10-Q

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 June 30, 2013

OR

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

For the transition period from                      to                     .

Commission file number 001-34030

HATTERAS FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

Maryland	26-1141886
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
110 Oakwood Drive, Suite 340 Winston Salem, North Carolina	27103
(Address of principal executive offices)	(Zip Code)

(336) 760-9347

(Registrant’s telephone number, including area code)

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

Indicate by check mark 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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	x	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

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

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

Class	Outstanding at July 27, 2013
Common Stock ($0.001 par value)		98,830,054

TABLE OF CONTENTS

		Page
PART I	Financial Information
Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	47
Item 4.	Controls and Procedures	51
PART II	Other Information
Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3.	Defaults Upon Senior Securities	52
Item 4.	Mine Safety Disclosures	52
Item 5.	Other Information	52
Item 6.	Exhibits	52
	Signatures	53

Hatteras Financial Corp.

Consolidated Balance Sheets

(Dollars in thousands, except share amounts)	(Unaudited)
	June 30, 2013			December 31, 2012
Assets
Mortgage-backed securities, at fair value (including pledged assets of $24,163,526 and $22,591,973 at June 30, 2013 and December 31, 2012, respectively)		$25,256,043			$23,919,251
Cash and cash equivalents		88,987			168,424
Restricted cash		149,210			281,021
Unsettled purchased mortgage-backed securities, at fair value		133,597			138,338
Receivable for securities sold		7,251			1,587,535
Accrued interest receivable		73,957			77,113
Principal payments receivable		199,553			190,832
Debt security, held to maturity, at cost		15,000			15,000
Interest rate hedge asset		25,921			-
Other assets		26,856			26,604
Total assets		$25,976,375			$26,404,118
Liabilities and shareholders’ equity
Repurchase agreements		$23,077,252			$22,866,429
Payable for unsettled securities		136,373			137,121
Accrued interest payable		4,773			7,592
Interest rate hedge liability		157,869			243,945
Dividend payable		73,809			73,804
Accounts payable and other liabilities		47,210			2,363
Total liabilities		$23,497,286			$23,331,254
Shareholders’ equity:
7.625% Series A Cumulative Redeemable Preferred stock, $.001 par value, 25,000,000 shares authorized, 11,500,000 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively ($287,500 aggregate liquidation preference)		278,252			278,252
Common stock, $.001 par value, 200,000,000 shares authorized, 98,830,054 and 98,822,654 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively		99			99
Additional paid-in capital		2,495,559			2,494,303
Retained earnings		26,012			37,356
Accumulated other comprehensive (loss) income		(320,833	)		262,854
Total shareholders’ equity		2,479,089			3,072,864
Total liabilities and shareholders’ equity		$25,976,375			$26,404,118

See accompanying notes.

1

Hatteras Financial Corp.

Consolidated Statements of Income

(Unaudited)

(Dollars in thousands, except per share amounts)	Three months		Three months		Six months		Six months
	Ended		Ended		Ended		Ended
	June 30, 2013		June 30, 2012		June 30, 2013		June 30, 2012
Interest income:
Interest income on mortgage-backed securities		$                115,115		$                128,720		$                239,356		$                241,480
Interest income on short-term cash investments		359		441		801		773
Total interest income		115,474		129,161		240,157		242,253
Interest expense		52,079		46,169		105,356		87,278
Net interest income		63,395		82,992		134,801		154,975
Operating expenses:
Management fee		4,714		4,312		9,434		8,154
Share based compensation		627		425		1,256		854
General and administrative		1,602		1,316		2,971		2,229
Total operating expenses		6,943		6,053		13,661		11,237
Other income:
Net gain on sale of mortgage-backed securities		8,802		12,205		11,302		14,710
Net gain on futures contracts		5,485		-		5,536		-
Total other income		14,287		12,205		16,838		14,710
Net income		70,739		89,144		137,978		158,448
Dividends on preferred stock		5,480		–		10,960		–
Net income available to common shareholders		$                65,259		$                89,144		$                127,018		$                158,448
Earnings per share - common stock, basic		$                    0.66		$                    0.91		$                      1.29		$                      1.80
Earnings per share - common stock, diluted		$                    0.66		$                    0.91		$                      1.29		$                      1.80
Dividends per share of common stock		$                    0.70		$                    0.90		$                      1.40		$                      1.80
Weighted average common shares outstanding, basic		98,830,054		97,969,074		98,828,827		87,789,596
Weighted average common shares outstanding, diluted		98,830,054		97,969,074		98,828,827		87,789,596

See accompanying notes.

2

Hatteras Financial Corp

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(Dollars in thousands)

	For the three		For the three		For the six		For the six
	months ended		months ended		months ended		months ended
	June 30, 2013		June 30, 2012		June 30, 2013		June 30, 2012
Net income		$70,739		$89,144		$137,978		$158,448
Other comprehensive (loss) income:
Net unrealized (losses) gains on securities available for sale		(627,560)		47,241		(646,412)		72,072
Net unrealized gains (losses) on interest rate hedges		37,679		(33,988)		62,725		(31,734)
Other comprehensive (loss) income		(589,881)		13,253		(583,687)		40,338
Comprehensive (loss) income		($519,142)		$102,397		($445,709)		$198,786

See accompanying notes.

3

Hatteras Financial Corp.

Consolidated Statement of Changes in Shareholders’ Equity

For the six months ended June 30, 2013

(Unaudited)

	7.625% Series A
	Cumulative
	Redeemable								Accumulated
(Dollars in thousands)	Preferred		Common		Additional				Other
	Stock		Stock		Paid-in		Retained		Comprehensive
	Amount		Amount		Capital		Earnings		Income (Loss)		Total
Balance at December 31, 2012		$278,252		$99		$2,494,303		$37,356		$262,854		3,072,864
Issuance of preferred stock		-		-		-		-		-		-
Issuance of common stock		-		-		-		-		-		-
Share based compensation expense		-		-		1,256		-		-		1,256
Dividends declared on common stock		-		-		-		(138,362)		-		(138,362)
Dividends declared on preferred stock		-		-		-		(10,960)		-		(10,960)
Net income		-		-		-		137,978		-		137,978
Other comprehensive loss		-		-		-		-		(583,687)		(583,687)
Balance at June 30, 2013		$278,252		$99		$2,495,559		$26,012		($320,833)		2,479,089

See accompanying notes.

4

Hatteras Financial Corp.

Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

	For the six		For the six
	months ended		months ended
Operating activities	June 30, 2013		June 30, 2012
Net income		$                137,978		$                158,448
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of premium related to mortgage-backed securities		92,058		65,475
Amortization related to interest rate swap agreements		163		184
Share based compensation expense		1,256		854
Hedge ineffectiveness		(96)		338
Net gain on sale of mortgage-backed securities		(11,302)		(14,710)
Net gain on sale of futures contracts		(5,536)		–
Changes in operating assets and liabilities:
Decrease (increase) in accrued interest receivable		3,156		(10,831)
Increase in other assets		(730)		(578)
Decrease in accrued interest payable		(2,819)		(203)
Increase (decrease) in accounts payable and other liabilities		1,122		(379)
Net cash provided by operating activities		215,250		198,598
Investing activities
Purchases of mortgage-backed securities		(6,029,805)		(8,959,135)
Principal repayments of mortgage-backed securities		3,180,421		1,938,005
Sale of mortgage-backed securities		2,361,380		2,383,298
Net cash used in investing activities		(488,004)		(4,637,832)
Financing activities
Issuance of common stock, net of cost of issuance		–		570,589
Cash dividends paid		(149,317)		(139,030)
Increase (decrease) in restricted cash on swap arrangements		131,811		(41,164)
Proceeds from repurchase agreements		126,103,804		102,306,555
Principal repayments on repurchase agreements		(125,892,981)		(98,316,070)
Net cash provided by financing activities		193,317		4,380,880
Net decrease in cash and cash equivalents		(79,437)		(58,354)
Cash and cash equivalents, beginning of period		168,424		347,045
Cash and cash equivalents, end of period		$                    88,987		$                288,691
Supplemental disclosure of cash flow information
Cash paid during the period for interest		$                  108,123		$                  87,481
Supplemental schedule of non-cash investing activities
Obligation to brokers for purchase of unsettled mortgage-backed securities		$               1,042,436		$             2,160,647
Receivable for securities sold		$                      7,251		$                           -
Supplemental schedule of non-cash financing activities
Dividends declared on preferred stock, not yet paid		$                      5,480		$                           -
Dividends declared on common stock, not yet paid		$                    69,181		$                  88,267

See accompanying notes.

5

Hatteras Financial Corp.

Notes to Consolidated Financial Statements

June 30, 2013

(Dollars in thousands except per share amounts)

1. Organization and Business Description

Hatteras Financial Corp. (the “Company”) was incorporated in Maryland on September 19, 2007. The Company was formed to invest in residential mortgage-backed securities (“MBS”), issued or guaranteed by the U.S. Government or U.S. Government sponsored agencies such as the Government National Mortgage Association (“Ginnie Mae”), the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (“agency securities”). The Company has a newly formed wholly owned subsidiary Diamond Shoals Funding LLC, a North Carolina limited liability company that currently has no business activity. The Company is externally managed by Atlantic Capital Advisors LLC (“ACA”).

The Company has elected to be taxed as a real estate investment trust (“REIT”). As a result, the Company does not pay federal income taxes on taxable income distributed to shareholders if certain REIT qualification tests are met. It is the Company’s policy to distribute 100% of its taxable income, after application of available tax attributes, within the time limits prescribed by the Internal Revenue Code of 1986, as amended (the “Code”), which may extend into the subsequent taxable year.

2. Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2013. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2012.

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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting

6

period. Actual results could differ from those estimates. Significant estimates affecting the accompanying consolidated financial statements include the valuation of agency securities and derivative instruments.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Diamond Shoals Funding LLC. The Company also considers the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 810 on Consolidation in determining whether consolidation is appropriate for any interests held in variable interest entities. All significant intercompany balances and transactions have been eliminated.

Financial Instruments

The Company considers its cash and cash equivalents, restricted cash, agency securities (settled and unsettled), forward purchase commitments, debt security held to maturity, receivable for securities sold, accrued interest receivable, principal payment receivable, payable for unsettled securities, derivative instruments, repurchase agreements and accrued interest payable to meet the definition of financial instruments. The carrying amount of cash and cash equivalents, restricted cash, receivable for securities sold, accrued interest receivable and payable for unsettled securities approximate their fair value due to the short maturities of these instruments and are valued using Level 1 inputs. The carrying amount of repurchase agreements is deemed to approximate fair value since the agreements are based upon a variable rate of interest and are valued using Level 2 inputs. See Note 4 for discussion of the fair value of agency securities and forward purchase commitments. See Note 5 for discussion of the fair value of the held to maturity debt security. See Note 7 for discussion of the fair value of derivative instruments.

The Company limits its exposure to credit losses on its portfolio of securities by purchasing agency securities. The portfolio is diversified to avoid undue exposure to loan originator, geographic and other types of concentration. The Company manages the risk of prepayments of the underlying mortgages by creating a diversified portfolio with a variety of expected prepayment characteristics. See Note 4 for additional information on MBS.

The Company is engaged in various trading and brokerage activities including repurchase agreements, interest rate swap agreements, and futures contracts in which counterparties primarily include broker-dealers, banks, and other financial institutions. In the event counterparties do not fulfill their obligations, the Company may be exposed to risk of loss. The risk of default depends on the creditworthiness of the counterparty and/or issuer of the instrument. It is the Company’s policy to review, as necessary, the credit standing for each counterparty. See Note 6 for additional information on repurchase agreements and Note 7 for additional information on interest rate swap agreements.

7

Mortgage-Backed Securities

The Company invests in agency securities representing interests in or obligations backed by pools of single-family residential mortgage loans. Guidance under the FASB ASC Topic 820 on Investments requires the Company to classify its investments as either trading, available-for-sale or held-to-maturity securities. Management determines the appropriate classifications of the securities at the time they are acquired and evaluates the appropriateness of such classifications at each balance sheet date. The Company currently classifies all of its agency securities as available-for-sale. All assets that are classified as available-for-sale are carried at fair value and unrealized gains and losses are included in other comprehensive income. The estimated fair values of agency securities are determined by management by obtaining valuations for its agency securities from independent sources and averaging these valuations. Security purchase and sale transactions are recorded on the trade date. Gains or losses realized from the sale of securities are included in income and are determined using the specific identification method. Firm purchase commitments to acquire “when issued” or to-be-announced (“TBA”) securities are recorded at fair value in accordance with ASC Topic 815, Derivatives and Hedging (“ASC 815”). The fair value of these purchase commitments is included in other assets or liabilities in the accompanying balance sheets.

The Company assesses its investment securities for other-than-temporary impairment on at least a quarterly basis. When the fair value of an investment is less than its amortized cost at the balance sheet date the impairment is designated as either “temporary” or “other-than-temporary.” In deciding whether or not a security is other-than-temporarily impaired, the Company uses a two step evaluation process. First, the Company determines whether it has made any decision to sell a security that is in an unrealized loss position, or, if not, the Company determines whether it is more likely than not that the Company will be required to sell the security prior to recovering its amortized cost basis. If the answer to either of these questions is “yes” then the security is considered other-than-temporarily impaired. There were no such impairment losses recognized during the periods presented.

Repurchase Agreements

The Company finances the acquisition of its agency securities through the use of repurchase agreements. Under these repurchase agreements, the Company sells securities to a lender and agrees 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 the Company receives and the repurchase price that the Company pays represents interest paid to the lender. Although structured as a sale and repurchase obligation, a repurchase agreement operates as a financing under which the Company pledges its securities as collateral to secure a loan which is equal in value to a specified percentage of the estimated fair value of the pledged collateral. The Company retains beneficial ownership of the pledged collateral. At the maturity of a repurchase agreement, the Company is required to repay the loan and concurrently receives back its pledged collateral from the lender or, with the consent of the lender, the Company may renew such agreement at the then prevailing financing rate. These repurchase agreements may require the Company to pledge additional assets to the lender in the event the estimated fair value of the existing pledged collateral declines.

8

Derivative Instruments

The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding. The objectives of our risk management strategy are 1) to attempt to mitigate the risk of the cost of our variable rate liabilities increasing during a period of rising interest rates, and 2) to reduce fluctuations in net book value over a range of interest rate scenarios. The principal instruments that we use are interest rate swaps. We also purchase or sell Euro Dollar Futures Contracts (“Futures Contracts”) to replicate the hedging results achieved with interest rate swaps. We do not enter any of these transactions for speculative purposes.

The Company accounts for derivative instruments in accordance with ASC 815, which requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet and to measure those instruments at fair value. The accounting for changes in the fair value of derivative instruments depends on whether the instruments are designated and qualify as part of a hedging relationship pursuant to ASC 815. Changes in fair value related to derivatives not in hedge designated relationships are recorded in gain (loss) on derivative instruments whereas changes in fair value related to derivatives in hedge designated relationships are initially recorded in other comprehensive income and later reclassified to income at the time that the hedged transactions affect earnings. Any portion of the changes in fair value due to hedge ineffectiveness is immediately recognized in the income statement in interest expense.

Derivative instruments in a gain position are reported as derivative assets at fair value and derivative instruments in a loss position are reported as derivative liabilities at fair value in the Company’s consolidated balance sheets. In the Company’s consolidated statements of cash flows, cash receipts and payments related to derivative instruments are classified according to the underlying nature or purpose of the derivative transaction, generally in the operating section for the Company’s derivatives. The use of derivatives creates exposure to credit risk relating to potential losses that could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. The Company attempts to minimize this risk by limiting our counterparties to major financial institutions with acceptable credit ratings, monitoring positions with individual counterparties and adjusting posted collateral as required.

Offsetting of Assets and Liabilities

The Company’s derivative agreements and repurchase agreements generally contain provisions that allow for netting or the offsetting of receivables and payables with each counterparty. The Company reports amounts in our consolidated balance sheets on a gross basis without regard for such rights of offset or master netting arrangements.

9

Interest Income

Interest income is earned and recognized based on the outstanding principal amount of the investment securities and their contractual terms. Premiums and discounts associated with the purchase of the investment securities are amortized or accreted into interest income over the actual lives of the securities using the effective interest method.

Income Taxes

The Company has elected to be taxed as a REIT under the Code. The Company will generally not be subject to Federal income tax to the extent that it distributes 100% of its taxable income, after application of available tax attributes, within the time limits prescribed by the Code and as long as it satisfies the ongoing REIT requirements including meeting certain asset, income and stock ownership tests.

Share-Based Compensation

Share-based compensation is accounted for under the guidance included in the ASC Topic on stock compensation. For share and share-based awards issued to employees, a compensation charge is recorded in earnings based on the fair value of the award. For transactions with non-employees in which services are performed in exchange for the Company’s common stock or other equity instruments, the transactions are recorded on the basis of the fair value of the service received or the fair value of the equity instruments issued, whichever is more readily measurable at the date of issuance. The Company’s share-based compensation transactions resulted in compensation expense of $627 and $425 for the three months ended June 30, 2013 and 2012, respectively. The Company’s share-based compensation transactions resulted in compensation expense of $1,256 and $854 for the six months ended June 30, 2013 and 2012, respectively.

Earnings Per Common Share (EPS)

Basic EPS is computed by dividing net income less preferred stock dividends to arrive at net income available to holders of common stock by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed using the two class method, as described in the ASC Topic on Earnings Per Share, which takes into account certain adjustments related to participating securities. Participating securities are unvested share-based awards that contain rights to receive nonforfeitable dividends, such as those awarded under the Company’s equity incentive plan. Net income available to holders of common stock after deducting dividends on unvested participating securities if antidilutive, is divided by the weighted average shares of common stock and common equivalent shares outstanding during the period. For the diluted EPS calculation, common equivalent shares outstanding includes the weighted average number of shares of common stock outstanding adjusted for the effect of dilutive unexercised stock options.

10

Recent Accounting Pronouncements

In October 2011, the FASB issued a proposed Accounting Standards Update (“ASU”) ASU 2011-20, Financial Services-Investment Companies: Amendments to the Scope, Measurement, and Disclosure Requirements (“ASU 2011-20”), which would amend the criteria in ASC Topic 946 on Investment Companies (“ASC 946”) for determining whether an entity qualifies as an investment company. As proposed, ASU 2011-20 would affect the measurement, presentation and disclosure requirements for Investment Companies, as defined, amend the investment company definition in ASC 946, and remove the current exemption for real estate investment trusts from this topic, which may have resulted in a material modification to the presentation of the Company’s financial statements. In June 2013, the FASB released ASU 2013-08 Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements that set forth new guidance on determining whether a company is subject to investment company accounting. These final rules maintained the scope exemption for real estate investment trusts.

In December 2011, the FASB released ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. Under this update, the Company is required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and transactions subject to an agreement similar to a master netting arrangement. The scope includes derivatives, sale and repurchase agreements and securities borrowing and securities lending arrangements. This disclosure is intended to enable financial statement users to understand the effect of such arrangements on the Company’s financial position. The objective of this update is to support further convergence between U.S. GAAP and International Financial Reporting Standards (“IFRS”). In January 2013, the FASB released ASU 2013-01 Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. Under this update, the FASB limited the scope of ASU 2011-11 to items identified in the implementation guidance which include derivatives, sale and repurchase agreements and securities borrowing and securities lending arrangements that are either offset on the balance sheet or subject to an enforceable master netting agreement. This disclosure was adopted and the adoption of this update did not have a material effect on the Company’s consolidated financial statements.

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income. Under this update, enhanced disclosures are required for items reclassified out of accumulated other comprehensive income. This update is effective for the first interim or annual period beginning on or after December 15, 2012. The disclosure was adopted and the adoption of this update did not have a material effect on the Company’s consolidated financial statements.

3. Financial Instruments

The Company’s valuation techniques for financial instruments are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect the Company’s market assumptions. The ASC Topic on Fair Value Measurements classifies these inputs into the following hierarchy:

Level 1 Inputs– Quoted prices for identical instruments in active markets.

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Level 2 Inputs– Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 Inputs– Instruments with primarily unobservable value drivers.

Other than the Futures Contracts, all of the Company’s agency securities and hedging assets and liabilities were valued using Level 2 inputs at June 30, 2013 and December 31, 2012. The Futures Contracts were valued using Level 1 inputs at June 30, 2013. See Notes 4 and 7, respectively for a discussion on how agency securities and hedging assets and liabilities were valued. The carrying values and fair values of all financial instruments as of June 30, 2013 and December 31, 2012 were as follows:

	June 30, 2013				December 31, 2012
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Assets
Mortgage-backed securities	$	25,256,043	$	25,256,043	$	23,919,251	$	23,919,251
Cash and cash equivalents		88,987		88,987		168,424		168,424
Restricted cash		149,210		149,210		281,021		281,021
Unsettled purchased mortgage backed securities		133,597		133,597		138,338		138,338
Receivable for securities sold		7,251		7,251		1,587,535		1,587,535
Accrued interest receivable		73,957		73,957		77,113		77,113
Principal payments receivable		199,553		199,553		190,832		190,832
Debt security		15,000		14,216		15,000		13,981
Interest rate hedge asset		25,921		25,921		-		-
Short term investment*		19,916		19,916		20,187		20,187
Forward purchase commitments*		-		-		5,452		5,452
Futures contracts*		5,587		5,587		-		-
Liabilities
Repurchase agreements	$	23,077,252	$	23,077,252	$	22,866,429	$	22,866,429
Payable for unsettled securities		136,373		136,373		137,121		137,121
Accrued interest payable		4,773		4,773		7,592		7,592
Interest rate hedge liability		157,869		157,869		243,945		243,945
Forward purchase commitments**		43,724		43,724		-		-

*These lines are included in Other assets on the balance sheets

**This line included in accounts payable and other liabilities on the balance sheets.

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4. Mortgage-Backed Securities

All of the Company’s agency securities were classified as available-for-sale and, as such, are reported at their estimated fair value. The agency securities market is primarily an over-the-counter market. As such, there are no standard, public market quotations or published trading data for individual agency securities. The Company estimates the fair value of the Company’s agency securities based on a market approach obtaining values for its securities primarily from third-party pricing services and dealer quotes. To ensure the Company’s fair value determinations are consistent with the ASC Topic on Fair Value Measurements and Disclosures, the Company regularly reviews the prices obtained and the methods used to derive those prices. The Company evaluates the pricing information it receives taking into account factors such as coupon, prepayment experience, fixed/adjustable rate, annual and life caps, coupon index, time to next reset and issuing agency, among other factors to ensure that estimated fair values are appropriate. The Company reviews the methods and inputs used by providers of pricing data to determine that the fair value of its assets and liabilities are properly classified in the fair value hierarchy.

The third-party pricing services gather trade data and use pricing models that incorporate such factors as coupons, primary mortgage rates, prepayment speeds, spread to the U.S. Treasury and interest rate swap curves, periodic and life caps and other similar factors. Traders at broker-dealers function as market-makers for these securities, and these brokers have a direct view of the trading activity. Brokers do not receive compensation for providing pricing information to the Company. The broker prices received are non-binding offers to trade. The brokers receive data from traders that participate in the active markets for these securities and directly observe numerous trades of securities similar to the securities owned by the Company. The Company’s analysis of fair value for these includes comparing the data received to other information, if available, such as repurchase agreement pricing or internal pricing models.

If the fair value of a security is not available using the Level 2 inputs as described above, or such data appears unreliable, the Company may estimate the fair value of the security using a variety of methods including, but not limited to, other independent pricing services, repurchase agreement pricing, discounted cash flow analysis, matrix pricing, option adjusted spread models and other fundamental analysis of observable market factors. At June 30, 2013, all of the Company’s agency securities values were based on third-party sources.

The Company’s investment portfolio consists solely of agency securities, which are backed by a U.S. Government agency or a U.S. Government sponsored entity. The following table presents certain information about the Company’s agency securities at June 30, 2013.

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	Agency
	Securities		Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Loss		Gain		Fair Value
Agency Securities
Fannie Mae Certificates
ARMS	$	14,043,290	$	(147,577)	$	153,385	$	14,049,098
Fixed Rate		2,127,131		(60,120)		-		2,067,011
Total Fannie Mae		16,170,421		(207,697)		153,385		16,116,109
Freddie Mac Certificates
ARMS		8,513,715		(115,264)		47,027		8,445,478
Fixed Rate		714,585		(20,129)		-		694,456
Total Freddie Mac		9,228,300		(135,393)		47,027		9,139,934
Total Agency Securities	$	25,398,721	$	(343,090)	$	200,412	$	25,256,043
The following table presents certain information about the Company’s agency securities at December 31, 2012.
	Agency
	Securities		Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Loss		Gain		Fair Value
Agency Securities
Fannie Mae Certificates
ARMS	$	14,081,259	$	(100)	$	329,780	$	14,410,939
Fixed Rate		743,299				9,296		752,595
Total Fannie Mae		14,824,558		(100)		339,076		15,163,534
Freddie Mac Certificates
ARMS		7,850,630		(21)		149,114		7,999,723
Fixed Rate		744,720		-		11,274		755,994
Total Freddie Mac		8,595,350		(21)		160,388	$	8,755,717
Total Agency Securities	$	23,419,908	$	(121)	$	499,464	$	23,919,251

The components of the carrying value of available-for-sale agency securities at June 30, 2013 and December 31, 2012 are presented below.

	June 30, 2013		December 31, 2012
Principal balance		$24,662,486		$22,771,731
Unamortized premium		736,237		648,181
Unamortized discount		(2)		(4)
Gross unrealized gains		200,412		499,464
Gross unrealized losses		(343,090)		(121)
Carrying value/estimated fair value	$	25,256,043	$	23,919,251

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The Company monitors the performance and market value of its agency securities portfolio on an ongoing basis. At June 30, 2013 and December 31, 2012, the Company had the following securities in a loss position presented below:

	Less than 12 months				Less than 12 months
	as of June 30, 2013				as of December 31, 2012
	Fair Market		Unrealized		Fair Market		Unrealized
	Value		Loss		Value		Loss
Fannie Mae Certificates
ARMS		$        7,100,520		$    (147,577)		$        149,954		$            (100)
Fixed Rate		2,067,011		(60,120)		-		-
Freddie Mac Certificates
ARMS		5,775,068		(115,264)		41,625		(21)
Fixed Rate		694,456		(20,129)		-		-
Total temporarily impaired securities		$15,637,055		$    (343,090)		$191,580		$            (121)

The Company did not make the decision to sell the above securities as of June 30, 2013 and December 31, 2012, nor was it deemed more likely than not the Company would be required to sell these securities before recovery of their amortized cost basis.

The following table presents components of interest income on the Company’s agency securities portfolio for the three months and six months ended June 30, 2013 and 2012:

	Three Months Ended				Six Months Ended
	June 30, 2013		June 30, 2012		June 30, 2013		June 30, 2012
Coupon interest on MBS		$163,964		$164,652		$331,397		$306,954
Net premium amortization		(48,849)		(35,932)		(92,041)		(65,474)
Interest income on MBS, net		$115,115		$128,720		$239,356		$241,480

The contractual maturity of the Company’s agency securities ranges from 15 to 30 years. Because of prepayments on the underlying mortgage loans, the actual weighted-average maturity is expected to be significantly less than the stated maturity.

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Unsettled Agency Securities Purchases

While most of the Company’s purchases of agency securities are accounted for using trade date accounting, some forward purchases, such as certain TBA’s do not qualify for trade date accounting and are considered derivatives for financial statement purposes. Pursuant to ASC 815, the Company accounts for these derivatives as all-in-one cash flow hedges. The net fair value of the forward commitment is reported on the balance sheet as an asset (or liability), with a corresponding unrealized gain (or loss) recognized in other comprehensive income. The following tables show the agency securities forward purchase commitments shown as a net liability in accounts payable and other liabilities on the balance sheets as of June 30, 2013 and shown as a net asset in other assets on the balance sheets as of December 31, 2012.

					Fair Market		Due to		Net
	Face		Cost		Value		Brokers (1)		Liability
June 30, 2013		$876,000		$906,063		$875,797		$906,063		$30,266
					Fair Market		Due to		Net
	Face		Cost		Value		Brokers (1)		Asset
December 31, 2012		$565,000		$585,100		$587,247		$585,100		$2,147

(1) Amounts due to brokers are usually settled within 30-90 days after period end.

Since the Company purchases forward for the purposes of holding the securities for investment, the Company considers all its agency securities, settled or unsettled, as part of its portfolio for the purposes of cash flow and interest rate sensitivity, and consequently hedging, duration measurement, and other related investment management activity.

At June 30, 2013 and December 31, 2012, the Company also had other forward purchase commitments treated as a derivatives liability in the amount of $13,458 and a derivative asset in the amount of $3,305, respectively.

5. Debt Security, Held to Maturity

The Company owns a $15,000 debt security from a repurchase lending counterparty that matures October 31, 2016. The debt security pays interest quarterly at the rate of 4.0% above the three-month London Interbank Offered Rate (“LIBOR”). The Company estimates the fair value of this note to be approximately $14,216, which was determined by present valuing the projected future cash flows using a discount rate from a similar issuer.

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6. Repurchase Agreements

At June 30, 2013 and December 31, 2012, the Company had repurchase agreements in place in the amount of $23,077,252 and $22,866,429, respectively, to finance MBS purchases. As of June 30, 2013 and December 31, 2012, the weighted average interest rate on these borrowings was 0.37% and 0.47%, respectively. The Company’s repurchase agreements are collateralized by the Company’s agency securities and typically bear interest at rates that are closely related to LIBOR. At June 30, 2013 and December 31, 2012, the Company had repurchase agreements outstanding with 25 and 24 counterparties with a weighted average contractual maturity 0.8 months, respectively. The following table presents the contractual repricing information regarding the Company’s repurchase agreements:

	June 30, 2013				December 31, 2012
			Weighted Average				Weighted Average
	Balance		Contractual Rate		Balance		Contractual Rate
Within 30 days		$22,569,149		0.37%		$    20,500,568		0.47%
30 days to 3 months		508,103		0.38%		2,365,861		0.48%
		$23,077,252		0.37%		$22,866,429		0.47%

The fair value of securities, cash, and accrued interest the Company had pledged under repurchase agreements at June 30, 2013 and December 31, 2012 was $24,216,775 and $24,268,949, respectively.

7. Derivative and other Hedging Instruments

In connection with our risk management strategy, we hedge a portion of our interest rate risk by entering into derivative and other hedging instrument contracts. We may enter into agreements for interest rate swaps, interest rate swaptions, interest rate cap or floor contracts and futures or forward contracts. Our risk management strategy attempts to manage the overall risk of the portfolio, reduce fluctuations in book value and generate additional income distributable to stockholders. For additional information regarding our derivative instruments and our overall risk management strategy, please refer to the discussion of derivative and other hedging instruments in Note 2.

The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The fair value of Futures Contracts is based on quoted prices from the exchange on which they trade. The table below presents the fair value of the Company’s derivative instruments as well as their classification on the balance sheets as of June 30, 2013 and December 31, 2012, respectively.

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Derivative Instruments	Balance Sheet Location	June 30, 2013		December 31, 2012
Interest rate swaps	Interest rate hedge asset	$	25,921	$	-
Forward purchase commitments	Other assets		-		5,452
Futures contracts	Other assets		5,587		-
Interest rate swaps	Interest rate hedge liability	$	157,869	$	243,945
Forward purchase commitments	Accounts payable and other liabilities		43,724	$	-

Cash Flow Hedges of Interest Rate Risk

The Company finances its activities primarily through repurchase agreements, which are generally settled on a short-term basis, usually from one to three months. At each settlement date, the Company refinances each repurchase agreement at the market interest rate at that time. Since the interest rates on its repurchase agreements change on a monthly basis, the Company is constantly exposed to changing interest rates. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The effect of these hedges is to synthetically lock up interest rates on a portion of the Company’s repurchase agreements for the terms of the swaps. Although the Company’s objective is to hedge the risk associated with changing repurchase agreement rates, the Company’s hedges are benchmark interest rate hedges which perform with reference to LIBOR. Therefore, the Company remains at risk to the variability of the spread between repurchase agreement rates and LIBOR interest rates.

For qualifying derivatives under cash flow hedge accounting, effective hedge gains or losses are initially recorded in accumulated other comprehensive income and subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three months ended June 30, 2013 and 2012, these effective hedge gains (losses) which were reclassified into earnings totaled $57,294 and ($59,168), respectively. During the six months ended June 30, 2013 and 2012, these effective hedge gains (losses) which were reclassified into earnings totaled $51,385 and ($87,591), respectively. Ineffective hedge gains (losses) are recorded on a current basis in earnings and for the three months ended June 30, 2013 and 2012, the Company recorded $212 and ($169) of hedge ineffectiveness gain (loss) in earnings, respectively. For the six months ended June 30, 2013 and 2012, the Company recorded $96 and ($338), respectively, hedge ineffectiveness gain (loss) in earnings. The hedge ineffectiveness is attributable primarily to differences in the reset dates on the Company’s swaps versus the refinancing dates of its repurchase agreements.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest is accrued and paid on the Company’s repurchase agreements. During the next 12 months, the Company estimates that an additional $113,831 will be reclassified as an increase to interest expense.

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The Company is hedging its exposure to the variability in future cash flows with interest rate swaps for current and forecasted transactions over a weighted-average period of 28 months. The table below shows the remaining term of the Company’s interest rate swaps as of June 30, 2013.

			Remaining	Weighted Average
	Notional		Term	Fixed Interest
Maturity	Amount		in Months	Rate in Contract
12 months or less	$	1,200,000	7	1.90%
Over 12 months to 24 months		3,800,000	19	1.78%
Over 24 months to 36 months		2,700,000	30	1.30%
Over 36 months to 48 months		2,600,000	43	0.91%
Over 48 months to 60 months		800,000	53	0.93%
Total	$	11,100,000	28	1.41%

Non-designated Hedge Instruments

For derivative financial instruments not designated as hedge instruments, realized and unrealized changes in fair value are recognized in the period in which the changes occur. The change in the fair value of Futures Contracts not designated and documented as hedges is recorded through earnings each period. During the three and six months ended June 30, 2013, the Company recognized a gain of $5,485 and $5,536, respectively, related to the change in fair value of these contracts. As of June 30, 2013, the fair value of these Futures Contracts was $5,587.

The Company uses Futures Contracts to 1) synthetically replicate an interest rate swap, or 2) offset the changes in value of its forward purchases of certain agency securities. The Company’s total Futures Contracts designed to replicate interest rate swaps had a notional equivalent amount of $800,000 at June 30, 2013 with a weighted average swap equivalent rate of 1.35% and a weighted average term of 56 months as of June 30, 2013. The Company did not own Futures Contracts at December 31, 2012.

The Company does not use either offsetting or netting to present any of its derivative assets or liabilities. The following table shows the gross amounts associated with the Company’s derivative financial instruments and the impact if netting were used as of June 30, 2013.

	Assets		Cash Collateral Posted		Net Amount
Interest rate swaps	$	25,921	$	-	$	25,921
Futures contracts		5,587		4,862		10,449
	Liabilities		Cash Collateral Posted		Net Amount
Interest rate swaps	$	157,869	$	144,348	$	13,521
Forward purchase commitments

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The following table shows the gross amounts associated with the Company’s derivative financial instruments and the impact if netting were used as of December 31, 2012.

	Assets		Cash Collateral Posted		Net Amount
Forward purchase commitments	$	5,452	$	-	$	5,452
	Liabilities		Cash Collateral Posted		Net Amount
Interest rate swaps	$	243,945	$	281,021	$	(37,076)

The table below presents the effect of the Company’s derivative financial instruments on the income statement for the three months ended June 30, 2013.

Derivative type for cash flow hedge	Amount of gain recognized in OCI on derivative (effective portion)		Location of loss reclassified from accumulated OCI into income (effective portion)	Amount of loss reclassified from accumulated OCI into income (effective portion)		Location of gain recognized in income on derivative (ineffective portion)	Amount of gain recognized in income on derivative (ineffective portion)
Interest Rate	$	57,294	Interest Expense	$	30,585	Interest Expense	$	212

The table below presents the effect of the Company’s derivative financial instruments on the income statement for the three months ended June 30, 2012.

Derivative type for cash flow hedge	Amount of loss recognized in OCI on derivative (effective portion)		Location of loss reclassified from accumulated OCI into income (effective portion)	Amount of loss reclassified from accumulated OCI into income (effective portion)		Location of loss recognized in income on derivative (ineffective portion)	Amount of loss recognized in income on derivative (ineffective portion)
Interest Rate	$	59,168	Interest Expense	$	28,352	Interest Expense	$	169

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The table below presents the effect of the Company’s derivative financial instruments on the income statement for the six months ended June 30, 2013.

Derivative type for cash flow hedge	Amount of gain recognized in OCI on derivative (effective portion)		Location of loss reclassified from accumulated OCI into income (effective portion)	Amount of loss reclassified from accumulated OCI into income (effective portion)		Location of gain recognized in income on derivative (ineffective portion)	Amount of gain recognized in income on derivative (ineffective portion)
Interest Rate	$	51,385	Interest Expense	$	60,515	Interest Expense	$	96

The table below presents the effect of the Company’s derivative financial instruments on the income statement for the six months ended June 30, 2012.

Derivative type for cash flow hedge	Amount of loss recognized in OCI on derivative (effective portion)		Location of loss reclassified from accumulated OCI into income (effective portion)	Amount of loss reclassified from accumulated OCI into income (effective portion)		Location of gain recognized in income on derivative (ineffective portion)	Amount of gain recognized in income on derivative (ineffective portion)
Interest Rate	$	87,591	Interest Expense	$	56,164	Interest Expense	$	338

The following table presents the impact of the Company’s interest rate swap agreements on the Company’s accumulated other comprehensive income (loss) for the six months ended June 30, 2013 and the year ended December 31, 2012, respectively.

	June 30, 2013		December 31, 2012
Beginning balance		(243,051)		($218,451)
Unrealized gain (loss) on interest rate swaps		51,385		(141,392)
Reclassification of net losses included in income statement		60,515		116,792
Ending balance		$                        (131,151)		$                        (243,051)

Credit-risk-related Contingent Features

The Company has agreements with certain of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender then the Company could also be declared in default on its derivative obligations.

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The Company has agreements with certain of its derivative counterparties that contain a provision where if the Company’s GAAP shareholders’ equity declines by a specified percentage over a specified time period, or if the Company fails to maintain a minimum shareholders’ equity threshold, then the Company could be declared in default on its derivative obligations. The Company has agreements with several of its derivative counterparties that contain provisions regarding maximum leverage ratios. The most restrictive of these leverage covenants is that if the Company exceeds a leverage ratio of 10 to 1 then the Company could be declared in default on its derivative obligations with that counterparty. At June 30, 2013, the Company was in compliance with these requirements.

As of June 30, 2013, the fair value of derivatives in a net liability position related to these agreements was $0. The Company has collateral posting requirements with each of its counterparties and all interest rate swap agreements were fully collateralized as of June 30, 2013.

8. Capital Stock

Issuance of Common Stock – “At the Market” Programs

From time to time, the Company may sell shares of its common stock in “at-the-market” offerings. Sales of the shares of common stock, if any, may be made in private transactions, negotiated transactions or any method permitted by law deemed to be an “at the market” offering as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made directly on the New York Stock Exchange (“NYSE”) or to or through a market maker other than on an exchange.

On February 29, 2012, the Company entered into sales agreements (the “2012 Sales Agreements”) with Cantor Fitzgerald & Co. (“Cantor”) and JMP Securities LLC (“JMP”) to establish a new “at-the-market” program (the “2012 Program”). Under the terms of the 2012 Sales Agreements, the Company may offer and sell up to 10,000,000 shares of its common stock from time to time through Cantor or JMP, each acting as agent and/or principal. The shares of common stock issuable pursuant to the 2012 Program are registered with the Securities and Exchange Commission (“SEC”) on the Company’s Registration Statement on Form S-3 (No. 333-179805), which became effective upon filing on February 29, 2012.

For the three and six months ended June 30, 2013, the Company did not issue any shares of common stock in at-the-market transactions.

Stock Repurchase Program

On June 18, 2013, the Company’s board of directors authorized a stock repurchase program (the “Repurchase Program”) to acquire up to 10,000,000 shares of the Company’s common stock. As of June 30, 2013, the Company had not repurchased any shares of common stock under the Repurchase Program. During periods when the Company’s board of directors has authorized the Company to repurchase shares under the Repurchase Program, the Company will not be authorized to issue shares of common stock under the 2012 Program described above. Similarly, during periods when the Company’s board of directors has authorized the Company to issue shares of common stock under the 2012 Program, the Company will not be authorized to repurchase shares under the Repurchase Program.

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9. Earnings per Share

	For the three months ended				For the six months ended
	June 30, 2013		June 30, 2012		June 30, 2013		June 30, 2012
Basic earnings per share:
Net income	$	70,739	$	89,144	$	137,978	$	158,448
Less preferred stock dividends		5,480		—		10,960		—
Net income available to common shareholders	$	65,259	$	89,144	$	127,018	$	158,448
Weighted average shares		98,830,054		97,969,074		98,828,827		87,789,596
Basic earnings per share	$	0.66	$	0.91	$	1.29	$	1.80
Diluted earnings per share:
Net income	$	70,739	$	89,144	$	137,978	$	158,448
Less preferred stock dividends for antidilutive shares		5,480		—		10,960		—
Net income available to common shareholders	$	65,259	$	89,144	$	127,018	$	158,448
Diluted weighted average shares		98,830,054		97,969,074		98,828,827		87,789,596
Diluted earnings per share	$	0.66	$	0.91	$	1.29	$	1.80

There are not any potentially dilutive shares for the three and six months ended June 30, 2013 and 2012, respectively.

10. Transactions with Related Parties

Management Fees

The Company is externally managed by ACA pursuant to a management agreement (the “Management Agreement”). All of the Company’s executive officers are also employees of ACA. ACA manages the Company’s day-to-day operations, subject to the direction and oversight of the Company’s board of directors which includes four independent directors. The Management Agreement expires on February 23, 2015 and is thereafter automatically renewed for an additional one-year term unless terminated under certain circumstances. ACA must be provided 180 days prior notice of any such termination and will be paid a termination fee equal to four times the average annual management fee earned by ACA during the two year period immediately preceding termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination.

Under the terms of the Management Agreement, the Company reimburses ACA for certain operating expenses of the Company that are borne by ACA. ACA is entitled to receive a management fee payable monthly in arrears in an amount equal to 1/12th of an amount determined as follows:

• for the Company’s equity up to $250 million, 1.50% (per annum) of equity; plus

• for the Company’s equity in excess of $250 million and up to $500 million, 1.10% (per annum) of equity; plus

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• for the Company’s equity in excess of $500 million and up to $750 million, 0.80% (per annum) of equity; plus

• for the Company’s equity in excess of $750 million, 0.50% (per annum) of equity.

For purposes of calculating the management fee, equity is defined as the value, computed in accordance with GAAP, of shareholders’ equity, adjusted to exclude the effects of unrealized gains or losses. The following table presents amounts paid for management fee and reimbursable expenses.

	Three months ended				Six months ended
	June 30, 2013		June 30, 2012		June 30, 2013		June 30, 2012
Management Fee	$	4,557	$	3,572	$	9,434	$	10,195
Reimbursable Expenses		407		–		1,033		–
Total	$	4,964	$	3,572	$	10,467	$	10,195

None of the reimbursement payments were specifically attributable to the compensation of the Company’s executive officers. At June 30, 2013 and December 31, 2012, the Company owed ACA $2,152 and $2,120, respectively, for the management fee and reimbursable expenses, which is included in accounts payable and other liabilities.

11. Accumulated Other Comprehensive Income (Loss)

The following table shows reclassifications in accumulated other comprehensive income (loss) for the three months ended June 30, 2013:

	Unrealized       gain/(loss) on       available for       sale agency       securities		Unrealized gain/(loss) on unsettled agency securities		Unrealized gain/(loss) on other investments		Unrealized gain/(loss) on derivative instruments		Total
Beginning balance accumulated other comprehensive income (loss) at 4/01/13	$	481,323	$	492	$	(214)	$	(212,553)	$	269,048
Other comprehensive income (loss) before reclassification		(615,199)		(2,776)		(291)		13,569		(604,697)
Balance Sheet Reclassification:
Amount reclassified to mortgage-backed securities available for sale		-		(492)		-		(6,476)		(6,968)
Income Statement Reclassification:
Amounts reclassified to net gain on the sale of mortgage-backed securities		(8,802)		-		-				(8,802)
Amounts reclassified to interest expense								30,586		30,586
Net current period other comprehensive income (loss)		(624,001)		(3,268)		(291)		37,679		(589,881)
Ending balance accumulated other comprehensive income (loss) at 6/30/13	$	(142,678)	$	(2,776)	$	(505)	$	(174,874)	$	(320,833)
The following table shows reclassifications in accumulated other comprehensive income for the six months ended June 30, 2013:
	Unrealized       gain/(loss) on       available for       sale agency       securities		Unrealized gain/(loss) on unsettled agency securities		Unrealized gain/(loss) on other investments		Unrealized gain/(loss) on derivative instruments		Total
Beginning balance accumulated other comprehensive income (loss) at 1/01/13	$	499,343	$	1,217	$	(107)	$	(237,599)	$	262,854
Other comprehensive income (loss) before reclassification		(630,719)		(2,284)		(398)		14,138		(619,263)
Balance Sheet Reclassification:
Amount reclassified to mortgage-backed securities available for sale		-		(1,709)		-		(11,928)		(13,637)
Income Statement Reclassification:
Amounts reclassified to net gain on the sale of mortgage-backed securities		(11,302)		-		-				(11,302)
Amounts reclassified to interest expense								60,515		60,515
Net current period other comprehensive income (loss)		(642,021)		(3,993)		(398)		62,725		(583,687)
Ending balance accumulated other comprehensive income (loss) at 6/30/13	$	(142,678)	$	(2,776)	$	(505)	$	(174,874)	$	(320,833)

The Company records unrealized gains and losses on its agency securities and swap positions as is described in Notes 4 and 7, respectively.

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

    In this Quarterly Report on Form 10-Q, we refer to Hatteras Financial Corp. as “we,” “us,” “our company,” or “our,” unless we specifically state otherwise or the context indicates otherwise. The following defines certain of the commonly used terms in this quarterly report on Form 10-Q: “MBS” refers to mortgage-backed securities; and “agency securities” refer to our residential MBS that are issued or guaranteed by a U.S. Government sponsored entity, such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”), or an agency of the U.S. Government, such as the Government National Mortgage Association (“Ginnie Mae”); “ARMs” refer to adjustable-rate mortgage loans which typically either 1) at all times have interest rates that adjust periodically to an increment over a specified interest rate index; or 2) have interest rates that are fixed for a specified period of time and, thereafter, generally adjust annually to an increment over a specified interest rate index.

The following discussion should be read in conjunction with our financial statements and accompanying notes included in Part 1, Item 1 of this Quarterly Report on Form 10-Q as well as our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission (“SEC”) on February 20, 2013.

Forward-Looking Statements

When used in this Quarterly Report on Form 10-Q, in future filings with the SEC or in press releases or other written or oral communications, statements which are not historical in nature, including those containing words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions, are intended to identify “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and, as such, may involve known and unknown risks, uncertainties and assumptions.

The forward-looking statements in this report are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. The following factors could cause actual results to vary from our forward-looking statements: changes in our investment financing and hedging strategy; the adequacy of our cash flow from operations and borrowings to meet our short-term liquidity requirements; the liquidity of our portfolio; unanticipated changes in our industry, the credit markets, the general economy or the real estate market; changes in interest rates and the market value of our agency securities; changes in the prepayment rates on the mortgage loans securing our agency securities; our ability to borrow to finance our assets; changes in government regulations affecting our business; our ability to maintain our qualification as a real estate investment trust (“REIT”) for federal income tax purposes; our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended (the “Investment Company Act”); and risks associated with investing in real estate assets, including changes in business conditions and the general economy. These and other risks, uncertainties and factors, including those described in our annual report on Form 10-K for the year ended December 31, 2012, including those set forth under the section captioned “Risk Factors” in our quarterly and current reports that we file with the SEC, could cause our actual results to differ materially from those projected in any forward-looking statements we make. All forward-looking statements speak only as of the date on which they are made. 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 are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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Overview

    We are an externally-managed mortgage REIT that invests primarily in single-family residential mortgage pass-through securities guaranteed or issued by a U.S. Government agency (such as the Ginnie Mae), or by a U.S. Government-sponsored entity (such as Fannie Mae and Freddie Mac). We refer to these securities as “agency securities.” We were incorporated in Maryland in September 2007 and commenced operations in November 2007. We listed our common stock on the New York Stock Exchange (“NYSE”) in April 2008 and trade under the symbol “HTS.”

We are externally-managed and advised by our manager, Atlantic Capital Advisors LLC.

We are organized and conduct our operations to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), and generally are not subject to federal taxes on our income to the extent we distribute our income to our shareholders and maintain our qualification as a REIT.

Our principal goal is to generate net income for distribution to our shareholders, through regular quarterly dividends, from the difference between the interest income on our investment portfolio and the interest costs of our borrowings and hedging activities, which we refer to as our net interest income, and other expenses. In general, our strategy is to manage interest rate risk while trying to eliminate any exposure to credit risk. We believe that the best approach to generating a positive net interest income is to manage our liabilities in relation to the interest rate risks of our investments. To help achieve this result, we employ repurchase financing, generally short-term, and combine our financings with hedging techniques, relying primarily on interest rate swaps. We may, subject to maintaining our REIT qualification, also employ other hedging instruments from time to time, including buying and selling futures, interest rate caps, collars and swaptions to protect against adverse interest rate movements.

We focus on agency securities consisting of mortgage loans with short effective durations, which we believe limits the impact of changes in interest rates on the market value of our portfolio and on our net interest income. However, because our investments vary in interest rate, prepayment speed and maturity, the leverage or borrowings that we employ to fund our asset purchases will never exactly match the terms or performance of our assets, even after we have employed our hedging techniques. Based on our manager’s experience, the interest rates of our assets will change more slowly than the corresponding short-term borrowings used to finance our assets. Consequently, changes in interest rates, particularly short-term interest rates, may significantly influence our net income and shareholders’ equity.

    Our manager’s approach to managing our portfolio is to take a longer term view of assets and liabilities; accordingly, our periodic earnings and mark-to-market valuations at the end of a period will not significantly influence our strategy of providing stable cash distributions to shareholders over the long term. Our manager has invested and seeks to invest in agency securities that it believes are likely to generate attractive risk-adjusted returns on capital invested, after considering (1) the amount and nature of anticipated cash flows from the asset, (2) our ability to borrow against the asset, (3) the capital requirements resulting from the purchase and financing of the asset, and (4) the costs of financing, hedging, and managing the asset.

Our focus on asset selection is to own assets with short durations and predictable prepayment characteristics. Since our formation, all of our invested assets have been in agency securities, and we currently intend that our investment assets will continue to be agency securities. These agency securities currently consist of mortgages that have principal and interest payments guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac. We invest in both fixed-rate and adjustable-rate agency securities. Adjustable rate mortgages (“ARMs”) are mortgages that have floating interest rates that reset on a specific time schedule, such as monthly, quarterly or annually, based on a specified index, such as the 12-month moving average of the one-year constant maturity U.S. Treasury rate (“CMT”) or the London Interbank Offered Rate (“LIBOR”). The ARMs we generally invest in, sometimes referred to as hybrid ARMS, have interest rates that are fixed for an initial period (typically three, five, seven or 10 years) and then reset annually thereafter to an increment over a pre-determined interest rate index. As of June 30, 2013, our portfolio consisted of approximately $26.3 billion in market value of agency securities, consisting of $23.5 billion of adjustable-rate securities and $2.8 billion of fixed rate securities.

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            The following table represents key data regarding our company since June 30, 2010:

(Dollars in thousands except per share amounts)
As of	Agency Securities (1)	Repurchase Agreements	Equity	Shares Outstanding	Book Value Per Share	Quarterly Weighted Average Earnings Per Share
June 30, 2013	$26,251,979	$23,077,252	$2,479,089	98,830	$22.18	$0.66
March 31, 2013	$26,373,535	$22,586,932	$3,072,265	98,830	$28.18	$0.62
December 31, 2012	$24,648,140	$22,866,429	$3,072,864	98,822	$28.19	$1.02
September 30, 2012	$27,931,504	$23,583,180	$3,212,556	98,809	$29.60	$0.83
June 30, 2012	$24,535,118	$20,152,860	$2,692,261	98,074	$27.45	$0.91
March 31, 2012	$22,562,895	$16,556,630	$2,669,300	97,779	$27.30	$0.89
December 31, 2011	$18,146,767	$16,162,375	$2,080,188	76,823	$27.08	$0.92
September 30, 2011	$19,014,997	$15,886,231	$2,015,003	76,547	$26.32	$1.04
June 30, 2011	$16,678,511	$14,800,594	$2,006,606	75,092	$26.72	$1.04
March 31, 2011	$14,811,137	$11,495,749	$1,894,540	72,572	$26.11	$0.96
December 31, 2010	$10,418,764	$8,681,060	$1,145,484	46,116	$24.84	$0.99
September 30, 2010	$9,581,916	$6,678,426	$1,190,313	46,085	$25.83	$1.12
June 30, 2010	$7,651,266	$5,982,998	$965,619	37,388	$25.83	$1.01

(1)   Includes unsettled purchases and forward commitments to purchase agency securities.

Factors that Affect our Results of Operations and Financial Condition

Our results of operations and financial condition are affected by various factors, many of which are beyond our control, including, among other things, our net interest income, the market value of our assets and the supply of and demand for such assets. We invest in financial assets and markets, and recent events, including those discussed below, can affect our business in ways that are difficult to predict, and produce results outside of typical operating variances. Our net interest income varies primarily as a result of changes in interest rates, borrowing costs and prepayment speeds, the behavior of which involves various risks and uncertainties. Prepayment rates, as reflected by the rate of principal paydown, and interest rates vary according to the type of investment, conditions in financial markets, government actions, competition and other factors, none of which can be predicted with any certainty. In general, as prepayment rates on our agency securities purchased at a premium increase, related purchase premium amortization increases, thereby reducing the net yield on such assets. Because changes in interest rates may significantly affect our activities, our operating results depend, in large part, upon our ability to manage interest rate risks and prepayment risks effectively while maintaining our status as a REIT.

We anticipate that, for any period during which changes in the interest rates earned on our assets do not coincide with interest rate changes on our borrowings, such asset coupon rates will reprice more slowly than the corresponding liabilities used to finance those assets. Consequently, changes in interest rates, particularly short-term interest rates, may significantly influence our net interest income. With the maturities of our assets generally being longer term than those of our liabilities, interest rate increases will tend to decrease our net interest income and the market value of our assets (and therefore our book value). Such rate increases could possibly result in operating losses or adversely affect our ability to make distributions to our shareholders.

Prepayments on agency securities and the underlying mortgage loans may be influenced by changes in market interest rates and a variety of economic, geographic and other factors beyond our control; and consequently, such prepayment rates cannot be predicted with certainty. To the extent we have acquired agency securities at a premium or discount to par, or face value, changes in prepayment rates may impact our anticipated yield. In periods of declining interest rates, prepayments on our agency securities will likely increase. If we are unable to reinvest the proceeds of these prepayments at comparable yields, our net interest income may suffer. The current climate of government intervention in the mortgage market significantly increases the risk associated with prepayments.

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While we intend to use hedging to mitigate some of our interest rate risk, we do not intend to hedge all of our exposure to changes in interest rates and prepayment rates, as there are practical limitations on our ability to insulate our portfolio from all potential negative consequences associated with changes in short-term interest rates in a manner that will allow us to seek attractive net spreads on our portfolio.

In addition, a variety of other factors relating to our business may also impact our financial condition and operating performance. These factors include:

• our degree of leverage;

• our access to funding and borrowing capacity;

• our borrowing costs;

• our hedging activities;

• the market value of our agency securities; and

• the REIT requirements, the requirements to qualify for an exemption under the Investment Company Act and other regulatory and accounting policies related to our business.

Our manager is entitled to receive a management fee that is based on our equity (as defined in our management agreement), regardless of the performance of our portfolio. Accordingly, the payment of our management fee may not decline in the event of a decline in our profitability and may cause us to incur losses.

For a discussion of additional risks relating to our business see the section captioned “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q, and in our Annual Report on Form 10-K for the year ended December 31, 2012.

Market and Interest Rate Trends and the Effect on our Portfolio

Credit Market Disruption

Since 2007, the residential housing and mortgage markets in the United States have experienced a variety of difficulties and challenging economic conditions including historically high loan defaults and credit losses, as well as decreased liquidity. Recently, the financial weakness of some of the European Union sovereign nations has renewed concerns of the stability of financial systems worldwide. Further increased volatility and deterioration in the overall financial markets may adversely affect the performance and market value of the agency securities in which we invest. In addition, we rely on the availability of financing to acquire agency securities on a leveraged basis. If market conditions deteriorate further, our lenders may exit the repurchase market, further tighten lending standards, or increase the amount of equity capital (or “haircut”) required to obtain financing, any of which could make it more difficult or costly for us to obtain financing.

Developments at Fannie Mae and Freddie Mac

Payments on the agency securities in which we invest are guaranteed by Fannie Mae and Freddie Mac. Because of the guarantee and the underwriting standards associated with mortgages underlying agency securities, agency securities historically have had high stability in value and have been considered to present low credit risk. In 2008, Fannie Mae and Freddie Mac were placed under the conservatorship of the U.S. government due to the significant weakness of their financial condition. The turmoil in the residential mortgage sector and concern over the future role of Fannie Mae and Freddie Mac at the time generally increased credit spreads and decreased price stability of agency securities. In response to the credit market disruption and the deteriorating financial condition of Fannie Mae and Freddie Mac, Congress and the U.S. Treasury undertook a series of actions in 2008 aimed at stabilizing the financial markets in general, and the mortgage market in particular. These actions include the large-scale buying of MBS, significant equity infusions into banks and aggressive monetary policy.

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In February 2011, the U.S. Treasury along with the U.S. Department of Housing and Urban Development released a report entitled “Reforming America’s Housing Finance Market” to Congress outlining alternatives for reforming the U.S. housing system, specifically Fannie Mae and Freddie Mac, and transforming the government’s involvement in the housing market. Other industry groups, such as the Mortgage Bankers Association and the National Association Home Builders, have also issued proposals outlining their views of the path for housing reform. It is unclear how future legislation may impact the housing finance market and the investing environment for agency securities, as the method of reform is undecided and has not yet been defined by the regulators. Without government support for residential mortgages, we may not be able to execute our current business model in an efficient manner.

      On October 4, 2012, the Federal Housing Finance Authority (the “FHFA”) released its white paper entitled “Building a New Infrastructure for the Secondary Mortgage Market” (the “FHFA White Paper”). This release follows up on the FHFA’s February 21, 2012 Strategic Plan for Enterprise Conservatorships, which set forth three goals for the next phase of the Fannie Mae and Freddie Mac conservatorships. These three goals are to (i) build a new infrastructure for the secondary mortgage market, (ii) gradually contract Fannie Mae and Freddie Mac’s presence in the marketplace while simplifying and shrinking their operations, and (iii) maintain foreclosure prevention activities and credit availability for new and refinanced mortgages.

      Since that time, there have been a number of other proposals introduced, both from industry groups and by the U.S. Congress. The most recent bill in Congress to receive serious consideration is the Housing Finance Reform and Taxpayer Protection Act of 2013, also known as the Corker-Warner bill. This legislation, among other things, would eliminate Freddie Mac and Fannie Mae and replace them with a new agency which would provide a financial guarantee that would only be tapped after private institutions and investors stepped in. It remains unclear whether this or any other proposals will become law or, should a proposal become law, if or how the enacted law will differ from the current draft of the bill. It is unclear how the proposals would impact housing finance, and what impact, if any, it will have on mortgage REITs.

      U.S. Treasury and Agency Securities Market Intervention

One of the main factors impacting market prices has been the U.S. Federal Reserve’s programs to purchase U.S. Treasury and agency securities in the open market. On September 21, 2011, the U.S. Federal Reserve announced “Operation Twist,” which is a program by which it purchased, by the end of December 2012, more than $650 billion of U.S. Treasury securities with remaining maturities between six and 30 years and sold an equal amount of U.S. Treasury securities with remaining maturities of three years or less. In December 2012, in an effort to keep long-term interest rates at low levels, the U.S. Federal Reserve announced an expansion of its asset buying program starting in January 2013, at which time it would commence outright purchases of longer-term U.S. Treasury securities at a pace of $45 billion per month. This new U.S. Treasury securities purchase program replaces “Operation Twist,” which expired in December 2012. On January 30, 2013, the U.S. Federal Reserve affirmed its intention to continue this policy. By reducing the available supply of longer term U.S. Treasury securities in the market, these actions should put downward pressure on longer term interest rates, including rates on financial assets that investors consider to be close substitutes for longer term U.S. Treasury securities, like certain types of agency securities. The reduction in longer term interest rates, in turn, may contribute to a broad easing in financial market conditions that the U.S. Federal Reserve hopes will provide additional stimulus to support the economic recovery.

In September 2012, the U.S. Federal Reserve announced a third round of “quantitative easing” aimed to improve the employment outlook and increase growth in the U.S. economy. To accomplish this goal, it announced that it would purchase at least $40 billion of agency securities per month on an “open-ended” timeline, in addition to the reinvestment of the proceeds of principal repayments from its existing MBS holdings. Additionally, it pledged to keep short-term interest rates near zero for an extended period of time. It later increased the purchasing target from $40 billion to $85 billion per month. Most recently the discussion has focused on the ending or “tapering” of these purchases, which some are predicting to begin in the second half of 2013.

These programs have had many effects on our assets. One effect of these purchases has been an increase in the prices of agency securities, which has contributed to the decrease of our net interest margin. Likewise, the recent talk of tapering the purchases has introduced large negative price moves of our assets. The unpredictability

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and size of these programs has injected additional volatility into the pricing and availability of our assets. It is difficult to quantify the impact, as there are many factors at work at the same time which affects the price of our securities and, therefore, our yield and book value. Due to the unpredictability in the markets for our securities in particular and yield generating assets in general, there is no pattern that can be implied with any certainty. We believe the largest risk is that if the government decides to sell significant portions of its portfolio, then we may see meaningful price declines.

U.S. Government Credit Rating

The U.S. debt ceiling and budget deficit concerns in mid-2011 led to the downgrade by Standard & Poor’s of the U.S. government’s credit rating for the first time in history. Assets backed by Fannie Mae and Freddie Mac are considered to have the credit of the U.S. government, and thus were also downgraded at that time. While the other rating agencies have not downgraded the U.S. government’s rating, if they were to do so it would likely impact the perceived credit risk associated with agency securities and, therefore, decrease the value of the agency securities in our portfolio. In addition, further downgrades of the U.S. government’s credit rating or the credit ratings of certain European countries would likely create broader financial turmoil and uncertainty, which could have a serious negative impact on the global banking system. This could have an adverse impact on our business, financial condition and results of operations.

      Regulatory Concerns

We believe that we conduct our business in a manner that allows us to avoid being regulated as an investment company under the Investment Company Act pursuant to the exemption provided by Section 3(c)(5)(C) for entities that are primarily engaged in the business of purchasing or otherwise acquiring “mortgages and other liens on and interests in real estate.” On August 31, 2011, the SEC issued a concept release (No. IC-29778; File No. SW7-34-11, Companies Engaged in the Business of Acquiring Mortgages and Mortgage-Related Instruments) pursuant to which it is reviewing whether certain companies that invest in MBS and rely on the exemption from registration under Section 3(c)(5)(C) of the Investment Company Act (such as us) should continue to be allowed to rely on such exemption from registration. If we fail to continue to qualify for this exemption from registration as an investment company, or the SEC determines that companies that invest in MBS are no longer able to rely on this exemption, our ability to use leverage would be substantially reduced and we would be unable to conduct our business as planned, or we may be required to register as an investment company under the Investment Company Act, either of which could negatively affect the value of shares of our common stock and our ability to make distributions to our shareholders.

Certain programs initiated by the U.S. Government, through the Federal Housing Administration and the Federal Deposit Insurance Corporation (“FDIC”), to provide homeowners with assistance in avoiding residential mortgage loan foreclosures are currently in effect. 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 to extend the payment terms of the loans. While the effect of these programs has not been as extensive as originally expected, the effect of such programs for holders of agency securities could be that such holders would experience changes in the anticipated yields of their agency securities due to (i) increased prepayment rates and (ii) lower interest and principal payments.

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) into law. The Dodd-Frank Act is extensive, complicated and comprehensive legislation that impacts practically all aspects of banking, and a significant overhaul of many aspects of the regulation of the financial services industry. Although many provisions remain subject to further rulemaking, the Dodd-Frank Act implements numerous and far-reaching changes that affect financial companies, including our company, and other banks and institutions which are important to our business model. Certain notable rules are, among other things:

• requiring regulation and oversight of large, systemically important financial institutions by establishing an interagency council on systemic risk and implementation of heightened prudential standards and regulation by the Board of Governors of the U.S. Federal Reserve for systemically important financial institutions (including nonbank financial companies), as well as the implementation of the FDIC resolution procedures for liquidation of large financial companies to avoid market disruption;

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• applying the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies, savings and loan holding companies and systemically important nonbank financial companies;

• limiting the U.S. Federal Reserve’s emergency authority to lend to nondepository institutions to facilities with broad-based eligibility, and authorizing the FDIC to establish an emergency financial stabilization fund for solvent depository institutions and their holding companies, subject to the approval of Congress, the Secretary of the U.S. Treasury and the U.S. Federal Reserve;

• creating regimes for regulation of over-the-counter derivatives and non-admitted property and casualty insurers and reinsurers;

• implementing regulation of hedge fund and private equity advisers by requiring such advisers to register with the SEC;

• providing for the implementation of corporate governance provisions for all public companies concerning proxy access and executive compensation; and

• reforming regulation of credit rating agencies.

Many of the provisions of the Dodd-Frank Act, including certain provisions described above are subject to further study, rulemaking, and the discretion of regulatory bodies. As the hundreds of regulations called for by the Dodd-Frank Act are promulgated, we will continue to evaluate the impact of any such regulations. It is unclear how this legislation may impact the borrowing environment, investing environment for agency securities and interest rate swaps as much of the bill’s implementation has not yet been defined by the regulators.

In addition, in 2010, the Group of Governors and Heads of Supervisors of the Basel Committee on Banking Supervision, the oversight body of the Basel Committee, published its “calibrated” capital standards for major banking institutions (“Basel III”). Under these standards, when fully phased in on January 1, 2019, banking institutions will be required to maintain heightened Tier 1 common equity, Tier 1 capital and total capital ratios, as well as maintaining a “capital conservation buffer.” Beginning with the Tier 1 common equity and Tier 1 capital ratio requirements, Basel III will be phased in incrementally between January 1, 2013 and January 1, 2019. The final package of Basel III reforms were approved by the G20 leaders in November 2010 and were subject to individual adoption by member nations, including the United States by January 1, 2013. As of July 2013, the majority of countries had not formally adopted Basel III. It is unclear how the adoption of Basel III will affect our business at this time.

      In September 2011, the Administration announced it was working on a major plan to allow certain homeowners who owe more on their mortgages than their homes are worth to refinance. In October 2011, the FHFA announced changes to the Home Affordable Refinance Program (“HARP”) to expand access to refinancing for qualified individuals and families whose homes have lost value, including increasing the HARP loan-to-value ratio above 125%. However, this would only apply to mortgages guaranteed by the U.S. government-sponsored entities. In addition, the expansion does not change the time period which these loans were originated, maintaining the requirement that the loans must have been guaranteed by Fannie Mae or Freddie Mac prior to June 2009. There are many challenging issues to this proposal, notably the question as to whether a loan with a loan-to-value ratio of 125% qualifies as a mortgage or an unsecured consumer loan. The chances of this initiative’s success have created additional uncertainty in the agency securities market, particularly with respect to possible increases in prepayment rates. We do not expect this announcement to have a significant impact on our results of operations.

On January 4, 2012, the U.S. Federal Reserve released a report titled “The U.S. Housing Market: Current Conditions and Policy Considerations” to Congress providing a framework for thinking about certain issues and tradeoffs that policy makers might consider. It is unclear how future legislation may impact the housing finance market and the investing environment for agency securities as the method of reform is undecided and has not yet been defined by the regulators.

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      Exposure to European Financial Counterparties

We have no direct exposure to any European sovereign credit. We do finance the acquisition of our agency securities with repurchase agreements, some of which are provided by European banks. In connection with these financing arrangements, we pledge our securities as collateral to secure the borrowing. The amount of collateral pledged will typically exceed the amount of the financing with the extent of over-collateralization ranging from 3%-6% of the amount borrowed. While repurchase agreement financing results in us recording a liability to the counterparty in our consolidated balance sheet, we are exposed to the counterparty, if during the term of the repurchase agreement financing, a lender should default on its obligation and we are not able to recover our pledged assets. The amount of this exposure is the difference between the amount loaned to us plus interest due to the counterparty and the fair value of the collateral pledged by us to the lender including accrued interest receivable on such collateral.

In addition, we use interest rate swaps to manage interest rate risk exposure in connection with our repurchase agreement financings. We will make cash payments or pledge securities as collateral as part of a margin arrangement in connection with interest rate swaps that are in an unrealized loss position. In the event that a counterparty were to default on its obligation, we would be exposed to a loss to a swap counterparty to the extent that the amount of cash or securities pledged exceeded the unrealized loss on the associated swaps and we were not able to recover the excess collateral.

During the past several years, several large European banks have experienced financial difficulty and have been either rescued by government assistance or by other large European banks. Some of these banks have U.S. banking subsidiaries, which have provided financing to us, particularly repurchase agreement financing for the acquisition of agency securities. At June 30, 2013, we had entered into repurchase agreements and/or interest rate swaps with seven financial institution counterparties that are either domiciled in Europe or a U.S.-based subsidiary of a European domiciled financial institution. Our total exposure to these banks was 10.1% of our equity at June 30, 2013. At June 30, 2013, we did not use credit default swaps or other forms of credit protection to hedge these exposures, although we may in the future. The following table shows our exposure by country to European banks.

(Dollars in thousands)	Number of    Counterparties	Exposure (1)		Exposure as a percentage of equity
England	1		$            35,228		1.4%
France	1		53,214		2.1%
Germany	2		35,348		1.4%
Netherlands	1		50,844		2.1%
Scotland	1		22,458		0.9%
Switzerland	1		53,700		2.2%
	7		$          250,792		10.1%

(1) Exposure represents our total assets pledged as collateral in excess of our obligations, including any accrued interest receivable on the pledged assets.

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. Management monitors our exposure to our repurchase agreement and swap counterparties on a regular basis, using various methods, including review of recent rating agency actions or other developments and by monitoring the amount of cash and securities collateral pledged and the associated loan amount under repurchase agreements and/or the fair of swaps with our counterparties. We intend to make reverse margin calls on our counterparties to recover excess collateral as permitted by the agreements governing our financing arrangements, or take other necessary actions to reduce the amount of our exposure to a counterparty when such actions are considered necessary.

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Interest Rates

Mortgage markets in general, and our strategy in particular, are interest rate sensitive. The relationship between several interest rates is generally determinant of the performance of our company. Our borrowings in the repurchase market have historically closely tracked LIBOR and the U.S. Federal Funds Target Rate. Significant volatility in these rates or a divergence from the historical relationship among these rates could negatively impact our ability to manage our portfolio. The agency securities we buy are affected by the shape of the yield curve, particularly along the area between two year Treasury rate and 10 year Treasury rates. The following table shows the 30-day LIBOR as compared to these rates at each period end:

	30- day LIBOR		Federal     Funds		Two-Year Treasury		10-Year Treasury
June 30, 2013		0.19%		0.07%		0.36%		2.49%
March 31, 2013		0.20%		0.09%		0.24%		1.85%
December 31, 2012		0.21%		0.09%		0.25%		1.78%
September 30, 2012		0.21%		0.09%		0.23%		1.63%
June 30, 2012		0.25%		0.09%		0.30%		1.65%
March 31, 2012		0.24%		0.09%		0.33%		2.21%
December 31, 2011		0.30%		0.25%		0.24%		1.88%
September 30, 2011		0.24%		0.25%		0.25%		1.92%
June 30, 2011		0.19%		0.25%		0.46%		3.16%
March 31, 2011		0.24%		0.25%		0.83%		3.47%
December 31, 2010		0.26%		0.25%		0.60%		3.30%
September 30, 2010		0.26%		0.25%		0.43%		2.51%
June 30, 2010		0.35%		0.25%		0.61%		2.93%

Principal Repayment Rate

Our net income is primarily a function of the difference between the yield on our assets and the financing cost of owning those assets. Since we tend to purchase assets at a premium to par, the main item that can affect the yield on our assets after they are purchased is the rate at which the mortgage borrowers repay the loan. While the scheduled repayments, which are the principal portion of the homeowners’ regular monthly payments, are fairly predictable, the unscheduled repayments, which are generally refinancing of the mortgage, are less so. Estimates of repayment rates are critical to the management of our portfolio, not only for estimating current yield but also to consider the rate of reinvestment of those proceeds into new securities, the yields which those new securities may add to our portfolio, as well as the extent to which we extend the duration of our liabilities in connection with hedging activities. The following table shows the weighted average principal repayment rate and the one-month constant prepayment rate (“CPR”) for the periods presented:

Quarter ended	Weighted Average Principal Repayment Rate (1)		Weighted   Average Principal  Repayment Rate Annualized (2)		One-Month    CPR (3)
June 30, 2013		7.03%		28.10%		20.8
March 31, 2013		6.50%		26.01%		19.0
December 31, 2012		6.64%		26.55%		19.8
September 30, 2012		6.90%		27.61%		20.5
June 30, 2012		6.36%		25.42%		19.7
March 31, 2012		6.42%		25.67%		19.6
December 31, 2011		6.85%		27.39%		20.8
September 30, 2011		7.14%		28.55%		21.7
June 30, 2011		4.64%		18.54%		14.9
March 31, 2011		5.61%		22.44%		17.5
December 31, 2010		7.81%		31.26%		23.9
September 30, 2010		8.48%		33.91%		25.5
June 30, 2010		11.27%		45.08%		29.1

33

(1) Scheduled and unscheduled principal payments as a percentage of the weighted average portfolio.

(2) Weighted average principal repayment rate annualized.

(3) CPR measures one month of unscheduled repayments as a percentage of principal on an annualized basis.

Book Value per Share

  As of June 30, 2013, our book value per share of common stock (total shareholders’ equity less aggregate liquidation preference of preferred stock divided by shares of common stock outstanding) was $22.18 which was a $6.00 decrease from the $28.18 book value at March 31, 2013. This was the largest period over period decrease we have experienced to date, and was largely driven by the decline in the prices of agency securities. The unrealized loss per share on our agency securities was ($1.91) at June 30, 2013, a decrease of $6.85 per share, from a gain of $4.94 per share on March 31, 2013. The unrealized loss per share on our interest rate swaps decreased to ($1.33) per share from ($2.21) on March 31, 2013. Although the primary purpose of our interest rate hedges is to synthetically fix future funding costs, we attempt to structure our interest rate hedge portfolio to also offset changes in our asset prices due to changes in interest rates. The price movements of our interest rate hedges and mortgage-backed securities are not perfectly correlated when interest rates change, and depend on a variety of market forces as the hedges may be valued off of a different benchmark than our assets. This mismatch in correlation, sometimes referred to as “basis risk” is not predictable and often occurs during times of illiquidity or other market disruptions. In the second quarter, for example, interest rates and prices changed more on agency securities than on U.S. Treasury securities or interest rate hedges with similar average lives. The following table shows the components of our book value on a per share basis at each period end:

As of	Common Equity		Undistributed Earnings	Unrealized Gain/(Loss) on MBS	Unrealized Gain/(Loss) on Interest Rate Swaps	Book Value Per Share
June 30, 2013	$	25.16	0.26	(1.91)	(1.33)	$	22.18
March 31, 2013	$	25.15	0.30	4.94	(2.21)	$	28.18
December 31, 2012	$	25.15	0.38	5.12	(2.46)	$	28.19
September 30, 2012	$	25.14	0.05	7.16	(2.75)	$	29.60
June 30, 2012	$	25.25	0.02	4.73	(2.55)	$	27.45
March 31, 2012	$	25.23	0.01	4.29	(2.23)	$	27.30
December 31, 2011	$	24.79	0.03	5.11	(2.85)	$	27.08
September 30, 2011	$	24.79	0.01	4.56	(3.04)	$	26.32
June 30, 2011	$	24.79	(0.03)	3.47	(1.51)	$	26.72
March 31, 2011	$	24.67	(0.06)	1.67	(0.17)	$	26.11
December 31, 2010	$	22.62	(0.08)	3.33	(1.03)	$	24.84
September 30, 2010	$	22.63	(0.07)	5.66	(2.39)	$	25.83
June 30, 2010	$	21.50	0.12	6.36	(2.15)	$	25.83

34

Investment in Agency Securities

We invest in both adjustable and fixed-rate agency securities. At June 30, 2013 and December 31, 2012, we owned $25.3 billion and $23.9 billion, respectively, of agency securities. While our strategy focuses on ARM securities, we also own fixed-rate securities with estimated durations that we believe are beneficial to the overall mix of our assets. As of June 30, 2013 and December 31, 2012, our agency securities portfolio was purchased at a net premium to par, or face value, with a weighted-average amortized cost of 102.99 and 102.85, respectively, of face value. As of June 30, 2013 and December 31, 2012, we had approximately $736.2 million and $648.2 million, respectively, of unamortized premium included in the cost basis of our agency securities.

During the quarter ended June 30, 2013, we purchased approximately $2.9 billion of agency securities with a weighted average coupon of 2.23%.

We typically want to own a higher percentage of Fannie Mae ARMs, than Freddie Mac ARMs as Fannie Mae has better cash flow to the security holder because Fannie Mae pays principal and interest sooner after accrual (45 days) as compared to Freddie Mac (75 days).

Our investment portfolio consisted of the following types of Fannie Mae and Freddie Mac securities at June 30, 2013:

(Dollars in thousands)	Agency Securities         Amortized         Cost		Gross         Unrealized         Loss		Gross         Unrealized         Gain		Estimated         Fair Value		% of Total
Agency Securities
Fannie Mae Certificates
ARMS	$	14,043,290	$	(147,577)	$	153,385	$	14,049,098		55.7%
Fixed Rate		2,127,131		(60,120)		-		2,067,011		8.2%
Total Fannie Mae		16,170,421		(207,697)		153,385		16,116,109
Freddie Mac Certificates
ARMS		8,513,715		(115,264)		47,027		8,445,478		33.4%
Fixed Rate		714,585		(20,129)		-		694,456		2.7%
Total Freddie Mac		9,228,300		(135,393)		47,027		9,139,934
Total Agency Securities	$	25,398,721	$	(343,090)	$	200,412	$	25,256,043

Our investment portfolio consisted of the following types of Fannie Mae and Freddie Mac securities at December 31, 2012:

	Agency Securities         Amortized         Cost		Gross         Unrealized         Loss		Gross         Unrealized         Gain		Estimated         Fair Value		% of Total
Agency Securities
Fannie Mae Certificates
ARMS	$	14,081,259	$	(100)	$	329,780	$	14,410,939		60.3%
Fixed Rate		743,299				9,296		752,595		3.1%
Total Fannie Mae		14,824,558		(100)		339,076		15,163,534
Freddie Mac Certificates
ARMS		7,850,630		(21)		149,114		7,999,723		33.4%
Fixed Rate		744,720		-		11,274		755,994		3.2%
Total Freddie Mac		8,595,350		(21)		160,388	$	8,755,717
Total Agency Securities	$	23,419,908	$	(121)	$	499,464	$	23,919,251

35

Adjustable-rate securities

As of June 30, 2013, our investment portfolio consisted of ARM securities as follows:

(Dollars in thousands) Months to Reset	% of ARM   Portfolio		Current Face value(1)		Weighted Avg.   Coupon (2)		Weighted Avg. Amortized   Purchase Price (3)		Amortized Cost (4)		Weighted Avg.   Market Price (5)		Market Value (6)
0-12		3.9%	$	833,434		2.93%	$	101.29	$	844,196	$	106.40	$	886,755
13-24		6.0%		1,276,823		3.95%	$	102.32		1,306,484	$	105.89		1,351,981
25-36		12.8%		2,751,990		3.17%	$	102.40		2,817,912	$	104.39		2,872,775
37-48		10.8%		2,359,605		2.63%	$	102.69		2,423,176	$	102.99		2,430,083
49-60		13.2%		2,880,306		3.07%	$	102.61		2,955,497	$	103.52		2,981,697
61-72		21.2%		4,651,072		2.67%	$	103.15		4,797,678	$	102.34		4,759,817
73-84		28.0%		6,251,251		2.21%	$	103.38		6,462,677	$	100.61		6,289,383
85-96		0.1%		13,075		3.64%	$	103.46		13,527	$	103.82		13,575
97-108		1.7%		387,101		2.86%	$	103.44		400,408	$	101.46		392,769
109-120		2.3%		517,595		2.45%	$	103.45		535,450	$	99.64		515,741
Total/Weighted Average		100.0%	$	21,922,252		2.73%	$	102.90	$	22,557,005	$	102.61	$	22,494,576

As of December 31, 2012, our investment portfolio consisted of ARM securities as follows:

(dollars in thousands) Months to Reset	% of ARM     Portfolio		Current Face value (1)		Weighted Avg.   Coupon (2)		Weighted Avg. Amortized   Purchase Price (3)		Amortized Cost (4)		Weighted Avg.   Market Price   (5)		Market Value (6)
0-12		4.1%	$	856,698		4.03%	$	101.24	$	867,348	$	106.79	$	914,832
13-24		4.3%		911,412		3.88%	$	102.28		932,202	$	106.08		966,854
25-36		10.2%		2,155,206		3.60%	$	102.27		2,204,154	$	105.55		2,274,763
37-48		14.3%		3,059,130		3.06%	$	102.38		3,132,043	$	104.84		3,207,245
49-60		16.1%		3,450,959		2.76%	$	102.82		3,548,369	$	104.81		3,616,891
61-72		13.5%		2,868,337		3.26%	$	102.55		2,941,356	$	105.54		3,027,295
73-84		33.9%		7,276,854		2.44%	$	103.37		7,522,264	$	104.54		7,607,359
85-96		0.6%		126,924		3.08%	$	103.47		131,327	$	105.17		133,487
97-108		-		-		-	$	-		-	$	-		-
109-120		3.0%		630,504		2.80%	$	103.54		652,826	$	104.99		661,936
Total ARMS		100.0%	$	21,336,024		2.95%	$	102.79	$	21,931,889	$	105.04	$	22,410,662

36

⁽¹⁾  The current face value is the current monthly remaining dollar amount of principal of a mortgage security. We compute current face value by multiplying the original face value of the security by the current principal balance factor. The current principal balance factor is essentially a fraction, where the numerator is the current outstanding balance and the denominator is the original principal balance.

⁽²⁾  For a pass-through certificate, the coupon reflects the weighted average nominal rate of interest paid on the underlying mortgage loans, net of fees paid to the servicer and the agency. The coupon for a pass-through certificate may change as the underlying mortgage loans are prepaid. The percentages indicated in this column are the nominal interest rates that will be effective through the interest rate reset date and have not been adjusted to reflect the purchase price we paid for the face amount of security.

⁽³⁾  Amortized purchase price is the dollar amount, per $100 of current face, of our purchase price for the security, adjusted for amortization as a result of scheduled and unscheduled principal paydowns.

⁽⁴⁾  Amortized cost is our total purchase price for the mortgage security, adjusted for amortization as a result of scheduled and unscheduled principal paydowns.

⁽⁵⁾  Market price is the dollar amount of market value, per $100 of nominal, or face value, of the mortgage security. Under normal conditions, we compute market value by obtaining valuations for the mortgage security from separate and independent sources and averaging these valuations.

⁽⁶⁾  Market value is the total market value for the mortgage security.

As of June 30, 2013 and December 31, 2012, the ARMs underlying our adjustable rate agency securities had fixed interest rates for an average period of approximately 58 months and 59 months, respectively after which time the interest rates reset and become adjustable annually. At June 30, 2013, approximately 1.0% of our agency ARMs will reach the end of their initial fixed-rate period in the next 12 months. At June 30, 2013, 97.0% of our agency ARMs were still in their initial fixed-rate period and 3.0% of our agency ARMs have already reached their initial reset period and will reset annually for the life of the security.

After the reset date, interest rates on our agency ARMs float based on spreads over various indices, usually LIBOR or the one-year CMT. These interest rate adjustments are subject to caps that limit the amount the applicable interest rate can increase during any year, known as an annual cap, and through the maturity of the security, known as a lifetime cap. Our agency ARMs typically have a maximum initial one-time adjustment of 5%, and the average annual interest rate increase (or decrease) to the interest rates on our agency securities is 2% per year. The average lifetime cap on increases (or decreases) to the interest rates on our agency securities is 5% from the initial stated rate.

Fixed-rate securities

In addition to adjustable-rate securities, we also invest in fixed-rate securities. All of our fixed-rate agency securities purchased to date have been 15-year amortizing fixed rate securities. At June 30, 2013, we owned $2.8 billion of 15-year fixed-rate agency securities with a weighted average life, assuming a constant prepayment rate of 10, of 4.1 years. The following table details our fixed rate portfolio at June 30, 2013 (dollars in thousands).

	% of Fixed     Rate Portfolio		Current       Face value		Weighted       Avg. Coupon		Weighted Avg. Amortized     Purchase Price		Amortized Cost		Weighted Avg.   Market Price		Market Value
Wtd Avg Months to Maturity
109-120		1.0%		28,479		2.50%	$	104.43		29,741	$	101.64		28,946
157-168		2.3%		60,756		3.00%	$	103.83		63,083	$	103.04		62,601
169-180		96.7%		2,650,998		2.50%	$	103.69		2,748,892	$	100.71		2,669,920
Total Fixed Rate/ Weighted Average		100.0%	$	2,740,233		2.51%	$	103.70	$	2,841,716	$	100.77	$	2,761,467

37

The following table details our fixed rate portfolio at December 31, 2012 (dollars in thousands).

	% of Fixed     Rate Portfolio		Current     Face value (1)		Weighted Avg.   Coupon (2)		Amortized   Purchase Price (3)		Amortized Cost (4)		Weighted Avg.   Market Price   (5)		Market Value (6)
Wtd Avg Months to Maturity
155-167		6.8%	$	95,979		3.00%	$	103.36	$	99,201	$	106.44	$	102,158
168-180		93.2%		1,339,726		2.60%	$	103.66		1,388,818	$	104.98		1,406,431
Total Fixed Rate/ Weighted Average		100.0%	$	1,435,705		2.62%	$	103.64	$	1,488,019	$	105.08	$	1,508,589

⁽¹⁾  The current face value is the current monthly remaining dollar amount of principal of a mortgage security. We compute current face value by multiplying the original face value of the security by the current principal balance factor. The current principal balance factor is essentially a fraction, where the numerator is the current outstanding balance and the denominator is the original principal balance.

⁽²⁾  For a pass-through certificate, the coupon reflects the weighted average nominal rate of interest paid on the underlying mortgage loans, net of fees paid to the servicer and the agency. The coupon for a pass-through certificate may change as the underlying mortgage loans are prepaid. The percentages indicated in this column have not been adjusted to reflect the purchase price we paid for the face amount of security.

⁽³⁾  Amortized purchase price is the dollar amount, per $100 of current face, of our purchase price for the security, adjusted for amortization as a result of scheduled and unscheduled principal paydowns.

⁽⁴⁾  Amortized cost is our total purchase price for the mortgage security, adjusted for amortization as a result of scheduled and unscheduled principal paydowns.

⁽⁵⁾  Market price is the dollar amount of market value, per $100 of nominal, or face value, of the mortgage security. Under normal conditions, we compute market value by obtaining valuations for the mortgage security from separate and independent sources and averaging these valuations.

⁽⁶⁾  Market value is the total market value for the mortgage security.

Forward Purchases

While most of our purchases of agency securities are accounted for using trade date accounting, some forward purchases, such as certain TBAs, do not qualify for trade date accounting and are considered derivatives for financial statement purposes. Pursuant to Accounting Standards Codification Topic 815, Derivatives and Hedging, we account for these derivatives as all-in-one cash flow hedges. The net fair value of the forward commitment is reported on the balance sheet as an asset (or liability), with a corresponding unrealized gain (or loss) recognized in other comprehensive income. Since we purchase forward for the purposes of holding the securities for investment, we consider all of our agency securities, settled or unsettled, as part of our portfolio for the purposes of cash flow and interest rate sensitivity, and consequently hedging, duration measurement, and other related investment management activity.

38

Liabilities

We have entered into repurchase agreements to finance most of our agency securities. Our repurchase agreements are secured by our agency securities and bear interest at rates that have historically moved in close relationship to LIBOR. As of June 30, 2013 and December 31, 2012, we had established 31 borrowing relationships with various investment banking firms and other lenders. We had an outstanding balance under our repurchase agreements at June 30, 2013 of $23.1 billion with 25 different counterparties. We had an outstanding balance of $22.9 billion at December 31, 2012 with 24 different counterparties.

Hedging Instruments

We generally intend to hedge as much of our interest rate risk as our manager deems prudent in light of market conditions. No assurance can be given that our hedging activities will have the desired beneficial impact on our results of operations or financial condition. Our policies do not contain specific requirements as to the percentages or amount of interest rate risk that our manager is required to hedge.

Interest rate hedging may fail to protect or could adversely affect us because, among other things:

• available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought;

• the duration of the hedge may not match the duration of the related liability;

• fair value accounting rules could foster adverse valuation adjustments due to credit quality considerations that could impact both earnings and shareholder equity;

• the party owing money in the hedging transaction may default on its obligation to pay;

• the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and

• the value of derivatives used for hedging may be adjusted from time to time in accordance with accounting rules to reflect changes in fair value. Downward adjustments, or “mark-to-market losses,” would reduce our shareholders’ equity.

As of June 30, 2013, we had entered into 83 interest rate swap agreements with 14 counterparties to hedge a benchmark interest rate – LIBOR. This portfolio of hedges is designed to lock in funding costs for specific funding activities associated with specific assets as a way to realize attractive net interest margins. This hedging strategy incorporates an assumed prepayment schedule, which, if not realized, will cause our results to differ from expectations. These swap agreements provide for fixed interest rates indexed off of one-month LIBOR and effectively fix the floating interest rates on $11.1 billion of borrowings under our repurchase agreements. We also invest in Euro Dollar Futures Contracts (“Futures Contracts”) as part of our strategy to mitigate interest rate risk. At June 30, 2013, we had invested in Futures Contracts which are designed to replicate interest rate swaps with a notional amount of $800.0 million with a weighted average swap equivalent rate of 1.35% and weighted average term of 56 months. If the rates on our repurchase agreements do not move in tandem with LIBOR, we will be less effective at fixing this cost and our results will differ from expectations.

39

Summary Financial Data

(in thousands, except per share amounts)
	Three months ended (unaudited)						Six months ended (unaudited)
	June 30, 2013			June 30, 2012			June 30, 2013			June 30, 2012
Statement of Income Data
Interest income on mortgage-backed securities	$	115,115		$	128,720		$	239,356		$	241,480
Interest income on short-term cash investments		359			441			801			773
Interest Expense		(52,079)			(46,169)			(105,356)			(87,278)
Net Interest Income		63,395			82,992			134,801			154,975
Gain on sale of mortgage-backed securities		8,802			12,205			11,302			14,710
Gain on futures contracts		5,485			–			5,536			–
Operating Expenses		(6,943)			(6,053)			(13,661)			(11,237)
Net income	$	70,739		$	89,144		$	137,978		$	158,448
Dividends on preferred stock		(5,480)			–			(10,960)			–
Net income available to common shareholders	$	65,259		$	89,144		$	127,018		$	158,448
Earnings per share -common stock, basic	$	0.66		$	0.91		$	1.29		$	1.80
Earnings per share -common stock, diluted	$	0.66		$	0.91		$	1.29		$	1.80
Weighted average shares outstanding		98,830,054			97,969,074			98,828,827			87,789,596
Cash dividends declared per common share	$	0.70		$	0.90		$	1.40		$	1.80
Key Portfolio Statistics
Average MBS (1)	$	24,824,334		$	21,149,623		$	24,477,266		$	19,204,331
Average Repurchase Agreements (2)	$	22,701,463		$	19,599,942		$	22,523,131		$	17,790,853
Average Total Shareholders’ Equity (3)	$	3,034,954		$	2,762,948		$	3,050,489		$	2,438,013
Average Common Equity (4)	$	2,756,702		$	2,762,948		$	2,772,237		$	2,438,013
Average Portfolio Yield (5)		1.85	%		2.43	%		1.96	%		2.51	%
Average Cost of Funds (6)		0.92	%		0.94	%		0.94	%		0.98	%
Interest Rate Spread (7)		0.93	%		1.49	%		1.02	%		1.53	%
Return on Average Equity (8)		9.47	%		12.91	%		9.16	%		13.00	%
Average Annual Portfolio Repayment Rate (9)		28.10	%		25.47	%		27.07	%		25.43	%
Debt to Equity (at period end) (10)		9.3	:1		7.5	:1		9.3	:1		7.5	:1
Debt to Additional Paid in Capital (at period end) (11)		8.3	:1		8.1	:1		8.3	:1		8.1	:1
Selected Balance Sheet Data (at period end)
Mortgage-backed securities	$	25,256,043		$	22,367,121		$	25,256,043		$	22,367,121
Total Assets		25,976,375			24,018,320			25,976,375			24,018,320
Repurchase Agreements		23,077,252			20,152,860			23,077,252			20,152,860
Stockholder’s Equity		2,479,089			2,692,261			2,479,089			2,692,261

* Average numbers for each period are weighted based on days on our books and records. All percentages are annualized.

⁽¹⁾  Our daily average investment in MBS was calculated by dividing the sum of our daily MBS investments during the period by the number of days in the period.

⁽²⁾  Our daily average balance outstanding under our repurchase agreements was calculated by dividing the sum of our daily outstanding balances under our repurchase agreements during the period by the number of days in the period.

⁽³⁾ Our daily average total shareholders’ equity was calculated by dividing the sum of our daily total shareholders’ equity during the period by the number of days in the period.

⁽⁴⁾  Our daily average common shareholders’ equity was calculated by dividing the sum of our daily common shareholders’ equity during the period by the number of days in the period.

⁽⁵⁾  Our average portfolio yield was calculated by dividing our interest income on mortgage-backed securities, net of amortization, by our average MBS.

⁽⁶⁾  Our average cost of funds was calculated by dividing our total interest expense (including hedges) by our average balance outstanding under our repurchase agreements.

⁽⁷⁾  Our interest rate spread was calculated by subtracting our average cost of funds from our average portfolio yield.

⁽⁸⁾  Our return on average common equity was calculated by dividing net income available to common shareholders by average common equity.

⁽⁹⁾  Our average annual principal repayment rate was calculated by dividing our total principal payments received during the year (scheduled and unscheduled) by our average MBS.

⁽¹⁰⁾  Our debt to equity ratio was calculated by dividing the amount outstanding under our repurchase agreements at period end by total shareholders’ equity at period end.

⁽¹¹⁾  Our debt to additional paid in capital ratio was calculated by dividing the amount outstanding under our repurchase agreements at period end by additional paid in capital at period end.

40

Results of Operations

 Overview

We raised $539 million in March 2012 through public offerings of our common stock and $278 million in August 2012 through a preferred stock offering. The results discussed in this section should be read keeping in mind that the average portfolio size in 2013 was significantly larger than at June 2012. This factor may cause some metrics regarding our results of operations to be less than perfect comparisons, and not necessarily clear indicators of normalized performance.

Three months ended June 30, 2013 and 2012

Our primary source of income is the interest income we earn on our investment portfolio. Our interest income for the quarter ended June 30, 2013 was $115.5 million, as compared to $129.2 million for the quarter ended June 30, 2012. One of the most significant factors in this decrease was lower average coupon on our average earnings assets. Our average agency securities for the quarter ended June 30, 2013 was $24.8 billion as compared to $21.1 billion for the quarter ended June 30, 2012. The changes in our interest income generally is not exactly proportionate to the increase in our average agency securities because the coupon rate on our recent purchases will be at different rates than in the portfolio in the comparable period. Our weighted average coupon during the second quarter was 2.72%, as compared to 3.18% during the second quarter of 2012. The decline in average coupon was somewhat offset by a portfolio that was approximately 17% larger than the quarter ended June 2012. Since mortgage rates fluctuate, they will increase or decrease our overall weighted average coupon rate as we vary the amount of securities in our portfolio. The difference between our interest income and interest expense is more important than the absolute level of rates.

Our annualized yield on average assets for the quarter ended June 30, 2013 was 1.85% as compared to 2.43% for the quarter ended June 30, 2012. After the stated coupon rate, the yield on our assets is most directly affected by the rate of repayments on our agency securities due to its impact on the amortization of premium on agency securities. Our yield decrease was both a function of a lower average coupon rate and the portfolio premium amortized at a higher rate than the comparable period. Our annualized rate of portfolio repayment for the three months ended June 30, 2013 was 28.1%, which was higher than the rate of 25.5% for the three months ended June 30, 2012. Our amortization expense was $48.8 for the three months ended June 30, 2013 and $35.9 million for the three months ended June 30, 2012. The increase in prepayments was largely brought on by the effects of the Federal Reserve’s focus on keeping mortgage rates low.

Our interest expense for the quarter ended June 30, 2013 was $52.1 million as compared to $46.2 million for the quarter ended June 30, 2012. Our average borrowings increased from $19.6 billion for the quarter ended June 30, 2012 to $22.7 billion for the quarter ended June 30, 2013, similar to the portfolio growth described above. Our annualized weighted average cost of funds, including hedges, was 0.92% for the quarter ended June 30, 2013, as compared to 0.94% for the quarter ended June 30, 2012. The components of our cost of funds are 1) rates on our repurchase agreements, 2) rates on our interest rate swaps compared to LIBOR, and 3) the total notional amount of the interest rate swaps.

Our net interest income for the quarter ended June 30, 2013 was $63.4 million, and our net interest margin, or “spread”, was 0.93%. For the quarter ended June 30, 2012, our net interest income was $83.0 million and our spread was 1.49%. This decrease in our spread was directly due to our decreased portfolio yield due to increased premium amortization rates, as described above. While the dollar figure is influenced significantly by the size of our portfolio and overall interest rate levels, we believe our spread is the more important indicator of our performance.

We occasionally sell securities as part of normal portfolio adjusting. We typically will selectively sell certain of our MBS when we think they are likely to underperform in the future as compared with other investment

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opportunities. We sold $621.5 million of securities in the second quarter of 2013, realizing gains of $8.8 million. We sold $1.4 billion of securities in the second quarter of 2012, realizing gains of $12.2 million. We also realized gains of $5.5 million in the second quarter of 2013 on our futures contracts which we do not designate as accounting hedges. We did not recognize any futures contracts gains in the comparable period of 2012.

Our total operating expenses for the quarters ended June 30, 2013 and 2012 were $6.9 million and $6.1 million, respectively. This increase was primarily due to increases in 1) the fee we pay our manager, and 2) reimbursable expenses related to personnel and technology. Our annualized expense ratio was 92 and 88 basis points, respectively, of average shareholder’s equity for the quarters ended June 30, 2013 and 2012.

Our net income available to common shareholders for the quarter ended June 30, 2013 was $65.3 million or $0.66 per weighted average share. This represents an annualized return on average equity of 9.47% for the period. For the quarter ended June 30, 2012, our net income was $89.1 million or $0.91 per weighted average share, and the annualized return on average equity was 12.91%. While many factors may affect these numbers, the decrease in the per share earnings was due primarily to a lower yielding portfolio as we experienced spread compression from investing in increasingly lower coupon securities while our costs of funding decreased at a lesser pace.

Six months ended June 30, 2013 and 2012

In general, most of the items influencing our operating results for the six month periods ended June 30, 2013 and 2012 were similar as the items affecting the quarterly results described above. For the six month period ended June 30, 2013, we had interest income of $240.2 million compared to $242.3 million for the same period in 2012. Due to investing the proceeds of our common stock offerings in March 2012 and August 2012, our portfolio was significantly larger, with average earning assets of $24.5 billion for the six months ended June 30, 2013 compared to $19.2 billion for the six months ended June 30, 2012. Offsetting this increase in earning assets was a lower yield on the portfolio. Our yield dropped from 2.51% for the six months ended June 30, 2012 to 1.96% for the six months ended June 30, 2013. This was the result of buying lower coupon agency securities with our offering proceeds and replacing repayments of principal on our agency securities. The portfolio prepayment rate increased on an annualized basis, from 25.5% for the first six months of 2012 to 27.1% for the same period in 2013.

Our interest expense for the six months ended June 30, 2013 was $105.4 million as compared to $87.3 million for the six months ended June 30, 2012. While our average borrowings increased proportionately along with our assets, the interest rates we pay on these borrowing were lower on average during the first half of 2013. Our average cost of funds, including hedges, fell from 0.98% for the six months ended June 30, 2012 to 0.94% for the same period in 2013. We realized gains on sale of our agency securities of $11.3 million for the six months ended June 30, 2013 as compared to $14.7 million for the six months ended June 30, 2012. We also recognized gains on Futures Contracts of $5.5 million for the six month ended June 30, 2013 as compared to none for the six months ended June 30, 2012.

Our net interest income for the six months ended June 30, 2013 was $134.8 million, and our spread was 1.02%. For the six months ended June 30, 2012, our net interest income was $155.0 million, and our spread was 1.53%. We incurred expenses for the six months ended June 30, 2013 and 2012 of $13.7 million and $11.2 million, respectively. We earned net income of $127.0 million, or $1.29 per weighted average share, for the six months ended June 30, 2013, and the annualized return on average equity was 9.16%. For the six months ended June 30, 2012, we earned net income of $158.4 million, or $1.80 per weighted average share, and the annualized return on average equity was 13.00%. Our per share income for the six months ended June 30, 2013 was lower than the six months ended June 30, 2012 due mainly to decreasing yield on our securities.

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Contractual Obligations and Commitments

We had the following contractual obligations under repurchase agreements as of June 30, 2013 and December 31, 2012:

	June 30, 2013
(dollars in thousands)	Balance		Weighted Average     Contractual Rate		Contractual     Interest Payments	Total Contractual     Obligation
Within 30 days	$	22,569,149		0.37%	$    5,424	$	22,574,573
30 days to 3 months		508,103		0.38%	268		508,371
	$	23,077,252		0.37%	$    5,692	$	23,082,944
	December 31, 2012
(dollars in thousands)	Balance		Weighted Average     Contractual Rate		Contractual  Interest Payments	Total Contractual     Obligation
Within 30 days	$	20,500,568		0.47%	$    5,855	$	20,506,423
30 days to 3 months		2,365,861		0.48%	940		2,366,801
	$	22,866,429		0.47%	$    6,795	$	22,873,224

From time to time we may make forward commitments to purchase our agency securities. The commitments require physical settlement with the sellers on settlement date, usually between 30 and 90 days from the date of trade. The following table shows the agency securities forward purchase commitments on the balance sheet as of June 30, 2013.

(dollars in     thousands)		Fair Market	Due to
Face	Cost	Value	Brokers
$876,000	$906,063	$875,797	$906,063

In addition, we had contractual commitments under interest rate swap agreements as of June 30, 2013. These agreements were for a total notional amount of $11.1 billion, had a weighted average rate of 1.41% and a weighted average term of 28 months.

Off-Balance Sheet Arrangements

As of June 30, 2013 and December 31, 2012, we did not maintain any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, or special purpose or variable interest entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, as of June 30, 2013 and December 31, 2012, we had not guaranteed any obligations of unconsolidated entities or entered into any commitment or intent to provide funding to any such entities.

Liquidity and Capital Resources

Our primary sources of funds are borrowings under repurchase arrangements and monthly principal and interest payments on our investments. Other sources of funds may include proceeds from debt and equity offerings and asset sales. We generally maintain liquidity to pay down borrowings under repurchase arrangements to reduce borrowing costs and otherwise efficiently manage our long-term investment capital. Because the level of these borrowings can be adjusted on a daily basis, the level of cash and cash equivalents carried on the balance sheet is significantly less important than our potential liquidity available under our borrowing arrangements. We currently believe that we have sufficient liquidity and capital resources available for the acquisition of additional investments, repayments on borrowings and the payment of cash dividends as required for continued qualification as a REIT.

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In response to the growth of our agency securities portfolio and to recent turbulent market conditions, we have aggressively pursued additional lending counterparties in order to help increase our financial flexibility and ability to withstand periods of contracting liquidity in the credit markets. At June 30, 2013, we had uncommitted repurchase facilities with 31 lending counterparties to finance this portfolio, subject to certain conditions, and have borrowings outstanding with 25 of these counterparties.

Liquidity Sources—Repurchase Facilities

With repurchase facilities being an integral part of our financing strategy, and thus our financial condition, full understanding of the repurchase market is necessary to understand the risks and drivers of our business. For example, we anticipate that, upon repayment of each borrowing under a repurchase agreement, we will use the collateral immediately for borrowing under a new repurchase agreement. And while we have borrowing capacity under our repurchase facilities well in excess of what is required for our operations, these borrowing lines are uncommitted and generally do not provide long term excess liquidity. Currently, we have not entered into any commitment agreements under which the lender would be required to enter into new repurchase agreements during a specified period of time, nor do we presently plan to have liquidity facilities with commercial banks.

The table below sets forth the average amount of repurchase agreements outstanding during each quarter and the amount of these repurchase agreements outstanding as of the end of each quarter for the last three years. The amounts at a period end can be both above and below the average amounts for the quarter. We do not manage our portfolio to have a pre-designated amount of borrowings at quarter end. These numbers will differ as we implement our portfolio management strategies and risk management strategies over changing market conditions.

(In thousands)	Average Daily          Repurchase Agreements	Repurchase            Agreements at              Period End	Highest Daily      Repurchase Balance      During Quarter	Lowest Daily      Repurchase Balance      During Quarter
June 30, 2013	$22,701,463	$23,077,252	$23,429,222	$22,383,758
March 31, 2013	22,342,818	22,586,932	23,017,196	21,337,947
December 31, 2012	23,692,240	22,866,429	24,396,444	22,824,383
September 30, 2012	22,541,260	23,583,180	24,299,580	20,152,860
June 30, 2012	19,599,942	20,152,860	21,086,250	16,449,862
March 31, 2012	15,981,764	16,556,630	16,691,652	15,566,983
December 31, 2011	16,280,835	16,162,375	16,807,220	15,886,231
September 30, 2011	14,884,196	15,886,231	15,907,289	14,334,014
June 30, 2011	13,540,291	14,800,594	14,800,594	11,401,240
March 31, 2011	9,983,197	11,495,749	11,495,749	8,566,200
December 31, 2010	7,326,776	8,681,060	8,681,060	6,633,989
September 30, 2010	6,302,601	6,678,426	6,736,759	5,934,419
June 30, 2010	6,092,328	5,982,998	6,218,628	5,956,811

As of June 30, 2013 and December 31, 2012, the weighted average margin requirement, or the percentage amount by which the collateral value must exceed the loan amount, which we also refer to as the haircut, under all our repurchase agreements, was 4.5% and 4.4%, respectively (weighted by borrowing amount). This rate remained fairly consistent as lending conditions have been stable.

We commonly receive margin calls from our lenders. We may receive margin calls daily, although we typically receive them once or twice per month. We receive margin calls under our repurchase agreements for two reasons. One of these is what is known as a “factor call” which occurs each month when the new factors (amount of principal remaining on the security) are published by the issuing agency, such as Fannie Mae. The second type of margin call we may receive is a valuation margin call. Both factor and valuation margin calls occur whenever the total value of our assets drops beyond a threshold amount, which is usually between $100,000 and $250,000. This threshold

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amount is generally set by each counterparty and does not vary based on the notional amount of the repurchase agreements outstanding with that counterparty. Both of these margin calls require a dollar for dollar restoration of the margin shortfall. The total amount of our unrestricted cash and cash equivalents, plus any unpledged securities, is available to satisfy margin calls, if necessary. As of June 30, 2013 and December 31, 2012, we had approximately $1.5 billion and $1.8 billion respectively, in agency securities, short term investments, cash and cash equivalents available to satisfy future margin calls. To date, we have maintained sufficient liquidity to meet margin calls, and we have never been unable to satisfy a margin call, although no assurance can be given that we will be able to satisfy requests from our lenders to post additional collateral in the future.

One risk to our liquidity is the collateral, or haircut, held by our lenders. In the event of insolvency by a repurchase agreement lender, our claim to our haircut becomes that of a general unsecured creditor.

An event of default or termination event under the standard master repurchase agreement would give our counterparty the option to terminate all repurchase transactions existing with us and require any amount due by us to the counterparty to be payable immediately. Our agreements for our repurchase facilities generally conform to the terms in the standard master repurchase agreement as published by the Securities Industry and Financial Markets Association (SIFMA) as to repayment, margin requirements and the segregation of all purchased securities covered by the repurchase agreement. In addition, each lender may require that we include supplemental terms and conditions to the standard master repurchase agreement that are generally required by the lender. Some of the typical terms which are included in such supplements and which supplement and amend terms contained in the standard agreement include changes to the margin maintenance requirements, purchase price maintenance requirements, the addition of a requirement that all controversies related to the repurchase agreement be litigated in a particular jurisdiction and cross default provisions. These provisions differ for each of our lenders.

As discussed above under “Market and Interest Rate Trends and the Effect on our Portfolio,” over the last few years the residential mortgage market in the United States has experienced difficult conditions including:

• increased volatility of many financial assets, including agency securities and other high-quality MBS assets, due to news of potential security liquidations;

• increased volatility and deterioration in the broader residential mortgage and MBS markets; and

• significant disruption in financing of MBS.

Although these conditions have lessened of late, if they increase and persist, our lenders may be forced to exit the repurchase market, become insolvent or further tighten lending standards or increase the amount of haircut, any of which could make it more difficult or costly for us to obtain financing.

Effects of Margin Requirements, Leverage and Credit Spreads

Our agency securities have values that fluctuate according to market conditions and, as discussed above, the market value of our agency securities will decrease as prevailing interest rates or credit spreads increase. When the value of the securities pledged to secure a repurchase loan decreases to the point where the positive difference between the collateral value and the loan amount is less than the haircut, our lenders may issue a margin call, which means that the lender will require us to pay the margin call in cash or pledge additional collateral to meet that margin call. Under our repurchase facilities, our lenders have full discretion to determine the value of the agency securities we pledge to them. Most of our lenders will value securities based on recent trades in the market. Lenders also issue margin calls as the published current principal balance factors change on the pool of mortgages underlying the securities pledged as collateral when scheduled and unscheduled paydowns are announced monthly.

Similar to the valuation margin calls that we receive on our repurchase agreements, we also receive margin calls on our derivative instruments when the value of a hedge position declines. This typically occurs when prevailing market rates decrease, with the severity of the decrease also dependent on the term of the hedges involved. The amount of any margin call will generally be dollar for dollar on a daily basis. Our posting of collateral with our hedge counterparties can be done in cash or securities, and is generally bilateral, which means that if the value of our interest rate hedges increases, our counterparty will post collateral with us.

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We experience margin calls in the ordinary course of our business, and under certain conditions, such as during a period of declining market value for agency securities, we experience margin calls at least monthly and often more frequently. In seeking to manage effectively the margin requirements established by our lenders, we maintain a position of cash and unpledged securities. We refer to this position as our liquidity. The level of liquidity we have available to meet margin calls is directly affected by our leverage levels, our haircuts and the price changes on our securities. If interest rates increase as a result of a yield curve shift or for another reason or if credit spreads widen, the prices of our collateral (and our unpledged assets that constitute our liquidity) will decline, we will experience margin calls, and we will use our liquidity to meet the margin calls. There can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls. If our haircuts increase, our liquidity will proportionately decrease. In addition, if we increase our borrowings, our liquidity will decrease by the amount of additional haircut on the increased level of indebtedness.

We intend to maintain a level of liquidity in relation to our assets that enables us to meet reasonably anticipated margin calls but that also allows us to be substantially invested in agency securities. We may misjudge the appropriate amount of our liquidity by maintaining excessive liquidity, which would lower our investment returns, or by maintaining insufficient liquidity, which would force us to liquidate assets into unfavorable market conditions and harm our results of operations and financial condition.

As of June 30, 2013, the weighted average haircut under our repurchase facilities was approximately 4.5%, and our leverage (defined as our debt-to-shareholders equity ratio) was approximately 9.3:1 as compared to 7.4:1 at December 31, 2012. This increase was primary attributable to the decline in market value of our agency securities, as discussed above under “Book Value,” and the corresponding decrease in our equity.

Liquidity Sources—Capital Offerings

In addition to our repurchase borrowings, we also rely on secondary securities offerings as a source of both short-term and long-term liquidity. During 2012, we received funds from sales of our common stock under an “at-the-market” offering program and from fully underwritten offerings we completed in March and August.

From time to time, we may sell shares of our common stock in “at the market” offerings. Sales of the shares of common stock, if any, may be made in private transactions, negotiated transactions or any method permitted by law deemed to be an “at the market” offering as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made directly on the NYSE or to or through a market maker other than on an exchange.

On February 29, 2012, we entered into sales agreements (the “2012 Sales Agreements”) with Cantor Fitzgerald & Co. (“Cantor”) and JMP Securities LLC (“JMP”) to establish a new “at-the-market” program (the “2012 Program”). Under the terms of the 2012 Sales Agreements, we may offer and sell up to 10,000,000 shares of our common stock from time to time through Cantor or JMP, each acting as agent and/or principal. The shares of our common stock issuable pursuant to the 2012 Program are registered with the SEC on our Registration Statement on Form S-3 (No. 333-179805), which became effective upon filing on February 29, 2012.

During the three and six months ended June 30, 2013, we did not sell any shares of common stock under the 2012 Sales Agreements.

On March 30, 2012, we completed an underwritten public offering of 20,125,000 shares of common stock, including 2,625,000 shares pursuant to the underwriters’ overallotment option, at a price to us of $26.81 per share, and received net proceeds of approximately $539.4 million after the payment of underwriting discounts and expenses.

On August 27, 2012, we issued 11,500,000 shares of our 7.625% Series A Cumulative Redeemable Preferred Stock, including 1,500,000 shares pursuant to the underwriters’ overallotment option, at a price of $25.00 per share and received net proceeds of approximately $278.3 million after the payment of underwriting discounts and expenses.

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We used the proceeds of our stock offerings to purchase additional agency securities, provide working capital, and to provide liquidity for our hedging strategy.

Forward-Looking Statements Regarding Liquidity

Based on our current portfolio, leverage rate and available borrowing arrangements, we believe that the net proceeds of our common equity offerings, combined with cash flow from operations and available borrowing capacity, will be sufficient to enable us to meet anticipated short-term (one year or less) liquidity requirements such as to fund our investment activities, to pay fees under our management agreement, to fund our distributions to shareholders and for general corporate expenses.

Our ability to meet our long-term (greater than one year) liquidity and capital resource requirements will be subject to obtaining additional debt financing and equity capital. We may increase our capital resources by obtaining long-term credit facilities or making public or private offerings of equity or debt securities, possibly including classes of preferred stock, common stock, and senior or subordinated notes. Such financing will depend on market conditions for capital raises and for the investment of any proceeds. If we are unable to renew, replace or expand our sources of financing on substantially similar terms, it may have an adverse effect on our business and results of operations.

We generally seek to borrow (on a recourse basis) between six and 12 times the amount of our shareholders’ equity. At June 30, 2013 and December 31, 2012, our total borrowings were approximately $23.1 billion and $22.9 billion (excluding accrued interest), respectively, which represented a leverage ratio of approximately 9.3:1 and 7.4:1, respectively.

Inflation

Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors directly influence our performance far more than inflation. Although inflation is a primary factor in any interest rate, changes in interest rates do not necessarily correlate with changes in inflation rates, and these affects may be imperfect or lagging. Our financial statements are prepared in accordance with GAAP and any distributions we may make will be determined by our board of directors based in part on our REIT taxable income as calculated according to the requirements of the Code; in each case, our activities and balance sheet are measured with reference to fair value without considering inflation.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

We seek to manage our risks related to the credit quality of our assets, interest rates, liquidity, prepayment speeds and market value while, at the same time, seeking to provide an opportunity to shareholders to realize attractive risk-adjusted returns through ownership of our capital stock. While we do not seek to avoid risk completely, we believe the risk can be quantified from historical experience and seek 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

Interest rate risk is the primary component of our market risk. Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We will be subject to interest rate risk in connection with our investments and our related financing obligations.

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Interest Rate Effect on Net Interest Income

Our operating results depend in large part on differences between the yields earned on our investments and our cost of borrowing and hedging activities. The cost of our borrowings will generally be based on prevailing market interest rates. During periods of rising interest rates, the borrowing costs associated with agency securities tend to increase while the income earned on agency securities may remain substantially unchanged until the interest rates reset. This results in a narrowing of the net interest spread between the assets and related borrowings and may even result in losses. The severity of any such decline would depend on our asset/liability composition at the time as well as the magnitude and duration of the interest rate increase. Further, an increase in short-term interest rates could also have a negative impact on the market value of our investments. If any of these events happen, we could experience a decrease in net income or incur a net loss during these periods, which could adversely affect our liquidity and results of operations.

We seek to mitigate interest rate risk through utilization of longer term repurchase agreements and hedging instruments, primarily interest rate swap agreements. Interest rate swap agreements are intended to serve as a hedge against future interest rate increases on our variable rate borrowings. As of June 30, 2013, we had entered into interest rate swap agreements designed to mitigate the effects of increases in interest rates under $11.1 billion of our repurchase agreements.

Hedging techniques are partly based on assumed levels of prepayments of our agency securities. If prepayments are slower or faster than assumed, the life of the agency securities will be longer or shorter, which would reduce the effectiveness of any hedging strategies we may use and may cause losses on such transactions. Hedging strategies involving the use of derivative securities are highly complex and may produce volatile returns. Hedging techniques are also limited by the rules relating to REIT qualification. In order to preserve our REIT status, we may be forced to terminate a hedging transaction at a time when the transaction is most needed.

Interest Rate Cap Risk

The ARMs that underlie our agency securities are typically subject to periodic and lifetime interest rate caps and floors, which limit the amount by which the security’s interest rate may change during any given period. However, our borrowing costs pursuant to our financing agreements will not be subject to similar restrictions. Therefore, in a period of increasing interest rates, interest rate costs on our borrowings could increase without limitation, while the interest-rate increases on our adjustable-rate agency and hybrid securities could effectively be limited by caps. Agency securities backed by ARMs may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding. This could result in our receipt of less cash from such investments than we would need to pay the interest cost on our related borrowings. These factors could lower our net interest income or cause a net loss during periods of rising interest rates, which would harm our financial condition, cash flows and results of operations.

Interest Rate Mismatch Risk

We fund a substantial portion of our acquisition of agency securities with borrowings that are based on, or move similarly to, LIBOR, while the interest rates on these agency securities may be indexed to LIBOR or another index rate, such as the one-year CMT rate. Accordingly, any increase in our borrowing rate relative to LIBOR or one-year CMT rates may result in an increase in our borrowing costs that is not matched by a corresponding increase in the interest earnings on these investments. Any such interest rate index mismatch could adversely affect our profitability, which may negatively impact distributions to our shareholders. To seek to mitigate interest rate mismatches, we may utilize the hedging strategies discussed above.

Our analysis of risks is based on our manager’s experience, estimates and assumptions, including estimates of fair value and interest rate sensitivity. Actual economic conditions or implementation of investment decisions by our manager may produce results that differ significantly from our manager’s estimates and assumptions.

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Prepayment Risk

As we receive repayments of principal on our agency securities from prepayments and scheduled payments, premiums paid on such securities are amortized against interest income and discounts are accreted to interest income. Premiums arise when we acquire agency securities at prices in excess of the principal balance of the mortgage loans underlying such agency securities. Conversely, discounts arise when we acquire agency securities at prices below the principal balance of the mortgage loans underlying such agency securities. To date, substantially all of our agency securities have been purchased at a premium.

  For financial accounting purposes, interest income is accrued based on the outstanding principal balance of the investment securities and their contractual terms. In general, purchase premiums on investment securities are amortized against interest income over the lives of the securities using the effective yield method, adjusted for actual prepayment and cash flow activity. An increase in the principal repayment rate will typically accelerate the amortization of purchase premiums and a decrease in the repayment rate will typically slow the accretion of purchase discounts, thereby reducing the yield/interest income earned on such assets.

  When we receive repayments of principal on our agency securities from prepayments and scheduled payments, to maintain a similar rate of earnings per share, we may want to reinvest the proceeds from these repayments in similar yielding investments. In addition, due to standard settlement conventions, it may take time to reinvest these proceeds and leave a gap in earnings until we can find and settle on suitable investment assets. In times of market illiquidity or tight supply, we may have periods where similar types of assets are not available to replace those assets repaid to us. A decrease in earnings could be significant in periods of high prepayments.

Extension Risk

We invest in agency securities that are either fixed-rate or backed by ARMs which have interest rates that are fixed for the early years of the loan (typically three, five, or seven years) and thereafter reset periodically, on the same basis as agency securities backed by ARMs. We compute the projected weighted-average life of our agency securities based on assumptions regarding the rate at which the borrowers will prepay the underlying mortgage loans. In general, when agency securities are acquired with borrowings, we may, but are not required to, enter into an interest rate swap agreement or other hedging instrument that effectively fixes our borrowing costs for a period close to the anticipated weighted-average life of the fixed-rate portion of the related agency securities. This strategy is designed to protect us from rising interest rates by fixing our borrowing costs for the duration of the fixed-rate period of the mortgage loans underlying the related agency securities.

We may structure our interest rate hedges to expire in conjunction with the estimated weighted average life of the fixed period of the mortgage loans underlying our agency securities. However, in a rising interest rate environment, the weighted average life of the mortgage loans underlying our agency securities could extend beyond the term of the swap agreement or other hedging instrument. This is sometimes referred to as “tail risk”. This could have a negative impact on our results from operations, as borrowing costs would no longer be fixed after the term of the hedging instrument while the income earned on the remaining agency securities would remain fixed for a period of time. This situation may also cause the market value of our agency securities to decline, with little or no offsetting gain from the related hedging transactions. In extreme situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur losses.

Interest Rate Risk and Effect on Market Value Risk

Another component of interest rate risk is the effect changes in interest rates will have on the market value of our agency securities. We face the risk that the market value of our agency securities will increase or decrease at different rates than that of our liabilities, including our hedging instruments.

We primarily assess our market value interest rate risk by estimating the effective duration of our assets relative to the effective duration of our liabilities. Effective duration essentially measures the market price volatility

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of financial instruments as interest rates change. We generally estimate effective duration using various financial models and empirical data. Different models and methodologies can produce different effective duration estimates for the same securities.

The sensitivity analysis tables presented below show the estimated impact of an instantaneous parallel shift in the yield curve, up and down 50 and 100 basis points, on the market value of our interest rate-sensitive investments and net annual interest income, at June 30, 2013 and December 31, 2012, assuming a static portfolio. When evaluating the impact of changes in interest rates on net income, prepayment assumptions and principal reinvestment rates are adjusted based on our manager’s expectations. The analysis presented utilized assumptions, models and estimates of the manager based on the manager’s judgment and experience.

June 30, 2013

Change in Interest rates	Percentage Change in Projected Annual Net Interest Income	Percentage Change in Projected Portfolio Value
+ 1.00%	(12.70%)	(1.77%)
+ 0.50%	(3.65%)	(0.99%)
- 0.50%	5.05%	0.93%
- 1.00%	(3.52%)	1.27%

December 31, 2012

Change in Interest rates	Percentage Change in Projected Annual Net Interest Income	Percentage Change in Projected Portfolio Value
+ 1.00%	(5.02%)	(0.90%)
+ 0.50%	(0.37%)	(0.44%)
- 0.50%	3.86%	0.18%
- 1.00%	(7.09%)	0.33%

While the charts above reflect the estimated immediate impact of interest rate increases and decreases on a static portfolio, we rebalance our portfolio from time to time either to seek to take advantage of or reduce the impact of changes in interest rates. It is important to note that the impact of changing interest rates on market value and net interest income can change significantly when interest rates change beyond 100 basis points from current levels. Therefore, the volatility in the market value of our assets could increase significantly when interest rates change beyond amounts shown in the table above. In addition, other factors impact the market value of and net interest income from our interest rate-sensitive investments and hedging instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, interest income would likely differ from that shown above, and such difference might be material and adverse to our shareholders.

The above table quantifies the potential changes in net interest income and portfolio value, which includes the value of swaps, should interest rates immediately change. Given the low level of interest rates at June 30, 2013 and December 31, 2012, we applied a floor of 0%, for all anticipated interest rates included in our assumptions. Due to presence of this floor, it is anticipated that any hypothetical interest rate decrease would have a limited positive impact on our funding costs beyond a certain level; however, because prepayments speeds are unaffected by this floor, it is expected that any increase in our prepayment speeds (occurring as a result of any interest rate decrease or otherwise) could result in an acceleration of our premium amortization and the reinvestment of such prepaid principal in lower yielding assets. As a result, the presence of this floor limits the positive impact of any interest rate decrease on our funding costs. Therefore, at some point, hypothetical interest rate decreases could cause the fair value of our financial instruments and our net interest income to decline.

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Risk Management

To the extent consistent with maintaining our REIT status, we seek to manage our interest rate risk exposure to protect our portfolio of agency securities and related debt against the effects of major interest rate changes. We generally seek to manage our interest rate risk by:

— attempting to structure our borrowing agreements to have a range of different maturities, terms, amortizations and interest rate adjustment periods;

— using derivatives, financial futures, swaps, options, caps, floors and forward sales to adjust the interest rate sensitivity of our agency securities and our borrowings;

— actively managing, on an aggregate basis, the interest rate indices, interest rate adjustment periods, interest rate caps and gross reset margins of our agency securities and the interest rate indices and adjustment periods of our borrowings; and

— monitoring and managing, on an aggregate basis, our liquidity and leverage to maintain tolerance for market value changes.

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures to ensure that material information relating to us is made known to the officers who certify our financial reports and to the members of senior management and the board of directors.

Based on management’s evaluation as of June 30, 2013, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) are effective to ensure that the 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 within the time periods specified in SEC rules and forms.

Changes in Internal Control over Financial Reporting

There was no change to our internal control over financial reporting during the quarter ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. Other Information

Item 1.  Legal Proceedings

Our company and our manager are not currently subject to any material legal proceedings.

Item 1A. Risk Factors

There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on February  20, 2013 and our subsequent quarterly filings on Form 10-Q.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

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Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not Applicable.

Item 5.  Other Information

None.

Item 6.  Exhibits

Exhibit   Number	Description of Exhibit
10.1	First Addendum and Amendment to Restricted Stock Agreements between William H. Gibbs, Jr. and Hatteras Financial Corp. effective June 26, 2013
10.2	Consulting Agreement between William H. Gibbs, Jr. and Hatteras Financial Corp. effective June 26, 2013
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002
101.INS XBRL	Instance Document (1)
101.SCH XBRL	Taxonomy Extension Schema Document (1)
101.CAL XBRL	Taxonomy Extension Calculation Linkbase Document (1)
101.DEF XBRL	Additional Taxonomy Extension Definition Linkbase Document Created (1)
101.LAB XBRL	Taxonomy Extension Label Linkbase Document (1)
101.PRE XBRL	Taxonomy Extension Presentation Linkbase Document (1)

⁽¹⁾  Submitted electronically herewith. Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets at June 30, 2013 (Unaudited) and December 31, 2012 (Derived from the audited balance sheet at December 31, 2012); (ii) Consolidated Statements of Income (Unaudited) for the three and six months ended June 30, 2013 and 2012; (iii) Consolidated Statements of Comprehensive Income (Unaudited) for the three and six months ended June 30, 2013 and 2012; (iv) Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) for the six months ended June 30, 2013; (v) Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2013 and 2012; and (vi) Notes to the Consolidated Financial Statements (Unaudited) for the six months ended June 30, 2013.

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SIGNATURES

Pursuant to the requirements 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.

		HATTERAS FINANCIAL CORP.
Dated:    July 29, 2013	BY:	/s/ KENNETH A. STEELE
		Kenneth A. Steele
		Chief Financial Officer, Treasurer and Secretary
		(Principal Financial Officer and Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit   Number	Description of Exhibit
10.1	First Addendum and Amendment to Restricted Stock Agreements between William H. Gibbs, Jr. and Hatteras Financial Corp. effective June 26, 2013
10.2	Consulting Agreement between William H. Gibbs, Jr. and Hatteras Financial Corp. effective June 26, 2013
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002
101.INS XBRL	Instance Document (1)
101.SCH XBRL	Taxonomy Extension Schema Document (1)
101.CAL XBRL	Taxonomy Extension Calculation Linkbase Document (1)
101.DEF XBRL	Additional Taxonomy Extension Definition Linkbase Document Created (1)
101.LAB XBRL	Taxonomy Extension Label Linkbase Document (1)
PRE XBRL	Taxonomy Extension Presentation Linkbase Document (1)

⁽¹⁾ Submitted electronically herewith. Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets at June 30, 2013 (Unaudited) and December 31, 2012 (Derived from the audited balance sheet at December 31, 2012); (ii) Consolidated Statements of Income (Unaudited) for the three and six months ended June 30, 2013 and 2012; (iii) Consolidated Statements of Comprehensive Income (Unaudited) for the three and six months ended June 30, 2013 and 2012; (iv) Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) for the six months ended June 30, 2013; (v) Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2013 and 2012; and (vi) Consolidated Notes to the Financial Statements (Unaudited) for the six months ended June 30, 2013.

EX-10.1

Exhibit 10.1

FIRST ADDENDUM AND AMENDMENT TO RESTRICTED STOCK AGREEMENTS

THIS FIRST ADDENDUM AND AMENDMENT TO RESTRICTED STOCK AGREEMENTS made this 26^th day of June, 2013, by and between WILLIAM H. GIBBS, JR. (“Grantee”) and HATTERAS FINANCIAL CORP., a Maryland corporation (“Company”).

W I T N E S S E T H:

WHEREAS, Grantee and Company executed those certain Restricted Stock Agreements dated effective September 17, 2012, August 4, 2011 and July 8, 2010 (the “Restricted Stock Agreements”); and

WHEREAS, pursuant certain Membership Interest Sale Agreement of even date herewith between Gibbs and the Company’s manager, Atlantic Capital Advisors, LLC, and the Employment Agreement between such parties of the same date, Gibbs’ Service to the Company (as such term is defined in the Restricted Stock Agreement) shall cease as of September 30, 2013; and

WHEREAS, the Administrator has determined that notwithstanding the cessation of Gibbs’ Service with the Company the unvested Award Shares shall not be forfeited by reason of such cessation and shall continue to vest in accordance with the terms of the Restricted Stock Agreements, and in consideration of and on the condition precedent that Gibbs provide consulting services to the Company subsequent to the date hereof under and pursuant to the Consulting Agreement between Gibbs and the Company of even date herewith (the “Consulting Agreement”); the parties hereto have agreed to amend the Restricted Stock Agreements as set forth herein.

NOW, THEREFORE, in consideration of the premises and the mutual agreements set forth herein and upon the express condition that Gibbs shall provide consulting services to the Company as set forth in the Consulting Agreement, the parties do agree as follows:

1.    Section 2(b) of the Restricted Stock Agreements is hereby deleted in its entirety and the following is inserted in lieu thereof:

“(b) One/fifth (1/5) of the Award Shares will vest and become nonforfeitable on each anniversary of the Grant Date, such that 100% of the Award Shares will be vested and nonforfeitable on the fifth anniversary of the Grant Date.”

2.    Section 2(e) of the Restricted Stock Agreements is hereby deleted in its entirety and marked “RESERVED.”

3.     Section 3 of the Restricted Stock Agreements is hereby deleted in its entirety and marked “RESERVED.”

4.     Except as amended herein, the Restricted Stock Agreements are hereby ratified, confirmed and approved in all respects.

IN WITNESS WHEREOF, the parties hereto have executed this First Addendum and Amendment to Restricted Stock Agreements all as of the day and year first written above.

	GRANTEE:
	/s/ William H. Gibbs, Jr.
	William H. Gibbs, Jr.
	COMPANY: HATTERAS FINANCIAL CORP.
By:	/s/ Michael R. Hough
	Michael R. Hough , Its CEO

EX-10.2

Exhibit 10.2

CONSULTING AGREEMENT

THIS CONSULTING AGREEMENT, made the 26^th day of June, 2013 by and between HATTERAS FINANCIAL CORP., a Maryland corporation (hereinafter referred to as the “Hatteras Financial”) and WILLIAM H. GIBBS, JR. of 5226 Sweet Meadow Lane, Clarksville, Maryland (hereinafter referred to as “Gibbs”).

W  I  T  N  E  S  S  E  T  H:

WHEREAS, Gibbs and Hatteras Financial executed those certain Restated Stock Agreements dated effective September 17, 2012, August 4, 2011 and July 8, 2010 (the “Restricted Stock Agreements”); and

WHEREAS, pursuant to that certain Membership Interest Sale Agreement, Hatteras Financial’s manager, Atlantic Capital Advisors, LLC has purchased and redeemed Gibbs’ membership interest therein and a condition precedent to the closing of the transactions contemplated in the Membership Interest Sale Agreement is the execution of this Consulting Agreement and that certain First Addendum and Amendment to Restricted Stock Agreements of even date herewith between Hatteras Financial and Gibbs which amends the Restricted Stock Agreements to allow Gibbs to continue to vest in the unvested award shares notwithstanding the scheduled cessation of his employment with Hatteras Financial’s manager, Atlantic Capital Advisors, LLC; and

WHEREAS, Gibbs through a number of years of experience has acquired experience in portfolio management of agency backed securities within which Hatteras Financial is active; and

WHEREAS, the Hatteras Financial wishes to utilize such expertise and Gibbs is agreeable to provide consulting services as described below.

NOW THEREFORE, in consideration of Hatteras Financial agreeing to the amendment of the Restricted Stock Agreements as set forth in the recitals above allowing continued vesting by Gibbs in the unvested restricted stock pursuant to the terms of the Restricted Stock Agreements as amended, the parties agree as follows.

1. Responsibilities of Gibbs. Gibbs shall provide such consulting services relating to the portfolio management of agency backed securities business of Hatteras Financial as Gibbs and Hatteras Financial agree, at such times as reasonably requested by Hatteras Financial and agreed by Gibbs. In no event shall Gibbs be requires to provide more than 8 hours of such consulting services per week. Gibbs shall not be required to travel in the provision of the consulting services unless mutually agreed between Hatteras Financial and Gibbs provided, all expenses related to such travel as so mutually agreed shall be borne by Hatteras Financial.

2. Term. Gibbs shall render the consulting services hereunder during the three (3) year period beginning on the date of this Agreement and ending September 30, 2016, unless earlier terminated pursuant to the terms of this Agreement.

3. Consideration. Hatteras Financial shall pay to Gibbs for the services to be rendered by him hereunder during the term of this Agreement an hourly consulting fee of One Thousand Dollars ($1,000.00). The consulting fee shall be payable in monthly installments on or before the tenth (10^th) day of the month following the calendar month in which Gibbs provides services hereunder during the term of this Agreement. The monthly consulting fee shall be an amount equal to the number of hours of service so provided by Gibbs

during the calendar month multiplied by the One Thousand Dollars ($1,000.00) hourly fee. Gibbs and Hatteras Financial shall each keep detailed records of the services performed hereunder and Gibbs hours devoted thereto. Any dispute with respect to the same not resolved by the parties within ninety (90) days shall be resolved in accordance with the dispute resolution procedures set forth in Section 9 hereof.

4. Authority. Gibbs agrees to observe and comply with the rules and regulations of Hatteras Financial as adopted by Hatteras Financial’s Board of Directors.

5. Relationship Between Parties. The relationship between the parties is that of independent contractors, and no relationship as employer-employee or principal-agent is intended or should be construed by the terms hereof. As such, Gibbs shall be responsible for paying any and all costs incurred by him in the performance of his services hereunder including, but not limited to, any and all federal or state income and self-employment taxes levied upon, or by reason of, his compensation hereunder.

6. Termination of Consulting Agreement. Unless terminated in accordance with the following provisions of this Section 6, Hatteras Financial shall continue to use the consulting services of Gibbs and Gibbs shall continue to provide such consulting services to Hatteras Financial during the term of this Consulting Agreement until its expiration as set forth in Section 2 of this Agreement. Notwithstanding the foregoing, Hatteras Financial may terminate this Agreement and Gibbs’ consulting services hereunder at any time with or without reason, with or without cause upon ten (10) days prior written notice.

7. Records. Upon the expiration of this Agreement, Gibbs shall return to Hatteras Financial any and all records or documents of Hatteras Financial which may come into his possession during the course of the consulting services rendered by him hereunder unless otherwise agreed to by Hatteras Financial in writing.

8. Noncompetition. In consideration of the provisions of this Consulting Agreement and the agreement of Hatteras Financial to enter into that certain First Addendum and Amendment to Restricted Stock Agreements with Gibbs of even date herewith under which the unvested Award Shares will continue to vest, Gibbs acknowledges and agrees:

A. In recognition of the highly competitive nature of the portfolio management of agency backed securities business engaged in by Hatteras Financial, Gibbs covenants and agrees that he will not for himself, with or on behalf of any other person, firm or entity (other than for the benefit of Hatteras Financial), whether such engagement is as an officer, director, proprietor, employee, partner, investor (other than as a holder of less than one percent (1%) of the outstanding capital stock of a publicly traded corporation), consultant, advisor, independent contractor, agent, or creditor:

i. During the term of his continued employment with Hatteras Financial’s affiliate management entity Atlantic Capital Advisors, LLC (“ACA”) for a period of twelve (12) months beginning October 1, 2013 (the day after the scheduled September 30, 2013 termination date of such employment under the Employment Agreement of even date herewith between Gibbs and ACA) and ending September 30, 2014 engage, own (subject to the one percent (1%) threshold of a publicly traded corporation as set forth above), consult or participate in the portfolio management of agency backed securities business;

2

ii. During the term of his continued employment with Hatteras Financial’s affiliate management entity “ACA” and for a period of thirty-six (36) months beginning October 1, 2013 (the day after the scheduled September 30, 2013 termination date of such employment under the Employment Agreement of even date herewith between Gibbs and ACA) and ending September 30, 2016, engage, own (subject to the one percent (1%) threshold of a publicly traded corporation as set forth above), consult or participate in a residential mortgage security based real estate investment trust business;

iii. Assist others in engaging in any activity hereby prohibited to Gibbs under this Agreement;

iv. Induce employees of Hatteras Financial to engage in any activity hereby prohibited to Gibbs or to terminate their employment with Hatteras Financial;

Gibbs represents and warrants that his individual experience and capabilities are such that the provisions of this covenant not to compete will not prevent him from earning a livelihood. The parties agree that the Restrictive Period shall be tolled during any period of time Gibbs is in breach or violation of the foregoing restrictions.

B. Gibbs agrees that during Gibbs’ the period of his consulting services with Hatteras Financial and for a period of one (1) year following termination of Gibbs’ consulting services with Hatteras Financial, Gibbs will not solicit or initiate contact, or communicate with by mail, phone, text message, email, personal meeting, or by any other means, any employee of Hatteras Financial who was an employee of Hatteras Financial within the past two (2) years of Gibbs’ termination from Hatteras Financial, for the purpose of inviting, encouraging or requesting any Hatteras Financial employee to engage in any activity hereby prohibited to Gibbs or to terminate their employment with Hatteras Financial or any of its affiliates.

C. It is expressly understood and agreed that although Gibbs and Hatteras Financial consider the restrictions contained above in this Section 8 reasonable for the purpose of preserving for Hatteras Financial and its affiliate management entity ACA, their respective goodwill, proprietary rights and going business value, if a final judicial determination is made by a court having jurisdiction that the time or territory or any other restriction contained in this Section 8 is an unenforceable restriction against Gibbs, the provisions of such restrictions shall not be rendered void but shall be deemed amended to apply as such maximum time and territory and to such other extent as such court may judicially determine or indicate to be reasonable. Alternatively, if the court referred to above finds that any restriction contained in this Section 8 is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein. The provisions of this Section 8 shall in no respect limit or otherwise affect the obligations of Gibbs under other agreements with Hatteras Financial. Gibbs acknowledges that the willingness of Hatteras Financial to enter this Consulting Agreement is conditioned upon Gibbs’ execution of that certain Membership Interest Sale Agreement of even date herewith with the Hatteras Financial affiliate management entity ACA (the “Purchase Agreement”). Therefore, Hatteras Financial and Gibbs further acknowledge and agree that a violation or breach of the restrictions upon Gibbs set forth in this Section 8 shall also be deemed a violation and breach of Gibbs’ restrictions under Section 8 of the Purchase Agreement; provided, however, that notwithstanding the foregoing provisions of this sentence, if Gibbs breaches the provisions of Section 8.A.ii., above, after December 31, 2015, such breach shall not constitute a breach of Section 8 of the Purchase Agreement, ACA shall have no remedy for such breach, and Hatteras Financial’s sole and exclusive remedy shall be pursuant to Section 8.D., below.

3

D. The parties agree that in the event of any violation or breach of the provisions of this Section 8 by Gibbs, Hatteras Financial’s sole and exclusive remedy under this Consulting Agreement for such violation or breach shall be Gibbs’ forfeiture of any and all stock under the Restricted Stock Agreement of Hatteras Financial under which Gibbs is a participant as of the date of this Agreement which has not yet become non-forfeitable and fully vested as of the date of such violation or breach. To the extent any such stock has become vested under the terms of such Restricted Stock Agreements after the violation or breach by Gibbs of the provisions of this Section 8 but prior to the date Hatteras Financial has actual knowledge of such violation or breach, Gibbs shall upon demand execute all assignments, stock powers and other documents or instruments necessary to transfer and convey all rights, title and interest in and to such stock to Hatteras Financial. The parties acknowledge that such remedy is in the nature of liquidated damages, and not a penalty, and is a reasonable substitute for damages in an amount that would otherwise be difficult to determine.

9. Arbitration. The parties agree that, except as set forth herein, any controversy, claim, or dispute involving the interpretation or breach of this Agreement shall be heard in the state or federal courts sitting in Forsyth County, North Carolina, and both parties expressly consent to the personal jurisdiction and venue of the North Carolina state and federal courts for such actions.

10. Notices. Any notice or other communication required or permitted under this Consulting Agreement shall be effective only if it is in writing and delivered personally or sent by certified mail, postage prepaid, or transmitted by telegram, telex or hand delivery, addressed as follows:

If to Hatteras Financial:	Hatteras Financial Corp.
	110 Oakwood Dr., Ste. 340 Winston-Salem, NC 27103
If to Gibbs:	William H. Gibbs, Jr.
	5226 Sweet Meadow Lane Clarksville, MD 21029

or to such other address as either party may designate by notice to the other, and shall be deemed to have been given upon receipt.

11. Entire Agreement. This Consulting Agreement constitutes the entire agreement between the parties hereto with respect to subject matter hereof, and supersedes and replaces in its entirety all negotiations and memorandums of understanding regarding the subject matter hereof.

12. Amendment. This Consulting Agreement may be amended only by an instrument in writing signed by the parties hereto, and any provision hereof may be waived only by an instrument in writing signed by the party or parties against whom or which enforcement of such waiver is sought. The failure of either party hereto at any time to require the performance by the other party hereto of any provision hereof shall in no way affect the full right to require such performance at any time thereafter, nor shall the waiver by either party hereto of a breach of any provision hereof be taken or held to be a waiver of any succeeding breach of such provision or a waiver of the provision itself or a waiver of any other provision of this Consulting Agreement.

13. Assignment. This Agreement and the obligations to be performed by each party hereunder are and shall remain non-assignable and non-transferable by such party, whether by voluntary act or by operation of law without the prior written consent of the other party. In the event Hatteras Financial sells substantially all of its assets or otherwise, upon closing of such sale it shall pay all

4

remaining amounts of the unpaid consideration due hereunder to Gibbs and to the extent Gibbs after thirty (30) days prior written notice of such proposed sale provides its written consent to an assignment of this Agreement to the proposed purchaser in which case Hatteras Financial may assign this Agreement and its continuing obligations hereunder to such purchaser, provided such transfer shall be conditioned on the assumption by such purchaser of Hatteras Financial’s obligations to pay the remaining consulting consideration to Gibbs in accordance with the other terms and provisions of this Agreement.

14. Severability. The parties hereto intend all provisions of this Agreement to be enforced to the fullest extent permitted by law. Accordingly, should a court of competent jurisdiction determine that the scope of any provision is too broad to be enforced as written, the parties intend that the court should reform the provision to such narrower scope as it determines to be enforceable. If, however, any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future law, such provision shall be fully severable; this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision were never a part hereof; and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance, except to the extent such remaining provisions constitute obligations of another party to this Agreement corresponding to the unenforceable provision.

15. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina

IN WITNESS WHEREOF, the parties have executed this Consulting Agreement all as of the day and year first written above.

	HATTERAS FINANCIAL: HATTERAS FINANCIAL CORP.
By:	/s/ Michael R. Hough
	Michael R. Hough, Its Chief Executive Officer
	GIBBS:
	/s/ William H. Gibbs, Jr.
	William H. Gibbs, Jr.

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EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Michael R. Hough, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Hatteras Financial Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 29, 2013

/s/    MICHAEL R. HOUGH        

Michael R. Hough

Chairman of the Board

and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Kenneth A. Steele, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Hatteras Financial Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 29, 2013

/S/    KENNETH A. STEELE        

Kenneth A. Steele

Chief Financial Officer, Treasurer

and Secretary

EX-32.1

Exhibit 32.1

Certification Pursuant To

18 U.S.C. Section 1350,

as Adopted Pursuant to

Section 906 of The Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Hatteras Financial Corp. (the “Company”) on Form 10-Q for the period ended June 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael R. Hough, Chairman of the Board and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: July 29, 2013

/s/    MICHAEL R. HOUGH        

Michael R. Hough

Chairman of the Board

and Chief Executive Officer

EX-32.2

Exhibit 32.2

Certification Pursuant To

18 U.S.C. Section 1350,

as Adopted Pursuant to

Section 906 of The Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Hatteras Financial Corp. (the “Company”) on Form 10-Q for the period ended June 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kenneth A. Steele, Chief Financial Officer, Treasurer and Secretary of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: July 29, 2013

/S/ KENNETH A. STEELE

Kenneth A. Steele

Chief Financial Officer, Treasurer

and Secretary

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Transactions with Related Parties

6 Months Ended

Jun. 30, 2013

Transactions with Related Parties

10. Transactions with Related Parties

Management Fees

The Company is externally managed by ACA pursuant to a management agreement (the “Management Agreement”). All of the Company’s executive officers are also employees of ACA. ACA manages the Company’s day-to-day operations, subject to the direction and oversight of the Company’s board of directors which includes four independent directors. The Management Agreement expires on February 23, 2015 and is thereafter automatically renewed for an additional one-year term unless terminated under certain circumstances. ACA must be provided 180 days prior notice of any such termination and will be paid a termination fee equal to four times the average annual management fee earned by ACA during the two year period immediately preceding termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination.

Under the terms of the Management Agreement, the Company reimburses ACA for certain operating expenses of the Company that are borne by ACA. ACA is entitled to receive a management fee payable monthly in arrears in an amount equal to 1/12th of an amount determined as follows:

• for the Company’s equity up to $250 million, 1.50% (per annum) of equity; plus

• for the Company’s equity in excess of $250 million and up to $500 million, 1.10% (per annum) of equity; plus

• for the Company’s equity in excess of $500 million and up to $750 million, 0.80% (per annum) of equity; plus

• for the Company’s equity in excess of $750 million, 0.50% (per annum) of equity.

For purposes of calculating the management fee, equity is defined as the value, computed in accordance with GAAP, of shareholders’ equity, adjusted to exclude the effects of unrealized gains or losses. The following table presents amounts paid for management fee and reimbursable expenses.

	Three months ended				Six months ended
	June 30, 2013		June 30, 2012		June 30, 2013		June 30, 2012
Management Fee	$	4,557	$	3,572	$	9,434	$	10,195
Reimbursable Expenses		407		–		1,033		–
Total	$	4,964	$	3,572	$	10,467	$	10,195

None of the reimbursement payments were specifically attributable to the compensation of the Company’s executive officers. At June 30, 2013 and December 31, 2012, the Company owed ACA $2,152 and $2,120, respectively, for the management fee and reimbursable expenses, which is included in accounts payable and other liabilities.

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Consolidated Statements of Income (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Interest income:
Interest income on mortgage-backed securities	$ 115,115	$ 128,720	$ 239,356	$ 241,480
Interest income on short-term cash investments	359	441	801	773
Total interest income	115,474	129,161	240,157	242,253
Interest expense	52,079	46,169	105,356	87,278
Net interest income	63,395	82,992	134,801	154,975
Operating expenses:
Management fee	4,714	4,312	9,434	8,154
Share based compensation	627	425	1,256	854
General and administrative	1,602	1,316	2,971	2,229
Total operating expenses	6,943	6,053	13,661	11,237
Other income:
Net gain on sale of mortgage-backed securities	8,802	12,205	11,302	14,710
Net gain on futures contracts	5,485		5,536
Total other income	14,287	12,205	16,838	14,710
Net income	70,739	89,144	137,978	158,448
Dividends on preferred stock	5,480		10,960
Net income available to common shareholders	$ 65,259	$ 89,144	$ 127,018	$ 158,448
Earnings per share - common stock, basic	$ 0.66	$ 0.91	$ 1.29	$ 1.80
Earnings per share - common stock, diluted	$ 0.66	$ 0.91	$ 1.29	$ 1.80
Dividends per share of common stock	$ 0.70	$ 0.90	$ 1.40	$ 1.80
Weighted average common shares outstanding, basic	98,830,054	97,969,074	98,828,827	87,789,596
Weighted average common shares outstanding, diluted	98,830,054	97,969,074	98,828,827	87,789,596

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Financial Instruments

6 Months Ended

Jun. 30, 2013

Financial Instruments

3. Financial Instruments

The Company’s valuation techniques for financial instruments are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect the Company’s market assumptions. The ASC Topic on Fair Value Measurements classifies these inputs into the following hierarchy:

Level 1 Inputs– Quoted prices for identical instruments in active markets.

Level 2 Inputs– Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 Inputs– Instruments with primarily unobservable value drivers.

Other than the Futures Contracts, all of the Company’s agency securities and hedging assets and liabilities were valued using Level 2 inputs at June 30, 2013 and December 31, 2012. The Futures Contracts were valued using Level 1 inputs at June 30, 2013. See Notes 4 and 7, respectively for a discussion on how agency securities and hedging assets and liabilities were valued. The carrying values and fair values of all financial instruments as of June 30, 2013 and December 31, 2012 were as follows:

	June 30, 2013				December 31, 2012
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Assets
Mortgage-backed securities	$	25,256,043	$	25,256,043	$	23,919,251	$	23,919,251
Cash and cash equivalents		88,987		88,987		168,424		168,424
Restricted cash		149,210		149,210		281,021		281,021
Unsettled purchased mortgage backed securities		133,597		133,597		138,338		138,338
Receivable for securities sold		7,251		7,251		1,587,535		1,587,535
Accrued interest receivable		73,957		73,957		77,113		77,113
Principal payments receivable		199,553		199,553		190,832		190,832
Debt security		15,000		14,216		15,000		13,981
Interest rate hedge asset		25,921		25,921		-		-
Short term investment*		19,916		19,916		20,187		20,187
Forward purchase commitments*		-		-		5,452		5,452
Futures contracts*		5,587		5,587		-		-
Liabilities
Repurchase agreements	$	23,077,252	$	23,077,252	$	22,866,429	$	22,866,429
Payable for unsettled securities		136,373		136,373		137,121		137,121
Accrued interest payable		4,773		4,773		7,592		7,592
Interest rate hedge liability		157,869		157,869		243,945		243,945
Forward purchase commitments**		43,724		43,724		-		-

*These lines are included in Other assets on the balance sheets

**This line included in accounts payable and other liabilities on the balance sheets.

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Earnings per Share (Tables)

6 Months Ended

Jun. 30, 2013

Earnings Per Share

	For the three months ended				For the six months ended
	June 30, 2013		June 30, 2012		June 30, 2013		June 30, 2012
Basic earnings per share:
Net income	$	70,739	$	89,144	$	137,978	$	158,448
Less preferred stock dividends		5,480		—		10,960		—
Net income available to common shareholders	$	65,259	$	89,144	$	127,018	$	158,448
Weighted average shares		98,830,054		97,969,074		98,828,827		87,789,596
Basic earnings per share	$	0.66	$	0.91	$	1.29	$	1.80
Diluted earnings per share:
Net income	$	70,739	$	89,144	$	137,978	$	158,448
Less preferred stock dividends for antidilutive shares		5,480		—		10,960		—
Net income available to common shareholders	$	65,259	$	89,144	$	127,018	$	158,448
Diluted weighted average shares		98,830,054		97,969,074		98,828,827		87,789,596
Diluted earnings per share	$	0.66	$	0.91	$	1.29	$	1.80

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Accumulated Other Comprehensive Income (Loss)

6 Months Ended

Jun. 30, 2013

Accumulated Other Comprehensive Income (Loss)

11. Accumulated Other Comprehensive Income (Loss)

The following table shows reclassifications in accumulated other comprehensive income (loss) for the three months ended June 30, 2013:

	Unrealized       gain/(loss) on       available for       sale agency       securities		Unrealized gain/(loss) on unsettled agency securities		Unrealized gain/(loss) on other investments		Unrealized gain/(loss) on derivative instruments		Total
Beginning balance accumulated other comprehensive income (loss) at 4/01/13	$	481,323	$	492	$	(214)	$	(212,553)	$	269,048
Other comprehensive income (loss) before reclassification		(615,199)		(2,776)		(291)		13,569		(604,697)
Balance Sheet Reclassification:
Amount reclassified to mortgage-backed securities available for sale		-		(492)		-		(6,476)		(6,968)
Income Statement Reclassification:
Amounts reclassified to net gain on the sale of mortgage-backed securities		(8,802)		-		-				(8,802)
Amounts reclassified to interest expense								30,586		30,586
Net current period other comprehensive income (loss)		(624,001)		(3,268)		(291)		37,679		(589,881)
Ending balance accumulated other comprehensive income (loss) at 6/30/13	$	(142,678)	$	(2,776)	$	(505)	$	(174,874)	$	(320,833)
The following table shows reclassifications in accumulated other comprehensive income for the six months ended June 30, 2013:
	Unrealized       gain/(loss) on       available for       sale agency       securities		Unrealized gain/(loss) on unsettled agency securities		Unrealized gain/(loss) on other investments		Unrealized gain/(loss) on derivative instruments		Total
Beginning balance accumulated other comprehensive income (loss) at 1/01/13	$	499,343	$	1,217	$	(107)	$	(237,599)	$	262,854
Other comprehensive income (loss) before reclassification		(630,719)		(2,284)		(398)		14,138		(619,263)
Balance Sheet Reclassification:
Amount reclassified to mortgage-backed securities available for sale		-		(1,709)		-		(11,928)		(13,637)
Income Statement Reclassification:
Amounts reclassified to net gain on the sale of mortgage-backed securities		(11,302)		-		-				(11,302)
Amounts reclassified to interest expense								60,515		60,515
Net current period other comprehensive income (loss)		(642,021)		(3,993)		(398)		62,725		(583,687)
Ending balance accumulated other comprehensive income (loss) at 6/30/13	$	(142,678)	$	(2,776)	$	(505)	$	(174,874)	$	(320,833)

The Company records unrealized gains and losses on its agency securities and swap positions as is described in Notes 4 and 7, respectively.

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Transactions with Related Parties - Additional Information (Detail) (USD $)	6 Months Ended
	Jun. 30, 2013 Y Person	Dec. 31, 2012
Related Party Transaction [Line Items]
Number of independent directors	4
Management agreement initial expiration date	February 23, 2015
Management agreement additional term of expiration (in years)	1
Prior notice for uncertain termination (in days)	180 days
Proportion of average annual management fee	4
Period of annual management fees earned (in years)	2
Management fee payable	$ 2,152,000	$ 2,120,000
Company's Equity Up To $250 Million
Related Party Transaction [Line Items]
Management fee bases per annum	1.50%
Company's Equity Up To $250 Million | Maximum
Related Party Transaction [Line Items]
Management fee payable	250,000,000
Company's Equity In Excess Of $250 Million And Up To $500 Million
Related Party Transaction [Line Items]
Management fee bases per annum	1.10%
Company's Equity In Excess Of $250 Million And Up To $500 Million | Maximum
Related Party Transaction [Line Items]
Management fee payable	500,000,000
Company's Equity In Excess Of $250 Million And Up To $500 Million | Minimum
Related Party Transaction [Line Items]
Management fee payable	250,000,000
Company's Equity In Excess Of $500 Million And Up To $750 Million
Related Party Transaction [Line Items]
Management fee bases per annum	0.80%
Company's Equity In Excess Of $500 Million And Up To $750 Million | Maximum
Related Party Transaction [Line Items]
Management fee payable	750,000,000
Company's Equity In Excess Of $500 Million And Up To $750 Million | Minimum
Related Party Transaction [Line Items]
Management fee payable	500,000,000
Company's Equity In Excess Of $750
Related Party Transaction [Line Items]
Management fee bases per annum	0.50%
Company's Equity In Excess Of $750 | Minimum
Related Party Transaction [Line Items]
Management fee payable	$ 750,000,000

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Repurchase Agreements - Additional Information (Detail) (USD $) In Thousands, unless otherwise specified	6 Months Ended	12 Months Ended
	Jun. 30, 2013 Person	Dec. 31, 2012 Person
Repurchase Agreement Counterparty [Line Items]
Number of counterparties in repurchase agreements	25	24
Weighted average contractual maturity of the repurchase agreements outstanding (in months)	24 days	24 days
Repurchase agreement amount	$ 23,077,252	$ 22,866,429
Weighted Average Contractual Rate	0.37%	0.47%
Fair value of assets pledged as collateral under repurchase agreements	$ 24,216,775	$ 24,268,949

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Organization and Business Description - Additional Information (Detail)	6 Months Ended
	Jun. 30, 2013
Organization And Summary Of Significant Accounting Policies [Line Items]
Distributions from taxable income	100.00%

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Accumulated Other Comprehensive Income (Loss) (Tables)

6 Months Ended

Jun. 30, 2013

Components of Accumulated Other Comprehensive Income (Loss)

The following table shows reclassifications in accumulated other comprehensive income (loss) for the three months ended June 30, 2013:

	Unrealized       gain/(loss) on       available for       sale agency       securities		Unrealized gain/(loss) on unsettled agency securities		Unrealized gain/(loss) on other investments		Unrealized gain/(loss) on derivative instruments		Total
Beginning balance accumulated other comprehensive income (loss) at 4/01/13	$	481,323	$	492	$	(214)	$	(212,553)	$	269,048
Other comprehensive income (loss) before reclassification		(615,199)		(2,776)		(291)		13,569		(604,697)
Balance Sheet Reclassification:
Amount reclassified to mortgage-backed securities available for sale		-		(492)		-		(6,476)		(6,968)
Income Statement Reclassification:
Amounts reclassified to net gain on the sale of mortgage-backed securities		(8,802)		-		-				(8,802)
Amounts reclassified to interest expense								30,586		30,586
Net current period other comprehensive income (loss)		(624,001)		(3,268)		(291)		37,679		(589,881)
Ending balance accumulated other comprehensive income (loss) at 6/30/13	$	(142,678)	$	(2,776)	$	(505)	$	(174,874)	$	(320,833)
The following table shows reclassifications in accumulated other comprehensive income for the six months ended June 30, 2013:
	Unrealized       gain/(loss) on       available for       sale agency       securities		Unrealized gain/(loss) on unsettled agency securities		Unrealized gain/(loss) on other investments		Unrealized gain/(loss) on derivative instruments		Total
Beginning balance accumulated other comprehensive income (loss) at 1/01/13	$	499,343	$	1,217	$	(107)	$	(237,599)	$	262,854
Other comprehensive income (loss) before reclassification		(630,719)		(2,284)		(398)		14,138		(619,263)
Balance Sheet Reclassification:
Amount reclassified to mortgage-backed securities available for sale		-		(1,709)		-		(11,928)		(13,637)
Income Statement Reclassification:
Amounts reclassified to net gain on the sale of mortgage-backed securities		(11,302)		-		-				(11,302)
Amounts reclassified to interest expense								60,515		60,515
Net current period other comprehensive income (loss)		(642,021)		(3,993)		(398)		62,725		(583,687)
Ending balance accumulated other comprehensive income (loss) at 6/30/13	$	(142,678)	$	(2,776)	$	(505)	$	(174,874)	$	(320,833)

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Capital Stock - Additional Information (Detail)	Jun. 18, 2013 Maximum	Jun. 30, 2013 2012 Program
Class of Stock [Line Items]
Common stock available for sale		10,000,000
Common stock share authorized to repurchase	10,000,000

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Mortgage-Backed Securities - Additional Information (Detail) (USD $) In Thousands, unless otherwise specified			6 Months Ended
	Jun. 30, 2013 Other Forward Purchase Commitments	Dec. 31, 2012 Other Forward Purchase Commitments	Jun. 30, 2013 Minimum	Jun. 30, 2013 Maximum
Investments Classified by Contractual Maturity Date [Line Items]
Contractual maturity of Company's agency securities, in years			15 years	30 years
Derivatives	$ 13,458	$ 3,305

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Schedule of Location of Derivatives on Balance Sheet (Detail) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Derivative [Line Items]
Interest rate swaps - Asset Derivatives found in Interest rate hedge asset	$ 25,921
Forward purchase commitments - Asset Derivatives found in Other Assets		5,452
Futures contracts - Asset Derivatives found in Other Assets	5,587
Interest rate swaps - Asset Derivatives found in Interest rate hedge liability	157,869	243,945
Forward purchase commitments found in Account payable and other liabilities	$ 43,724

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Amounts Paid for Management Fee and Reimbursable Expenses (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Related Party Transaction [Line Items]
Management Fee	$ 4,557	$ 3,572	$ 9,434	$ 10,195
Reimbursable Expenses	407		1,033
Total	$ 4,964	$ 3,572	$ 10,467	$ 10,195

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Components of Carrying Value of Available-For-Sale Agency Securities (Detail) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Schedule of Available-for-sale Securities [Line Items]
Principal balance	$ 24,662,486	$ 22,771,731
Unamortized premium	736,237	648,181
Unamortized discount	(2)	(4)
Gross unrealized gains	200,412	499,464
Gross unrealized losses	(343,090)	(121)
Carrying value/estimated fair value	$ 25,256,043	$ 23,919,251

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Gross Amounts Associated With Derivative Financial Instruments (Detail) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Interest Rate Swap
Derivative [Line Items]
Assets	$ 25,921
Assets, Net Amount	25,921
Liabilities	157,869	243,945
Liabilities, Cash Collateral Posted	144,348	281,021
Liabilities, Net Amount	13,521	(37,076)
Futures Contracts
Derivative [Line Items]
Assets	5,587
Assets, Cash Collateral Posted	4,862
Assets, Net Amount	10,449
Forward Purchase Commitments
Derivative [Line Items]
Assets		5,452
Assets, Net Amount		$ 5,452

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Transactions with Related Parties (Tables)

6 Months Ended

Jun. 30, 2013

Amounts Paid for Management Fee and Reimbursable Expenses

The following table presents amounts paid for management fee and reimbursable expenses.

	Three months ended				Six months ended
	June 30, 2013		June 30, 2012		June 30, 2013		June 30, 2012
Management Fee	$	4,557	$	3,572	$	9,434	$	10,195
Reimbursable Expenses		407		–		1,033		–
Total	$	4,964	$	3,572	$	10,467	$	10,195

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Consolidated Statement of Changes in Shareholders' Equity (USD $) In Thousands	Total	7.625% Series A Cumulative Redeemable Preferred Stock	Common Stock Amount	Additional Paid-in Capital	Retained Earnings	Accumulated Other Comprehensive Income (Loss)
Balance at Dec. 31, 2012	$ 3,072,864	$ 278,252	$ 99	$ 2,494,303	$ 37,356	$ 262,854
Issuance of stock
Issuance of stock
Share based compensation expense	1,256			1,256
Dividends declared on common stock	(138,362)				(138,362)
Dividends declared on preferred stock	(10,960)				(10,960)
Net income	137,978				137,978
Other comprehensive loss	(583,687)					(583,687)
Balance at Jun. 30, 2013	$ 2,479,089	$ 278,252	$ 99	$ 2,495,559	$ 26,012	$ (320,833)

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Organization and Business Description

6 Months Ended

Jun. 30, 2013

Organization and Business Description

1. Organization and Business Description

Hatteras Financial Corp. (the “Company”) was incorporated in Maryland on September 19, 2007. The Company was formed to invest in residential mortgage-backed securities (“MBS”), issued or guaranteed by the U.S. Government or U.S. Government sponsored agencies such as the Government National Mortgage Association (“Ginnie Mae”), the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (“agency securities”). The Company has a newly formed wholly owned subsidiary Diamond Shoals Funding LLC, a North Carolina limited liability company that currently has no business activity. The Company is externally managed by Atlantic Capital Advisors LLC (“ACA”).

The Company has elected to be taxed as a real estate investment trust (“REIT”). As a result, the Company does not pay federal income taxes on taxable income distributed to shareholders if certain REIT qualification tests are met. It is the Company’s policy to distribute 100% of its taxable income, after application of available tax attributes, within the time limits prescribed by the Internal Revenue Code of 1986, as amended (the “Code”), which may extend into the subsequent taxable year.

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Mortgage-Backed Securities

6 Months Ended

Jun. 30, 2013

Mortgage-Backed Securities

4. Mortgage-Backed Securities

All of the Company’s agency securities were classified as available-for-sale and, as such, are reported at their estimated fair value. The agency securities market is primarily an over-the-counter market. As such, there are no standard, public market quotations or published trading data for individual agency securities. The Company estimates the fair value of the Company’s agency securities based on a market approach obtaining values for its securities primarily from third-party pricing services and dealer quotes. To ensure the Company’s fair value determinations are consistent with the ASC Topic on Fair Value Measurements and Disclosures, the Company regularly reviews the prices obtained and the methods used to derive those prices. The Company evaluates the pricing information it receives taking into account factors such as coupon, prepayment experience, fixed/adjustable rate, annual and life caps, coupon index, time to next reset and issuing agency, among other factors to ensure that estimated fair values are appropriate. The Company reviews the methods and inputs used by providers of pricing data to determine that the fair value of its assets and liabilities are properly classified in the fair value hierarchy.

The third-party pricing services gather trade data and use pricing models that incorporate such factors as coupons, primary mortgage rates, prepayment speeds, spread to the U.S. Treasury and interest rate swap curves, periodic and life caps and other similar factors. Traders at broker-dealers function as market-makers for these securities, and these brokers have a direct view of the trading activity. Brokers do not receive compensation for providing pricing information to the Company. The broker prices received are non-binding offers to trade. The brokers receive data from traders that participate in the active markets for these securities and directly observe numerous trades of securities similar to the securities owned by the Company. The Company’s analysis of fair value for these includes comparing the data received to other information, if available, such as repurchase agreement pricing or internal pricing models.

If the fair value of a security is not available using the Level 2 inputs as described above, or such data appears unreliable, the Company may estimate the fair value of the security using a variety of methods including, but not limited to, other independent pricing services, repurchase agreement pricing, discounted cash flow analysis, matrix pricing, option adjusted spread models and other fundamental analysis of observable market factors. At June 30, 2013, all of the Company’s agency securities values were based on third-party sources.

The Company’s investment portfolio consists solely of agency securities, which are backed by a U.S. Government agency or a U.S. Government sponsored entity. The following table presents certain information about the Company’s agency securities at June 30, 2013.

	Agency
	Securities		Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Loss		Gain		Fair Value
Agency Securities
Fannie Mae Certificates
ARMS	$	14,043,290	$	(147,577)	$	153,385	$	14,049,098
Fixed Rate		2,127,131		(60,120)		-		2,067,011
Total Fannie Mae		16,170,421		(207,697)		153,385		16,116,109
Freddie Mac Certificates
ARMS		8,513,715		(115,264)		47,027		8,445,478
Fixed Rate		714,585		(20,129)		-		694,456
Total Freddie Mac		9,228,300		(135,393)		47,027		9,139,934
Total Agency Securities	$	25,398,721	$	(343,090)	$	200,412	$	25,256,043
The following table presents certain information about the Company’s agency securities at December 31, 2012.
	Agency
	Securities		Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Loss		Gain		Fair Value
Agency Securities
Fannie Mae Certificates
ARMS	$	14,081,259	$	(100)	$	329,780	$	14,410,939
Fixed Rate		743,299				9,296		752,595
Total Fannie Mae		14,824,558		(100)		339,076		15,163,534
Freddie Mac Certificates
ARMS		7,850,630		(21)		149,114		7,999,723
Fixed Rate		744,720		-		11,274		755,994
Total Freddie Mac		8,595,350		(21)		160,388	$	8,755,717
Total Agency Securities	$	23,419,908	$	(121)	$	499,464	$	23,919,251

The components of the carrying value of available-for-sale agency securities at June 30, 2013 and December 31, 2012 are presented below.

	June 30, 2013		December 31, 2012
Principal balance		$24,662,486		$22,771,731
Unamortized premium		736,237		648,181
Unamortized discount		(2)		(4)
Gross unrealized gains		200,412		499,464
Gross unrealized losses		(343,090)		(121)
Carrying value/estimated fair value	$	25,256,043	$	23,919,251

The Company monitors the performance and market value of its agency securities portfolio on an ongoing basis. At June 30, 2013 and December 31, 2012, the Company had the following securities in a loss position presented below:

	Less than 12 months				Less than 12 months
	as of June 30, 2013				as of December 31, 2012
	Fair Market		Unrealized		Fair Market		Unrealized
	Value		Loss		Value		Loss
Fannie Mae Certificates
ARMS		$        7,100,520		$    (147,577)		$        149,954		$            (100)
Fixed Rate		2,067,011		(60,120)		-		-
Freddie Mac Certificates
ARMS		5,775,068		(115,264)		41,625		(21)
Fixed Rate		694,456		(20,129)		-		-
Total temporarily impaired securities		$15,637,055		$    (343,090)		$191,580		$            (121)

The Company did not make the decision to sell the above securities as of June 30, 2013 and December 31, 2012, nor was it deemed more likely than not the Company would be required to sell these securities before recovery of their amortized cost basis.

The following table presents components of interest income on the Company’s agency securities portfolio for the three months and six months ended June 30, 2013 and 2012:

	Three Months Ended				Six Months Ended
	June 30, 2013		June 30, 2012		June 30, 2013		June 30, 2012
Coupon interest on MBS		$163,964		$164,652		$331,397		$306,954
Net premium amortization		(48,849)		(35,932)		(92,041)		(65,474)
Interest income on MBS, net		$115,115		$128,720		$239,356		$241,480

The contractual maturity of the Company’s agency securities ranges from 15 to 30 years. Because of prepayments on the underlying mortgage loans, the actual weighted-average maturity is expected to be significantly less than the stated maturity.

Unsettled Agency Securities Purchases

While most of the Company’s purchases of agency securities are accounted for using trade date accounting, some forward purchases, such as certain TBA’s do not qualify for trade date accounting and are considered derivatives for financial statement purposes. Pursuant to ASC 815, the Company accounts for these derivatives as all-in-one cash flow hedges. The net fair value of the forward commitment is reported on the balance sheet as an asset (or liability), with a corresponding unrealized gain (or loss) recognized in other comprehensive income. The following tables show the agency securities forward purchase commitments shown as a net liability in accounts payable and other liabilities on the balance sheets as of June 30, 2013 and shown as a net asset in other assets on the balance sheets as of December 31, 2012.

					Fair Market		Due to		Net
	Face		Cost		Value		Brokers (1)		Liability
June 30, 2013		$876,000		$906,063		$875,797		$906,063		$30,266
					Fair Market		Due to		Net
	Face		Cost		Value		Brokers (1)		Asset
December 31, 2012		$565,000		$585,100		$587,247		$585,100		$2,147

(1) Amounts due to brokers are usually settled within 30-90 days after period end.

Since the Company purchases forward for the purposes of holding the securities for investment, the Company considers all its agency securities, settled or unsettled, as part of its portfolio for the purposes of cash flow and interest rate sensitivity, and consequently hedging, duration measurement, and other related investment management activity.

At June 30, 2013 and December 31, 2012, the Company also had other forward purchase commitments treated as a derivatives liability in the amount of $13,458 and a derivative asset in the amount of $3,305, respectively.

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Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2013

Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2013. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2012.

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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates affecting the accompanying consolidated financial statements include the valuation of agency securities and derivative instruments.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Diamond Shoals Funding LLC. The Company also considers the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 810 on Consolidation in determining whether consolidation is appropriate for any interests held in variable interest entities. All significant intercompany balances and transactions have been eliminated.

Financial Instruments

The Company considers its cash and cash equivalents, restricted cash, agency securities (settled and unsettled), forward purchase commitments, debt security held to maturity, receivable for securities sold, accrued interest receivable, principal payment receivable, payable for unsettled securities, derivative instruments, repurchase agreements and accrued interest payable to meet the definition of financial instruments. The carrying amount of cash and cash equivalents, restricted cash, receivable for securities sold, accrued interest receivable and payable for unsettled securities approximate their fair value due to the short maturities of these instruments and are valued using Level 1 inputs. The carrying amount of repurchase agreements is deemed to approximate fair value since the agreements are based upon a variable rate of interest and are valued using Level 2 inputs. See Note 4 for discussion of the fair value of agency securities and forward purchase commitments. See Note 5 for discussion of the fair value of the held to maturity debt security. See Note 7 for discussion of the fair value of derivative instruments.

The Company limits its exposure to credit losses on its portfolio of securities by purchasing agency securities. The portfolio is diversified to avoid undue exposure to loan originator, geographic and other types of concentration. The Company manages the risk of prepayments of the underlying mortgages by creating a diversified portfolio with a variety of expected prepayment characteristics. See Note 4 for additional information on MBS.

The Company is engaged in various trading and brokerage activities including repurchase agreements, interest rate swap agreements, and futures contracts in which counterparties primarily include broker-dealers, banks, and other financial institutions. In the event counterparties do not fulfill their obligations, the Company may be exposed to risk of loss. The risk of default depends on the creditworthiness of the counterparty and/or issuer of the instrument. It is the Company’s policy to review, as necessary, the credit standing for each counterparty. See Note 6 for additional information on repurchase agreements and Note 7 for additional information on interest rate swap agreements.

Mortgage-Backed Securities

The Company invests in agency securities representing interests in or obligations backed by pools of single-family residential mortgage loans. Guidance under the FASB ASC Topic 820 on Investments requires the Company to classify its investments as either trading, available-for-sale or held-to-maturity securities. Management determines the appropriate classifications of the securities at the time they are acquired and evaluates the appropriateness of such classifications at each balance sheet date. The Company currently classifies all of its agency securities as available-for-sale. All assets that are classified as available-for-sale are carried at fair value and unrealized gains and losses are included in other comprehensive income. The estimated fair values of agency securities are determined by management by obtaining valuations for its agency securities from independent sources and averaging these valuations. Security purchase and sale transactions are recorded on the trade date. Gains or losses realized from the sale of securities are included in income and are determined using the specific identification method. Firm purchase commitments to acquire “when issued” or to-be-announced (“TBA”) securities are recorded at fair value in accordance with ASC Topic 815, Derivatives and Hedging (“ASC 815”). The fair value of these purchase commitments is included in other assets or liabilities in the accompanying balance sheets.

The Company assesses its investment securities for other-than-temporary impairment on at least a quarterly basis. When the fair value of an investment is less than its amortized cost at the balance sheet date the impairment is designated as either “temporary” or “other-than-temporary.” In deciding whether or not a security is other-than-temporarily impaired, the Company uses a two step evaluation process. First, the Company determines whether it has made any decision to sell a security that is in an unrealized loss position, or, if not, the Company determines whether it is more likely than not that the Company will be required to sell the security prior to recovering its amortized cost basis. If the answer to either of these questions is “yes” then the security is considered other-than-temporarily impaired. There were no such impairment losses recognized during the periods presented.

Repurchase Agreements

The Company finances the acquisition of its agency securities through the use of repurchase agreements. Under these repurchase agreements, the Company sells securities to a lender and agrees 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 the Company receives and the repurchase price that the Company pays represents interest paid to the lender. Although structured as a sale and repurchase obligation, a repurchase agreement operates as a financing under which the Company pledges its securities as collateral to secure a loan which is equal in value to a specified percentage of the estimated fair value of the pledged collateral. The Company retains beneficial ownership of the pledged collateral. At the maturity of a repurchase agreement, the Company is required to repay the loan and concurrently receives back its pledged collateral from the lender or, with the consent of the lender, the Company may renew such agreement at the then prevailing financing rate. These repurchase agreements may require the Company to pledge additional assets to the lender in the event the estimated fair value of the existing pledged collateral declines.

Derivative Instruments

The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding. The objectives of our risk management strategy are 1) to attempt to mitigate the risk of the cost of our variable rate liabilities increasing during a period of rising interest rates, and 2) to reduce fluctuations in net book value over a range of interest rate scenarios. The principal instruments that we use are interest rate swaps. We also purchase or sell Euro Dollar Futures Contracts (“Futures Contracts”) to replicate the hedging results achieved with interest rate swaps. We do not enter any of these transactions for speculative purposes.

The Company accounts for derivative instruments in accordance with ASC 815, which requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet and to measure those instruments at fair value. The accounting for changes in the fair value of derivative instruments depends on whether the instruments are designated and qualify as part of a hedging relationship pursuant to ASC 815. Changes in fair value related to derivatives not in hedge designated relationships are recorded in gain (loss) on derivative instruments whereas changes in fair value related to derivatives in hedge designated relationships are initially recorded in other comprehensive income and later reclassified to income at the time that the hedged transactions affect earnings. Any portion of the changes in fair value due to hedge ineffectiveness is immediately recognized in the income statement in interest expense.

Derivative instruments in a gain position are reported as derivative assets at fair value and derivative instruments in a loss position are reported as derivative liabilities at fair value in the Company’s consolidated balance sheets. In the Company’s consolidated statements of cash flows, cash receipts and payments related to derivative instruments are classified according to the underlying nature or purpose of the derivative transaction, generally in the operating section for the Company’s derivatives. The use of derivatives creates exposure to credit risk relating to potential losses that could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. The Company attempts to minimize this risk by limiting our counterparties to major financial institutions with acceptable credit ratings, monitoring positions with individual counterparties and adjusting posted collateral as required.

Offsetting of Assets and Liabilities

The Company’s derivative agreements and repurchase agreements generally contain provisions that allow for netting or the offsetting of receivables and payables with each counterparty. The Company reports amounts in our consolidated balance sheets on a gross basis without regard for such rights of offset or master netting arrangements.

Interest Income

Interest income is earned and recognized based on the outstanding principal amount of the investment securities and their contractual terms. Premiums and discounts associated with the purchase of the investment securities are amortized or accreted into interest income over the actual lives of the securities using the effective interest method.

Income Taxes

The Company has elected to be taxed as a REIT under the Code. The Company will generally not be subject to Federal income tax to the extent that it distributes 100% of its taxable income, after application of available tax attributes, within the time limits prescribed by the Code and as long as it satisfies the ongoing REIT requirements including meeting certain asset, income and stock ownership tests.

Share-Based Compensation

Share-based compensation is accounted for under the guidance included in the ASC Topic on stock compensation. For share and share-based awards issued to employees, a compensation charge is recorded in earnings based on the fair value of the award. For transactions with non-employees in which services are performed in exchange for the Company’s common stock or other equity instruments, the transactions are recorded on the basis of the fair value of the service received or the fair value of the equity instruments issued, whichever is more readily measurable at the date of issuance. The Company’s share-based compensation transactions resulted in compensation expense of $627 and $425 for the three months ended June 30, 2013 and 2012, respectively. The Company’s share-based compensation transactions resulted in compensation expense of $1,256 and $854 for the six months ended June 30, 2013 and 2012, respectively.

Earnings Per Common Share (EPS)

Basic EPS is computed by dividing net income less preferred stock dividends to arrive at net income available to holders of common stock by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed using the two class method, as described in the ASC Topic on Earnings Per Share, which takes into account certain adjustments related to participating securities. Participating securities are unvested share-based awards that contain rights to receive nonforfeitable dividends, such as those awarded under the Company’s equity incentive plan. Net income available to holders of common stock after deducting dividends on unvested participating securities if antidilutive, is divided by the weighted average shares of common stock and common equivalent shares outstanding during the period. For the diluted EPS calculation, common equivalent shares outstanding includes the weighted average number of shares of common stock outstanding adjusted for the effect of dilutive unexercised stock options.

Recent Accounting Pronouncements

In October 2011, the FASB issued a proposed Accounting Standards Update (“ASU”) ASU 2011-20, Financial Services-Investment Companies: Amendments to the Scope, Measurement, and Disclosure Requirements (“ASU 2011-20”), which would amend the criteria in ASC Topic 946 on Investment Companies (“ASC 946”) for determining whether an entity qualifies as an investment company. As proposed, ASU 2011-20 would affect the measurement, presentation and disclosure requirements for Investment Companies, as defined, amend the investment company definition in ASC 946, and remove the current exemption for real estate investment trusts from this topic, which may have resulted in a material modification to the presentation of the Company’s financial statements. In June 2013, the FASB released ASU 2013-08 Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements that set forth new guidance on determining whether a company is subject to investment company accounting. These final rules maintained the scope exemption for real estate investment trusts.

In December 2011, the FASB released ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. Under this update, the Company is required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and transactions subject to an agreement similar to a master netting arrangement. The scope includes derivatives, sale and repurchase agreements and securities borrowing and securities lending arrangements. This disclosure is intended to enable financial statement users to understand the effect of such arrangements on the Company’s financial position. The objective of this update is to support further convergence between U.S. GAAP and International Financial Reporting Standards (“IFRS”). In January 2013, the FASB released ASU 2013-01 Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. Under this update, the FASB limited the scope of ASU 2011-11 to items identified in the implementation guidance which include derivatives, sale and repurchase agreements and securities borrowing and securities lending arrangements that are either offset on the balance sheet or subject to an enforceable master netting agreement. This disclosure was adopted and the adoption of this update did not have a material effect on the Company’s consolidated financial statements.

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income. Under this update, enhanced disclosures are required for items reclassified out of accumulated other comprehensive income. This update is effective for the first interim or annual period beginning on or after December 15, 2012. The disclosure was adopted and the adoption of this update did not have a material effect on the Company’s consolidated financial statements.

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Derivatives and other Hedging Instruments - Additional Information (Detail) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Derivative [Line Items]
Ineffective losses recorded on a current basis in earnings	$ 212,000	$ (169,000)	$ 96,000	$ (338,000)
Estimated amount related to derivatives reclassified to interest expense during the next 12 months			113,831,000
Future cash flows for forecasted transactions, average period in months			28 months
Gain recognized due to change in fair value of contracts	5,485,000		5,536,000
Derivative, description of terms	The Company's total Futures Contracts designed to replicate interest rate swaps had a notional equivalent amount of $800.0 million at June 30, 2013 with a weighted average swap equivalent rate of 1.35% and a weighted average term of 56 months as of June 30, 2013.
Maximum leverage ratio the Company can reach before it could be in default of one of its derivative obligations			10 to 1
Eurodollar Futures Contracts
Derivative [Line Items]
Future cash flows for forecasted transactions, average period in months			56 months
Futures contracts - Asset Derivatives found in Other Assets	5,587,000		5,587,000
Weighted average swap equivalent rate	1.35%		1.35%
Fair value of derivatives in net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to agreements	0		0
Eurodollar Futures Contracts | Foreign exchange future
Derivative [Line Items]
Futures contracts notional amount	800,000		800,000
Reclassification out of accumulated other comprehensive income | Accumulated net gain (loss) from designated or qualifying cash flow hedges
Derivative [Line Items]
Effective hedge losses reclassified into earnings	$ 57,294,000	$ (59,168,000)	$ 51,385,000	$ (87,591,000)

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Summary of Significant Accounting Policies - Additional Information (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Significant Accounting Policies [Line Items]
Impairment losses recognized during the period			$ 0
Distributes from taxable income			100.00%
Share-based compensation expense	$ 627	$ 425	$ 1,256	$ 854

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Schedule of Agency Securities in Unrealized Loss Position (Detail) (USD $) In Thousands, unless otherwise specified	6 Months Ended	12 Months Ended
	Jun. 30, 2013	Dec. 31, 2012
Investments, Unrealized Loss Position [Line Items]
Fair Market Value - Less than 12 months	$ 15,637,055	$ 191,580
Unrealized Loss - Less than 12 months	(343,090)	(121)
Fannie Mae Certificates, ARMs
Investments, Unrealized Loss Position [Line Items]
Fair Market Value - Less than 12 months	7,100,520	149,954
Unrealized Loss - Less than 12 months	(147,577)	(100)
Fannie Mae Certificates, Fixed Rate
Investments, Unrealized Loss Position [Line Items]
Fair Market Value - Less than 12 months	2,067,011
Unrealized Loss - Less than 12 months	(60,120)
Freddie Mac Certificates, ARMs
Investments, Unrealized Loss Position [Line Items]
Fair Market Value - Less than 12 months	5,775,068	41,625
Unrealized Loss - Less than 12 months	(115,264)	(21)
Freddie Mac Certificates, Fixed Rate
Investments, Unrealized Loss Position [Line Items]
Fair Market Value - Less than 12 months	694,456
Unrealized Loss - Less than 12 months	$ (20,129)

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Debt Security Held To Maturity - Additional Information (Detail) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2013	Dec. 31, 2012
Schedule of Held-to-maturity Securities [Line Items]
Debt security, held to maturity, at cost	$ 15,000	$ 15,000
Maturity date	Oct. 31, 2016
Debt security bears interest at the rate	The debt security pays interest quarterly at the rate of 4.0% above the three-month London Interbank Offered Rate ("LIBOR").
Debt security, held to maturity, fair value	$ 14,216
Debt security, held to maturity, stated interest rate	4.00%

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Accumulated Other Comprehensive Income (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning balance accumulated other comprehensive income	$ 269,048		$ 262,854
Other comprehensive income (loss) before reclassification	(604,697)		(619,263)
Amount reclassified to mortgage-backed securities available for sale	(6,968)		(13,637)
Amounts reclassified to net gain on the sale of mortgage-backed securities	(8,802)		(11,302)
Amounts reclassified to interest expense	30,586		60,515
Net current period other comprehensive income (loss)	(589,881)	13,253	(583,687)	40,338
Ending balance accumulated other comprehensive income (loss)	(320,833)		(320,833)
Available-for-sale Securities
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning balance accumulated other comprehensive income	481,323		499,343
Other comprehensive income (loss) before reclassification	(615,199)		(630,719)
Amount reclassified to mortgage-backed securities available for sale	(8,802)		(11,302)
Net current period other comprehensive income (loss)	(624,001)		(642,021)
Ending balance accumulated other comprehensive income (loss)	(142,678)		(142,678)
Unsettled Agency Contracts
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning balance accumulated other comprehensive income	492		1,217
Other comprehensive income (loss) before reclassification	(2,776)		(2,284)
Amount reclassified to mortgage-backed securities available for sale	(492)		(1,709)
Net current period other comprehensive income (loss)	(3,268)		(3,993)
Ending balance accumulated other comprehensive income (loss)	(2,776)		(2,776)
Other Investments
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning balance accumulated other comprehensive income	(214)		(107)
Other comprehensive income (loss) before reclassification	(291)		(398)
Net current period other comprehensive income (loss)	(291)		(398)
Ending balance accumulated other comprehensive income (loss)	(505)		(505)
Derivative Instruments
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning balance	(212,553)		(237,599)
Other comprehensive income (loss) before reclassification	13,569		14,138
Amount reclassified to mortgage-backed securities available for sale	(6,476)		(11,928)
Amounts reclassified to interest expense	30,586		60,515
Net current period other comprehensive income (loss)	37,679		62,725
Ending balance	$ (174,874)		$ (174,874)

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Schedule of Interest Rate Swap Agreements on Accumulated Other Comprehensive Income (Detail) (Interest Rate Swap, USD $) In Thousands, unless otherwise specified	6 Months Ended	12 Months Ended
	Jun. 30, 2013	Dec. 31, 2012
Interest Rate Swap
Derivative Instruments and Hedging Activities Disclosures [Line Items]
Beginning balance	$ (243,051)	$ (218,451)
Unrealized gain (loss) on interest rate swaps	51,385	(141,392)
Reclassification of net losses included in income statement	60,515	116,792
Ending balance	$ (131,151)	$ (243,051)

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Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Mortgage-backed securities, pledged assets	$ 24,163,526	$ 22,591,973
7.625% Series A Cumulative Redeemable Preferred stock, par value	$ 0.001	$ 0.001
7.625% Series A Cumulative Redeemable Preferred stock, shares authorized	25,000,000	25,000,000
7.625% Series A Cumulative Redeemable Preferred stock, shares issued	11,500,000	11,500,000
7.625% Series A Cumulative Redeemable Preferred stock, shares outstanding	11,500,000	11,500,000
7.625% Series A Cumulative Redeemable Preferred stock, aggregate Liquidation Preference	$ 287,500	$ 287,500
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	200,000,000	200,000,000
Common stock, shares issued	98,830,054	98,822,654
Common stock,shares outstanding	98,830,054	98,822,654

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Derivative and other Hedging Instruments

6 Months Ended

Jun. 30, 2013

Derivative and other Hedging Instruments

7. Derivative and other Hedging Instruments

In connection with our risk management strategy, we hedge a portion of our interest rate risk by entering into derivative and other hedging instrument contracts. We may enter into agreements for interest rate swaps, interest rate swaptions, interest rate cap or floor contracts and futures or forward contracts. Our risk management strategy attempts to manage the overall risk of the portfolio, reduce fluctuations in book value and generate additional income distributable to stockholders. For additional information regarding our derivative instruments and our overall risk management strategy, please refer to the discussion of derivative and other hedging instruments in Note 2.

The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The fair value of Futures Contracts is based on quoted prices from the exchange on which they trade. The table below presents the fair value of the Company’s derivative instruments as well as their classification on the balance sheets as of June 30, 2013 and December 31, 2012, respectively.

Derivative Instruments	Balance Sheet Location	June 30, 2013		December 31, 2012
Interest rate swaps	Interest rate hedge asset	$	25,921	$	-
Forward purchase commitments	Other assets		-		5,452
Futures contracts	Other assets		5,587		-
Interest rate swaps	Interest rate hedge liability	$	157,869	$	243,945
Forward purchase commitments	Accounts payable and other liabilities		43,724	$	-

Cash Flow Hedges of Interest Rate Risk

The Company finances its activities primarily through repurchase agreements, which are generally settled on a short-term basis, usually from one to three months. At each settlement date, the Company refinances each repurchase agreement at the market interest rate at that time. Since the interest rates on its repurchase agreements change on a monthly basis, the Company is constantly exposed to changing interest rates. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The effect of these hedges is to synthetically lock up interest rates on a portion of the Company’s repurchase agreements for the terms of the swaps. Although the Company’s objective is to hedge the risk associated with changing repurchase agreement rates, the Company’s hedges are benchmark interest rate hedges which perform with reference to LIBOR. Therefore, the Company remains at risk to the variability of the spread between repurchase agreement rates and LIBOR interest rates.

For qualifying derivatives under cash flow hedge accounting, effective hedge gains or losses are initially recorded in accumulated other comprehensive income and subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three months ended June 30, 2013 and 2012, these effective hedge gains (losses) which were reclassified into earnings totaled $57,294 and ($59,168), respectively. During the six months ended June 30, 2013 and 2012, these effective hedge gains (losses) which were reclassified into earnings totaled $51,385 and ($87,591), respectively. Ineffective hedge gains (losses) are recorded on a current basis in earnings and for the three months ended June 30, 2013 and 2012, the Company recorded $212 and ($169) of hedge ineffectiveness gain (loss) in earnings, respectively. For the six months ended June 30, 2013 and 2012, the Company recorded $96 and ($338), respectively, hedge ineffectiveness gain (loss) in earnings. The hedge ineffectiveness is attributable primarily to differences in the reset dates on the Company’s swaps versus the refinancing dates of its repurchase agreements.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest is accrued and paid on the Company’s repurchase agreements. During the next 12 months, the Company estimates that an additional $113,831 will be reclassified as an increase to interest expense.

The Company is hedging its exposure to the variability in future cash flows with interest rate swaps for current and forecasted transactions over a weighted-average period of 28 months. The table below shows the remaining term of the Company’s interest rate swaps as of June 30, 2013.

			Remaining	Weighted Average
	Notional		Term	Fixed Interest
Maturity	Amount		in Months	Rate in Contract
12 months or less	$	1,200,000	7	1.90%
Over 12 months to 24 months		3,800,000	19	1.78%
Over 24 months to 36 months		2,700,000	30	1.30%
Over 36 months to 48 months		2,600,000	43	0.91%
Over 48 months to 60 months		800,000	53	0.93%
Total	$	11,100,000	28	1.41%

Non-designated Hedge Instruments

For derivative financial instruments not designated as hedge instruments, realized and unrealized changes in fair value are recognized in the period in which the changes occur. The change in the fair value of Futures Contracts not designated and documented as hedges is recorded through earnings each period. During the three and six months ended June 30, 2013, the Company recognized a gain of $5,485 and $5,536, respectively, related to the change in fair value of these contracts. As of June 30, 2013, the fair value of these Futures Contracts was $5,587.

The Company uses Futures Contracts to 1) synthetically replicate an interest rate swap, or 2) offset the changes in value of its forward purchases of certain agency securities. The Company’s total Futures Contracts designed to replicate interest rate swaps had a notional equivalent amount of $800,000 at June 30, 2013 with a weighted average swap equivalent rate of 1.35% and a weighted average term of 56 months as of June 30, 2013. The Company did not own Futures Contracts at December 31, 2012.

The Company does not use either offsetting or netting to present any of its derivative assets or liabilities. The following table shows the gross amounts associated with the Company’s derivative financial instruments and the impact if netting were used as of June 30, 2013.

	Assets		Cash Collateral Posted		Net Amount
Interest rate swaps	$	25,921	$	-	$	25,921
Futures contracts		5,587		4,862		10,449
	Liabilities		Cash Collateral Posted		Net Amount
Interest rate swaps	$	157,869	$	144,348	$	13,521
Forward purchase commitments

The following table shows the gross amounts associated with the Company’s derivative financial instruments and the impact if netting were used as of December 31, 2012.

	Assets		Cash Collateral Posted		Net Amount
Forward purchase commitments	$	5,452	$	-	$	5,452
	Liabilities		Cash Collateral Posted		Net Amount
Interest rate swaps	$	243,945	$	281,021	$	(37,076)

The table below presents the effect of the Company’s derivative financial instruments on the income statement for the three months ended June 30, 2013.

Derivative type for cash flow hedge	Amount of gain recognized in OCI on derivative (effective portion)		Location of loss reclassified from accumulated OCI into income (effective portion)	Amount of loss reclassified from accumulated OCI into income (effective portion)		Location of gain recognized in income on derivative (ineffective portion)	Amount of gain recognized in income on derivative (ineffective portion)
Interest Rate	$	57,294	Interest Expense	$	30,585	Interest Expense	$	212

The table below presents the effect of the Company’s derivative financial instruments on the income statement for the three months ended June 30, 2012.

Derivative type for cash flow hedge	Amount of loss recognized in OCI on derivative (effective portion)		Location of loss reclassified from accumulated OCI into income (effective portion)	Amount of loss reclassified from accumulated OCI into income (effective portion)		Location of loss recognized in income on derivative (ineffective portion)	Amount of loss recognized in income on derivative (ineffective portion)
Interest Rate	$	59,168	Interest Expense	$	28,352	Interest Expense	$	169

The table below presents the effect of the Company’s derivative financial instruments on the income statement for the six months ended June 30, 2013.

Derivative type for cash flow hedge	Amount of gain recognized in OCI on derivative (effective portion)		Location of loss reclassified from accumulated OCI into income (effective portion)	Amount of loss reclassified from accumulated OCI into income (effective portion)		Location of gain recognized in income on derivative (ineffective portion)	Amount of gain recognized in income on derivative (ineffective portion)
Interest Rate	$	51,385	Interest Expense	$	60,515	Interest Expense	$	96

The table below presents the effect of the Company’s derivative financial instruments on the income statement for the six months ended June 30, 2012.

Derivative type for cash flow hedge	Amount of loss recognized in OCI on derivative (effective portion)		Location of loss reclassified from accumulated OCI into income (effective portion)	Amount of loss reclassified from accumulated OCI into income (effective portion)		Location of gain recognized in income on derivative (ineffective portion)	Amount of gain recognized in income on derivative (ineffective portion)
Interest Rate	$	87,591	Interest Expense	$	56,164	Interest Expense	$	338

The following table presents the impact of the Company’s interest rate swap agreements on the Company’s accumulated other comprehensive income (loss) for the six months ended June 30, 2013 and the year ended December 31, 2012, respectively.

	June 30, 2013		December 31, 2012
Beginning balance		(243,051)		($218,451)
Unrealized gain (loss) on interest rate swaps		51,385		(141,392)
Reclassification of net losses included in income statement		60,515		116,792
Ending balance		$                        (131,151)		$                        (243,051)

Credit-risk-related Contingent Features

The Company has agreements with certain of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender then the Company could also be declared in default on its derivative obligations.

The Company has agreements with certain of its derivative counterparties that contain a provision where if the Company’s GAAP shareholders’ equity declines by a specified percentage over a specified time period, or if the Company fails to maintain a minimum shareholders’ equity threshold, then the Company could be declared in default on its derivative obligations. The Company has agreements with several of its derivative counterparties that contain provisions regarding maximum leverage ratios. The most restrictive of these leverage covenants is that if the Company exceeds a leverage ratio of 10 to 1 then the Company could be declared in default on its derivative obligations with that counterparty. At June 30, 2013, the Company was in compliance with these requirements.

As of June 30, 2013, the fair value of derivatives in a net liability position related to these agreements was $0. The Company has collateral posting requirements with each of its counterparties and all interest rate swap agreements were fully collateralized as of June 30, 2013.

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Consolidated Statements of Comprehensive Income (Loss) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Net income	$ 70,739	$ 89,144	$ 137,978	$ 158,448
Other comprehensive (loss) income:
Net unrealized (losses) gains on securities available for sale	(627,560)	47,241	(646,412)	72,072
Net unrealized gains (losses) on interest rate hedges	37,679	(33,988)	62,725	(31,734)
Net current period other comprehensive income (loss)	(589,881)	13,253	(583,687)	40,338
Comprehensive (loss) income	$ (519,142)	$ 102,397	$ (445,709)	$ 198,786

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Assets
Mortgage-backed securities, at fair value (including pledged assets of $24,163,526 and $22,591,973 at June 30, 2013 and December 31, 2012, respectively)	$ 25,256,043	$ 23,919,251
Cash and cash equivalents	88,987	168,424
Restricted cash	149,210	281,021
Unsettled purchased mortgage-backed securities, at fair value	133,597	138,338
Receivable for securities sold	7,251	1,587,535
Accrued interest receivable	73,957	77,113
Principal payments receivable	199,553	190,832
Debt security, held to maturity, at cost	15,000	15,000
Interest rate hedge asset	25,921
Other assets	26,856	26,604
Total assets	25,976,375	26,404,118
Liabilities and shareholders' equity
Repurchase agreements	23,077,252	22,866,429
Payable for unsettled securities	136,373	137,121
Accrued interest payable	4,773	7,592
Interest rate hedge liability	157,869	243,945
Dividend payable	73,809	73,804
Accounts payable and other liabilities	47,210	2,363
Total liabilities	23,497,286	23,331,254
Shareholders' equity:
7.625% Series A Cumulative Redeemable Preferred stock, $.001 par value, 25,000,000 shares authorized, 11,500,000 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively ($287,500 aggregate liquidation preference)	278,252	278,252
Common stock, $.001 par value, 200,000,000 shares authorized, 98,830,054 and 98,822,654 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively	99	99
Additional paid-in capital	2,495,559	2,494,303
Retained earnings	26,012	37,356
Accumulated other comprehensive (loss) income	(320,833)	262,854
Total shareholders' equity	2,479,089	3,072,864
Total liabilities and shareholders' equity	$ 25,976,375	$ 26,404,118

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Carrying Values and Fair Values of All Financial Instruments (Detail) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013		Dec. 31, 2012		Jun. 30, 2012	Dec. 30, 2011
Fair Value of Financial Instruments [Line Items]
Mortgage-backed securities	$ 25,256,043		$ 23,919,251
Cash and cash equivalents	88,987		168,424		288,691	347,045
Restricted cash	149,210		281,021
Unsettled purchased mortgage backed securities	133,597		138,338
Receivable for securities sold	7,251		1,587,535
Accrued interest receivable	73,957		77,113
Principal payments receivable	199,553		190,832
Debt security	15,000		15,000
Interest rate hedge asset	25,921
Forward purchase commitments			5,452
Futures contracts	5,587
Repurchase agreements	23,077,252		22,866,429
Payable for unsettled securities	136,373		137,121
Accrued interest payable	4,773		7,592
Forward purchase commitments	43,724
Carrying (Reported) Amount, Fair Value Disclosure
Fair Value of Financial Instruments [Line Items]
Mortgage-backed securities	25,256,043		23,919,251
Cash and cash equivalents	88,987		168,424
Restricted cash	149,210		281,021
Unsettled purchased mortgage backed securities	133,597		138,338
Receivable for securities sold	7,251		1,587,535
Accrued interest receivable	73,957		77,113
Principal payments receivable	199,553		190,832
Debt security	15,000		15,000
Interest rate hedge asset	25,921
Short term investment	19,916	[1]	20,187	[1]
Forward purchase commitments			5,452	[1]
Futures contracts	5,587	[1]
Repurchase agreements	23,077,252		22,866,429
Payable for unsettled securities	136,373		137,121
Accrued interest payable	4,773		7,592
Interest rate hedge liability	157,869		243,945
Forward purchase commitments	43,724	[2]
Estimate of Fair Value, Fair Value Disclosure
Fair Value of Financial Instruments [Line Items]
Mortgage-backed securities	25,256,043		23,919,251
Cash and cash equivalents	88,987		168,424
Restricted cash	149,210		281,021
Unsettled purchased mortgage backed securities	133,597		138,338
Receivable for securities sold	7,251		1,587,535
Accrued interest receivable	73,957		77,113
Principal payments receivable	199,553		190,832
Debt security	14,216		13,981
Interest rate hedge asset	25,921
Short term investment	19,916	[1]	20,187	[1]
Forward purchase commitments			5,452	[1]
Futures contracts	5,587	[1]
Repurchase agreements	23,077,252		22,866,429
Payable for unsettled securities	136,373		137,121
Accrued interest payable	4,773		7,592
Interest rate hedge liability	157,869		243,945
Forward purchase commitments	$ 43,724	[2]

[1] These lines are included in Other assets on the balance sheets

[2] This line included in accounts payable and other liabilities on the balance sheets.

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Derivative and other Hedging Instruments (Tables)

6 Months Ended

Jun. 30, 2013

Schedule of Location of Derivatives Instruments on Balance Sheet

The table below presents the fair value of the Company’s derivative instruments as well as their classification on the balance sheets as of June 30, 2013 and December 31, 2012, respectively.

Derivative Instruments	Balance Sheet Location	June 30, 2013		December 31, 2012
Interest rate swaps	Interest rate hedge asset	$	25,921	$	-
Forward purchase commitments	Other assets		-		5,452
Futures contracts	Other assets		5,587		-
Interest rate swaps	Interest rate hedge liability	$	157,869	$	243,945
Forward purchase commitments	Accounts payable and other liabilities		43,724	$	-

Hedging Exposure Future Cash Flows with Interest Rate Swaps For Forecasted Transactions

The table below shows the remaining term of the Company’s interest rate swaps as of June 30, 2013.

			Remaining	Weighted Average
	Notional		Term	Fixed Interest
Maturity	Amount		in Months	Rate in Contract
12 months or less	$	1,200,000	7	1.90%
Over 12 months to 24 months		3,800,000	19	1.78%
Over 24 months to 36 months		2,700,000	30	1.30%
Over 36 months to 48 months		2,600,000	43	0.91%
Over 48 months to 60 months		800,000	53	0.93%
Total	$	11,100,000	28	1.41%

Gross Amounts Associated With Derivative Financial Instruments

The following table shows the gross amounts associated with the Company’s derivative financial instruments and the impact if netting were used as of June 30, 2013.

	Assets		Cash Collateral Posted		Net Amount
Interest rate swaps	$	25,921	$	-	$	25,921
Futures contracts		5,587		4,862		10,449
	Liabilities		Cash Collateral Posted		Net Amount
Interest rate swaps	$	157,869	$	144,348	$	13,521
Forward purchase commitments

The following table shows the gross amounts associated with the Company’s derivative financial instruments and the impact if netting were used as of December 31, 2012.

	Assets		Cash Collateral Posted		Net Amount
Forward purchase commitments	$	5,452	$	-	$	5,452
	Liabilities		Cash Collateral Posted		Net Amount
Interest rate swaps	$	243,945	$	281,021	$	(37,076)

Schedule of Location of Derivatives on Income Statement

The table below presents the effect of the Company’s derivative financial instruments on the income statement for the three months ended June 30, 2013.

Derivative type for cash flow hedge	Amount of gain recognized in OCI on derivative (effective portion)		Location of loss reclassified from accumulated OCI into income (effective portion)	Amount of loss reclassified from accumulated OCI into income (effective portion)		Location of gain recognized in income on derivative (ineffective portion)	Amount of gain recognized in income on derivative (ineffective portion)
Interest Rate	$	57,294	Interest Expense	$	30,585	Interest Expense	$	212

The table below presents the effect of the Company’s derivative financial instruments on the income statement for the three months ended June 30, 2012.

Derivative type for cash flow hedge	Amount of loss recognized in OCI on derivative (effective portion)		Location of loss reclassified from accumulated OCI into income (effective portion)	Amount of loss reclassified from accumulated OCI into income (effective portion)		Location of loss recognized in income on derivative (ineffective portion)	Amount of loss recognized in income on derivative (ineffective portion)
Interest Rate	$	59,168	Interest Expense	$	28,352	Interest Expense	$	169

The table below presents the effect of the Company’s derivative financial instruments on the income statement for the six months ended June 30, 2013.

Derivative type for cash flow hedge	Amount of gain recognized in OCI on derivative (effective portion)		Location of loss reclassified from accumulated OCI into income (effective portion)	Amount of loss reclassified from accumulated OCI into income (effective portion)		Location of gain recognized in income on derivative (ineffective portion)	Amount of gain recognized in income on derivative (ineffective portion)
Interest Rate	$	51,385	Interest Expense	$	60,515	Interest Expense	$	96

The table below presents the effect of the Company’s derivative financial instruments on the income statement for the six months ended June 30, 2012.

Derivative type for cash flow hedge	Amount of loss recognized in OCI on derivative (effective portion)		Location of loss reclassified from accumulated OCI into income (effective portion)	Amount of loss reclassified from accumulated OCI into income (effective portion)		Location of gain recognized in income on derivative (ineffective portion)	Amount of gain recognized in income on derivative (ineffective portion)
Interest Rate	$	87,591	Interest Expense	$	56,164	Interest Expense	$	338

Interest Rate Swap

Schedule of Interest Rate Swap Agreements on Accumulated Other Comprehensive Income

The following table presents the impact of the Company’s interest rate swap agreements on the Company’s accumulated other comprehensive income (loss) for the six months ended June 30, 2013 and the year ended December 31, 2012, respectively.

	June 30, 2013		December 31, 2012
Beginning balance		(243,051)		($218,451)
Unrealized gain (loss) on interest rate swaps		51,385		(141,392)
Reclassification of net losses included in income statement		60,515		116,792
Ending balance		$                        (131,151)		$                        (243,051)

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Schedule of Location of Derivatives on Income Statement (Detail) (Interest Rate Contract, USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Interest Rate Contract
Derivative Instruments and Hedging Activities Disclosures [Line Items]
Derivative type for cash flow hedge	Interest Rate	Interest Rate	Interest Rate	Interest Rate
Amount of gain recognized in OCI on derivative (effective portion)	$ 57,294		$ 51,385
Amount of loss recognized in OCI on derivative (effective portion)		59,168		87,591
Location of loss reclassified from accumulated OCI into income (effective portion)	Interest Expense	Interest Expense	Interest Expense	Interest Expense
Amount of loss reclassified from accumulated OCI into income (effective portion)	30,585	28,352	60,515	56,164
Location of gain (loss)recognized in income on derivative (ineffective portion)	Interest Expense	Interest Expense	Interest Expense	Interest Expense
Amount of gain (loss) recognized in income on derivative (ineffective portion)	212		96
Amount of gain (loss) recognized in income on derivative (ineffective portion)		$ 169		$ 338

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Contractual Repricing Information Regarding Repurchase Agreements (Detail) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Repurchase Agreement Counterparty [Line Items]
Balance, repurchase agreement	$ 23,077,252	$ 22,866,429
Weighted Average Contractual Rate	0.37%	0.47%
Within 30 days
Repurchase Agreement Counterparty [Line Items]
Balance, repurchase agreement	22,569,149	20,500,568
Weighted Average Contractual Rate	0.37%	0.47%
30 days to 3 months
Repurchase Agreement Counterparty [Line Items]
Balance, repurchase agreement	$ 508,103	$ 2,365,861
Weighted Average Contractual Rate	0.38%	0.48%

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Schedule of Agency Securities Forward Purchase Commitments (Detail) (USD $) In Thousands, unless otherwise specified	6 Months Ended		12 Months Ended
	Jun. 30, 2013		Dec. 31, 2012
Net Investment Income [Line Items]
Forward purchase agreements - Face	$ 876,000		$ 565,000
Forward purchase agreements - Cost	906,063		585,100
Forward purchase agreements - Fair Market Value	875,797		587,247
Forward purchase agreements - Due To Brokers	906,063	[1]	585,100	[1]
Forward purchase agreements - Net Asset	$ 30,266		$ 2,147

[1] Amounts due to brokers are usually settled within 30-90 days after period end.

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Schedule of Agency Securities Forward Purchase Commitments (Parenthetical) (Detail)	6 Months Ended
	Jun. 30, 2013 D
Net Investment Income [Line Items]
Days to coupon reset or contractual payment, minimum range	30
Days to coupon reset or contractual payment, maximum range	90

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Repurchase Agreements

6 Months Ended

Jun. 30, 2013

Repurchase Agreements

6. Repurchase Agreements

At June 30, 2013 and December 31, 2012, the Company had repurchase agreements in place in the amount of $23,077,252 and $22,866,429, respectively, to finance MBS purchases. As of June 30, 2013 and December 31, 2012, the weighted average interest rate on these borrowings was 0.37% and 0.47%, respectively. The Company’s repurchase agreements are collateralized by the Company’s agency securities and typically bear interest at rates that are closely related to LIBOR. At June 30, 2013 and December 31, 2012, the Company had repurchase agreements outstanding with 25 and 24 counterparties with a weighted average contractual maturity 0.8 months, respectively. The following table presents the contractual repricing information regarding the Company’s repurchase agreements:

	June 30, 2013				December 31, 2012
			Weighted Average				Weighted Average
	Balance		Contractual Rate		Balance		Contractual Rate
Within 30 days		$22,569,149		0.37%		$    20,500,568		0.47%
30 days to 3 months		508,103		0.38%		2,365,861		0.48%
		$23,077,252		0.37%		$22,866,429		0.47%

The fair value of securities, cash, and accrued interest the Company had pledged under repurchase agreements at June 30, 2013 and December 31, 2012 was $24,216,775 and $24,268,949 respectively.

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Schedule of Agency Securities Portfolio Backed by U.S. Government Agency or U.S. Government Sponsored Entity (Detail) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Schedule of Available-for-sale Securities [Line Items]
Agency Securities Amortized Cost	$ 25,398,721	$ 23,419,908
Gross Unrealized Loss	(343,090)	(121)
Gross Unrealized Gain	200,412	499,464
Carrying value/estimated fair value	25,256,043	23,919,251
Federal National Mortgage Association Certificates and Obligations (FNMA)
Schedule of Available-for-sale Securities [Line Items]
Agency Securities Amortized Cost	16,170,421	14,824,558
Gross Unrealized Loss	(207,697)	(100)
Gross Unrealized Gain	153,385	339,076
Carrying value/estimated fair value	16,116,109	15,163,534
Federal National Mortgage Association Certificates and Obligations (FNMA) | Fannie Mae Certificates, ARMs
Schedule of Available-for-sale Securities [Line Items]
Agency Securities Amortized Cost	14,043,290	14,081,259
Gross Unrealized Loss	(147,577)	(100)
Gross Unrealized Gain	153,385	329,780
Carrying value/estimated fair value	14,049,098	14,410,939
Federal National Mortgage Association Certificates and Obligations (FNMA) | Fannie Mae Certificates, Fixed Rate
Schedule of Available-for-sale Securities [Line Items]
Agency Securities Amortized Cost	2,127,131	743,299
Gross Unrealized Loss	(60,120)
Gross Unrealized Gain		9,296
Carrying value/estimated fair value	2,067,011	752,595
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises
Schedule of Available-for-sale Securities [Line Items]
Agency Securities Amortized Cost	9,228,300	8,595,350
Gross Unrealized Loss	(135,393)	(21)
Gross Unrealized Gain	47,027	160,388
Carrying value/estimated fair value	9,139,934	8,755,717
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises | Freddie Mac Certificates, ARMs
Schedule of Available-for-sale Securities [Line Items]
Agency Securities Amortized Cost	8,513,715	7,850,630
Gross Unrealized Loss	(115,264)	(21)
Gross Unrealized Gain	47,027	149,114
Carrying value/estimated fair value	8,445,478	7,999,723
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises | Freddie Mac Certificates, Fixed Rate
Schedule of Available-for-sale Securities [Line Items]
Agency Securities Amortized Cost	714,585	744,720
Gross Unrealized Loss	(20,129)
Gross Unrealized Gain		11,274
Carrying value/estimated fair value	$ 694,456	$ 755,994

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Hedging Exposure Future Cash Flows with Interest Rate Swaps For Forecasted Transactions (Detail) (USD $)	6 Months Ended
	Jun. 30, 2013
Derivative Instruments, Gain (Loss) [Line Items]
Remaining Term in Months	28 months
Weighted Average Fixed Interest Rate in Contract	1.41%
Cash flow hedging
Derivative Instruments, Gain (Loss) [Line Items]
Notional Amount	$ 11,100,000,000
12 Months Or Less
Derivative Instruments, Gain (Loss) [Line Items]
Maturity - remaining maturity range	0 months
Maturity - remaining maturity range	12 months
Remaining Term in Months	7 months
Weighted Average Fixed Interest Rate in Contract	1.90%
12 Months Or Less | Cash flow hedging
Derivative Instruments, Gain (Loss) [Line Items]
Notional Amount	1,200,000,000
Over 12 Months To 24 Months
Derivative Instruments, Gain (Loss) [Line Items]
Maturity - remaining maturity range	12 months
Maturity - remaining maturity range	24 months
Remaining Term in Months	19 months
Weighted Average Fixed Interest Rate in Contract	1.78%
Over 12 Months To 24 Months | Cash flow hedging
Derivative Instruments, Gain (Loss) [Line Items]
Notional Amount	3,800,000,000
Over 24 Months To 36 Months
Derivative Instruments, Gain (Loss) [Line Items]
Maturity - remaining maturity range	24 months
Maturity - remaining maturity range	36 months
Remaining Term in Months	30 months
Weighted Average Fixed Interest Rate in Contract	1.30%
Over 24 Months To 36 Months | Cash flow hedging
Derivative Instruments, Gain (Loss) [Line Items]
Notional Amount	2,700,000,000
Over 36 Months To 48 Months
Derivative Instruments, Gain (Loss) [Line Items]
Maturity - remaining maturity range	36 months
Maturity - remaining maturity range	48 months
Remaining Term in Months	43 months
Weighted Average Fixed Interest Rate in Contract	0.91%
Over 36 Months To 48 Months | Cash flow hedging
Derivative Instruments, Gain (Loss) [Line Items]
Notional Amount	2,600,000,000
Over 48 Months To 60 Months
Derivative Instruments, Gain (Loss) [Line Items]
Maturity - remaining maturity range	48 months
Maturity - remaining maturity range	60 months
Remaining Term in Months	53 months
Weighted Average Fixed Interest Rate in Contract	0.93%
Over 48 Months To 60 Months | Cash flow hedging
Derivative Instruments, Gain (Loss) [Line Items]
Notional Amount	$ 800,000,000

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Earnings per Share

6 Months Ended

Jun. 30, 2013

Earnings per Share

9. Earnings per Share

	For the three months ended				For the six months ended
	June 30, 2013		June 30, 2012		June 30, 2013		June 30, 2012
Basic earnings per share:
Net income	$	70,739	$	89,144	$	137,978	$	158,448
Less preferred stock dividends		5,480		—		10,960		—
Net income available to common shareholders	$	65,259	$	89,144	$	127,018	$	158,448
Weighted average shares		98,830,054		97,969,074		98,828,827		87,789,596
Basic earnings per share	$	0.66	$	0.91	$	1.29	$	1.80
Diluted earnings per share:
Net income	$	70,739	$	89,144	$	137,978	$	158,448
Less preferred stock dividends for antidilutive shares		5,480		—		10,960		—
Net income available to common shareholders	$	65,259	$	89,144	$	127,018	$	158,448
Diluted weighted average shares		98,830,054		97,969,074		98,828,827		87,789,596
Diluted earnings per share	$	0.66	$	0.91	$	1.29	$	1.80

There are not any potentially dilutive shares for the three and six months ended June 30, 2013 and 2012, respectively.

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Debt Security, Held to Maturity

6 Months Ended

Jun. 30, 2013

Debt Security, Held to Maturity

5. Debt Security, Held to Maturity

The Company owns a $15,000 debt security from a repurchase lending counterparty that matures October 31, 2016. The debt security pays interest quarterly at the rate of 4.0% above the three-month London Interbank Offered Rate (“LIBOR”). The Company estimates the fair value of this note to be approximately $14,216, which was determined by present valuing the projected future cash flows using a discount rate from a similar issuer.

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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Operating activities
Net income	$ 137,978	$ 158,448
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of premium related to mortgage-backed securities	92,058	65,475
Amortization related to interest rate swap agreements	163	184
Share based compensation expense	1,256	854
Hedge ineffectiveness	(96)	338
Net gain on sale of mortgage-backed securities	(11,302)	(14,710)
Net gain on sale of futures contracts	(5,536)
Changes in operating assets and liabilities:
Decrease (increase) in accrued interest receivable	3,156	(10,831)
Increase in other assets	(730)	(578)
Decrease in accrued interest payable	(2,819)	(203)
Increase (decrease) in accounts payable and other liabilities	1,122	(379)
Net cash provided by operating activities	215,250	198,598
Investing activities
Purchases of mortgage-backed securities	(6,029,805)	(8,959,135)
Principal repayments of mortgage-backed securities	3,180,421	1,938,005
Sale of mortgage-backed securities	2,361,380	2,383,298
Net cash used in investing activities	(488,004)	(4,637,832)
Financing activities
Issuance of common stock, net of cost of issuance		570,589
Cash dividends paid	(149,317)	(139,030)
Increase (decrease) in restricted cash on swap arrangements	131,811	(41,164)
Proceeds from repurchase agreements	126,103,804	102,306,555
Principal repayments on repurchase agreements	(125,892,981)	(98,316,070)
Net cash provided by financing activities	193,317	4,380,880
Net decrease in cash and cash equivalents	(79,437)	(58,354)
Cash and cash equivalents, beginning of period	168,424	347,045
Cash and cash equivalents, end of period	88,987	288,691
Supplemental disclosure of cash flow information
Cash paid during the period for interest	108,123	87,481
Supplemental schedule of non-cash investing activities
Obligation to brokers for purchase of unsettled mortgage-backed securities	1,042,436	2,160,647
Receivable for securities sold	7,251
Preferred Stock
Supplemental schedule of non-cash financing activities
Dividends declared, not yet paid	5,480
Common Stock Amount
Supplemental schedule of non-cash financing activities
Dividends declared, not yet paid	$ 69,181	$ 88,267

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Earnings per Share (Detail) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Basic earnings per share:
Net income	$ 70,739	$ 89,144	$ 137,978	$ 158,448
Less preferred stock dividends	5,480		10,960
Net income available to common shareholders	65,259	89,144	127,018	158,448
Weighted average shares	98,830,054	97,969,074	98,828,827	87,789,596
Basic earnings per share	$ 0.66	$ 0.91	$ 1.29	$ 1.80
Diluted earnings per share:
Net income	70,739	89,144	137,978	158,448
Less preferred stock dividends for antidilutive shares	5,480		10,960
Net income available to common shareholders	$ 65,259	$ 89,144	$ 127,018	$ 158,448
Diluted weighted average shares	98,830,054	97,969,074	98,828,827	87,789,596
Diluted earnings per share	$ 0.66	$ 0.91	$ 1.29	$ 1.80

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Schedule Of Interest Income (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Gain (Loss) on Investments [Line Items]
Coupon interest on MBS	$ 163,964	$ 164,652	$ 331,397	$ 306,954
Net premium amortization	(48,849)	(35,932)	(92,041)	(65,474)
Interest income on MBS, net	$ 115,115	$ 128,720	$ 239,356	$ 241,480

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Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2013

Basis of Presentation and Use of Estimates

Basis of Presentation and Use of Estimates

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2013. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2012.

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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates affecting the accompanying consolidated financial statements include the valuation of agency securities and derivative instruments.

Principles of Consolidation

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Diamond Shoals Funding LLC. The Company also considers the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 810 on Consolidation in determining whether consolidation is appropriate for any interests held in variable interest entities. All significant intercompany balances and transactions have been eliminated.

Financial Instruments

Financial Instruments

The Company considers its cash and cash equivalents, restricted cash, agency securities (settled and unsettled), forward purchase commitments, debt security held to maturity, receivable for securities sold, accrued interest receivable, principal payment receivable, payable for unsettled securities, derivative instruments, repurchase agreements and accrued interest payable to meet the definition of financial instruments. The carrying amount of cash and cash equivalents, restricted cash, receivable for securities sold, accrued interest receivable and payable for unsettled securities approximate their fair value due to the short maturities of these instruments and are valued using Level 1 inputs. The carrying amount of repurchase agreements is deemed to approximate fair value since the agreements are based upon a variable rate of interest and are valued using Level 2 inputs. See Note 4 for discussion of the fair value of agency securities and forward purchase commitments. See Note 5 for discussion of the fair value of the held to maturity debt security. See Note 7 for discussion of the fair value of derivative instruments.

The Company limits its exposure to credit losses on its portfolio of securities by purchasing agency securities. The portfolio is diversified to avoid undue exposure to loan originator, geographic and other types of concentration. The Company manages the risk of prepayments of the underlying mortgages by creating a diversified portfolio with a variety of expected prepayment characteristics. See Note 4 for additional information on MBS.

The Company is engaged in various trading and brokerage activities including repurchase agreements, interest rate swap agreements, and futures contracts in which counterparties primarily include broker-dealers, banks, and other financial institutions. In the event counterparties do not fulfill their obligations, the Company may be exposed to risk of loss. The risk of default depends on the creditworthiness of the counterparty and/or issuer of the instrument. It is the Company’s policy to review, as necessary, the credit standing for each counterparty. See Note 6 for additional information on repurchase agreements and Note 7 for additional information on interest rate swap agreements.

Mortgage-Backed Securities

Mortgage-Backed Securities

The Company invests in agency securities representing interests in or obligations backed by pools of single-family residential mortgage loans. Guidance under the FASB ASC Topic 820 on Investments requires the Company to classify its investments as either trading, available-for-sale or held-to-maturity securities. Management determines the appropriate classifications of the securities at the time they are acquired and evaluates the appropriateness of such classifications at each balance sheet date. The Company currently classifies all of its agency securities as available-for-sale. All assets that are classified as available-for-sale are carried at fair value and unrealized gains and losses are included in other comprehensive income. The estimated fair values of agency securities are determined by management by obtaining valuations for its agency securities from independent sources and averaging these valuations. Security purchase and sale transactions are recorded on the trade date. Gains or losses realized from the sale of securities are included in income and are determined using the specific identification method. Firm purchase commitments to acquire “when issued” or to-be-announced (“TBA”) securities are recorded at fair value in accordance with ASC Topic 815, Derivatives and Hedging (“ASC 815”). The fair value of these purchase commitments is included in other assets or liabilities in the accompanying balance sheets.

The Company assesses its investment securities for other-than-temporary impairment on at least a quarterly basis. When the fair value of an investment is less than its amortized cost at the balance sheet date the impairment is designated as either “temporary” or “other-than-temporary.” In deciding whether or not a security is other than temporarily impaired, the Company uses a two step evaluation process. First, the Company determines whether it has made any decision to sell a security that is in an unrealized loss position, or, if not, the Company determines whether it is more likely than not that the Company will be required to sell the security prior to recovering its amortized cost basis. If the answer to either of these questions is “yes” then the security is considered other-than-temporarily impaired. There were no such impairment losses recognized during the periods presented.

Repurchase Agreements

Repurchase Agreements

The Company finances the acquisition of its agency securities through the use of repurchase agreements. Under these repurchase agreements, the Company sells securities to a lender and agrees 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 the Company receives and the repurchase price that the Company pays represents interest paid to the lender. Although structured as a sale and repurchase obligation, a repurchase agreement operates as a financing under which the Company pledges its securities as collateral to secure a loan which is equal in value to a specified percentage of the estimated fair value of the pledged collateral. The Company retains beneficial ownership of the pledged collateral. At the maturity of a repurchase agreement, the Company is required to repay the loan and concurrently receives back its pledged collateral from the lender or, with the consent of the lender, the Company may renew such agreement at the then prevailing financing rate. These repurchase agreements may require the Company to pledge additional assets to the lender in the event the estimated fair value of the existing pledged collateral declines.

Derivative Instruments

Derivative Instruments

The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding. The objectives of our risk management strategy are 1) to attempt to mitigate the risk of the cost of our variable rate liabilities increasing during a period of rising interest rates, and 2) to reduce fluctuations in net book value over a range of interest rate scenarios. The principal instruments that we use are interest rate swaps. We also purchase or sell Euro Dollar Futures Contracts (“Futures Contracts”) to replicate the hedging results achieved with interest rate swaps. We do not enter any of these transactions for speculative purposes.

The Company accounts for derivative instruments in accordance with ASC 815, which requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet and to measure those instruments at fair value. The accounting for changes in the fair value of derivative instruments depends on whether the instruments are designated and qualify as part of a hedging relationship pursuant to ASC 815. Changes in fair value related to derivatives not in hedge designated relationships are recorded in gain (loss) on derivative instruments whereas changes in fair value related to derivatives in hedge designated relationships are initially recorded in other comprehensive income and later reclassified to income at the time that the hedged transactions affect earnings. Any portion of the changes in fair value due to hedge ineffectiveness is immediately recognized in the income statement in interest expense.

Derivative instruments in a gain position are reported as derivative assets at fair value and derivative instruments in a loss position are reported as derivative liabilities at fair value in the Company’s consolidated balance sheets. In the Company’s consolidated statements of cash flows, cash receipts and payments related to derivative instruments are classified according to the underlying nature or purpose of the derivative transaction, generally in the operating section for the Company’s derivatives. The use of derivatives creates exposure to credit risk relating to potential losses that could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. The Company attempts to minimize this risk by limiting our counterparties to major financial institutions with acceptable credit ratings, monitoring positions with individual counterparties and adjusting posted collateral as required.

Offsetting of Assets and Liabilities

Offsetting of Assets and Liabilities

The Company’s derivative agreements and repurchase agreements generally contain provisions that allow for netting or the offsetting of receivables and payables with each counterparty. The Company reports amounts in our consolidated balance sheets on a gross basis without regard for such rights of offset or master netting arrangements.

Interest Income

Interest Income

Interest income is earned and recognized based on the outstanding principal amount of the investment securities and their contractual terms. Premiums and discounts associated with the purchase of the investment securities are amortized or accreted into interest income over the actual lives of the securities using the effective interest method.

Income Taxes

Income Taxes

The Company has elected to be taxed as a REIT under the Code. The Company will generally not be subject to Federal income tax to the extent that it distributes 100% of its taxable income, after application of available tax attributes, within the time limits prescribed by the Code and as long as it satisfies the ongoing REIT requirements including meeting certain asset, income and stock ownership tests.

Share-Based Compensation

Share-Based Compensation

Share-based compensation is accounted for under the guidance included in the ASC Topic on stock compensation. For share and share-based awards issued to employees, a compensation charge is recorded in earnings based on the fair value of the award. For transactions with non-employees in which services are performed in exchange for the Company’s common stock or other equity instruments, the transactions are recorded on the basis of the fair value of the service received or the fair value of the equity instruments issued, whichever is more readily measurable at the date of issuance. The Company’s share-based compensation transactions resulted in compensation expense of $627 and $425 for the three months ended June 30, 2013 and 2012, respectively. The Company’s share-based compensation transactions resulted in compensation expense of $1,256 and $854 for the six months ended June 30, 2013 and 2012, respectively.

Earnings Per Common Share (EPS)

Earnings Per Common Share (EPS)

Basic EPS is computed by dividing net income less preferred stock dividends to arrive at net income available to holders of common stock by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed using the two class method, as described in the ASC Topic on Earnings Per Share, which takes into account certain adjustments related to participating securities. Participating securities are unvested share-based awards that contain rights to receive nonforfeitable dividends, such as those awarded under the Company’s equity incentive plan. Net income available to holders of common stock after deducting dividends on unvested participating securities if antidilutive, is divided by the weighted average shares of common stock and common equivalent shares outstanding during the period. For the diluted EPS calculation, common equivalent shares outstanding includes the weighted average number of shares of common stock outstanding adjusted for the effect of dilutive unexercised stock options.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In October 2011, the FASB issued a proposed Accounting Standards Update (“ASU”) ASU 2011-20, Financial Services-Investment Companies: Amendments to the Scope, Measurement, and Disclosure Requirements (“ASU 2011-20”), which would amend the criteria in ASC Topic 946 on Investment Companies (“ASC 946”) for determining whether an entity qualifies as an investment company. As proposed, ASU 2011-20 would affect the measurement, presentation and disclosure requirements for Investment Companies, as defined, amend the investment company definition in ASC 946, and remove the current exemption for real estate investment trusts from this topic, which may have resulted in a material modification to the presentation of the Company’s financial statements. In June 2013, the FASB released ASU 2013-08 Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements that set forth new guidance on determining whether a company is subject to investment company accounting. These final rules maintained the scope exemption for real estate investment trusts.

In December 2011, the FASB released ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. Under this update, the Company is required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and transactions subject to an agreement similar to a master netting arrangement. The scope includes derivatives, sale and repurchase agreements and securities borrowing and securities lending arrangements. This disclosure is intended to enable financial statement users to understand the effect of such arrangements on the Company’s financial position. The objective of this update is to support further convergence between U.S. GAAP and International Financial Reporting Standards (“IFRS”). In January 2013, the FASB released ASU 2013-01 Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. Under this update, the FASB limited the scope of ASU 2011-11 to items identified in the implementation guidance which include derivatives, sale and repurchase agreements and securities borrowing and securities lending arrangements that are either offset on the balance sheet or subject to an enforceable master netting agreement. This disclosure was adopted and the adoption of this update did not have a material effect on the Company’s consolidated financial statements.

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income. Under this update, enhanced disclosures are required for items reclassified out of accumulated other comprehensive income. This update is effective for the first interim or annual period beginning on or after December 15, 2012. The disclosure was adopted and the adoption of this update did not have a material effect on the Company’s consolidated financial statements.

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Capital Stock

6 Months Ended

Jun. 30, 2013

Capital Stock

8. Capital Stock

Issuance of Common Stock – “At the Market” Programs

From time to time, the Company may sell shares of its common stock in “at-the-market” offerings. Sales of the shares of common stock, if any, may be made in private transactions, negotiated transactions or any method permitted by law deemed to be an “at the market” offering as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made directly on the New York Stock Exchange (“NYSE”) or to or through a market maker other than on an exchange.

On February 29, 2012, the Company entered into sales agreements (the “2012 Sales Agreements”) with Cantor Fitzgerald & Co. (“Cantor”) and JMP Securities LLC (“JMP”) to establish a new “at-the-market” program (the “2012 Program”). Under the terms of the 2012 Sales Agreements, the Company may offer and sell up to 10,000,000 shares of its common stock from time to time through Cantor or JMP, each acting as agent and/or principal. The shares of common stock issuable pursuant to the 2012 Program are registered with the Securities and Exchange Commission (“SEC”) on the Company’s Registration Statement on Form S-3 (No. 333-179805), which became effective upon filing on February 29, 2012.

For the three and six months ended June 30, 2013, the Company did not issue any shares of common stock in at-the-market transactions.

Stock Repurchase Program

On June 18, 2013, the Company’s board of directors authorized a stock repurchase program (the “Repurchase Program”) to acquire up to 10,000,000 shares of the Company’s common stock. As of June 30, 2013, the Company had not repurchased any shares of common stock under the Repurchase Program. During periods when the Company’s board of directors has authorized the Company to repurchase shares under the Repurchase Program, the Company will not be authorized to issue shares of common stock under the 2012 Program described above. Similarly, during periods when the Company’s board of directors has authorized the Company to issue shares of common stock under the 2012 Program, the Company will not be authorized to repurchase shares under the Repurchase Program.

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Repurchase Agreements (Tables)

6 Months Ended

Jun. 30, 2013

Contractual Repricing Information Regarding Repurchase Agreements

The following table presents the contractual repricing information regarding the Company’s repurchase agreements:

	June 30, 2013				December 31, 2012
			Weighted Average				Weighted Average
	Balance		Contractual Rate		Balance		Contractual Rate
Within 30 days		$22,569,149		0.37%		$    20,500,568		0.47%
30 days to 3 months		508,103		0.38%		2,365,861		0.48%
		$23,077,252		0.37%		$22,866,429		0.47%

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Financial Instruments (Tables)

6 Months Ended

Jun. 30, 2013

Carrying Values and Fair Values of All Financial Instruments

The carrying values and fair values of all financial instruments as of June 30, 2013 and December 31, 2012 were as follows:

	June 30, 2013				December 31, 2012
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Assets
Mortgage-backed securities	$	25,256,043	$	25,256,043	$	23,919,251	$	23,919,251
Cash and cash equivalents		88,987		88,987		168,424		168,424
Restricted cash		149,210		149,210		281,021		281,021
Unsettled purchased mortgage backed securities		133,597		133,597		138,338		138,338
Receivable for securities sold		7,251		7,251		1,587,535		1,587,535
Accrued interest receivable		73,957		73,957		77,113		77,113
Principal payments receivable		199,553		199,553		190,832		190,832
Debt security		15,000		14,216		15,000		13,981
Interest rate hedge asset		25,921		25,921		-		-
Short term investment*		19,916		19,916		20,187		20,187
Forward purchase commitments*		-		-		5,452		5,452
Futures contracts*		5,587		5,587		-		-
Liabilities
Repurchase agreements	$	23,077,252	$	23,077,252	$	22,866,429	$	22,866,429
Payable for unsettled securities		136,373		136,373		137,121		137,121
Accrued interest payable		4,773		4,773		7,592		7,592
Interest rate hedge liability		157,869		157,869		243,945		243,945
Forward purchase commitments**		43,724		43,724		-		-

*These lines are included in Other assets on the balance sheets

**This line included in accounts payable and other liabilities on the balance sheets.

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Document and Entity Information	6 Months Ended
	Jun. 30, 2013	Jul. 27, 2013
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2013
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q2
Trading Symbol	HTS
Entity Registrant Name	HATTERAS FINANCIAL CORP
Entity Central Index Key	0001419521
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		98,830,054

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Mortgage-Backed Securities (Tables)

6 Months Ended

Jun. 30, 2013

Schedule of Agency Securities Portfolio Backed by U.S. Government Agency or U.S. Government Sponsored Entity

The following table presents certain information about the Company’s agency securities at June 30, 2013.

	Agency
	Securities		Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Loss		Gain		Fair Value
Agency Securities
Fannie Mae Certificates
ARMS	$	14,043,290	$	(147,577)	$	153,385	$	14,049,098
Fixed Rate		2,127,131		(60,120)		-		2,067,011
Total Fannie Mae		16,170,421		(207,697)		153,385		16,116,109
Freddie Mac Certificates
ARMS		8,513,715		(115,264)		47,027		8,445,478
Fixed Rate		714,585		(20,129)		-		694,456
Total Freddie Mac		9,228,300		(135,393)		47,027		9,139,934
Total Agency Securities	$	25,398,721	$	(343,090)	$	200,412	$	25,256,043
The following table presents certain information about the Company’s agency securities at December 31, 2012.
	Agency
	Securities		Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Loss		Gain		Fair Value
Agency Securities
Fannie Mae Certificates
ARMS	$	14,081,259	$	(100)	$	329,780	$	14,410,939
Fixed Rate		743,299				9,296		752,595
Total Fannie Mae		14,824,558		(100)		339,076		15,163,534
Freddie Mac Certificates
ARMS		7,850,630		(21)		149,114		7,999,723
Fixed Rate		744,720		-		11,274		755,994
Total Freddie Mac		8,595,350		(21)		160,388	$	8,755,717
Total Agency Securities	$	23,419,908	$	(121)	$	499,464	$	23,919,251

Components of Carrying Value of Available-For-Sale Agency Securities

The components of the carrying value of available-for-sale agency securities at June 30, 2013 and December 31, 2012 are presented below.

	June 30, 2013		December 31, 2012
Principal balance		$24,662,486		$22,771,731
Unamortized premium		736,237		648,181
Unamortized discount		(2)		(4)
Gross unrealized gains		200,412		499,464
Gross unrealized losses		(343,090)		(121)
Carrying value/estimated fair value	$	25,256,043	$	23,919,251

Schedule of Agency Securities in Unrealized Loss Position

The Company monitors the performance and market value of its agency securities portfolio on an ongoing basis. At June 30, 2013 and December 31, 2012, the Company had the following securities in a loss position presented below:

	Less than 12 months				Less than 12 months
	as of June 30, 2013				as of December 31, 2012
	Fair Market		Unrealized		Fair Market		Unrealized
	Value		Loss		Value		Loss
Fannie Mae Certificates
ARMS		$        7,100,520		$    (147,577)		$        149,954		$            (100)
Fixed Rate		2,067,011		(60,120)		-		-
Freddie Mac Certificates
ARMS		5,775,068		(115,264)		41,625		(21)
Fixed Rate		694,456		(20,129)		-		-
Total temporarily impaired securities		$15,637,055		$    (343,090)		$191,580		$            (121)

Schedule of Interest Income

The following table presents components of interest income on the Company’s agency securities portfolio for the three months and six months ended June 30, 2013 and 2012:

	Three Months Ended				Six Months Ended
	June 30, 2013		June 30, 2012		June 30, 2013		June 30, 2012
Coupon interest on MBS		$163,964		$164,652		$331,397		$306,954
Net premium amortization		(48,849)		(35,932)		(92,041)		(65,474)
Interest income on MBS, net		$115,115		$128,720		$239,356		$241,480

Schedule of Agency Securities Forward Purchase Commitments

The following tables show the agency securities forward purchase commitments shown as a net liability in accounts payable and other liabilities on the balance sheets as of June 30, 2013 and shown as a net asset in other assets on the balance sheets as of December 31, 2012.

					Fair Market		Due to		Net
	Face		Cost		Value		Brokers (1)		Liability
June 30, 2013		$876,000		$906,063		$875,797		$906,063		$30,266
					Fair Market		Due to		Net
	Face		Cost		Value		Brokers (1)		Asset
December 31, 2012		$565,000		$585,100		$587,247		$585,100		$2,147

(1) Amounts due to brokers are usually settled within 30-90 days after period end.