NLY Annaly Capital Management Inc

• GAAP net income of $669.7 million, $0.69 per average common share
• Normalized core earnings of $0.31 per average common share, excludes $0.02 of PAA
• Common stock book value of $11.73, economic leverage of 6.0:1
• Executed share repurchases to date totaling $217.0 million since November 2015
• Credit investment portfolio represents 23% of stockholders’ equity
• Updated capital allocation policy in support of diversification strategy
• Enhanced disclosure of Commercial Real Estate, Residential Credit and Middle Market Lending businesses

Annaly Capital Management, Inc. (NYSE:NLY) (the “Company”) today announced its financial results for the quarter and year ended December 31, 2015.

“In the challenging market environment of 2015, Annaly delivered over $1.2 billion in dividend distributions to shareholders while producing an attractive return on equity with the lowest leverage in the industry” commented Kevin Keyes, Chief Executive Officer and President. “Annaly is not only the largest and most liquid mortgage REIT in the world, the Company now operates a more efficient and diverse investment platform positioned to uniquely benefit from investment opportunities across numerous markets and asset classes.

“Also this quarter, in an effort to continue to provide increased transparency into our evolving business strategy and capital allocation options, we have included enhanced disclosure of our sizeable commercial real estate, residential credit and middle market lending portfolios. As we have stated, these three businesses complement our core Agency MBS strategies and now comprise approximately 23% of our total equity capital.”

Updated Capital Allocation Policy

As part of the Company’s diversification strategy, in February 2016, the Company’s board of directors (“Board”) adopted an updated capital allocation policy. The updated policy allows the Company greater flexibility to generate attractive returns for the Company’s stockholders. Under the Company’s capital allocation policy, subject to oversight by the Board, the Company may allocate investments within its target asset classes as it determines is appropriate from time to time. The following target assets have been approved for investment under the Company’s capital allocation policy.

Residential

       

Commercial

-- Agency mortgage-backed securities

       

-- Commercial real estate, including:

-- To-be-announced forward contracts (or TBAs)

Commercial mortgage loans

-- Agency debentures

Commercial mortgage-backed securities

-- Residential credit investments, including:

Preferred equity

Residential mortgage loans

Other real estate-related debt investments

Residential mortgage-backed securities

Real property

Agency credit risk sharing transactions

-- Corporate debt including loans and securities of

         

middle market companies

 

The Board may make changes to the Company’s capital allocation policy and targeted assets as it deems appropriate at its discretion.

Enhanced Financial Disclosure

Beginning with the third quarter 2015, the Company introduced a series of non-GAAP “normalized” financial metrics intended to provide investors more details on the various components of the Company’s financial performance. The Company’s traditional non-GAAP “core earnings” measure includes a component of premium amortization representing the change in estimated long-term constant prepayment rates (“CPR”) (referred to herein as the premium amortization adjustment (“PAA”)). Normalized core earnings presents the Company’s core earnings excluding the PAA. Additionally, under the title “normalized” the Company discloses other measures (such as net interest margin, annualized yield on interest earning assets, net interest spread and core return on average equity) which exclude the effect of the PAA. Discussions of period-over-period fluctuations within the following ‘Financial Performance’ section are presented based on GAAP and normalized results.

The Company’s GAAP and core earnings metrics (that are not normalized) include the PAA because in accordance with GAAP the Company recognizes income under the retrospective method on a substantial portion of its Residential Investment Securities classified as available-for-sale. Premiums and discounts associated with the purchase of Residential Investment Securities are amortized or accreted into income over the remaining projected lives of the securities. Using a third-party supplied model and market information to project future cash flows and expected remaining lives of securities, the effective interest rate determined for each security is applied as if it had been in place from the security’s acquisition. The amortized cost of the investment is then adjusted to the amount that would have existed had the new effective yield been applied since the acquisition date. The adjustment to amortized cost is offset with a charge or credit to interest income. Changes in interest rates and other market factors will impact prepayment speed projections and the amount of premium amortization recognized in any given period.

The following table illustrates the impact of adjustments to long-term CPR estimates on premium amortization expense for the quarters ended December 31, 2015, September 30, 2015, and December 31, 2014:

        December 31, 2015   September 30, 2015   December 31, 2014 (dollars in thousands) Premium amortization expense $ 159,720 $ 255,123 $ 198,041 Less: PAA cost (benefit)   (18,072 )     83,136     31,695 Premium amortization expense exclusive of PAA $ 177,792     $ 171,987   $ 166,346     December 31, 2015   September 30, 2015   December 31, 2014 (per common share) Premium amortization expense $ 0.17 $ 0.27 $ 0.21 Less: PAA cost (benefit)   (0.02 )     0.09     0.03 Premium amortization expense exclusive of PAA $ 0.19     $ 0.18   $ 0.18  

In addition to the enhanced disclosures described above, the Company is also providing additional and more detailed information on its commercial real estate, residential credit and corporate debt businesses in its Fourth Quarter 2015 Supplemental Information available on the Company’s website www.annaly.com.

Financial Performance

The following table summarizes certain key performance indicators as of and for the quarters ended December 31, 2015, September 30, 2015, and December 31, 2014:

                 

 

December 31, 2015   September 30, 2015   December 31, 2014 Book value per common share $11.73 $11.99 $13.10 Economic leverage at period-end (1) 6.0:1 5.8:1 5.4:1 GAAP net income (loss) per common share $0.69 ($0.68) ($0.71) Normalized core earnings per common share (2) $0.31 $0.30 $0.33 Annualized return (loss) on average equity 22.15% (20.18%) (19.91%) Annualized normalized core return on average equity (2) 10.30% 9.67% 10.00% Normalized net interest margin (2) (3) 1.71% 1.65% 1.74% Normalized net interest spread (2) 1.37% 1.29% 1.50% Normalized average yield on interest earning assets (2) 3.05% 2.94% 3.19%   (1)   Computed as the sum of recourse debt, TBA derivative notional outstanding and net forward purchases of investments divided by total equity. Recourse debt consists of repurchase agreements, other secured financing and Convertible Senior Notes. Securitized debt, participation sold and mortgages payable are non-recourse to the Company and are excluded from this measure. (2) Excludes effect of the PAA due to changes in long-term CPR estimates. (3) Represents the sum of the Company’s annualized normalized economic net interest income (inclusive of interest expense on interest rate swaps used to hedge cost of funds) plus TBA dollar roll income (less interest expense on swaps used to hedge dollar roll transactions) divided by the sum of its average interest earning assets plus average outstanding TBA derivative balances. Average interest earning assets reflects the average amortized cost of our investments during the period.  

The Company reported GAAP net income for the quarter ended December 31, 2015 of $669.7 million, or $0.69 per average common share, compared to a GAAP net loss of ($627.5) million, or ($0.68) per average common share, for the quarter ended September 30, 2015, and a GAAP net loss of ($658.3) million, or ($0.71) per average common share, for the quarter ended December 31, 2014. The increase for the quarter ended December 31, 2015 compared to each of the quarters ended September 30, 2015 and December 31, 2014 is primarily the result of favorable market value changes on interest rate swaps.

Normalized core earnings for the quarter ended December 31, 2015 was $311.1 million, or $0.31 per average common share, compared to $300.7 million, or $0.30 per average common share, for the quarter ended September 30, 2015, and $330.6 million, or $0.33 per average common share, for the quarter ended December 31, 2014. Normalized core earnings increased during the quarter ended December 31, 2015 compared to the quarter ended September 30, 2015 on higher interest income earned on the Company’s commercial investment portfolio. Normalized core earnings declined during the quarter ended December 31, 2015 compared to the quarter ended December 31, 2014 due to the absence of investment advisory income and dividend income from Chimera Investment Corp. (“Chimera”) following termination of our relationship with Chimera as well as due to higher interest expense on repurchase agreements on higher weighted average rates, partially offset by lower average balances during the quarter ended December 31, 2015. Core earnings for the quarter ended December 31, 2015 was $329.2 million, or $0.33 per average common share, compared to $217.6 million, or $0.21 per average common share, for the quarter ended September 30, 2015, and $298.9 million, or $0.30 per average common share, for the quarter ended December 31, 2014.

GAAP net income for the year ended December 31, 2015 was $465.7 million, or $0.42 per average common share and a GAAP net loss for the year ended December 31, 2014 of ($842.3) million, or ($0.96) per average common share. Normalized core earnings for the years ended December 31, 2015 and 2014 were $1.3 billion, or $1.28 per average common share, and $1.2 billion, or $1.16 per average common share, respectively. Core earnings for the years ended December 31, 2015 and 2014 were $1.2 billion, or $1.20 per average common share, and $1.1 billion, or $1.14 per average common share, respectively.

The following table presents a reconciliation between GAAP net income (loss), core earnings and normalized core earnings for the quarters ended December 31, 2015, September 30, 2015, and December 31, 2014. Core earnings is defined as net income (loss) excluding gains or losses on disposals of investments and termination of interest rate swaps, unrealized gains or losses on interest rate swaps and financial instruments measured at fair value through earnings, net gains and losses on trading assets, impairment losses, net income (loss) attributable to noncontrolling interest, and certain other non-recurring gains or losses, and inclusive of dollar roll income (a component of Net gains (losses) on trading assets). Normalized core earnings presents the Company’s core earnings excluding the PAA.

                For the quarters ended December 31, 2015   September 30, 2015   December 31, 2014 (dollars in thousands) GAAP net income (loss) $ 669,666   $ (627,491 ) $ (658,272 ) Less: Unrealized (gains) losses on interest rate swaps (463,126 ) 822,585 873,468 Net (gains) losses on disposal of investments 7,259 7,943 (3,420 ) Net (gains) losses on trading assets (42,584 ) (108,175 ) 57,454

Net unrealized (gains) losses on financial instruments measured at fair value through earnings

62,703 24,501 29,520 Net (income) loss attributable to noncontrolling interest 373 197 196 Plus: TBA dollar roll income (1)   94,914       98,041       -   Core earnings 329,205 217,601 298,946 Premium amortization adjustment cost (benefit)   (18,072 )     83,136       31,695   Normalized core earnings $ 311,133     $ 300,737     $ 330,641     GAAP net income (loss) per average common share $ 0.69     $ (0.68 )   $ (0.71 ) Core earnings per average common share $ 0.33     $ 0.21     $ 0.30   Normalized core earnings per average common share $ 0.31     $ 0.30     $ 0.33     (1)   Represents a component of Net gains (losses) on trading assets.  

The following table presents a reconciliation between GAAP net income (loss), core earnings and normalized core earnings for the years ended December 31, 2015 and 2014:

                For the years ended December 31, 2015   December 31, 2014 GAAP net income (loss) $ 465,747 $ (842,279 ) Less: Realized (gains) losses on termination of interest rate swaps 226,462 779,333 Unrealized (gains) losses on interest rate swaps 124,869 948,755 Net (gains) losses on disposal of investments (50,987 ) (93,716 ) Net (gains) losses on trading assets (29,623 ) 245,495

Net unrealized (gains) losses on financial instruments measured at fair value through earnings

103,169 86,172 Impairment of goodwill 22,966 - Other non-recurring loss (1) - 23,783 GAAP net (income) loss attributable to noncontrolling interest 809 196 Plus: TBA dollar roll income (2)   348,531       -   Core earnings 1,211,943 1,147,739 Premium amortization adjustment cost (benefit)   73,365       25,538   Normalized core earnings $ 1,285,308     $ 1,173,277     GAAP net income (loss) per average common share $ 0.42     $ (0.96 ) Core earnings per average common share $ 1.20     $ 1.14   Normalized core earnings per average common share $ 1.28     $ 1.16     (1)   Represents a one-time payment made by FIDAC to Chimera. This amount is a component of Other income (loss) in the Company’s Consolidated Statements of Comprehensive Income (Loss). (2) Represents a component of Net gains (losses) on trading assets.  

Normalized net interest margin for the quarters ended December 31, 2015, September 30, 2015, and December 31, 2014 was 1.71%, 1.65% and 1.74%, respectively. For the quarter ended December 31, 2015, the normalized average yield on interest earning assets was 3.05% and the average cost of interest bearing liabilities, including interest expense on interest rate swaps used to hedge cost of funds, was 1.68%, which resulted in a normalized net interest spread of 1.37%. The normalized average yield on interest earning assets for the quarter ended December 31, 2015 increased when compared to the quarter ended September 30, 2015 on higher weighted average coupons on residential and commercial investments and decreased when compared to the quarter ended December 31, 2014 due to lower weighted average coupons on Residential Investment Securities and higher premium amortization expense exclusive of PAA, partially offset by higher interest income on commercial investments. The rise in our average cost of interest bearing liabilities for the quarter ended December 31, 2015 when compared to the quarter ended September 30, 2015 is primarily attributable to higher average costs of repurchase agreements, partially offset by a reduction in interest expense on swaps. Our average cost of interest bearing liabilities for the quarter ended December 31, 2015 when compared to the quarter ended December 31, 2014 was relatively unchanged.

Asset Portfolio

Residential Investment Securities

Residential Investment Securities, which are comprised of Agency mortgage-backed securities, Agency debentures, credit risk transfer securities and Non-Agency mortgage-backed securities, totaled $67.2 billion at December 31, 2015, compared to $67.0 billion at September 30, 2015 and $82.9 billion at December 31, 2014. The Company’s Residential Investment Securities portfolio at December 31, 2015 was comprised of 93% fixed-rate assets with the remainder constituting adjustable or floating-rate investments.

The Company uses a third-party model and market information to project prepayment speeds for purposes of determining amortization of premiums and discounts on Residential Investment Securities. Changes to model assumptions, including interest rates and other market data, as well as periodic revisions to the model may cause changes to the results. The net amortization of premiums and accretion of discounts on Residential Investment Securities for the quarters ended December 31, 2015, September 30, 2015, and December 31, 2014, was $159.7 million (which included PAA benefit of $18.1 million), $255.1 million (which included PAA cost of $83.1 million), and $198.0 million (which included PAA cost of $31.7 million), respectively. The total net premium balance on Residential Investment Securities at December 31, 2015, September 30, 2015, and December 31, 2014, was $5.0 billion, $4.8 billion, and $5.3 billion, respectively. The weighted average amortized cost basis of the Company’s non-interest-only Residential Investment Securities at each of December 31, 2015, September 30, 2015, and December 31, 2014, was 105.3. The weighted average amortized cost basis of the Company’s interest-only Residential Investment Securities at December 31, 2015, September 30, 2015, and December 31, 2014, was 16.0%, 16.1%, and 15.4%, respectively. The weighted average experienced CPR on our Agency mortgage-backed securities for the quarters ended December 31, 2015, September 30, 2015, and December 31, 2014, was 9.7%, 11.5% and 8.4%, respectively. The weighted average projected long-term CPR on our Agency mortgage-backed securities at December 31, 2015, September 30, 2015, and December 31, 2014, was 8.8%, 9.2% and 8.7%, respectively.

At December 31, 2015, the Company had outstanding $13.8 billion in notional balances of TBA derivative positions. Realized and unrealized gains (losses) on TBA derivatives are recorded in Net gains (losses) on trading assets in the Company’s Consolidated Statements of Comprehensive Income (Loss). The following table summarizes certain characteristics of the Company’s TBA derivatives at December 31, 2015:

         

Purchase and sale contracts for

 

 

 

 

derivative TBAs

   

Notional

 

Implied Cost Basis

 

Implied Market Value

 

Net Carrying Value

(dollars in thousands) Purchase contracts $ 13,761,000 $ 14,177,338 $ 14,169,775 $ (7,563 ) Sale contracts   -     -     -     -   Net TBA derivatives $ 13,761,000   $ 14,177,338   $ 14,169,775   $ (7,563 )  

During the quarter ended December 31, 2015, the Company disposed of $2.7 billion of Residential Investment Securities, resulting in a net realized loss of ($7.5) million. During the quarter ended September 30, 2015, the Company disposed of $3.7 billion of Residential Investment Securities, resulting in a net realized gain of $4.5 million. During the quarter ended December 31, 2014, the Company disposed of $7.3 billion of Residential Investment Securities, resulting in a net realized gain of $3.2 million.

During the year ended December 31, 2015, the Company disposed of $23.9 billion of Residential Investment Securities, resulting in a net realized gain of $63.3 million. During the year ended December 31, 2014, the Company disposed of $22.5 billion of Residential Investment Securities, resulting in a net realized gain of $94.5 million.

Commercial Investments Portfolio

The Company’s commercial investments portfolio consists of commercial real estate debt and equity investments and corporate debt. Commercial real estate debt and preferred equity, including securitized loans of consolidated variable interest entities (“VIEs”) and loans held for sale of $278.6 million, totaled $4.5 billion and investments in commercial real estate totaled $535.9 million at December 31, 2015. Commercial real estate debt and preferred equity, including securitized loans of consolidated VIEs and loans held for sale of $476.6 million, totaled $4.7 billion and investments in commercial real estate totaled $301.4 million at September 30, 2015. Corporate debt investments totaled $488.5 million as of December 31, 2015, up from $425.0 million at September 30, 2015. The weighted average levered return on commercial real estate debt and preferred equity, which includes loans held for sale, as of December 31, 2015, September 30, 2015, and December 31, 2014, was 7.60%, 6.79% and 9.54%, respectively. Excluding loans held for sale, the weighted average levered return on commercial real estate debt and preferred equity was 9.23% and 9.31% at December 31, 2015 and September 30, 2015, respectively. The weighted average levered return on investments in commercial real estate, excluding real estate held-for-sale, as of December 31, 2015, September 30, 2015, and December 31, 2014, was 10.59%, 11.36% and 12.98%, respectively.

During the fourth quarter, the Company originated or provided additional funding on pre-existing commercial real estate debt commitments totaling $412.8 million with a weighted average coupon of 3.70%, of which $280.0 million ($278.6 million net of unamortized origination fees) is held for sale at December 31, 2015. During the quarter, the Company received cash from its commercial real estate investments of $578.6 million from loan sales, partial paydowns, prepayments and maturities with a weighted average coupon of 3.24%. During the quarter, the Company, through joint venture arrangements, acquired two retail properties and a multifamily property for a combined gross purchase price of $244.7 million and a net equity investment for $76.6 million. The Company also acquired AAA-rated commercial mortgage-backed securities during the quarter for a gross purchase price of $43.0 million and a net equity investment for $7.3 million. During the quarter, the Company grew its corporate debt portfolio by $63.5 million.

At December 31, 2015, September 30, 2015, and December 31, 2014, residential and commercial credit assets (including loans held for sale) comprised 23%, 22% and 11% of stockholders’ equity.

Capital and Funding

At December 31, 2015, total stockholders’ equity was $11.9 billion. Leverage at December 31, 2015, September 30, 2015, and December 31, 2014, was 5.1:1, 4.8:1 and 5.4:1, respectively. For purposes of calculating the Company’s leverage ratio, debt consists of repurchase agreements, other secured financing, Convertible Senior Notes, securitized debt, participation sold and mortgages payable. Securitized debt, participation sold and mortgages payable are non-recourse to the Company. Economic leverage, which excludes non-recourse debt and includes other forms of financing such as TBA dollar roll transactions, was 6.0:1 at December 31, 2015, compared to 5.8:1 at September 30, 2015, and 5.4:1 at December 31, 2014. At December 31, 2015, September 30, 2015, and December 31, 2014, the Company’s capital ratio, which represents the ratio of stockholders’ equity to total assets (inclusive of total market value of TBA derivatives), was 13.3%, 13.7%, and 15.1%, respectively. On a GAAP basis, the Company produced an annualized return (loss) on average equity for the quarters ended December 31, 2015, September 30, 2015, and December 31, 2014 of 22.15%, (20.18%), and (19.91%), respectively. On a normalized core earnings basis, the Company provided an annualized return on average equity for the quarters ended December 31, 2015, September 30, 2015, and December 31, 2014, of 10.30%, 9.67%, and 10.00%, respectively.

At December 31, 2015, September 30, 2015, and December 31, 2014, the Company had a common stock book value per share of $11.73, $11.99 and $13.10, respectively.

As previously announced, the Company’s Board authorized the repurchase of up to $1 billion of its outstanding common shares through December 31, 2016. Since the beginning of the fourth quarter 2015, the Company repurchased 23.1 million shares of its outstanding common stock for total proceeds of $217.0 million, representing an average price per share of $9.40, of which 11.9 million shares for total proceeds of $114.3 million had settled as of December 31, 2015.

At December 31, 2015, September 30, 2015, and December 31, 2014, the Company had outstanding $56.2 billion, $56.4 billion, and $71.4 billion of repurchase agreements, with weighted average remaining maturities of 151 days, 147 days, and 141 days, respectively, and with weighted average borrowing rates of 1.83%, 1.75%, and 1.62%, after giving effect to the Company’s interest rate swaps used to hedge cost of funds. During the quarters ended December 31, 2015, September 30, 2015, and December 31, 2014, the weighted average rate on repurchase agreements was 0.78%, 0.73%, and 0.60%, respectively.

The following table presents the principal balance and weighted average rate of repurchase agreements by maturity at December 31, 2015:

        Maturity     Principal Balance     Weighted Average Rate (dollars in thousands) Within 30 days $ 20,467,487 0.69 % 30 to 59 days 8,023,209 0.74 % 60 to 89 days 4,125,426 0.74 % 90 to 119 days 4,846,580 0.60 % Over 120 days(1)   18,768,158     1.33 % Total $ 56,230,860     0.90 %   (1)   Approximately 14% of the total repurchase agreements have a remaining maturity over 1 year.  

The following table presents the principal balance, weighted average rate and weighted average days to maturity on outstanding debt at December 31, 2015:

      Weighted Average Principal Balance   Rate  

Days to Maturity (3)

 

(dollars in thousands)

Repurchase agreements $ 56,230,860 0.90 %   151 Other secured financing (1) 1,845,048 0.59 % 1,423 Securitized debt of consolidated VIEs (2) 2,536,473 0.78 % 2,537 Participation sold (2) 13,137 5.58 % 487 Mortgages payable (2)   338,444 4.16 % 3,155 Total indebtedness $ 60,963,962       (1)   Represents advances from the Federal Home Loan Bank of Des Moines. (2) Non-recourse to the Company. (3) Determined based on estimated weighted-average lives of the underlying debt instruments.  

Hedge Portfolio

At December 31, 2015, the Company had outstanding interest rate swaps with a net notional amount of $30.2 billion. Changes in the unrealized gains or losses on the interest rate swaps are reflected in the Company’s Consolidated Statements of Comprehensive Income (Loss). The Company enters into interest rate swaps to mitigate the risk of rising interest rates that affect the Company’s cost of funds or its dollar roll transactions. As of December 31, 2015, the swap portfolio, excluding forward starting swaps, had a weighted average pay rate of 2.26%, a weighted average receive rate of 0.53% and a weighted average maturity of 7.02 years.

The following table summarizes certain characteristics of the Company’s interest rate swaps at December 31, 2015:

             

 

 

Weighted

Weighted

Weighted

 

Average Pay

Average Receive

Average Years

Maturity

 

Current Notional (1)

 

Rate(2)(3)

 

Rate (2)

 

to Maturity (2)

(dollars in thousands) 0 - 3 years $ 3,240,436 1.85 % 0.36 % 1.80 3 - 6 years 11,675,000 1.82 % 0.55 % 4.25 6 - 10 years 11,635,250 2.44 % 0.57 % 7.92 Greater than 10 years   3,634,400   3.70 %   0.43 %   19.37 Total / Weighted Average $ 30,185,086   2.26 %   0.53 %   7.02 (1)   Notional amount includes $0.5 billion in forward starting pay fixed swaps, which settle in January 2016. (2) Excludes forward starting swaps. (3) Weighted average fixed rate on forward starting pay fixed swaps was 1.44%.  

The Company enters into U.S. Treasury and Eurodollar futures contracts to hedge a portion of its interest rate risk. The following table summarizes outstanding futures positions as of December 31, 2015:

        Notional - Long Notional - Short

Weighted Average

Positions   Positions  

Years to Maturity

(dollars in thousands) 2-year swap equivalent Eurodollar contracts $ - $ (7,000,000 ) 2.00 U.S. Treasury futures - 5 year - (1,847,200 ) 4.42 U.S. Treasury futures - 10 year and greater   -     (655,600 )   6.92 Total $ -   $ (9,502,800 )   2.81  

At December 31, 2015, September 30, 2015, and December 31, 2014, the Company’s hedge ratio was 57%, 58% and 48%, respectively. Our hedge ratio measures total notional balances of interest rate swaps, interest rate swaptions and futures relative to repurchase agreements and TBA notional outstanding.

Dividend Declarations

Common dividends declared for each of the quarters ended December 31, 2015, September 30, 2015, and December 31, 2014 were $0.30 per common share. The annualized dividend yield on the Company’s common stock for the quarter ended December 31, 2015, based on the December 31, 2015 closing price of $9.38, was 12.79%, compared to 12.16% for the quarter ended September 30, 2015, and 11.10% for the quarter ended December 31, 2014.

Key Metrics

The following table presents key metrics of the Company’s portfolio, liabilities and hedging positions, and performance as of and for the quarters ended December 31, 2015, September 30, 2015, and December 31, 2014:

        December 31, 2015 September 30, 2015 December 31, 2014

Portfolio Related Metrics:

Fixed-rate Investment Securities as a percentage of total Residential Investment Securities 93% 93% 95% Adjustable-rate and floating-rate Investment Securities as a percentage of total Investment Securities 7% 7% 5% Weighted average experienced CPR, for the period 9.7% 11.5% 8.4% Weighted average projected long-term CPR, as of period end 8.8% 9.2% 8.7% Weighted average levered return on commercial real estate debt and preferred equity at period-end (1) 7.60% 6.79% 9.54% Weighted average levered return on investments in commercial real estate at period-end (2) 10.59% 11.36% 12.98%  

Liabilities and Hedging Metrics:

Weighted average days to maturity on repurchase agreements outstanding at period-end 151 147 141 Hedge ratio (3) 57% 58% 48% Weighted average pay rate on interest rate swaps at period-end (4) 2.26% 2.26% 2.49% Weighted average receive rate on interest rate swaps at period-end (4) 0.53% 0.42% 0.22% Weighted average net rate on interest rate swaps at period-end (4) 1.73% 1.84% 2.27% Leverage at period-end (5) 5.1:1 4.8:1 5.4:1 Economic leverage at period-end (6) 6.0:1 5.8:1 5.4:1 Capital ratio at period-end 13.3% 13.7% 15.1%  

Performance Related Metrics:

Book value per common share $11.73 $11.99 $13.10 GAAP net income (loss) per common share $0.69 ($0.68) ($0.71) Core earnings per common share $0.33 $0.21 $0.30 Normalized core earnings per common share $0.31 $0.30 $0.33 Annualized return (loss) on average equity 22.15% (20.18%) (19.91%) Annualized core return on average equity 10.89% 7.00% 9.05% Annualized normalized core return on average equity 10.30% 9.67% 10.00% Net interest margin 1.80% 1.27% 1.59% Normalized net interest margin 1.71% 1.65% 1.74% Average yield on interest earning assets (7) 3.15% 2.48% 3.04% Normalized average yield on interest earning assets (7) 3.05% 2.94% 3.19% Average cost of interest bearing liabilities (8) 1.68% 1.65% 1.69% Net interest spread 1.47% 0.83% 1.35% Normalized net interest spread 1.37% 1.29% 1.50% (1)   Includes loans held for sale. Excluding loans held for sale, the weighted average levered return on commercial real estate debt and preferred equity was 9.23% and 9.31% at December 31, 2015 and September 30, 2015, respectively. (2) Excludes real estate held-for-sale. (3) Measures total notional balances of interest rate swaps, interest rate swaptions and futures relative to repurchase agreements and TBA notional outstanding. (4) Excludes forward starting swaps. (5) Debt consists of repurchase agreements, other secured financing, Convertible Senior Notes, securitized debt, participation sold and mortgages payable. Securitized debt, participation sold and mortgages payable are non-recourse to the Company. (6) Computed as the sum of recourse debt, TBA derivative notional outstanding and net forward purchases of investments divided by total equity. (7) Average interest earning assets reflects the average amortized cost of our investments during the period. (8) Includes interest expense on interest rate swaps used to hedge cost of funds.  

Other Information

Annaly’s principal business objectives are to generate net income for distribution to its shareholders from its investments and capital preservation. Annaly is a Maryland corporation that has elected to be taxed as a real estate investment trust (“REIT”). Annaly is managed and advised by Annaly Management Company LLC.

The Company prepares a supplement to provide additional quarterly information for the benefit of its shareholders. The supplement can be found at the Company’s website in the Investors section under Investor Presentations.

Conference Call

The Company will hold the fourth quarter 2015 earnings conference call on February 25, 2016 at 10:00 a.m. Eastern Time. The number to call is 888-317-6003 for domestic calls and 412-317-6061 for international calls. The conference passcode is 3130649. There will also be an audio webcast of the call on www.annaly.com. The replay of the call is available for one week following the conference call. The replay number is 877-344-7529 for domestic calls and 412-317-0088 for international calls and the conference passcode is 10080365. If you would like to be added to the e-mail distribution list, please visit www.annaly.com, click on Investor Relations, then select Email Alerts and complete the email notification form.

This news release and our public documents to which we refer contain or incorporate by reference certain forward-looking statements which are based on various assumptions (some of which are beyond our control) and may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "anticipate," "continue," or similar terms or variations on those terms or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, changes in interest rates; changes in the yield curve; changes in prepayment rates; the availability of mortgage-backed securities and other securities for purchase; the availability of financing and, if available, the terms of any financings; changes in the market value of our assets; changes in business conditions and the general economy; our ability to grow our commercial business; our ability to grow our residential mortgage credit business; credit risks related to our investments in credit risk transfer securities, residential mortgage-backed securities and related residential mortgage credit assets, commercial real estate assets and corporate debt; our ability to consummate any contemplated investment opportunities; changes in government regulations affecting our business; our ability to maintain our qualification as a REIT for federal income tax purposes; and our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended. For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see "Risk Factors" in our most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q. We do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

        ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (dollars in thousands, except per share data)        

December 31,

September 30,

June 30, March 31,

December 31,

2015

2015 2015 2015

2014 (1)

(Unaudited)   (Unaudited)   (Unaudited)   (Unaudited)     ASSETS Cash and cash equivalents $ 1,769,258 $ 2,237,423 $ 1,785,158 $ 1,920,326 $ 1,741,244 Investments, at fair value: Agency mortgage-backed securities 65,718,224 65,806,640 67,605,287 69,388,001 81,565,256 Agency debentures 152,038 413,115 429,845 995,408 1,368,350 Credit risk transfer securities 456,510 330,727 214,130 108,337 - Non-Agency mortgage-backed securities 906,722 490,037 - - - Commercial real estate debt investments (2) 2,911,828 2,881,659 2,812,824 1,515,903 - Investment in affiliate - - 123,343 141,246 143,045 Commercial real estate debt and preferred equity, held for investment (3) 1,348,817 1,316,595 1,332,955 1,498,406 1,518,165 Loans held for sale 278,600 476,550 - - - Investments in commercial real estate 535,946 301,447 216,800 207,209 210,032 Corporate debt 488,508 424,974 311,640 227,830 166,464 Reverse repurchase agreements - - - 100,000 100,000 Interest rate swaps, at fair value 19,642 39,295 30,259 25,908 75,225 Other derivatives, at fair value 22,066 87,516 38,074 113,503 5,499 Receivable for investments sold 121,625 127,571 247,361 2,009,937 1,010,094 Accrued interest and dividends receivable 231,336 228,169 234,006 247,801 278,489 Receivable for investment advisory income - 3,992 10,589 10,268 10,402 Other assets 119,422 67,738 48,229 34,430 30,486 Goodwill 71,815 71,815 71,815 94,781 94,781 Intangible assets, net   38,536       33,424       33,365       36,383       37,835   Total assets   $ 75,190,893     $ 75,338,687     $ 75,545,680     $ 78,675,677     $ 88,355,367   LIABILITIES AND STOCKHOLDERS’ EQUITY Liabilities: Repurchase agreements $ 56,230,860 $ 56,449,364 $ 57,459,552 $ 60,477,378 $ 71,361,926 Other secured financing 1,845,048 359,970 203,200 90,000 - Convertible Senior Notes - - - 749,512 845,295 Securitized debt of consolidated VIEs (4) 2,540,711 2,553,398 2,610,974 1,491,829 260,700 Participation sold 13,286 13,389 13,490 13,589 13,693 Mortgages payable 334,707 166,697 146,359 146,470 146,553 Interest rate swaps, at fair value 1,677,571 2,160,350 1,328,729 2,025,170 1,608,286 Other derivatives, at fair value 49,963 113,626 40,539 61,778 8,027 Dividends payable 280,779 284,348 284,331 284,310 284,293 Payable for investments purchased 107,115 744,378 673,933 5,205 264,984 Accrued interest payable 151,843 145,554 131,629 155,072 180,501 Accounts payable and other liabilities   53,088       63,280       58,139       50,774       47,328   Total liabilities   63,284,971       63,054,354       62,950,875       65,551,087       75,021,586   Stockholders’ Equity:

7.875% Series A Cumulative Redeemable Preferred Stock:

7,412,500 authorized, issued and outstanding

177,088 177,088 177,088 177,088 177,088

7.625% Series C Cumulative Redeemable Preferred Stock

12,650,000 authorized, 12,000,000 issued and outstanding

290,514 290,514 290,514 290,514 290,514

7.50% Series D Cumulative Redeemable Preferred Stock:

18,400,000 authorized, issued and outstanding 445,457 445,457 445,457 445,457 445,457

Common stock, par value $0.01 per share, 1,956,937,500 authorized,

935,929,561, 947,826,176, 947,768,496, 947,698,431, and 947,643,079

issued and outstanding, respectively

9,359 9,478 9,478 9,477 9,476 Additional paid-in capital 14,675,768 14,789,320 14,788,677 14,787,117 14,786,509 Accumulated other comprehensive income (loss) (377,596 ) 262,855 (354,965 ) 773,999 204,883 Accumulated deficit   (3,324,616 )     (3,695,884 )     (2,766,250 )     (3,364,147 )     (2,585,436 ) Total stockholders’ equity 11,895,974 12,278,828 12,589,999 13,119,505 13,328,491   Noncontrolling interest   9,948       5,505       4,806       5,085       5,290   Total equity   11,905,922       12,284,333       12,594,805       13,124,590       13,333,781   Total liabilities and equity $ 75,190,893     $ 75,338,687     $ 75,545,680     $ 78,675,677     $ 88,355,367   (1)   Derived from the audited consolidated financial statements at December 31, 2014. (2) Includes senior securitized commercial mortgage loans of consolidated VIEs with a carrying value of $2.6 billion, $2.6 billion, $2.6 billion and $1.4 billion at December 31, 2015, September 30, 2015, June 30, 2015 and March 31, 2015, respectively. (3) Includes senior securitized commercial mortgage loans of consolidated VIE with a carrying value of $262.7 million, $314.9 million, $361.2 million, $361.2 million, and $398.6 million at December 31, 2015, September 30, 2015, June 30, 2015, March 31, 2015 and December 31, 2014, respectively. (4) Includes securitized debt of consolidated VIEs carried at fair value of $2.4 billion, $2.4 billion, $2.4 billion and $1.3 billion at December 31, 2015, September 30, 2015, June 30, 2015 and March 31, 2015, respectively.     ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (dollars in thousands, except per share data)             For the quarters ended December 31, September 30, June 30, March 31, December 31, 2015   2015   2015   2015   2014 Net interest income: Interest income $ 576,580 $ 450,726 $ 624,277 $ 519,114 $ 648,088 Interest expense   118,807     110,297     113,072     129,420     134,512   Net interest income   457,773     340,429     511,205     389,694     513,576   Realized and unrealized gains (losses): Realized gains (losses) on interest rate swaps(1) (159,487 ) (162,304 ) (144,465 ) (158,239 ) (174,908 ) Realized gains (losses) on termination of interest rate swaps - - - (226,462 ) - Unrealized gains (losses) on interest rate swaps   463,126     (822,585 )   700,792     (466,202 )   (873,468 ) Subtotal   303,639     (984,889 )   556,327     (850,903 )   (1,048,376 ) Net gains (losses) on disposal of investments (7,259 ) (7,943 ) 3,833 62,356 3,420 Net gains (losses) on trading assets 42,584 108,175 (114,230 ) (6,906 ) (57,454 )

Net unrealized gains (losses) on financial instruments measured at fair value

through earnings

(62,703 ) (24,501 ) 17,581 (33,546 ) (29,520 ) Impairment of goodwill   -     -     (22,966 )   -     -   Subtotal   (27,378 )   75,731     (115,782 )   21,904     (83,554 ) Total realized and unrealized gains (losses)   276,261     (909,158 )   440,545     (828,999 )   (1,131,930 ) Other income (loss): Investment advisory income - 3,780 10,604 10,464 10,858 Dividend income from affiliate - - 4,318 4,318 4,048 Other income (loss)   (10,447 )   (13,455 )   (22,275 )   (1,024 )   3,421   Total other income (loss)   (10,447 )   (9,675 )   (7,353 )   13,758     18,327   General and administrative expenses: Compensation and management fee 37,193 37,450 37,014 38,629 38,734 Other general and administrative expenses   10,643     12,007     14,995     12,309     19,720   Total general and administrative expenses   47,836     49,457     52,009     50,938     58,454   Income (loss) before income taxes 675,751 (627,861 ) 892,388 (476,485 ) (658,481 )   Income taxes   6,085     (370 )   (7,683 )   14     (209 ) Net income (loss) 669,666 (627,491 ) 900,071 (476,499 ) (658,272 ) Net income (loss) attributable to noncontrolling interest   (373 )   (197 )   (149 )   (90 )   (196 ) Net income (loss) attributable to Annaly 670,039 (627,294 ) 900,220 (476,409 ) (658,076 ) Dividends on preferred stock   17,992     17,992     17,992     17,992     17,992   Net income (loss) available (related) to common stockholders $ 652,047   $ (645,286 ) $ 882,228   $ (494,401 ) $ (676,068 ) Net income (loss) per share available (related) to common stockholders: Basic $ 0.69   $ (0.68 ) $ 0.93   $ (0.52 ) $ (0.71 ) Diluted $ 0.69   $ (0.68 ) $ 0.93   $ (0.52 ) $ (0.71 ) Weighted average number of common shares outstanding: Basic   945,072,058     947,795,500     947,731,493     947,669,831     947,615,793   Diluted   945,326,098     947,795,500     947,929,762     947,669,831     947,615,793   Net income (loss) $ 669,666   $ (627,491 ) $ 900,071   $ (476,499 ) $ (658,272 ) Other comprehensive income (loss): Unrealized gains (losses) on available-for-sale securities (648,106 ) 609,725 (1,125,043 ) 631,472 1,175,864 Reclassification adjustment for net (gains) losses included in net income (loss)   7,655     8,095     (3,921 )   (62,356 )   (3,161 ) Other comprehensive income (loss)   (640,451 )   617,820     (1,128,964 )   569,116     1,172,703   Comprehensive income (loss) 29,215 (9,671 ) (228,893 ) 92,617 514,431 Comprehensive income (loss) attributable to noncontrolling interest   (373 )   (197 )   (149 )   (90 )   (196 ) Comprehensive income (loss) attributable to Annaly $ 29,588   $ (9,474 ) $ (228,744 ) $ 92,707   $ 514,627     (1) Interest expense related to the Company’s interest rate swaps is recorded in Realized gains (losses) on interest rate swaps on the Consolidated Statements of Comprehensive Income (Loss).                 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (dollars in thousands, except per share data)   For the years ended December 31, December 31, 2015

2014 (2)

(Unaudited)     Net interest income: Interest income $ 2,170,697 $ 2,632,398 Interest expense   471,596       512,659   Net interest income   1,699,101       2,119,739   Realized and unrealized gains (losses): Realized gains (losses) on interest rate swaps(1) (624,495 ) (825,360 ) Realized gains (losses) on termination of interest rate swaps (226,462 ) (779,333 ) Unrealized gains (losses) on interest rate swaps   (124,869 )     (948,755 ) Subtotal   (975,826 )     (2,553,448 ) Net gains (losses) on disposal of investments 50,987 93,716 Net gains (losses) on trading assets 29,623 (245,495 )

Net unrealized gains (losses) on financial instruments measured at fair value through earnings

(103,169 ) (86,172 ) Impairment of goodwill   (22,966 )     -   Subtotal   (45,525 )     (237,951 ) Total realized and unrealized gains (losses)   (1,021,351 )     (2,791,399 ) Other income (loss): Investment advisory income 24,848 31,343 Dividend income from affiliate 8,636 25,189 Other income (loss)   (47,201 )     (12,488 ) Total other income (loss)   (13,717 )     44,044   General and administrative expenses: Compensation and management fee 150,286 155,560 Other general and administrative expenses   49,954       53,778   Total general and administrative expenses   200,240       209,338   Income (loss) before income taxes 463,793 (836,954 ) Income taxes   (1,954 )     5,325   Net income (loss) 465,747 (842,279 ) Net income (loss) attributable to noncontrolling interest   (809 )     (196 ) Net income (loss) attributable to Annaly 466,556 (842,083 ) Dividends on preferred stock   71,968       71,968   Net income (loss) available (related) to common stockholders $ 394,588     $ (914,051 ) Net income (loss) per share available (related) to common stockholders: Basic $ 0.42     $ (0.96 ) Diluted $ 0.42     $ (0.96 ) Weighted average number of common shares outstanding: Basic   947,062,099       947,539,294   Diluted   947,276,742       947,539,294   Net income (loss) $ 465,747     $ (842,279 ) Other comprehensive income (loss): Unrealized gains (losses) on available-for-sale securities (531,952 ) 3,048,291 Reclassification adjustment for net (gains) losses included in net income (loss)   (50,527 )     (94,475 ) Other comprehensive income (loss)   (582,479 )     2,953,816   Comprehensive income (loss) (116,732 ) 2,111,537 Comprehensive income (loss) attributable to noncontrolling interest   (809 )     (196 ) Comprehensive income (loss) attributable to Annaly $ (115,923 )   $ 2,111,733   (1)   Interest expense related to the Company’s interest rate swaps is recorded in Realized gains (losses) on interest rate swaps on the Consolidated Statements of Comprehensive Income (Loss). (2) Derived from the audited consolidated financial statements at December 31, 2014.

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Annaly Capital Management, Inc.Investor Relations1-888-8Annalywww.annaly.com