Hatteras Financial (HTS) 10-Q 2009 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2009

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  ¨    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	¨	Accelerated filer	¨
Non-accelerated filer	x  (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 October 23, 2009
Common Stock ($0.001 par value)	36,199,911

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	16
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	31
Item 4T.	Controls and Procedures	34
PART II	Other Information
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Submission of Matters to a Vote of Security Holders	35
Item 5.	Other Information	35
Item 6.	Exhibits	35
	Signatures	36

PART I. Financial Information

Item 1. Financial Statements

Hatteras Financial Corp.

Balance Sheets

(In thousands, except per share data)	(Unaudited)
	September 30, 2009		December 31, 2008
Assets
Mortgage-backed securities, available for sale at fair value (including pledged assets of $6,347,440 and $4,829,671 at September 30, 2009 and December 31, 2008, respectively)	$	6,732,544	$	5,107,074
Unsettled purchased mortgage-backed securities, at fair value		570,897		104,656
Cash and cash equivalents		172,825		143,717
Restricted cash		60,065		66,727
Accrued interest receivable		35,348		28,455
Principal payments receivable		30,404		8,788
Note receivable		10,000		—
Interest rate hedge asset		3,507		131
Other assets		1,004		778
Total assets	$	7,616,594	$	5,460,326
Liabilities and shareholders’ equity
Repurchase agreements	$	6,007,909	$	4,519,435
Payable for unsettled securities		567,252		104,467
Accrued interest payable		2,863		8,626
Interest rate hedge liability		51,647		62,822
Dividend payable		41,630		26,777
Accounts payable and other liabilities		1,696		1,912
Total liabilities		6,672,997		4,724,039
Shareholders’ equity:
Preferred stock, $.001 par value, 10,000 shares authorized, none outstanding at September 30, 2009 and December 31, 2008		—		—
Common stock, $.001 par value, 100,000 shares authorized, 36,200 and 36,186 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively		36		36
Additional paid-in capital		769,990		769,159
Retained earnings (accumulated deficit)		5,833		(2,787	)
Accumulated other comprehensive income (loss)		167,738		(30,121	)
Total shareholders’ equity		943,597		736,287
Total liabilities and shareholders’ equity	$	7,616,594	$	5,460,326

See accompanying notes.

1

Hatteras Financial Corp.

Statements of Income

(Unaudited)

(In thousands, except per share amounts)	Three months Ended September 30, 2009		Three months Ended September 30, 2008		Nine months Ended September 30, 2009		Nine months Ended September 30, 2008
Interest income:
Interest income on mortgage-backed securities	$	72,442	$	65,106	$	209,833	$	133,146
Interest income on investments		230		371		480		1,823
Interest income		72,672		65,477		210,313		134,969
Interest expense		23,656		33,251		72,953		70,460
Net interest income		49,016		32,226		137,360		64,509
Operating expenses:
Management fee		2,172		1,794		6,499		4,291
Share-based compensation		332		296		963		894
General and administrative		745		416		1,827		888
Total operating expenses		3,249		2,506		9,289		6,073
Net income	$	45,767	$	29,720	$	128,071	$	58,436
Earnings per share - common stock, basic and diluted	$	1.26	$	1.11	$	3.54	$	2.81
Dividends per share	$	1.15	$	1.05	$	3.30	$	2.49
Weighted average shares outstanding		36,200		26,777		36,194		20,825

See accompanying notes.

2

Hatteras Financial Corp.

Statement of Changes in Shareholders’ Equity

For the nine months ended September 30, 2009

(Unaudited)

(Dollars in thousands)							Retained			Accumulated
				Additional			Earnings			Other
	Common Stock			Paid-in			(Accumulated			Comprehensive
	Shares	Amount		Capital			Deficit)			Income (Loss)			Total
Balance at December 31, 2008	36,186	$	36	$	769,159		$	(2,787	)	$	(30,121	)	$	736,287
Issuance of restricted stock	14		—		—			—			—			—
Cost of issuance of common stock					(132	)								(132	)
Share based compensation	—		—		963			—			—			963
Dividends declared on common stock	—		—		—			(119,451	)		—			(119,451	)
Comprehensive income:
Net income	—		—		—			128,071			—			128,071
Other comprehensive income:
Net unrealized gain on securities available for sale	—		—		—			—			183,430			183,430
Net unrealized gain on interest rate hedges	—		—		—			—			14,429			14,429
Comprehensive income														325,930
Balance at September 30, 2009	36,200	$	36	$	769,990		$	5,833		$	167,738		$	943,597

See accompanying notes.

3

Hatteras Financial Corp.

Statements of Cash Flows

(Unaudited)

(Dollars in thousands)	For the nine months ended
	September 30, 2009			September 30, 2008
Operating activities
Net income	$	128,071		$	58,436
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of premium paid for mortgage-backed securities		13,189			4,768
Amortization related to interest rate swap agreements		121			44
Share based compensation		963			894
Hedge ineffectiveness		(121	)		(159	)
Changes in operating assets and liabilities:
Increase in accrued interest receivable		(6,892	)		(20,265	)
Increase in other assets		(349	)		(715	)
(Decrease) increase in accrued interest payable		(5,762	)		2,085
(Decrease) increase in accounts payable and other liabilities		(216	)		649
Net cash provided by operating activities		129,004			45,737
Investing activities
Purchases of mortgage-backed securities		(2,304,202	)		(3,828,976	)
Purchase of note receivable		(10,000	)		—
Principal repayments of mortgage-backed securities		823,900			287,392
Net cash used in investing activities		(1,490,302	)		(3,541,584	)
Financing activities
Issuance of common stock, net of cost of issuance		(132	)		414,183
Cash dividends paid		(104,598	)		(28,272	)
Decrease (increase) in restricted cash on swap arrangements		6,662			(11,751	)
Proceeds from repurchase agreements		46,491,674			25,537,886
Principal repayments on repurchase agreements		(45,003,200	)		(22,336,736	)
Net cash provided by financing activities		1,390,406			3,575,310
Net increase in cash and cash equivalents		29,108			79,463
Cash and cash equivalents, beginning of period		143,717			18,442
Cash and cash equivalents, end of period	$	172,825		$	97,905
Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	78,715		$	68,559
Supplemental schedule of non-cash financing activities
Obligation to brokers incurred for purchase of mortgage-backed securities	$	567,252		$	—
Mortgage-backed securities held under defaulted repurchase agreement, including accrued interest of $301				$	114,671
Repurchase agreement offset by default of counterparty, including accrued
Interest payable of $183				$	107,583

See accompanying notes.

4

Hatteras Financial Corp.

Notes to Financial Statements

For the three and nine months ended September 30, 2009 and 2008

(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, and commenced its planned business activities on November 5, 2007, the date of the initial closing of a private issuance of common stock. The Company was formed to invest in residential mortgage-backed securities (“RMBS”), issued or guaranteed by the U.S. Government or U.S. Government sponsored agencies such as Ginnie Mae, Fannie Mae and Freddie Mac (“agency RMBS”). 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 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 nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2009. These unaudited financial statements should be read in conjunction with the audited financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2008. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. For comparison purposes, certain amounts have been reclassified in the financial statements as of December 31, 2008 to conform to current year presentation.

Financial Instruments

The Company considers its cash and cash equivalents, restricted cash, MBS (settled and unsettled), note receivable, interest receivable, accounts payable, derivative instruments and repurchase agreements and accrued interest payable to meet the definition of financial instruments. The carrying amount of cash and cash equivalents, interest receivable and accounts payable approximated their fair value due to the short maturities of these instruments. The carrying amount of MBS and derivatives instruments are marked to fair value. See footnote 4 and 7 for additional discussion of these items. The carrying amount of the note receivable is deemed to approximate fair value based on the terms and characteristics of the note (see footnote 5.) The carrying amount of the repurchase agreements and accrued interest payable is deemed to approximate fair value since the lines are based upon a variable rate of interest.

5

Hatteras Financial Corp.

Notes to Financial Statements—(Continued)

For the three and nine months ended September 30, 2009 and 2008

(Dollars in thousands except per share amounts)

Mortgage-Backed Securities

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 of the reporting period for which impairment is assessed, the impairment is designated as either “temporary” or “other-than-temporary.” In deciding on whether or not a security is other than temporarily impaired, the Company uses a two step evaluation process. First, has the Company made any decision to sell a security that is in an unrealized loss position, or, if not, is it more likely than not that the Company will be forced 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. At September 30, 2009, the Company had no securities in an unrealized loss position.

Interest Income

Interest income is accrued based on the outstanding principal amount of the investment securities and their contractual terms. Premiums and discounts associated with the purchase of the investment securities are amortized or accreted into interest income over the 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 using the fair value based method. 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 $332 and $296 for the three months ended September 30, 2009 and 2008, respectively. The Company’s share-based compensation transactions resulted in compensation expense of $963 and $894 for the nine months ended September 30, 2009 and 2008, respectively.

Earnings Per Common Share (EPS)

Basic EPS is computed by dividing 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 by dividing net income available to holders of common stock 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 June 2009, the FASB issued new guidance concerning the organization of authoritative guidance under U.S. GAAP. This new guidance created the FASB Accounting Standards Codification (ASC). The Codification is now the single source of authoritative nongovernmental U.S. generally accepted accounting principles (“GAAP”), superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”), and related accounting literature. The ASC reorganizes the thousands of GAAP pronouncements into roughly 90 accounting topics and displays them using a consistent structure. Also included is relevant Securities and Exchange Commission guidance organized using the same topical structure in separate sections. The ASC is effective for financial statements issued for reporting periods that end after September 15, 2009.

6

Hatteras Financial Corp.

Notes to Financial Statements—(Continued)

For the three and nine months ended September 30, 2009 and 2008

(Dollars in thousands except per share amounts)

The Company adopted new U.S. GAAP guidance related to transfers and servicing which requires an assessment as to whether assets purchased from a particular counterparty and financed through a repurchase agreement with the same counterparty can be considered and accounted for as separate transactions. This new guidance requires that all of the following criteria be met in order to consider the transaction as separate (1) the initial transfer and the repurchase financing cannot be contractually contingent on one another; (2) the repurchase financing entered into between the parties provides the initial transferor with full recourse to the transferee upon default and the repurchase price is fixed; (3) the financial asset subject to the initial transfer and repurchase financing is readily obtainable in the marketplace and the transfer is executed at market rates; and (4) the repurchase agreement and financial asset do not mature simultaneously. This Company adopted this guidance on January 1, 2009 and its adoption did not have a material impact on our financial position or results of operations.

The Company adopted new U.S. GAAP guidance related to financial instruments which amends the required disclosures about fair value of financial instruments. The ASC now requires a public entity to provide disclosures about fair value of financial instruments in interim financial information for interim and annual financial periods ending after June 15, 2009. This Company adopted this guidance in its June 30, 2009 financial statements and the adoption did not have a material impact on the financial statements.

The Company adopted new U.S. GAAP guidance related to investments debt and equity securities which clarifies the determination of an other-than-temporary impairment. The previous guidance for determining whether an impairment is other than temporary to debt securities required that the entity’s management assert it has both the positive intent and ability to hold an impaired security until recovery. The new guidance replaces this requirement with a requirement that an entity conclude it does not intend to sell an impaired security and it is not more likely than not it will be required to sell the security before the recovery of its cost basis to conclude that an impairment is temporary. This new guidance is effective for interim and annual periods ending after June 15, 2009. We have adopted the new guidance and there was no material impact on our financial condition or results of operations.

The Company adopted new U.S. GAAP guidance related to fair value measurements and disclosures. This guidance clarifies the objective of fair value when a market is not active and includes additional factors for determining whether there has been a significant decrease in market activity, eliminates the presumption that all transactions are distressed unless proven otherwise, and requires an entity to disclose a change in valuation technique. This new guidance was effective for interim and annual periods ending after June 15, 2009. We have adopted this accounting guidance and there was no impact on our financial condition or results of operations.

3. Financial Instruments

The Company’s valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. These inputs are classified 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.

7

Hatteras Financial Corp.

Notes to Financial Statements—(Continued)

For the three and nine months ended September 30, 2009 and 2008

(Dollars in thousands except per share amounts)

The fair values of the Company’s RMBS and interest rate hedges based on the level of inputs are summarized below:

	September 30, 2009
	Fair Value Measurements Using						Total at Fair Value
	Level 1		Level 2		Level 3
Assets
Mortgage backed securities	$	—	$	6,732,544	$	—	$	6,732,544
Unsettled purchased mortgage backed securities		—		570,897		—		570,897
Interest rate hedges		—		3,507		—		3,507
Total	$	—	$	7,306,948	$	—	$	7,306,948
Liabilities
Interest rate hedges	$	—	$	51,647	$	—	$	51,647
Total	$	—	$	51,647	$	—	$	51,647

The carrying values and approximate fair values of other financial instruments as of September 30, 2009 and December 31, 2008 were as follows:

	September 30, 2009		December 31, 2008
	Carrying Value	Fair Value	Carrying Value	Fair Value
Assets
Mortgage backed securities	6,732,544	6,732,544	5,107,074	5,107,074
Unsettled purchased mortgage backed securities	570,897	570,897	104,656	104,656
Cash and cash equivalents	172,825	172,825	143,717	143,717
Restricted cash	60,065	60,065	66,727	66,727
Accrued interest receivable	35,348	35,348	28,455	28,455
Note receivable	10,000	10,000	—	—
Interest rate hedge asset	3,507	3,507	131	131
Liabilities
Repurchase agreements	6,007,909	6,007,909	4,519,435	4,519,435
Payable for unsettled securities	567,252	567,252	104,467	104,467
Accrued interest payable	2,863	2,863	8,626	8,626
Interest rate hedge liability	51,647	51,647	62,822	62,822

4. Mortgage-Backed Securities

All of the Company’s mortgage-backed securities (“MBS”) were classified as available-for-sale and, as such, are reported at their estimated fair value. The estimated fair values of MBS are generally determined by management from three separate and independent sources and averaging these valuations. If the fair value of a security is not available from a dealer or third-party pricing service, or such data appear unreliable, the Company may estimate the fair value of the security using a variety of methods including, but not limited to, other pricing services, repurchase agreement pricing, discounted cash flow analysis, matrix pricing, option adjusted spread models and other

8

Hatteras Financial Corp.

Notes to Financial Statements—(Continued)

For the three and nine months ended September 30, 2009 and 2008

(Dollars in thousands except per share amounts)

fundamental analysis of observable market factors. At September 30, 2009, all of the Company’s MBS values were based on third-party sources. The Company’s MBS portfolio consists solely of agency RMBS, 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 MBS at September 30, 2009.

	MBS Amortized Cost		Gross Unrealized Gain		Estimated Fair Value
Agency MBS
Fannie Mae Certificates	$	4,515,506	$	147,440	$	4,662,946
Freddie Mac Certificates		2,004,880		64,718		2,069,598
Total MBS	$	6,520,386	$	212,158	$	6,732,544

The following table presents certain information about the Company’s MBS at December 31, 2008.

	MBS Amortized Cost		Gross Unrealized Loss			Gross Unrealized Gain		Estimated Fair Value
Agency RMBS
Fannie Mae Certificates	$	3,592,680	$	(1,750	)	$	22,811	$	3,613,741
Freddie Mac Certificates		1,482,208		(302	)		11,427		1,493,333
Total MBS	$	5,074,888	$	(2,052	)	$	34,238	$	5,107,074

The components of the carrying value of available-for-sale MBS at September 30, 2009 and December 31, 2008 are presented below.

	September 30, 2009			December 31, 2008
Principal balance	$	6,427,055		$	5,013,233
Unamortized premium		93,357			61,696
Unamortized discount		(26	)		(41	)
Gross unrealized gains		212,158			34,238
Gross unrealized losses		—			(2,052	)
Carrying value/estimated fair value	$	6,732,544		$	5,107,074

The Company monitors the performance and market value of its investment securities portfolio on an ongoing basis. At September 30, 2009, the Company did not have any securities in a loss position.

The following table presents components of interest income on the Company’s RMBS portfolio for the three and nine months ended September 30, 2009 and 2008, respectively:

	Three months ended						Nine months ended
	September 30, 2009			September 30, 2008			September 30, 2009			September 30, 2008
Coupon interest on MBS	$	77,853			66,960		$	223,022			137,914
Premium amortization		(5,411	)		(1,854	)		(13,189	)		(4,768	)
Interest income on MBS, net	$	72,442		$	65,106		$	209,833		$	133,146

9

Hatteras Financial Corp.

Notes to Financial Statements—(Continued)

For the three and nine months ended September 30, 2009 and 2008

(Dollars in thousands except per share amounts)

The contractual maturity of the Company’s RMBS ranges from 20 to 30 years. Because of prepayments on the underlying mortgage loans, the actual weighted-average maturity is expected to be less than the stated maturity. The following table presents certain information about the Company’s RMBS that will reprice or amortize based on contractual terms, which do not consider prepayment assumptions at September 30, 2009 and December 31, 2008:

Months to Coupon Reset	Fair Value		September 30, 2009 % of Total		WAC		Fair Value		December 31, 2008 % of Total		WAC
0 - 36 Months	$	1,428,748	21.2	%	5.06	%	$	418,183	8.2	%	5.18	%
37 - 60 Months		3,713,669	55.2	%	4.90	%		3,184,191	62.3	%	5.29	%
61 - 84 Months		1,575,691	23.4	%	5.11	%		1,504,700	29.5	%	5.28	%
85 - 120 Months		14,436	0.2	%	4.38	%		—	—		—
Total MBS	$	6,732,544	100.0	%	4.98	%	$	5,107,074	100.0	%	5.28	%

5. Note Receivable

During the third quarter of 2009, the Company acquired a $10.0 million senior note receivable from a repo lending counterparty. The note is AAA-rated by Standard and Poors, Inc. and matures December 15, 2010. It bears interest at the rate of 10% per annum, payable monthly, and is callable by the issuer at par. The Company estimates the fair value of this note to approximate par based on the prices of other AAA rated notes of similar maturities, considering the coupon, the lack of marketability and the non-public nature of the issuer.

6. Repurchase Agreements

At September 30, 2009 and December 31, 2008, the Company had repurchase agreements in place in the amount of $6,007,909 and $4,519,435, respectively, to finance RMBS purchases. At September 30, 2009 and December 31, 2008, the average interest rate on these borrowings was 0.57% and 2.12%, respectively. The Company’s repurchase agreements are collateralized by the Company’s RMBS and typically bear interest at rates that are based on LIBOR. At September 30, 2009 and December 31, 2008, respectively, the Company had repurchase agreements outstanding with 18 and 14 counterparties with a weighted average contractual maturity of 57 days and 93 days, respectively. The following table presents the contractual repricing information regarding the Company’s repurchase agreements:

	September 30, 2009				December 31, 2008
(dollars in thousands)	Balance		Weighted Average Contractual Rate		Balance		Weighted Average Contractual Rate
Within 30 days	$	5,507,909	0.33	%	$	4,019,435	1.99	%
30 days to 3 months		100,000	3.72	%		—	0.00	%
3 months to 36 months		400,000	3.01	%		500,000	3.15	%
	$	6,007,909	0.57	%	$	4,519,435	2.12	%

10

Hatteras Financial Corp.

Notes to Financial Statements—(Continued)

For the three and nine months ended September 30, 2009 and 2008

(Dollars in thousands except per share amounts)

At September 30, 2009, the Company’s repurchase agreements had the following counterparties, amounts at risk and weighted average remaining maturities:

Repurchase Agreement Counterparties	Amount Outstanding		Amount at Risk(1)		Weighted Average Maturity of Repurchase Agreements in Days	Percent of Total Amount Outstanding
Bank of America Securities, LLC	$	602,602	$	37,081	29	10.1	%
Citigroup Global Markets Inc.		500,000		36,590	389	8.3	%
South Street Securities LLC		452,964		21,374	28	7.5	%
Deutsche Bank Securities Inc.		518,825		34,506	29	8.6	%
Credit Suisse Securities (USA) LLC		434,210		35,264	16	7.2	%
BNP Paribas Securities Corp		410,089		16,854	29	6.8	%
Barclays Capital Inc.		380,930		23,791	29	6.3	%
Mizuho		370,252		15,757	26	6.2	%
Cantor Fitzgerald & Co.		429,971		26,808	29	7.2	%
MF Global Inc.		308,385		18,741	27	5.1	%
Greenwich Capital Markets, Inc.		230,126		15,463	21	3.8	%
Daiwa Securities America Inc.		205,799		16,580	23	3.4	%
Mitsubishi UFJ Securities (USA), Inc.		356,304		24,833	23	6.0	%
LBBW Securities LLC		158,591		9,862	28	2.6	%
Jefferies & Company, Inc.		256,411		15,043	27	4.3	%
Nomura Securities International, Inc.		19,684		1,109	28	0.3	%
Morgan Stanley & Co. Incorporated		225,765		13,676	23	3.8	%
ING Financial Markets LLC		147,001		7,463	30	2.5	%
Total	$	6,007,909	$	370,795		100.0	%

⁽¹⁾ Equal to the fair value of securities sold, plus accrued interest income, minus the sum of repurchase agreement liabilities, plus accrued interest expense.

7. Derivatives - Interest Rate Swap Agreements

Risk Management Objective of Using Derivatives

The Company is exposed to certain risk arising from both its business operations and economic conditions. 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 Company’s primary source of

11

Hatteras Financial Corp.

Notes to Financial Statements—(Continued)

For the three and nine months ended September 30, 2009 and 2008

(Dollars in thousands except per share amounts)

debt funding is repurchase agreements. Since the interest rate on repurchase agreement changes on a monthly basis, the Company is exposed to constantly changing interest rates, and the cash flows associated with these rates. To minimize the effect of changes in these interest rates, the Company enters into interest rate swap agreements which help to manage the volatility in the interest rate exposures and their related cash flows.

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 rate on its repurchase agreements change on a monthly basis, the Company is constantly exposed to changing interest rates. The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company currently uses interest rate swaps as part of its interest rate risk management strategy. 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 outstanding debt for the terms of the swaps.

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 and nine months ending September 30, 2009, these effective hedge losses totaled ($22,488) and ($22,812), respectively. Ineffective gains or losses are recorded on a current basis in earnings and for the three and nine months ended September 30, 2009, the Company recorded ($58) and $121, respectively, of hedge ineffectiveness loss and gain in earnings, 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 twelve months, the Company estimates that an additional $50,963 will be reclassified as an increase to interest expense.

The Company is hedging its exposure to the variability in future cash flows for forecasted transactions over an average period of 28 months.

			Remaining
	Notional		Term	Fixed Interest
Maturity	Amount		in Months	Rate in Contract
12 months or less		300,000	10	2.98	%
Over 12 months to 24 months		900,000	18	3.37	%
Over 24 months to 36 months		300,000	29	2.95	%
Over 36 months to 48 months		600,000	43	2.03	%
Over 48 months to 60 months		200,000	50	1.94	%
Total	$	2,300,000	28	2.79	%

12

Hatteras Financial Corp.

Notes to Financial Statements—(Continued)

For the three and nine months ended September 30, 2009 and 2008

(Dollars in thousands except per share amounts)

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheet as of September 30, 2009 and December 31, 2008.

Asset Derivatives						Liability Derivatives
As of September 30, 2009			As of December 31, 2008			As of September 30, 2009			As of December 31, 2008
Balance Sheet	Fair Value		Balance Sheet	Fair Value		Balance Sheet	Fair Value		Balance Sheet	Fair Value
Interest rate hedge asset	$	3,507	Interest rate hedge asset	$	131	Interest rate hedge liability	$	51,647	Interest rate hedge liability	$	62,822

The table below presents the effect of the Company’s derivative financial instruments on the income statement for the three months ended September 30, 2009.

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 loss recognized in income on derivative (ineffective portion)
Interest Rate	$	22,488	Interest Expense	$	14,194	Interest Expense	$	58

The table below presents the effect of the Company’s derivative financial instruments on the income statement for the nine months ended September 30, 2009.

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	$	22,812	Interest Expense	$	37,243	Interest Expense	$	121

The following table presents the impact of the Company’s interest rate swap agreements on the Company’s other comprehensive loss for the nine months ended September 30, 2009 and the year ended December 31, 2008.

	September 30, 2009			December 31, 2008
Balance at beginning of year	$	(62,496	)	$	—
Unrealized loss on interest rate swaps		(22,812	)		(67,536	)
Reclassification of net losses included in income statement		37,243			5,040
Balance at end of period	$	(48,065	)	$	(62,496	)

13

Hatteras Financial Corp.

Notes to Financial Statements—(Continued)

For the three and nine months ended September 30, 2009 and 2008

(Dollars in thousands except per share amounts)

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 U.S. GAAP shareholders’ equity declines by a specified percentage over a specified time period, then the Company could 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 fails to maintain a minimum shareholders’ equity above a certain threshold amount then the Company could be declared in default on its derivative obligations. The minimum shareholders’ equity threshold amounts specified in these agreements are $100 million and $350 million, respectively. At September 30, 2009 the Company was in compliance with these requirements.

As of September 30, 2009, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $48,140. The Company has collateral posting requirements with each of its counterparties and all interest rate swap agreements were fully collateralized as of September 30, 2009.

8. Earnings per Share

	For the three months ended				For the nine months ended
	September 30, 2009		September 30, 2008		September 30, 2009		September 30, 2008
Basic earnings per share:
Net income	$	45,767	$	29,720	$	128,071	$	58,436
Weighted average shares		36,200		26,777		36,194		20,825
Basic earnings per share	$	1.26	$	1.11	$	3.54	$	2.81
Diluted earnings per share:
Net income	$	45,767	$	29,720	$	128,071	$	58,436
Weighted average shares		36,200		26,777		36,194		20,825
Potential dilutive shares from exercise of stock options		25		8		17		4
Diluted weighted average shares		36,225		26,785		36,211		20,829
Diluted earnings per share	$	1.26	$	1.11	$	3.54	$	2.81

9. 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 November 5, 2010 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 three times the average annual management fee earned by ACA during the two year period immediately preceding termination,

14

Hatteras Financial Corp.

Notes to Financial Statements—(Continued)

For the three and nine months ended September 30, 2009 and 2008

(Dollars in thousands except per share amounts)

calculated as of the end of the most recently completed fiscal quarter prior to the date of termination. Certain terminations involving the internalization of the Company’s management, however, may result in no or a capped termination fee. Under the terms of the Management Agreement, the Company is responsible for all operating expenses of the Company other than those borne by ACA. ACA is generally responsible for costs incident to the performance of its duties, such as compensation of its employees and overhead expenses (such as rent, utilities, furniture and equipment, bookkeeping and other back office expenses.)

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. For the three months ended September 30, 2009 and 2008, the Company incurred $2,172 and $1,794 in management fees, respectively. For the nine months ended September 30, 2009 and 2008, the Company incurred $6,499 and $4,291 in management fees, respectively. At September 30, 2009 and December 31, 2008, the Company owed ACA $720 and $660, respectively, for the management fee, which is included in accounts payable and other liabilities.

10. Accumulated Other Comprehensive Income

Accumulated other comprehensive income consists of the following components:

	September 30, 2009			December 31, 2008
Unrealized gain on securities, net	$	212,158		$	32,186
Unrealized gain on unsettled securities		3,645			189
Unrealized loss on swap		(48,065	)		(62,496	)
Accumulated other comprehensive (loss) income	$	167,738		$	(30,121	)

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

Comprehensive income (loss) for the three and nine months ended September 30, 2009 and 2008 consists of the following components:

	Three months ended						Nine months ended
	September 30, 2009			September 30, 2008			September 30, 2009		September 30, 2008
Net income	$	45,767		$	29,720		$	128,071	$	58,436
Unrealized gain (loss) on securities		82,220			(31,346	)		183,430		(58,385	)
Unrealized gain (loss) on interest rate swaps		(8,294	)		(5,266	)		14,429		2,083
Unrealized gain on receivable		—			1,040			—		1,040
Comprehensive income (loss)	$	119,693		$	(5,852	)	$	325,930	$	3,174

15

Hatteras Financial Corp.

Notes to Financial Statements—(Continued)

For the three and nine months ended September 30, 2009 and 2008

(Dollars in thousands except per share amounts)

11. Subsequent Events

We evaluated all events or transactions that occurred after September 30, 2009 up through October 29, 2009, the date we issued these financial statements.

On October 9, 2009, the Company initiated a controlled equity offering program (the “CEO Program”) through which it may, from time to time, publicly offer and sell shares of common stock through Cantor Fitzgerald & Co. (“Cantor”) in privately negotiated and/or at-the-market transactions. Although the Company may likely issue shares in the future, no shares have been issued under this program since its inception.

In connection with the CEO program, the Company entered into a Sales Agreement (the “Agreement”) with Cantor, as sales agent. In accordance with the terms of the Agreement, the Company may offer and sell up to 5,000,000 shares of common stock (the “CEO Shares”) from time to time through Cantor. Sales of the CEO Shares, if any, may be made as sales at other than a fixed price made on or through the facilities of the New York Stock Exchange, or sales made to or through a market maker or through an electronic communications network, or in any other manner that may be deemed to be an “at-the-market offering” as defined in Rule 415 of the 1933 Act. Cantor will make all sales on a best efforts basis using commercially reasonable efforts consistent with its normal trading and sales practices on mutually agreed terms between the Company and Cantor.

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: RMBS refers to residential mortgage-backed securities; agency RMBS and agency securities refer to our RMBS that are issued or guaranteed by a U.S. Government sponsored entity, such as Fannie Mae or Freddie Mac, or an agency of the U.S. Government, such as Ginnie Mae; hybrids and hybrid ARMs refer to hybrid mortgage loans that 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; and ARMs refers to hybrids after the fixed rate period expires and adjustable-rate mortgage loans which typically at all times have interest rates that 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 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, 2008 filed February 19, 2009.

Forward-Looking Statements

When used in this quarterly report on Form 10-Q, in future filings with the Securities and Exchange Commission (“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.

Forward-looking statements 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 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 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

16

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 the annual, 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.

Overview

We are a mortgage REIT that invests in adjustable-rate and hybrid adjustable-rate single-family residential mortgage pass-through securities guaranteed or issued by a U.S. Government agency (such as the Government National Mortgage Association, or Ginnie Mae), or by a U.S. Government-sponsored entity (such as the Federal National Mortgage Association, or Fannie Mae, and the Federal Home Loan Mortgage Corporation, or Freddie Mac). We were incorporated in Maryland in September 2007 and commenced operations in November 2007. We completed our initial public offering in April 2008, and listed our common stock on the New York Stock Exchange “NYSE” under the symbol “HTS”. We are managed and advised by our manager, Atlantic Capital Advisors LLC.

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 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 instruments, relying primarily on interest rate swaps. We may, subject to maintaining our REIT qualification, also employ other hedging techniques from time to time, including interest rate caps, floors and swaptions to mitigate the effects of adverse interest rate movements.

We focus on agency securities consisting of hybrid adjustable-rate residential mortgage loans with short effective durations, which we believe reduces 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.

Since our formation, virtually all of our invested assets have been in agency securities. These agency securities principally consist of whole-pool, pass-through certificates that are backed by adjustable-rate mortgages, or ARMs, and hybrid ARMs that have principal and interest payments guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac. ARMs have interest rates that reset monthly, quarterly and annually, based on the 12-month moving average of the one-year constant maturity U.S. Treasury rate or LIBOR. Hybrid ARMs have interest rates that are fixed for a longer initial period (typically three, five, seven or 10 years) and, thereafter, generally adjust annually to an increment over a pre-determined interest rate index. As of September 30, 2009, our portfolio consisted of approximately $6.7 billion in market value of agency RMBS with a weighted average initial fixed-interest rate period of 47 months.

We are organized and conduct our operations to qualify as a REIT under the Code, and generally are not subject to federal taxes on our income to the extent we currently distribute our income to our shareholders and maintain our qualification as a REIT.

17

The following table represents key data regarding our company since the beginning of operations on November 5, 2007:

(in thousands except per share amounts)

As of	Agency Securities		Repurchase Agreements		Equity		Shares Outstanding	Book Value Per Share		Quarterly Diluted Earnings Per Share
September 30, 2009	$	7,303,441	$	6,007,909	$	943,597	36,200	$	26.07	$	1.26
June 30, 2009	$	6,699,512	$	5,496,854	$	865,204	36,200	$	23.90	$	1.20
March 31, 2009	$	6,329,731	$	5,250,382	$	803,575	36,192	$	22.20	$	1.07
December 31, 2008	$	5,211,730	$	4,519,435	$	736,287	36,186	$	20.35	$	0.73
September 30, 2008	$	4,974,648	$	4,569,262	$	527,220	26,777	$	19.69	$	1.11
June 30, 2008	$	5,097,189	$	4,387,739	$	561,176	26,777	$	20.96	$	0.88
March 31, 2008	$	3,036,826	$	2,739,631	$	329,400	15,268	$	21.57	$	0.71
December 31, 2007	$	1,619,290	$	1,475,512	$	165,356	8,368	$	19.76	$	0.15

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, such as 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, 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 assets will reprice more slowly than the corresponding liabilities. Consequently, changes in interest rates, particularly short-term interest rates, may significantly influence our net interest income. With the maturities of our assets generally of 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 such prepayments at comparable yields, our net interest income may suffer.

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;

18

• our access to funding and borrowing capacity;

• our hedging activities; 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 “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008.

Market and Interest Rate Trends and the Effect on our Portfolio

Credit Market Disruption

During the past two years, the residential housing and mortgage markets in the United States have experienced a variety of difficulties and changed economic conditions including loan defaults, credit losses and decreased liquidity. These conditions have resulted in volatility in the value of the agency securities in our portfolio and an increase in the average collateral requirements under our repurchase agreements. Liquidating sales by several large institutions increased the volatility of many financial assets, including agency securities and other high-quality RMBS. As a result, values for RMBS, including some agency securities, were negatively impacted. Further increased volatility and deterioration in the broader residential mortgage and RMBS 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. As values for certain types of agency securities declined many lenders in the agency securities market tightened their lending standards, and in some cases, withdrew financing of residential mortgage assets and agency securities. Our lenders may have owned or financed RMBS that have declined in value and caused them to incur losses. Although market conditions have returned to more normal conditions, if they were to worsen again, our lenders may be forced to exit the repurchase market, or 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. Furthermore, certain lenders also could become insolvent which could cause us to incur losses.

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 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 have 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 mortgage-backed securities, significant equity infusions into banks and aggressive monetary policy. We cannot predict whether or when new actions may occur, the timing and pace of current actions already implemented, or what impact if any, such actions, or future actions, could have on our business, results of operations and financial condition.

19

Interest Rates

The overall credit market deterioration since 2007 has also affected prevailing interest rates, which have been unusually volatile since the third quarter of 2007. Since September 18, 2007, the U.S. Federal Reserve lowered the target for the Federal Funds Rate nine times from 5.25% to 1.0% in October 2008. In December 2008, the Federal Reserve stated that it was adopting a policy of “quantitative easing” and would target keeping the Federal Funds Rate between 0 and 0.25%. Our funding costs, which traditionally have tracked the 30-day London Interbank Offered Rate, or LIBOR, have generally benefited by this easing of monetary policy, although to a somewhat lesser extent. Because of continued uncertainty in the credit markets and U.S. economic conditions, we expect that interest rates are likely to experience continued volatility, which will likely affect our financial results since our cost of funds is largely dependent on short-term rates.

Historically, the 30-day LIBOR, has closely tracked movements in the Federal Funds Rate. Our borrowings in the repurchase market have also historically closely tracked LIBOR. So traditionally, a lower Federal Funds rate has indicated a time of increased net interest margin and higher asset values. However, since July 2007 (prior to our commencement of operations) LIBOR and repurchase market rates have been significantly higher than the target Federal Funds Rate. The difference between 30-day LIBOR and the Federal Funds rate has been quite volatile, with the spread alternately returning to more normal levels and then widening out again. Towards the end of the third quarter of 2008 this difference increased to historically high levels. Although this difference has returned to more normal levels, the volatility in these rates and divergence from the historical relationship among these rates could negatively impact our ability to manage our portfolio. If this were to occur, our net interest margin and the value of our portfolio might suffer as a result. The following table shows the 30-day LIBOR as compared to the Federal Funds rate at each period end:

	30-Day LIBOR		Federal Funds
September 30, 2009	0.25	%	0.25	%
June 30, 2009	0.31	%	0.25	%
March 31, 2009	0.50	%	0.25	%
December 31, 2008	0.44	%	0.25	%
September 30, 2008	3.93	%	2.00	%
June 30, 2008	2.46	%	2.00	%
March 31, 2008	2.70	%	2.25	%
December 31, 2007	4.60	%	4.25	%

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. Being able to accurately estimate and manage these repayment rates is a critical portion of 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 and the yields which those new securities may add to our portfolio. The following table shows the average principal repayment rate for each quarter since our commencement of operations:

Quarter ended	Average Quarterly Principal Repayment Rate		Average Rate Annualized
September 30, 2009	5.56	%	22.26	%
June 30, 2009	5.23	%	20.93	%
March 31, 2009	3.09	%	12.36	%
December 31, 2008	1.96	%	7.84	%
September 30, 2008	2.12	%	8.46	%
June 30, 2008	3.14	%	12.57	%
March 31, 2008	3.90	%	15.61	%

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Investing the Proceeds of our Offerings

We began operations following the closing of our initial private offering on November 5, 2007. We raised additional equity capital three times in 2008. The following is a summary of these transactions:

(Dollars in thousands except per share amounts)
Date of Offering	Number of Shares of Common Stock Sold	Offering Price Per Share		Net Proceeds (1)
November 5, 2007	8,203,937	$	20.00	$	157,054
February 5, 2008	6,900,000	$	24.00	$	158,743
April 30, 2008 (IPO)	11,500,000	$	24.00	$	255,440
December 15, 2008	9,409,090	$	22.00	$	196,463

(1) After deducting underwriting discounts, and other fees and costs associates with issuance.

While our operations are affected in many ways by the issuance of additional shares, the most significant immediate earnings impact is that we generally do not invest all of the proceeds immediately. Depending on market conditions, and the fact that normal trade settlement on agency securities is not based on the trade date, we have averaged around two months to invest the proceeds from these offerings. Since each capital raise was individually significant to the size of our portfolio, our results from operations, and some statistics regarding such results, may not be meaningful or portray the underlying fundamentals of our investment portfolio.

Counter-Party Default

During 2008, one of our lenders, Lehman Brothers Inc. (“LBI”), became insolvent and defaulted under the terms of our repurchase agreement with them. We filed a claim with the trustee handling the estate and have reserved the entire amount of our exposure, $6.1 million, in the quarter ended December 31, 2008. We continue to seek repayment from the estate. On May 29, 2009, the trustee for the estate filed its first interim report which discussed the complexity of the estate and that considerable time may be needed to adequately resolve all claims. The final deadline for claims was July 1, 2009. During the nine months ended September 30, 2009, we received no payments or additional information regarding the status of our claim.

Book Value per Share

As of September 30, 2009, our book value per share of common stock (total shareholders’ equity divided by shares of common stock outstanding) was $26.07, an increase of $2.17, or 9.08%, from $23.90 at June 30, 2009 and an increase of $5.72, or 28.11%, from $20.35 at December 31, 2008. Declining U.S. Treasury securities rates, U.S. government actions, particularly the large-scale purchasing of agency securities, and decreasing turmoil in the financial markets increased values on our securities to historically high levels. Our interest rate swaps, which fix the borrowing cost on a portion of our financing, generally help mitigate changes in our book value. Generally, the

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value of our interest rate swaps moves in the opposite direction of the value of our agency securities. However, for much of the first nine months of 2009, our swap values remained fairly level, or strengthened along with the value of our agency securities. The following table shows the components of our book value at each period end:

As of	Common Shareholders’ Equity		Undistributed Earnings		Unrealized Gain/(Loss) on MBS		Unrealized Gain/(Loss) on Interest Rate Swaps		Book Value Per Share
September 30, 2009	$	21.27	0.16		5.96		(1.32	)	$	26.07
June 30, 2009	$	21.26	0.05		3.69		(1.10	)	$	23.90
March 31, 2009	$	21.26	(0.05	)	2.75		(1.76	)	$	22.20
December 31, 2008	$	21.26	(0.08	)	0.90		(1.73	)	$	20.35
September 30, 2008	$	21.37	0.12		(1.88	)	0.08		$	19.69
June 30, 2008	$	21.37	0.06		(0.75	)	0.28		$	20.96
March 31, 2008	$	20.72	0.44		0.55		(0.14	)	$	21.57
December 31, 2007	$	18.79	0.15		0.82		—		$	19.76

Investments

Agency Securities

As of September 30, 2009 and December 31, 2008, our agency securities portfolio was purchased at a net premium to par, or face value, with a weighted-average amortized cost of 101.45 and 101.23, respectively, of face value, due to the average interest rates on these securities being higher than prevailing market rates. As of September 30, 2009 and December 31, 2008, we had approximately $93.4 million and $61.7 million, respectively, of unamortized premium included in the cost basis of our investments.

As of September 30, 2009, our investment portfolio consisted of agency securities as follows:

(dollars in thousands) Months to Reset	% of 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)
0-36	21.2	%	$	1,369,147	5.06	%	$	101.55	$	1,390,307	$	104.35	$	1,428,748
37-60	55.2	%		3,542,940	4.90	%		101.43		3,593,560		104.82		3,713,669
61-84	23.4	%		1,500,952	5.11	%		101.42		1,522,226		104.98		1,575,691
85-120	0.2	%		14,016	4.38	%		101.97		14,292		102.99		14,436
Total MBS	100.0	%	$	6,427,055	4.98	%	$	101.45	$	6,520,385	$	104.75	$	6,732,544

As of December 31, 2008, our investment portfolio consisted of agency securities as follows:

(dollars in thousands) Months to Reset	% of 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)
0-36	8.2	%	$	411,259	5.18	%	$	101.22	$	416,276	$	101.68	$	418,183
37-60	62.3	%		3,123,892	5.29	%		101.25		3,162,918		101.93		3,184,191
61-85	29.5	%		1,478,082	5.28	%		101.19		1,495,694		101.80		1,504,700
Total MBS	100.0	%	$	5,013,233	5.28	%	$	101.23	$	5,074,888	$	101.87	$	5,107,074

⁽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.

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⁽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 three valuations.

⁽⁶⁾ Market value is the total market value for the mortgage security. Under normal conditions, we compute market value by obtaining valuations for the mortgage security from separate and independent sources and averaging three valuations.

Our investment portfolio consisted of the following breakdown between Fannie Mae and Freddie Mac at September 30, 2009 and December 31, 2008:

	September 30, 2009				December 31, 2008
(dollars in thousands)	Estimated Fair Value		% of Total		Estimated Fair Value		% of Total
Agency MBS
Fannie Mae Certificates	$	4,662,946	69.3	%	$	3,613,741	70.8	%
Freddie Mac Certificates		2,069,598	30.7	%		1,493,333	29.2	%
Total MBS	$	6,732,544			$	5,107,074

As of September 30, 2009 and December 31, 2008, the hybrid ARM mortgage loans underlying our agency securities had fixed interest rates for an average period of approximately 47 months and 55 months, respectively, after which time the interest rates reset and become adjustable. After the reset date, interest rates on our hybrid ARM agency securities float based on spreads over various indices, usually LIBOR or the one-year Constant Maturity Treasury, or CMT, rate. These interest rates are subject to caps that limit the amount the applicable interest rate can increase (or decrease) during any year, known as an annual cap, and through the maturity of the security, known as a lifetime cap. The average annual cap on changes to the interest rates on our agency securities is generally 2% per year. The average lifetime cap on changes to the interest rates on our agency securities is generally 5% from the initial stated rate.

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 September 30, 2009 and December 31, 2008, we had 23 and 21 borrowing relationships, respectively, with various investment banking firms and other lenders. We had outstanding balances under our repurchase agreements at September 30, 2009 and December 31, 2008 of $6.0 billion and $4.5 billion, respectively. We continue to seek additional new relationships to help mitigate counterparty credit risk and keep borrowing rates competitive.

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Hedging Instruments

We generally intend to employ interest rate derivatives on the basis of our managers’ discretion, adjusting our hedge coverage in response to changing market opportunities and prospects. No assurance can be given that our hedging activities will have the desired 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;

• 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 September 30, 2009, we had entered into 24 interest rate swap agreements designed to lock in funding costs for specific funding activities associated with specific assets, in such a way as to assure realizing attractive net interest margins. Such hedges incorporate an assumed prepayment schedule, which, if not realized, will cause hedge 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 $2.3 billion of borrowings under our repurchase agreements. We have also entered into six longer-term repurchase agreements, totaling $500.0 million, as a means of hedging our interest rate exposure. We intend to continue to add interest rate hedge positions according to our hedging strategy.

Summary Financial Data

(in thousands, except per share amounts)

	Three months ended (unaudited)						Nine months ended (unaudited)
	September 30, 2009			September 30, 2008			September 30, 2009			September 30, 2008
Balance Sheet Data
Total Assets		7,616,594			5,136,656			7,616,594			5,136,656
Total Liabilities		6,672,997			4,609,436			6,672,997			4,609,436
Total Stockholder’s Equity		943,597			527,220			943,597			527,220
Statement of Income Data
Interest Income	$	72,672		$	65,477		$	210,313		$	134,969
Interest Expense		(23,656	)		(33,251	)		(72,953	)		(70,460	)
Net Interest Income		49,016			32,226			137,360			64,509
Operating Expenses		(3,249	)		(2,506	)		(9,289	)		(6,073	)
Net Income	$	45,767		$	29,720		$	128,071		$	58,436

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Earnings per share of common stock -basic and diluted	$	1.26		$	1.11		$	3.54		$	2.81
Weighted average shares of common stock outstanding		36,200			26,777			36,194			20,825
Distributions per share of common stock	$	1.15		$	1.05		$	3.30		$	2.49
Key Portfolio Statistics*
Average RMBS(1)	$	6,347,472		$	5,141,952		$	5,932,745		$	3,498,358
Average Repurchase Agreements(2)	$	5,781,639		$	4,678,382		$	5,378,396		$	3,185,686
Average Equity(3)	$	910,096		$	549,310		$	848,389		$	443,386
Average Portfolio Yield(4)		4.57	%		5.08	%		4.72	%		5.07	%
Average Cost of Funds(5)		1.64	%		2.84	%		1.81	%		2.95	%
Interest Rate Spread(6)		2.93	%		2.24	%		2.91	%		2.12	%
Return on Average Equity(7)		20.12	%		21.64	%		20.13	%		17.57	%
Average Annual Portfolio Repayment Rate (8)		22.26	%		8.46	%		18.73	%		11.09	%
Debt to Equity(at period end)(9)		6.4:1			8.7:1			6.4:1			8.7:1
Debt to Additional Paid in Capital (at period end)(10)		7.8:1			8.0:1			7.8:1			8.0:1

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

⁽¹⁾ Our daily average investment in agency RMBS for the quarter was calculated by dividing the sum of our daily agency RMBS investments during the quarter by the number of days in that quarter.

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

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

⁽⁴⁾ Our average portfolio yield for the quarter was calculated by dividing our net interest income by our average agency RMBS.

⁽⁵⁾ Our average cost of funds for the quarter was calculated by dividing our total interest expense (including hedges) by our average borrowings.

⁽⁶⁾ Our interest rate spread for the quarter was calculated by subtracting our average cost of funds from our average portfolio yield.

⁽⁷⁾ Our return on average equity for the quarter was calculated by dividing net income by average equity.

⁽⁸⁾ Our average annual principal repayment rate was calculated by dividing our total principal payments received during the quarter (scheduled and unscheduled) by our average RMBS.

⁽⁹⁾ Our debt to equity ratio for the quarter was calculated by dividing the amount outstanding under our repurchase agreements by total shareholders’ equity.

⁽¹⁰⁾ Our debt to additional paid in capital ratio for the quarter was calculated by dividing the amount outstanding under our repurchase agreements by additional paid in capital.

Results of Operations

Three months ended September 30, 2009 and 2008

Our primary source of income is the interest income we earn on our investment portfolio. Our interest income for the quarter ended September 30, 2009 was $72.7 million, as compared to $65.5 million for the quarter ended September 30, 2008. This increase was primarily driven by having a significantly larger investment portfolio. Our average earning assets grew from $5.1 billion for the third quarter of 2008 to $6.3 billion for the third quarter of 2009. This increase was the result of investing the proceeds of our public common stock offering conducted in December of 2008. This offering increased our equity and our portfolio size. Our annualized yield of average assets was 4.57% and 5.08%, respectively, for the quarters ended September 30, 2009 and 2008. This decrease reflects the decline of overall mortgage rates on new securities purchased throughout the period plus an increase in our prepayment rate.

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The yield on our assets is directly affected by the rate of repayments on our agency securities. Our annualized rate of portfolio repayment for the three months ended September 30, 2009 was 22.26%, which was a significant increase from the three months ended September 30, 2008 rate of 8.46%. As credit market conditions made both purchasing a home and refinancing difficult in the second half of 2008, our portfolio repayments dropped to historically low levels, therefore reducing our premium amortization expense during that time. It is difficult to estimate repayment speeds for future periods. Historically, when mortgage rates fall dramatically, the prepayment of the underlying mortgages has tended to increase significantly. However, the current U.S. economic and housing markets have inhibited, and may continue to inhibit, the homeowner’s ability to purchase a new home or refinance an existing mortgage, keeping these rates slower than normal. On the other hand, the U.S. government has been significantly active in the mortgage market in an attempt to promote national housing market stability and economic growth. Their ability to dramatically alter the mortgage market poses a significant risk to the sustainability of our current earnings. One of the ways that we try to mitigate the risk of high repayment speeds on our assets is to keep the price of our portfolio as close to par as possible, as changes in repayment speeds have a lesser affect on income than a higher price portfolio. At September 30, 2009, our portfolio had an average dollar price of $101.45 per $100 of face value.

Our interest expense for the quarter ended September 30, 2009 was $23.7 million as compared to $33.3 million for the quarter ended September 30, 2008. Our average borrowings increased from $4.7 billion for the quarter ended September 30, 2008 to $5.8 billion for the quarter ended September 30, 2009, due to the increase in portfolio size. Despite this increase in borrowings, our expense dropped significantly due to decreasing short-term interest rates which are associated with funding our portfolio. Our annualized average cost of funds, including hedges, was 1.64% for the quarter ended September 30, 2009, as compared to 2.84% for the quarter ended September 30, 2008. During this time frame the Federal Reserve cut rates from 2.00% to 0.25%, and the 30-day LIBOR experienced an even larger decline.

Our net interest income for the quarter ended September 30, 2009 was $49.0 million, and our net interest margin, or “spread”, was 2.93%. For the quarter ended September 30, 2008 our net interest income was $32.2 million and our spread was 2.24%. While the dollar figure is more influenced by the size or our portfolio and overall interest rate levels, our spread is the more important indicator of our performance. While asset yields have fallen slightly over the last year, funding costs have fallen even more so. This increasing spread indicates the increased earning power of our strategy. Although the markets have been volatile on both the asset yield and liability expense levels, the overall margin between the two has remained wide by historical standards.

Our total expenses for the quarter ended September 30, 2009 and 2008 were $3.2 million and $2.5 million, respectively. Approximately half of this increase was generally due to a higher management fee, which increased this year due to our larger equity base upon which the management fee is based. The rest of this increase relates to higher general and administrative costs.

Our net income for the quarter ended September 30, 2009 was $45.8 million or $1.26 per diluted share. This represents a annualized return on average equity of 20.12% for the period. For the quarter ended September 30, 2008, our net income was $29.7 million or $1.11 per diluted share, and the annualized return on average equity was 21.64%. While many factors affect these numbers, the increase in the per share earnings and return on equity are indicative of the widening interest rate spread environment in which we have been operating for the last year. Our net income is significantly affected by our leverage, particularly in times of high interest rate spread. Our leverage during the quarter averaged around 6.4:1, as compared to 8.7:1 during the same quarter in 2008. Some of this decrease occurs naturally since as asset prices increase, our leverage drops as our unrealized gains, which is a component of equity, increase. Conversely, leverage would increase when asset prices drop, making some of the apparent safety of low leverage temporary. Also, the increase in government intervention in the mortgage markets increased the uncertainty, and therefore risk, with agency RMBS performance, especially as it relates to repayment speeds. Given these uncertainties, we have operated with lower leverage in 2009.

Nine months ended September 30, 2009 and 2008

In general, most of the items influencing our operating results for the nine month periods ended September 30, 2009 and 2008 were similar as the items affecting the quarterly results described above. For the nine month period

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ended September 30, 2009 we had interest income of $210.3 million compared to $135.0 million for the same period in 2008. Due to the amount and timing of our equity capital raises, our portfolio has grown continuously and significantly since inception. We had average earning assets of $5.9 billion for the nine months ended September 30, 2009 compared to $3.5 billion for the nine months ended September 30, 2008. Our yield dropped from 5.08% for the nine months ended September 30, 2008 to 4.72% for the nine months ended September 30, 2009. This was the result of buying lower coupon MBS in 2009 combined with an increase in the annualized portfolio prepayment rate, which rose from 11.1% for the first nine months of 2008 to 18.7% for the same period in 2009.

Our interest expense for the nine months ended September 30, 2009, was $73.0 million as compared to $70.5 million for the nine months ended September 30, 2008. While our average borrowings increased proportionately along with our assets, the interest rates we pay on these borrowing were generally falling throughout both of these periods. Our annualized average cost of funds, including hedges, fell from 2.95% for the nine months ended September 30, 2008 to 1.81% for the same period in 2009.

Our net interest income for the nine months ended September 30, 2009 was $137.4 million, and our spread, was 2.91%. For the nine months ended September 30, 2008, our net interest income was $64.5 million and our spread was 2.12%. We incurred expenses for the nine months ended September 30, 2009 and 2008 of $9.3 million and $6.1 million, respectively. Similar to the quarterly results, this increase was largely due to a larger management fee and increased general and administrative expenses.

We earned net income of $128.1 million or $3.54 per weighted average share for the nine months ended September 30, 2009. For the nine months ended September 30, 2008, we earned net income of $58.4 million or $2.81 per weighted average share. On a per share basis, earnings increased approximately 26% when comparing the nine months ended September 30, 2009 to the nine months ended September 30, 2008. This increase was mostly a result of lower borrowing costs due to the unprecedented drop in short term interest rates, and thus unusually high spread, for the nine months ended September 30, 2009.

Contractual Obligations and Commitments

We had the following contractual obligations under repurchase agreements as of September 30, 2009 and December 31, 2008 (dollar amounts in thousands):

	September 30,2009
(dollars in thousands)	Balance		Weighted Average Contractual Rate		Contractual Interest Payments		Total Contractual Obligation
Within 30 days	$	5,507,909	0.33	%	$	1,311	$	5,509,220
30 days to 3 months		100,000	3.72	%		622		100,622
3 months to 36 months		400,000	3.01	%		15,555		415,555
	$	6,007,909	0.57	%	$	17,488	$	6,025,397
	December 31, 2008
(dollars in thousands)	Balance		Weighted Average Contractual Rate		Contractual Interest Payments		Total Contractual Obligation
Within 30 days	$	4,019,435	1.99	%	$	4,856	$	4,024,291
30 days to 3 months		—	—			—		—
3 months to 36 months		500,000	3.15	%		28,604		528,604
	$	4,519,435	2.12	%	$	33,460	$	4,552,895

In addition, we had contractual commitments under interest rate swap agreements as of September 30, 2009. These agreements were for a total notional amount of $2.3 billion, had an average rate of 2.79% and average term of 28 months.

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Off-Balance Sheet Arrangements

As of September 30, 2009 and December 31, 2008, 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 September 30, 2009 and December 31, 2008, 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.

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 September 30, 2009 we had uncommitted repurchase facilities with 23 lending counterparties to finance this portfolio, subject to certain conditions, and have borrowings outstanding with 18 of these counterparties.

On October 9, 2009, we entered into a Sales Agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co. Under the terms of the Sales Agreement, we may offer and sell up to 5,000,000 shares of our common stock from time to time through Cantor Fitzgerald & Co., acting as agent and/or principal. 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, including sales made directly on the New York Stock Exchange or to or through a market maker other than on an exchange. Under the Sales Agreement, Cantor Fitzgerald & Co. will use its commercially reasonable efforts consistent with its normal sales and trading practices to sell the shares of common stock as directed by us. The compensation payable to Cantor Fitzgerald & Co. for sales of shares of common stock pursuant to the Sales Agreement will be up to 2% of the gross sales price per share for any shares sold under the Sales Agreement.

Liquidity Sources—Repurchase Facilities

The following table presents certain information regarding our risk exposure on our repurchase agreements as of September 30, 2009 (dollar amounts in thousands):

Repurchase Agreement Counterparties	Amount Outstanding		Amount at Risk (1)		Percent of Total Amount Outstanding
Bank of America Securities, LLC	$	602,602	$	37,081	10.1	%
Citigroup Global Markets Inc.		500,000		36,590	8.3	%
South Street Securities LLC		452,964		21,374	7.5	%
Deutsche Bank Securities Inc.		518,825		34,506	8.6	%
Credit Suisse Securities (USA) LLC		434,210		35,264	7.2	%
BNP Paribas Securities Corp		410,089		16,854	6.8	%
Barclays Capital Inc.		380,930		23,791	6.3	%
Mizuho		370,252		15,757	6.2	%
Cantor Fitzgerald & Co.		429,971		26,808	7.2	%
MF Global Inc.		308,385		18,741	5.1	%
Greenwich Capital Markets, Inc.		230,126		15,463	3.8	%
Daiwa Securities America Inc.		205,799		16,580	3.4	%
Mitsubishi UFJ Securities (USA), Inc.		356,304		24,833	6.0	%
LBBW Securities LLC		158,591		9,862	2.6	%
Jefferies & Company, Inc.		256,411		15,043	4.3	%
Nomura Securities International, Inc.		19,684		1,109	0.3	%
Morgan Stanley & Co. Incorporated		225,765		13,676	3.8	%
ING Financial Markets LLC		147,001		7,463	2.5	%
Total	$	6,007,909	$	370,795	100.0	%

⁽¹⁾ The amount at risk is equal to the fair value of securities sold, plus accrued interest income, minus the sum of repurchase agreement liabilities, plus accrued interest expense.

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The following table presents certain information regarding our risk exposure on our repurchase agreements as of December 31, 2008 (dollar amounts in thousands):

Repurchase Agreement Counterparties	Amount Outstanding		Amount at Risk (1)		Percent of Total Amount Outstanding
Citigroup Global Markets Inc.	$	500,000	$	27,726	11.0	%
Mizuho		489,730		19,829	10.8	%
Deutsche Bank Securities Inc.		467,858		36,942	10.4	%
BNP Paribas Securities Corp		446,087		29,030	9.9	%
Credit Suisse Securities (USA) LLC		442,490		43,168	9.8	%
South Street Securities LLC(2)		421,183		28,874	9.3	%
Bank of America Securities, LLC		417,947		34,811	9.2	%
Merrill Lynch Government Securities Inc.		266,266		21,060	5.9	%
Greenwich Capital Markets, Inc.		261,026		18,924	5.8	%
Barclays Capital Inc.		250,910		27,417	5.6	%
Cantor Fitzgerald & Co.		189,165		13,548	4.2	%
MF Global Inc.		151,101		8,927	3.3	%
ING Financial Markets LLC		121,932		11,816	2.7	%
Daiwa Securities America Inc.		93,740		7,072	2.1	%
Total	$	4,519,435	$	329,144	100.0	%

⁽¹⁾ The amount at risk is equal to the fair value of securities sold, plus accrued interest income, minus the sum of repurchase agreement liabilities, plus accrued interest expense.

⁽²⁾ Wachovia Securities LLC served as the agent for this counterparty.

As of September 30, 2009, 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 approximately 4.98% (weighted by borrowing amount). As of December 31, 2008, our weighted average haircut was 5.4%. Declines in the value of our agency securities portfolio can trigger margin calls by our lenders under our repurchase agreements. 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.

As discussed above under “—Market and Interest Rate Trends and the Effect on our Portfolio,” over the last two 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 RMBS assets, due to news of potential security liquidations;

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

• significant disruption in financing of RMBS.

If these conditions persist, our lenders may be forced to exit the repurchase market, become insolvent or further tighten lending standards or increase the amount of required equity capital or 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.

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. 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 September 30, 2009, the weighted average haircut under our repurchase facilities was approximately 4.98%, and our leverage (defined as our debt-to-shareholders equity ratio) was approximately 6.4:1.

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, pay fees under our management agreement, fund our distributions to shareholders and 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.

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We generally seek to borrow (on a recourse basis) between eight and 12 times the amount of our shareholders’ equity. At September 30, 2009 and December 31, 2008, our total borrowings were approximately $6.0 billion and $4.5 billion (excluding accrued interest), respectively, which represented a leverage ratio of approximately 6.4:1 and 6.1:1, respectively.

Inflation

Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more than inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our financial statements are prepared in accordance with GAAP and 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.

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 September 30, 2009, we had entered into 24 interest rate swap agreements designed to mitigate the effects of increases in interest rates under $2.3 billion of our repurchase agreements.

The selection of hedging instruments is 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

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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

Both the ARMs and hybrid 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 and hybrid agency securities could effectively be limited by caps. Agency securities backed by ARMs and hybrid 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 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 LIBOR relative to one-year CMT rates will generally 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.

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.

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.

Extension Risk

We invest in agency securities backed by hybrid 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 backed by hybrid ARMs based on assumptions regarding the rate at which the borrowers will prepay the underlying mortgage loans. In general, when agency securities backed by hybrid ARMs 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.

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We may structure our interest rate swap agreements 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 fixed-rate mortgage loans underlying our agency securities could extend beyond the term of the swap agreement or other hedging instrument. 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 interest rate risk by estimating the effective duration of our assets and the effective duration of our liabilities and by estimating the time difference between the interest rate adjustment of our assets and the interest rate adjustment of our liabilities. Effective duration essentially measures the market price volatility 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 interest income, at September 30, 2009 and December 31, 2008, assuming a static portfolio. When evaluating the impact of changes in interest rates, 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.

September 30, 2009
Change in Interest rates	Percentage Change in Projected Net Interest Income	Percentage Change in Projected Portfolio Value
+ 1.00%	(6.6%)	(1.38%)
+ 0.50%	(2.7%)	(0.40%)
- 0.50%	0.88%	0.04%
- 1.00%	(4.0)%	(0.3%)

December 31, 2008
Change in Interest Rates	Percentage Change in Projected Net Interest Income	Percentage Change in Projected Portfolio Value
+1.00%	(7.3)%	(0.59)%
+0.50%	(3.4)%	(0.15)%
-0.50%	3.3%	0.14%
-1.00%	2.6%	0.51%

While the tables 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.

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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:

• monitoring and adjusting, if necessary, the reset index and interest rate related to our agency securities and our borrowings;

• 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 4T. Controls and Procedures

We have established disclosure controls and procedures to ensure that material information relating to our company 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 September 30, 2009, our Chief Executive Officer and Chief Financial Officer believe our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) are effective to ensure that the information required to be disclosed by our company in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

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 the our Annual Report on Form 10-K filed on February 19, 2009 with the SEC.

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

None.

Item 3. Defaults Upon Senior Securities

None.

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Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

On October 9, 2009, we entered into the Sales Agreement with Cantor Fitzgerald & Co. Under the terms of the Sales Agreement, we may offer and sell up to 5,000,000 shares of our common stock from time to time through Cantor Fitzgerald & Co., acting as agent and/or principal. 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, including sales made directly on the New York Stock Exchange or to or through a market maker other than on an exchange. Under the Sales Agreement, Cantor Fitzgerald & Co. will use its commercially reasonable efforts consistent with its normal sales and trading practices to sell the shares of common stock as directed by us. The compensation payable to Cantor Fitzgerald & Co. for sales of shares of common stock pursuant to the Sales Agreement will be up to 2% of the gross sales price per share for any shares sold under the Sales Agreement.

Item 6. Exhibits

(a) Exhibits.

Exhibit Number	Description of Exhibit
3.1	Articles of Incorporation *
3.2	Bylaws *
4.1	Form of Stock Certificate *
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

* Incorporated by reference to the Registration Statement filed on Form S-11 (File No. 333-149314) filed with the SEC on February 20, 2008, as amended.

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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: October 29, 2009	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
3.1	Articles of Incorporation *
3.2	Bylaws *
4.1	Form of Stock Certificate *
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

* Incorporated by reference to the Registration Statement filed on Form S-11 (File No. 333-149314) filed with the SEC on February 20, 2008, as amended.