10-Q 1 a50057968.htm ANNALY CAPITAL MANAGEMENT, INC. 10-Q a50057968.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED:  SEPTEMBER 30, 2011

OR

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

FOR THE TRANSITION PERIOD FROM _______________ TO _________________

COMMISSION FILE NUMBER:  1-13447

ANNALY CAPITAL MANAGEMENT, INC.
(Exact name of Registrant as specified in its Charter)
 
MARYLAND 22-3479661
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
 
1211 AVENUE OF THE AMERICAS, SUITE 2902
NEW YORK, NEW YORK
(Address of principal executive offices)

10036
 (Zip Code)

(212) 696-0100
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
 
Yes x    No o

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

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:
 
  Class Outstanding at November 8, 2011
  Common Stock, $.01 par value 970,083,961
 
 
 

 
 
ANNALY CAPITAL MANAGEMENT, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I
 
  PAGE
Part I.     FINANCIAL INFORMATION
 
   
Item 1.  Financial Statements:
 
   
Consolidated Statements of Financial Condition at September 30, 2011 (Unaudited) and December 31, 2010
(Derived from the audited Consolidated Statement of Financial Condition at December 31, 2010)
 
1
   
Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) for the quarters and nine months ended September 30, 2011 and 2010
2
   
Consolidated Statements of Stockholders’ Equity (Unaudited) for the nine months ended September 30, 2011 and 2010
4
   
Consolidated Statements of Cash Flows (Unaudited) for the quarters and nine months ended September 30, 2011 and 2010
5
   
Notes to Consolidated Financial Statements (Unaudited)
7
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
24
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk
39
   
Item 4. Controls and Procedures
40
   
Part II.     OTHER INFORMATION
 
   
Item 1. Legal Proceedings
42
   
Item 1A. Risk Factors
42
   
Item 6. Exhibits
42
   
SIGNATURES
45
 
 
 

 
 
PART I
Part I
Item 1.  Financial Statements

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 (dollars in thousands, except share and per share amounts)
 
 
 
ASSETS
 
September 30, 2011
(Unaudited)
 
December 31, 2010(1)
Cash and cash equivalents
  $ 3,473,866     $ 282,626  
Reverse repurchase agreements
    360,315       1,006,163  
Investments, at fair value:
               
   U.S. Treasury Securities (including pledged assets of $158,556 and
      $660,823, respectively)
    172,892       1,100,447  
   Securities borrowed
    1,052,810       216,676  
   Agency Mortgage-Backed Securities (including pledged
      assets of $92,974,164 and $67,787,023, respectively)
    106,588,710       78,440,330  
   Agency debentures (including pledged assets of $488,063
      and $1,068,869, respectively)
    824,092       1,108,261  
   Investments in affiliates
    209,374       252,863  
   Equity securities
    3,929       -  
Corporate debt, held for investment
    27,988       21,683  
Receivable for investments sold
    402,817       151,460  
Accrued interest and dividends receivable
    410,862       345,250  
Receivable from Prime Broker
    3,272       3,272  
Receivable for advisory and service fees
    19,656       16,172  
Intangible for customer relationships, net
    11,531       9,290  
Goodwill
    42,030       42,030  
Interest rate swaps, at fair value
    -       2,561  
Other derivative contracts, at fair value
    1,450       2,607  
Other assets
    26,112       24,899  
Total assets
  113,631,706     $ 83,026,590  
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Liabilities:
               
 U.S. Treasury Securities sold, not yet purchased, at fair value
  $ 549,505     $ 909,462  
  Repurchase agreements
    86,495,905       65,533,537  
  Securities loaned, at fair value
    907,061       217,841  
  Payable for investments purchased
    5,852,986       4,575,026  
  Convertible Senior Notes
    557,045       600,000  
  Accrued interest payable
    128,371       115,766  
  Dividends payable
    581,752       404,220  
  Interest rate swaps, at fair value
    2,540,558       754,439  
  Other derivative contracts, at fair value
    -       2,446  
  Accounts payable and other liabilities
    74,837       8,921  
     Total liabilities
    97,688,020       73,121,658  
                 
6.00% Series B Cumulative Convertible Preferred Stock:
  4,600,000 shares authorized, 1,389,249 and 1,652,047 shares issued and
  outstanding, respectively
    33,664       40,032  
                 
Stockholders’ Equity:
               
   7.875% Series A Cumulative Redeemable Preferred Stock: 7,412,500
     authorized, issued and outstanding
    177,088       177,088  
  Common stock, par value $0.01 per share, 1,987,987,500 authorized,
     969,913,060  and 631,594,205 issued and outstanding, respectively
    9,699       6,316  
  Additional paid-in capital
    15,042,361       9,175,245  
  Accumulated other comprehensive income (loss)
    3,073,488       1,164,642  
  Accumulated deficit
    (2,392,614 )     (658,391 )
     Total stockholders’ equity
    15,910,022       9,864,900  
                 
Total liabilities, Series B Cumulative Convertible Preferred Stock and
  stockholders’ equity
  $ 113,631,706     $ 83,026,590  
 
(1)  
 Derived from the audited consolidated financial statements at December 31, 2010.
See notes to consolidated financial statements.
 
1

 
  
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
 (dollars in thousands, except share and per share amounts)
(Unaudited)
 
   
For the Quarters Ended
September 30,
 
For the Nine Months Ended
September 30,
   
2011
 
2010
 
2011
 
2010
Interest income:
                       
  Investments
  $ 926,558     $ 700,964     $ 2,713,141     $ 1,997,681  
  U.S. Treasury Securities
    2,302       751       13,624       791  
  Securities loaned
    1,942       1,261       5,153       2,575  
    Total interest income
    930,802       702,976       2,731,918       2,001,047  
                                 
Interest expense:
                               
  Repurchase agreements
    109,014       105,393       311,780       294,457  
  Convertible Senior Notes
    8,798       7,033       22,465       17,194  
  U.S. Treasury Securities sold, not yet purchased
    2,109       459       11,867       483  
  Securities borrowed
    1,496       1,047       4,081       2,176  
      Total interest expense
    121,417       113,932       350,193       314,310  
                                 
Net interest income
    809,385       589,044       2,381,725       1,686,737  
                                 
Other income (loss):
                               
  Investment advisory and other fee income
    20,828       15,343       58,745       41,752  
  Net gains (losses) on sales of Agency mortgage-backed securities and
    debentures
    91,668       61,986       126,189       147,989  
  Dividend income
    8,706       8,097       23,233       23,391  
  Net gains (losses) on trading assets
    1,942       1,082       15,042       1,159  
  Net unrealized gain (losses) on interest-only Agency mortgage-backed
     securities
    (39,321 )     -       (39,045 )     -  
  Income (expense) from underwriting
    2,772       915       5,599       1,415  
     Subtotal
    86,595       87,423       189,763       215,706  
  Realized gains (losses) on interest rate swaps(1)
    (231,849 )     (188,636 )     (654,757 )     (545,009 )
  Unrealized gains (losses) on interest rate swaps
    (1,505,333 )     (448,253 )     (1,802,968 )     (1,158,023 )
     Subtotal
    (1,737,182 )     (636,889 )     (2,457,725 )     (1,703,032 )
     Total other income (loss)
    (1,650,587 )     (549,466 )     (2,267,962 )     (1,487,326 )
 
Expenses:
                               
  Distribution fees
    -       -       -       360  
  General and administrative expenses
    65,194       43,430       174,250       124,991  
     Total expenses
    65,194       43,430       174,250       125,351  
                                 
Income (loss) before income taxes and income from equity method  investment in affiliate
    (906,396 )     (3,852 )     (60,487 )       74,060  
                                 
 Income taxes
    (15,417 )     (11,076 )     (41,754 )     (27,227 )
                                 
 Income from equity method investment in affiliate
    -       868       1,140       1,943  
                                 
 Net income (loss)
    (921,813 )     (14,060 )     (101,101 )     48,776  
                                 
Dividends on preferred stock
    4,172       4,515       12,706       13,765  
                                 
Net income (loss) available (related) to common shareholders
  $ (925,985 )   $ (18,575 )   $ (113,807 )   $ 35,011  
                                 
Net income (loss) available (related) per share to common shareholders:
                               
  Basic
  $ (0.98 )   $ (0.03 )   $ (0.14 )   $ 0.06  
  Diluted
  $ (0.98 )   $ (0.03 )   $ (0.14 )   $ 0.06  
                                 
Weighted average number of common shares outstanding:
                               
  Basic
    948,545,975       611,904,518       841,912,810       575,742,043  
  Diluted
    948,545,975       611,904,518       841,912,810       575,958,563  
                                 
 Net income (loss)
  $ (921,813 )   $ (14,060 )   $ (101,101 )     48,776  
 Other comprehensive income (loss):
                               
  Unrealized gains (losses) on available-for-sale securities
    1,115,325       (619,080 )     2,020,737       52,880  
  Unrealized losses on interest rate swaps
    -       18,402       14,298       81,329  
  Reclassification adjustment for net (gains) losses  included in net income (loss)
    (91,668 )     (61,986 )     (126,189 )     (147,989 )
  Other comprehensive income (loss)
    1,023,657       (662,664 )     1,908,846       (13,780 )
Comprehensive income (loss)
  $ 101,844     $ (676,724 )   $ 1,807,745     $ 34,996  
 
(1) Interest expense related to the Company’s interest rate swaps is recorded in Realized losses on interest rate swaps on the Consolidated Statements of Operations and Comprehensive Income (Loss).
 
See notes to consolidated financial statements.
 
 
2

 
 
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(dollars in thousands, except per share data)
(Unaudited)

   
Preferred
Stock
 
Common
Stock
Par Value
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income
 
Accumulated
Deficit
 
 
Total
                                     
BALANCE, December  31, 2009
  $ 177,088     $ 5,531     $ 7,817,454     $ 1,891,317     $ (336,964 )   $ 9,554,426  
                                                 
  Net income
    -       -       -       -       48,776       48,776  
  Other comprehensive income
    -       -       -       (13,780 )     -       (13,780 )
  Net proceeds from follow-on offering
    -       600       1,046,793       -       -       1,047,393  
  Exercise of stock options
    -       2       2,841       -       -       2,843  
  Stock option expense and long-term compensation expense
    -       -       3,562       -       -       3,562  
  Conversion of Series B cumulative preferred stock
    -       7       7,215       -       -       7,222  
  Net proceeds from direct purchase and dividend reinvestment
    -       66       117,089       -       -       117,155  
  Preferred Series A dividends declared  $1.477 per share
    -       -       -       -       (10,945 )     (10,945 )
  Preferred Series B dividends declared $1.125 per share
    -       -       -       -       (2,820 )     (2,820 )
  Common dividends declared, $2.01 per share
    -       -       -       -       (1,166,446 )     (1,166,446 )
 
BALANCE, September 30, 2010
  $ 177,088     $ 6,206     $ 8,994,954     $ 1,877,537     $ (1,468,399 )   $ 9,587,386  
 
BALANCE, December  31, 2010
  $ 177,088     $ 6,316     $ 9,175,245     $ 1,164,642     $ (658,391 )   $ 9,864,900  
                                                 
  Net loss
    -       -       -       -       (101,101 )     (101,101 )
  Other comprehensive income
    -       -       -       1,908,846       -       1,908,846  
  Exercise of stock options
    -       6       7,858       -       -       7,864  
  Stock option expense and long-term compensation expense
    -       4       3,858       -       -       3,862  
  Conversion of Series B cumulative preferred stock
    -       7       6,361       -       -       6,368  
  Net proceeds from direct purchase and dividend reinvestment
    -       261       455,445       -       -       455,706  
  Net proceeds from follow-on offerings
    -       3,105       5,348,741       -       -       5,351,846  
  Contingent beneficial conversion feature on Convertible Senior Notes
    -       -       44,853       -       -       44,853  
  Preferred Series A dividends declared  $1.477 per share
    -       -       -       -       (10,945 )     (10,945 )
  Preferred Series B dividends declared $1.125 per share
    -       -       -       -       (1,761 )     (1,761 )
  Common dividends declared, $1.87 per share
    -       -       -       -       (1,620,416 )     (1,620,416 )
                                                 
BALANCE, September 30, 2011
  $ 177,088     $ 9,699     $ 15,042,361     $ 3,073,488     $ (2,392,614 )   $ 15,910,022  
 
See notes to consolidated financial statements.
 
 
3

 
 
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (dollars in thousands)
(Unaudited)
 
   
For the Quarters Ended
September 30,
 
For the Nine Months Ended
September 30,
   
2011
 
2010
 
2011
 
2010
Cash flows from operating activities:
                       
    Net income (loss)
  $ (921,813 )   $ (14,060 )   $ (101,101 )     48,776  
    Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
                               
    Amortization of Investment premiums and discounts, net
    200,942       155,868       502,186       457,052  
    Amortization of intangibles
    676       407       1,511       1,220  
    Amortization of deferred expenses
    900       900       2,700       2,250  
    Amortization of contingent beneficial conversion feature on convertible senior notes
    1,898       -       1,898       -  
    (Gains) losses on sales of Agency mortgage-backed securities and debentures
    (91,668 )     (61,986 )     (126,189 )     (147,989 )
    Stock option and long-term compensation expense
    1,403       1,196       3,862       3,562  
    Unrealized (gains) losses on equity securities
    63       -       63       -  
    Unrealized (gains) losses on interest rate swaps
    1,505,333       448,253       1,802,968       1,158,023  
    Unrealized (gains) losses on interest-only Agency mortgage-backed securities
    39,321       -       39,045       -  
    Net (gains) losses on trading securities
    (1,942 )     (1,082 )     (15,042 )     (1,159 )
    Gain on investment in affiliate, equity method
    -       (97 )     (98 )     (312 )
    Proceeds from repurchase agreements from Broker Dealer
    157,069,300       365,003,080       720,578,286       936,383,970  
    Payments on repurchase agreements from Broker Dealer
    (156,683,356 )     (364,576,286 )     (719,466,382 )     (930,904,601 )
    Proceeds from reverse repurchase agreements to Broker Dealer
    27,610,583       20,927,968       132,302,897       29,891,027  
    Payments on reverse repurchase agreements to Broker Dealer
    (27,359,741 )     (21,376,914 )     (131,634,729 )     (30,153,996 )
    Proceeds from reverse repurchase agreements to Shannon
    58,848       -       65,893       -  
    Payments on reverse repurchase agreements to Shannon
    (76,140 )     -       (88,213 )     -  
    Proceeds from securities borrowed
    12,445,883       877,755       14,898,651       1,989,846  
    Payments on securities borrowed
    (12,978,764 )     (886,755 )     (15,734,785 )     (2,212,011 )
    Proceeds from securities loaned
    12,398,720       996,966       14,902,887       2,366,791  
    Payments on securities loaned
    (11,938,989 )     (987,876 )     (14,213,667 )     (2,144,516 )
    Proceeds from U.S. Treasury Securities
    (5,303,369 )     3,075,309       (18,193,311 )     3,451,909  
    Payments on U.S. Treasury Securities
    5,716,809       (3,075,325 )     18,514,722       (3,511,758 )
    Net payments on derivatives
    (1,771 )     (1,527 )     (4,545 )     (2,545 )
    Net change in:
                               
      Other assets
    (4,795 )     15,308       (4,110 )     3,477  
      Accrued interest and dividend receivable
    (22,148 )     (22,272 )     (62,792 )     (24,303 )
      Advisory and service fees receivable
    10       (1,779 )     (3,484 )     (2,573 )
      Interest payable
    5,618       14,471       12,605       24,376  
      Accounts payable and other liabilities
    (4,058 )     17,536       65,916       41,347  
         Net cash provided by (used in) operating activities
    1,667,753       529,058       4,047,642       6,717,863  
Cash flows from investing activities:
                               
  Payments on purchases of Agency mortgage-backed securities and  debentures
    (17,054,754 )     (12,662,901 )     (49,344,466 )     (38,779,302 )
  Proceeds from sales of Agency mortgage-backed securities and debentures
    3,568,718       1,284,437       9,001,949       5,516,172  
  Principal payments on Agency mortgage-backed securities
    5,074,528       5,569,728       14,429,098       22,307,773  
  Proceeds from Agency debentures called
    288,925       349,875       906,523       1,223,875  
  Payments on purchase of corporate debt
    -       -       (7,425 )     -  
  Principal payments on corporate debt
    -       -       1,155       -  
  Net gains (losses) on other derivative securities
    -       -       11,518       -  
  Purchase of investment in affiliate
    -       -       (57,500 )     -  
  Purchase of customer relationships
    -       -       (3,555 )     -  
  Purchase of equity securities
    (3,990 )     -       (3,990 )     -  
  Payments on reverse repurchase agreements
    -       -       -       (4,032,426 )
  Proceeds from reverse repurchase agreements
    -       -       -       4,291,430  
       Net cash provided by (used  in) investing activities
    (8,126,573 )     (5,458,861 )     (25,066,693 )     (9,472,478 )
Cash flows from financing activities:
                               
  Proceeds from repurchase agreements
    72,790,611       55,726,371       200,627,105       166,732,844  
  Principal payments on repurchase agreements
    (65,127,815 )     (51,499,332 )     (180,776,641 )     (165,769,674 )
  Issuance of Convertible Senior Notes
    -       -       -       582,000  
  Proceeds from exercise of stock options
    1,752       1,032       7,864       2,843  
  Net proceeds from follow-on offerings
    2,410,435       1,047,393       5,351,846       1,047,393  
  Net proceeds from direct purchases and dividend  reinvestments
    -       997       455,706       117,155  
  Dividends paid
    (544,141 )     (385,151 )     (1,455,589 )     (1,173,028 )
       Net cash provided by (used  in) financing activities
    9,530,842       4,891,310       24,210,291       1,539,533  
Net increase (decrease) in cash and cash equivalents
    3,072,022       (38,493 )     3,191,240       (1,215,082 )
Cash and cash equivalents, beginning of period
    401,844       327,979       282,626       1,504,568  
Cash and cash equivalents, end of period
  $ 3,473,866     $ 289,486     $ 3,473,866     $ 289,486  
                                 
  Interest paid (excluding interest paid on interest rate swaps)
  $ 118,539     $ 288,097     $ 347,648     $ 834,943  
  Net interest paid on interest rate swaps
  $ 229,109     $ 200,039     $ 644,962     $ 514,651  
  Taxes paid
  $ 17,919     $ 11,330     $ 43,595     $ 27,938  
                                 
Noncash investing activities:
                               
  Receivable for Investments sold
  $ 402,817     $ 1,637,542     $ 402,817     $ 1,637,542  
  Payable for Investments purchased
  $ 5,852,986     $ 8,165,941     $ 5,852,986     $ 8,165,941  
  Net change in unrealized loss on available-for-sale securities and interest rate swaps, net of reclassification adjustment
  $ 1,023,657     $ (662,664 )   $ 1,908,846     $ (13,780 )
                                 
Noncash financing activities:
                               
  Dividends declared, not yet paid
  $ 581,752     $ 422,036     $ 581,752     $ 422,036  
  Contingent beneficial conversion feature
  $ 44,853       -     $ 44,853          
  Conversion of Series B cumulative preferred stock
  $ 6,295     $ 7,206     $ 6,368     $ 7,222  
 
See notes to consolidated financial statements.
 
 
4

 
 
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)

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

A summary of the Company’s significant accounting policies follows:
 
Basis of Presentation - The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements.  Accordingly, they may not include all of the information and footnotes required by accounting principles generally accepted in the United States of America ("GAAP").
 
The consolidated financial statements include the accounts of the Company, FIDAC, FIDAC UK, FIDAC FSI, Merganser, RCap, Shannon, Charlesfort and the Fund.  All intercompany balances and transactions have been eliminated.
 
Beginning with our consolidated financial statements for the six month period ending June 30, 2011, the Company reclassified previously presented financial information so that amounts previously presented in the Consolidated Statements of Operations and Comprehensive Income (Loss) as interest expense on swaps are presented in Other income (loss) as Realized gains (losses) on interest rate swaps. Consolidated financial statements for periods prior to June 30, 2011 will be conformed to the restated presentation. Accordingly, interest expense for the quarter and nine months ended September 30, 2010 decreased by $231.8 million and $654.8 million and Other income (loss) decreased by the same amounts, respectively to reflect the restated.
 
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand and cash held in money market funds on an overnight basis.
 
Reverse Repurchase Agreements - The Company may invest its daily available cash balances via reverse repurchase agreements to provide additional yield on its assets.  These investments will typically be recorded as short term investments and will generally mature daily.  Reverse repurchase agreements are recorded at cost and are collateralized by mortgage-backed securities pledged by the counterparty to the agreement.  Reverse repurchase agreements entered into by RCap are recorded on trade date at the contract amount, are collateralized by mortgage-backed securities and generally mature within 90 days.  Margin calls are made by RCap as appropriate based on the daily valuation of the underlying collateral versus the contract price.  RCap generates income from the spread between what is earned on the reverse repurchase agreements and what is paid on the matched repurchase agreements.  Cash flows related to RCap’s activity are included in cash flows from operating activities. Reverse repurchase agreements entered into by the Company are included in cash flows from investing activities.
 
 
5

 
 
Securities borrowed and loaned transactions – RCap records securities borrowed and loaned transactions at fair value. Securities borrowed and lending transactions require RCap to provide the counterparty with collateral in the form of cash. RCap receives collateral in the form of cash for securities loaned transactions. For these transactions, the fees received or paid by RCap are recorded as interest income or expense. On a daily basis, market value changes of securities borrowed or loaned against may require counterparties to deposit additional collateral or RCap to return collateral pledged, when appropriate.
 
U.S. Treasury Securities - RCap trades U.S. Treasury securities for its proprietary portfolio, which consists of long and short positions on U.S. Treasury bills, notes, and bonds. U.S. Treasury securities are classified as trading investments and are recorded on trade date at cost. Changes in fair value are reflected in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss). U.S. Treasury bills trade at a discount to par with the difference between proceeds received upon maturity and purchase price recognized as interest income in the Company’s Consolidated Statements of Operations. Interest income on U.S. Treasury notes and bonds is accrued based on the outstanding principal amount of those investments and their contractual terms.  Premiums and discounts associated with the purchase of the U.S. Treasury notes and bonds are amortized into interest income over the projected lives of the securities using the interest method.
 
Investment Securities –Agency mortgage-backed securities, Agency debentures, and corporate debt are referred to herein as “Investment Securities.”  Although the Company generally intends to hold most of its Agency mortgage-backed securities and Agency debentures until maturity, it may, from time to time, sell any of its Agency mortgage-backed securities and Agency debentures as part of its overall management of its portfolio.  Investment Securities classified as available-for-sale are reported at estimated fair value, based on fair values obtained and compared to independent sources, with unrealized gains and losses reported as a component of stockholders’ equity. Investment Securities transactions are recorded on the trade date.  Realized gains and losses on sales of Investment Securities are determined using the specific identification method.
 
On April 1, 2011, the Company elected the fair value option for interest-only mortgage-backed securities acquired on or after such date. These interest-only mortgage-backed securities represent the Company’s right to receive a specified proportion of the contractual interest flows of specific agency securities.  Interest-only securities acquired on or after April 1, 2011 are measured at fair value through earnings in the Company’s Consolidated Statements of Operations and Comprehensive Income.  The interest-only securities are included in Agency mortgage-backed securities, at fair value on the accompanying Consolidated Statements of Financial Condition.
 
Agency Mortgage-Backed Securities and Agency Debentures – The Company invests primarily in mortgage pass-through certificates, collateralized mortgage obligations and other mortgage-backed securities representing interests in or obligations backed by pools of mortgage loans, and certificates guaranteed by Ginnie Mae, Freddie Mac or Fannie Mae (collectively, Agency mortgage-backed securities”).  The Company also invests in Agency debentures issued by Federal Home Loan Bank (“FHLB”), Freddie Mac, and Fannie Mae.
 
Equity Securities – The Company invests in equity securities that are classified as available-for-sale or trading.  Equity securities classified as available-for-sale are reported at fair value, based on market quotes, with unrealized gains and losses reported as a component of stockholders’ equity. Equity securities classified as trading are reported at fair value, based on market quotes, with unrealized gains and losses reported in the Statement of Operations and Comprehensive Income (Loss).  Dividends are recorded on declaration date.
 
Management evaluates available-for-sale securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.  The Company determines if it (1) has the intent to sell the securities, (2) is more likely than not that it will be required to sell the securities before recovery, or (3) does not expect to recover the entire amortized cost basis of the securities.  Further, the security is analyzed for credit loss (the difference between the present value of cash flows expected to be collected and the amortized cost basis).  The credit loss, if any, will then be recognized in the consolidated statement of operations, while the balance of losses related to other factors will be recognized in other comprehensive income (“OCI”).  There was no other-than-temporary impairment for the quarters and nine months ended September 30, 2011 and 2010.
 
 
6

 
 
Interest income is accrued based on the outstanding principal amount of the Investment Securities and their contractual terms.  Premiums and discounts associated with the purchase of the Investment Securities are amortized into interest income over the projected lives of the securities using the interest method.  The Company’s policy for estimating prepayment speeds for calculating the effective yield is to evaluate historical performance, consensus prepayment speeds, and current market conditions.
 
Derivative Instruments The Company accounts for interest rate swaps at fair value as either assets or liabilities on the Consolidated Statements of Financial Condition.  The changes in the fair value of the interest rate swaps are recognized in earnings.  The Company uses interest rate swaps to manage its exposure to changing interest rates on its repurchase agreements. Net payments on interest rate swaps are included in the Consolidated Statements of Cash Flows as a component of net income (loss).  Unrealized gains (losses) on interest rate swaps are removed from net income (loss) as an adjustment to cash flows from operating activities.
 
The Company elected to net by counterparty the fair value of interest rate swap contracts.  These contracts contain legally enforceable provisions that allow for netting or setting off of all individual swap receivables and payables with each counterparty and, therefore, the fair value of those swap contracts are netted by counterparty.  The credit support annex provisions of the Company’s interest rate swap contracts allow the parties to mitigate their credit risk by requiring the party which is out of the money to post collateral. As the Company elects to net by counterparty the fair value of interest rate swap contracts, it also nets by counterparty any collateral exchanged as part of the interest rate swap contracts.  Substantially all collateral is non-cash.
 
In addition, the Company’s agreements with certain of its counterparties with whom it has both interest rate swap contracts and master repurchase agreements contain legally enforceable provisions that allow for netting or setting off of on an aggregate basis all receivables, payables and collateral postings required under both the interest rate swap contract and the master repurchase agreement with respect to each such counterparty.
 
RCap enters into U.S. Treasury, Eurodollar, and federal funds futures and options contracts for speculative or hedging purposes. RCap maintains a margin account which is settled daily with futures and options commission merchants. Changes in the unrealized gains or losses on the futures and options contracts are reflected in the Company’s Consolidated Statements of Operations.  Unrealized gains (losses) are removed from net income (loss) as an adjustment to cash flows from operating activities in the Consolidated Statements of Cash Flows.
 
Credit Risk – The Company has limited its exposure to credit losses on its portfolio of Agency mortgage-backed securities by only purchasing securities issued by Freddie Mac, Fannie Mae or Ginnie Mae and Agency debentures issued by the FHLB, Freddie Mac and Fannie Mae.  The payment of principal and interest on the Freddie Mac and Fannie Mae Agency mortgage-backed securities are guaranteed by those respective agencies, and the payment of principal and interest on the Ginnie Mae Agency mortgage-backed securities are backed by the full faith and credit of the U.S. government.  Principal and interest on Agency debentures are guaranteed by the agency issuing the debenture.  Substantially all of the Company’s Investment Securities have an actual or implied “AAA” rating.  The Company faces credit risk on the portions of its portfolio which are not Agency mortgage-backed securities and Agency debentures.

Market Risk - Weakness in the mortgage market may adversely affect the performance and market value of the Company’s investments.  This could negatively impact the Company’s net book value.  Furthermore, if many of the Company’s lenders are unwilling or unable to provide additional financing, the Company could be forced to sell its Investment Securities at an inopportune time when prices are depressed. The Company does not anticipate having difficulty converting its assets to cash or extending financing terms due to the fact that its Agency mortgage-backed securities and Agency debentures have an actual or implied “AAA” rating and principal payment is guaranteed by Freddie Mac, Fannie Mae, or Ginnie Mae.
 
Repurchase Agreements - The Company finances the acquisition of its Agency mortgage-backed securities and Agency debentures through the use of repurchase agreements.  Repurchase agreements are treated as collateralized financing transactions and are presented at their contractual principal amounts as specified in the respective agreements.   Reverse repurchase agreements and repurchase agreements with the same counterparty and the same maturity are presented net in the Consolidated Statements of Financial Condition when the terms of the agreements permit netting. The Company reports cash flows on repurchase agreements as financing activities in the Consolidated Statements of Cash Flows.  The Company reports cash flows on repurchase agreements entered into by RCap and Shannon as operating activities in the Consolidated Statements of Cash Flows.
 
 
7

 
 
Convertible Senior Notes – The Company records the notes at their contractual amounts, including accrued interest.  The Company has analyzed whether the embedded conversion option should be bifurcated and has determined that bifurcation was not necessary at inception.  The notes have a conversion price adjustment feature that is evaluated at the time of the conversion price adjustment.  A contingent beneficial conversion feature was recognized in the quarter ended September 30, 2011 as a result of adjustments to the conversion price for dividends declared.
 
Cumulative Convertible Preferred Stock - The Series B Cumulative Convertible Preferred Stock (the “Series B Preferred Stock”) contains fundamental change provisions that allow the holder to redeem the Series B Preferred Stock for cash if certain events occur.  As redemption under these provisions is not solely within the Company’s control, the Company has classified the Series B Preferred Stock as temporary equity in the accompanying Consolidated Statements of Financial Condition.  The Company has analyzed whether the embedded conversion option should be bifurcated and has determined that bifurcation is not necessary.
 
Income Taxes - The Company has elected to be taxed as a REIT and intends to comply with the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), with respect thereto.  Accordingly, the Company will not be subjected to federal income tax to the extent of its distributions to shareholders and as long as certain asset, income and stock ownership tests are met.  The Company and its direct and indirect subsidiaries, FIDAC, FIDAC UK, Merganser and RCap, have made separate joint elections to treat these subsidiaries as taxable REIT subsidiaries.  As such, each of the taxable REIT subsidiaries are taxable as a domestic C corporation and subject to federal, state, and local income taxes based upon its taxable income.
 
The provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740, Income Taxes, clarify the accounting for uncertainty in income taxes recognized in financial statements and prescribe a recognition threshold and measurement attribute for tax positions taken or expected to be taken on a tax return. ASC 740 also requires that interest and penalties related to unrecognized tax benefits be recognized in financial statements. The Company does not have any unrecognized tax benefits that would affect its financial position.  Thus, no accruals for penalties and interest were necessary as of September 30, 2011.
 
Goodwill and Intangible Assets - The Company’s acquisitions of FIDAC and Merganser were accounted for using the purchase method.  Under the purchase method, net assets and results of operations of acquired companies are included in the consolidated financial statements from the date of acquisition. The costs of FIDAC and Merganser were allocated to the assets acquired, including identifiable intangible assets, and the liabilities assumed based on their estimated fair values at the date of acquisition. The excess of purchase price over the fair value of the net assets acquired was recognized as goodwill.  In addition, FIDAC UK acquired a customer relationship after its formation. Goodwill and intangible assets are periodically (but not less frequently than annually) reviewed for potential impairment.  Intangible assets with an estimated useful life are expected to amortize over a 7.7 year weighted average time period.  During the quarters and nine months ended September 30, 2011 and 2010, there were no impairment losses.  
 
Stock Based Compensation - The Company is required to measure and recognize in the consolidated financial statements the compensation cost relating to share-based payment transactions.  The Company recognizes compensation expense on a straight-line basis over the requisite service period for the entire award (that is, over the requisite service period of the last separately vesting portion of the award).
 
Use of Estimates - The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  All assets classified as trading or available-for-sale and interest rate swaps are reported at their estimated fair value, based on market prices.  The Company’s policy is to obtain fair values from one or more independent sources.  Fair values from independent sources are compared to internal prices for reasonableness.  Actual results could differ from those estimates.
 
 
8

 

A Summary of Recent Accounting Pronouncements Follows:

Presentation

Comprehensive Income (ASC 220)

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

Assets

Intangibles – Goodwill and Other (ASC 350)

In September 2011, FASB released ASU 2011-08, which allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.   The objective of the update is to simplify how entities test goodwill for impairment.  Under this update, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount.   This update if effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  The Company is not eligible to elect early adoption.  This update has no material effect on the Company’s consolidated financial statements.

Broad Transactions

Fair Value Measurements and Disclosures (ASC 820)
 
In May 2011, FASB released ASU 2011-04 further converging US GAAP and IFRS by providing common fair value measurement and disclosure requirements.  The amendments in this Update change the wording used to describe the requirements in US GAAP for measuring fair value and for disclosing information about fair value measurements.  These include those that clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements and those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.  This guidance is effective for interim and annual reporting periods beginning after December 15, 2011.  This update may result in additional disclosure and the Company is evaluating the effect on the Company’s consolidated financial statements.

Transfers and Servicing (ASC 860)
 
In April 2011, FASB issued ASU 2011-03 regarding repurchase agreements.  In a typical repurchase agreement transaction, an entity transfers financial assets to the counterparty in exchange for cash with an agreement for the counterparty to return the same or equivalent financial assets for a fixed price in the future.  Previous to this update, one of the factors in determining whether sale treatment could be used was whether the transferor maintained effective control of the transferred assets and in order to do so, the transferor must have the ability to repurchase such assets. Based on this update, the FASB concluded that the assessment of effective control should focus on a transferor’s contractual rights and obligations with respect to transferred financial assets, rather than whether the transferor has the practical ability to perform in accordance with those rights or obligations.  Therefore, this update removes the transferor’s ability criterion from consideration of effective control.  This update is effective for the first interim or annual period beginning on or after December 15, 2011.  As the Company records repurchase agreements as secured borrowings and not sales, this update will have no effect on the Company’s consolidated financial statements.
 
 
9

 
 
Financial Services – Investment Companies (ASC 946)
 
In October 2011, FASB issued a proposed ASU 2011-200 which would amend the criteria in Topic 946 for determining whether an entity qualifies as an investment company.  The proposed ASU would affect the measurement, presentation and disclosure requirements for investment companies.  This proposed update amends the investment company definition in ASC 946 and removes the current exemption for Real Estate Investment Trusts from this topic.  The update may result in material modification to the presentation of the Company’s consolidated financial statements and the Company is currently evaluating the full effect of the update.
 
 
10

 
 
2.   AGENCY MORTGAGE-BACKED SECURITIES

The following tables present the Company’s available-for-sale Agency mortgage-backed securities portfolio as of September 30, 2011 and December 31, 2010 which were carried at their fair value:

 
September 30, 2011
 
Freddie Mac
 
Fannie Mae
 
Ginnie Mae
 
Total Agency
Mortgage-Backed Securities
   
(dollars in thousands)
Mortgage-backed
                       
 securities, gross
  $ 30,371,944     $ 68,940,202     $ 796,512     $ 100,108,658  
Unamortized discount
    (12,166 )     (15,528 )     (400 )     (28,094 )
Unamortized premium
    879,830       2,516,205       28,106       3,424,141  
Amortized cost
    31,239,608       71,440,879       824,218       103,504,705  
                                 
Gross unrealized gains
    993,468       2,255,539       37,946       3,286,953  
Gross unrealized losses
    (14,206 )     (187,832 )     (910 )     (202,948 )
                                 
Estimated fair value
  $ 32,218,870     $ 73,508,586     $ 861,254     $ 106,588,710  
                                 
   
Amortized Cost
 
Gross Unrealized
Gain
 
Gross Unrealized
Loss
 
Estimated
Fair Value
   
(dollars in thousands)
Adjustable rate
  $ 9,420,551     $ 401,054     $ (3,240 )   $ 9,818,365  
                                 
Fixed rate
    94,084,154       2,885,899       (199,708 )     96,770,345  
                                 
Total
  $ 103,504,705     $ 3,286,953     $ (202,948 )   $ 106,588,710  

 
December 31, 2010
 
Freddie Mac
 
Fannie Mae
 
Ginnie Mae
 
Total Agency
mortgage-backed securities
   
(dollars in thousands)
Mortgage-backed
                       
 securities, gross
  $ 19,846,543     $ 54,341,140     $ 824,029     $ 75,011,712  
Unamortized discount
    (14,651 )     (18,329 )     (403 )     (33,383 )
Unamortized premium
    517,507       1,795,116       26,200       2,338,823  
Amortized cost
    20,349,399       56,117,927       849,826       77,317,152  
                                 
Gross unrealized gains
    463,471       1,211,324       29,408       1,704,203  
Gross unrealized losses
    (140,027 )     (438,918 )     (2,080 )     (581,025 )
                                 
Estimated fair value
  $ 20,672,843     $ 56,890,333     $ 877,154     $ 78,440,330  
                                 
   
Amortized Cost
 
Gross Unrealized
Gain
 
Gross Unrealized
Loss
 
Estimated
Fair Value
   
(dollars in thousands)
Adjustable rate
  $ 10,954,627     $ 257,822     $ (75,440 )   $ 11,137,009  
                                 
Fixed rate
    66,362,525       1,446,381       (505,585 )     67,303,321  
                                 
Total
  $ 77,317,152     $ 1,704,203     $ (581,025 )   $ 78,440,330  

 
11

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

   
September 30, 2011
 
December 31, 2010
   
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
Weighted-Average Life
 
(dollars in thousands)
Less than one year
  $ 1,258,333     $ 1,239,663     $ 915,398     $ 901,824  
Greater than one year and less than five years
    95,745,349       92,856,677       59,732,123       58,321,570  
Greater than or equal to five years
    9,585,028       9,408,365       17,792,809       18,093,758  
                                 
Total
  $ 106,588,710     $ 103,504,705     $ 78,440,330     $ 77,317,152  

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

The following table presents the gross unrealized losses, and estimated fair value of the Company’s Agency mortgage-backed securities by length of time that such securities have been in a continuous unrealized loss position at September 30, 2011 and December 31, 2010.
 
   
Unrealized Loss Position For:
(dollars in thousands)
   
Less than 12 Months
 
12 Months or More
 
Total
   
Estimated
Fair Value
   
Unrealized
Losses
   
Estimated
Fair Value
   
Unrealized
Losses
   
Estimated
Fair Value
   
Unrealized
Losses
                                     
September 30, 2011
  $ 5,243,617     $ (192,455 )   $ 305,241     $ (10,493 )   $ 5,548,858     $ (202,948 )
December 31, 2010
  $ 28,608,996     $ (577,096 )   $ 166,481     $ (3,929 )   $ 28,775,477     $ (581,025 )

The decline in value of these securities is solely due to market conditions and not the quality of the assets.  Substantially all of the Agency mortgage-backed securities are “AAA” rated or carry an implied “AAA” rating.  The investments are not considered other-than-temporarily impaired because the Company currently has the ability and intent to hold the investments to maturity or for a period of time sufficient for a forecasted market price recovery up to or beyond the cost of the investments or the Company is not required to sell for regulatory or other reasons.  Also, the Company is guaranteed payment of the principal amount of the securities by the government agency which created them.
 
During the quarter and nine months ended September 30, 2011, the Company sold $3.6 billion and $8.5 billion of Agency mortgage-backed securities, resulting in a realized gain of $91.7 million and $118.5 million, respectively.  During the quarter and nine months ended September 30, 2010, the Company sold $2.8 billion and $5.8 billion of Agency mortgage-backed securities, resulting in a realized gain of $61.9 million and $146.6 million respectively.

Interest-only securities represent the right to receive a specified portion of the contractual interest flows of the underlying unamortized principal balance of specific Agency mortgage-backed securities.  As of September 30, 2011, interest-only securities accounted for under the fair value option had unrealized losses of $39.0 million and an amortized cost of $140.1 million.

 
12

 
 
3.   AGENCY DEBENTURES
 
At September 30, 2011, the Company owned Agency debentures with a fair value of $824.1 million, including unrealized gains of $5.5 million.  At December 31, 2010, the Company owned Agency debentures with a fair value of $1.1 billion, including an unrealized gain of $9.7 million.
 
For the quarter and nine months ended September 30, 2011, the Company sold or had called $288.9 million and $1.2 billion of Agency debentures, resulting in realized gains of $0 and $7.7 million, respectively.  For the quarter and nine months ended September 30, 2010, the Company sold or had called $350.0 million and $1.7 billion of Agency debentures, resulting in a realized gain of $125,000 and $1.3 million, respectively.

4.   INVESTMENT IN AFFILIATES, AVAILABLE FOR SALE EQUITY SECURITIES
 
Substantially all of the Company’s available-for-sale equity securities are shares of Chimera Investment Corporation (Chimera) and CreXus Investment Corp. (CreXus) and are reported at fair value.  The Company owned approximately 45.0 million shares of Chimera at a fair value of approximately $124.6 million at September 30, 2011 and approximately 45.0 million shares of Chimera at a fair value of approximately $184.9 million at December 31, 2010.  At September 30, 2011, the investment in Chimera had an unrealized loss of $14.2 million. The Company owned approximately 9.5 million shares of CreXus at a fair value of approximately $84.6 million at September 30, 2011 and approximately 4.5 million shares of CreXus at a fair value of approximately $59.3 million at December 31, 2010.  At September 30, 2011, the investment in CreXus had an unrealized loss of $40.8 million.
 
The Company determined other-than-temporary impairment was not necessary for the quarter or nine months ended September 30, 2011 as the Company has the intent and ability to retain its investments for a period of time sufficient to allow for any anticipated recovery in market value.
 
5.   REVERSE REPURCHASE AGREEMENTS
 
At September 30, 2011, RCap had outstanding reverse repurchase agreements with non-affiliates of $338.0 million. At December 31, 2010, RCap had outstanding reverse repurchase agreements with non-affiliates of $1.0 billion.  At September 30, 2011, Shannon had outstanding reverse repurchase agreements with non-affiliates of $22.3 million.

6.   FAIR VALUE MEASUREMENTS
 
The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.  The three levels are defined as follows:
 
Level 1– inputs to the valuation methodology are quoted prices (unadjusted) for identical assets and liabilities in active markets.
 
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
 
Level 3 – inputs to the valuation methodology are unobservable and significant to overall fair value.
 
Available-for-sale-equity securities are valued based on quoted prices (unadjusted) in an active market.  Agency mortgage-backed securities, debentures and interest rate swaps are valued internally and compared to quoted prices for similar assets and dealer quotes.  Management incorporates common market pricing methods, including a spread measurement to the Treasury curve or interest rate swap curve as well as underlying characteristics of the particular security including coupon, periodic and life caps, rate reset period and expected life of the security.
 
The Company’s Investment Securities characteristics are as follows:
 
 
13

 
 
 
Weighted
Average
Coupon
on Fixed Rate
Investments
Weighted
Average
Coupon on
Adjustable Rate
Investments
Weighted
Average
Yield on
Fixed Rate
Investments
Weighted
Average
Yield
on Adjustable
Rate Investments
Weighted
Average
Lifetime Cap
on Adjustable
Investments
Weighted Average
 Term to Next
Adjustment on
Adjustable Rate
Investments
             
At September 30, 2011
4.81%
3.85%
3.78%
2.79%
9.63%
40 months
At December 31, 2010
4.92%
4.28%
4.00%
3.04%
10.16%
39 months
 
The classification of assets and liabilities by level remains unchanged at September 30, 2011, when compared to the year ended December 31, 2010, with the exception of equity securities, which were acquired during the quarter ended September 30, 2011.  The Company’s financial assets and liabilities carried at fair value on a recurring basis are valued as follows:

   
Level 1
 
Level 2
 
Level 3
At September 30, 2011
 
(dollars in thousands)
Assets:
                 
  Agency mortgage-backed securities
  $ -     $ 106,588,710     $ -  
  Agency debentures
    -       824,092       -  
  Investment in affiliates
    209,374       -       -  
  U.S. Treasury Securities
    172,892       -       -  
  Equity securities
    3,929       -       -  
  Securities borrowed
    -       1,052,810       -  
  Other derivative contracts
    -       1,450       -  
Liabilities:
                       
  Interest rate swaps
    -       2,540,558       -  
  U.S. Treasury securities sold, not yet purchased
    549,505       -       -  
  Securities loaned
    -       907,061       -  
 
   
Level 1
  Level 2  
Level 3
   
(dollars in thousands)
Assets:
                 
  Agency mortgage-backed securities
  $ -     $ 78,440,330     $ -  
  Agency debentures
    -       1,108,261       -  
  Investments in affiliates
    184,879       -       -  
  U.S. Treasury securities
    1,100,447       -       -  
  Securities borrowed
    -       216,676       -  
  Interest rate swaps
    -       2,561       -  
  Other derivative contracts
    2,607       -       -  
Liabilities:
                       
  Interest rate swaps
    -       754,439       -  
  U.S. Treasury securities sold, not yet purchased
    909,462       -       -  
  Securities loaned
    -       217,841       -  
  Other derivative contracts
    -       2,446       -  
 
The carrying amount of cash and cash equivalents, reverse repurchase agreements, receivable for Agency mortgage-backed securities sold, accrued interest and dividends receivable, receivable for advisory and service fees, repurchase agreements with maturities shorter than one year, payable for investments purchased, dividends payable, accounts payable and other liabilities, and accrued interest payable, generally approximates fair value at September 30, 2011 due to the short term nature of these financial instruments.
 
 
14

 

7.   REPURCHASE AGREEMENTS
 
The Company had outstanding $86.5 billion and $65.5 billion of repurchase agreements with weighted average borrowing rates of 1.61% and 1.84%, after giving effect to the Company’s interest rate swaps, and weighted average remaining maturities of 122 days and 127 days as of September 30, 2011 and December 31, 2010, respectively.  Investment Securities and U.S. Treasury Securities pledged as collateral under these repurchase agreements and interest rate swaps had an estimated fair value of $93.6 billion at September 30, 2011 and $69.5 billion at December 31, 2010.
 
At September 30, 2011 and December 31, 2010, the repurchase agreements had the following remaining maturities:

   
September 30, 2011
 
December 31, 2010
   
(dollars in thousands)
1 day
  $ 508,647     $ -  
2 to 29 days
    30,514,704       32,669,341  
30 to 59 days
    17,452,781       13,767,522  
60 to 89 days
    6,642,708       4,776,597  
90 to 119 days
    15,863,279       6,068,376  
Over 120 days
    15,513,786       8,251,701  
Total
  $ 86,495,905     $ 65,533,537  
 
The Company did not have an amount at risk greater than 10% of the equity of the Company with any counterparty as of September 30, 2011 or December 31, 2010.

The Company has entered into long term repurchase agreements which provide the counterparties with the right to call the balance prior to maturity date.  These repurchase agreements totaled $5.0 billion and the fair value of the option to call was ($296.4 million) at September 30, 2011.  The repurchase agreements totaled $5.9 billion and the fair value of the option to call was ($313.2 million) at December 31, 2010.  Management has determined that the call option is not required to be bifurcated as it is deemed clearly and closely related to the debt instrument, therefore the fair value of the option is not recorded in the consolidated financial statements. The long term repurchase agreements are modeled and priced as pay fixed versus receive floating interest rate swaps whereby the fixed receiver has the option to cancel the swap after an initial lockout period.

Additionally, as of September 30, 2011 and December 31, 2010, the Company has entered into repurchase agreements with a term of over one year.  The amount of the repurchase agreements is $1.0 billion and $500 million and they have an estimated fair value of $1.1 billion and $513.3 million as of September 30, 2011 and December 31, 2010, respectively.

8.   DERIVATIVE INSTRUMENTS
 
In connection with the Company’s interest rate risk management strategy, the Company economically hedges a portion of its interest rate risk by entering into derivative financial instrument contracts.  As of September 30, 2011, such instruments are comprised of interest rate swaps, which in effect modify the cash flows on repurchase agreements.  The use of interest rate swaps creates exposure to credit risk relating to potential losses that could be recognized if the counterparties to these instruments fail to perform their obligations under the contracts.  In the event of a default by the counterparty, the Company could have difficulty obtaining its Investment Securities pledged as collateral for swaps.  The Company does not anticipate any defaults by its counterparties.
 
The purpose of the swaps is to mitigate the risk of rising interest rates that affect the Company’s cost of funds.
 
 
15

 
 
The location and fair value of the Company’s interest rate swaps reported in the Consolidated Statements of Financial Condition as of September 30, 2011 and December 31, 2010 are as follows:

 
Location on Consolidated
Statements of Financial
Condition
 
Notional Amount
   
Net Estimated Fair
Value/Carrying Value
     
(dollars in thousands)
 
September 30, 2011
Assets
  $ -     $ -  
September 30, 2011
Liabilities
  $ 40,461,190     $ (2,540,558 )
December 31, 2010
Assets
  $ 200,000     $ 2,561  
December 31, 2010
Liabilities
  $ 26,882,460     $ (754,439 )
 
The effect of the Company’s interest rate swaps on the Consolidated Statements of Operations and Comprehensive Income is as follows:
 
   
Location on Consolidated Statements
of Operations and Comprehensive Income
   
Realized Gains (Loss) Recognized on
   Unrealized Gains (Losses) on
   
Interest Rate Swaps*
  Interest Rate Swaps
   
(dollars in thousands)
For the Quarter Ended September 30, 2011
  $ (231,849 )   $ (1,505,333 )
For the Quarter Ended September 30, 2010
  $ (188,636 )   $ (448,253 )
For the Nine Months Ended September 30, 2011
  $ (654,757 )   $ (1,802,968 )
For the Nine Months Ended September 30, 2010
  $ (545,009 )   $ (1,158,023 )

* Net interest payments on interest rate swaps is presented in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) as realized gains (losses) on interest rate swaps.
 
The weighted average pay rate at September 30, 2011 was 2.57% and the weighted average receive rate was 0.25%.  The weighted average pay rate at September 30, 2010 was 3.34% and the weighted average receive rate was 0.31%.  Without netting the market value of the swaps by dealer at September 30, 2011, the gross unrealized loss on interest rate swaps was $2.5 billion, with a notional amount of $40.5 billion.  Without netting the market value of the swaps by dealer at September 30, 2010, the gross unrealized loss on interest rate swaps was $1.6 billion, with a notional amount of $25.9 billion.

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

9.   CONVERTIBLE SENIOR NOTES

In 2010, Company issued $600.0 million in aggregate principal amount of its 4% convertible senior notes due 2015 (“Convertible Senior Notes”) for net proceeds following underwriting expenses of approximately $582.0 million.  Interest on the Convertible Senior Notes is paid semi-annually at a rate of 4% per year and the Convertible Senior Notes will mature on February 15, 2015 unless earlier repurchased or converted.  The Convertible Senior Notes are convertible into shares of Common Stock at an initial conversion rate and conversion rate at September 30, 2011 of 46.6070 and 60.1093 shares of Common Stock per $1,000 principal amount of Convertible Senior Notes, which is equivalent to an initial conversion price and conversion price at September 30, 2011 of approximately $21.4560 and $16.6364 per share of Common Stock, respectively, subject to adjustment in certain circumstances.  During the quarter ended September 30, 2011, it was determined that there was a contingent beneficial conversion feature.  The intrinsic value of the contingent beneficial conversion feature was $44.9 million.  This intrinsic value is included  in Additional paid in capital on the Company’s Consolidated Statements of Financial Condition and, therefore, reduces the liability associated with  the Convertible Senior Notes.  The $44.9 million discount to the principal amount of the Convertible Senior Notes is recognized in interest expense over the remaining life of the notes using the effective yield method.  The market value of the Convertible Senior Notes at September 30, 2011 and December 31, 2010 was $687.8 million and $699.2 million, respectively, based on closing price.
 
 
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10.  PREFERRED STOCK AND COMMON STOCK

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

On July 11, 2011 the Company entered into an agreement pursuant to which it sold 138,000,000 shares of its common stock for net proceeds following expenses of approximately $2.41 billion. This transaction settled on July 15, 2011.

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

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

During the quarter and nine months ended September 30, 2011, 134,000 options and 596,000 options were exercised for an aggregate exercise price of $1.8 million and $7.9 million, respectively, and 0 shares and 654,000 restricted shares were granted under the Long-Term Stock Incentive Plan (“Incentive Plan”), respectively.  During the quarter and nine months ended September 30, 2010, 79,000 options and 227,000 options were exercised under the Incentive Plan for an aggregate exercise price of $1.0 million and $2.8 million, respectively.

During the quarter and nine months ended September 30, 2011, 260,000 shares and 263,000 shares of Series B Preferred Stock were converted into 732,000 shares and 740,000 shares of common stock, respectively.  During the quarter and nine months ended September 30, 2010, 297,000 and 298,000 shares of Series B Preferred Stock were converted into 741,000 and 743,000 shares of common stock, respectively.

During the nine months ended September 30, 2011, the Company raised $455.7 million by issuing 26.2 million shares through the Direct Purchase and Dividend Reinvestment Program.  The Company did not issue any shares through the program during the quarter ended September 30, 2011.  During the quarter and nine months ended September 30, 2010, the Company raised $691,000 and $117.2 million by issuing 39,000 shares and 6.6 million shares, through the Direct Purchase and Dividend Reinvestment Program.

(B) Preferred Stock

At September 30, 2011 and December 31, 2010, the Company had issued and outstanding 7,412,500 shares of Series A Cumulative Redeemable Preferred Stock (Series A Preferred Stock), with a par value $0.01 per share and a liquidation preference of $25.00 per share plus accrued and unpaid dividends (whether or not declared). The Series A Preferred Stock must be paid a dividend at a rate of 7.875% per year on the $25.00 liquidation preference before the common stock is entitled to receive any dividends. The Series A Preferred Stock is redeemable at $25.00 per share plus accrued and unpaid dividends (whether or not declared) exclusively at the Company's option commencing on April 5, 2009 (subject to the Company's right under limited circumstances to redeem the Series A Preferred Stock earlier in order to preserve its qualification as a REIT). The Series A Preferred Stock is senior to the Company's common stock and is on parity with the Series B Preferred Stock with respect to dividends and distributions, including distributions upon liquidation, dissolution or winding up. The Series A Preferred Stock generally does not have any voting rights, except if the Company fails to pay dividends on the Series A Preferred Stock for six or more quarterly periods (whether or not consecutive). Under such circumstances, the Series A Preferred Stock, together with the Series B Preferred Stock, will be entitled to vote to elect two additional directors to the Board, until all unpaid dividends have been paid or declared and set apart for payment. In addition, certain material and adverse changes to the terms of the Series A Preferred Stock cannot be made without the affirmative vote of holders of at least two-thirds of the outstanding shares of Series A Preferred Stock and Series B Cumulative Convertible Preferred Stock (Series B Preferred Stock). Through September 30, 2011, the Company had declared and paid all required quarterly dividends on the Series A Preferred Stock.
 
 
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At September 30, 2011 and December 31, 2010, the Company had issued and outstanding 1,389,249 and 1,652,047, respectively, shares of Series B Preferred Stock, with a par value $0.01 per share and a liquidation preference of $25.00 per share plus accrued and unpaid dividends (whether or not declared). The Series B Preferred Stock must be paid a dividend at a rate of 6% per year on the $25.00 liquidation preference before the common stock is entitled to receive any dividends.
 
The Series B Preferred Stock is not redeemable. The Series B Preferred Stock is convertible into shares of common stock at a conversion rate that adjusts from time to time upon the occurrence of certain events, including if the Company distributes to its common shareholders in any calendar quarter cash dividends in excess of $0.11 per share. Initially, the conversion rate was 1.7730 shares of common shares per $25 liquidation preference.   At September 30, 2011, the conversion ratio was 2.8944 shares of common stock per $25 liquidation preference.  Commencing April 5, 2011, the Company has the right in certain circumstances to convert each Series B Preferred Stock into a number of common shares based upon the then prevailing conversion rate. The Series B Preferred Stock is also convertible into common shares at the option of the Series B preferred shareholder at any time at the then prevailing conversion rate. The Series B Preferred Stock is senior to the Company's common stock and is on parity with the Series A Preferred Stock with respect to dividends and distributions, including distributions upon liquidation, dissolution or winding up. The Series B Preferred Stock generally does not have any voting rights, except if the Company fails to pay dividends on the Series B Preferred Stock for six or more quarterly periods (whether or not consecutive). Under such circumstances, the Series B Preferred Stock, together with the Series A Preferred Stock, will be entitled to vote to elect two additional directors to the Board, until all unpaid dividends have been paid or declared and set apart for payment. In addition, certain material and adverse changes to the terms of the Series B Preferred Stock cannot be made without the affirmative vote of holders of at least two-thirds of the outstanding shares of Series B Preferred Stock and Series A Preferred Stock. Through September 30, 2011, the Company had declared and paid all required quarterly dividends on the Series B Preferred Stock.  During the quarter and nine months ended September 30, 2011, 260,000 shares and 263,000 shares of Series B Preferred Stock were converted into 732,000 shares and 740,000 shares of common stock, respectively.  During the quarter and nine months ended September 30, 2010, 297,000 and 298,000 shares of Series B Preferred Stock were converted into 741,000 and 743,000 shares of common stock, respectively.
 
(C) Distributions to Shareholders

During the quarter and nine months ended September 30, 2011, the Company declared dividends to common shareholders totaling $581.8 million or $0.60 per share and $1.6 billion or $1.87 per share, respectively, of which $581.8 million was paid to shareholders on October 27, 2011.  During the quarter and nine months ended September 30, 2011, the Company declared dividends to Series A Preferred shareholders totaling approximately $3.6 million or $0.492 per share and $10.9 million or $1.477 per share, and Series B shareholders totaling approximately $524 thousand or $0.375 per share and approximately $1.8 million or $1.125 per share, respectively.

During the quarter and nine months ended September 30, 2010, the Company declared dividends to common shareholders totaling $422.0 million or $0.68 per share and $1.2 billion or $2.01 per share, respectively, of which $422.0 million was paid to shareholders on October 28, 2010.  During the quarter and nine months ended September 30, 2010, the Company declared dividends to Series A Preferred shareholders totaling approximately $3.6 million or $0.492188 per share and $10.9 million or $1.4766 per share and Series B shareholders totaling approximately $867,000 or $0.375 per share and $2.8 million or $1.125, respectively.

11.  NET INCOME PER COMMON SHARE
 
 
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The following table presents a reconciliation of the net income and shares used in calculating basic and diluted earnings per share for the quarters and nine months ended September 30, 2011 and 2010.
 
   
For the Quarters Ended
 
For the Nine Months Ended
   
September 30,
2011
 
September 30,
2010
 
September 30,
2011
 
September 30,
2010
Net income (loss)
  $ (921,813 )   $ (14,060 )   $ (101,101 )   $ 48,776  
Less: Preferred stock dividends
    4,172       4,515       12,706       13,765  
Net income (loss) available to common shareholders, prior to
  adjustment for dilutive potential common shares, if necessary
  $ (925,985 )   $ (18,575 )   $ (113,807 )   $ 35,011  
Add: Preferred Series B dividends, if Series B shares are dilutive
    -       -       -       -  
Add: Interest on Convertible Senior Notes, if Notes are dilutive
    -       -       -       -  
Net income (loss) available to common shareholders, as adjusted
  $ (925,985 )   $ (18,575 )   $ (113,807 )   $ 35,011  
                                 
Weighted average shares of common stock outstanding-basic
    948,546       611,905       841,913       575,742  
Add:  Effect of dilutive stock options
    -       -       -       217  
Add:  Series B Cumulative Convertible Preferred Stock, if dilutive
    -       -       -       -  
Add:  Convertible Senior Notes, if dilutive
    -       -       -       -  
Weighted average shares of common stock outstanding-diluted
    948,546       611,905       841,913       575,959  

Options to purchase 572,000 and 572,000 shares of common stock were outstanding and considered anti-dilutive as their exercise price exceeded the average stock price for the quarter and nine months ended September 30, 2011. Options to purchase 572,000 and 566,000 shares of common stock were outstanding and considered anti-dilutive as their exercise price exceeded the average stock price for the quarter and nine months ended September 30, 2010, respectively.
 
12.  LONG-TERM STOCK INCENTIVE PLANS

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

Stock options were issued at the market price on the date of grant, subject to an immediate or four year vesting in four equal installments with a contractual term of 5 or 10 years.  During the nine months ended September 30, 2011, the Company granted 654,000 restricted shares that vest over four years.
 
 
19

 

 
 
For the Nine Months Ended
   
September 30, 2011
 
September 30, 2010
   
Number of
Shares
 
Weighted Average Exercise Price
 
Number of
Shares
 
Weighted Average Exercise Price
Options outstanding at the beginning of period
    6,891,975     $ 15.20       7,271,503     $ 15.20  
Granted
    7,500       18.67       7,500       17.24  
Exercised
    (596,470 )     13.18       (226,791 )     12.54  
Forfeited
    -       -       (14,400 )     14.85  
Expired
    (3,750 )     12.15       (6,250 )     18.26  
Options outstanding at the end of period
    6,299,255     $ 15.54       7,031,562     $ 15.28  
Options exercisable at the end of the period
    4,534,143     $ 16.12       3,961,568     $ 16.04  
 
The weighted average remaining contractual term was approximately 5.7 years for stock options outstanding and approximately 5.1 years for stock options exercisable as of September 30, 2011.  As of September 30, 2011, there was approximately $5.3 million of total unrecognized compensation cost related to nonvested share-based compensation awards.  That cost is expected to be recognized over a weighted average period of 1.3 years.
 
The weighted average remaining contractual term was approximately 6.9 years for stock options outstanding and approximately 5.8 years for stock options exercisable as of September 30, 2010.  As of September 30, 2010, there was approximately $10.0 million of total unrecognized compensation cost related to nonvested share-based compensation awards.  That cost is expected to be recognized over a weighted average period of 2.2 years.
 
13.  INCOME TAXES

As a REIT, the Company is not subject to federal income tax on earnings distributed to its shareholders. Most states recognize REIT status as well. The Company has decided to distribute the majority of its income and retain a portion of the permanent difference between book and taxable income arising from Section 162(m) of the Code pertaining to employee remuneration.

During the quarter and nine months ended September 30, 2011, the Company’s taxable REIT subsidiaries recorded $2.6 million and $9.4 million of income tax expense for income attributable to those subsidiaries, and the portion of earnings retained based on Code Section 162(m) limitations.  During the quarter and nine months ended September 30, 2011, the Company recorded $12.8 million and $32.4 million of income tax expense for a portion of earnings retained based on Section 162(m) limitations.
 
During the quarter and nine months ended September 30, 2010, the Company’s taxable REIT subsidiaries recorded $2.4 million and $5.4 million of income tax expense for income attributable to those subsidiaries, and the portion of earnings retained based on Code Section 162(m) limitations.  During the quarter and nine months ended September 30, 2010, the Company recorded $8.6 million and $21.8 million of income tax expense for a portion of earnings retained based on Section 162(m) limitations.   

The Company files tax returns in several U.S jurisdictions, including New York State and New York City. The 2007 through 2010 tax year remains open to U.S. federal, state and local tax examinations.
 
The effective tax rate of 53% was calculated based on the Company’s estimated taxable income after dividends paid deduction and differ from the federal statutory rate as a result of state and local taxes and permanent difference pertaining to employee remuneration as discussed above.

The statutory combined federal, state, and city corporate tax rate is 45%.  This amount is applied to the amount of estimated REIT taxable income retained (if any and only up to 10% of ordinary income as all capital gain income is distributed) and to taxable income earned at the taxable subsidiaries.  Thus, as a REIT, the Company’s effective tax rate is significantly less as it is allowed to deduct dividend distributions.

14.  LEASE COMMITMENTS AND CONTINGENCIES
 
Commitments

The Company has a non-cancelable lease for office space which commenced in May 2002 and expires in December 2015. Additionally, on January 1, 2011 the Company acquired additional office space. Merganser has a non-cancelable lease for office space, which commenced on May 2003 and expires in May 2014.  Merganser subleases a portion of its leased space to a subtenant.  FIDAC has a lease for office space which commenced in October 2010 and expires in February 2016. FIDAC UK has a lease for office space that expires in March 2019, which FIDAC UK has the right to terminate early in March 2014 by providing six months’ notice to the lessor.  The Company’s aggregate future minimum lease payments total $9.4 million.   The following table details the lease payments.
 
 
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Year Ending December
 
Lease Commitment
 
Sublease Income
  Net Amount
   
(dollars in thousands)
2011 (remaining)
  $ 750     $ 42     $ 708  
2012
    3,003       70       2,933  
2013
    3,004       -       3,004  
2014
    2,522       -       2,522  
2015
    161       -       161  
Later years