio of mortgage-
related assets for each rate shock scenario are projected, based on a variety of assumptions including prepayment
speeds, time until coupon reset, yield on future acquisitions, slope of the yield curve and size of the portfolio.
Assumptions made on the interest rate-sensitive liabilities, which are repurchase agreements, include anticipated
interest rates (no negative rates are utilized), collateral requirements as a percent of the repurchase agreement and
amount of borrowing. Assumptions made in calculating the impact on net asset value of interest rate shocks
include projected changes in U.S. Treasury interest rates, prepayment rates and the yield spread of mortgage-
related assets relative to prevailing U.S. Treasury interest rates.

Tabular Presentation

The information presented in the table below projects the impact of instantaneous parallel shifts in interest

rates on Anworth’s annual projected net income (relative to the unchanged interest rate scenario), and the impact
of the same instantaneous parallel shifts on Anworth’s projected portfolio value (the value of our assets,
including the value of any derivative instruments or hedges, such as interest rate swap agreements). These
projections are based on investments in place at December 31, 2013, and include all of our interest rate sensitive
assets, liabilities and hedges, such as interest rate swap agreements.

Change in Interest Rates

Percentage Change in
Projected Net Interest Income

Percentage Change In
Projected Portfolio Value

–2%
–1%
0%
1%
2%

–104%
–24%
0%
–17%
–40%

–1.9%
0.0%
0%
–1.2%
–2.8%

The information presented in the table below projects the impact of the same sudden changes in interest
rates on Anworth’s annual projected net income and projected portfolio value compared to the base case used in
the table above, and the only difference is that it excludes the effect of the interest rate swap agreements on both
net interest income and portfolio value. As of December 31, 2013, the aggregate notional amount of the interest
rate swap agreements was $5.375 billion and the weighted average maturity was approximately 3.9 years.

Change in Interest Rates

Percentage Change in
Projected Net Interest Income

Percentage Change In
Projected Portfolio Value

–2%
–1%
0%
1%
2%

131%
211%
0%
66%
–90%

2.8%
2.4%
0%
–3.5%
–7.5%

Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and related financial information required to be filed hereunder are indexed under

Item 15 of this Annual Report on Form 10-K and are incorporated herein by reference.

Item 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

Item 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls

We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)

under the Exchange Act), designed to ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized and reported on a timely basis.

Our management, with the participation of our Principal Executive Officer and Principal Financial Officer,
has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by
this Annual Report on Form 10-K. Based on such evaluation, our Principal Executive Officer and Principal
Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are
effective.

Management Report on Internal Control Over Financial Reporting

The management of Anworth is responsible for establishing and maintaining adequate internal control over

financial reporting. Anworth’s internal control system was designed to provide reasonable assurance to the
Company’s management and board of directors regarding the preparation and fair presentation of prepared
financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those

systems determined to be effective can provide only reasonable assurance with respect to financial statement
preparation and presentation.

Our management assessed the effectiveness of the Company’s internal control over financial reporting as of

December 31, 2013. In making this assessment, it used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework from 1992.
Although COSO recently issued a new Integrated Framework on May 14, 2013, this new framework must be

implemented by no later than December 15, 2014 and the period from May 14, 2013 through December 15, 2014
will be a transition period. Based on our assessment, we believe that, as of December 31, 2013, Anworth’s
internal control over financial reporting is effective based on the criteria set forth in the 1992 COSO Framework.

The Company’s independent auditors, McGladrey LLP, have issued an attestation report on the

effectiveness of the Company’s internal control over financial reporting. This report appears on the following
page of this Annual Report on Form 10-K.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders
Anworth Mortgage Asset Corporation

We have audited Anworth Mortgage Asset Corporation’s (the Company) internal control over financial
reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992. The Company’s
management is responsible 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
Item 9A, “Management’s Report on Internal Control over Financial Reporting.” Our responsibility is to express
an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our
audit 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 audit also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed 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 (a) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) 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 (c) 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. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
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 Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board

(United States), the balance sheets of Anworth Mortgage Asset Corporation as of December 31, 2013 and 2012
and the related statements of income, comprehensive income, stockholders’ equity and cash flows for each of the
three years in the period ended December 31, 2013 and our report dated February 26, 2014 expressed an
unqualified opinion.

McGladrey LLP

Los Angeles, California
February 26, 2014

Item 9B. OTHER INFORMATION

None.

PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item is incorporated herein by reference from the information under the

captions entitled “Election of Directors—Information Regarding Nominees for Director,” “Executive Officers”
and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement to be filed
with the SEC no later than April 30, 2014.

Item 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference from the information under the caption

entitled “Executive Compensation” in our definitive proxy statement to be filed with the SEC no later than
April 30, 2014.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED STOCKHOLDER MATTERS

Certain of the information required by this Item is incorporated by reference from the information under the

caption entitled “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters” in our definitive proxy statement to be filed with the SEC no later than April 30, 2014.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR

INDEPENDENCE

The information required by this Item is incorporated by reference from the information under the caption

entitled “Certain Relationships and Related Transactions, and Director Independence” in our definitive proxy
statement to be filed with the SEC no later than April 30, 2014.

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item is incorporated by reference from the information under the caption
entitled “Principal Accountant Fees and Services” in our definitive proxy statement to be filed with the SEC no
later than April 30, 2014.

Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Documents filed as part of this report:

PART IV

(1) The following financial statements of the Company are included in Part II, Item 8 of this Annual Report

on Form 10-K:

•

Report of Independent Registered Public Accounting Firm, McGladrey LLP;

Balance Sheets as of December 31, 2013 and December 31, 2012;

Statements of Income: For the Years Ended December 31, 2013, December 31, 2012 and December 31,
2011;

Statements of Comprehensive Income: For the Years Ended December 31, 2013, December 31, 2012
and December 31, 2011;

Statements of Stockholders’ Equity: For the Years Ended December 31, 2013, December 31, 2012 and
December 31, 2011; and

Statements of Cash Flows: For the Years Ended December 31, 2013, December 31, 2012 and
December 31, 2011;

Notes to Financial Statements.

(2) Schedules to financial statements:

All financial statement schedules have been omitted because they are either inapplicable or the information
required is provided in the Company’s Financial Statements and Notes thereto, included in Part II, Item 8 of this
Annual Report on Form 10-K.

(3) The exhibits listed on the accompanying Exhibit Index are filed as part of this Annual Report on

Form 10-K.

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.

DATED: February 26, 2014

ANWORTH MORTGAGE ASSET CORPORATION

/s/

JOSEPH LLOYD MCADAMS
Joseph Lloyd McAdams
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)

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 dates indicated.

Signature

Title

Date

/s/

JOSEPH LLOYD MCADAMS
Joseph Lloyd McAdams

/s/ THAD M. BROWN

Thad M. Brown

/s/

JOSEPH E. MCADAMS
Joseph E. McAdams

/s/ LEE A. AULT, III

Lee A. Ault, III

/s/ CHARLES H. BLACK

Charles H. Black

/s/

JOE E. DAVIS
Joe E. Davis

/s/ ROBERT C. DAVIS

Robert C. Davis

Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)

Chief Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)

February 26, 2014

Executive Vice President, Chief

February 26, 2014

Investment Officer and Director

February 26, 2014

Director

[THIS PAGE INTENTIONALLY LEFT BLANK]

ANWORTH MORTGAGE ASSET CORPORATION

INDEX TO FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm McGladrey LLP . . . . . . . . . . . . . . . . . . . . . . . . .
Balance Sheets as of December 31, 2013 and 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statements of Income for the Years Ended December 31, 2013, 2012 and 2011 . . . . . . . . . . . . . . . . . . . . . .
Statements of Comprehensive Income for the Years Ended December 31, 2013, 2012 and 2011 . . . . . . . . .
Statements of Stockholders’ Equity for the Years Ended December 31, 2013, 2012 and 2011 . . . . . . . . . . .
Statements of Cash Flows for the Years Ended December 31, 2013, 2012 and 2011 . . . . . . . . . . . . . . . . . . .
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

F-2
F-3
F-4
F-5
F-6
F-7
F-8

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
Anworth Mortgage Asset Corporation

We have audited the accompanying balance sheets of Anworth Mortgage Asset Corporation, or the
Company, as of December 31, 2013 and 2012, and the related statements of income, comprehensive income,
stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013. These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements 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. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial

position of the Company as of December 31, 2013 and 2012, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted
accounting principles.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board

(United States), the Company’s internal control over financial reporting as of December 31, 2013, based on
criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 1992, and our report dated February 26, 2014 expressed an
unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

McGladrey LLP

Los Angeles, California
February 26, 2014

F-2

ANWORTH MORTGAGE ASSET CORPORATION

BALANCE SHEETS
(in thousands, except per share amounts)

December 31,
2013

December 31,
2012

Agency MBS:

ASSETS

Agency MBS pledged to counterparties at fair value . . . . . . . . . . . . . . . . . . . . . . . . . .
Agency MBS at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paydowns receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 8,060,567
462,478
33,401

$ 8,523,557
668,726
52,410

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and dividends receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative instruments at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8,556,446
7,368
23,310
22,551
9,816

9,244,693
2,910
25,839
111
11,552

Total Assets:

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 8,619,491

$ 9,285,105

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:

Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative instruments at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends payable on Series A Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends payable on Series B Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends payable on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

30,117
7,580,000
37,380
55,914
1,035
394
11,097
1,368

20,376
8,020,000
37,380
96,144
1,011
414
21,302
761

Total Liabilities:

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 7,717,305

$ 8,197,388

Series B Cumulative Convertible Preferred Stock: par value $0.01 per share;

liquidating preference $25.00 per share ($25,241 and $26,652, respectively); 1,010
and 1,066 shares issued and outstanding at December 31, 2013 and December 31,
2012, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23,924

25,222

Stockholders’ Equity:

Series A Cumulative Preferred Stock: par value $0.01 per share; liquidating

preference $25.00 per share ($47,984 and $46,935, respectively); 1,919 and 1,877
shares issued and outstanding at December 31, 2013 and December 31, 2012,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Common Stock: par value $0.01 per share; authorized 200,000 shares, 138,717 and
142,013 issued and outstanding at December 31, 2013 and December 31, 2012,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss) consisting of unrealized losses and
gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Accumulated deficit

46,537

45,447

1,387
1,185,369

1,420
1,197,793

(92,008)
(263,023)

79,776
(261,941)

Total Stockholders’ Equity:

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 878,262

$ 1,062,495

Total Liabilities and Stockholders’ Equity:

. . . . . . . . . . . . . . . . . . . . . . . . .

$ 8,619,491

$ 9,285,105

See accompanying notes to audited financial statements.

F-3

ANWORTH MORTGAGE ASSET CORPORATION

STATEMENTS OF INCOME
(in thousands, except per share amounts)

Interest income:

Interest on Agency MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$174,728
56

$195,763
90

$224,130
50

For the Years Ended December 31,

2013

2012

2011

Interest expense:

Interest expense on repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense on junior subordinated notes . . . . . . . . . . . . . . . . . . . . . .

174,784

195,853

224,180

91,690
1,280

92,970

84,720
1,353

86,073

87,975
1,290

89,265

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

81,814

109,780

134,915

Gain on sales of Agency MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recovery on Non-Agency MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses:

9,237
397

4,434
1,426

—
2,225

Management fee to related party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation, incentive compensation and benefits . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(11,961)
—
(3,767)

(11,585)
—
(3,837)

—
(10,979)
(3,285)

Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(15,728)

(15,422)

(14,264)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 75,720

$100,218

$122,876

Dividend on Series A Cumulative Preferred Stock . . . . . . . . . . . . . . . . . . . . . .
Dividend on Series B Cumulative Convertible Preferred Stock . . . . . . . . . . . .

(4,142)
(1,594)

(4,045)
(1,728)

(4,044)
(1,841)

Net income to common stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 69,984

$ 94,445

$116,991

Basic earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic weighted average number of shares outstanding . . . . . . . . . . . . . . . . . . .
Diluted weighted average number of shares outstanding . . . . . . . . . . . . . . . . .

$
$

0.49
0.49
142,455
146,400

$
$

0.68
0.67
138,382
142,485

$
$

0.91
0.90
128,601
132,759

See accompanying notes to audited financial statements.

F-4

ANWORTH MORTGAGE ASSET CORPORATION

STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)

For the Years Ended December 31,

2013

2012

2011

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 75,720

$100,218

$ 122,876

Available-for-sale Agency MBS, fair value adjustment . . . . . . . . . . . . .
Reclassification adjustment for net (gains) on sales of Agency MBS

included in net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain (losses) on cash flow hedges . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustment for interest expense on swap agreements

(225,208)

32,985

62,598

(9,237)
3,411

(4,434)
(52,691)

—

(103,164)

included in net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

59,250

Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(171,784)

53,693

29,553

68,345

27,779

Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (96,064) $129,771

$ 150,655

See accompanying notes to audited financial statements.

F-5

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F-6

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S

ANWORTH MORTGAGE ASSET CORPORATION

STATEMENTS OF CASH FLOWS
(in thousands)

Operating Activities:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by

operating activities:

Amortization of premium and discounts (Agency

MBS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sales of Agency MBS . . . . . . . . . . . . . . . . . . . .
Amortization of restricted stock . . . . . . . . . . . . . . . . . . .
Non-cash incentive compensation . . . . . . . . . . . . . . . . . .
Recovery on Non-Agency MBS . . . . . . . . . . . . . . . . . . .
Changes in assets and liabilities: . . . . . . . . . . . . . . . . . . . . . . .
Decrease (increase) in interest receivable . . . . . . . . . . . .
Decrease (increase) in prepaid expenses and other . . . . .
Increase (decrease) in accrued interest payable . . . . . . .
Increase (decrease) in accrued expenses . . . . . . . . . . . . .

For the Years Ended December 31,

2013

2012

2011

75,720

100,218

122,876

62,033
(9,237)
202
—
(397)

2,529
1,737
9,732
607

72,774
(4,434)
202
—
(1,426)

2,246
1,775
(3,186)
(282)

58,552
—
282
877
(2,225)

(988)
(8,711)
3,462
97

Net cash provided by operating activities . . . .

142,926

167,887

174,222

Investing Activities:

Available-for-sale Agency MBS:

Proceeds from sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

636,807
(2,591,994)
2,356,590

141,438
(3,231,919)
2,550,225

—

(3,600,881)
2,239,583

Net cash provided by (used in) investing

activities . . . . . . . . . . . . . . . . . . . . . . . . . . .

401,403

(540,256) $ (1,361,298)

Financing Activities:

Borrowings from repurchase agreements . . . . . . . . . . . . . . . .
Repayments on repurchase agreements . . . . . . . . . . . . . . . . .
Proceeds from common stock issued, net of common stock

repurchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds on Series B Preferred Stock issued . . . . . . . . . . . . .
Proceeds on Series A Preferred Stock issued . . . . . . . . . . . . .
Series A Preferred stock dividends paid . . . . . . . . . . . . . . . . .
Series B Preferred stock dividends paid . . . . . . . . . . . . . . . . .
Common stock dividends paid . . . . . . . . . . . . . . . . . . . . . . . .

Net cash (used in) provided by financing

$ 42,833,039
(43,273,039)

$ 43,857,077
(43,432,077)

$ 35,770,255
(34,550,255)

(15,293)
1,335
1,090
(4,117)
(1,615)
(81,271)

49,655
265
50
(4,044)
(1,761)
(102,763)

87,292
5,064
—
(4,044)
(1,821)
(121,159)

activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(539,871) $

366,402

$ 1,185,332

Net increase (decrease) in cash and cash equivalents . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . .

Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . .

Supplemental Disclosure of Cash Flow Information:

Cash paid for interest
Conversions of Series B Preferred Stock into common

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock repurchased . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in payable for securities purchased . . . . . . . . . . . . . .

$
$
$

4,458
2,910

7,368

83,237

(5,967)
8,877

2,910

89,258

(1,744)
10,621

8,877

85,803

2,633
38,031

$
$
— $

$
2,283
4,251
$
(20,679) $

7,851
5,269
(343,141)

See accompanying notes to audited financial statements.

F-7

ANWORTH MORTGAGE ASSET CORPORATION

NOTES TO FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Anworth Mortgage Asset Corporation, or Anworth, was incorporated in Maryland on October 20, 1997 and

commenced operations on March 17, 1998. We are in the business of investing primarily in United States, or
U.S., agency mortgage-backed securities, or Agency MBS. Agency MBS are securities representing obligations
guaranteed by the U.S. government, such as Ginnie Mae, or guaranteed by federally sponsored enterprises, such
as Fannie Mae or Freddie Mac. Our principal business objective is to generate net income for distribution to our
stockholders based upon the spread between the interest income on our mortgage-related assets and the costs of
borrowing to finance our acquisition of those assets.

We have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of
1986, or the Code. As a REIT, we routinely distribute substantially all of the taxable income generated from our
operations to our stockholders. As long as we retain our REIT status, we generally will not be subject to federal
or state taxes on our income to the extent that we distribute our taxable net income to our stockholders.

Effective as of December 31, 2011, we entered into a Management Agreement, or the Management
Agreement with Anworth Management, LLC, or the Manager, which effected the externalization of our
management function, or the Externalization. Since the effective date, our day-to-day operations have been
conducted by the Manager through the authority delegated to it under the Management Agreement and pursuant
to the policies established by our board of directors. The Manager is supervised and directed by our board of
directors and is responsible for (i) the selection, purchase and sale of our investment portfolio; (ii) our financing
and hedging activities; and (iii) providing us with management services. The Manager will also perform such
other services and activities relating to our assets and operations as may be appropriate. In exchange for these
services, the Manager receives a management fee paid monthly in arrears in an amount equal to one-twelfth of
1.20% of our Equity (as defined in the Management Agreement). Our board of directors affirmatively elected to
renew the Management Agreement for another one-year term expiring on December 31, 2014.

BASIS OF PRESENTATION

The accompanying financial statements are prepared on the accrual basis of accounting in accordance with
generally accepted accounting principles utilized in the United States of America, or GAAP. The preparation of
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.
Material estimates that are susceptible to change relate to the determination of the fair value of securities,
amortization of security premiums and accretion of security discounts and accounting for derivatives and hedging
activities. Actual results could materially differ from these estimates. In the opinion of management, all material
adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been
included.

The following is a summary of our significant accounting policies:

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and highly liquid investments with original maturities of

three months or less. The carrying amount of cash equivalents approximates their fair value.

F-8

Reverse Repurchase Agreements

We use securities purchased under agreements to resell, or reverse repurchase agreements, as a means of

investing excess cash. Although legally structured as a purchase and subsequent resale, reverse repurchase
agreements are treated as financing transactions under which the counterparty pledges securities (U.S. treasury
securities or Agency MBS) and accrued interest as collateral to secure a loan. The difference between the
purchase price that we pay and the resale price that we receive represents interest paid to us and is included in
“Other income” on our statements of income. It is our policy to generally take possession of securities purchased
under reverse repurchase agreements at the time such agreements are made.

Mortgage-Backed Securities (MBS)

Agency MBS are securities that are obligations (including principal and interest) which are guaranteed by

the U.S. government, such as Ginnie Mae, or guaranteed by federally sponsored enterprises, such as Fannie Mae
or Freddie Mac. Our investment grade Agency MBS portfolio is invested primarily in fixed-rate and adjustable-
rate mortgage-backed pass-through certificates and hybrid adjustable-rate MBS. Hybrid adjustable-rate MBS
have an initial interest rate that is fixed for a certain period, usually three to ten years, and then adjusts annually
for the remainder of the term of the loan. We structure our investment portfolio to be diversified with a variety of
prepayment characteristics, investing in mortgage-related assets with prepayment penalties, investing in certain
mortgage security structures that have prepayment protections and purchasing mortgage-related assets at a
premium and at a discount. Our portfolio also includes a small amount of Non-Agency MBS (approximately $79
thousand) and this is now included with the Agency MBS. Prior year balances have been presented consistent
with this treatment.

We classify our MBS as either trading investments, available-for-sale investments or held-to-maturity
investments. Our management determines the appropriate classification of the securities at the time they are
acquired and evaluates the appropriateness of such classifications at each balance sheet date. We currently
classify all of our MBS as available-for-sale. All assets that are classified as available-for-sale are carried at fair
value and unrealized gains or losses are generally included in “Other comprehensive income (loss)” as a
component of stockholders’ equity. Losses that are credit-related on securities classified as available-for-sale,
which are determined by management to be other-than-temporary in nature, are reclassified from “Other
comprehensive income” to income (loss).

The most significant source of our revenue is derived from our investments in MBS. Interest income on our
Agency MBS is accrued based on the actual coupon rate and the outstanding principal amount of the underlying
mortgages. Premiums and discounts are amortized or accreted into interest income over the estimated lives of the
securities using the effective interest yield method, adjusted for the effects of actual and estimated prepayments
based on the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 320-
10. Our policy for estimating prepayment speeds for calculating the effective yield is to evaluate historical
performance, street consensus prepayment speeds and current market conditions. If our estimate of prepayments
is materially incorrect, as compared to the aforementioned references, 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, which
could be material and adverse.

Securities are recorded on the date the securities are purchased or sold. Realized gains or losses from

securities transactions are determined based on the specific identified cost of the securities.

F-9

The following table shows our investments’ gross unrealized losses and fair value of those individual
securities that have been in a continuous unrealized loss position at December 31, 2013 and December 31, 2012,
aggregated by investment category and length of time (dollar amounts in thousands):

December 31, 2013

Less Than 12 Months

12 Months or More

Total

Description of Securities

Number
of
Securities

Fair
Value

Unrealized
Losses

Number
of
Securities

Fair
Value

Unrealized
Losses

Number
of
Securities

Fair
Value

Unrealized
Losses

Agency MBS . . . . . . .

202

$4,262,712 $(122,890)

230

$763,911 $(23,089)

432

$5,026,623 $(145,979)

December 31, 2012

Less Than 12 Months

12 Months or More

Total

Description of Securities

Number
of
Securities

Fair
Value

Unrealized
Losses

Number
of
Securities

Fair
Value

Unrealized
Losses

Number
of
Securities

Fair
Value

Unrealized
Losses

Agency MBS . . . . . . . . .

$907,972

$(2,457)

207

$283,638

$(4,117)

275

$1,191,610

$(6,574)

We do not consider those Agency MBS that have been in a continuous loss position for 12 months or more
to be other-than-temporarily impaired. The unrealized losses on our investments in Agency MBS were caused by
fluctuations in interest rates. We purchased the Agency MBS primarily at a premium relative to their face value
and the contractual cash flows of those investments are guaranteed by the U.S. government or government-
sponsored agencies. Since September 2008, the government-sponsored agencies have been in the conservatorship
of the U.S. government. We do not expect to sell the Agency MBS at a price less than the amortized cost basis of
our investments. Because the decline in market value of the Agency MBS is attributable to changes in interest
rates and not the credit quality of the Agency MBS in our portfolio, and because we do not have the intent to sell
these investments nor is it more likely than not that we will be required to sell these investments before recovery
of their amortized cost basis, which may be at maturity, we do not consider these investments to be other-than-
temporarily impaired at December 31, 2013.

Repurchase Agreements

We finance the acquisition of our MBS primarily through the use of repurchase agreements. Under these
repurchase agreements, we sell securities to a lender and agree to repurchase the same securities in the future for
a price that is higher than the original sales price. The difference between the sale price that we receive and the
repurchase price that we pay represents interest paid to the lender. Although structured as a sale and repurchase
obligation, a repurchase agreement operates as a financing under which we pledge our securities and accrued
interest as collateral to secure a loan which is equal in value to a specified percentage of the estimated fair value
of the pledged collateral. We retain beneficial ownership of the pledged collateral. Upon the maturity of a
repurchase agreement, we are required to repay the loan and concurrently receive back our pledged collateral
from the lender or, with the consent of the lender, we may renew such agreement at the then-prevailing financing
rate. These repurchase agreements may require us to pledge additional assets to the lender in the event the
estimated fair value of the existing pledged collateral declines.

Derivative Financial Instruments

Interest Rate Risk Management

We primarily use short-term (less than or equal to 12 months) repurchase agreements to finance the

purchase of MBS. These obligations expose us to variability in interest payments due to changes in interest rates.
We continuously monitor changes in interest rate exposures and evaluate hedging opportunities.

F-10

Our objective is to limit the impact of interest rate changes on earnings and cash flows. We achieve this by
entering into interest rate swap agreements, which effectively convert a percentage of our repurchase agreements
to fixed-rate obligations over a period of up to ten years. Under interest rate swap contracts, we agree to pay an
amount equal to a specified fixed rate of interest times a notional principal amount and to receive in return an
amount equal to a specified variable-rate of interest times a notional amount, generally based on the London
Interbank Offered Rate, or LIBOR. The notional amounts are not exchanged. We account for these swap
agreements as cash flow hedges in accordance with ASC 815-10. We do not issue or hold derivative contracts for
speculative purposes.

For all interest rate swap agreements entered into prior to September 9, 2013, we are exposed to credit
losses in the event of non-performance by counterparties to interest rate swap agreements. In order to limit credit
risk associated with swap agreements, our current practice is to only enter into swap agreements with large
financial institution counterparties who are market makers for these types of instruments, limit our exposure on
each swap agreement to a single counterparty under our defined guidelines and either pay or receive collateral to
or from each counterparty on a periodic basis to cover the net fair market value position of the swap agreements
held with that counterparty.

For all interest rate swap agreements entered into on or after September 9, 2013, all swap participants are

required by rules of the Commodities Futures Trading Commission, or CFTC, under authority granted to it
pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, to clear
swaps through a registered derivatives clearing organization, or “swap execution facility,” through standardized
documents under which each swap counterparty transfers its position to another entity whereby a central
clearinghouse effectively becomes the counterparty on each side of the swap. Both the swap execution facility
and the central clearing house could require greater initial and periodic margin (collateral) requirements and
additional transaction fees. It is the intent of the Dodd-Frank Act that the clearing of swaps in this manner is
designed to avoid concentration of risk in any single entity by spreading and centralizing the risk in the
clearinghouse and its members.

Accounting for Derivatives and Hedging Activities

In accordance with ASC 815-10, a derivative that is designated as a hedge is recognized as an asset/liability

On the date we enter into a derivative contract, we designate the derivative as a hedge of the variability of

cash flows that are to be received or paid in connection with a recognized asset or liability (a “cash flow” hedge).
Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash flow
hedge, to the extent that the hedge is effective, are recorded in “Other comprehensive income” and reclassified to
income when the forecasted transaction affects income (e.g., when periodic settlement interest payments are due
on repurchase agreements). The swap agreements are carried on our balance sheets at their fair value, based on
values obtained from large financial institutions who are market makers for these types of instruments. Hedge
ineffectiveness, if any, is recorded in current-period income.

When we discontinue hedge accounting, the gain or loss on the derivative remains in “Accumulated other

comprehensive income” and is reclassified into income when the forecasted transaction affects income. In all
situations in which hedge accounting is discontinued and the derivative remains outstanding, we will carry the
derivative at its fair value on our balance sheet, recognizing changes in the fair value in current-period income.

F-11

For purposes of the cash flow statement, cash flows from derivative instruments are classified with the cash

flows from the hedged item.

For more details on the amounts and other qualitative information on our swap agreements, see Note 12. For

more information on the fair value of our swap agreements, see Note 6.

Credit Risk

At December 31, 2013, we have attempted to limit our exposure to credit losses on our MBS by purchasing
securities primarily through Freddie Mac and Fannie Mae. The payment of principal and interest on the Freddie
Mac and Fannie Mae MBS are guaranteed by those respective enterprises. In September 2008, both Freddie Mac
and Fannie Mae were placed in the conservatorship of the U.S. government. While it is the intent that the
conservatorship will help stabilize Freddie Mac’s and Fannie Mae’s losses and overall financial position, there can
be no assurance that it will succeed or that, if necessary, Freddie Mac or Fannie Mae will be able to satisfy its
guarantees of Agency MBS. In August 2011, the ratings of each of U.S. sovereign debt, Fannie Mae and Freddie
Mac were downgraded from AAA to AA+ by Standard & Poor’s, and affirmed at Aaa by Moody’s Investors
Service, or Moody’s, with each of Standard & Poor’s and Moody’s revising the outlook on U.S. sovereign debt,
Fannie Mae and Freddie Mac to negative. Each of Standard & Poor’s and Moody’s has indicated that it would likely
change its ratings on Fannie Mae and Freddie Mac if it was to change its rating on the U.S. government. In
June 2013, Standard & Poor’s affirmed its AA+ long-term sovereign credit rating on the United States and revised
the outlook from negative to stable, and in July 2013, Moody’s affirmed its Aaa government bond rating of the
United States and revised the outlook from negative to stable. We do not know what effect any changes in the
ratings of U.S. sovereign debt, Fannie Mae and Freddie Mac will ultimately have on the U.S. economy, the value of
our securities, or the ability of Fannie Mae and Freddie Mac to satisfy its guarantees of Agency MBS if necessary.

Our adjustable-rate MBS are subject to periodic and lifetime interest rate caps. Periodic caps can limit the

amount an interest rate can increase during any given period. Some adjustable-rate MBS subject to periodic
payment caps may result in a portion of the interest being deferred and added to the principal outstanding.

Other-than-temporary losses on our available-for-sale MBS, as measured by the amount of decline in
estimated fair value attributable to credit losses that are considered to be other-than-temporary, are charged
against income, resulting in an adjustment of the cost basis of such securities. Based on the criteria in ASC-320-
10, the determination of whether a security is other-than-temporarily impaired, or OTTI, involves judgments and
assumptions based on both subjective and objective factors. When a security is impaired, an OTTI is considered
to have occurred if (i) we intend to sell the security, (ii) it is more likely than not that we will be required to sell
the security before recovery of its amortized cost basis, or (iii) we do not expect to recover its amortized cost
basis (i.e., there is a credit-related loss). The following are among, but not all of, the factors considered in
determining whether and to what extent an OTTI exists and the portion that is related to credit loss: (i) the
expected cash flow from the investment; (ii) whether there has been an other-than-temporary deterioration of the
credit quality of the underlying mortgages; (iii) the credit protection available to the related mortgage pool for
MBS; (iv) any other market information available, including analysts’ assessments and statements, public
statements and filings made by the debtor or counterparty; (v) management’s internal analysis of the security,
considering all known relevant information at the time of assessment; and (vi) the magnitude and duration of
historical decline in market prices. Because management’s assessments are based on factual information as well
as subjective information available at the time of assessment, the determination as to whether an other-than-
temporary decline exists and, if so, the amount considered impaired, is also subjective and therefore constitutes
material estimates that are susceptible to significant change.

Income Taxes

We have elected to be taxed as a REIT and to comply with the provisions of the Code with respect thereto.
Accordingly, we will not be subject to federal income tax to the extent that our distributions to our stockholders
satisfy the REIT requirements and that certain asset, income and stock ownership tests are met.

F-12

We have no unrecognized tax benefits and do not anticipate any increase in unrecognized benefits during
2014 relative to any tax positions taken prior to January 1, 2014. Should the accrual of any interest or penalties
relative to unrecognized tax benefits be necessary, it is our policy to record such accruals in our income taxes
accounts; and no such accruals existed at December 31, 2013. Through 2013, we filed both REIT and taxable
REIT subsidiary U.S. federal and California income tax returns. These returns are generally open to examination
by the IRS and the California Franchise Tax Board for all years after 2009 and 2008, respectively.

Cumulative Convertible Preferred Stock

We classify our Series B Cumulative Convertible Preferred Stock, or Series B Preferred Stock, on our

balance sheets using the guidance in ASC 480-10-S99. The Series B Preferred Stock contains certain
fundamental change provisions that allow the holder to redeem the preferred stock for cash only if certain events
occur, such as a change in control. As redemption under these circumstances is not solely within our control, we
have classified the Series B Preferred Stock as temporary equity.

We have analyzed whether the conversion features in the Series B Preferred Stock should be bifurcated

under the guidance in ASC 815-10 and have determined that bifurcation is not necessary.

Stock-Based Compensation

In accordance with ASC 718-10 and ASC 505-50, any compensation cost relating to share-based payment

transactions is recognized in the financial statements.

Restricted stock is expensed over the vesting period (see Note 11).

Earnings Per Share

Basic earnings per share, or EPS, is computed by dividing net income available to common stockholders by

the weighted average number of common shares outstanding during the period. Diluted EPS assumes the
conversion, exercise or issuance of all potential common stock equivalents (which includes stock options and
convertible preferred stock) and adding back the Series B Preferred Stock dividends, unless the effect is to reduce
a loss or increase the income per share.

The computation of EPS for the years ended December 31, 2013, 2012 and 2011 is as follows (amounts in

thousands, except per share data):

Net Income
Available to
Common
Stockholders

Average
Shares

Earnings
per
Share

For the year ended December 31, 2013

Basic EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of dilutive securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 69,984
1,594

142,455
3,945

$ 0.49
—

Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 71,578

146,400

$ 0.49

For the year ended December 31, 2012

$ 94,445
1,728

138,382
4,103

$ 0.68
(0.01)

Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 96,173

142,485

$ 0.67

For the year ended December 31, 2011

$116,991
1,841

128,601
4,158

$ 0.91
(0.01)

Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$118,832

132,759

$ 0.90

F-13

For the years ended December 31, 2013, 2012 and 2011, options to purchase 5,000 shares, 320,700 shares

and 592,480 shares of our common stock, respectively, were outstanding and not included in the computation of
diluted EPS, as their exercise price and option expense exceeded the average stock price for those respective
years.

Accumulated Other Comprehensive Income

In accordance with ASC 220-10-55-2, comprehensive income is divided into net income and other

comprehensive income, which includes unrealized gains and losses on marketable securities classified as
available-for-sale, and unrealized gains and losses on derivative financial instruments that qualify for cash flow
hedge accounting under ASC 815-10.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities.”

This ASU requires the disclosure in tabular format in a footnote of the gross amounts subject to rights of set-off,
the gross amounts of any set-off and the net amounts shown on the balance sheet. This ASU also requires the
disclosure of any agreements subject to such netting arrangements. This ASU will affect all financial instruments
such as securities lending agreements, repurchase agreements, reverse repurchase agreements, and derivatives
instruments. As there are differences in the offsetting requirements in GAAP and International Financial
Reporting Standards (IFRS), the objective of this disclosure is to facilitate comparison between companies that
prepare their financial statements according to those different reporting requirements. This ASU became
effective for our financial statements beginning with the quarter ended March 31, 2013. We have adopted this
ASU and it did not have a material impact on our financial statements.

On January 31, 2013, the FASB issued ASU 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of
Disclosures about Offsetting Assets and Liabilities.” This ASU clarifies that ordinary trade receivables and other
receivables are not in the scope of ASU 2011-11 and specifically, that ASU 2011-11 applies only to derivatives,
repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending
transactions that are either subject to rights of set-off or to master netting arrangements. This ASU is only a
clarification of the ASU mentioned in the paragraph above and it became effective for our financial statements
beginning with the quarter ended March 31, 2013. We have adopted this ASU and it did not have a material
impact on our financial statements.

On February 5, 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of
Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The amendments in this ASU will
require entities to: (1) present (either on the face of the statement where net income is presented or in the notes)
the effect on the line items of net income of significant amounts reclassified out of accumulated other
comprehensive income, but only if the item reclassified is required under GAAP to be reclassified to net income
in its entirety in the same reporting period; and (2) cross-reference to other disclosures currently required under
GAAP for other reclassification items that are not required under GAAP to be reclassified directly to net income
in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified
out of accumulated other comprehensive income is initially transferred to a balance sheet account instead of
directly related to income or expense. This ASU became effective for our financial statements beginning with the
quarter ended March 31, 2013. We have adopted this ASU and it did not have a material impact on our financial
statements.

In the first quarter of 2013, the FASB issued ASU 2013-04, “Liabilities (Topic 405): Obligations Resulting

from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the
Reporting Date.” This ASU requires an entity to measure obligations resulting from joint and several liability
arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting
date, as the sum of the following: (a) the amount the reporting entity agreed to pay on the basis of its arrangement

F-14

among its co-obligors; and (b) any additional amount the reporting entity expects to pay on behalf of its co-
obligors. This ASU also requires an entity to disclose the nature and amount of the obligation as well as other
information about the obligations including the terms and conditions of the arrangement. Examples of obligations
within the scope of this ASU include debt arrangements, other contractual obligations, and settled litigation and
judicial rulings. This ASU is effective for our financial statements beginning with the quarter ending March 31,
2014. We do not believe this ASU will have a material impact on our financial statements.

In July 2013, the FASB issued ASU 2013-10, “Inclusion of the Fed Funds Effective Swap Rate (or
Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes.” Prior to the
amendments in this ASU, only interest rates on direct Treasury obligations of the U.S. government and the
London Interbank Offered Rate (LIBOR) were considered as acceptable benchmark interest rates. This ASU now
also allows the use of the Fed Funds Effective Swap Rate as an acceptable benchmark interest rate. This ASU is
effective prospectively for qualifying new or re-designated hedging relationships entered into on or after July 17,
2013. We have adopted this ASU and it did not have a material impact on our financial statements.

NOTE 2. REVERSE REPURCHASE AGREEMENTS

At December 31, 2013, we did not have any reverse repurchase agreements outstanding. During the year
ended December 31, 2013, the maximum amount of reverse repurchase agreements outstanding was $210 million
and the average daily amount outstanding was approximately $7.2 million. These investments are used as a
means of investing excess cash. The collateral for these loans was principally U.S. Treasury securities with an
aggregate fair value equal to the amount of the loans. At December 31, 2012, there were no reverse repurchase
agreements outstanding.

NOTE 3. MORTGAGE-BACKED SECURITIES (MBS)

The following tables summarize our Agency MBS classified as available-for-sale as of December 31, 2013

and December 31, 2012, which are carried at their fair value (amounts in thousands):

December 31, 2013

By Agency

Ginnie Mae

Freddie Mac

Fannie Mae

Amortized cost . . . . . . . . . . . . . . . . . . . . . . .
Paydowns receivable(1) . . . . . . . . . . . . . . . . .
Unrealized gains . . . . . . . . . . . . . . . . . . . . . .
Unrealized losses . . . . . . . . . . . . . . . . . . . . .

13,374
—
10
(124)

$3,618,312
33,401
18,384
(89,263)

$4,950,005

—
68,860
(56,592)

Fair value . . . . . . . . . . . . . . . . . . . . . . .

13,260

$3,580,834

$4,962,273

Non-Agency
MBS

Total
MBS

$ —
—
79
—

$8,581,691
33,401
87,333
(145,979)

$8,556,446

By Security Type

ARMs

Hybrids

15-Year
Fixed-Rate

30-Year
Fixed-Rate

Floating-Rate
CMOs(2)

Total
MBS

Amortized cost . . . . . . . . . . . .
Paydowns receivable(1) . . . . . .
Unrealized gains . . . . . . . . . . .
Unrealized losses . . . . . . . . . .

$1,594,183
2,843
46,294
(2,560)

$5,168,156
30,558
31,668
(85,614)

$1,714,427

$ 103,476

—
1,695
(57,774)

—
7,591
(29)

$1,449
—
85
(2)

$8,581,691
33,401
87,333
(145,979)

Fair value . . . . . . . . . . . .

$1,640,760

$5,144,768

$1,658,348

$ 111,038

$1,532

$8,556,446

(1) Paydowns receivable are generated when the Company receives notice from Freddie Mac of prepayments

but does not receive the actual cash with respect to such prepayments until the 15th day of the following
month.

(2) Non-Agency MBS are included in the Floating-Rate CMOs category.

F-15

During the year ended December 31, 2013, we received proceeds of approximately $637 million from the

sale of Agency MBS and recognized gross realized gains on sales of approximately $14.89 million and gross
realized losses on sales of approximately $5.65 million. During the year ended December 31, 2012, we received
proceeds of approximately $141 million from the sale of Agency MBS and recognized gross realized gains on
sales of approximately $4.4 million. There were no gross realized losses on sales during the year ended
December 31, 2012.

December 31, 2012

By Agency

Ginnie Mae

Freddie Mac

Fannie Mae

Amortized cost . . . . . . . . . . . . . . . . . . . . . . .
Paydowns receivable(1) . . . . . . . . . . . . . . . .
Unrealized gains . . . . . . . . . . . . . . . . . . . . . .
Unrealized losses . . . . . . . . . . . . . . . . . . . . .

15,646
—
25
(204)

$3,133,758
52,410
51,681
(2,683)

$5,867,079

—
130,308
(3,687)

Fair value . . . . . . . . . . . . . . . . . . . . . . .

15,467

$3,235,166

$5,993,700

Non-Agency
MBS

Total
MBS

$ —
—
360
—

$ 360

$9,016,483
52,410
182,374
(6,574)

$9,244,693

By Security Type

ARMs

Hybrids

15-Year
Fixed-Rate

30-Year
Fixed-Rate

Floating-Rate
CMOs(2)

Total
MBS

Amortized cost . . . . . . . . . . . .
Paydowns receivable(1) . . . . .
Unrealized gains . . . . . . . . . . .
Unrealized losses . . . . . . . . . .

$1,866,616
5,605
64,208
(2,697)

$5,202,362
46,805
66,623
(3,817)

$1,629,854

$ 315,438

—
25,401
(60)

—
25,773
—

Fair value . . . . . . . . . . . .

$1,933,732

$5,311,973

$1,655,195

$ 341,211

$2,213
—
369
—

$2,582

$9,016,483
52,410
182,374
(6,574)

$9,244,693

(1) Paydowns receivable are generated when the Company receives notice from Freddie Mac of prepayments

but does not receive the actual cash with respect to such prepayments until the 15th day of the following
month.

(2) Non-Agency MBS are included in the Floating-Rate CMOs category.

NOTE 4. REPURCHASE AGREEMENTS

We have entered into repurchase agreements with large financial institutions to finance most of our Agency

MBS. The repurchase agreements are short-term borrowings that are secured by the market value of our MBS
and bear fixed interest rates that have historically been based upon LIBOR.

F-16

At December 31, 2013 and December 31, 2012, the repurchase agreements had the following balances (in

thousands), weighted average interest rates and remaining weighted average maturities:
December 31, 2013

December 31, 2012

Overnight
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less than 30 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30 days to 90 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 90 days to less than 1 year . . . . . . . . . . . . . . . . . . . . . . . . . .
1 year to 2 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weighted
Average
Interest
Rate

0.00% $
0.39
0.39
—
—
—

Balance

—

4,120,000
3,900,000

—
—
—

Balance

—
3,105,000
4,475,000

—
—
—

$7,580,000

0.39% $8,020,000

Weighted
Average
Interest
Rate

0.00%
0.47
0.47
—
—
—

0.47%

Weighted average maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average term to maturity (after accounting for swap

38 days

agreements) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,010 days

Weighted average borrowing rate (after accounting for swap

34 days

420 days

agreements) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.50%

1.12%

Agency MBS pledged as collateral under the repurchase

agreements and swap agreements . . . . . . . . . . . . . . . . . . . . . . .

$8,060,567

$8,523,557

The following table presents information about certain assets and liabilities that are subject to master netting

arrangements (or similar agreements) only in the event of default on a contract. See Notes 1, 6 and 12 for more
information on the Company’s hedging instruments.

Gross Amounts
of Recognized
Assets or
Liabilities

Gross Amounts
Offset in the
Balance Sheets

Net Amounts of
Assets
or Liabilities
Presented in
the Balance
Sheets

Gross Amounts Not Offset
in the Balance Sheets(1)

Financial
Instruments

Cash
Collateral
Received

Net
Amounts

December 31, 2013
(in thousands)
Derivative assets at fair

value(2)

. . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . .

Repurchase Agreements(3) . .
Derivative liabilities at fair

22,551

$7,580,000

value(2)

. . . . . . . . . . . . . . .

55,914

Total . . . . . . . . . . . . . . . .

$7,635,914

December 31, 2012
(in thousands)
Derivative assets at fair

value(2)

. . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . .

Repurchase Agreements(3) . .
Derivative liabilities at fair

111

$8,020,000

value(2)

. . . . . . . . . . . . . . .

96,144

Total . . . . . . . . . . . . . . . .

$8,116,144

$—

—

$—

22,551

(22,551)

$7,580,000

$(7,580,000)

$—

55,914

(55,914) —

$7,635,914

$(7,635,914)

$—

—

$—

Gross Amounts
of Recognized
Assets or
Liabilities

Gross Amounts
Offset in the
Balance Sheets

Net Amounts of
Assets
or Liabilities
Presented in
the Balance
Sheets

Gross Amounts Not Offset
in the Balance Sheets(1)

Financial
Instruments

Cash
Collateral
Received

Net
Amounts

111

(111)

$8,020,000

$(8,020,000)

$—

96,144

(96,144) —

$8,116,144

$(8,116,144)

$—

—

$—

—

$—

F-17

(1) Amounts presented are limited to collateral pledged sufficient to reduce the related Net Amount to zero in

accordance with ASU No. 2011-11, as amended by ASU No. 2013-01.

(2) At December 31, 2013, we had pledged approximately $84.2 million in Agency MBS as collateral and paid
another approximately $7.1 million on swap margin calls on our derivatives. At December 31, 2012, we had
pledged approximately $110.6 million in Agency MBS as collateral and paid another approximately $8.7
million on swap margin calls on our derivatives.

(3) At December 31, 2013, we had pledged approximately $7.98 billion in Agency MBS as collateral on our

repurchase agreements. At December 31, 2012, we had pledged approximately $8.41 billion in Agency
MBS as collateral on our repurchase agreements.

NOTE 5.

JUNIOR SUBORDINATED NOTES

On March 15, 2005, we issued $37,380,000 of junior subordinated notes to a newly-formed statutory trust,

Anworth Capital Trust I, organized by us under Delaware law. The trust issued $36,250,000 in trust preferred
securities to unrelated third party investors. Both the notes and the trust preferred securities require quarterly
payments and bear interest at the prevailing three-month LIBOR rate plus 3.10%, reset quarterly. The first
interest payment was made on June 30, 2005. Both the notes and the trust preferred securities will mature in 2035
and are currently redeemable, in whole or in part, without penalty. We used the net proceeds of this private
placement to invest in Agency MBS. We have reviewed the structure of the transaction under ASC 810-10 and
concluded that Anworth Capital Trust I does not meet the requirements for consolidation. On September 26,
2005, the notes, the trust preferred securities and the related agreements were amended. The only material change
was that one of the class holders requested that interest payments be made quarterly on
January 30, April 30, July 30 and October 30 instead of at the end of each calendar quarter. This became
effective with the quarterly payment after September 30, 2005. As of the date of this filing, we have not
redeemed any of these notes or trust preferred securities.

NOTE 6. FAIR VALUES OF FINANCIAL INSTRUMENTS

As defined in ASC 820-10, fair value is the price that would be received from the sale of an asset or paid to

transfer or settle a liability in an orderly transaction between market participants in the principal (or most
advantageous) market for the asset or liability. ASC 820-10 establishes a fair value hierarchy that ranks the
quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at
fair value are classified and disclosed in one of the three following categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data. This

includes those financial instruments that are valued using models or other valuation methodologies where
substantially all of the assumptions are observable in the marketplace, can be derived from observable market
data or are supported by observable levels at which transactions are executed in the marketplace. We consider the
inputs utilized to fair value our Agency MBS to be Level 2. Management bases the fair value for these
investments primarily on third party bid price indications provided by dealers who make markets in these
instruments. The Agency MBS market is primarily an over-the-counter market. As such, there are no standard,
public market quotations or published trading data for individual MBS securities. As our portfolio consists of
hundreds of similar, but distinct, securities that have each been traded with only one broker counterparty, we
generally seek to have each Agency MBS security priced by one broker. The prices received are non-binding
offers to trade, but are indicative quotations of the market value of our securities as of the market close on the last
day of each quarter. The brokers receive trading data from several traders that participate in the active markets
for these securities and directly observe numerous trades of securities similar to the securities owned by us.
Given the volume of market activity for Agency MBS, it is our belief that the broker pricing accurately reflects
market information for actual, contemporaneous transactions. We do not adjust quotes or prices we obtain from
brokers and pricing services. In the limited instances where valuations are received on a security from multiple

F-18

brokers, we use the median value of the prices received to determine fair value. To validate the prices we obtain,
to ensure our fair value determinations are consistent with ASC 820, and to ensure that we properly classify these
securities in the fair value hierarchy, we evaluate the pricing information we receive taking into account factors
such as coupon, prepayment experience, fixed/adjustable rate, coupon index, time to reset and issuing agency,
among other factors. Based on these factors, broker prices are compared to prices of similar securities provided
by other brokers. If we determine (based on such a comparison and our market knowledge and expertise) that a
security is priced significantly differently than similar securities, the broker is contacted and requested to revisit
their valuation of the security. If a broker refuses to reconsider its valuation, we will request pricing from another
broker and use the median value of the prices received to determine fair value. If we are unable to receive a
valuation from another broker, the price received from an independent third party pricing service will be used, if
it is determined (based on our market knowledge and expertise) to be more reliable than the broker pricing.
However, the fair value reported may not be indicative of the amounts that could be realized in an actual market
exchange.

Our derivative assets and derivative liabilities are comprised of swap agreements, in which we pay a fixed
rate of interest and receive a variable rate of interest that is based on LIBOR. The fair value of these instruments
is reported to us independently from dealers who are large financial institutions and are market makers for these
types of instruments. The LIBOR swap rate is observable at commonly quoted intervals over the full term of the
swap agreements and therefore is considered a Level 2 item. The fair value of the derivative instruments’ assets
and liabilities are the estimated amounts the Company would either receive or pay to terminate these agreements
at the reporting date, taking into account current interest rates and the Company’s credit worthiness. For more
information on our swap agreements, see Note 1 and Note 12.

Level 3: Unobservable inputs that are not corroborated by market data. This is comprised of financial
instruments whose fair value is estimated based on internally developed models or methodologies utilizing
significant inputs that are generally less readily observable from objective sources.

In determining the appropriate levels, we perform a detailed analysis of the assets and liabilities that are
subject to ASC 820-10. At each reporting period, all assets and liabilities for which the fair value measurement is
based on significant unobservable inputs are classified as Level 3.

At December 31, 2013, fair value measurements were as follows (in thousands):

Level 1

Level 2

Level 3

Total

Assets

Agency MBS(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative instruments(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —

$— $8,556,446

22,551 —

$— $8,556,446
22,551

Liabilities

Derivative instruments(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$— $

55,914

$— $

55,914

(1) For more detail about the fair value of our Agency MBS by agency and type of security, see Note 3 in the

audited financial statements.

(2) Derivative instruments are hedging instruments under ASC 815-10. For more detail about our derivative

instruments, see Notes 1 and 12 in the audited financial statements.

Cash and cash equivalents, restricted cash, interest receivable, repurchase agreements and interest payable
are reflected in our audited financial statements at their costs, which approximate their fair value because of the
nature and short term of these instruments.

Junior subordinated notes are variable-rate debt and, as we believe the spread would be consistent with the

expectations of market participants as of December 31, 2013 and December 31, 2012, the carrying value
approximates fair value.

F-19

NOTE 7.

INCOME TAXES

We have elected to be taxed as a REIT and to comply with the provisions of the Code with respect thereto.

Accordingly, we will not be subject to federal or state income taxes to the extent that our distributions to
stockholders satisfy the REIT requirements and certain asset, income and stock ownership tests are met. We
believe we currently meet all REIT requirements regarding the ownership of our common stock and the
distribution of our taxable net income. Therefore, we believe that we continue to qualify as a REIT under the
provisions of the Code.

At December 31, 2012, total capital loss carryforwards available were $6.9 million. They were utilized in
2013. Income tax expense (benefit) for the years ended December 31, 2013, 2012 and 2011 was zero. None of
the components of income tax expense are significant on a separately stated basis.

At December 31, 2013 and December 31, 2012, there were no significant deferred tax assets and deferred

tax liabilities.

The tables below present tax information regarding Anworth’s dividend distributions for the fiscal year

ended December 31, 2013:

Series A Cumulative Preferred Stock (CUSIP 03747 20 0)

Declaration
Date

Record
Date

01/18/13
04/19/13
07/19/13
10/03/13

03/28/13
06/28/13
09/30/13
12/31/13

Payable
Date

04/15/13
07/15/13
10/15/13
01/15/14

2013
Total
Distribution
Per
Share

$0.539063
0.539063
0.539063
0.539063

2013
Ordinary
Income

$0.539063
0.529797
0.492073

—

Total:

$2.156252

$1.560933

2013
Return
of Capital

$—
—
—
—

$—

2013
Long-Term
Capital
Gains

$
—
0.009266
0.046990
—

Carry-Over
to 2014

—
—
—
0.539063

$0.056256

$0.539063

Series B Cumulative Convertible Preferred Stock (CUSIP 03747 30 9)

Declaration
Date

Record
Date

01/18/13
04/19/13
07/19/13
10/03/13

03/28/13
06/28/13
09/30/13
12/31/13

Payable
Date

04/15/13
07/15/13
10/15/13
01/15/14

2013
Total
Distribution
Per
Share

$0.390625
0.390625
0.390625
0.390625

2013
Ordinary
Income

$0.390625
0.383813
0.356080
—

Total:

$1.562500

$1.130518

2013
Return
of Capital

$—
—
—
—

$—

2013
Long-Term
Capital
Gains

—
0.006812
0.034545

—

Carry-Over
to 2014

—
—
—
0.390625

$0.041357

$0.390625

Common Stock (CUSIP 03747 10 1)

Declaration
Date

Record
Date

Payable
Date

12/14/12
03/28/13
06/28/13
09/30/13
12/13/13

12/28/12
04/08/13
07/08/13
10/10/13
12/23/13

01/29/13
04/29/13
07/29/13
10/29/13
01/29/14

Total:

2013
Total
Distribution
Per
Share

$0.04
0.15
0.15
0.12
0.08

$0.54

2013
Ordinary
Income

$ —
0.1500
0.1474
0.0940
—

2013
Return
of Capital

$ —
—
—
0.0128
—

2013
Long-Term
Capital
Gains

$ —
—
0.0026
0.0132
—

$0.3914

$0.0128

$0.0158

Carry-Over
from 2012(1)

Carry-Over
to 2014

$0.04
—
—
—
—

$0.04

$ —
—
—
—
0.08

$0.08

F-20

(1) The $0.04 that is a carry-over from 2012 is also treated as 2013 ordinary income.

NOTE 8. SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK

The Series B Preferred Stock has a par value of $0.01 per share and a liquidation preference of $25.00 per
share plus accrued and unpaid dividends (whether or not declared). The holders of the Series B Preferred Stock
must be paid a dividend at a rate of 6.25% per year on the $25.00 liquidation preference before holders of our
common stock are entitled to receive any dividends. The Series B Preferred Stock is senior to our common stock
and on parity with our 8.625% Series A Cumulative Preferred Stock, or Series A Preferred Stock, with respect to
the payment of distributions and amounts, upon liquidation, dissolution or winding up. So long as any shares of
the Series B Preferred Stock remain outstanding, we will not, without the affirmative vote or consent of the
holders of at least two-thirds of the shares of the Series B Preferred Stock outstanding at the time, authorize or
create, or increase the authorized or issued amount of, any class or series of capital stock ranking senior to the
Series B Preferred Stock with respect to payment of dividends or the distribution of assets upon liquidation,
dissolution or winding up.

The Series B Preferred Stock has no maturity date and is not redeemable. The Series B Preferred Stock is

convertible at the then-current conversion rate into shares of our common stock per $25.00 liquidation
preference. The conversion rate is adjusted in any fiscal quarter in which the cash dividends paid to common
stockholders results in an annualized common stock dividend yield that is greater than 6.25%. The conversion
ratio is also subject to adjustment upon the occurrence of certain specific events such as a change of control. The
Series B Preferred Stock is convertible into shares of our common stock at the option of the holder(s) of Series B
Preferred Stock at any time at the then-prevailing conversion rate. On or after January 25, 2012, we may, at our
option, under certain circumstances, convert each share of Series B Preferred Stock into a number of shares of
our common stock at the then-prevailing conversion rate. We may exercise this conversion option only if our
common stock price equals or exceeds 130% of the then-prevailing conversion price of the Series B Preferred
Stock for at least twenty (20) trading days in a period of thirty (30) consecutive trading days (including the last
trading day of such period) ending on the trading day immediately prior to our issuance of a press release
announcing the exercise of the conversion option. The Series B Preferred Stock contains certain fundamental
change provisions that allow the holder to redeem the Series B Preferred Stock for cash if certain events occur,
such as a change in control. The Series B Preferred Stock generally does not have voting rights, except if
dividends on the Series B Preferred Stock are in arrears for six or more quarterly periods (whether or not
consecutive). Under such circumstances, the holders of Series B Preferred Stock, together with the holders of
Series A Preferred Stock, would be entitled to elect two additional directors to our board of directors to serve
until all unpaid dividends have been paid or declared and set aside for payment. In addition, certain material and
adverse changes to the terms of the Series B Preferred Stock may not be taken without the affirmative vote of at
least two-thirds of the outstanding shares of Series B Preferred Stock and Series A Preferred Stock voting
together as a single class. Through December 31, 2013, we have declared and set aside for payment the required
dividends for the Series B Preferred Stock.

During the year ended December 31, 2013, there were three transactions to convert an aggregate of 111,000

shares of Series B Preferred Stock into an aggregate of 425,907 shares of our common stock at a weighted
average conversion rate of 3.8370. During the year ended December 31, 2013, we issued an aggregate of 54,566
shares of Series B Preferred Stock at a weighted average price of $24.50 per share, which provided net proceeds
to us of approximately $1.34 million.

NOTE 9. PUBLIC OFFERINGS AND CAPITAL STOCK

At December 31, 2013, our authorized capital included 200 million shares of common stock, of which

138,717,419 shares were issued and outstanding.

F-21

At December 31, 2013, our authorized capital included 20 million shares of $0.01 par value preferred stock,

of which 5.15 million shares had been designated 8.625% Series A Cumulative Preferred Stock (liquidation
preference $25.00 per share) and 3.15 million shares had been designated 6.25% Series B Cumulative
Convertible Preferred Stock (liquidation preference $25.00 per share). The undesignated shares of preferred stock
may be issued in one or more classes or series, with such distinctive designations, rights and preferences as
determined by our board of directors. The Series A Preferred Stock has no maturity date and we are not required
to redeem it at any time. We may redeem the Series A Preferred Stock for cash, at our option, in whole or from
time to time in part, at a redemption price of $25.00 per share, plus accrued and unpaid dividends, if any, to the
redemption date. To date, we have not redeemed any shares of our Series A Preferred Stock. At December 31,
2013, there were 1,919,378 shares of Series A Preferred Stock issued and outstanding and 1,009,640 shares of
Series B Preferred Stock issued and outstanding.

On May 27, 2011, we entered into a Controlled Equity Offering Sales Agreement, or the 2011 Sales

Agreement, with Cantor Fitzgerald & Co., or Cantor, to sell up to 20,000,000 shares of our common stock,
1,000,000 shares of our Series A Preferred Stock and 1,000,000 shares of our Series B Preferred Stock. During
the year ended December 31, 2013, we issued under the 2011 Sales Agreement (i) an aggregate of 41,978 shares
of our Series A Preferred Stock at a weighted average price of $26.08 per share, which provided net proceeds to
us of approximately $1.09 million, net of sales commissions less reimbursement of fees, and (ii) an aggregate of
54,566 shares of our Series B Preferred Stock at a weighted average price of $24.50 per share, which provided
net proceeds to us of approximately $1.34 million, net of sales commissions less reimbursement of fees. During
the year ended December 31, 2013, we did not issue any shares of our common stock under the 2011 Sales
Agreement. At December 31, 2013, there were 19,409,400 shares of common stock, 956,122 shares of Series A
Preferred Stock and 894,518 shares of Series B Preferred Stock, respectively, available for sale under the 2011
Sales Agreement.

On October 3, 2011, we announced that our board of directors had authorized a share repurchase program

which permits us to acquire up to 2,000,000 shares of our common stock. The shares are expected to be acquired
at prevailing prices through open market transactions. The manner, price, number and timing of share
repurchases will be subject to market conditions and applicable SEC rules. Our board of directors also authorized
the Company to purchase an amount of our common stock up to the amount of common stock sold through our
2012 Dividend Reinvestment and Stock Purchase Plan. On December 13, 2013, we announced that our board of
directors had authorized us to acquire up to an additional 5,000,000 shares of our common stock through our
share repurchase program. During the year ended December 31, 2013, we repurchased an aggregate of 7,646,429
shares at a weighted average price of $4.95 per share under our share repurchase program.

Our Dividend Reinvestment and Stock Purchase Plan allows stockholders and non-stockholders to purchase

shares of our common stock and to reinvest dividends therefrom to acquire additional shares of our common
stock. On March 14, 2012, we filed a shelf registration statement on Form S-3 with the SEC, registering up to
27 million shares of our common stock for our 2012 Dividend Reinvestment and Stock Purchase Plan, or the
2012 Plan. During the year ended December 31, 2013, we issued an aggregate of 3,924,551 shares of our
common stock at a weighted average price of $5.84 per share, resulting in proceeds to us of approximately $22.9
million. At December 31, 2013, there were approximately 16.8 million shares remaining under the 2012 Plan.
Effective July 5, 2013, we reduced the discount rate on dividend reinvestment offered through our 2012 Plan
from 1% to zero until further notice.

On December 28, 2009, we filed a shelf registration statement on Form S-3 with the SEC, and, on

February 26, 2010, we filed a pre-effective amendment thereto with the SEC, offering up to $600 million of our
capital stock. The registration statement was declared effective on March 26, 2010. At December 31, 2013,
approximately $544.7 million of our capital stock was available for issuance under the registration statement.

On November 7, 2005, we filed a registration statement on Form S-8 with the SEC to register an aggregate

of up to 3.5 million shares of our common stock to be issued pursuant to the Anworth Mortgage Asset

F-22

Corporation 2004 Equity Compensation Plan. To date, we have issued approximately 2,840,000 shares of
common stock under the plan. This amount includes 273,469 shares of unexercised stock options and restricted
stock and restricted stock units.

NOTE 10. TRANSACTIONS WITH AFFILIATES

Management Agreement and Externalization

Effective as of December 31, 2011, we entered into the Management Agreement, pursuant to which our day-

to-day operations are conducted by the Manager. The Manager is supervised and directed by our board of
directors and is responsible for (i) the selection, purchase and sale of our investment portfolio; (ii) our financing
and hedging activities; and (iii) providing us with management services. The Manager will also perform such
other services and activities relating to our assets and operations as may be appropriate. In exchange for these
services, the Manager receives a management fee paid monthly in arrears in an amount equal to one-twelfth of
1.20% of our Equity (as defined in the Management Agreement).

On the effective date of the Management Agreement, the employment agreements with our executives were

terminated, our employees became employees of the Manager, and we took such other actions as were
reasonably necessary to implement the Management Agreement and to externalize our management function. In
2011, Messrs. Lloyd McAdams and Joseph E. McAdams had employment agreements with the Company. For
the year ended December 31, 2011, we paid these executives a total of approximately $6.85 million in annual
salaries, incentive compensation and bonuses. These amounts were included in the income statement line item
“Compensation, incentive compensation and benefits.”

A trust controlled by Lloyd McAdams, our Chairman, Chief Executive Officer and President, and Heather
U. Baines, an Executive Vice President of the Manager, beneficially owns 50% of the outstanding membership
interests of the Manager; Joseph E. McAdams, the Chief Investment Officer of the Manager, beneficially owns
45% of the outstanding membership interests of the Manager; and Thad M. Brown, our Chief Financial Officer,
owns 5% of the outstanding membership interests of the Manager.

Nothing in the Management Agreement prevents the Manager or any of its affiliates from engaging in other

businesses or from rendering services of any kind to any other person or entity, including investment in or
advisory service to others investing in any type of real estate investment, other than advising other REITs that
invest more than 75% of their assets in U.S. agency residential MBS. Directors, officers and employees of the
Manager may serve as our directors and officers.

Messrs. Lloyd McAdams, Joseph E. McAdams, Charles J. Siegel and John T. Hillman and Ms. Heather U.
Baines and others are officers and employees of PIA Farmland, Inc. and its external manager, PIA, where they
devote a portion of their time. PIA Farmland, Inc., a privately-held real estate investment trust investing in U.S.
farmland properties to lease to independent farm operators, was incorporated in February 2013 and acquired its
first farm property in October 2013. These officers and employees are under no contractual obligations to PIA
Farmland, Inc., its external manager, PIA, or to Anworth or its external manager, Anworth Management, LLC, as
to their time commitment. Mr. Steven Koomar, the Chief Executive Officer of PIA Farmland, Inc., has no
involvement with either Anworth or its external manager, Anworth Management, LLC.

The terms of the Management Agreement, including the management fee payable, were not negotiated on an

arm’s-length basis, and its terms may not be as favorable to us as if it was negotiated with an unaffiliated party.
The management fee that we pay to the Manager is not tied to our performance. The management fee is paid
regardless of our performance and it may not provide sufficient incentive to the Manager to seek to achieve risk-
adjusted returns for our investment portfolio.

The Management Agreement may only be terminated without cause, as defined in the agreement, after the

completion of its initial term on December 31, 2013, or the expiration of any annual renewal term. We are
required to provide 180-days prior notice of non-renewal of the Management Agreement and must pay a

F-23

termination fee on the last day of the initial term or any automatic renewal term, equal to three times the average
annual management fee earned by the Manager during the prior 24-month period immediately preceding the
most recently completed month prior to the effective date of termination. Our board of directors affirmatively
elected to renew the Management Agreement for another one-year term expiring on December 31, 2014. We may
only not renew the Management Agreement with or without cause with the consent of the majority of our
independent directors. These provisions make it difficult to terminate the Management Agreement and increase
the effective cost to us of not renewing the Management Agreement.

Certain of our former officers were previously granted restricted stock and other equity awards (see Note
11), including dividend equivalent rights, in connection with their service to us, and certain of our former officers
had agreements under which they would receive payments if the Company is subject to a change in control
(discussed later in this Note 10). In connection with the Externalization, certain of the agreements under which
our officers were granted equity awards and would be paid payments in the event of a change in control were
modified so that such agreements will continue with respect to our former officers and employees after they
became officers and employees of the Manager. In addition, as officers and employees of the Manager, they will
continue to be eligible to receive equity incentive awards under equity incentive plans in effect now or in the
future.

Change in Control and Arbitration Agreements

On June 27, 2006, we entered into Change in Control and Arbitration Agreements with each of Mr. Thad M.

Brown, our Chief Financial Officer, Mr. Charles J. Siegel, our then Senior Vice President-Finance, Ms. Bistra
Pashamova, our then Senior Vice President and Portfolio Manager, and Mr. Evangelos Karagiannis, our then
Vice President and Portfolio Manager, as well as certain of our other officers. In connection with the
Externalization, we amended these agreements to provide that should a change in control (as defined in the
amended agreements) occur, each of these officers will receive certain severance and other benefits valued as of
December 31, 2011. Under the amended agreements, in the event that a change in control occurs, each of these
officers will receive a lump sum payment equal to (i) 12 months annual base salary in effect on December 31,
2011, plus (ii) the average annual incentive compensation received for the two complete fiscal years prior
December 31, 2011, plus (iii) the average annual bonus received for the two complete fiscal years prior to
December 31, 2011, as well as other benefits. The amended Change in Control and Arbitration Agreements also
provide for accelerated vesting of equity awards granted to these officers upon a change in control.

Agreements with Pacific Income Advisers, Inc.

On June 13, 2002, we entered into a sublease agreement with Pacific Income Advisers, Inc., or PIA, a
company owned by trusts controlled by certain of our officers. Under this sublease agreement, as amended on
July 8, 2003, we leased, on a pass-through basis, 5,500 square feet of office space from PIA and paid rent at an
annual rate equal to PIA’s obligation, which was $57.46 per square foot. This sublease agreement terminated on
June 30, 2012. During the years ended December 31, 2012 and December 31, 2011, we expensed $169 thousand
and $326 thousand, respectively, in rent and related expenses to PIA under this sublease.

On January 26, 2012, we entered into a sublease agreement with PIA that became effective on July 1, 2012.
Under the new sublease agreement, we lease, on a pass-through basis, 7,300 square feet of office space from PIA
and pay rent at an annual rate equal to PIA’s obligation, which is currently $59.87 per square foot. The base
monthly rental for us is $36,426.47, which will be increased 3% per annum beginning on July 1, 2013. The new
sublease agreement runs through June 30, 2022 unless earlier terminated pursuant to the master lease. During the
years ended December 31, 2013 and December 31, 2012, we paid or accrued $489 thousand and $227 thousand,
respectively, in rent and other operating expenses to PIA under the new sublease agreement, which is included in
“Other expenses” on the statements of income.

F-24

At December 31, 2013, the future minimum lease commitment was as follows (in whole dollars):

Year

Commitment

2014

2015

2016

2017

2018

Thereafter

Total
Commitment

$443,669

$456,987

$470,720

$484,852

$499,398

$1,866,754

$4,222,380

On July 25, 2008, we entered into an administrative services agreement with PIA, which was amended and

restated on August 20, 2010. Under this agreement, PIA provides administrative services and equipment to us
including human resources, operational support and information technology, and we pay an annual fee of 5 basis
points on the first $225 million of stockholders’ equity and 1.25 basis points thereafter (paid quarterly in arrears)
for those services. The administrative services agreement had an initial term of one year and renews for
successive one-year terms thereafter unless either party gives notice of termination no less than 30 days before
the expiration of the then-current annual term. We may also terminate the administrative services agreement
upon 30 days prior written notice for any reason and immediately if there is a material breach by PIA. Included
in “Other expenses” on the statements of income are fees of $211 thousand paid to PIA in connection with this
agreement during the year ended December 31, 2013. During the years ended December 31, 2012 and 2011, we
paid fees of $207 thousand and $199 thousand, respectively, to PIA in connection with this agreement.

NOTE 11. EQUITY COMPENSATION PLAN

2004 Equity Compensation Plan

At our May 27, 2004 annual stockholders’ meeting, our stockholders adopted the Anworth Mortgage Asset

Corporation 2004 Equity Compensation Plan, or the Plan, which amended and restated our 1997 Stock Option
and Awards Plan. The Plan authorized the grant of stock options and other stock-based awards, as of
December 31, 2005, for an aggregate of up to 3,500,000 shares of our registered our common stock. The Plan
authorizes our board of directors, or a committee of our Board, to grant incentive stock options, as defined under
section 422 of the Code, options not so qualified, restricted stock, dividend equivalent rights, or DERs, phantom
shares, stock-based awards that qualify as performance-based awards under Section 162(m) of the Code and
other stock-based awards. The exercise price for any option granted under the Plan may not be less than 100% of
the fair market value of the shares of common stock at the time the option is granted. At December 31, 2013,
660,414 shares remained available for future issuance under the Plan through any combination of stock options
or other awards. The Plan does not provide for automatic annual increases in the aggregate share reserve or the
number of shares remaining available for grant. We filed a registration statement on Form S-8 on November 7,
2005 to register an aggregate of up to 3,500,000 shares of our common stock to be issued pursuant to the Plan.

A summary of stock option transactions for the plan follows:

Outstanding, beginning of year . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2013

2012

2011

Weighted
Average
Exercise
Price

$13.736
—
—
13.800

Weighted
Average
Exercise
Price

$12.535
—
—
10.570

Weighted
Average
Exercise
Price

$12.480
—
6.700
11.400

621,100
—
(260)
(28,360)

592,480
—
—

(271,780)

320,700
—
—

(315,700)

Outstanding, end of year

. . . . . . . . . . . . . . . . . .

5,000

$ 9.720

320,700

$13.736

592,480

$12.535

Weighted average fair value of options expired
during the year . . . . . . . . . . . . . . . . . . . . . . . .
Options exercisable at year-end . . . . . . . . . . . . .

$13.800

$10.570

$11.400

5,000

320,700

592,480

The aggregate intrinsic value of options exercised during 2011 and those outstanding at December 31, 2013

and December 31, 2012 are immaterial.

F-25

The following table summarizes information about stock options outstanding at December 31, 2013:

Exercise
Price

$ 9.72

Options
Outstanding and
Exercisable

Remaining
Contractual
Life (Years)

5,000

1.6

The following table summarizes information about restricted stock transactions during the year ended

December 31, 2013:

Grant
Date Fair
Value

$4.24
$5.93

Unvested Shares at
December 31, 2012

Restricted
Shares
Granted

Shares Vested
in 2013

Shares
Forfeited

Unvested
Shares at
December 31, 2013

46,649
197,362

244,011

—
—

—

15,542
—

15,542

—
—

—

31,107
197,362

228,469

Weighted
Average
Remaining
Contractual
Life (Years)

1.8
2.8

2.7

In October 2005, our board of directors approved the grant of an aggregate of 200,780 shares of restricted

stock to various employees under our 2004 Equity Plan. The stock price on the grant date was $7.72. The
restricted stock vests 10% per year on each anniversary date for a ten-year period and shall also vest immediately
upon the death of the grantee or upon the grantee reaching age 65. Each grantee shall have the right to sell 40%
of the restricted stock any time after such shares have vested. The remaining 60% of such vested restricted stock
may not be sold until after termination of employment with us. We amortize the restricted stock over the vesting
period, which is the lesser of ten years or the remaining number of years to age 65.

In October 2006, our board of directors approved a grant of an aggregate of 197,362 shares of performance-

based restricted stock to various officers and employees under our 2004 Equity Plan. Such grant was made
effective on October 18, 2006. The closing stock price on the effective date of the grant was $9.12. The shares
were to vest in equal annual installments over the next three years provided that the annually compounded rate of
return on our common stock, including dividends, exceeds 12% measured from the effective date of the grant to
each of the next three anniversary dates. As the annually compounded rate of return did not exceed 12%, the
shares will vest on the anniversary date thereafter when the annually compounded rate of return exceeds 12%. If
the annually compounded rate of return does not exceed 12% within ten years after the effective date of the grant,
then the shares will be forfeited. The shares will fully vest within the ten-year period upon the death of a grantee.
Upon vesting, each grantee shall have the right to sell 40% of the restricted stock any time after such shares have
vested. The remaining 60% of such vested restricted stock may not be sold, transferred or pledged until after
termination of employment with us or upon the tenth anniversary of the effective date.

The fair value of the aforementioned stock-based awards was estimated using the Black-Scholes model with

the following weighted-average assumptions:

2005
Grant

2006
Grant

Assumptions

Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected lives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6.00%

4.00%
29.00% 28.00%
4.80%
4.29%

10 years

We recognize the compensation expense related to restricted stock over the ten-year vesting period. The
weighted average remaining term of the two grants is 2.7 years. During the years ended December 31, 2013 and
December 31, 2012, we expensed approximately $202 thousand and $202 thousand, respectively, related to these

F-26

restricted stock grants. At our May 24, 2007 annual meeting of stockholders, our stockholders adopted the
Anworth Mortgage Asset Corporation 2007 Dividend Equivalent Rights Plan, or the 2007 Dividend Equivalent
Rights Plan. A dividend equivalent right, or DER, is a right to receive amounts equal in value to the dividend
distributions paid on a share of our common stock. DERs are paid in either cash or shares of our common stock,
whichever is specified by our Compensation Committee at the time of grant, at such times as dividends are paid
on shares of our common stock during the period between the date a DER is issued and the date the DER expires
or earlier terminates. The Compensation Committee may impose such other conditions to the grant of DERs as it
may deem appropriate. The maximum term for DERs under the 2007 Dividend Equivalent Rights Plan is ten
years from the date of grant. Prior to January 1, 2012, an aggregate of 582,000 DERs were issued to our officers
under the 2007 Dividend Equivalent Rights Plan. These DERs are not attached to any stock and only have the
right to receive the same cash distribution per common share distributed to our common stockholders during the
term of the grant. All of these grants have a five-year term from the date of the grant. During the years ended
December 31, 2013, December 31, 2012 and December 31, 2011, we paid or accrued $291 thousand, $402
thousand and $547 thousand, respectively, related to DERs granted.

Certain of our officers have previously been granted restricted stock and other equity incentive awards,

including dividend equivalent rights, in connection with their service to us. In connection with the
Externalization, certain of the agreements under which our officers have been granted equity awards were
modified so that such agreements will continue with respect to our officers after they became officers and
employees of the Manager. As a result, these awards and any future grants will be accounted for as non-
employee awards. In addition, as officers of the Company and employees of the Manager, they will continue to
be eligible to receive equity incentive awards under equity incentive plans in effect now or in the future. In
accordance with the Externalization effective as of December 31, 2011, the DERs previously granted to all of our
officers, with the exception of our Chief Executive Officer and Chief Financial Officer, were terminated under
the 2007 Dividend Equivalent Rights Plan and were reissued under the 2004 Equity Compensation Plan with the
same amounts, terms and conditions. During the three months ended March 31, 2013, grants of an aggregate of
300,000 DERs that were issued to various officers under the 2007 Dividend Equivalents Right Plan expired. In
February 2013, our board of directors approved grants of an aggregate of 300,000 DERs to our Chief Executive
Officer and Chief Financial Officer under the 2007 Dividend Equivalent Rights Plan and to various officers of
the Manager under the 2004 Equity Compensation Plan. Portions of the grants expire in 2016, 2017 and 2018. In
December 2013, grants of an aggregate of 150,000 DERs that were issued to various officers under the 2007
DER Plan expired and our board of directors approved grants of an aggregate of 150,000 DERs to replace those
expiring. Portions of the new grants expire in 2014, 2015 and 2016.

NOTE 12. HEDGING INSTRUMENTS

At December 31, 2013, we were a counterparty to interest rate swap agreements, which are derivative
instruments as defined by ASC 815-10, with an aggregate notional amount of $5.375 billion and a weighted
average maturity of approximately 3.9 years. During the year ended December 31, 2013, six of our outstanding
swap agreements with an aggregate notional amount of $375 million matured. During the year ended
December 31, 2013, we entered into 38 new swap agreements with an aggregate notional amount of $2.59 billion
and terms of up to ten years. We utilize swap agreements to manage interest rate risk relating to our repurchase
agreements (the hedged item) and do not anticipate entering into derivative transactions for speculative or trading
purposes. In accordance with the swap agreements, we will pay a fixed-rate of interest during the term of the
swap agreements (ranging from 0.578% to 3.06%) and receive a payment that varies with the three-month
LIBOR rate.

F-27

At December 31, 2013 and December 31, 2012, our swap agreements had the following notional amounts

(in thousands), weighted average interest rates and remaining term in months:

December 31, 2013

December 31, 2012

Notional
Amount

$ 410,000
680,000
1,145,000
1,715,000
925,000
500,000

$5,375,000

Weighted
Average
Interest
Rate

Remaining
Term in
Months

2.07%
2.07
1.82
1.18
2.11
2.84

1.81%

4
18
29
48
76
107

Notional
Amount

$ 375,000
410,000
680,000
1,595,000
100,000
—

$3,160,000

Weighted
Average
Interest
Rate

Remaining
Term in
Months

3.32%
2.07
2.07
1.64
1.18
—

1.98%

2
16
30
45
72
—

Less than 12 months . . . . . . . . . . . . . . . .
1 year to 2 years . . . . . . . . . . . . . . . . . . .
2 years to 3 years . . . . . . . . . . . . . . . . . . .
3 years to 5 years . . . . . . . . . . . . . . . . . . .
5 years to 7 years . . . . . . . . . . . . . . . . . . .
7 years to 10 years . . . . . . . . . . . . . . . . . .

Swap Agreements by Counterparty

December 31,
2013

December 31,
2012

(in thousands)

JPMorgan Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deutsche Bank Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RBS Greenwich Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nomura Securities International
ING Financial Markets LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank of New York . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chicago Mercantile Exchange(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Morgan Stanley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit Suisse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LBBW Securities, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,175,000
1,165,000
800,000
650,000
650,000
260,000
400,000
150,000
75,000
50,000

$ 800,000
800,000
485,000
450,000
150,000
100,000
—
150,000
175,000
50,000

$5,375,000

$3,160,000

(1) For all swap agreements entered into after September 9, 2013, the counterparty will be the Chicago

Mercantile Exchange regardless of who the trading party is. See the section entitled “Derivative Financial
Instruments – Interest Rate Risk Management” in Note 1 for additional details.

During the year ended December 31, 2013, there was a decrease in unrealized losses of approximately $62.7

million, from approximately $96 million in unrealized losses at December 31, 2012 to approximately $33.3
million in unrealized losses, on our swap agreements included in “Other comprehensive income” (this decrease
in unrealized losses consisted of unrealized gains on cash flow hedges of approximately $3.4 million and a
reclassification adjustment for interest expense included in net income of approximately $59.3 million).

At December 31, 2013, we had asset and liability derivatives of approximately $22.6 million and $55.9

million, respectively (shown on our audited balance sheets).

During the year ended December 31, 2013, there was no gain or loss recognized in earnings due to hedge

ineffectiveness. We have determined that our hedges are still considered “highly effective.” There were no
components of the derivative instruments’ gain or loss excluded from the assessment of hedge effectiveness. The
maximum length of our swap agreements is ten years. We do not anticipate any discontinuance of the swap
agreements and thus do not expect to recognize any gain or loss into earnings because of this.

F-28

For more information on our accounting policies, the objectives and risk exposures relating to derivatives

and hedging agreements, see the section on “Derivative Financial Instruments” in Note 1. For more information
on the fair value of our swap agreements, see Note 6.

NOTE 13. COMMITMENTS AND CONTINGENCIES

Lease Commitment and Administrative Services Commitment—We sublease office space and use

administrative services from PIA as more fully described in Note 10.

NOTE 14. OTHER EXPENSES

Legal and accounting fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Printing and stockholder communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Directors and Officers insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DERs expense(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of restricted stock(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Software implementation and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Administrative service fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock exchange and filing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sarbanes-Oxley consulting fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board of directors fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities data services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

For the Years Ended December 31,

2013

2012

2011

$ 503
211
469
291
202
295
211
489
215
136
107
324
131
183

(in thousands)
$ 520
205
436
402
202
287
207
396
238
136
119
327
124
238

$ 608
219
431
—
—
258
199
326
192
131
113
334
110
364

Total of other expenses:

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,767

$3,837

$3,285

(1) For the year ended December 31, 2011, “DERs expense” of $547 thousand was included in “Compensation

expense.”

(2) For the year ended December 31, 2011, “Amortization of restricted stock” of $202 thousand was included in

“Compensation expense.”

NOTE 15. SUMMARIZED QUARTERLY RESULTS (UNAUDITED)

The following tables summarize quarterly results for the years ended December 31, 2013 and December 31,

2012. Earnings per share amounts for each quarter and the full years have been calculated separately.
Accordingly, quarterly amounts may not add to the annual amounts because of substantial differences in the
average shares outstanding during each period and, with regard to diluted earnings per share amounts, they may
also differ because of the inclusion of the effect of potentially dilutive securities only in the periods in which
such effect would have been dilutive. Diluted EPS assumes the conversion, exercise or issuance of all potential
common stock equivalents (which includes stock options and convertible preferred stock) and adding back the
Series B Preferred Stock dividends, unless the effect is to reduce a loss or increase the income per share.

F-29

For the year ended December 31, 2013 (in thousands, except per share amounts):

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Interest income net of amortization of premium and discount:

Interest on Agency MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 43,450
17

$ 45,231
13

$ 42,646
11

$ 43,403
13

43,467

45,244

42,657

43,416

Interest expense:

Interest expense on repurchase agreements . . . . . . . . . . . . . .
Interest expense on junior subordinated notes . . . . . . . . . . . .

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of Agency MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recovery on Non-Agency MBS . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Dividend on Series A Cumulative Preferred Stock . . . . . . . . . . . . .
Dividend on Series B Cumulative Convertible Preferred Stock . . .

20,902
320

21,222

22,245
5,170
129
(3,920)

23,624

(1,034)
(412)

20,046
320

20,366

24,878
2,076
103
(4,059)

22,998

(1,035)
(394)

22,484
321

22,805

19,852
1,991
100
(3,935)

18,008

(1,035)
(394)

Net income to common stockholders . . . . . . . . . . . . . . . . . . . . . . .

$ 22,178

$ 21,569

$ 16,579

Basic earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per common share . . . . . . . . . . . . . . . . . . . . . . . .
Basic weighted average number of shares outstanding . . . . . . . . . .
Diluted weighted average number of shares outstanding . . . . . . . .

$
$

0.16
0.15
142,903
146,945

$
$

0.15
0.15
144,252
148,126

$
$

0.12
0.12
142,380
146,287

28,258
318

28,576

14,840
—
64
(3,814)

11,090

(1,035)
(394)

9,661

0.07
0.07
140,314
144,272

$
$

For the year ended December 31, 2012 (in thousands, except per share amounts):

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Interest income net of amortization of premium and discount:

Interest on Agency MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 53,249
14

$ 50,327
16

$ 47,177
14

$ 45,010
46

Interest expense:

Interest expense on repurchase agreements . . . . . . . . . . . . . .
Interest expense on junior subordinated notes . . . . . . . . . . . .

Dividend on Series A Cumulative Preferred Stock . . . . . . . . . . . . .
Dividend on Series B Cumulative Convertible Preferred Stock . . .

53,263

50,343

47,191

45,056

20,574
345

20,919

32,344
—
623
(3,845)
29,122

(1,011)
(450)

20,669
340

21,009

29,334
—
350
(3,872)
25,812

(1,011)
(449)

21,408
339

21,747

25,444
—
299
(3,792)
21,951

(1,011)
(412)

22,069
329

22,398

22,658
4,434
154
(3,913)
23,333

(1,012)
(416)

Net income to common stockholders . . . . . . . . . . . . . . . . . . . . . . .

$ 27,661

$ 24,352

$ 20,528

$ 21,905

$
$

0.20
0.20
135,064
139,292

$
$

0.18
0.18
137,064
141,292

$
$

0.15
0.15
139,209
143,148

$
$

0.15
0.15
142,140
146,159

F-30

NOTE 16. SUBSEQUENT EVENTS

From January 1, 2014 through February 21, 2014, we repurchased an aggregate of 2,223,414 shares of our

common stock at a weighted average price of $4.76 per share under our share repurchase program.

From January 1, 2014 through February 21, 2014, we entered into two new swap agreements with an

aggregate notional amount of $75 million and terms of up to six years. From January 1, 2014 through
February 21, 2014, two swap agreements with an aggregate notional amount of $150 million matured.

F-31

[THIS PAGE INTENTIONALLY LEFT BLANK]

Exhibit
Number

1.1

EXHIBIT INDEX

Description

Controlled Equity Offering Sales Agreement dated May 27, 2011 between Anworth Mortgage Asset
Corporation and Cantor Fitzgerald & Co. (incorporated by reference from our Current Report on
Form 8-K filed with the SEC on May 27, 2011)

3.1

Amended Articles of Incorporation of Anworth (incorporated by reference from our Registration

Statement on Form S-11, Registration No. 333-38641, which became effective under the Securities
Act of 1933 on March 12, 1998)

3.2

3.3

3.4

3.5

3.6

3.7

3.8

4.1

4.2

4.3

4.4

Amended Bylaws of the Company (incorporated by reference from our Current Report on Form 8-K

filed with the SEC on March 13, 2009)

Articles of Amendment to Amended Articles of Incorporation (incorporated by reference from our

Definitive Proxy Statement filed pursuant to Section 14(a) of the Securities Exchange Act of 1934,
as filed with the SEC on May 14, 2003)

Articles Supplementary for Series A Cumulative Preferred Stock (incorporated by reference from our

Current Report on Form 8-K filed with the SEC on November 3, 2004)

Articles Supplementary for Series A Cumulative Preferred Stock (incorporated by reference from our

Current Report on Form 8-K filed with the SEC on January 21, 2005)

Articles Supplementary for Series B Cumulative Convertible Preferred Stock (incorporated by
reference from our Current Report on Form 8-K filed with the SEC on January 30, 2007)

Articles Supplementary for Series B Cumulative Convertible Preferred Stock (incorporated by

reference from our Current Report on Form 8-K filed with the SEC on May 21, 2007)

Articles of Amendment to Amended Articles of Incorporation (incorporated by reference from our

Current Report on Form 8-K filed with the SEC on May 28, 2008)

Specimen Common Stock Certificate (incorporated by reference from our Registration Statement on
Form S-11, Registration No. 333-38641, which became effective under the Securities Act of 1933
on March 12, 1998)

Specimen Series A Cumulative Preferred Stock Certificate (incorporated by reference from our

Current Report on Form 8-K filed with the SEC on November 3, 2004)

Specimen Series B Cumulative Convertible Preferred Stock Certificate (incorporated by reference

from our Current Report on Form 8-K filed with the SEC on January 30, 2007)

Specimen Anworth Capital Trust I Floating Rate Preferred Stock Certificate (liquidation amount

$1,000 per Preferred Security) (incorporated by reference from our Current Report on Form 8-K
filed with the SEC on March 16, 2005)

4.5

Specimen Anworth Capital Trust I Floating Rate Common Stock Certificate (liquidation amount

$1,000 per Common Security) (incorporated by reference from our Current Report on Form 8-K
filed with the SEC on March 16, 2005)

4.6

4.7

Specimen Anworth Floating Rate Junior Subordinated Note Due 2035 (incorporated by reference

from our Current Report on Form 8-K filed with the SEC on March 16, 2005)

Junior Subordinated Indenture dated as of March 15, 2005, between Anworth and JPMorgan Chase
Bank (incorporated by reference from our Current Report on Form 8-K filed with the SEC on
March 16, 2005)

10.1*

2004 Equity Compensation Plan (incorporated by reference from our Definitive Proxy Statement

filed pursuant to Section 14(a) of the Securities Exchange Act of 1934, as filed with the SEC on
April 26, 2004)

Exhibit
Number

Description

10.2*

2007 Dividend Equivalent Rights Plan (incorporated by reference from our Definitive Proxy

Statement filed pursuant to Section 14(a) of the Securities Exchange Act of 1934, as filed with the
SEC on April 26, 2007)

10.3*

2012 Dividend Reinvestment and Stock Purchase Plan (incorporated by reference from our

Registration Statement on Form S-3, Registration No. 333-180093, which became effective under
the Securities Act of 1933 on March 14, 2012)

10.4

10.5

10.6

10.7

Termination Agreement, dated as of December 31, 2011, between Anworth and Lloyd McAdams,
with respect to the Employment Agreement, dated as of January 1, 2002, between Anworth and
Lloyd McAdams, as amended (incorporated by reference from our Current Report on Form 8-K
filed with the SEC on January 3, 2012)

Termination Agreement, dated as of December 31, 2011, between Anworth and Heather U. Baines,
with respect to the Employment Agreement, dated as of January 1, 2002, between Anworth and
Heather U. Baines, as amended (incorporated by reference from our Current Report on Form 8-K
filed with the SEC on January 3, 2012)

Termination Agreement, dated as of December 31, 2011, between Anworth and Joseph E. McAdams,
with respect to the Employment Agreement, dated as of January 1, 2002, between Anworth and
Joseph E. McAdams, as amended (incorporated by reference from our Current Report on Form 8-
K filed with the SEC on January 3, 2012)

Purchase Agreement dated as of March 15, 2005, by and among Anworth, Anworth Capital Trust I,
TABERNA Preferred Funding I, Ltd., and Merrill Lynch International (incorporated by reference
from our Current Report on Form 8-K filed with the SEC on March 16, 2005)

10.8

Second Amended and Restated Trust Agreement dated as of September 26, 2005 by and among

Anworth, JPMorgan Chase Bank, National Association, Chase Bank USA, National Association,
Lloyd McAdams, Joseph McAdams, Thad Brown and the several Holders, as defined therein
(incorporated by reference from our Annual Report on Form 10-K for the fiscal year ended
December 31, 2005, as filed with the SEC on March 16, 2006)

10.9*

Change in Control and Arbitration Agreement, dated June 27, 2006, between Anworth and Thad M.
Brown (incorporated by reference from our Current Report on Form 8-K filed with the SEC on
June 28, 2006), as amended by Amendment to Anworth Mortgage Asset Corporation Change in
Control and Arbitration Agreement, effective December 31, 2011, between Anworth and Thad M.
Brown (incorporated by reference from our Current Report on Form 8-K filed with the SEC on
January 3, 2012)

10.10

Amended and Restated Administrative Services Agreement dated August 20, 2010, between

Anworth and PIA (incorporated by reference from our Current Report on Form 8-K filed with the
SEC on August 20, 2010)

10.11

Management Agreement dated as of December 31, 2011 by and between Anworth Mortgage Asset

Corporation and Anworth Management, LLC (incorporated by reference from our Current Report
on Form 8-K filed with the SEC on January 3, 2012)

10.12

Sublease dated as of January 26, 2012, between Anworth and PIA (incorporated by reference from

our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, as filed with the SEC on
August 6, 2012)

12.1

23.1

31.1

Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends

Consent of Independent Registered Public Accounting Firm

Certification of the Principal Executive Officer, as required by Rule 13a-14(a) of the Securities

Exchange Act of 1934

Exhibit
Number

Description

31.2

Certification of the Principal Financial Officer, as required by Rule 13a-14(a) of the Securities

Exchange Act of 1934

32.1

Certifications of the Principal Executive Officer provided pursuant to 18 U.S.C. Section 1350 as

adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certifications of the Principal Financial Officer provided pursuant to 18 U.S.C. Section 1350 as

adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101

XBRL Instance Document

XBRL Taxonomy Extension Schema Document

XBRL Taxonomy Extension Calculation Linkbase Document

XBRL Taxonomy Definition Linkbase Document

XBRL Taxonomy Extension Labels Linkbase Document

XBRL Taxonomy Extension Presentation Linkbase Document

Represents a management contract or compensatory plan, contract or arrangement in which any director or
any of the named executives participates.

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Anworth Mortgage Asset Corporation

2013 Annual Report

Corporate Information

DIRECTORS

Transfer Agent and Registrar

Lloyd McAdams
Chairman of the Board of Directors, President and
Chief Executive Officer

Joseph E. McAdams
Director, Chief Investment Officer and Executive
Vice President

Lee A. Ault, III
Director

Charles H. Black
Director

Joe E. Davis
Director

Robert C. Davis
Director

EXECUTIVE OFFICERS

Thad M. Brown
Chief Financial Officer, Secretary and Treasurer

Heather U. Baines
Executive Vice President

Charles J. Siegel
Senior Vice President—Finance and Assistant
Secretary

Bistra Pashamova
Senior Vice President

Evangelos Karagiannis
Vice President

American Stock Transfer & Trust Company, LLC
59 Maiden Lane, Plaza Level
New York, NY 10038
Tel. (212) 936-5100

Independent Registered Public Accounting Firm

McGladrey LLP
515 S. Flower Street, 41st Floor
Los Angeles, CA 90071

Legal Counsel

Greenberg Traurig, LLP
1840 Century Park East, Suite 1900
Los Angeles, CA 90067

Investor Relations

Any stockholder wishing a copy of the Company’s
Annual Report on Form 10-K or the Quarterly Report
on Form 10-Q, as filed with the Securities and
Exchange Commission, may obtain such report,
without charge, upon written request to the
Company, Attn: Investor Relations.

Stock Listings

The Company’s securities are traded on the New
York Stock Exchange as follows: Series A
Cumulative Preferred Stock (Symbol: ANH.A);
Series B Cumulative Convertible Preferred Stock
(Symbol: ANH.B); and Common Stock (Symbol:
ANH).

Annual Meeting of Stockholders

Our Annual Meeting of Stockholders will be held at
10:00 a.m. on Thursday, May 22, 2014 at Loews
Santa Monica Beach Hotel in Santa Monica, CA.

EXECUTIVE OFFICES

Corporate Governance

Anworth Mortgage Asset Corporation
1299 Ocean Avenue, Second Floor
Santa Monica, CA 90401
(310) 255-4493 | Fax (310) 434-0070

Corporate Website

www.anworth.com

The Company filed (1) an annual certification of its
Chief Executive Officer in 2013 with the NYSE
regarding the Company’s compliance with the
NYSE’s corporate governance listing standards and
(2) the certifications of its Chief Executive Officer
and Chief Financial Officer required by Section 302
of the Sarbanes-Oxley Act of 2002 as exhibits to its
2013 Annual Report on Form 10-K.

Anworth Mortgage Asset Corporation
1299 Ocean Avenue, Second Floor
Santa Monica, CA 90401
(310) 255-4493
Fax: (310) 434-0070
www.anworth.com