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Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-34385
 
INVESCO MORTGAGE CAPITAL INC.
(Exact Name of Registrant as Specified in Its Charter)
 
     
Maryland
(State or Other Jurisdiction of
Incorporation or Organization)
  26-2749336
(I.R.S. Employer
Identification No.)
     
1555 Peachtree Street, N.E., Suite 1800
Atlanta, Georgia

(Address of Principal Executive Offices)
  30309
(Zip Code)
(404) 892-0896
(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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 þ No o
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 o   Accelerated filer þ   Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of August 9, 2011, there were 94,782,520 outstanding shares of common stock of Invesco Mortgage Capital Inc.
 
 

 


 

INVESCO MORTGAGE CAPITAL INC.
TABLE OF CONTENTS
         
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 EX-101 INSTANCE DOCUMENT
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 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
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 EX-101 DEFINITION LINKBASE DOCUMENT

 


Table of Contents

PART I
ITEM 1.   FINANCIAL STATEMENTS
INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
                 
    As of  
    June 30,     December 31,  
    2011     2010  
$ in thousands, except per share amounts   (Unaudited)          
ASSETS
               
Mortgage-backed securities, at fair value
    12,155,861       5,578,333  
Cash
    66       63,552  
Restricted cash
    134,037       101,144  
Investment related receivable
    121,120       7,601  
Investments in unconsolidated limited partnerships, at fair value
    48,177       54,725  
Accrued interest receivable
    46,295       22,503  
Derivative assets, at fair value
    19,131       33,255  
Other assets
    2,063       1,287  
 
           
Total assets
    12,526,750       5,862,400  
 
           
 
               
LIABILITIES AND EQUITY
               
Liabilities:
               
Repurchase agreements
    9,560,766       4,344,659  
Derivative liability, at fair value
    139,129       37,850  
Dividends and distributions payable
    72,575       49,741  
Investment related payable
    910,552       372,285  
Accrued interest payable
    9,853       2,579  
Accounts payable and accrued expenses
    1,645       1,065  
Due to affiliate
    6,863       3,407  
 
           
Total liabilities
    10,701,383       4,811,586  
 
           
 
               
Equity:
               
Preferred Stock: par value $0.01 per share; 50,000,000 shares authorized, 0 shares issued and outstanding
           
Common Stock: par value $0.01 per share; 450,000,000 shares authorized, 92,945,506 and 49,854,196 shares issued and outstanding, at June 30, 2011 and December 31, 2010, respectively
    929       499  
Additional paid in capital
    1,889,173       1,002,809  
Accumulated other comprehensive income (loss)
    (89,838 )     24,015  
Distributions in excess of earnings
    (4,423 )     (8,173 )
 
           
Total shareholders’ equity
    1,795,841       1,019,150  
 
               
Non-controlling interest
    29,526       31,664  
 
           
Total equity
    1,825,367       1,050,814  
 
           
 
               
Total liabilities and equity
    12,526,750       5,862,400  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

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INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
$ in thousands, except per share data   2011     2010     2011     2010  
Revenues
                               
Interest income
    108,981       29,207       177,517       47,217  
Interest expense
    34,207       6,379       49,785       10,031  
 
                       
Net interest income
    74,774       22,828       127,732       37,186  
 
                       
 
                               
Other income
                               
Gain on sale of investments
    3,605       642       4,805       1,375  
Equity in earnings and fair value change in unconsolidated limited partnerships
    1,873       1,649       3,731       2,095  
Loss on other-than-temporarily impaired securities
          (262 )           (386 )
Unrealized loss on interest rate swaps
    (197 )     (10 )     (202 )     (35 )
Realized and unrealized credit default swap income
    1,259             3,791        
 
                       
Total other income
    6,540       2,019       12,125       3,049  
 
                       
 
                               
Expenses
                               
Management fee — related party
    5,753       1,771       9,728       3,055  
General and administrative
    1,157       1,017       2,026       1,954  
 
                       
Total expenses
    6,910       2,788       11,754       5,009  
 
                       
Net income
    74,404       22,059       128,103       35,226  
 
                       
 
                               
Net income attributable to non-controlling interest
    1,406       1,309       2,857       2,427  
 
                       
Net income attributable to common shareholders
    72,998       20,750       125,246       32,799  
 
                       
 
                               
Earnings per share:
                               
Net income attributable to common shareholders (basic/diluted)
    0.99       0.91       2.00       1.70  
 
                       
Dividends declared per common share
    0.97       0.74       1.97       1.52  
 
                       
Weighted average number of shares of common stock:
                               
Basic
    73,486       22,808       62,731       19,266  
 
                       
Diluted
    74,929       24,239       64,167       20,695  
 
                       
 
                               
The accompanying notes are an integral part of these consolidated financial statements.

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INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EQUITY
For the six months ended June 30, 2011

(Unaudited)
                                                                         
    Attributable to Common Shareholders                    
                            Accumulated                                
                    Additional     Other     Distributions in     Total     Non-              
$ in thousands, except per   Common Stock     Paid in     Comprehensive     excess of     Shareholders’     Controlling     Total     Comprehensive  
share amounts   Shares     Amount     Capital     Income (loss)     earnings     Equity     Interest     Equity     Income  
Balance at January 1, 2011
    49,854,196       499       1,002,809       24,015       (8,173 )     1,019,150       31,664       1,050,814        
 
                                                     
Net income
                            125,246       125,246       2,857       128,103       128,103  
Comprehensive income
                                                                       
Change in net unrealized gains and losses on available for sale securities
                      567             567       276       843       843  
Change in net unrealized gains and losses on derivatives
                      (114,420 )           (114,420 )     (2,465 )     (116,885 )     (116,885 )
 
                                                                     
Total comprehensive income
                                                                    12,061  
 
                                                                     
Net proceeds from issuance of common stock, net of offering costs
    43,087,519       430       886,272                   886,702             886,702          
Stock awards
    3,791                                                    
Common stock dividends
                            (121,496 )     (121,496 )           (121,496 )        
Common unit dividends
                                        (2,807 )     (2,807 )        
Amortization of equity-based compensation
                92                   92       1       93          
 
                                                       
Balance at June 30, 2011
    92,945,506       929       1,889,173       (89,838 )     (4,423 )     1,795,841       29,526       1,825,367          
 
                                                       
The accompanying notes are an integral part of this consolidated financial statement.

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INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                 
$ in thousands   Six Months Ended June 30,  
    2011     2010  
Cash Flows from Operating Activities
               
Net income
    128,103       35,226  
Adjustments to reconcile net income to net cash provided by operating activities
               
Amortization of mortgage-backed securities premiums and discounts, net
    11,149       (5,423 )
Unrealized loss on interest swap
    202       35  
Unrealized gain on credit default swap
    (1,685 )      
Gain on sale of mortgage-backed securities
    (4,805 )     (1,375 )
Loss on other-than-temporarily impaired securities
          386  
Equity in earnings and fair value change in unconsolidated limited partnerships
    (3,731 )     (2,095 )
Amortization of equity-based compensation
    93       61  
Changes in operating assets and liabilities
               
Increase in accrued interest
    (23,792 )     (6,959 )
(Increase) decrease in other assets
    (776 )     320  
Increase in accrued interest payable
    7,274       745  
Increase in due to affiliate
    3,278       1,033  
Increase in accounts payable and accrued expenses
    533       1,085  
 
           
Net cash provided by operating activities
    115,843       23,039  
 
           
 
               
Cash Flows from Investing Activities
               
Purchase of mortgage-backed securities
    (7,020,050 )     (1,826,855 )
(Contributions) distributions (to) from Investment in PPIP, net
    11,710       (36,134 )
Principal payments from mortgage-backed securities
    491,577       160,835  
Proceeds from sale of mortgage-backed securities
    344,767       169,016  
 
           
Net cash used in investing activities
    (6,171,996 )     (1,533,138 )
 
           
 
               
Cash Flows from Financing Activities
               
Proceeds from issuance of common stock
    886,929       342,136  
Restricted cash
    (26,944 )     (16,445 )
Proceeds from repurchase agreements
    33,213,268       6,720,307  
Principal repayments of repurchase agreements
    (27,997,161 )     (5,589,934 )
Investment related payable
    18,044        
Proceeds from TALF financing
          71,525  
Principal payments of TALF financing
          (145 )
Payments of dividends and distributions
    (101,469 )     (25,151 )
 
           
Net cash provided by financing activities
    5,992,667       1,502,293  
 
           
 
               
Net change in cash
    (63,486 )     (7,806 )
Cash, beginning of period
    63,552       24,041  
 
           
 
               
Cash, end of period
    66       16,235  
 
           
 
               
Supplement disclosure of cash flow information
               
Interest paid
    42,511       9,247  
 
           
 
               
Non-cash investing and financing activities information
               
 
               
Net change in unrealized gain on available-for-sale securities and derivatives
    (116,043 )     (6,298 )
 
           
Net change in investment in PPIP
    (1,431 )     228  
 
           
Net change in restricted cash
    (5,949 )      
 
           
Dividends and distributions declared not paid
    72,575       20,329  
 
           
Payable for mortgage-backed securities purchased
    (399,323 )     (363,753 )
 
           
The accompanying notes are an integral part of these consolidated financial statements.

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INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 — Organization and Business Operations
     Invesco Mortgage Capital Inc. (the “Company”) is a Maryland corporation focused on investing in, financing and managing residential and commercial mortgage-backed securities and mortgage loans. The Company invests in residential mortgage-backed securities (“RMBS”) for which a U.S. Government Agency such as the Government National Mortgage Association (“Ginnie Mae”), the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”) guarantees payments of principal and interest on the securities (collectively “Agency RMBS”). The Company’s Agency RMBS investments include mortgage pass-through securities and collateralized mortgage obligations (“CMOs”). The Company also invests in RMBS that are not issued or guaranteed by a U.S. government Agency (“non-Agency RMBS”), commercial mortgage-backed securities (“CMBS”), and residential and commercial mortgage loans. The Company is externally managed and advised by Invesco Advisers, Inc. (the “Manager”), a registered investment adviser and an indirect, wholly-owned subsidiary of Invesco Ltd. (“Invesco”), a global investment management company.
     The Company conducts its business through IAS Operating Partnership LP (the “Operating Partnership”) as its sole general partner. As of June 30, 2011, the Company owned 98.5% of the Operating Partnership and Invesco Investments (Bermuda) Ltd., a direct, wholly-owned subsidiary of Invesco, owned the remaining 1.5%.
     The Company finances its Agency RMBS, non-Agency RMBS and CMBS investments through short-term borrowings structured as repurchase agreements. The Manager has secured commitments for the Company with a number of repurchase agreement counterparties. In addition, the Company had financed its CMBS portfolio with financings under the U.S. government’s Term Asset-Backed Securities Loan Facility (“TALF”) which were repaid and replaced with repurchase agreements during 2010. The Company has also financed its investments in certain non-Agency RMBS, CMBS and residential and commercial mortgage loans by contributing capital to a partnership that invests in the public private investments funds (the “PPIF”) managed by the Company’s Manager. In addition, the Company may use other sources of financing including committed borrowing facilities and other private financing.
     The Company elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes under the provisions of the Internal Revenue Code of 1986, as amended (“Code”), commencing with the Company’s taxable year ended December 31, 2009. To maintain the Company’s REIT qualification, the Company is generally required to distribute at least 90% of its taxable income to its shareholders annually.
Note 2 — Summary of Significant Accounting Policies
Basis of Quarterly Presentation
     The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial position and the results of operations of the Company for the interim periods presented have been included. Certain disclosures included in the Company’s annual report are not required to be included on an interim basis in the company’s quarterly reports on Forms 10-Q. The Company has condensed or omitted these disclosures. The interim consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and related notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2010 which was filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2011. The results of operations for the period ended June 30, 2011 are not necessarily indicative of the results to be expected for the full year or any other future period.

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Principles of Consolidation
     The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated.
Use of Estimates
     The accounting and reporting policies of the Company conform to U.S. GAAP. The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Examples of estimates include, but are not limited to, estimates of the fair values of financial instruments, interest income on mortgage-backed securities (“MBS”) and other-than-temporary impairment charges. Actual results may differ from those estimates.
Cash and Cash Equivalents
     The Company considers all highly liquid investments that have original or remaining maturity dates of three months or less when purchased to be cash equivalents. At June 30, 2011, the Company had cash and cash equivalents, including amounts restricted, in excess of the Federal Deposit Insurance Corporation, or FDIC, deposit insurance limit of $250,000 per institution. The Company mitigates its risk of loss by placing cash and cash equivalents with numerous major financial institutions.
Deferred Offering Costs
     The Company records costs associated with stock offerings as a reduction in additional paid in capital. The Company includes deferred offering costs in other assets.
Underwriting Commissions and Costs
     Underwriting commissions and direct costs incurred in connection with the Company’s initial public offering (“IPO”) and subsequent follow-on common stock offerings are reflected as a reduction of additional paid-in-capital.
Repurchase Agreements
     The Company finances its Agency RMBS, non-Agency RMBS and its CMBS investment portfolio 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.
     In instances where the Company acquires Agency RMBS, non-Agency RMBS or CMBS through repurchase agreements with the same counterparty from whom the Agency RMBS, non-Agency RMBS or CMBS were purchased, the Company accounts for the purchase commitment and repurchase agreement on a net basis and records a forward commitment to purchase Agency RMBS, non-Agency RMBS or CMBS as a derivative instrument if the transaction does not comply with the criteria for gross presentation. All of the following criteria must be met for gross presentation in the circumstance where the repurchase assets are financed with the same counterparty:
    the initial transfer of and repurchase financing cannot be contractually contingent;
    the repurchase financing entered into between the parties provides full recourse to the transferee and the repurchase price is fixed;
    the financial asset has an active market and the transfer is executed at market rates; and
    the repurchase agreement and financial asset do not mature simultaneously.

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     If the transaction complies with the criteria for gross presentation, the Company records the assets and the related financing on a gross basis on its balance sheet, and the corresponding interest income and interest expense in its statements of operations. Such forward commitments are recorded at fair value with subsequent changes in fair value recognized in income. Additionally, the Company records the cash portion of its investment in Agency RMBS and non-Agency RMBS as a mortgage related receivable from the counterparty on its balance sheet.
     For assets representing available-for-sale investment securities any change in fair value is reported through consolidated other comprehensive income (loss) with the exception of impairment losses, which are recorded in the consolidated statement of operations.
Fair Value Measurements
     In January 2010, the FASB updated guidance entitled, “Improving Disclosures about Fair Value Measurements.” The guidance required a number of additional disclosures regarding fair value measurements. Specifically, entities should disclose: (1) the amount of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers; (2) the reasons for any transfers in or out of Level 3; and (3) information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. Except for the requirement to disclose information about purchases, sales, issuances, and settlements in the reconciliation of recurring Level 3 measurements on a gross basis, all the amendments are effective for interim and annual reporting periods beginning after December 15, 2009. The Company adopted these provisions in preparing its Consolidated Financial Statements for the period ended March 31, 2010. The adoption of these provisions only affected the disclosure requirements for fair value measurements and as a result had no impact on the Company’s consolidated statements of operations and consolidated balance sheets.
     The Company discloses the fair value of its financial instruments according to a fair value hierarchy (Levels 1, 2, and 3, as defined). In accordance with U.S. GAAP, the Company is required to provide enhanced disclosures regarding instruments in the Level 3 category (which require significant management judgment), including a separate reconciliation of the beginning and ending balances for each major category of assets and liabilities.
     Additionally, U.S. GAAP permits entities to choose to measure many financial instruments and certain other items at fair value (the “fair value option”). Unrealized gains and losses on items for which the fair value option has been elected are irrevocably recognized in earnings at each subsequent reporting date.
     During 2009, the Company elected the fair value option for its investments in unconsolidated limited partnerships. The Company has the one-time option to elect fair value for these financial assets on the election date. The changes in the fair value of these instruments are recorded in equity in earnings and fair value change in unconsolidated limited partnerships in the consolidated statements of operations.
Securities
     The Company designates securities as held-to-maturity, available-for-sale, or trading depending on its ability and intent to hold such securities to maturity. Trading and securities available-for-sale are reported at fair value, while securities held-to-maturity are reported at amortized cost. Although the Company generally intends to hold most of its RMBS and CMBS until maturity, the Company may, from time to time, sell any of its RMBS or CMBS as part of its overall management of its investment portfolio and as such will classify its RMBS and CMBS as available-for-sale securities.
     All securities classified as available-for-sale are reported at fair value, based on market prices from third-party sources, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity. When applicable, included with available-for-sale securities are forward purchase commitments on to be announced securities (“TBA”). The Company records TBA purchases on the trade date and the corresponding payable is recorded as an outstanding liability as a payable for investments purchased until the settlement date of the transaction. This is presented in the “Investment related payable” line item on the consolidated balance sheet.

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     The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. The determination of whether a security is other-than-temporarily impaired involves judgments and assumptions based on subjective and objective factors. Consideration is given to (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of recovery, in fair value of the security, and (iii) the Company’s intent and ability to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value.
     For debt securities, the amount of the other-than-temporary impairment related to a credit loss or impairments on securities that the Company has the intent or for which it is more likely than not that the Company will need to sell before recovery are recognized in earnings and reflected as a reduction in the cost basis of the security. The amount of the other-than-temporary impairment on debt securities related to other factors is recorded consistent with changes in the fair value of all other available-for-sale securities as a component of consolidated shareholders’ equity in other comprehensive income or loss with no change to the cost basis of the security.
Interest Income Recognition
     Interest income on available-for-sale MBS, which includes accretion of discounts and amortization of premiums on such MBS, is recognized over the life of the investment using the effective interest method. Management estimates, at the time of purchase, the future expected cash flows and determines the effective interest rate based on these estimated cash flows and the Company’s purchase price. As needed, these estimated cash flows are updated and a revised yield is computed based on the current amortized cost of the investment. In estimating these cash flows, there are a number of assumptions subject to uncertainties and contingencies, including the rate and timing of principal payments (prepayments, repurchases, defaults and liquidations), the pass through or coupon rate and interest rate fluctuations. In addition, management must use its judgment to estimate interest payment shortfalls due to delinquencies on the underlying mortgage loans. These uncertainties and contingencies are difficult to predict and are subject to future events that may impact management’s estimates and its interest income. Security transactions are recorded on the trade date. Realized gains and losses from security transactions are determined based upon the specific identification method and recorded as gain (loss) on sale of available-for-sale securities in the consolidated statement of operations.
Investments in Unconsolidated Limited Partnerships
     The Company has investments in unconsolidated limited partnerships. In circumstances where the Company has a non-controlling interest but is deemed to be able to exert significant influence over the affairs of the enterprise the Company utilizes the equity method of accounting. Under the equity method of accounting, the initial investment is increased each period for additional capital contributions and a proportionate share of the entity’s earnings and decreased for cash distributions and a proportionate share of the entity’s losses.
     The Company elected the fair value option for its investments in unconsolidated limited partnerships. The election for investments in unconsolidated limited partnerships was made upon their initial recognition in the financial statements. The Company has elected the fair value option for the investments in unconsolidated limited partnerships for the purpose of enhancing the transparency of its financial condition.
     The Company measures the fair value of the investments in unconsolidated limited partnerships on the basis of the net asset value per share of the investments as permitted in guidance effective for the interim and annual periods ended after December 15, 2009.
Dividends and Distributions Payable
     Dividends and distributions payable represent dividends declared at the balance sheet date which are payable to common shareholders and distributions declared at the balance sheet date which are payable to non-controlling interest common unit holders of the Operating Partnership, respectively.

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Earnings per Share
     The Company calculates basic earnings per share by dividing net income for the period by weighted-average shares of the Company’s common stock outstanding for that period. Diluted income per share takes into account the effect of dilutive instruments, such as units of limited partnership interest in the Operating Partnership (“OP Units”), and unvested restricted stock, but uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted-average number of shares outstanding.
Comprehensive Income
     Comprehensive income is comprised of net income, as presented in the consolidated statements of operations, adjusted for changes in unrealized gains or losses on available for sale securities and changes in the fair value of derivatives accounted for as cash flow hedges.
Accounting for Derivative Financial Instruments
     U.S. GAAP provides disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (i) how and why an entity uses derivative instruments; (ii) how derivative instruments and related hedged items are accounted for; and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. U.S. GAAP requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
     The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts, such as credit default swaps, that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting under U.S. GAAP.
Income Taxes
     The Company elected to be taxed as a REIT, commencing with the Company’s taxable year ended December 31, 2009. Accordingly, the Company will generally not be subject to U.S. federal and applicable state and local corporate income tax to the extent that the Company makes qualifying distributions to its shareholders, and provided the Company satisfies on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income, distribution and stock ownership tests. If the Company fails to qualify as a REIT, and does not qualify for certain statutory relief provisions, it will be subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which the Company lost its REIT qualification. Accordingly, the Company’s failure to qualify as a REIT could have a material adverse impact on its results of operations and amounts available for distribution to its shareholders.
     A REIT’s dividend paid deduction for qualifying dividends to the Company’s shareholders is computed using its taxable income as opposed to net income reported on the consolidated financial statements. Taxable income, generally, will differ from net income reported on the consolidated financial statements because the determination of taxable income is based on tax regulations and not financial accounting principles.

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     The Company may elect to treat certain of its future subsidiaries as taxable REIT subsidiaries (“TRS”). In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate-related business. A TRS is subject to U.S. federal, state and local corporate income taxes.
     While a TRS will generate net income, a TRS can declare dividends to the Company which will be included in its taxable income and necessitate a distribution to its shareholders. Conversely, if the Company retains earnings at a TRS level, no distribution is required and the Company can increase book equity of the consolidated entity. The Company has no adjustments regarding its tax accounting treatment of any uncertainties. The Company expects to recognize interest and penalties related to uncertain tax positions, if any, as income tax expense, which will be included in general and administrative expense.
Share-Based Compensation
     On July 1, 2009, the Company adopted an equity incentive plan under which its independent directors, as part of their compensation for serving as directors, are eligible to receive quarterly restricted stock awards. In addition, the Company may compensate the officers and employees of the Manager under this plan pursuant to the management agreement.
     Share-based compensation arrangements include share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Compensation costs relating to share-based payment transactions are recognized in the consolidated financial statements, based on the fair value of the equity or liability instruments issued on the date of grant, for awards to the Company’s independent directors. Compensation related to stock awards to officers and employees of the Manager are recorded at the estimated fair value of the award during the vesting period. The Company makes an upward or downward adjustment to compensation expense for the difference in the fair value at the date of grant and the date the award was earned.
Dividend Reinvestment Plan
     Effective as of August 27, 2010, the Company implemented a dividend reinvestment and stock purchase plan (the “Plan”). Under the terms of the Plan, shareholders who participate in the Plan may purchase shares of common stock directly from the Company. Plan participants may also automatically reinvest all or a portion of their dividends for additional shares of stock.
Reclassifications
     The presentation of certain prior period reported amounts has been reclassified to be consistent with the current presentation. Such reclassifications had no impact on net income or equity attributable to common shareholders.
Recent Accounting Pronouncements
     In January 2010, the FASB issued Accounting Standards Update 2010-06, “Improving Disclosures about Fair Value Measurements” (ASU 2010-06). ASU 2010-06 amends Topic 820 to require a number of additional disclosures regarding fair value measurements. Specifically, ASU 2010-06 requires entities to disclose: (1) the amount of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers; (2) the reasons for any transfers in or out of Level 3; and (3) information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. ASU 2010-06 also clarifies existing fair value disclosures about the appropriate level of disaggregation and about inputs and valuation techniques for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures were effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the rollforward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The additional disclosure requirements were incorporated into Note 7, “Financial Instruments”.

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     In April 2011, the FASB issued Accounting Standards Update 2011-03, “Reconsideration of Effective Control for Repurchase Agreements” (ASU 2011-03). ASU 2011-03 simplifies the accounting for financial assets transferred under repurchase agreements (repos) and similar arrangements, by eliminating the transferor’s ability criterion from the assessment of effective control over those assets. This guidance is effective fir fiscal years and interim periods beginning after December 15, 2011. The Company does not believe that the adoption of the amended guidance will have a significant effect on our consolidated financial statements.
     In May 2011, the FASB issued Accounting Standards Update 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS” (ASU 2011-04). ASU 2011-04 amends Topic 820 and does not modify the requirements for when fair value measurements apply; rather, it clarifies the Board’s intent about the application of existing fair value measurement requirements, and changes to a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. For public entities, this guidance is effective for fiscal years and interim periods beginning after December 15, 2011. Early application by public entities is not permitted. The Company does not anticipate any material impact from this guidance.
     In June 2011, the FASB issued Accounting Standards Update 2011-05, “Presentation of Comprehensive Income” (ASU 2011-05). ASU 2011-05 amends Topic 220 and eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity, which is the Company’s current presentation, and also requires presentation of reclassification adjustments from other comprehensive income to net income on the face of the financial statements. This guidance is effective for fiscal years and interim periods beginning after December 15, 2011, and is not expected to have a material effect on the Company’s financial condition or results of operations, though it will change the Company’s financial statement presentation.
Note 3 — Mortgage-Backed Securities
     All of the Company’s MBS are classified as available-for-sale and, as such, are reported at fair value, which is determined by obtaining valuations from an independent source. If the fair value of a security is not available from a dealer or third-party pricing service, or such data appears unreliable, the Company may estimate the fair value of the security using a variety of methods including other pricing services, repurchase agreement pricing, discounted cash flow analysis, matrix pricing, option adjusted spread models and other fundamental analysis of observable market factors. At June 30, 2011, all of the Company’s MBS values were based on values obtained from third-party pricing services. The following tables present certain information about the Company’s investment portfolio at June 30, 2011 and December 31, 2010.
                                                         
June 30, 2011                                           Net        
            Unamortized             Unrealized             Weighted        
    Principal     Premium     Amortized     Gain/     Fair     Average     Average  
$ in thousands   Balance     (Discount)     Cost     (Loss)     Value     Coupon (1)     Yield (2)  
Agency RMBS:
                                                       
15 year fixed-rate
    1,996,178       106,361       2,102,539       15,732       2,118,271       4.43 %     3.24 %
30 year fixed-rate
    4,672,172       320,753       4,992,925       45,550       5,038,475       5.26 %     3.99 %
ARM
    118,688       2,981       121,669       1,094       122,763       3.60 %     3.22 %
Hybrid ARM
    1,233,212       27,161       1,260,373       11,102       1,271,475       3.34 %     2.98 %
 
                                             
Total Agency
    8,020,250       457,256       8,477,506       73,478       8,550,984       4.73 %     3.64 %
 
                                             
 
                                                       
MBS-CMO
    353,790       (278,533 )     75,257       3,530       78,787       3.17 %     6.23 %
Non-Agency MBS
    2,757,121       (408,616 )     2,348,505       (28,085 )     2,320,420       4.46 %     5.90 %
CMBS
    1,229,100       (6,617 )     1,222,483       (16,813 )     1,205,670       5.42 %     5.49 %
 
                                             
Total
    12,360,261       (236,510 )     12,123,751       32,110       12,155,861       4.70 %     4.28 %
 
                                             
 
(1)   Net weighted average coupon (“WAC”) is presented net of servicing and other fees.
 
(2)   Average yield incorporates future prepayment and loss assumptions.
 
(3)   The Non-agency MBS held by the Company is 84.1% fixed rate and 15.9% floating rate, based on fair value.

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December 31, 2010                                           Net        
            Unamortized             Unrealized             Weighted        
    Principal     Premium     Amortized     Gain/     Fair     Average     Average  
$ in thousands   Balance     (Discount)     Cost     (Loss)     Value     Coupon (1)     Yield (2)  
Agency RMBS:
                                                       
15 year fixed-rate
    1,789,891       99,611       1,889,502       (8,688 )     1,880,814       4.49 %     2.89 %
30 year fixed-rate
    2,059,475       163,332       2,222,807       6,771       2,229,578       5.54 %     3.57 %
ARM
    21,926       1,080       23,006       (494 )     22,512       4.23 %     2.55 %
Hybrid ARM
    70,253       1,612       71,865       448       72,313       3.68 %     2.71 %
 
                                             
Total Agency
    3,941,545       265,635       4,207,180       (1,963 )     4,205,217       5.03 %     3.25 %
 
                                             
MBS-CMO
    57,232       (30,248 )     26,984       1,821       28,805       4.92 %     3.59 %
Non-Agency RMBS:
    1,168,797       (339,501 )     829,296       17,072       846,368       4.83 %     5.47 %
CMBS
    488,246       (4,640 )     483,606       14,337       497,943       5.35 %     5.51 %
 
                                             
Total
    5,655,820       (108,754 )     5,547,066       31,267       5,578,333       5.01 %     3.78 %
 
                                             
 
(1)   Net weighted average coupon (“WAC”) is presented net of servicing and other fees.
 
(2)   Average yield incorporates future prepayment and loss assumptions.
 
(3)   The Non-agency MBS held by the Company is 75.8% fixed rate and 24.2% floating rate, based on fair value.
     The components of the carrying value of the Company’s investment portfolio at June 30, 2011 and December 31, 2010 are presented below.
                 
$ in thousands   June 30, 2011     December 31, 2010  
Principal balance
    12,360,261       5,655,820  
Unamortized premium
    476,535       271,728  
Unamortized discount
    (713,045 )     (380,482 )
Gross unrealized gains
    141,465       75,231  
Gross unrealized losses
    (109,355 )     (43,964 )
 
           
Fair value
    12,155,861       5,578,333  
 
           
     The following table summarizes certain characteristics of the Company’s investment portfolio, at fair value, according to estimated weighted average life classifications as of June 30, 2011 and December 31, 2010:
                 
$ in thousands   June 30, 2011     December 31, 2010  
Less than one year
    9,806       26,214  
Greater than one year and less than five years
    6,112,694       3,304,668  
Greater than or equal to five years
    6,033,361       2,247,451  
 
           
Total
    12,155,861       5,578,333  
 
           
     The following tables present the gross unrealized losses and estimated fair value of the Company’s MBS by length of time that such securities have been in a continuous unrealized loss position at June 30, 2011 and December 31, 2010, respectively:
                                                 
June 30, 2011   Less than 12 Months     12 Months or More     Total  
            Unrealized             Unrealized             Unrealized  
$ in thousands   Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
Agency RMBS:
                                               
15 year fixed-rate
    859,816       (6,027 )                 859,816       (6,027 )
30 year fixed-rate
    1,427,539       (10,235 )                 1,427,539       (10,235 )
ARM
    38,250       (184 )     7,325       (228 )     45,575       (412 )
Hybrid ARM
    366,385       (1,475 )                 366,385       (1,475 )
 
                                   
Total Agency
    2,691,990       (17,921 )     7,325       (228 )     2,699,315       (18,149 )
 
                                   
 
                                               
MBS-CMO
    8,701       (793 )                 8,701       (793 )
Non-Agency RMBS
    1,442,438       (46,344 )     26,292       (3,790 )     1,468,730       (50,134 )
CMBS
    759,672       (40,279 )                 759,672       (40,279 )
 
                                   
Total
    4,902,801       (105,337 )     33,617       (4,018 )     4,936,418       (109,355 )
 
                                   

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December 31, 2010   Less than 12 Months     12 Months or More     Total  
            Unrealized             Unrealized             Unrealized  
$ in thousands   Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
Agency RMBS:
                                               
15 year fixed-rate
    1,039,444       (17,284 )                 1,039,444       (17,284 )
30 year fixed-rate
    802,118       (10,885 )                 802,118       (10,885 )
ARM
    14,911       (251 )     7,601       (244 )     22,512       (495 )
Hybrid ARM
    10,912       (17 )                 10,912       (17 )
 
                                   
Total Agency
    1,867,385       (28,437 )     7,601       (244 )     1,874,986       (28,681 )
 
                                   
 
                                               
MBS-CMO
                                   
Non-Agency RMBS
    370,839       (13,242 )                 370,839       (13,242 )
CMBS
    138,037       (2,041 )                 138,037       (2,041 )
 
                                   
Total
    2,376,261       (43,720 )     7,601       (244 )     2,383,862       (43,964 )
 
                                   
     The following table presents the impact of the Company’s MBS on its accumulated other comprehensive income for the three and six months ended June 30, 2011 and 2010.
                                 
    Three Months     Three Months     Six Months     Six Months  
    ended     ended     ended     ended  
$ in thousands   June 30, 2011     June 30, 2010     June 30, 2011     June 30, 2010  
Accumulated other comprehensive income from investment securities:
                               
Unrealized gain on MBS at beginning of period
    41,217       18,307       31,267       12,741  
Unrealized gain on MBS, net
    (9,107 )     15,613       843       21,179  
 
                       
Balance at the end of period
    32,110       33,920       32,110       33,920  
 
                       
     During the three months ended June 30, 2011, the Company reclassified $774,000 of net unrealized gains from other comprehensive income into Gain on Sale of Investments as a result of the Company selling certain investments.
     During the six months ended June 30, 2011, the Company reclassified $2.9 million of net unrealized gains from other comprehensive income into Gain on Sale of Investments as a result of the Company selling certain investments.
     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 considers several factors, including the nature of the investment, communications from the trustees of securitizations regarding the credit quality of the security, the severity and duration of the impairment, the cause of the impairment, and the Company’s intent that it is more likely than not that the Company can hold the security until recovery of its cost basis.
     The following table presents the other-than-temporary impairments for the three and six months ended June 30, 2011 and 2010.

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    Three Months     Three Months     Six Months     Six Months  
    ended     ended     ended     ended  
$ in thousands   June 30, 2011     June 30, 2010     June 30, 2011     June 30, 2010  
Credit related other-than-temporary impairments included in earnings
          262             386  
Non-credit related other-than-temporary impairments recognized in other comprehensive income
                       
 
                       
Total other-than-temporary impairment losses
          262             386  
 
                       
     The following table presents a roll-forward of the credit loss component of other-than-temporary impairments for the three and six months ended June 30, 2011 and 2010.
                                 
    Three Months     Three Months     Six Months     Six Months  
    ended     ended     ended     ended  
$ in thousands   June 30, 2011     June 30, 2010     June 30, 2011     June 30, 2010  
Cumulative credit loss amount at the beginning of the period
    510       124       510        
Additions for credit losses for which other-than-temporary impairment had not been previously recognized
          262             386  
 
                       
Cumulative credit loss amount at end of period
    510       386       510       386  
 
                       
     The following table presents components of interest income on the Company’s Agency and non-Agency portfolio for the three and six months ended June 30, 2011 and 2010.
For the three months ended June 30, 2011
                         
            Net (Premium        
    Coupon     Amortization)/Discount     Interest  
$ in thousands   Interest     Accretion     Income  
Agency
    78,954       (15,907 )     63,047  
Non-Agency
    25,455       9,967       35,422  
CMBS
    10,569       (35 )     10,534  
Other
    (22 )           (22 )
 
                 
Total
    114,956       (5,975 )     108,981  
 
                 
For the six months ended June 30, 2011
                         
            Net (Premium        
    Coupon     Amortization)/Discount     Interest  
$ in thousands   Interest     Accretion     Income  
Agency
    130,312       (30,129 )     100,183  
Non-Agency
    40,958       18,933       59,891  
CMBS
    17,377       47       17,424  
Other
    19             19  
 
                 
Total
    188,666       (11,149 )     177,517  
 
                 
For the three months ended June 30, 2010
                         
            Net (Premium        
    Coupon     Amortization)/Discount     Interest  
$ in thousands   Interest     Accretion     Income  
Agency
    14,385       (4,895 )     9,490  
Non-Agency
    8,756       8,334       17,090  
CMBS
    2,564       59       2,623  
Other
    4             4  
 
                 
Total
    25,709       3,498       29,207  
 
                 
For the six months ended June 30, 2010
                         
            Net (Premium        
    Coupon     Amortization)/Discount     Interest  
$ in thousands   Interest     Accretion     Income  
Agency
    23,999       (8,215 )     15,784  
Non-Agency
    13,182       13,468       26,650  
CMBS
    4,601       170       4,771  
Other
    12             12  
 
                 
Total
    41,794       5,423       47,217  
 
                 

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Note 4 — Investments in Unconsolidated Limited Partnerships
Invesco Mortgage Recovery Feeder Fund, L.P. and Invesco Mortgage Recovery Loans AIV, L.P.
     The Company invested in certain non-Agency RMBS, CMBS and residential and commercial mortgage loans by contributing equity capital to a legacy securities PPIF managed by the Manager, Invesco Mortgage Recovery Feeder Fund, L.P. (the “Invesco PPIP Fund”) that receives financing under the U.S. government’s Public Private Investment Program (“PPIP”). In addition the Manager identified a whole loan transaction for the Company, which resulted in the Company’s admission into an alternative investment vehicle, the Invesco Mortgage Recovery Loans AIV, L.P. (“AIV”). The Company’s initial commitment in the Invesco PPIP Fund and AIV was $25.0 million. The Invesco PPIP Fund and AIV limited partnership agreements provided for additional subscriptions of limited partners within six months of the initial closing. During 2009 and 2010, the Invesco PPIP Fund and AIV accepted additional subscriptions and the Company increased its overall commitment to $100.0 million which effectively increased the Company’s initial ownership interest in the Invesco PPIP Fund and AIV. As of March 31, 2010, the Invesco PPIP Fund stopped accepting investment subscriptions and was deemed closed. The Company made its first contributions to the Invesco PPIP Fund in October 2009. In connection with the increase of the Company’s interest in the Invesco PPIP Fund and AIV, the Company is committed to fund approximately $30.7 million of additional capital at June 30, 2011. The Company realized approximately $3.5 million and $5.6 million of equity in earnings for the three and six months ended June 30, 2011 and $1.6 million and $1.8 million for the three and six months ended June 30, 2010, respectively. The Company also realized $1.6 million and $1.9 million of unrealized loss from these investments for the three and six months ended June 30, 2011, respectively, and $44,000 and $260,000 of unrealized appreciation for the three and six months ended June 30, 2010, respectively.
     The Company’s non-controlling, unconsolidated ownership interests in these entities are accounted for under the equity method. Capital contributions, distributions, profits and losses of the Invesco PPIP Fund and AIV are allocated in accordance with the terms of the entities’ limited partnership agreements. Such allocations may differ from the stated percentage interests, if any, as a result of preferred returns and allocation formulas as described in such agreements. The Company has made the fair value election for its investment in both unconsolidated limited partnerships. The fair value measurement for the investment in unconsolidated limited partnerships is based on the net asset value per share of the investment, or its equivalent.
Note 5 — Borrowings
Repurchase Agreements
     The Company has entered into repurchase agreements to finance the majority of its portfolio of investments. The repurchase agreements bear interest at a contractually agreed rate. The repurchase obligations mature and typically reinvest every thirty days to one year and have a weighted average aggregate interest rate of 0.52% and 0.57% at June 30, 2011 and December 31, 2010, respectively. During the second quarter of 2010, the Company entered into a repurchase agreement with a one year maturity. The facility was subsequently amended and expires in April 2012. These repurchase agreements are being accounted for as secured borrowings since the Company maintains effective control of the financed assets. The following table summarizes certain characteristics of the Company’s repurchase agreements at June 30, 2011 and December 31, 2010:
                                 
    June 30, 2011     December 31, 2010  
            Weighted             Weighted  
            Average             Average  
    Amount     Interest     Amount     Interest  
$ in thousands   Outstanding     Rate     Outstanding     Rate  
Agency RMBS
    7,174,858       0.23 %     3,483,440       0.33 %
Non-Agency RBS
    1,510,666       1.44 %     459,979       1.76 %
CMBS
    875,242       1.28 %     401,240       1.30 %
 
                       
Total
    9,560,766       0.52 %     4,344,659       0.57 %
 
                       

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     Under the repurchase agreements, the respective lender retains the right to mark the underlying collateral to fair value. A reduction in the value of pledged assets would require the Company to provide additional collateral or fund margin calls. In addition, the repurchase agreements are subject to certain financial covenants. The Company is in compliance with these covenants at June 30, 2011.
     The following tables summarize certain characteristics of the Company’s repurchase agreements at June 30, 2011 and December 31, 2010:
                         
June 30, 2011           Percent of Total        
$ in thousands   Amount     Amount     Company MBS  
Repurchase Agreement Counterparties   Outstanding     Outstanding     Held as Collateral  
Credit Suisse Securities (USA) LLC
    2,118,108       22.1 %     2,347,235  
Nomura Securities International, Inc.
    996,218       10.4 %     699,639  
Wells Fargo Securities, LLC
    809,187       8.5 %     880,658  
Goldman, Sachs & Co.
    664,506       7.0 %     699,452  
RBS Securities Inc.
    581,275       6.1 %     640,571  
JP Morgan Securities Inc.
    528,132       5.5 %     585,193  
Deutsche Bank Securities Inc.
    502,685       5.3 %     534,088  
Morgan Stanley & Co. Incorporated
    444,418       4.6 %     842,343  
Mitsubishi UFJ Securities (USA), Inc.
    427,066       4.5 %     448,179  
BNP Paribas Securities Corp.
    406,279       4.2 %     422,443  
Barclays Capital Inc.
    388,502       4.1 %     432,872  
UBS Securities Inc.
    316,790       3.3 %     333,696  
CitiGroup Global Markets Inc.
    277,111       2.9 %     302,876  
Banc of America Securities LLC
    262,788       2.7 %     292,023  
Guggenheim Liquidity Services, LLC
    246,880       2.6 %     258,754  
Mizuho Securities USA Inc.
    181,080       1.9 %     200,072  
Jefferies & Company, Inc
    145,752       1.5 %     153,171  
Industrial and Commercial Bank of China Financial Services LLC
    141,737       1.5 %     148,341  
Cantor Fitzgerald & Co.
    95,195       1.0 %     149,734  
Royal Bank of Canada
    27,057       0.3 %     35,709  
 
                 
Total
    9,560,766       100.0 %     10,407,049  
 
                 
                         
December 31, 2010           Percent of Total        
$ in thousands   Amount     Amount     Company MBS  
Repurchase Agreement Counterparties   Outstanding     Outstanding     Held as Collateral  
Credit Suisse Securities (USA) LLC
    974,369       22.4 %     1,072,719  
Wells Fargo Securities, LLC
    614,365       14.1 %     710,529  
Morgan Stanley & Co. Incorporated
    468,748       10.8 %     511,022  
Deutsche Bank Securities Inc.
    463,087       10.7 %     493,533  
Barclays Capital Inc.
    287,469       6.6 %     322,035  
Goldman, Sachs & Co.
    273,369       6.4 %     291,512  
Mitsubishi UFJ Securities (USA), Inc.
    261,594       6.0 %     273,131  
BNP Paribas Securities Corp.
    228,566       5.3 %     239,218  
JP Morgan Securities Inc.
    227,261       5.2 %     255,403  
RBS Securities Inc.
    210,332       4.8 %     241,331  
Banc of America Securities LLC
    200,081       4.6 %     220,018  
Nomura Securities International, Inc.
    135,418       3.1 %     144,586  
 
                 
Total
    4,344,659       100.0 %     4,775,037  
 
                 
     Company MBS held by counterparties as security for repurchase agreements was $10.4 billion and $4.8 billion at June 30, 2011 and December 31, 2010, respectively. This represents a collateral ratio (Company MBS Held as Collateral/Amount Outstanding) of 109% and 110% respectively. The decline in the collateral ratio was due to the change in asset mix as the Company had a higher percentage of credit assets that generally have lower advance rates.
     Cash collateral held by the counterparties at June 30, 2011 and December 31, 2010 was $85.0 million and $81.3 million, respectively. In addition, cash collateral held by the Company at June 30, 2011 and December 31, 2010 was approximately $29.1 million and $11.1 million, respectively.

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Note 6 — Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
     The Company is exposed to certain risks 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 investments, debt funding, and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.
     The Company also utilizes credit derivatives such as credit default swaps (“CDS”) to provide credit event protection based on a financial index or specific security in exchange for receiving a fixed-rate fee or premium over the term of the contract. These instruments enable the Company to synthetically assume the credit risk of a reference security, portfolio of securities or index of securities. The counterparty pays a premium to the Company and the Company agrees to make a payment to compensate the counterparty for losses upon the occurrence of a specified credit event.
     Although contract-specific, credit events generally include bankruptcy, failure to pay, restructuring, obligation acceleration, obligation default, or repudiation/moratorium. Upon the occurrence of a defined credit event, the difference between the value of the reference obligation and the CDS’s notional amount is recorded as a realized loss in the statement of operations.
     Our only CDS contract was entered into on December 31, 2010 where the Company sold protection on a specific pool of non-Agency RMBS that exceed a specified loss limit of 25% for a stated fixed rate fee of 3%. The Company’s maximum exposure is the unpaid principal balance of the underlying RMBS that exceeds the specified loss limit. The Company is required to post cash collateral to secure potential loss payments.
     At June 30, 2011, the open CDS sold by the Company is summarized as follows:
                 
$ in thousand   June 30, 2011     December 31, 2010  
Fair value amount
    1,685        
Notional amount
    128,760       149,964  
Maximum potential amount of future undiscounted payments
    96,570       112,500  
Recourse provisions with third parties
           
Collateral held by counterparty
    19,777        
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 one to twelve month basis, the Company is 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 primarily 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 effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of

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the derivatives is recognized directly in earnings. During the three months ended June 30, 2011, the Company recorded $197,000 of unrealized swap losses in earnings as hedge ineffectiveness attributable primarily to differences in the reset dates on the Company’s swaps versus the refinancing dates of certain of its repurchase agreements. For the three months ended June 30, 2010, the Company recorded $10,000 of unrealized swap losses in earnings.
     During the six months ended June 30, 2011, the Company recorded $202,000 of unrealized swap losses in earnings as hedge ineffectiveness attributable primarily to differences in the reset dates on the Company’s swaps versus the refinancing dates of certain of its repurchase agreements. For the six months ended June 30, 2010, the Company recorded $35,000 of unrealized swap losses in earnings.
     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 $134.6 million 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 a maximum period of 119 months.
     As of June 30, 2011, the Company had the following interest rate derivatives outstanding, that were designated as cash flow hedges of interest rate risk:
                         
    Notional     Average     Average  
    Amount     Fixed Pay     Maturity  
Remaining Interest Rate Swap Term   $ in thousands     Rate     (Years)  
1 year or less
                 
Greater than 1 year and less than 3 years
    475,000       1.88 %     1.7  
Greater than 3 years and less than 5 years
    5,100,000       2.25 %     4.7  
Greater than 5 years
    1,350,000       2.59 %     7.2  
 
                 
Total
    6,925,000       2.29 %     4.9  
 
                 
     At June 30, 2011, the Company’s counterparties held approximately $19.8 million of cash margin deposits and approximately $211.2 million in Agency RMBS as collateral against its swap contracts. The cash is classified as restricted cash and the Agency RMBS is included in the total mortgage-backed securities on our consolidated balance sheet.
Tabular Disclosure of the Effect of Derivative Instruments on the Balance Sheet
     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 June 30, 2011 and December 31, 2010.
                                                         
$ in thousands                              
Asset Derivatives     Liability Derivatives  
As of June 30, 2011     As of December 31, 2010     As of June 30, 2011     As of December 31, 2010  
Balance           Balance             Balance             Balance        
Sheet   Fair Value     Sheet     Fair Value     Sheet     Fair Value     Sheet     Fair Value  
Interest rate
          Interest rate           Interest rate swap           Interest rate swap        
swap asset
    17,446     swap asset     33,255     liability     139,129     liability     37,850  
Tabular Disclosure of the Effect of Derivative Instruments on the Income Statement
     The table below presents the effect of the Company’s derivative financial instruments on the statement of operations for the three and six months ended June 30, 2011 and 2010.

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Three months ended June 30, 2011
                                         
            Location of loss                      
            reclassified from             Location of loss        
$ in thousands           accumulated     Amount of loss     recognized in        
Derivative   Amount of loss     OCI into     reclassified from     income on     Amount of loss  
type for   recognized     income     accumulated OCI into     derivative     recognized in income  
cash flow   in OCI on derivative     (effective     income (effective     (ineffective     on derivative  
hedge   (effective portion)     portion)     portion)     portion)     (ineffective portion  
Interest Rate Swap
    170,915     Interest Expense     23,829     Other Expense     197  
Six months ended June 30, 2011
                                         
            Location of loss                      
            reclassified from             Location of loss        
$ in thousands           accumulated     Amount of loss     recognized in        
Derivative   Amount of loss     OCI into     reclassified from     income on     Amount of loss  
type for   recognized     income     accumulated OCI into     derivative     recognized in income  
cash flow   in OCI on derivative     (effective     income (effective     (ineffective     on derivative  
hedge   (effective portion)     portion)     portion)     portion)     (ineffective portion  
Interest Rate Swap
    149,041     Interest Expense     32,156     Other Expense     202  
Three months ended June 30, 2010
                                         
            Location of loss                      
            reclassified from             Location of loss        
$ in thousands           accumulated     Amount of loss     recognized in        
Derivative   Amount of loss     OCI into     reclassified from     income on     Amount of loss  
type for   recognized     income     accumulated OCI into     derivative     recognized in income  
cash flow   in OCI on derivative     (effective     income (effective     (ineffective     on derivative  
hedge   (effective portion)     portion)     portion)     portion)     (ineffective portion  
Interest Rate Swap
    25,201     Interest Expense     3,070     Other Expense     10  
Six months ended June 30, 2010
                                         
            Location of loss                      
            reclassified from             Location of loss        
$ in thousands           accumulated     Amount of loss     recognized in        
Derivative   Amount of loss     OCI into     reclassified from     income on     Amount of loss  
type for   recognized     income     accumulated OCI into     derivative     recognized in income  
cash flow   in OCI on derivative     (effective     income (effective     (ineffective     on derivative  
hedge   (effective portion)     portion)     portion)     portion)     (ineffective portion  
Interest Rate Swap
    32,347     Interest Expense     4,870     Other Expense     35  
                         
            Amount of gain recognized in income on derivative  
Derivative   Location of gain            
not designated as   recognized in income   Three months     Three months  
hedging instrument   on derivative   ended June 30, 2011     ended June 30, 2010  
CDS Contract
  Gain on credit default swap     240        
                         
            Amount of gain recognized in income on derivative  
Derivative   Location of gain            
not designated as   recognized in income   Six months ended     Six months ended  
hedging instrument   on derivative   ended June 30, 2011     ended June 30, 2010  
CDS Contract
  Gain on credit default swap     1,685        
Credit-risk-related Contingent Features
     The Company has agreements with each of its derivative counterparties. Some of those agreements contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.

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     The Company has an agreement with one of its derivative counterparties that contains a provision where if the Company’s net asset value declines by certain percentages over specified time periods, then the Company could be declared in default on its derivative obligations. The Company also has an agreement with one of its derivative counterparties that contains a provision where if the Company’s shareholders’ equity declines by certain percentages over specified time periods, then the Company could be declared in default on its derivative obligations.
     The Company has an agreement with one of its derivative counterparties that contain a provision where if the Company fails to maintain a minimum shareholders’ equity or market value of $100 million and $80 million, respectively, then the Company could be declared in default on its derivative obligations.
     As of June 30, 2011, 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 $134.3 million. The Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of approximately $19.8 million of cash and $211.2 million of Agency RMBS. If the Company had breached any of these provisions at June 30, 2011, it could have been required to settle its obligations under the agreements at their termination value. The Company was in compliance with all of the financial provisions of these agreements through June 30, 2011.
Note 7 — Financial Instruments
     U.S. GAAP defines fair value, provides a consistent framework for measuring fair value under U.S. GAAP and Accounting Standards Codification (ASC) Topic 820 expands fair value financial statement disclosure requirements. ASC Topic 820 does not require any new fair value measurements and only applies to accounting pronouncements that already require or permit fair value measures, except for standards that relate to share-based payments.
     Valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels are defined as follows:
    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.
     The fair values on a recurring basis of the Company’s MBS and interest rate hedges based on the level of inputs at June 30, 2011 and December 31, 2010 are summarized below:
                                 
    June 30, 2011        
    Fair Value Measurements Using:        
                            Total at  
$ in thousands   Level 1     Level 2     Level 3     Fair Value  
Assets
                               
Mortgage-backed securities(1)
          12,155,861             12,155,861  
Investments in unconsolidated limited partnerships
                48,177       48,177  
Derivatives
          17,446       1,685       19,131  
 
                       
Total
          12,173,307       49,862       12,223,169  
 
                       
 
                               
Liabilities
                               
Derivatives
          139,129             139,129  
 
                       
Total
          139,129             139,129  
 
                       

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    December 31, 2010        
    Fair Value Measurements Using:        
                            Total at  
$ in thousands   Level 1     Level 2     Level 3     Fair Value  
Assets
                               
Mortgage-backed securities(1)
          5,578,333             5,578,333  
Investments in unconsolidated limited partnerships
                54,725       54,725  
Derivatives
          33,255             33,255  
 
                       
Total
          5,611,588       54,725       5,666,313  
 
                       
 
                               
Liabilities
                               
Derivatives
          37,850             37,850  
 
                       
 
                               
Total
          37,850             37,850  
 
                       
 
(1)   For more detail about the fair value of our MBS and type of securities, see Note 3 in the unaudited consolidated financial statements.
     The following table presents additional information about the Company’s investments in unconsolidated limited partnerships which are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value:
                 
$ in thousands   June 30, 2011     December 31, 2010  
Beginning balance
    54,725       4,128  
Purchases
    8,314       56,357  
Sales and settlements
    (18,593 )     (14,036 )
Total net gains / (losses) included in net income
               
Realized gains/(losses), net
    5,602       4,780  
Unrealized gains/(losses), net
    (1,871 )     3,496  
Unrealized gain/(losses), net included in other comprehensive income
           
 
           
Ending balance
    48,177       54,725  
 
           
     The fair value of the repurchase agreements is based on an expected present value technique. This method discounts future estimated cash flows using rates the Company determined best reflect current market interest rates that would be offered for loans with similar characteristics and credit quality. At June 30, 2011 the repurchase agreements had a fair value of $9.6 billion and a carrying value of $9.6 billion. At December 31, 2010 the repurchase agreements had a fair value of $4.3 billion and a carrying value of $4.3 billion.
Note 8 — Related Party Transactions
     The Company is externally managed and advised by the Manager. Pursuant to the terms of the management agreement, the Manager provides the Company with its management team, including its officers, along with appropriate support personnel. Each of the Company’s officers is an employee of Invesco or one of Invesco’s affiliates. The Company does not have any employees. With the exception of the Company’s Chief Financial Officer, the Manager is not obligated to dedicate any of its employees exclusively to the Company, nor is the Manager or its employees obligated to dedicate any specific portion of its or their time to the Company’s business. The Manager is at all times subject to the supervision and oversight of the Company’s board of directors and has only such functions and authority as the Company delegates to it.
Management Fee
     The Company pays the Manager a management fee equal to 1.50% of the Company’s shareholders’ equity per annum, which is calculated and payable quarterly in arrears. For purposes of calculating the management fee, shareholders’ equity is equal to the sum of the net proceeds from all issuances of equity securities since inception (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance), plus retained earnings at the end of the most recently completed calendar quarter (without taking into account any non-cash equity compensation expense incurred in current or prior periods), less any amount paid to repurchase common stock since inception, and excluding any unrealized gains, losses or other items that do not affect realized net income (regardless of whether such items are included in other comprehensive income or loss, or in net income).

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This amount will be adjusted to exclude one-time events pursuant to changes in U.S. GAAP, and certain non-cash items after discussions between the Manager and the Company’s independent directors and approval by a majority of the Company’s independent directors.
     The Manager has agreed to reduce (but not below zero) the management fee payable by the Company under the management agreement with respect to any equity investment the Company may make in the Invesco PPIP Fund managed by the Manager. The fee reduction occurs at the PPIP level.
     For the three months ended June 30, 2011 and 2010, the Company incurred management fees of approximately $5.8 million and $1.8 million, respectively of which approximately $5.8 million and $1.8 million, respectively, was accrued but had not been paid.
     For the six months ended June 30, 2011 and 2010, the Company incurred management fees of approximately $9.7 million and $3.1 million, respectively.
Expense Reimbursement
     Pursuant to the management agreement, the Company is required to reimburse the Manager for operating expenses related to the Company incurred by the Manager, including certain salary expenses and other expenses related to legal, accounting, due diligence and other services. The Company’s reimbursement obligation is not subject to any dollar limitation.
     The Company incurred costs, originally paid by Invesco, of approximately $1.3 million and $2.7 million for the three and six months ended June 30, 2011, respectively, compared to approximately $1.5 and $2.1 million for the three and six months ended June 30, 2010, respectively. Approximately $1.0 million and $2.2 million was expensed for the three and six months ended June 30, 2011, respectively, compared to $893,000 and $1.2 million for the three and six months ended June 30, 2010, respectively. Approximately $383,000 and $525,000 was charged against equity as a cost of raising capital for the three and six months ended June 30, 2011, respectively, compared to $619,000 and $856,000 for the three and six months ended June 30, 2010, respectively.
Termination Fee
     A termination fee is due to the Manager upon termination of the management agreement by the Company equal to three times the sum of the average annual management fee earned by the Manager during the 24-month period prior to such termination, calculated as of the end of the most recently completed fiscal quarter.
Note 9 — Shareholders’ Equity
Securities Convertible into Shares of Common Stock
     The limited partner who holds units of the Operating Partnership (“OP Units”) has the right to cause the Operating Partnership to redeem their OP Units for cash equal to the market value of an equivalent number of shares of common stock, or at the Company’s option, the Company may purchase their OP Units by issuing one share of common stock for each OP Unit redeemed. The Company has also adopted an equity incentive plan which includes the ability of the Company to grant securities convertible into the Company’s common stock to the independent directors and the executive officers of the Company and the personnel of the Manager.
Registration Rights
     The Company entered into a registration rights agreement with regard to the common stock and OP Units owned by the Manager and Invesco Investments (Bermuda) Ltd., respectively, upon completion of the Company’s IPO and any shares of common stock that the Manager may elect to receive under the management agreement or otherwise. Pursuant to the registration rights agreement, the Company has granted to the Manager and Invesco Investments (Bermuda) Ltd., (i) unlimited demand registration rights to have the shares purchased by the Manager

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or granted to it in the future and the shares that the Company may issue upon redemption of the OP Units purchased by Invesco Investments (Bermuda) Ltd. registered for resale, and (ii) in certain circumstances, the right to “piggy-back” these shares in registration statements the Company might file in connection with any future public offering so long as the Company retains the Manager under the management agreement.
Public Offerings
     During the quarter ended June 30, 2011, the Company issued 1,237,716 shares of common stock at an average price of $22.62 under the Company’s Direct Stock Purchase Plan (“DSPP”) with total proceeds of approximately $27.8 million, net of issuance costs.
     On June 23, 2011, the Company completed a follow-on public offering of 17,000,000 shares of common stock and an issuance of an additional 2,550,000 shares of common stock pursuant to the underwriters’ full exercise of their over-allotment option at $20.15 per share. Net proceeds to the Company were $388.8 million, net of issuance costs of approximately $5.1 million.
Share-Based Compensation
     The Company established the 2009 Equity Incentive Plan for grants of restricted common stock and other equity based awards to the independent directors and the executive officers of the Company and personnel of the Manager (the “Incentive Plan”). Under the Incentive Plan, a total of 1,000,000 shares of common stock are currently reserved for issuance. Unless terminated earlier, the Incentive Plan will terminate in 2019, but will continue to govern the unexpired awards. The Company recognized compensation expense of approximately $34,000 and approximately $34,000 for the three months ended June 30, 2011 and 2010, respectively. The Company recognized compensation expense of approximately $68,000 and approximately $53,000 for the six months ended June 30, 2011 and 2010, respectively. During the three months ended June 30, 2011 and 2010, the Company issued 1,467 and 921 shares, respectively, of restricted stock pursuant to the Incentive Plan to the Company’s non-executive directors. During the six months ended June 30, 2011 and 2010, the Company issued 2,895 and 1,755 shares, respectively, of restricted stock pursuant to the Incentive Plan to the Company’s non-executive directors. The fair market value of the shares granted was determined by the closing stock market price on the date of the grant.
     On March 17, 2010, the Company awarded 5,725 restricted stock units to the executive officers of the Company who are employees of the Manager. On March 14, 2011, the Company issued 18,419 restricted stock units to non-executive employees of the Manager. The restricted stock units vest equally in four installments on the anniversary date of each award. Compensation related to stock awards to officers and employees of the Manager are recorded at the estimated fair value of the award during the vesting period. The Company makes an upward or downward adjustment to compensation expense for the difference in the fair value at the date of grant and the date the award was earned. The Company recognized compensation expense of approximately $28,000 for the three months ended June 30, 2011 related to awards to officers and employees of the Manager.
     The Company recognized compensation expense of approximately $37,000 for the six months ended June 30, 2011 related to awards to officers and employees of the Manager.
     On March 17, 2011, the Company issued 896 shares of common stock (net of tax withholding) in exchange for 1,430 restricted stock units which vested under the 2009 Equity Incentive Plan. The remaining restricted stock units awarded to the executive officers of the Company on March 17, 2010 were forfeited in March 2011.
Dividends
     On June 9, 2011, the Company declared a dividend of $0.97 per share of common stock. The dividend was paid on July 28, 2011 to shareholders of record as of the close of business on June 17, 2011.

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Note 10 — Earnings per Share
Earnings per share for the three and six months ended June 30, 2011 and 2010 is computed as follows:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
$ in thousands   2011     2010     2011     2010  
Numerator (Income)
                               
Basic Earnings
                               
Net income available to common shareholders
    72,998       20,750       125,246       32,799  
Effect of dilutive securities:
                               
Income allocated to non-controlling interest
    1,406       1,309       2,857       2,427  
 
                       
Dilutive net income available to shareholders
    74,404       22,059       128,103       35,226  
 
                       
 
                               
Denominator (Weighted Average Shares)
                               
Basic Earnings:
                               
Shares available to common shareholders
    73,486       22,808       62,731       19,266  
Effect of dilutive securities:
                               
Restricted Stock Awards
    18       6       11       3  
OP Units
    1,425       1,425       1,425       1,426  
 
                       
Dilutive Shares
    74,929       24,239       64,167       20,695  
 
                       
Note 11 — Non-controlling Interest — Operating Partnership
     Non-controlling interest represents the aggregate OP Units in the Operating Partnership held by limited partners (the “Unit Holders”). Income allocated to the non-controlling interest is based on the Unit Holders’ ownership percentage of the Operating Partnership. The ownership percentage is determined by dividing the number of OP Units held by the Unit Holders by the total number of dilutive shares of common stock. The issuance of common stock (“Share” or “Shares”) or OP Units changes the percentage ownership of both the Unit Holders and the holders of common stock. Since an OP unit is generally redeemable for cash or Shares at the option of the Company, it is deemed to be equivalent to a Share. Therefore, such transactions are treated as capital transactions and result in an allocation between shareholders’ equity and non-controlling interest in the accompanying consolidated balance sheet to account for the change in the ownership of the underlying equity in the Operating Partnership. As of June 30, 2011 and 2010, non-controlling interest related to the outstanding 1,425,000 OP units represented a 1.5% and 5.2% interest in the Operating Partnership, respectively. Income allocated to the Operating Partnership non-controlling interest for the three months ended June 30, 2011 and 2010 was approximately $1.4 million and $1.3 million, respectively. Income allocated to the Operating Partnership non-controlling interest for the six months ended June 30, 2011 and 2010 was approximately $2.9 million and $2.4 million, respectively. For the three months ended June 30, 2011 and 2010, distributions paid to the non-controlling interest were $1.4 million and $1.1 million, respectively. For the six months ended June 30, 2011 and 2010, distributions paid to the non-controlling interest were $2.8 million and $2.6 million, respectively. As of June 30, 2011 and 2010, distributions payable to the non-controlling interest were approximately $1.4 million and $1.1 million, respectively.
Note 12 — Subsequent Events
     The Company has reviewed subsequent events occurring through the date that these consolidation financial statements were issued, and determined that no subsequent events occurred that would require accrual or additional disclosure.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
     In this quarterly report on Form 10-Q, or this “Report,” we refer to Invesco Mortgage Capital Inc. and its consolidated subsidiaries as “we,” “us,” “our Company,” or “our,” unless we specifically state otherwise or the context indicates otherwise. We refer to our external manager, Invesco Advisers, Inc., as our “Manager,” and we refer to the indirect parent company of our Manager, Invesco Ltd. (NYSE:IVZ,) together with its consolidated subsidiaries (other than us), as “Invesco.”
     The following discussion should be read in conjunction with our consolidated financial statements and the accompanying notes to our consolidated financial statements, which are included in Item 1 of this report, as well as the information contained in our most recent Form 10-K filed with the Securities and Exchange Commission (the “SEC”).
Forward-Looking Statements
     We make forward-looking statements in this Report and other filings we make with the SEC within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and such statements are intended to be covered by the safe harbor provided by the same. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. When we use the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions, we intend to identify forward-looking statements. Factors that could cause actual results to differ from those expressed in the Company’s forward-looking statements include, but are not limited to:
    the impact of any deficiencies in foreclosure practices of third parties and related delays in the foreclosure process;
 
    our business and investment strategy;
 
    our investment portfolio;
 
    our projected operating results;
 
    actions and initiatives of the U.S. government, including the impact of the final agreement on the U.S. debt ceiling and budget deficit; and changes to U.S. government policies, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and our ability to respond to and comply with such actions, initiatives and changes;
 
    our ability to obtain additional financing arrangements and the terms of such arrangements;
 
    financing and advance rates for our target assets;
 
    changes to our expected leverage;
 
    general volatility of the securities markets in which we invest;
 
    interest rate mismatches between our target assets and our borrowings used to fund such investments;
 
    the adequacy of our cash flow from operations and borrowings to meet our short-term liquidity needs;
 
    our ability to maintain sufficient liquidity to meet any margin calls;

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    changes in interest rates and the market value of our target assets;
 
    changes in prepayment rates on our target assets;
 
    effects of hedging instruments on our target assets;
 
    rates of default or decreased recovery rates on our target assets;
 
    modifications to whole loans or loans underlying securities;
 
    the degree to which our hedging strategies may or may not protect us from interest rate volatility;
 
    changes in governmental regulations, tax law and rates, and similar matters and our ability to respond to such changes;
 
    our ability to maintain our qualification as a REIT for U.S. federal income tax purposes;
 
    our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended (the “1940 Act”);
 
    availability of investment opportunities in mortgage-related, real estate-related and other securities;
 
    availability of U.S. government Agency guarantees with regard to payments of principal and interest on securities;
 
    estimates relating to our ability to continue to make distributions to our shareholders;
 
    availability of qualified personnel;
 
    our understanding of our competition;
 
    changes to accounting principles generally accepted in the United States of America (“US GAAP”); and
 
    market trends in our industry, interest rates, real estate values, the debt securities markets or the general economy.
     These forward-looking statements are based upon information presently available to our management and are inherently subjective, uncertain and subject to change. There can be no assurance that actual results will not differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks identified under the captions “Risk Factors,” “Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Report and the most recent Form 10-K, which is available on the SEC’s website at www.sec.gov.
     All written or oral forward-looking statements that we make, or that are attributable to us, are expressly qualified by this cautionary notice. We expressly disclaim any obligation to update the information in any public disclosure if any forward-looking statement later turns out to be inaccurate, except as may otherwise be required by law.
Overview
     We are a Maryland corporation primarily focused on investing in, financing and managing residential and commercial mortgage-backed securities and mortgage loans. Our common stock is listed on the New York Stock

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Exchange under the symbol “IVR”. We are externally managed and advised by Invesco Advisers, Inc., our Manager, which is an indirect, wholly-owned subsidiary of Invesco Ltd. We elected to qualify to be taxed as a REIT commencing with our taxable year ended December 31, 2009. Accordingly, we generally will not be subject to U.S. federal income taxes on our taxable income that we distribute currently to our shareholders as long as we maintain our qualification as a REIT. We operate our business in a manner that will permit us to maintain our exemption from registration under the 1940 Act.
     Our objective is to provide attractive risk-adjusted returns to our shareholders, primarily through dividends and secondarily through capital appreciation. To achieve this objective, we primarily invest in the following:
    Agency RMBS, which are residential mortgage-backed securities, for which a U.S. government Agency such as the Government National Mortgage Association (“Ginnie Mae”) or a federally chartered corporation such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”) guarantees payments of principal and interest on the securities;
 
    Non-Agency RMBS, which are RMBS that are not issued or guaranteed by a U.S. government agency or a federally chartered corporation;
 
    CMBS, which are commercial mortgage-backed securities; and
 
    Residential and commercial mortgage loans.
     We finance our investments in Agency RMBS, non-Agency RMBS and CMBS through short-term borrowings structured as repurchase agreements. We have also financed our investments in certain non-Agency RMBS, CMBS and residential and commercial mortgage loans by contributing capital to one or more of the legacy securities public-private investment funds (“PPIFs”) that receive financing under the U.S. government’s Public-Private Investment Program (“PPIP”), established and managed by our Manager (the “Invesco PPIP Fund”), which, in turn, invests in our target assets.
Recent Developments
     During the quarter ended June 30, 2011, we issued 1,237,716 shares of common stock at an average price of $22.62 under the Company’s Direct Stock Purchase Plan with total proceeds to us of approximately $27.8 million, net of issuance costs.
     On June 9, 2011, we declared a dividend of $0.97 per share of common stock. The dividend was paid on July 28, 2011 to shareholders of record as of the close of business on June 17, 2011.
     On June 23, 2011, we completed a follow-on public offering of 17,000,000 shares of common stock and an issuance of an additional 2,550,000 shares of common stock pursuant to the underwriters’ full exercise of their over-allotment option at $20.15 per share. Net proceeds to us were approximately $388.8 million, net of issuance costs of approximately $5.1 million.
Factors Impacting Our Operating Results
     Our operating results can be affected by a number of factors, many of which are beyond our control, and primarily depend on, among other things, the level of our net interest income, the market value of our assets and the supply of, and demand for, the target assets in which we invest. Our net interest income, which includes the amortization of purchase premiums and accretion of purchase discounts, varies primarily as a result of changes in market interest rates and prepayment speeds, as measured by the constant prepayment rate (“CPR”) on our target assets. Interest rates and prepayment speeds vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty.

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Market Conditions
     Beginning in the summer of 2007, significant adverse changes in financial market conditions resulted in a deleveraging of the entire global financial system. As part of this process, residential and commercial mortgage markets in the United States experienced a variety of difficulties, including loan defaults, credit losses and reduced liquidity. As a result, many lenders tightened their lending standards, reduced lending capacity, liquidated significant portfolios or exited the market altogether, and therefore, financing with attractive terms was generally unavailable. In response to these unprecedented events, the U.S. government has taken a number of actions to stabilize the financial markets and encourage lending. Significant measures include the enactment of the Emergency Economic Stabilization Act of 2008 to, among other things, establish the Troubled Asset Relief Program, (“TARP”), the enactment of the Housing and Economic Recovery Act (“HERA”), which established a new regulator for Fannie Mae and Freddie Mac and the establishment of the Term Asset-Backed Securities Loan Facility (“TALF”) and the PPIP. Some of these programs are beginning to expire and the impact of the wind-down of these programs on the financial sector and on the economic recovery is unknown. Although the financial markets showed signs of stabilizing in 2010, it remains unclear when the economy will fully recover. Further volatility and deterioration in the residential and commercial mortgage markets could adversely impact the performance and market value of our target assets.
     We have elected to participate in programs established by the U.S. government, including the TALF and the PPIP, in order to increase our ability to acquire our target assets and to provide a source of financing for such acquisitions. The TALF was intended to make credit available to consumers and businesses on more favorable terms by facilitating the issuance of asset-backed securities and improving the market conditions for asset-backed securities generally. The Federal Reserve Bank of New York, (“FRBNY”) made up to $200 billion of loans under the TALF. The facility ceased making loans collateralized by newly issued and legacy ABS on March 31, 2010. As a result, we are no longer able to obtain additional TALF loans as a source of financing for investments in legacy CMBS. In November 2010, the Company exercised its right to prepay the TALF loans secured by CMBS. The purpose for the prepayment was to obtain lower borrowing costs from other sources. The financings under the TALF were replaced with repurchase agreements.
     The PPIP is designed to encourage the transfer of certain illiquid legacy real estate-related assets off of the balance sheets of financial institutions, restarting the market for these assets and supporting the flow of credit and other capital into the broader economy. As of March 31, 2010, the Invesco PPIP Fund stopped accepting investment subscriptions and the fund was deemed closed.
     The Dodd-Frank Act enacted on July 21, 2010, contains numerous provisions affecting the financial and mortgage industries, many of which may have an impact on our operating environment and the target assets in which we invest. Consequently, the Dodd-Frank Act may affect our cost of doing business, may limit our investment opportunities and may affect the competitive balance within our industry and market areas.
     The recent U.S. debt ceiling and budget deficit debate has increased the possibility of the credit-rating agencies downgrading the U.S.’s credit rating. Because Fannie Mae and Freddie Mac are in conservatorship of the U.S. government, if the U.S.’s credit rating were downgraded, it may impact the credit risk associated with Agency RMBS and other assets, and, therefore, decrease the value of the Agency RMBS, non-Agency RMBS and CMBS in our portfolio, which could cause our repurchase counterparties to make margin calls on our borrowings and swaps if our collateral is insufficient to cover the debt secured by our assets and could reduce our book value. If the value or our assets declines, we may have to sell assets at reduced prices to cover such margin calls. In addition, a downgrade of the U.S. government’s credit rating could potentially create broader financial instability, which may weigh heavily on the global banking system and could limit our ability to finance our investment portfolio A default could also reduce our ability to finance these assets through repurchase agreements or result in increased advance rates, “haircuts” (the percentage amount by which the collateral value must exceed the loan amount) and other funding costs associated with such financing.
     Although U.S. lawmakers have reached an agreement on a national debt ceiling and budget, the terms of such agreement could negatively impact the trading market for U.S. government securities and could result in limited economic growth. This may negatively affect the value of our investment portfolio, which could cause our repurchase counterparties to make margin calls on our borrowings and swaps if our collateral is insufficient to cover

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the debt secured by our assets, which could, in turn, require us to sell our assets at reduced prices to cover such margin calls.
Investment Activities
     As of June 30, 2011, 41.2% of our equity was invested in Agency RMBS, 42.8% in non-Agency RMBS, 13.4% in CMBS, and 2.6% in the Invesco PPIP Fund. We use leverage on our target assets to achieve our return objectives. For our total investment portfolio, we focus on securities we believe provide attractive returns when levered approximately 3 to 7 times. The leverage on classes of assets may periodically exceed the stated ranges as we adjust our borrowings to obtain the best available source and minimize total interest expense, while maintaining our overall portfolio leverage guidelines.
     As of June 30, 2011, we had approximately $5.0 billion in 30-year fixed rate securities that offered higher coupons and call protection based on the collateral attributes. We balanced this with approximately $2.1 billion in 15-year fixed rate securities, approximately $1.3 billion in hybrid adjustable-rate mortgages (“ARMs”) and approximately $122.8 million in ARMs we believe to have similar durations based on prepayment speeds. As of June 30, 2011, we had purchased approximately $2.0 billion non-Agency RMBS fixed rate mortgages and $369.9 million non-Agency RMBS ARMs.
     Initially, we focused on CMBS that could be financed under the TALF. In November 2010, the Company exercised its right to prepay the TALF loans secured by CMBS. The purpose for the prepayment was to obtain lower borrowing costs. The Company obtained additional advances under existing repurchase agreement financing arrangements. As of June 30, 2011, we owned approximately $1.2 billion in CMBS and financed $875.2 million in repurchase agreements. In addition, as of June 30, 2011, we had purchased approximately $78.8 million in CMOs.
     During the three months ended June 30, 2011, we purchased approximately $3.4 billion of mortgage-backed securities. The average yield on these purchases as of June 30, 2011 is 4.21%.
Investment Portfolio
The following table summarizes certain characteristics of our investment portfolio as of June 30, 2011:
                                                         
                                            Net        
            Unamortized             Unrealized             Weighted        
    Principal     Premium     Amortized     Gain/     Fair     Average     Average  
$ in thousands   Balance     (Discount)     Cost     (Loss)     Value     Coupon (1)     Yield (2)  
Agency RMBS:
                                                       
15 year fixed-rate
    1,996,178       106,361       2,102,539       15,732       2,118,271       4.43 %     3.24 %
30 year fixed-rate
    4,672,172       320,753       4,992,925       45,550       5,038,475       5.26 %     3.99 %
ARM
    118,688       2,981       121,669       1,094       122,763       3.60 %     3.22 %
Hybrid ARM
    1,233,212       27,161       1,260,373       11,102       1,271,475       3.34 %     2.98 %
 
                                             
Total Agency
    8,020,250       457,256       8,477,506       73,478       8,550,984       4.73 %     3.64 %
 
                                             
 
MBS-CMO
    353,790       (278,533 )     75,257       3,530       78,787       3.17 %     6.23 %
Non-Agency MBS
    2,757,121       (408,616 )     2,348,505       (28,085 )     2,320,420       4.46 %     5.90 %
CMBS
    1,229,100       (6,617 )     1,222,483       (16,813 )     1,205,670       5.42 %     5.49 %
 
                                             
Total
    12,360,261       (236,510 )     12,123,751       32,110       12,155,861       4.70 %     4.28 %
 
                                             
 
(1)   Net weighted average coupon (“WAC”) is presented net of servicing and other fees.
(2)   Average yield incorporates future prepayment and loss assumptions.
(3)   The Non-agency MBS held by the Company is 84.1% fixed rate and 15.9% floating rate, based on fair value.

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     The following table summarizes certain characteristics of our investment portfolio, at fair value, according to their estimated weighted average life classifications as of June 30, 2011:
         
$ in thousands   June 30, 2011  
Less than one year
    9,806  
Greater than one year and less than five years
    6,112,694  
Greater than or equal to five years
    6,033,361  
 
     
Total
    12,155,861  
 
     
     The following table presents certain information about the carrying value of our available for sale MBS at June 30, 2011:
         
$ in thousands   June 30, 2011  
Principal balance
    12,360,261  
Unamortized premium
    476,535  
Unamortized discount
    (713,045 )
Gross unrealized gains
    141,465  
Gross unrealized losses
    (109,355 )
 
     
Fair value
    12,155,861  
 
     
     Financing and Other Liabilities. We enter into repurchase agreements to finance the majority of our Agency RMBS, non-Agency RMBS and CMBS. These agreements are secured by our Agency RMBS, Non-Agency RMBS and CMBS and bear interest at rates that have historically moved in close relationship to the London Interbank Offer Rate (“LIBOR”). As of June 30, 2011, we had entered into repurchase agreements totalling $9.6 billion. In addition, we committed to invest up to $100.0 million in the Invesco PPIP Fund, which, in turn, invests in our target assets. As of June 30, 2011, approximately $69.3 million of our commitment to the Invesco PPIP Fund has been called.
     The Company records the liability for mortgage-backed securities purchased for which settlement has not taken place as an investment related payable. As of June 30, 2011 and December 31, 2010, the Company had investment related payables of $0.9 million and $0.4 million respectively of which no items were outstanding greater than thirty days. The change in balance was primarily due to an increase in mortgage-backed security purchases at quarter end related to our follow-on common stock issuance.
     Hedging Instruments. We generally hedge as much of our interest rate risk as we deem prudent in light of market conditions. No assurance can be given that our hedging activities will have the desired beneficial impact on our results of operations or financial condition. Our investment policies do not contain specific requirements as to the percentages or amount of interest rate risk that we are 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 June 30, 2011, we have entered into interest rate swap agreements designed to mitigate the effects of increases in interest rates under a portion of our repurchase agreements. These swap agreements provide for fixed interest rates indexed off of one-month LIBOR and effectively fix the floating interest rates on $6.9 billion of borrowings under our repurchase agreements as of June 30, 2011. We intend to continue to add interest rate hedge positions according to our hedging strategy.

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     The following table summarizes our hedging activity as of June 30, 2011:
                         
    Notional     Average     Average  
    Amount     Fixed Pay     Maturity  
Remaining Interest Rate Swap Term   $ in thousands     Rate     (Years)  
1 year or less
                 
Greater than 1 year and less than 3 years
    475,000       1.88 %     1.7  
Greater than 3 years and less than 5 years
    5,100,000       2.25 %     4.7  
Greater than 5 years
    1,350,000       2.59 %     7.2  
 
                 
Total
    6,925,000       2.29 %     4.9  
 
                 
     Approximately $500.0 million of the total $6.9 billion of the swap notional amount on June 30, 2011 were forward-starting interest rate swaps with effective dates beyond June 30, 2011. Additionally, we had approximately $881.5 million of unsettled securities which would have increased our total outstanding borrowing balance if the purchases would have been settled with repurchase agreements.
Credit Default Swap Agreement
     We entered into a credit default swap (“CDS”) on December 31, 2010 with a $150.0 million notional balance and a fair value of $0. Under this CDS, we sold protection (and receive premium payments of 3.0% on the outstanding notional amount) on a specific pool of non-Agency RMBS that exceed a specified loss limit of 25%. Our maximum exposure is the unpaid principal balance of the underlying RMBS that exceeds the specified loss limit. The CDS is not designated as a hedging instrument therefore the unrealized gain of $240,000 and $1.7 million is included in the gain on credit default swap in the statement of operations for the three and six months ended June 30, 2011, respectively.
     At June 30, 2011, the open CDS sold by us is summarized as follows:
                 
$ in thousand   June 30, 2011     December 31, 2010  
Fair value amount
    1,685        
Notional amount
    128,760       149,964  
Maximum potential amount of future undiscounted payments
    96,570       112,500  
Recourse provisions with third parties
           
Collateral held by counterparty
    19,777        
Book Value per Share
     Our book value per share was $19.34 and $20.49 as of June 30, 2011 and December 31, 2010, respectively, on a fully diluted basis, after giving effect to our units of limited partnership interest in our operating partnership, which may be converted to common shares at the sole election of the Company. The decline in our book value is primarily attributable to the decrease in value of our interest rate swaps.
Critical Accounting Policies
     Our consolidated financial statements are prepared in accordance with U.S. GAAP, which requires the use of estimates and assumptions that involve the exercise of judgment and use of assumptions as to future uncertainties. Our most critical accounting policies involve decisions and assessments that could affect our reported assets and liabilities, as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our consolidated financial statements are based are reasonable at the time made and based upon information available to us at that time. We rely upon independent pricing of our assets at each quarter’s end to arrive at what we believe to be reasonable estimates of fair market value. The complete listing of our Critical Accounting Policies was disclosed in our 2010 annual report on Form 10-K as filed with the SEC on March 14, 2011, and there have been no material changes to our Critical Accounting Policies as disclosed therein.

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Expected Impact of New Authoritative Guidance on Future Financial Information
     In April 2011, the FASB issued Accounting Standards Update 2011-03, “Reconsideration of Effective Control for Repurchase Agreements” (ASU 2011-03). ASU 2011-03 simplifies the accounting for financial assets transferred under repurchase agreements (repos) and similar arrangements, by eliminating the transferor’s ability criterion from the assessment of effective control over those assets. The guidance is effective for fiscal years and interim periods beginning after December 15, 2011. We do not believe that the adoption of the amended guidance will have a significant effect on our consolidated financial statements now or in the future.
     In May 2011, the FASB issued Accounting Standards Update 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS” (ASU 2011-04). ASU 2011-04 amends Topic 820 and does not modify the requirements for when fair value measurements apply; rather, it clarifies the Board’s intent about the application of existing fair value measurement requirements, and changes to a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. For public entities, this guidance is effective for fiscal years and interim periods beginning after December 15, 2011. Early application by public entities is not permitted. We do not anticipate any material impact from this guidance now or in the future.
     In June 2011, the FASB issued Accounting Standards Update 2011-05, “Presentation of Comprehensive Income” (ASU 2011-05). ASU 2011-05 amends Topic 220 and eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity, which is our current presentation, and also requires presentation of reclassification adjustments from other comprehensive income to net income on the face of the financial statements. This guidance is effective for fiscal years and interim periods beginning after December 15, 2011, and is not expected to have a material effect on our financial condition or results of operations now or in the future. However, it will change our financial statement presentation once adopted.
Results of Operations
     The table below presents certain information from our Consolidated Statement of Operations for the three and six month periods ending June 30, 2011 and 2010.
                                 
    Three Months ended     Six Months ended  
    June 30,     June 30,  
$ in thousands, except per share data   2011     2010     2011     2010  
Revenues
                               
Interest income
    108,981       29,207       177,517       47,217  
Interest expense
    34,207       6,379       49,785       10,031  
 
                       
Net interest income
    74,774       22,828       127,732       37,186  
 
                       
Other income
    6,540       2,019       12,125       3,049  
 
                       
 
                               
Expenses
                               
Management fee — related party
    5,753       1,771       9,728       3,055  
General and administrative
    1,157       1,017       2,026       1,954  
 
                       
Total expenses
    6,910       2,788       11,754       5,009  
 
                       
Net income
    74,404       22,059       128,103       35,226  
 
                       
 
                               
Net income attributable to non-controlling interest
    1,406       1,309       2,857       2,427  
 
                       
 
                               
Net income attributable to common shareholders
    72,998       20,750       125,246       32,799  
 
                       
 
                               
Earnings per share:
                               
Net income attributable to common shareholders (basic/diluted)
    0.99       0.91       2.00       1.70  
 
                       
Dividends declared per common share
    0.97       0.74       1.97       1.52  
 
                       
Weighted average number of shares of common stock:
                               
Basic
    73,486       22,808       62,731       19,266  
 
                       
Diluted
    74,929       24,239       64,167       20,695  
 
                       

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Net Income Summary
     For the three months ended June 30, 2011, our net income was $74.4 million or $0.99 basic and diluted income per weighted average share available to common shareholders compared to $22.1 million or $0.91 basic and diluted income per weighted average share available to common shareholders for the three months ended June 30, 2010.
     For the six months ended June 30, 2011, our net income was $128.1 million or $2.00 basic and diluted income per weighted average share available to common shareholders compared to $35.2 million or $1.70 basic and diluted income per weighted average share available to common shareholders for the six months ended June 30, 2010.
     The increase to net income for the three and six month periods is primarily attributable to the growth in our investment portfolio resulting from our follow-on common stock offerings. Since June 30, 2010, we completed four follow-on common stock offerings raising approximately $1.4 billion in equity.
Interest Income and Average Earning Asset Yield
     Our primary source of income is interest earned on our investment portfolio. We had average earning assets of $10.2 billion and $2.0 billion and earned interest income of $109.0 million and $29.2 million for the three months ended June 30, 2011 and 2010, respectively. The yield on our average investment portfolio was 4.29% and 5.71% for the respective periods. The change in our average assets and the portfolio yield was primarily the result of the change in our portfolio composition as we have allocated a higher amount of equity to Agency RMBS at lower yields and higher leverage.
     We had average earning assets of $8.3 billion and $1.7 billion and earned interest income of $177.5 million and $47.2 million for the six months ended June 30, 2011 and 2010, respectively. The yield on our average investment portfolio was 4.28% and 5.54% for the respective periods. The change in our average assets and the portfolio yield was primarily the result of the change in our portfolio composition as we have allocated a higher amount of equity to Agency RMBS at lower yields and higher leverage.
     The CPR of our portfolio impacts the amount of premium and discount on the purchase of securities that is recognized into income. Our Agency and non-Agency RMBS had a weighted average CPR of 8.1 and 12.8 for the three months ended June 30, 2011 and March 31, 2011, respectively. The table below shows the three month CPR for our RMBS compared to bonds with similar characteristics (“Cohorts”):
                                 
    June 30, 2011     March 31, 2011  
    Company     Cohort     Company     Cohort  
15 year Agency RMBS
    7.7       12.8       9.0       16.1  
30 year Agency RMBS
    9.2       13.0       13.4       19.8  
Agency Hybrid ARM RMBS
    5.6       N/A       6.4       N/A  
Non-Agency RMBS
    11.5       N/A       14.0       N/A  
 
                       
Overall
    8.1       N/A       11.1       N/A  
 
                       

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Interest Expense and the Cost of Funds
     Our largest expense is the interest expense on borrowed funds. We had average borrowed funds of $8.9 billion and $1.6 billion and total interest expense of $34.2 million and $6.4 million for the three months ended June 30, 2011 and 2010, respectively. The increase in average borrowed funds and interest expense was primarily the result of increasing the size of our investment portfolio.
     We had average borrowed funds of $7.2 billion and $1.3 billion and total interest expense of $49.8 million and $10.0 million for the six months ended June 30, 2011 and 2010, respectively. The increase in average borrowed funds and interest expense was primarily the result of increasing the size of our investment portfolio.
     Our average cost of funds was 1.54% and 1.58% for the three months ended June 30, 2011 and 2010, respectively. Since a substantial portion of our repurchase agreements are short term, changes in market rates are directly reflected in our interest expense. Interest expense includes borrowing costs, as well as any hedging costs.
     Our average cost of funds was 1.39% and 1.54% for the six months ended June 30, 2011 and 2010, respectively. Since a substantial portion of our repurchase agreements are short term, changes in market rates are directly reflected in our interest expense. Interest expense includes borrowing costs, as well as any hedging costs.
Net Interest Income
     Our net interest income, which equals interest income less interest expense, totaled $74.8 million and $22.8 million for the three months ended June 30, 2011 and 2010, respectively. Our net interest rate margin, which equals the yield on our average assets for the period less the average cost of funds for the period, was 2.75% and 4.13% for the three months ended June 30, 2011 and 2010, respectively. The increase in net interest income was primarily the result of increasing our investment portfolio while the decrease in our net interest margin was a direct result of our change in asset mix and the impact of additional cost of funds related to our interest rate hedges.
     Our net interest income totaled $127.7 million and $37.2 million for the six months ended June 30, 2011 and 2010, respectively. Our net interest rate margin was 2.89% and 4.00% for the six months ended June 30, 2011 and 2010, respectively. The increase in net interest income was primarily the result of increasing our investment portfolio while the decrease in our net interest margin was a direct result of our change in asset mix between Agency RMBS, non-Agency RMBS and CMBS.
Other Income
     As part of our credit process, all of our MBS are reviewed on a monthly basis to determine if they continue to meet our risk and return targets. This process involves looking at changing market assumptions and the impact those assumptions will have on the individual securities. As a result of our change in market assumptions, we sold securities and recognized net gain of approximately $3.6 million and $642,000 for the three month periods ended June 30, 2011 and 2010, respectively.
     As a result of our change in market assumptions, we sold securities and recognized net gain of approximately $4.8 million and $1.4 million for the six month periods ended June 30, 2011 and 2010, respectively.
     For the three months ended June 30, 2011 and 2010, we recognized equity in earnings of approximately $3.5 million and $1.6 million, respectively, and unrealized loss on the change in fair value of our investment in the Invesco PPIP Fund of approximately $1.6 million and unrealized income on the change in fair value of our investment in the Invesco PPIP Fund of approximately $44,000, respectively. The net increase in equity in earnings and unrealized loss on the change in fair value was primarily the result of an increase in the fair value of the PPIP Fund.

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     For the six months ended June 30, 2011 and 2010, we recognized equity in earnings of approximately $5.6 million and $1.8 million, respectively, and unrealized loss on the change in fair value of our investment in the Invesco PPIP Fund of approximately $1.9 million and unrealized income on the change in fair value of our investment in the Invesco PPIP Fund of approximately $260,000, respectively. The net earnings from the unconsolidated limited partnership were primarily the result of a gain realized offset by a decrease in the fair value of the PPIP Fund.
     For the three months ended June 30, 2011 we recognized income of $1.3 million on our investment in a CDS of which $240,000 is an unrealized gain based on change in the fair market value of the CDS and $1.0 million represents premium payments we receive for providing protection.
     For the six months ended June 30, 2011 we recognized income of $3.8 million on our investment in a CDS of which $1.7 million is an unrealized gain based on change in the fair market value of the CDS and $2.1 million represents premium payments we receive for providing protection.
Expenses
     We incurred management fees of $5.8 million and $1.8 million for the three months ended June 30, 2011, and 2010, respectively, which are payable to our Manager under our management agreement. The increase in management fees is attributable to an increase in shareholders’ equity resulting from our follow-on common stock offerings in 2010 and 2011. This management fee and the relationship between the Company and the Manager are discussed further in our discussion of related party relationships.
     We incurred management fees of $9.7 million and $3.1 million for the six months ended June 30, 2011, and 2010, respectively, which are payable to our Manager under our management agreement. The increase in management fees is attributable to an increase in shareholders’ equity resulting from our follow-on common stock offerings in 2010 and 2011. This management fee and the relationship between the Company and the Manager are discussed further in our discussion of related party relationships.
     Our general and administrative expenses were approximately $1.2 million and $1.0 million for the three months ended June 30, 2011 and 2010, respectively. The majority of the increase is related to an increase in professional fees and other miscellaneous general and administrative costs offset by lower insurance premium cost for our liability insurance to indemnify our directors and officers.
     Our general and administrative expenses were approximately $2.0 million and $2.0 million for the six months ended June 30, 2011 and 2010, respectively.
Net Income and Return on Average Equity
     Our net income was $74.4 million and $22.1 million for the three months ended June 30, 2011 and 2010, respectively. Our annualized return on average equity was 18.99% and 17.71% for the three months ended June 30, 2011 and 2010, respectively. The increase in net income and return on average equity was primarily the result of an increase in our net interest income following our portfolio growth.
     Our net income was $128.1 million and $35.2 million for the six months ended June 30, 2011 and 2010, respectively. Our annualized return on average equity was 18.80% and 16.08% for the six months ended June 30, 2011 and 2010, respectively. The increase in net income and return on average equity was primarily the result of an increase in our net interest income following our portfolio growth.

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Liquidity and Capital Resources
     Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to pay dividends, fund investments, repayment of borrowings and other general business needs. Our primary sources of funds for liquidity consist of the net proceeds from our common equity offerings, net cash provided by operating activities, cash from repurchase agreements and other financing arrangements and future issuances of equity and/or debt securities.
     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. 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 our balance sheet is significantly less important than our potential liquidity available under borrowing arrangements.
     We held cash and cash equivalents of approximately $66,000 and $16.2 million at June 30, 2011 and 2010, respectively. Our cash and cash equivalents decreased due to normal fluctuations in cash balances related to the timing of principal and interest payments, repayments of debt, and asset purchases and sales.
     Our operating activities provided net cash of approximately $115.8 million and $23.0 million for the six month periods ended June 30, 2011 and 2010, respectively. The cash provided by operating activities increased due to the increase in net interest income earned by the portfolio which resulted from the increase in average interest earning assets of $8.3 billion in investments at June 30, 2011 as compared to $1.7 billion at June 30, 2010.
     Our investing activities used net cash of $6.2 billion and $1.5 billion for the six month periods ended June 30, 2011 and 2010, respectively. During the six month period ended June 30, 2011 we utilized cash to purchase $7.0 billion in securities which were offset by proceeds from asset sales of $344.8 million and principal payments of $491.6 million. During the six month period ended June 30, 2010 we utilized cash to purchase $1.8 billion in securities and sold $169.0 million and received principal payments of $160.8 million. The increase in principal payments resulted from the larger portfolio at June 30, 2011 as compared to 2010.
     Our financing activities for the six months ended June 30, 2011 consisted of net proceeds from our March and June 2011 follow-on public offerings in which we raised approximately $886.9 million and from our repurchase agreements.
     Our financing activities for the six months ended June 30, 2010 consisted of net proceeds from our January and May 2010 follow-on public offerings in which we raised approximately $342.1 million and from our repurchase agreements.
     We allocate our equity to each of our target assets and apply leverage to obtain our net interest income. We invest in assets that provide attractive returns with an aggregate debt-to-equity ratio of 3 to 7 times. On June 23, 2011, we raised additional net proceeds of approximately $389 million from a follow-on public offering. We immediately identified and purchased our target assets following the offering. Approximately $881.5 million of our target assets did not settle prior to June 30, 2011 and therefore were not fully levered at June 30, 2011. The table below shows the allocation of our equity and debt-to-equity ratio as of June 30, 2011. The leverage on each class of assets may periodically exceed the stated ranges as we adjust our borrowings to obtain the best available source and minimize total interest expense while maintaining our overall portfolio leverage guidelines.

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$ in thousands   Agency     Non-Agency     CMBS     PPIF     Total  
Borrowings
    7,174,858       1,510,666       875,242             9,560,766  
Equity allocation
    751,880       780,487       244,823       48,177       1,825,367  
Debt / Equity Ratio
    9.5       1.9       3.6             5.2  
% of Total Equity
    41.2 %     42.8 %     13.4 %     2.6 %     100.0 %
     As of June 30, 2011, our total leverage ratio was 5.2x. The leverage ratio was impacted by the purchase of approximately $881.5 million of securities at the end of June that settled in July. If the liabilities from these security purchases would have settled with repurchase agreements prior to the end of the quarter the total leverage ratio would have been approximately 5.7x.
     We enter into repurchase agreements with various counterparties to fund our purchases of MBS. The following table summarizes our total borrowings by type of investment as of June 30, 2011 and December 31, 2010:
                                 
    June 30, 2011     December 31, 2010  
            Weighted             Weighted  
            Average             Average  
    Amount     Interest     Amount     Interest  
$ in thousands   Outstanding     Rate     Outstanding     Rate  
Agency RMBS
    7,174,858       0.23 %     3,483,440       0.33 %
Non-Agency RBS
    1,510,666       1.44 %     459,979       1.76 %
CMBS
    875,242       1.28 %     401,240       1.30 %
 
                       
Total
    9,560,766       0.52 %     4,344,659       0.57 %
 
                       
     As of June 30, 2011, 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 our repurchase agreements for Agency RMBS was approximately 4.60% (weighted by borrowing amount), under our repurchase agreements for non-Agency RMBS was approximately 20.58% and under our repurchase agreements for CMBS was approximately 17.96%. Across our repurchase facilities for Agency RMBS, the haircuts range from a low of 3% to a high of 6%, for non-Agency RMBS range from a low of 10% to a high of 40% and for CMBS range from a low of 15% to a high of 30%. Our hedged cost of funds was approximately 2.47% and 0.89% as of June 30, 2011 and December 31, 2010, respectively. Declines in the value of our securities portfolio can trigger margin calls by our lenders under our repurchase agreements. An event of default or termination event would give some of our counterparties the option to terminate all repurchase transactions existing with us and require any amount due by us to the counterparties to be payable immediately.
     As discussed above under “—Market Conditions,” the residential mortgage market in the United States has experienced difficult economic conditions including:
    increased volatility of many financial assets, including agency securities and other high-quality RMBS assets, due to potential security liquidations;
 
    increased volatility and deterioration in the broader residential mortgage and RMBS markets; and
 
    significant disruption in financing of RMBS.
     If these conditions persist, then 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. In addition, because Fannie Mae and Freddie Mac are in conservatorship of the U.S. government, if the U.S.’s credit rating is downgraded, it may impact the credit risk associated with Agency RMBS and other assets, and, therefore, decrease the value of the Agency RMBS, non-Agency RBMS and CMBS in our portfolio, which could cause our repurchase counterparties to make margin calls on our borrowings and swaps, if our collateral is insufficient to cover the debt secured by our assets.

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     Effective as of August 27, 2010, we implemented a dividend reinvestment and stock purchase plan (the “DRIP”), pursuant to which we registered and reserved for issuance 2,000,000 shares of our common stock. Under the terms of the DRIP, shareholders who participate in the DRIP may purchase shares of our common stock directly from us, in cash investments up to $10,000. At our sole discretion, we may accept optional cash investments in excess of $10,000 per month, which may qualify for a discount from the market price of 0% to 3%. The DRIP participants may also automatically reinvest all or a portion of their dividends for additional shares of our stock. We expect to use the proceeds from any dividend reinvestments or stock purchases for general corporate purposes. During the six months ended June 30, 2011, we issued a total of 1,275 common shares pursuant to the plan.
Effects of Margin Requirements, Leverage and Credit Spreads
     Our securities have values that fluctuate according to market conditions and, as discussed above, the market value of our 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 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. In seeking to effectively manage 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, then 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 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.
Forward-Looking Statements Regarding Liquidity
     Based upon 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 to fund our investment activities, pay fees under our management agreement, fund our distributions to shareholders and for other 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 through 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 our ability to invest such offering 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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Contractual Obligations
     On July 1, 2009, we entered into an agreement with our Manager pursuant to which our Manager is entitled to receive a management fee and the reimbursement of certain expenses, which was amended on May 24, 2011. The management fee will be calculated and payable quarterly in arrears in an amount equal to 1.50% of our shareholders’ equity, per annum, calculated and payable quarterly in arrears. Our Manager uses the proceeds from its management fee in part to pay compensation to its officers and personnel who, notwithstanding that certain of those individuals are also our officers, receive no cash compensation directly from us. We are required to reimburse our Manager for operating expenses related to us incurred by our Manager, including certain salary expenses and other expenses relating to legal, accounting, due diligence and other services. Expense reimbursements to our Manager are made in cash on a monthly basis following the end of each month. Our reimbursement obligation is not subject to any dollar limitation. Refer to Note 8 – “Related Party Transactions” for details of our reimbursements to our Manager.
Contractual Commitments
     As of June 30, 2011, we had the following contractual commitments and commercial obligations:
                                         
    Payments Due by Period  
            Less than 1                    
$ in thousands   Total     year     1-3 years     3-5 years     After 5 years  
Repurchase agreements
    9,560,766       9,560,766                    
Invesco PPIP Fund investment
    30,727             30,727              
 
                             
Total contractual obligations
    9,591,493       9,560,766       30,727              
 
                             
     As of June 30, 2011, we have approximately $6.2 million in contractual interest payments related to our repurchase agreements.
Off-Balance Sheet Arrangements
     We committed to invest up to $100.0 million in the Invesco PPIP Fund, which, in turn, invests in our target assets. As of June 30, 2011 and 2010, approximately $69.3 million and $40.0 million of the commitment have been called, respectively.
     We also utilize credit derivatives, such as credit default swaps, to provide credit event protection based on a financial index or specific security in exchange for receiving a fixed-rate fee or premium over the term of the contract. These instruments enable us to synthetically assume the credit risk of a reference security, portfolio of securities or index of securities. The counterparty pays a premium to us and we agree to make a payment to compensate the counterparty for losses upon the occurrence of a specified credit event.
     Although contract-specific, credit events generally include bankruptcy, failure to pay, restructuring, obligation acceleration, obligation default, or repudiation/moratorium. Upon the occurrence of a defined credit event, the difference between the value of the reference obligation and the CDS’s notional amount is recorded as realized loss in the statement of operations.
     Our only CDS contract was entered into on December 31, 2010 with a $150.0 million notional balance where we sold protection on a specific pool of non-Agency RMBS that exceed a specified loss limit of 25% for a stated fixed rate fee of 3%. Our maximum exposure is the unpaid principal balance of the underlying RMBS that exceeds the specified loss limit. We posted cash collateral to secure potential loss payments of $19.8 million as of June 30, 2011. The notional amount of the CDS at June 30, 2011 is $128.8 million, and we estimate the fair market value of the CDS is approximately $1.7 million at June 30, 2011.

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Shareholders’ Equity
     During the quarter ended June 30, 2011, we issued 1,237,716 shares of common stock at an average price of $22.62 under the DSPP with total proceeds of approximately $27.8 million, net of issuance costs.
     On June 23, 2011, we completed a follow-on public offering of 17,000,000 shares of common stock and an issuance of an additional 2,550,000 shares of common stock pursuant to the underwriters’ full exercise of their over-allotment option at $20.15 per share. Net proceeds to us were approximately $388.8 million, net of issuance costs of approximately $5.1 million.
Unrealized Gains and Losses
     Since we account for our investment securities as “available-for-sale,” unrealized fluctuations in market values of assets do not impact our U.S. GAAP income but rather are reflected on our balance sheet by changing the carrying value of the asset and shareholders’ equity under “Accumulated Other Comprehensive Income (Loss).” In addition, unrealized fluctuations in market values of our cash flow hedges that qualify for hedge accounting are also reflected in “Accumulated Other Comprehensive Income (Loss).” For the three months ended June 30, 2011 and 2010, net unrealized loss included in shareholders’ equity was $156.1 million and $6.5 million, respectively.
     For the six months ended June 30, 2011 and 2010, net unrealized gain included in shareholders’ equity was $116.0 million and $6.3 million, respectively.
     As a result of this mark-to-market accounting treatment, our book value and book value per share are likely to fluctuate far more than if we used historical amortized cost accounting. As a result, comparisons with companies that use historical cost accounting for some or all of their balance sheet may not be meaningful.
Share-Based Compensation
     We established the 2009 Equity Incentive Plan for grants of restricted common stock and other equity based awards to our independent, non-executive directors, and to the officers and employees of the Manager (the “Incentive Plan”). Under the Incentive Plan, a total of 1,000,000 shares are currently reserved for issuance. Unless terminated earlier, the Incentive Plan will terminate in 2019, but will continue to govern the unexpired awards. Our three independent, non-executive directors are each eligible to receive $45,000 in restricted common stock annually. For the three months ended June 30, 2011 and 2010, we recognized compensation expense of approximately $34,000 and $34,000 and issued 1,467 and 921 shares, respectively, of restricted stock to our independent, non-executive directors pursuant to the Incentive Plan. For the six months ended June 30, 2011 and 2010, we recognized compensation expense of approximately $68,000 and $53,000 and issued 2,895 and 1,755 shares, respectively, of restricted stock to our independent, non-executive directors pursuant to the Incentive Plan. The number of shares issued was determined based on the closing price of our common stock on the NYSE on the actual date of grant.

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Dividends
     We intend to continue to make regular quarterly distributions to holders of our common stock. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable income. We intend to pay regular quarterly dividends to our shareholders in an amount equal at least 90% of our net taxable income. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our repurchase agreements and other debt payable. If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make cash distributions, or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.
     On June 9, 2011, we declared a dividend of $0.97 per share of common stock. The dividend was paid on July 28, 2011 to shareholders of record as of the close of business on June 17, 2011.
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.
Other Matters
     We calculate that at least 75% of our assets were qualified REIT assets, as defined in the Internal Revenue Code of 1986, as amended (the “Code”) for the period ended June 30, 2011. We also calculate that our revenue qualifies for the 75% source of income test and for the 95% source of income test rules for the period ended June 30, 2011. Consequently, we met the REIT income and asset test as of June 30, 2011. We also met all REIT requirements regarding the ownership of our common stock and the distribution of our net income as of June 30, 2011. Therefore, as of June 30, 2011, we believe that we qualified as a REIT under the Code.
     At all times, we intend to conduct our business so that neither we nor our operating partnership nor the subsidiaries of our operating partnership are required to register as an investment company under the 1940 Act. If we were required to register as an investment company, then our use of leverage would be substantially reduced. Because we are a holding company that conducts our business through our operating partnership and the operating partnership’s wholly-owned or majority-owned subsidiaries, the securities issued by these subsidiaries that are excepted from the definition of “investment company” under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, together with any other investment securities the operating partnership may own, may not have a combined value in excess of 40% of the value of the operating partnership’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis, which we refer to as the 40% test. This requirement limits the types of businesses in which we may engage through our subsidiaries. In addition, we believe neither the company nor the operating partnership are considered an investment company under Section 3(a)(1)(A) of the 1940 Act because they do not engage primarily or hold themselves out as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, through the operating partnership’s wholly-owned or majority-owned subsidiaries, the company and the operating partnership are primarily engaged in the non-investment company businesses of these subsidiaries. IAS Asset I LLC and certain of the operating partnership’s other subsidiaries that we may form in the future rely upon the exclusion from the definition of “investment company” under the 1940 Act provided by Section 3(c)(5)(C) of the 1940 Act, which is available for entities “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” This exclusion generally requires that at least 55% of each subsidiary’s portfolio be comprised of qualifying assets and at least 80% be comprised of qualifying assets and real estate-related assets (and no more than 20% comprised of miscellaneous assets). Qualifying assets for this purpose include mortgage loans fully secured by real estate and other assets, such as whole pool Agency and non-Agency RMBS, that the SEC or its staff in various no-action letters has determined are the functional equivalent of mortgage loans fully secured by real estate. We treat as real estate-related assets CMBS, debt and equity securities of companies primarily engaged in real estate businesses, Agency partial pool certificates and securities issued by pass-through entities of which substantially all of the assets consist of qualifying assets

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and/or real estate-related assets. Additionally, unless certain mortgage securities represent all the certificates issued with respect to an underlying pool of mortgages, the MBS may be treated as securities separate from the underlying mortgage loans and, thus, may not be considered qualifying interests for purposes of the 55% requirement. We calculate that as of June 30, 2011, we conducted our business so as not to be regulated as an investment company under the 1940 Act.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
     The primary components of our market risk are related to interest rate, prepayment and market value. While we do not seek to avoid risk completely, we believe the risk can be quantified from historical experience and we 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 highly sensitive to many factors, including governmental, monetary and tax policies, domestic and international economic and political considerations, and other factors beyond our control. We are subject to interest rate risk in connection with our investments and our repurchase agreements. Our repurchase agreements are typically of limited duration and will be periodically refinanced at current market rates. We mitigate this risk through utilization of derivative contracts, primarily interest rate swap agreements, interest rate caps and interest rate floors.
Interest Rate Effect on Net Interest Income
     Our operating results depend in large part upon differences between the yields earned on our investments and our cost of borrowing and interest rate hedging activities. Most of our repurchase agreements provide financing based on a floating rate of interest calculated on a fixed spread over LIBOR. The fixed spread will vary depending on the type of underlying asset which collateralizes the financing. Accordingly, the portion of our portfolio which consists of floating interest rate assets are match-funded utilizing our expected sources of short-term financing, while our fixed interest rate assets are not match-funded. During periods of rising interest rates, the borrowing costs associated with our investments tend to increase while the income earned on our fixed interest rate investments may remain substantially unchanged. This increase in borrowing costs results in the narrowing of the net interest spread between the related assets and borrowings and may even result in losses. Further, during this portion of the interest rate and credit cycles, defaults could increase and result in credit losses to us, which could adversely affect our liquidity and operating results. Such delinquencies or defaults could also have an adverse effect on the spread between interest-earning assets and interest-bearing liabilities.
     Hedging techniques are partly based on assumed levels of prepayments of our RMBS. If prepayments are slower or faster than assumed, the life of the RMBS will be longer or shorter, which would reduce the effectiveness of any hedging strategies we may use and may cause losses on such transactions. Hedging strategies involving the use of derivative securities are highly complex and may produce volatile returns.
Interest Rate Effects on Fair Value
     Another component of interest rate risk is the effect that changes in interest rates will have on the market value of the assets that we acquire. We face the risk that the market value of our assets will increase or decrease at different rates than those of our liabilities, including our hedging instruments.
     We primarily assess our interest rate risk by estimating the duration of our assets and the duration of our liabilities. Duration measures the market price volatility of financial instruments as interest rates change. We generally calculate duration using various financial models and empirical data. Different models and methodologies can produce different duration numbers for the same securities.
     The impact of changing interest rates on fair value can change significantly when interest rates change materially. Therefore, the volatility in the fair value of our assets could increase significantly in the event interest rates change materially. In addition, other factors impact the fair value of our interest rate-sensitive investments and

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hedging instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, changes in actual interest rates may have a material adverse effect on us.
Prepayment Risk
     As we receive prepayments of principal on our investments, premiums paid on these investments are amortized against interest income. In general, an increase in prepayment rates will accelerate the amortization of purchase premiums, thereby reducing the interest income earned on the investments. Conversely, discounts on such investments are accreted into interest income. In general, an increase in prepayment rates will accelerate the accretion of purchase discounts, thereby increasing the interest income earned on the investments.
Extension Risk
     We compute the projected weighted-average life of our investments based upon assumptions regarding the rate at which the borrowers will prepay the underlying mortgages. In general, when a fixed-rate or hybrid adjustable-rate security is 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 average life of the fixed-rate portion of the related assets. This strategy is designed to protect us from rising interest rates, because the borrowing costs are fixed for the duration of the fixed-rate portion of the related target asset.
     However, if prepayment rates decrease in a rising interest rate environment, then the life of the fixed-rate portion of the related assets 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 end of the hedging instrument, while the income earned on the hybrid adjustable-rate assets would remain fixed. This situation may also cause the market value of our hybrid adjustable-rate assets 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.
Market Risk
Market Value Risk
     Our available-for-sale securities are reflected at their estimated fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income pursuant to ASC Topic 320. The estimated fair value of these securities fluctuates primarily due to changes in interest rates and other factors. Generally, in a rising interest rate environment, the estimated fair value of these securities would be expected to decrease; conversely, in a decreasing interest rate environment, the estimated fair value of these securities would be expected to increase.
     The sensitivity analysis table presented below shows 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 June 30, 2011, 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 our Manager based on our Manager’s judgment and experience.
         
    Percentage Change in Projected   Percentage Change in Projected
Change in Interest Rates   Net Interest Income   Portfolio Value
+1.00%
  23.42%   (1.34)%
+0.50%   19.53%   (0.58)%
-0.50%   (19.58)%   0.18%
-1.00%   (38.03)%   (0.03)%

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Real Estate Risk
     Residential and commercial property values are subject to volatility and may be affected adversely by a number of factors, including, but not limited to: national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions (such as the supply of housing stock); changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay our loans, which could also cause us to suffer losses.
Credit Risk
     We believe that our investment strategy will generally keep our credit losses and financing costs low. However, we retain the risk of potential credit losses on all of the residential and commercial mortgage loans, as well as the loans underlying the non-Agency RMBS and CMBS in our portfolio. We seek to manage this risk through our pre-acquisition due diligence process and through the use of non-recourse financing, which limits our exposure to credit losses to the specific pool of mortgages that are subject to the non-recourse financing. In addition, with respect to any particular asset, our Manager’s investment team evaluates, among other things, relative valuation, supply and demand trends, shape of yield curves, prepayment rates, delinquency and default rates, recovery of various sectors and vintage of collateral.
Risk Management
     To the extent consistent with maintaining our REIT qualification, we seek to manage risk exposure to protect our investment portfolio against the effects of major interest rate changes. We generally seek to manage this risk by:
    monitoring and adjusting, if necessary, the reset index and interest rate related to our target assets and our financings;
    attempting to structure our financing agreements to have a range of different maturities, terms, amortizations and interest rate adjustment periods;
    using hedging instruments, primarily interest rate swap agreements but also financial futures, options, interest rate cap agreements, floors and forward sales to adjust the interest rate sensitivity of our target assets and our borrowings; and
    actively managing, on an aggregate basis, the interest rate indices, interest rate adjustment periods, and gross reset margins of our target assets and the interest rate indices and adjustment periods of our financings.
ITEM 4. CONTROLS AND PROCEDURES.
     Our management is responsible for establishing and maintaining disclosure controls and procedures that are designed to ensure that information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that the required information is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.
     We have evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures as of June 30, 2011. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation,

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our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
     No change occurred in our internal control over financial reporting (as defined in Rule13a-15(f) and 15d-15(f) of the Exchange Act) during the six months ended June 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
     From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. As of June 30, 2011, we were not involved in any such legal proceedings.
ITEM 1A. RISK FACTORS.
     Other than the risk factor set forth below, there were no material changes during the period covered by this report to the risk factors previously disclosed in our annual report on Form 10-K for the year ended December 31, 2010, as filed with the SEC on March 14, 2011. Additional risks not presently known, or that we currently deem immaterial, also may have a material adverse affect on our business, financial condition and results of operation.
     Standard & Poor’s recent downgrade in the credit rating of the U.S. government and the possibility of a further downgrade or additional downgrades by other credit rating agencies may have a material adverse effect on our business, financial condition and results of operations, as well as the price of our common stock.
     Standard & Poor’s (“S&P”) recent downgrade in the credit rating of the U.S. government and the possibility of a further downgrade by S&P or additional downgrades by other credit rating agencies may have a material adverse effect on our business, financial condition and results of operations, as well as the price of our common stock. The impact on the company of the downgrade and resulting financial market volatility may include, but not be limited to, the following:
    The value of our assets may decline;
 
    Since we utilize repurchase agreements which are secured by our assets, a decline in value of our assets may require us to post additional collateral to secure our debt;
 
    Significant changes in interest rates may occur which may increase our borrowing costs, reduce advance rates on repurchase agreements and reduce our liquidity; and
 
    Such interest rate volatility may cause further decline in the value of our interest rate swaps causing us to post additional collateral.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. RESERVED

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ITEM 5. OTHER INFORMATION.
None.

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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.
         
  INVESCO MORTGAGE CAPITAL INC.
 
 
August 9, 2011  By:   /s/ Richard J. King    
    Richard J. King   
    President and Chief Executive Officer   
 
     
August 9, 2011  By:   /s/ Donald R. Ramon    
    Donald R. Ramon   
    Chief Financial Officer   

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EXHIBIT INDEX
Item 6.   Exhibits
     
Exhibit No.   Description
3.1
  Articles of Amendment and Restatement of Invesco Mortgage Capital Inc., incorporated by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission on August 12, 2009.
 
   
3.2
  Amended and Restated Bylaws of Invesco Mortgage Capital Inc., incorporated by reference to Exhibit 3.2 to Amendment No. 8 to our Registration Statement on Form S-11, filed with the Securities and Exchange Commission on June 18, 2009.
 
   
10.1
  Amendment to Management Agreement by and among Invesco Mortgage Capital Inc., IAS Operating Partnership LP, IAS Asset I LLC and Invesco Advisors, Inc., dated as of May 24, 2011.
 
   
31.1
  Certification of Richard J. King pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
31.2
  Certification of Donald R. Ramon pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
32.1
  Certification of Richard J. King pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
32.2
  Certification of Donald R. Ramon pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
101
  The following series of unaudited XBRL-formatted documents are collectively included herewith as Exhibit 101. The financial information is extracted from Invesco Mortgage Capital Inc.’s unaudited consolidated interim financial statements and notes that are included in this Form 10-Q Report.
 
   
 
  101.INS XBRL Instance Document
 
   
 
  101.SCH XBRL Taxonomy Extension Schema Document
 
   
 
  101.CAL XBRL Taxonomy Calculation Linkbase Document
 
   
 
  101.LAB XBRL Taxonomy Label Linkbase Document
 
   
 
  101.PRE XBRL Taxonomy Presentation Linkbase Document
 
   
 
  101.DEF XBRL Taxonomy Definition Linkbase Document

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