ANNALY MORTGAGE MANAGEMENT INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2004

OR

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

FOR THE TRANSITION PERIOD FROM _______________ TO _________________

COMMISSION FILE NUMBER: 1-13447

ANNALY MORTGAGE MANAGEMENT, INC.
(Exact name of Registrant as specified in its Charter)

MARYLAND 22-3479661
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)

1211 AVENUE OF THE AMERICAS SUITE 2902
NEW YORK, NEW YORK
(Address of principal executive offices)

10036
(Zip Code)

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

Indicate by check mark whether the Registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:

Yes |X| No |_|

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):

Yes |X| No |_|

APPLICABLE ONLY TO CORPORATE ISSUERS:

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 August 6 , 2004
Common Stock, $.01 par value 120,377,727

ANNALY MORTGAGE MANAGEMENT, INC.

FORM 10-Q

INDEX

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements:

Statements of Financial Condition- June 30, 2004 (Unaudited) and December 31, 2003 1

Statements of Operations and Comprehensive Income (Unaudited) for the quarters and six months ended
June 30, 2004 and 2003 2

Statement of Stockholders' Equity (Unaudited) for the six months ended June 30, 2004 3

Statements of Cash Flows (Unaudited) for the quarters and six months ended June 30, 2004 and 2003 4

Notes to Financial Statements (Unaudited) 5-13

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14-29

Item 3. Quantitative and Qualitative Disclosure about Market Risk 30-31

Item 4. Controls and Procedures 31

PART II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders 32

Item 6. Exhibits and Reports on Form 8-K 32-33

SIGNATURES 34

PART I.
ITEM 1. FINANCIAL STATEMENTS

ANNALY MORTGAGE MANAGEMENT, INC.
STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)

JUNE 30, 2004
CONSOLIDATED DECEMBER 31,
(UNAUDITED) 2003
------------- ------------

ASSETS

Cash and cash equivalents $ 4,499 $ 247
Mortgage-Backed Securities, at fair value 16,142,801 11,956,512
Agency debentures, at fair value 978,994 978,167
Accrued interest receivable 74,874 53,743
Receivable for advisory and service fees 1,644 --
Customer relationships 15,613 --
Goodwill 22,905 --
Other assets 1,427 1,617
------------ ------------
Total assets $ 17,242,757 $ 12,990,286
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Repurchase agreements $ 15,342,123 $ 11,012,903
Payable for Mortgage-Backed Securities purchased 263,207 761,115
Accrued interest payable 19,959 14,989
Dividends payable 57,674 45,155
Other liabilities 3,294 4,017
Accounts payable 3,989 2,887
------------ ------------
Total liabilities 15,690,246 11,841,066
------------ ------------

Stockholders' Equity:
7.875% Series A Cumulative Redeemable Preferred Stock: par value $.01
per share; 4,887,500 authorized, 4,250,000 and 0, shares issued and
outstanding, respectively 102,708 --
Common stock: par value $.01 per share; 500,000,000 authorized,
120,148,709 and 96,074,096 shares issued and outstanding, respectively 1,202 961
Additional paid-in capital 1,620,666 1,194,159
Accumulated other comprehensive loss (177,489) (47,261)
Retained earnings 5,424 1,361
------------ ------------
Total stockholders' equity 1,552,511 1,149,220
------------ ------------

Total liabilities and stockholders' equity $ 17,242,757 $ 12,990,286
============ ============

See notes to financial statements.

1

PART I.
ITEM 1. FINANCIAL STATEMENTS

ANNALY MORTGAGE MANAGEMENT, INC
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

FOR THE QUARTER FOR THE SIX
ENDED JUNE 30, FOR THE MONTHS ENDED FOR THE SIX
2004 QUARTER ENDED JUNE 30, 2004 MONTHS ENDED
(CONSOLIDATED) JUNE 30, 2003 (CONSOLIDATED) JUNE 30, 2003
--------------------------------------------------------------------

INTEREST INCOME $ 122,234 $ 93,892 $ 236,575 $ 181,392

INTEREST EXPENSE 55,648 51,770 105,951 95,818
-------------------------------------------------------------------

NET INTEREST INCOME 66,586 42,122 130,624 85,574

INVESTMENT ADVISORY AND SERVICE FEES, NET 1,260 -- 1,260 --

GAIN ON SALE OF MORTGAGE-BACKED SECURITIES 2,126 20,231 2,721 31,252

GENERAL AND ADMINISTRATIVE EXPENSES 5,643 4,201 11,008 7,898
-------------------------------------------------------------------

NET INCOME BEFORE TAXES 64,329 58,152 123,597 108,928

INCOME TAXES 494 -- 919 --
-------------------------------------------------------------------
NET INCOME 63,835 58,152 122,678 108,928

DIVIDEND ON PREFERRED STOCK 1,998 -- 1,998 --
-------------------------------------------------------------------

NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 61,837 $ 58,152 $ 120,680 $ 108,928
===================================================================

NET INCOME PER SHARE AVAILABLE TO COMMON
SHAREHOLDERS:

Basic $ 0.52 $ 0.62 $ 1.05 $ 1.22
===================================================================

Diluted $ 0.52 $ 0.62 $ 1.04 $ 1.22
===================================================================

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 118,276,509 93,384,128 115,391,357 89,019,821
===================================================================

Diluted 118,469,756 93,588,024 115,659,173 89,231,272
===================================================================

NET INCOME $ 63,835 $ 58,152 $ 122,678 $ 108,928
-------------------------------------------------------------------

COMPREHENSIVE LOSS
Unrealized loss on available-for sale securities (179,863) (49,579) (127,507) (43,069)
Less: reclassification adjustment for net
gains included in net income (2,126) (20,231) (2,721) (31,252)
-------------------------------------------------------------------

Other comprehensive loss (181,989) (69,810) (130,228) (74,321)
-------------------------------------------------------------------

COMPREHENSIVE INCOME (LOSS) ($ 118,154) ($ 11,658) ($ 7,550) $ 34,607
===================================================================

See notes to financial statements.

2

PART I.
ITEM 1. FINANCIAL STATEMENTS

ANNALY MORTGAGE MANAGEMENT, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2004
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

COMMON ADDITIONAL OTHER
PREFERRED STOCK PAID-IN COMPREHENSIVE COMPREHENSIVE RETAINED
STOCK PAR VALUE CAPITAL INCOME (LOSS) INCOME (LOSS) EARNINGS TOTAL
----------------------------------------------------------------------------------------------

BALANCE, JANUARY 1, 2004 $ 961 $1,194,159 ($47,261) $ 1,361 $1,149,220
Net income $ 58,843 58,843
Other comprehensive income:
Unrealized net gains on
securities, net of
reclassification adjustment 51,761 51,761
-----------
Comprehensive income $110,604 110,604
===========
Proceeds from issuance of
7.875% Series A Cumulative
redeemable preferred stock $102,870 102,870
Exercise of stock options 459 459
Proceeds from direct purchase
and dividend reinvestment 1 734 735
Net proceeds from equity
shelf program 10 20,041 20,051
Net proceeds from follow-on
offering 207 363,385 363,592
Dividend declared for the
quarter ended March 31,
2004, $0.50 per share (58,943) (58,943)
---------------------------------- -----------------------------------------

BALANCE, MARCH 31, 2004 $102,870 $1,179 $1,578,778 $4,500 $ 1,261 $1,688,588

Net income $ 63,835 $63,835
Other comprehensive loss:
Unrealized net loss on
securities, net of
reclassification adjustment (181,989) (181,989)
-----------
Comprehensive loss ($118,154) (118,154)
===========
Preferred stock offering (162) (162)
Exercise of stock options 202 202
Proceeds from direct purchase
and dividend reinvestment 1 1,208 1,209
FIDAC acquisition 22 40,478 40,500
Preferred dividend declared
for the quarter ended June
30, 2004, $0.47 per share (1,998) (1,998)
Common dividend declared for
the quarter ended June 30,
2004, $0.48 per share (57,674) (57,674)
---------------------------------- -----------------------------------------
BALANCE, JUNE 30, 2004 $102,708 $1,202 $1,620,666 ($177,489) $ 5,424 $1,552,511
================================== =========================================

See notes to financial statements.

3

PART I.
ITEM 1. FINANCIAL STATEMENTS

ANNALY MORTGAGE MANAGEMENT, INC
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)

FOR THE QUARTER FOR THE FOR THE SIX FOR THE SIX
ENDED QUARTER ENDED MONTHS ENDED MONTHS ENDED
JUNE 30, 2004 JUNE 30, 2003 JUNE 30, 2004 JUNE 30, 2003
----------------------------------------------------------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 63,835 $ 58,152 $ 122,678 $ 108,928
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of Mortgage premiums and discounts, net 56,141 57,614 97,642 106,133
Amortization of intangibles 18 -- 18 --
Gain on sale of Mortgage-Backed Securities (2,126) (20,231) (2,721) (31,252)
Stock option expense 90 58 307 60
Market value adjustment on long-term repurchase
agreement (1,270) 1,993 (523) 2,097
Increase in accrued interest receivable, net of
interest purchased on securities (5,124) (7,939) (21,046) (8,319)
(Decrease) increase in other assets 3 (232) (1,188) (265)
Increase in advisory and service fees receivable (81) -- (81) --
(Increase) decrease in accrued interest payable (1,340) 873 4,970 1,853
Increase in accrued expenses and other liabilities 1,186 1,169 353 295
---------------------------------------------------------------
Net cash provided by operating activities 111,332 91,457 200,409 179,530
---------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Mortgage-Backed Securities (3,249,700) (4,920,184) (8,532,426) (7,217,253)
Purchase of Agency debentures (100,000) (1,170,000) (250,000) (1,341,000)
Proceeds from sale of Mortgage-Backed Securities 259,938 1,576,147 284,097 2,112,393
Proceeds from called agency debentures 150,000 171,000 250,000 171,000
Principal payments of Mortgage-Backed Securities 2,133,853 2,178,798 3,338,072 4,050,322
Cash from FIDAC acquisition 2,526 -- 2,526 --
---------------------------------------------------------------
Net cash used in investing activities (803,383) (2,164,239) (4,907,731) (2,224,538)
---------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from repurchase agreements 36,583,949 31,387,072 66,778,141 55,682,830
Principal payments on repurchase agreements (35,931,226) (29,416,888) (62,449,121) (53,683,870)
Proceeds from exercise of stock options 112 94 355 309
Proceeds from direct purchase and dividend
reinvestment 1,209 1,349 1,943 2,302
Net proceeds from follow-on offerings -- 151,315 363,592 151,315
Proceeds from preferred offering 102,708 -- 102,708 --
Net proceeds from equity shelf program -- -- 20,051 --
Dividends paid (60,940) (50,801) (106,095) (108,300)
---------------------------------------------------------------
Net cash provided by financing activities 695,812 2,072,141 4,711,574 2,044,586
---------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents 3,761 (641) 4,252 (422)

Cash and cash equivalents, beginning of period 738 945 247 726

---------------------------------------------------------------
Cash and cash equivalents, end of period $ 4,499 $ 304 $ 4,499 $ 304
===============================================================

Supplemental disclosure of cash flow information:
Interest paid $ 56,989 $ 50,897 $ 100,982 $ 93,965
===============================================================

Noncash financing activities:
Net change in unrealized loss on available-for-
sale securities net of reclassification adjustment ($ 181,989) ($ 69,810) ($ 130,228) ($ 74,321)
===============================================================

Dividends declared, not yet paid $ 57,674 $ 56,420 $ 57,674 $ 56,420
===============================================================

Noncash investing and financing activities:
Noncash acquisition of FIDAC $ 40,500 -- $ 40,500 --
===============================================================

See notes to financial statements

4

ANNALY MORTGAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE QUARTERS AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
- --------------------------------------------------------------------------------

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Annaly Mortgage Management, Inc. (the "Company") was incorporated in
Maryland on November 25, 1996. The Company commenced its operations of
purchasing and managing an investment portfolio of mortgage-backed securities on
February 18, 1997, upon receipt of the net proceeds from the private placement
of equity capital. An initial public offering was completed on October 14, 1997.
The Company acquired Fixed Income Discount Advisory Company ("FIDAC") on June 4,
2004 (See Note 2). FIDAC is a registered investment advisor and is a taxable
REIT subsidiary of the Company.

A SUMMARY OF THE COMPANY'S SIGNIFICANT ACCOUNTING POLICIES FOLLOWS:

BASIS OF PRESENTATION - The accompanying unaudited financial statements
have been prepared in conformity with the instructions to Form 10-Q and Article
10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly,
they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America ("GAAP"). The
interim financial statements are unaudited; however, in the opinion of the
Company's management, all adjustments, consisting only of normal recurring
accruals, necessary for a fair statement of the results of operations have been
included. These unaudited financial statements should be read in conjunction
with the audited financial statements included in the Company's Annual Report on
form 10-K for the year ended December 31, 2003. The nature of the Company's
business is such that the results of any interim period are not necessarily
indicative of results for a full year. Certain reclassifications have been made
to prior period financial statements, where appropriate, to conform to the
current period presentation. The consolidated unaudited financial statements as
of and for the quarter ended June 30, 2004 include the accounts of the Company
and FIDAC. All material intercompany balances have been eliminated.

CASH AND CASH EQUIVALENTS - Cash and cash equivalents includes cash on
hand and money market funds. The carrying amounts of cash equivalents
approximate their value.

MORTGAGE-BACKED SECURITIES AND AGENCY DEBENTURES - The Company invests
primarily in mortgage pass-through certificates, collateralized mortgage
obligations and other mortgage-backed securities representing interests in or
obligations backed by pools of mortgage loans (collectively, "Mortgage-Backed
Securities"). The Company also invests in Federal Home Loan Bank ("FHLB"),
Federal Home Loan Mortgage Corporation ("FHLMC"), and Federal National Mortgage
Association ("FNMA") debentures. The Mortgage-Backed Securities and agency
debentures are collectively referred to herein as "Investment Securities."

Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," requires the Company to
classify its Investment Securities as either trading investments,
available-for-sale investments or held-to-maturity investments. Although the
Company generally intends to hold most of its Investment Securities until
maturity, it may, from time to time, sell any of its Investment Securities as
part of its overall management of its portfolio. Accordingly, this flexibility
requires the Company to classify all of its Investment Securities as
available-for-sale. All assets classified as available-for-sale are reported at
estimated fair value, based on market prices provided by certain dealers who
make markets in these financial instruments, with unrealized gains and losses
excluded from earnings and reported as a separate component of stockholders'
equity.

Unrealized losses on Investment Securities that are considered other than
temporary, as measured by the amount of decline in fair value attributable to
factors other than temporary, are recognized in income and the cost basis of the
Mortgage-Backed Securities is adjusted. There were no such adjustments for the
quarters ended June 30, 2004 or 2003.

5

Interest income is accrued based on the outstanding principal amount of
the Investment Securities and their contractual terms. Premiums and discounts
associated with the purchase of the Investment Securities are amortized into
interest income over the lives of the securities using the interest method. The
Company's policy for estimating prepayment speeds for calculating the effective
yield is to evaluate historical performance, street consensus prepayment speeds,
and current market conditions.

Investment Securities transactions are recorded on the trade date.
Purchases of newly issued securities are recorded when all significant
uncertainties regarding the characteristics of the securities are removed,
generally shortly before settlement date. Realized gain and losses on such
transactions are determined on the specific identification basis.

CREDIT RISK - At June 30 2004 and December 31, 2003, the Company has
limited its exposure to credit losses on its portfolio of Investment Securities
by only purchasing securities issued FHLMC, FNMA, Government National Mortgage
Association ("GNMA"), or FHLB. The payment of principal and interest on the
FHLMC and FNMA Mortgage-Backed Securities are guaranteed by those respective
agencies and the payment of principal and interest on the GNMA Mortgage-Backed
Securities are backed by the full-faith-and-credit of the U.S. government. At
June 30 2004 and December 31, 2003 all of the Company's Investment Securities
have an actual or implied "AAA" rating.

REPURCHASE AGREEMENTS - The Company finances the acquisition of its
Investment Securities through the use of repurchase agreements. Repurchase
agreements are treated as collateralized financing transactions and are carried
at their contractual amounts, including accrued interest, as specified in the
respective agreements. Accrued interest is recorded as a separate line item on
the statement of financial condition.

INCOME TAXES - The Company has elected to be taxed as a Real Estate
Investment Trust ("REIT") and intends to comply with the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), with respect thereto.
Accordingly, the Company will not be subjected to federal income tax to the
extent of its distributions to shareholders and as long as certain asset, income
and stock ownership tests are met. The Company and FIDAC have made a joint
election to treat FIDAC as a taxable REIT subsidiary. As such, FIDAC will be
taxable as a domestic C corporation and subject to federal and state and local
income taxes based upon it taxable income.

USE OF ESTIMATES - 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.

RECENT ACCOUNTING PRONOUNCEMENTS - In March 2004, the Emerging Issues Task
Force, or EITF, reached a consensus on Issue No. 03-1, THE MEANING OF
OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS. This
Issue provides clarification with respect to the meaning of other-than-temporary
impairment and its application to investments classified as either
available-for-sale or held-to-maturity under SFAS, No. 115, ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, (including individual
securities and investments in mutual funds), and investments accounted for under
the cost method or the equity method. The guidance for evaluating whether an
investment is other-than-temporarily impaired must be applied in
other-than-temporary impairment evaluations made in reporting periods beginning
after June 15, 2004. This Issue did not have a material impact on the Company's
financial statements.

2. FIXED INCOME DISCOUNT ADVISORY COMPANY

MERGER WITH FIXED INCOME DISCOUNT ADVISORY COMPANY

In June 2001, the FASB issued SFAS No. 141, "Business Combinations," which
provides that all business combinations initiated after June 30, 2001 be
accounted for using the purchase method. Under the purchase method, net assets
and results of operations of acquired companies are included in the consolidated
financial statements from the date of acquisition. In addition, SFAS 141
provides that the cost of an acquired entity must be allocated to the assets
acquired, including identifiable intangible assets, and the liabilities assumed
based on their estimated fair

6

values at the date of acquisition. The excess of cost over the fair value of the
net assets acquired must be recognized as goodwill.

On December 31, 2003, the Company entered into a merger agreement with
FIDAC. At the annual meeting of the Company's shareholders held on May 27, 2004,
shareholders voted to approve the merger. The merger closed before the opening
of business on June 4, 2004. The merger was accounted for using the purchase
method of accounting in accordance with SFAS No. 141. Accordingly, the
consolidated balance sheet as of June 30, 2004 includes the effects of the
merger and the Company's application of the purchase method of accounting.
Additionally, the consolidated statements of operations and cash flows for the
respective periods ended June 30, 2004 include the combined results of the
Company and FIDAC for the period from June 4, 2004 to June 30, 2004. Before June
4, 2004 the Company did not have an ownership interest in FIDAC and therefore
financial results are not included in prior periods.

Upon completion of the merger and pursuant to the merger agreement, FDC
Merger Sub, ("Merger Sub"), the Company's wholly owned subsidiary created solely
for the purpose of effectuating the merger, merged with and into FIDAC. As a
result of the merger, Merger Sub ceased to exist, and FIDAC is the surviving
corporation and operates as the Company's wholly owned taxable REIT subsidiary.
At the time of the merger, each FIDAC shareholder received approximately 2,935
shares of the Company's common stock for each share of FIDAC stock the
shareholder owned and has the right to receive additional shares of the
Company's common stock in the future, based on FIDAC achieving specific
performance goals.

The Company maintains its Real Estate Investment Trust ("REIT") status for
U.S. federal income tax purposes and the Company and FIDAC made a taxable REIT
subsidiary election. The taxable REIT subsidiary is fully subject to corporate
income tax. Income from the taxable REIT subsidiaries may be retained by the
subsidiary or distributed to the parent REIT company.

The value of the shares of the Company's common stock issued to the FIDAC
shareholders immediately upon the consummation of the acquisition was fixed at
$40,500,000 based upon the closing price of the Company's common stock on
December 31, 2003, and was paid on June 4, 2004 by delivering 2,201,080 shares
of the Company's common stock.

A summary of the fair values of the net assets acquired is as follows:

(dollars in thousands)
- --------------------------------------------------------------------------------
Cash and cash equivalents $ 2,526
Receivable for advisory fees and services 1,564
Other assets 591
Customer relationships 15,613
FIDAC trademark 250
Non-compete agreements 140
Goodwill 22,905
Accounts payable (748)

--------
Total fair value of net assets, including acquisition cost $ 42,841
========

The total amount of goodwill represents the purchase price in excess of the fair
value of the net assets acquired. Under SFAS No. 142, "Goodwill and Other
Intangible Assets," goodwill is not amortized. Customer relationships are deemed
by the Company to have an indefinite life based on a lack of attrition history
and management's expectation of continued service to FIDAC clients and,
accordingly, are not amortized. Instead, they are required to be tested at least
annually for impairment. FIDAC trademark and non-compete agreements are
considered intangible assets subject to amortization over their estimated life
of 3 years and 1 year, respectively. For the quarter ended June 30, 2004,
amortization expense related to these intangibles was $18,000.

7

3. MORTGAGE-BACKED SECURITIES

The following table pertains to the Company's Mortgage-Backed Securities
classified as available-for-sale as of June 30, 2004 and December 31, 2003,
which are carried at their fair value:

GOVERNMENT TOTAL
FEDERAL HOME FEDERAL NATIONAL NATIONAL MORTGAGE-
LOAN MORTGAGE MORTGAGE MORTGAGE BACKED
JUNE 30, 2004 CORPORATION ASSOCIATION ASSOCIATION SECURITIES
----------------------------------------------------------------------
(dollars in thousands)

Mortgage-Backed Securities, gross $ 5,384,705 $ 10,185,570 $ 354,360 $ 15,924,635
Unamortized discount (317) (527) (143) (987)
Unamortized premium 119,856 259,704 6,116 385,676
----------------------------------------------------------------------

Amortized cost 5,504,244 10,444,747 360,333 16,309,324

Gross unrealized gains 13,886 12,477 1,240 27,603
Gross unrealized losses (56,207) (132,220) (5,699) (194,126)
----------------------------------------------------------------------

Estimated fair value $ 5,461,923 $ 10,325,004 $ 355,874 $ 16,142,801
======================================================================

GROSS UNREALIZED GROSS UNREALIZED ESTIMATED FAIR
AMORTIZED COST GAIN LOSS VALUE
----------------------------------------------------------------------
(dollars in thousands)

Adjustable rate $ 11,870,951 $ 22,269 ($ 123,980) $ 11,769,240

Fixed rate 4,438,373 5,334 (70,146) 4,373,561
----------------------------------------------------------------------

Total $ 16,309,324 $ 27,603 ($ 194,126) $ 16,142,801
======================================================================

GOVERNMENT TOTAL
FEDERAL HOME FEDERAL NATIONAL NATIONAL MORTGAGE-
LOAN MORTGAGE MORTGAGE MORTGAGE BACKED
DECEMBER 31, 2003 CORPORATION ASSOCIATION ASSOCIATION SECURITIES
----------------------------------------------------------------------
(dollars in thousands)

Mortgage-Backed Securities, gross $ 3,763,364 $ 7,509,544 $ 419,223 $ 11,692,130

Unamortized discount (198) (1,034) (209) (1,441)
Unamortized premium 87,726 206,580 7,005 301,311
----------------------------------------------------------------------

Amortized cost 3,850,892 7,715,090 426,019 11,992,000

Gross unrealized gains 8,301 16,133 452 24,886
Gross unrealized losses (18,114) (39,984) (2,277) (60,374)
----------------------------------------------------------------------

Estimated fair value $ 3,841,079 $ 7,691,239 $ 424,194 $ 11,956,512
======================================================================

GROSS UNREALIZED GROSS UNREALIZED ESTIMATED FAIR
AMORTIZED COST GAIN LOSS VALUE
----------------------------------------------------------------------
(dollars in thousands)

Adjustable rate $ 8,565,873 $ 13,118 ($ 35,490) $ 8,543,501

Fixed rate 3,426,127 11,768 (24,884) 3,413,011
----------------------------------------------------------------------

Total $ 11,992,000 $ 24,886 ($ 60,374) $ 11,956,512
======================================================================

8

Mortgage-Backed Securities with a carrying value of $1.2 billion have been
in a continuous unrealized loss position over 12 months at June 30, 2004 in the
amount of $28.5 million. The Mortgage-Backed Securities with a carrying value of
$14.9 billion have been in a continuous unrealized loss position for less than
12 months at June 30, 2004 in the amount of $165.6 million. Mortgage-Backed
Securities with a carrying value of $809.0 million have been in a continuous
unrealized loss position over 12 months at December 31, 2003 in the amount of
$8.2 million. Mortgage-Backed Securities with a carrying value of $6.7 billion
have been in a continuous unrealized loss position for less than 12 months at
December 31, 2003 in the amount of $52.2 million. The reason for the decline in
value of these securities is due to changes in interest rates. All of the
Mortgage-Backed Securities are "AAA" rated or carry an implied "AAA" rating.
These investments are not considered other-than-temporarily impaired since the
Company has the ability and intent to hold the investments for a period of time,
to maturity, if necessary, sufficient for a forecasted market price recovery up
to or beyond the cost of the investments. Also, the Company is guaranteed
payment on the par value of the securities.

The adjustable rate Mortgage-Backed Securities are limited by periodic
caps (generally interest rate adjustments are limited to no more than 1% every
six months) and lifetime caps. The weighted average lifetime cap was 10.1% at
June 30, 2004 and 9.9% at December 31, 2003.

During the six months ended June 30, 2004, the Company realized $2.7
million in net gains from sales of Mortgage-Backed Securities. During the six
months ended June 30, 2003, the Company realized $31.3 million in net gains from
sales of Mortgage-Backed Securities.

4. AGENCY DEBENTURES

At June 30, 2004, the Company owned callable agency debentures totaling $
990.0 million par value and a total discount of $41,000. FHLMC, FNMA, and FHLB
are the issuers of the debentures. All of the Company's agency debentures are
classified as available-for-sale. The agency debentures had a carrying value of
$979.0 million and $978.2 million at June 30, 2004 and December 31, 2003,
respectively. The agency debentures with a carrying value of $194.4 million have
been in a continuous unrealized loss position over 12 months at June 30, 2004 of
$644,000. The agency debentures with a carrying value of $784.6 million have
been in a continuous unrealized loss position for less than 12 months at June
30, 2004 in the amount of $10.3 million. The debentures with a carrying value of
$978.2 million have been in a continuous unrealized loss position for less than
12 months at December 31, 2003 of $11.8 million. The Company's agency debentures
are adjustable rate and fixed rate with a weighted average lifetime cap of 4.36%
at June 30, 2004 and 5.80% at December 31, 2003. All of the agency debentures
carry an implied "AAA" rating. These investments are not considered
other-than-temporarily impaired since the Company has the ability and intent to
hold the investments for a period of time, to maturity, if necessary, sufficient
for a forecasted market price recovery up to or beyond the cost of the
investments. Also, the Company is guaranteed payment on the par value of the
securities.

5. REPURCHASE AGREEMENTS

The Company had outstanding $15.3 billion and $11.0 billion of repurchase
agreements with a weighted average borrowing rate of 1.51% and 1.51%, and a
weighted average remaining maturity of 101 days and 90 days as of June 30, 2004
and December 31, 2003, respectively. Investment Securities pledged had an
estimated fair value of $15.4 billion at June 30, 2004.

9

At June 30, 2004 and December 31, 2003, the repurchase agreements had the
following remaining maturities:

JUNE 30, 2004 DECEMBER 31, 2003
----------------------------------
(dollars in thousands)

Within 30 days $12,145,353 $ 8,589,184
30 to 59 days 950,492 709,552
60 to 89 days 6,278 --
90 to 119 days -- --
Over 120 days 2,240,000 1,714,167
----------------------------------

Total $15,342,123 $11,012,903
==================================

6. OTHER LIABILITIES

In 2001, the Company entered into a repurchase agreement maturing in July
2004, at which time the repurchase agreement gives the buyer the right to
extend, in whole or in part, in three-month increments up to July 2006. In July
2004, the buyer extended the repurchase agreement, in whole, for the next three
months, with the right to further extend in October 2004. The repurchase
agreement has a principal value of $100,000,000. The Company accounts for the
extension option as a separate interest rate floor liability carried at fair
value. The initial fair value of $1.2 million allocated to the extension option
resulted in a similar discount on the repurchase agreement borrowings that is
being amortized over the initial term of 3 years using the effective yield
method. At June 30, 2004 and December 31, 2003, the fair value of this interest
rate floor was $3.3 million and $4.0 million, respectively, and was classified
as other liabilities.

7. PREFERRED STOCK AND COMMON STOCK

During the quarter ended June 30, 2004, the Company declared dividends to
common shareholders totaling $57.7 million or $0.48 per share, which were paid
on July 28, 2004. During the quarter ended June 30, 2004, the Company declared
dividends to the preferred shareholders totaling $2.0 million or $0.47 per
share, which were paid on June 30, 2004. On January 21, 2004, the Company
entered into an underwriting agreement pursuant to which the Company raised net
proceeds of approximately $363.6 million in equity in an offering of 20,700,000
shares of common stock. On March 31, 2004, the Company entered into an
underwriting agreement pursuant to which the Company raised net proceeds of
approximately $102.9 million in net proceeds through an offering of 4,250,000
shares of 7.875% Series A Cumulative Redeemable Preferred Stock, which settled
on April 5, 2004. During the six months ended June 30, 2004, 1,027,400 shares of
the Company's common stock were issued through the Equity Shelf Program,
totaling net proceeds of $20.1 million. During the quarter ended June 30, 2004
no shares were issued through the Equity Shelf Program. During the six months
ended June 30, 2004, 40,200 options were exercised under the long-term
compensation plan at $662,000. Also, 105,942 shares were sold through the
dividend reinvestment and direct purchase program for $1.9 million for the six
months ended June 30, 2004.

8. EARNINGS PER SHARE AVAILABLE TO COMMON SHAREHOLDERS

For the quarter ended June 30, 2004, the reconciliation is as follows:

FOR THE QUARTER ENDED JUNE 30, 2004
(dollars in thousands, except per share amounts)
Weighted Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------------------------------------------------

Net income available to common shareholders $61,837
-------
Basic earnings per share $61,837 118,277 $0.52
=====

Effect of dilutive securities:
Dilutive stock options 193

------------------------------
Diluted earnings per share $61,837 118,470 $0.52
================================================

10

Options to purchase 1,281,750 shares of stock were outstanding and
considered anti-dilutive as their exercise price exceeded the average stock
price for the quarter ended June 30, 2004.

For the quarter ended June 30, 2003, the reconciliation is as follows:

FOR THE QUARTER ENDED JUNE 30, 2003
(dollars in thousands, except per share amounts)
Weighted Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------------------------------------------------

Net income $58,152
-------

Basic earnings per share $58,152 93,384 $0.62
=====

Effect of dilutive securities:
Dilutive stock options 204

---------------------------
Diluted earnings per share $58,152 93,588 $0.62
=============================================

Options to purchase 12,500 shares of stock were outstanding and considered
anti-dilutive as their exercise price exceeded the average stock price for the
quarter ended June 30, 2003.

For the six months ended June 30, 2004, the reconciliation is as follows:

FOR THE SIX MONTHS ENDED JUNE 30, 2004
---------------------------------------------------
Weighted Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------------------------------------------------

Net income available to common shareholders $120,680
--------

Basic earnings per share 120,680 115,391 $1.05
=====

Effect of dilutive securities:
Dilutive stock options 268

----------------------------
Diluted earnings per share $120,680 115,659 $1.04
==============================================

Options to purchase 12,500 shares of stock were outstanding and considered
anti-dilutive as their exercise price exceeded the average stock price for the
six months ended June 30, 2004.

For the six months ended June 30, 2003, the reconciliation is as follows:

FOR THE SIX MONTHS ENDED JUNE 30, 2003
---------------------------------------------------
Weighted Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------------------------------------------------

Net income $108,928
--------

Basic earnings per share 108,928 89,020 $1.22
=====

Effect of dilutive securities:
Dilutive stock options 211

----------------------------
Diluted earnings per share $108,928 89,231 $1.22
==============================================

11

Options to purchase 12,500 shares of stock were outstanding and considered
anti-dilutive as their exercise price exceeded the average stock price for the
six months ended June 30, 2003.

9. LONG-TERM STOCK INCENTIVE PLAN

The Company has adopted a long term stock incentive plan for executive
officers, key employees and no employee directors (the "Incentive Plan"). The
Incentive Plan authorizes the Compensation Committee of the board of directors
to grant awards, including incentive stock options as defined under Section 422
of the Code ("ISOs") and options not so qualified ("NQSOs"). The Incentive Plan
authorizes the granting of options or other awards for an aggregate of the
greater of 500,000 shares or 9.5% of the fully diluted outstanding shares of the
Company's common stock.

The following table sets forth activity relating to the Company's stock
options awards:

For the six months ended June 30,
-----------------------------------------------------------------------
2004 2003
-----------------------------------------------------------------------
Weighted Weighted
Average Number of Average
Number of Shares Exercise Price Shares Exercise Price
-----------------------------------------------------------------------

Options outstanding at the beginning
of period 1,063,259 $14.28 512,706 $ 8.59
Granted 639,750 17.39 6,250 20.70
Exercised (40,200) 8.82 (35,622) 8.69
Expired -- -- -- --
----------------------------------------------------------------

Options outstanding at the end of
period 1,662,809 $15.61 483,333 $ 8.74
================================================================

The following table summarizes information about stock options outstanding
at June 30, 2004:

Weighted Average
Weighted Average Remaining Contractual
Range of Exercise Prices Options Outstanding Exercise Price Life (Years)
- -------------------------------------------------------------------------------------------------------------

$7.94-$19.99 1,650,309 $15.57 8.5
$20.00-$29.99 12,500 20.53 3.0
------------------------------------------------------
1,662,809 $15.61 7.8
======================================================

The Company accounts for the incentive plan under the intrinsic value
method in accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation,
to stock-based employee compensation:

12

For the quarter ended For the six months ended
(dollars in thousands, except per share data)
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
--------------------------------------------------------------

Net income available to common shareholders, as
reported $ 61,837 $ 58,152 $ 120,680 $ 108,928

Deduct: Total stock-based employee compensation
expense determined under fair value based method (37) (4) (75) (9)
----------------------------------------------------------
Pro-forma net income available to common
shareholers $ 61,800 $ 58,148 $ 120,605 $ 108,919
==========================================================

Net income per share available to common shareholders, as reported
Basic $ 0.52 $ 0.62 $ 1.05 $ 1.22
Diluted $ 0.52 $ 0.62 $ 1.04 $ 1.22

Pro-forma net income per share available to common shareholders
Basic $ 0.52 $ 0.62 $ 1.05 $ 1.22
Diluted $ 0.52 $ 0.62 $ 1.04 $ 1.22

10. LEASE COMMITMENTS

The Company has a noncancelable lease for office space, which commenced in
May 2002 and expires in December 2009.

The Company's aggregate future minimum lease payments are as follows:

Total per Year
(dollars in thousands)
2004 (remainder of year) $ 250
2005 500
2006 530
2007 532
2008 532
2009 532
------
Total remaining lease payments $2,876
======

11. INTEREST RATE RISK

The primary market risk to the Company is interest rate risk. Interest
rates are highly sensitive to many factors, including governmental monetary and
tax policies, domestic and international economic and political considerations
and other factors beyond the Company's control. Changes in the general level of
interest rates can affect net interest income, which is the difference between
the interest income earned on interest-earning assets and the interest expense
incurred in connection with the interest-bearing liabilities, by affecting the
spread between the interest-earning assets and interest-bearing liabilities.
Changes in the level of interest rates also can affect the value of the
Mortgage-Backed Securities and the Company's ability to realize gains from the
sale of these assets. A decline in the value of the Mortgage-Backed Securities
pledged as collateral for borrowings under repurchase agreements could result in
the counterparties demanding additional collateral pledges or liquidation of
some of the existing collateral to reduce borrowing levels.

The Company seeks to manage the extent to which net income changes as a
function of changes in interest rates by matching adjustable-rate assets with
variable-rate borrowings. In addition, although the Company has not done so to
date, the Company may seek to mitigate the potential impact on net income of
periodic and lifetime coupon adjustment restrictions in the portfolio of
Mortgage-Backed Securities by entering into interest rate agreements such as
interest rate caps and interest rate swaps.

Changes in interest rates may also have an effect on the rate of mortgage
principal prepayments and, as a result, prepayments on Mortgage-Backed
Securities. The Company will seek to mitigate the effect of changes in the
mortgage principal repayment rate by balancing assets purchased at a premium
with assets purchased at a discount. To date, the aggregate premium exceeds the
aggregate discount on the Mortgage-Backed Securities. As a result, prepayments,
which result in the expensing of unamortized premium, will reduce net income
compared to what net income would be absent such prepayments.

13

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this quarterly report, and certain
statements contained in our future filings with the Securities and Exchange
Commission (the "SEC" or the "Commission"), in our press releases or in our
other public or shareholder communications may not be, based on historical facts
and are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements which are
based on various assumptions, (some of which are beyond our control) may be
identified by reference to a future period or periods, or by the use of
forward-looking terminology, such as "may," "will," "believe," "expect,"
"anticipate," "continue," or similar terms or variations on those terms, or the
negative of those terms. Actual results could differ materially from those set
forth in forward-looking statements due to a variety of factors, including, but
not limited to, changes in interest rates, changes in yield curve, changes in
prepayment rates, the availability of mortgage backed securities for purchase,
the availability of financing and, if available, the terms of any financing,
FIDAC's client's removal of assets FIDAC manages, FIDAC's regulatory
requirements, and competition in the investment management business. For a
discussion of the risks and uncertainties which could cause actual results to
differ from those contained in the forward-looking statements, see our 2003 Form
10-K. We do not undertake, and specifically disclaim any obligation, to publicly
release the result of any revisions which may be made to any forward-looking
statements to reflect the occurrence of anticipated or unanticipated events or
circumstances after the date of such statements.

OVERVIEW

We are a real estate investment trust that owns and manages a portfolio of
mortgage-backed securities and agency debentures. Our principal business
objective is to generate net income for distribution to our stockholders from
the spread between the interest income on our investment securities and the
costs of borrowing to finance our acquisition of investment securities. Our
wholly owed subsidiary is a registered investment advisor that generates
advisory and service fee income.

We are primarily engaged in the business of investing, on a leveraged
basis, in mortgage pass-through certificates, collateralized mortgage
obligations and other mortgage-backed securities representing interests in or
obligations backed by pools of mortgage loans (collectively, "Mortgage-Backed
Securities"). We also invest in Federal Home Loan Bank ("FHLB"), Federal Home
Loan Mortgage Corporation ("FHLMC"), and Federal National Mortgage Association
("FNMA") debentures. The Mortgage-Backed Securities and agency debentures are
collectively referred to herein as "Investment Securities."

Under our capital investment policy, at least 75% of our total assets must
be comprised of high-quality mortgage-backed securities and short-term
investments. High quality securities means securities that (1) are rated within
one of the two highest rating categories by at least one of the nationally
recognized rating agencies, (2) are unrated but are guaranteed by the United
States government or an agency of the United States government, or (3) are
unrated but are determined by us to be of comparable quality to rated
high-quality Mortgage-Backed Securities.

The remainder of our assets, comprising not more than 25% of our total
assets, may consist of other qualified REIT real estate assets which are unrated
or rated less than high quality, but which are at least "investment grade"
(rated "BBB" or better by Standard & Poor's Corporation ("S&P") or the
equivalent by another nationally recognized rating agency) or, if not rated,
determined by us to be of comparable credit quality to an investment which is
rated "BBB" or better.

We may acquire Mortgage-Backed Securities backed by single-family
residential mortgage loans as well as securities backed by loans on
multi-family, commercial or other real estate-related properties. To date, all
of the mortgage-backed securities that we have acquired have been backed by
single-family residential mortgage loans.

14

We have elected to be taxed as a REIT for federal income tax purposes.
Pursuant to the current federal tax regulations, one of the requirements of
maintaining its status as a REIT is that we must distribute at least 90% of our
REIT taxable income (determined without regard to the deduction for dividends
paid and by excluding any net capital gain) to our stockholders, subject to
certain adjustments.

The results of our operations are affected by various factors, many of
which are beyond our control. The results of our operations primarily depend on,
among other things, the amount of our net interest income, the market value of
our assets and the supply of and demand for such assets. Our net interest
income, which reflects the amortization of purchase premiums, varies primarily
as a result of changes in interest rates, borrowing costs and prepayment speeds,
the behavior of which involves various risks and uncertainties. Prepayment
speeds, as reflected by the Constant Prepayment Rate, or CPR, and interest rates
vary according to the type of investment, conditions in financial markets,
competition and other factors, none of which can be predicted with any
certainty. In general, as prepayment speeds on our Mortgage-Backed Securities
portfolio increase, related purchase premium amortization increases, thereby
reducing the net yield on such assets. The CPR on our Investment Securities
portfolio averaged 33% and 44% for the quarters ended June 30, 2004 and 2003,
respectively. Since changes in interest rates may significantly affect our
activities, our operating results depend, in large part, upon our ability to
effectively manage interest rate risks and prepayment risks while maintaining
our status as a REIT.

The following table presents the CPR experienced on our Mortgage-Backed
Securities portfolio, on an annualized basis, for the following quarterly
periods presented.

QUARTER ENDED CPR
- ------------- ---
June 30, 2004 33%
March 31, 2004 31%
December 31, 2003 37%
September 30, 2003 48%
June 30, 2003 44%

We believe that the CPR in future periods will depend, in part, on changes
in and the level of market interest rates across the yield curve, with higher
CPRs expected during periods of declining interest rates and lower CPRs expected
during periods of rising interest rates.

We have extended contractual maturities on borrowings, such that, our
weighted average term to next rate adjustment on our repurchase agreements was
101 days at June 30, 2004, as compared to 90 days at December 31, 2003.

The table below provides quarterly information regarding our average balances,
interest income, interest expense, yield on assets, cost of funds and net
interest income for the following quarterly periods presented.

Yield on
Average Average Average
Investment Total Interest Balance of Total Average Net Net
Securities Interest Earning Repurchase Interest Cost of Interest Interest
Held (1) Income Assets Agreements Expense Funds Income Rate Spread
---------- -------- -------- ---------- -------- ------- -------- -----------

For the Quarter Ended
June 30, 2004 $16,649,072 $ 122,234 2.94% $15,880,353 $ 55,648 1.40% $ 66,586 1.54%
For the Quarter Ended
March 31, 2004 $14,452,245 $ 114,341 3.16% $13,587,211 $ 50,303 1.48% $ 64,038 1.68%
For the Year Ended
December 31, 2003 $12,007,333 $ 337,433 2.81% $11,549,368 $ 182,004 1.58% $ 155,429 1.23%
For the Quarter Ended
December 31, 2003 $11,799,730 $ 89,186 3.02% $11,235,908 $ 42,264 1.50% $ 46,922 1.52%
For the Quarter Ended
September 30, 2003 $12,577,165 $ 66,855 2.13% $12,186,985 $ 43,922 1.44% $ 22,933 0.69%
For the Quarter Ended
June 30, 2003 $12,815,290 $ 93,892 2.93% $12,311,329 $ 51,770 1.68% $ 42,122 1.25%
For the Quarter Ended
March 31, 2003 $10,837,147 $ 87,500 3.23% $10,463,252 $ 44,048 1.68% $ 43,452 1.55%

(1) Does not reflect unrealized gains/(losses).

15

We continue to explore alternative business strategies, alternative
investments and other strategic initiatives to complement our core business
strategy of investing, on a leveraged basis, in high quality Investment
Securities. No assurance, however, can be provided that any such strategic
initiative will or will not be implemented in the future.

CRITICAL ACCOUNTING POLICIES

Management's discussion and analysis of financial condition and results of
operations is based on the amounts reported our financial statements. These
financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America. In preparing the financial
statements, management is required to make various judgments, estimates and
assumptions that affect the reported amounts. Changes in these estimates and
assumptions could have a material effect on our financial statements. The
following is a summary of our policies most affected by management's judgments,
estimates and assumptions.

Market valuation of Investment Securities: All assets classified as
available-for-sale are reported at fair value, based on market prices. Although
we generally intend to hold most of our Investment Securities until maturity, we
may, from time to time, sell any of our Investment Securities as part our
overall management of our portfolio. Accordingly, this flexibility requires us
to classify all of our Investment Securities as available-for-sale. Our policy
is to obtain market values from three independent sources and record the market
value of the securities based on the average of the three. The investments with
unrealized loss are not considered other-than-temporarily impaired since the
Company has the ability and intent to hold the investments for a period of time
sufficient on a forecasted market price up to or beyond the cost of the
investment. Unrealized losses on Investment Securities that are considered other
than temporary, as measured by the amount of decline in fair value attributable
to factors other than temporary, are recognized in income and the cost basis of
the Investment Securities is adjusted. There were no such adjustments for the
quarters ended June 30, 2004 and 2003. The investments with unrealized losses
are not considered other than temporarily impaired since the Company has the
ability and intent to hold the investments for a period of time, to maturity, if
necessary, sufficient on a forecasted market price up to or beyond the cost of
the investments

Investment Securities transactions are recorded on the trade date.
Purchases of newly issued securities are recorded when all significant
uncertainties regarding the characteristics of the securities are removed,
generally shortly before settlement date. Realized gains and losses on such
transactions are determined on the specific identification basis.

Interest income: Interest income is accrued based on the outstanding
principal amount of the outstanding principal amount of the Investment
Securities and their contractual terms. Premiums and discounts associated with
the purchase of the Investment Securities are amortized into interest income
over the projected lives of the securities using the interest method. Our policy
for estimating prepayment speeds for calculating the effective yield is to
evaluate historical performance, street consensus prepayment speeds, and current
market conditions.

Repurchase Agreements: We finance the acquisition of our Investment
Securities through the use of repurchase agreements. Repurchase agreements are
treated as collateralized financing transactions and are carried at their
contractual amounts, including accrued interest, as specified in the respective
agreements. Accrued interest is recorded as a separate line item.

INCOME TAXES: We elected to be taxed as a Real Estate Investment Trust
("REIT") and intend to comply with the provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), with respect thereto. Accordingly, the Company
will not be subjected to federal income tax to the extent of its distributions
to shareholders and as long as certain asset, income and stock ownership tests
are met. The Company and FIDAC have made a joint election to treat FIDAC as a
taxable REIT subsidiary. As such, FIDAC will be taxable as a domestic C
corporation and subject to federal and state and local income taxes based upon
it taxable income.

16

RESULTS OF OPERATIONS: FOR THE QUARTERS AND SIX MONTHS ENDED JUNE 30, 2004 AND
2003

NET INCOME SUMMARY

For the quarter ended June 30, 2004, our net income was $63.8 million, or
$0.52 basic earnings per share available for common shareholders, as compared to
$58.2 million, or $0.62 basic earnings per average share, for the quarter ended
June 30, 2003. We attribute the increase in total net income for the quarter
ended June 30, 2004, over the quarter ended June 30, 2003 to the increased asset
base. The increased asset base was the result of deploying additional capital of
approximately $529.4 million from June 30, 2003 to June 30, 2004, into our
strategy. Even though net income increased, net income per share available to
common shareholders decreased. The decrease in net income per share available to
common shareholders was primarily due to the reduction of gains on Mortgage
Backed Securities sold. For the quarter ended June 30, 2004, gain on sale of
Mortgage-Backed Securities was $2.1 million, as compared to $20.2 million, or
$0.22 per share for the quarter ended June 30, 2003. The decline in gain was
only partially offset by the increase in the interest rate spread. The interest
rate spread for the quarter ended June 30, 2004 was 1.54%, as compared to 1.25%
for the quarter ended June 30, 2003. We compute our net income per share by
dividing net income available to common shareholders by the weighted average
number of shares of outstanding common stock during the period, which was
118,276,509 for the quarter ended June 30, 2004 and 93,384,128 for the quarter
ended June 30, 2003. Dividends for the quarter ended June 30, 2004, was $0.48
per share of common stock, or $57.7 million in total, and $0.47 per share of
preferred stock, or $2.0 million in total. Dividends per share for the quarter
ended June 30, 2003 was $0.60 per share, or $56.4 million in total. Our return
on average equity was 15.76% for the quarter ended June 30, 2004 and 20.79% for
the quarter ended June 30, 2003. The decline in the return on average equity
resulted from the decline in gains on sale of Mortgage-Backed Securities.

For the six months ended June 30, 2004, our net income was $122.7 million,
or $1.05 basic earnings per share, as compared to $108.9 million, or $1.22 basic
earnings per average share available to common shareholders, for the six months
ended June 30, 2003. We attribute the increase in net income for the six months
ended June 30, 2004, over the six months ended June 30, 2003 to the increased
asset base. The increased asset base was the result of deploying additional
common and preferred capital, of approximately, $529.4 million from June 30,
2003 to June 30, 2004, into our strategy. Even though total net income
increased, net income per share decreased. The decrease in net income per share
available to common shareholders was primarily due to the reduction of gains on
Mortgage Backed Securities sold. For the six months ended June 30, 2004, gain on
sale of Mortgage-Backed Securities was $2.7 million, as compared to $31.3
million, or $0.35 per share for the six months ended June 30, 2003. We compute
our net income per share by dividing net income available to common shareholders
by the weighted average number of shares of outstanding common stock during the
period, which was 115,391,357 for the six months ended June 30, 2004 and
89,019,821 for the six months ended June 30, 2003. Dividend for the six months
ended June 30, 2004, was $0.98 per share of common stock, or $116.6 million in
total and $0.47 per share of preferred stock or $2.0 million in total. Dividend
for the six months ended June 30, 2003 was $1.20 per share, or $107.2 million in
total. Our return on average equity was 16.77% for the six months ended June 30,
2004 and 19.70% for the six months ended June 30, 2003. The decline in the
return on average equity resulted from the decline in gains on sale of
Mortgage-Backed Securities.

17

NET INCOME SUMMARY
(RATIOS FOR THE QUARTER HAVE BEEN ANNUALIZED,
DOLLARS IN THE THOUSANDS, EXCEPT FOR PER SHARE DATA)

Quarter Six Months
ended Quarter Ended Six Months
June 30, 2004 ended June 30, 2004 Ended
(Consolidated) June 30, 2003 (Consolidated) June 30, 2003
-------------------------------------------------------------------

Interest income $ 122,234 $ 93,892 $ 236,575 $ 181,392
Interest expense 55,648 51,770 105,951 95,818
------------------------------------------------------------------
Net interest income 66,586 42,122 130,624 85,574
Gain on sale of Mortgage Backed Securities 2,126 20,231 2,721 31,252
Investment advisory and service fees 1,260 -- 1,260 --
General and administrative expenses 5,643 4,201 11,008 7,898
------------------------------------------------------------------
Net income before taxes $ 64,329 $ 58,152 $ 123,597 $ 108,928
Income taxes 494 -- 919 --
------------------------------------------------------------------
Net Income $ 63,835 $ 58,152 $ 122,678 $ 108,928
==================================================================

Weighted average number of basic shares
outstanding 118,276,509 93,384,128 115,391,357 89,019,821
Weighted average number of diluted shares
outstanding 118,469,756 93,588,024 115,659,172 89,231,272

Basic net income per share available to common
shareholders $ 0.52 $ 0.62 $ 1.05 $ 1.22
Diluted net income per share available to
common shareholders $ 0.52 $ 0.62 $ 1.04 $ 1.22

Average total assets $ 17,790,725 $ 13,692,434 $ 16,190,579 $ 13,014,651
Average total equity $ 1,620,550 $ 1,119,075 $ 1,463,440 $ 1,106,072

Annualized return on average assets 1.44% 1.70% 1.52% 1.67%
Annualized return on average equity 15.76% 20.79% 16.77% 19.70%

INTEREST INCOME AND AVERAGE EARNING ASSET YIELD

We had average earning assets of $16.6 billion and $12.8 billion for the
quarters ended June 30, 2004 and 2003, respectively. Our primary source of
income for the quarters ended June 30, 2004 and 2003 was interest income. A
portion of our income was generated by gains on the sales of our Mortgage-Backed
Securities. Our interest income was $122.2 million for the quarter ended June
30, 2004 and $93.9 million for the quarter ended June 30, 2003. The yield on
average investment securities remained materially unchanged, from 2.93% for the
quarter ended June 30, 2003 to 2.94% for the quarter ended June 30, 2004. Our
average earning asset balance increased by $3.8 billion and interest income
increased by $28.3 million for the quarter ended June 30, 2004 as compared to
the quarter ended June 30, 2003. The increase was the direct result of the
increased asset base. The yield remained materially unchanged for the comparable
periods because the decline in the weighted average coupon rate at June 30, 2004
of 4.31%, as compared to 4.52% at June 30, 2003 was offset by the improvement in
prepayment speeds. So, even though the prepayment speeds decreased to 33% CPR
for the quarter ended June 30, 2004, from 44% CPR for the quarter ended June 30,
2003, the overall yield increased by one basis points.

We had average earning assets of $15.6 billion and $11.8 billion for the
six months ended June 30, 2004 and 2003, respectively. Our primary source of
income for the quarters ended June 30, 2004 and 2003 was interest income. A
portion of our income was generated by gains on the sales of our Mortgage-Backed
Securities. Our interest income was $236.6 million for the six months ended June
30, 2004 and $181.4 million for the six months ended June 30, 2003. The yield on
average investment securities remained materially unchanged from 3.07% for

18

the six months ended June 30, 2003, to 3.04% for the six months ended June 30,
2004. Our average earning asset balance increased by $3.8 billion and interest
income increased by $55.2 million for the six months ended June 30, 2004 as
compared to the six months ended June 30, 2003, with the substantial increase in
the average asset base.

The table below shows our average balance of interest earning assets, our
yield on average earning assets and our interest income for the quarter ended
June 30, 2004, March 31, 2004, the year ended December 31, 2003 and the four
quarters in 2003.

AVERAGE EARNING ASSET YIELD
(RATIOS FOR THE QUARTERS HAVE BEEN ANNUALIZED, DOLLARS IN THOUSANDS)

Average
Average Yield on Constant
Investment Investment Prepayment Interest
Securities Securities Rate Income
---------- ---------- ---- ------

For the Quarter Ended June 30, 2004 $16,649,072 2.94% 33% $122,234
For the Quarter Ended March 31, 2004 $14,452,245 3.16% 31% $114,341
- ---------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2003 $12,007,333 2.81% 37% $337,433
For the Quarter Ended December 31, 2003 $11,799,730 3.02% 37% $ 89,186
For the Quarter Ended September 30, 2003 $12,577,165 2.13% 48% $ 66,855
For the Quarter Ended June 30, 2003 $12,815,290 2.93% 44% $ 93,892
For the Quarter Ended March 31, 2003 $10,837,147 3.23% 41% $ 87,500

The constant prepayment rate ("CPR") on our Mortgage-Backed Securities for
the quarters ended June 30, 2004 and 2003 was 33% and 44%, respectively. CPR is
an assumed rate of prepayment for our Mortgage-Backed Securities, expressed as
an annual rate of prepayment relative to the outstanding principal balance of
our Mortgage-Backed Securities. CPR does not purport to be either a historical
description of the prepayment experience of our Mortgage-Backed Securities or a
prediction of the anticipated rate of prepayment of our Mortgage-Backed
Securities. The homeowners' prepayment option makes the average term yield and
performance of a mortgage-backed security uncertain because of the uncertainty
in timing of the return of principal. In general, prepayments decrease the total
yield on a bond purchased at a premium, because over life of the bond that
premium has to be amortized. The faster prepayments, the shorter the life of the
security, which results in the increased amortization. The total amortization
for the quarters ended June 30, 2004 and 2003 was $56.1 million, $57.6,
respectively. The prepayment speeds for June of 2004 were trending lower than
the speeds for April and May 2004. We expect this trend to continue for the
third quarter of 2004.

Principal prepayments had a negative effect on our earning asset yield for
the quarters ended June 30, 2004 and 2003 because we adjust our rates of premium
amortization and discount accretion monthly based upon the effective yield
method, which takes into consideration changes in prepayment speeds.

INTEREST EXPENSE AND THE COST OF FUNDS

We anticipate that our largest expense will be the cost of borrowed funds.
We had average borrowed funds of $15.9 billion and total interest expense of
$55.6 million for the quarter ended June 30, 2004. We had average borrowed funds
of $12.3 billion and total interest expense of $51.8 million for the quarter
ended June 30, 2003. Our average cost of funds was 1.40% for the quarter ended
June 30, 2004 and 1.68% for the quarter ended June 30, 2003. The cost of funds
rate decreased 0.28% and the average borrowed funds increased by $3.6 billion
for the quarter ended June 30, 2004 when compared to the quarter ended June 30,
2003. Interest expense for the quarter increased by $3.8 million due to the
substantial increase in the average repurchase balance even though the cost of
funds rate decreased. The increase in the average repurchase balance was the
result of us implementing our leveraged strategy after the completion of the
equity offerings in the first quarter 2004, in addition to equity acquired in
through the equity shelf program, the direct purchase and dividend reinvestment
plan, and options exercised. Since a substantial portion of our repurchase
agreements are short term, market rates are directly reflected in our interest
expense. Our average cost of funds was 0.25% above average one-month LIBOR and
0.14% below average six-month LIBOR for the quarter ended June 30, 2004. Our
average cost of funds was 0.42% above average one-month LIBOR and 0.48% above
average six-month LIBOR for the quarter ended June 30, 2003.

19

We had average borrowed funds of $14.7 billion and total interest expense
of $106.0 million for the six months ended June 30, 2004. We had average
borrowed funds of $11.4 billion and total interest expense of $95.8 million for
the six months ended June 30, 2003. Our average cost of funds was 1.44% for the
six months ended June 30, 2004 and 1.68% for the six months ended June 30, 2003.
The cost of funds rate decreased 0.24% and the average borrowed funds increased
by $3.3 billion for the six months ended June 30, 2004 when compared to the six
months ended June 30, 2003. Interest expense for the six months increased by $
10.2 million due to the substantial increase in the average repurchase balance
even though the cost of funds rate decreased. The increase in the average
repurchase balance was the result of one implementing one leveraged strategy
after the completion of the equity offerings in the second quarter 2003 and the
first quarter 2004, in addition to equity acquired through the equity shelf
program, the direct purchase and dividend reinvestment plan, and options
exercised.

The table below shows our average borrowed funds and average cost of funds
as compared to average one-month and average six-month LIBOR for the quarter
ended June 30, 2004, March 31, 2004, the year ended December 31, 2003 and the
four quarters in 2003.

AVERAGE COST OF FUNDS
(RATIOS FOR THE QUARTERS HAVE BEEN ANNUALIZED, DOLLARS IN THOUSANDS)

Average Average Average
One-Month Cost Cost
LIBOR of Funds of Funds
Relative to Relative to Relative to
Average Average Average Average Average Average Average
Borrowed Interest Cost of One-Month Six-Month Six-Month One-Month Six-Month
Funds Expense Funds LIBOR LIBOR LIBOR LIBOR LIBOR
-------- -------- ------- --------- --------- ----------- ----------- -----------

For the Quarter Ended
June 30, 2004 $15,880,353 $ 55,648 1.40% 1.15% 1.54% (0.39%) 0.25% (0.14%)
For the Quarter Ended
March 31, 2004 $13,587,211 $ 50,303 1.48% 1.10% 1.18% (0.08%) 0.38% 0.30%
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended
December 31, 2003 $11,549,368 $ 182,004 1.58% 1.21% 1.23% (0.02%) 0.37% 0.35%
For the Quarter Ended
December 31, 2003 $11,235,908 $ 42,264 1.50% 1.13% 1.23% (0.10%) 0.37% 0.27%
For the Quarter Ended
September 30, 2003 $12,186,985 $ 43,922 1.44% 1.11% 1.17% (0.06%) 0.33% 0.27%
For the Quarter Ended
June 30, 2003 $12,311,329 $ 51,770 1.68% 1.26% 1.20% 0.06% 0.42% 0.48%
For the Quarter Ended
March 31, 2003 $10,463,252 $ 44,048 1.68% 1.34% 1.33% 0.01% 0.34% 0.35%

NET INTEREST INCOME

Our net interest income which equals interest income less interest
expense, totaled $66.6 million for the quarter ended June 30, 2004 and $42.1
million for the quarter ended June 30, 2003. Our net interest income increased
because of increase in assets that resulted from the common stock and preferred
stock equity offerings in the first quarter of 2004. Our net interest spread,
which equals the yield on our average assets for the period less the average
cost of funds for the period, was 1.54% for the quarter ended June 30, 2004 as
compared to 1.25% for the quarter ended June 30, 2003. Even though the weighted
average coupon at June 30, 2004 of 4.31% declined from 4.52% at June 30, 2003,
the improvement in CPR in combination with the reduction in the funding cost
resulted in a 29 basis point increase in the net interest rate spread.

Our net interest income, totaled $130.6 million for the six months ended
June 30, 2004 and $85.6 million for the six months ended June 30, 2003. Our net
interest income increased because of increase in assets that resulted from the
offerings in 2004. Our net interest spread, which equals the yield on our
average assets for the period less the average cost of funds for the period, was
1.60% for the six months ended June 30, 2004 as compared to 1.38% for the
quarter ended June 30, 2003.

The table below shows our interest income by earning asset type, average
earning assets by type, total interest income, interest expense, average
repurchase agreements, average cost of funds, and net interest income for the
quarter ended June 30, 2004, March 31, 2004, the year ended December 31, 2003,
and the four quarters in 2003.

20

NET INTEREST INCOME
(RATIOS FOR THE QUARTERS HAVE BEEN ANNUALIZED, DOLLARS IN THOUSANDS)

Yield on
Average Average Average Net
Investment Total Interest Balance of Average Net Interest
Securities Interest Earning Repurchase Interest Cost of Interest Rate
Held Income Assets Agreements Expense Funds Income Spread
---------- -------- -------- ---------- -------- ------- -------- --------

For the Quarter Ended
June 30, 2004 $16,649,072 $ 122,234 2.94% $15,880,353 $ 55,648 1.40% $ 66,586 1.54%
For the Quarter Ended
March 31, 2004 $14,452,245 $ 114,341 3.16% $13,587,211 $ 50,303 1.48% $ 64,038 1.68%
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended
December 31, 2003 $12,007,333 $ 337,433 2.81% $11,549,368 $ 182,004 1.58% $ 155,429 1.23%
For the Quarter Ended
December 31, 2003 $11,799,730 $ 89,186 3.02% $11,235,908 $ 42,264 1.50% $ 46,922 1.52%
For the Quarter Ended
September 30, 2003 $12,577,165 $ 66,855 2.13% $12,186,985 $ 43,922 1.44% $ 22,933 0.69%
For the Quarter Ended
June 30, 2003 $12,815,290 $ 93,892 2.93% $12,311,329 $ 51,770 1.68% $ 42,122 1.25%
For the Quarter Ended
March 31, 2003 $10,837,147 $ 87,500 3.23% $10,463,252 $ 44,048 1.68% $ 43,452 1.55%

INVESTMENT ADVISORY AND SERVICE FEES

FIDAC is a registered investment advisor which generally receives annual
net investment advisory fees of approximately 10 to 15 basis points of the gross
assets it manages, assists in managing or supervises. At June 30, 2004, FIDAC
had under management approximately $1.7 billion in net assets and $12.8 billion
in gross assets, compared to $1.5 billion in net assets and $13.6 billion in
gross assets at December 31, 2003. Investment advisory and services fees for the
month of June 2004 totaled $1.3 million, net of fees paid to third parties,
pursuant to distribution service agreements for facilitating and promoting
distribution of shares of FIDAC's clients and are included in the consolidated
statement of operations and comprehensive income. For the month of June 2004,
such fees were $298,000, which were paid out of FIDAC investment advisory fees.

GAINS AND LOSSES ON SALES OF MORTGAGE-BACKED SECURITIES

For the quarter ended June 30, 2004, we sold Mortgage-Backed Securities
with an aggregate historical amortized cost of $182.8 million for an aggregate
gain of $2.1 million. For the quarter ended June 30, 2003, we sold
Mortgage-Backed Securities with an aggregate historical amortized cost of $1.6
billion for an aggregate gain of $20.2 million. The gain on sale of
Mortgage-Backed Securities declined by $18.1 million. For the six months ended
June 30, 2004, we sold Mortgage-Backed Securities with an aggregate historical
amortized cost of $256.4 million for an aggregate gain of $2.7 million. For the
six months ended June 30, 2003, we sold Mortgage-Backed Securities with an
aggregate historical amortized cost of $2.4 billion for an aggregate gain of
$31.3 million. The gain on sale of Mortgage-Backed Securities declined by $28.6
million. The difference between the sale price and the historical amortized cost
of our Mortgage-Backed Securities is a realized gain and increases income
accordingly. We do not expect to sell assets on a frequent basis, but may from
time to time sell existing assets to acquire assets, which our management
believes might have higher risk-adjusted returns as part of our asset/liability
management strategy.

GENERAL AND ADMINISTRATIVE EXPENSE

General and administrative ("G&A") expenses were $5.6 million for the
quarter ended June 30, 2004 and $4.2 million for the quarter ended June 30,
2003. G&A expenses as a percentage of average assets was 0.13% for the quarters
ended June 30, 2004 and 2003. G&A expenses as a percentage of average equity was
1.39% and 1.50% on an annualized basis for the quarters ended June 30, 2004 and
2003, respectively. The increase of $1.4 million for the quarter ended June 30,
2004, is primarily the result of increased salaries and D&O insurance.

21

G&A expenses were $11.0 million for the six months ended June 30, 2004 and
$7.9 million for the six months ended June 30, 2003. G&A expenses as a
percentage of average assets was 0.14% and 0.12% on an annualized basis for the
six months ended June 30, 2004 and 2003, respectively. G&A expenses as a
percentage of average equity was 1.50% and 1.43% on an annualized basis for the
six months ended June 30, 2004 and 2003, respectively.

G&A EXPENSES AND OPERATING EXPENSE RATIOS
(RATIOS FOR THE QUARTERS HAVE BEEN ANNUALIZED, DOLLARS IN THOUSANDS)

Total G&A Total G&A
Total G&A Expenses/Average Expenses/Average
Expenses Assets (annualized) Equity (annualized)
--------- ------------------- -------------------

For the Quarter Ended June 30, 2004 $5,643 0.13% 1.39%
For the Quarter Ended March 31, 2004 $5,790 0.15% 1.63%
- ----------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2003 $16,233 0.13% 1.45%
For the Quarter Ended December 31, 2003 $4,225 0.13% 1.47%
For the Quarter Ended September 30, 2003 $4,110 0.12% 1.42%
For the Quarter Ended June 30, 2003 $4,201 0.12% 1.50%
For the Quarter Ended March 31, 2003 $3,697 0.12% 1.37%

NET INCOME AND RETURN ON AVERAGE EQUITY

Our net income was $63.8 million for the quarter ended June 30, 2004 and
$58.2 million for the quarter ended June 30, 2003. Our return on average equity
was 15.76 % for the quarter ended June 30, 2004 and 20.79% for the quarter ended
June 30, 2003. Our net income was $122.7 million for the six months ended June
30, 2004 and $108.9 million for the six months ended June 30, 2003. Our return
on average equity was 16.77% for the six months ended June 30, 2004 and 19.70%
for the six months ended June 30, 2003. The table below shows our net interest
income, investment advisory and service fees, gain on sale of Mortgage-Backed
Securities, G&A expenses, and income taxes each as a percentage of average
equity, and the return on average equity for the quarter ended June 30, 2004,
March 31, 2004, the year ended December 31, 2003, and for the four quarters in
2003.

COMPONENTS OF RETURN ON AVERAGE EQUITY
(RATIOS FOR ALL QUARTERS ARE ANNUALIZED)

Investment Gain on Sale of Income
Net Interest Advisory Fees and Mortgage-Backed G&A Expenses/ Taxes/ Return on
Income/Average Services/ Average Securities/Average Average Average Average
Equity Equity Equity Equity Equity Equity
-------------- ----------------- ------------------ ------------- ------- ---------

For the Quarter Ended June 30, 2004 16.44% 0.31% 0.52% 1.29% 1.39% 15.76%
For the Quarter Ended March 31, 2004 18.05% - 0.17% 1.63% - 16.59%
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2003 13.85% - 3.64% 1.45% - 16.04%
For the Quarter Ended December 31, 2003 16.36% - - 1.47% - 14.89%
For the Quarter Ended September 30, 2003 7.95% - 3.35% 1.42% - 9.88%
For the Quarter Ended June 30, 2003 15.06% - 7.23% 1.50% - 20.79%
For the Quarter Ended March 31, 2003 16.11% - 4.09% 1.37% - 18.83%

FINANCIAL CONDITION

INVESTMENT SECURITIES

All of our Mortgage-Backed Securities at June 30, 2004 were
adjustable-rate or fixed-rate Mortgage-Backed Securities backed by single-family
mortgage loans. All of the mortgage assets underlying these Mortgage-Backed
Securities were secured with a first lien position on the underlying
single-family properties. All our Mortgage-Backed Securities were FHLMC, FNMA or
GNMA mortgage pass-through certificates or collateralized mortgage obligations
("CMOs"), which carry an actual or implied "AAA" rating. We mark-to-market all
of our

22

Mortgage Backed Securities to fair value.

All of our agency debentures are callable and carry an implied "AAA"
rating. We mark-to-market all of our agency debentures to fair value.

We accrete discount balances as an increase in interest income over the
life of discount Investment Securities and we amortize premium balances as a
decrease in interest income over the life of premium Investment Securities. At
June 30, 2004 and December 31, 2003, we had on our statement of financial
condition a total of $1.0 million and $1.5 million, respectively, of unamortized
discount (which is the difference between the remaining principal value and
current historical amortized cost of our Investment Securities acquired at a
price below principal value) and a total of $385.7 million and $323.9 million,
respectively, of unamortized premium (which is the difference between the
remaining principal value and the current historical amortized cost of our
Investment Securities acquired at a price above principal value).

We received mortgage principal repayments of $2.1 billion for the quarter
ended June 30, 2004 and $2.2 billion for the quarter ended June 30, 2003. Given
our current portfolio composition, if mortgage principal prepayment rates were
to increase over the life of our Mortgage-Backed Securities, all other factors
being equal, our net interest income would decrease during the life of these
Mortgage-Backed Securities as we would be required to amortize our net premium
balance into income over a shorter time period. Similarly, if mortgage principal
prepayment rates were to decrease over the life of our Mortgage-Backed
Securities, all other factors being equal, our net interest income would
increase during the life of these Mortgage-Backed Securities, as we would
amortize our net premium balance over a longer time period.

The table below summarizes our Investment Securities at June 30, 2004,
March 31, 2004, December 31, 2003, September 30, 2003, June 30, 2003 and March
31, 2003.

INVESTMENT SECURITIES
(DOLLARS IN THOUSANDS)

Estimated
Amortized Fair Weighted
Net Amortized Cost/Principal Estimated Value/Principal Average
Principal Value Premium Cost Value Fair Value Value Yield
--------------- ------- --------- -------------- ---------- --------------- --------

At June 30, 2004 $16,914,635 $ 384,648 $17,299,283 102.27% $17,121,795 101.22% 3.04%
At March 31, 2004 $17,662,596 $ 412,563 $18,075,159 102.34% $18,079,598 102.36% 2.72%
- ----------------------------------------------------------------------------------------------------------------------------
At December 31, 2003 $12,682,130 $ 299,810 $12,981,940 102.36% $12,934,679 101.99% 2.96%
At September 30, 2003 $12,363,260 $ 293,694 $12,656,954 102.38% $12,605,085 101.96% 2.35%
At June 30, 2003 $13,939,447 $ 322,838 $14,262,285 102.32% $14,263,475 102.32% 2.87%
At March 31, 2003 $11,957,710 $ 289,360 $12,247,070 102.42% $12,318,070 103.01% 2.83%

The tables below set forth certain characteristics of our Investment
Securities. The index level for adjustable-rate Investment Securities is the
weighted average rate of the various short-term interest rate indices, which
determine the coupon rate.

ADJUSTABLE-RATE INVESTMENT SECURITY CHARACTERISTIC
(DOLLARS IN THOUSANDS)

Weighted Principal Value
Weighted Weighted Weighted Average Weighted at Period End as
Average Average Average Term to Weighted Average % of Total
Principal Coupon Index Net Next Average Asset Investment
Value Rate Level Margin Adjustment Lifetime Cap Yield Securities
--------- -------- -------- -------- ---------- ------------ -------- ----------------

At June 30, 2004 $11,806,171 3.95% 2.19% 1.76% 29 months 10.07% 2.73% 69.80%
At March 31, 2004 $13,059,967 3.90% 2.20% 1.70% 30 months 9.77% 2.91% 73.94%
- --------------------------------------------------------------------------------------------------------------------------------
At December 31, 2003 $9,294,934 3.85% 2.25% 1.60% 23 months 9.86% 2.47% 73.29%
At September 30, 2003 $8,498,116 3.76% 2.17% 1.59% 22 months 9.75% 1.77% 68.74%
At June 30, 2003 $8,889,012 3.69% 2.18% 1.51% 18 months 9.70% 2.47% 63.77%
At March 31, 2003 $7,716,248 3.93% 2.31% 1.62% 13 months 10.04% 2.20% 64.53%

23

FIXED-RATE INVESTMENT SECURITY CHARACTERISTICS
(DOLLARS IN THOUSANDS)

Principal Value
at Period End as
Weighted Weighted % of Total
Average Coupon Average Investment
Principal Value Rate Asset Yield Secur