Repurchase agreements and reverse repurchase agreements with the same counterparty and the same maturity are presented net in the Consolidated Statements of Financial Condition when the terms of the agreements permit netting. The following table summarizes the gross amounts of reverse repurchase agreements and repurchase agreements, amounts offset in accordance with netting arrangements and net
amounts of repurchase agreements and reverse repurchase agreements as presented in the Consolidated Statements of Financial Condition as of March 31, 2016 and December 31, 2015
.
Refer to "Derivative Instruments" footnote for information related to the effect of netting arrangements on the Company's derivative instruments.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The table below summarizes fair value information about our derivative assets and liabilities as of March 31, 2016 and December 31, 2015:
Derivatives Instruments
|
Balance Sheet Location
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Assets:
|
|
|
(dollars in thousands)
|
|
Interest rate swaps
|
Interest rate swaps, at fair value
|
|
$
|
93,312
|
|
|
$
|
19,642
|
|
TBA derivatives
|
Other derivatives, at fair value
|
|
|
76,732
|
|
|
|
9,622
|
|
Futures contracts
|
Other derivatives, at fair value
|
|
|
717
|
|
|
|
12,444
|
|
|
|
|
$
|
170,761
|
|
|
$
|
41,708
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
Interest rate swaps, at fair value
|
|
$
|
2,782,961
|
|
|
$
|
1,677,571
|
|
TBA derivatives
|
Other derivatives, at fair value
|
|
|
-
|
|
|
|
17,185
|
|
Futures contracts
|
Other derivatives, at fair value
|
|
|
69,171
|
|
|
|
32,778
|
|
|
|
|
$
|
2,852,132
|
|
|
$
|
1,727,534
|
|
The following table summarizes certain characteristics of the Company's interest rate swaps at
March 31, 2016
and December 31, 2015:
March 31, 2016
|
|
Maturity
|
|
Current Notional
(1)
|
|
|
Weighted Average Pay Rate
(2) (3)
|
|
|
Weighted Average Receive Rate
(2)
|
|
|
Weighted Average Years to Maturity
(2)
|
|
(dollars in thousands)
|
|
0 - 3 years
|
|
$
|
4,290,419
|
|
|
|
1.79
|
%
|
|
|
0.47
|
%
|
|
|
1.87
|
|
3 - 6 years
|
|
|
11,925,000
|
|
|
|
1.87
|
%
|
|
|
0.73
|
%
|
|
|
4.22
|
|
6 - 10 years
|
|
|
10,227,550
|
|
|
|
2.49
|
%
|
|
|
0.76
|
%
|
|
|
7.88
|
|
Greater than 10 years
|
|
|
3,434,400
|
|
|
|
3.54
|
%
|
|
|
0.59
|
%
|
|
|
18.64
|
|
Total / Weighted Average
|
|
$
|
29,877,369
|
|
|
|
2.26
|
%
|
|
|
0.69
|
%
|
|
|
6.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Maturity
|
|
Current Notional
(1)
|
|
|
Weighted Average Pay Rate
(2) (3)
|
|
|
Weighted Average Receive Rate
(2)
|
|
|
Weighted Average Years 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) There were no forward starting pay fixed swaps as of March 31, 2016. Notional amount includes $500.0 million in forward starting pay fixed swaps as of December 31, 2015.
|
(2) Excludes forward starting swaps.
|
(3) There were no forward starting pay fixed swaps as of March 31, 2016. Weighted average fixed rate on forward starting pay fixed swaps was 1.44% as of December 31, 2015.
|
|
There were no swaptions outstanding as of March 31, 2016 and December 31, 2015, respectively.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The following table summarizes certain characteristics of the Company's TBA derivatives as of
March 31, 2016 and December 31, 2015
:
March 31, 2016
|
|
Purchase and sale contracts for derivative TBAs
|
|
Notional
|
|
|
Implied Cost Basis
|
|
|
Implied Market Value
|
|
|
Net Carrying Value
|
|
(dollars in thousands)
|
|
Purchase contracts
|
|
$
|
14,273,000
|
|
|
$
|
14,847,792
|
|
|
$
|
14,924,524
|
|
|
$
|
76,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
The following table summarizes certain characteristics of the Company's futures derivatives as of
March 31, 2016 and December 31, 2015
:
|
|
March 31, 2016
|
|
|
|
Notional - Long Positions
|
|
|
Notional - Short Positions
|
|
|
Weighted Average Years to Maturity
|
|
|
|
(dollars in thousands)
|
|
|
|
|
2-year swap equivalent Eurodollar contracts
|
|
$
|
-
|
|
|
$
|
(4,375,000
|
)
|
|
|
2.00
|
|
U.S. Treasury futures - 5 year
|
|
|
-
|
|
|
|
(1,847,200
|
)
|
|
|
4.42
|
|
U.S. Treasury futures - 10 year and greater
|
|
|
-
|
|
|
|
(655,600
|
)
|
|
|
6.75
|
|
Total
|
|
$
|
-
|
|
|
$
|
(6,877,800
|
)
|
|
|
3.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Notional - Long Positions
|
|
|
Notional - Short Positions
|
|
|
Weighted Average 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
|
|
The Company presents derivative contracts on a gross basis on the Consolidated Statements of Financial Condition. Derivative contracts may contain legally enforceable provisions that allow for netting or setting off receivables and payables with each counterparty.
The following tables present information about derivative assets and liabilities that are subject to such provisions and can potentially be offset on our Consolidated Statements of Financial Condition as of
March 31, 2016 and December 31, 2015
, respectively.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
March 31, 2016
|
|
|
|
|
Amounts Eligible for Offset
|
|
|
|
|
|
|
Gross Amounts
|
|
|
Financial Instruments
|
|
|
Cash Collateral
|
|
|
Net Amounts
|
|
Assets:
|
|
(dollars in thousands)
|
|
Interest rate swaps, at fair value
|
|
$
|
93,312
|
|
|
$
|
(93,312
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
TBA derivatives, at fair value
|
|
|
76,732
|
|
|
|
-
|
|
|
|
-
|
|
|
|
76,732
|
|
Futures contracts, at fair value
|
|
|
717
|
|
|
|
(110
|
)
|
|
|
-
|
|
|
|
607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps, at fair value
|
|
$
|
2,782,961
|
|
|
$
|
(93,312
|
)
|
|
$
|
(1,617,530
|
)
|
|
$
|
1,072,119
|
|
TBA derivatives, at fair value
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Futures contracts, at fair value
|
|
|
69,171
|
|
|
|
(110
|
)
|
|
|
(69,061
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
Amounts Eligible for Offset
|
|
|
|
|
|
|
|
Gross Amounts
|
|
|
Financial Instruments
|
|
|
Cash Collateral
|
|
|
Net Amounts
|
|
Assets:
|
|
(dollars in thousands)
|
|
Interest rate swaps, at fair value
|
|
$
|
19,642
|
|
|
$
|
(18,040
|
)
|
|
$
|
-
|
|
|
$
|
1,602
|
|
TBA derivatives, at fair value
|
|
|
9,622
|
|
|
|
(7,367
|
)
|
|
|
-
|
|
|
|
2,255
|
|
Futures contracts, at fair value
|
|
|
12,443
|
|
|
|
(10,868
|
)
|
|
|
-
|
|
|
|
1,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
Interest rate swaps, at fair value
|
|
$
|
1,677,571
|
|
|
$
|
(18,040
|
)
|
|
$
|
(913,576
|
)
|
|
$
|
745,955
|
|
TBA derivatives, at fair value
|
|
|
17,185
|
|
|
|
(7,367
|
)
|
|
|
-
|
|
|
|
9,818
|
|
Futures contracts, at fair value
|
|
|
32,778
|
|
|
|
(10,868
|
)
|
|
|
(21,910
|
)
|
|
|
-
|
|
The effect of interest rate swaps on the Consolidated Statements of Comprehensive Income (Loss) is as follows:
|
|
Location on Consolidated Statements of Comprehensive Income (Loss)
|
|
|
|
Realized Gains (Losses) on Interest Rate Swaps
(1)
|
|
|
Realized Gains (Losses) on Termination of Interest Rate Swaps
|
|
|
Unrealized Gains (Losses) on Interest Rate Swaps
|
|
|
|
(dollars in thousands)
|
|
Quarters Ended:
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
$
|
(147,475
|
)
|
|
$
|
-
|
|
|
$
|
(1,031,720
|
)
|
March 31, 2015
|
|
$
|
(158,239
|
)
|
|
$
|
(226,462
|
)
|
|
$
|
(466,202
|
)
|
(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).
The effect of other derivative contracts on the Company's Consolidated Statements of Comprehensive Income (Loss) is as follows:
Quarter Ended March 31, 2016
|
|
Derivative Instruments
|
|
Realized Gain (Loss)
|
|
|
Unrealized Gain (Loss)
|
|
|
Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Trading Assets
|
|
(dollars in thousands)
|
|
Net TBA derivatives
(1)
|
|
$
|
219,993
|
|
|
$
|
84,295
|
|
|
$
|
304,288
|
|
Net interest rate swaptions
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Futures
|
|
$
|
(130,994
|
)
|
|
$
|
(48,120
|
)
|
|
$
|
(179,114
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
125,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31, 2015
|
|
Derivative Instruments
|
|
Realized Gain (Loss)
|
|
|
Unrealized Gain (Loss)
|
|
|
Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Trading Assets
|
|
(dollars in thousands)
|
|
Net TBA derivatives
(1)
|
|
$
|
(55,644
|
)
|
|
$
|
117,188
|
|
|
$
|
61,544
|
|
Net interest rate swaptions
|
|
$
|
(21,891
|
)
|
|
$
|
17,083
|
|
|
$
|
(4,808
|
)
|
Futures
|
|
$
|
(5,506
|
)
|
|
$
|
(58,126
|
)
|
|
$
|
(63,632
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
(6,896
|
)
|
(1) Includes options on TBA contracts.
Certain of the Company's derivative contracts are subject to International Swaps and Derivatives
Association Master Agreements or other similar agreements which may contain provisions that
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
grant counterparties certain rights with respect to the applicable agreement upon the occurrence of certain events such as (i) a decline in stockholders' equity in excess of specified thresholds or dollar amounts over set periods of time, (ii) the Company's failure to maintain its REIT status, (iii) the Company's failure to comply with limits on the amount of leverage, and (iv) the Company's stock being delisted from the New York Stock Exchange (NYSE). Upon the occurrence of any one of items (i) through (iv), or another default under the agreement, the counterparty to the applicable agreement has a right to terminate the agreement in accordance with its provisions. The aggregate fair value of all derivative instruments with the aforementioned features that are in a net liability position at March 31, 2016 was approximately $2.6 billion, which represents the maximum amount the Company would be required to pay upon termination. This amount is fully collateralized.
10.
CONVERTIBLE SENIOR NOTES
In 2010, the Company issued $600.0 million in aggregate principal amount of its 4% Convertible Senior Notes for net proceeds of approximately $582.0 million. In 2012, the Company repurchased $492.5 million in aggregate principal amount of its 4% Convertible Senior Notes. In February 2015, the 4% Convertible Senior Notes matured and the Company repaid the remaining 4% Convertible Senior Notes for the face amount of $107.5 million.
In May 2012, the Company issued $750.0 million in aggregate principal amount of its 5% Convertible Senior Notes due 2015 for net proceeds of approximately $727.5 million. In May 2015, the 5% Convertible Senior Notes matured and the Company repaid the 5% Convertible Senior Notes for the face amount of $750.0 million.
11.
COMMON STOCK AND PREFERRED STOCK
The Company's authorized shares of capital stock, par value of $0.01 per share, consists of 1,956,937,500 shares classified as common stock, 7,412,500 shares classified as 7.875% Series A Cumulative Redeemable Preferred Stock, 4,600,000 shares classified as 6.00% Series B Cumulative Convertible Preferred Stock, 12,650,000 shares classified as 7.625% Series C Cumulative Redeemable Preferred Stock and 18,400,000 shares classified as 7.50% Series D Cumulative Redeemable Preferred Stock.
(A) Common Stock
At March 31, 2016 and December 31, 2015, the Company had issued and outstanding 924,853,133 and 935,929,561 shares of common stock, respectively, with a par value of $0.01 per share.
No options were exercised during the three months ended March 31, 2016 and 2015.
During the quarter ended March 31, 2016, the Company raised $0.5 million, by issuing 54,000 shares, through the Direct Purchase and Dividend Reinvestment Program. During the quarter ended March 31, 2015, the Company raised $0.6 million, by issuing 53,000 shares, through the Direct Purchase and Dividend Reinvestment Program.
In August 2015, the Company announced that its board of directors ("Board") had authorized the repurchase of up to $1.0 billion of its outstanding common shares through December 31, 2016 ("Repurchase Program"). During the quarter ended March 31, 2016, the Company repurchased 11,132,226 shares of its common stock under the Repurchase Program for an aggregate amount of $102.7 million. All common shares purchased were part of a publicly announced plan in open-market transactions.
In March 2012, the Company entered into six separate Distribution Agency Agreements ("Distribution Agency Agreements") with each of Merrill Lynch; Pierce, Fenner & Smith Incorporated; Credit Suisse Securities (USA) LLC; Goldman, Sachs & Co.; J.P. Morgan Securities LLC; Morgan Stanley & Co. LLC; and RCap Securities, Inc. (together, the Agents). Pursuant to the terms of the Distribution Agency Agreements, the Company may sell from time to time through the Agents, as its sales agents, up to 125,000,000 shares of the Company's common stock. The Company did not make any sales under the Distribution Agency Agreements during the
quarters
ended March 31, 2016 and 2015.
(B) Preferred Stock
At March 31, 2016 and December 31, 2015, the Company had issued and outstanding 7,412,500 shares of Series A Cumulative Redeemable Preferred Stock ("Series A Preferred Stock"), with a par value of $0.01 per share and a liquidation preference of $25.00 per share plus accrued and unpaid dividends (whether or not declared). The Series A Preferred Stock is entitled to a dividend at a rate of 7.875% per year based on the $25.00 liquidation preference before the common stock is entitled to receive any dividends. The Series A Preferred Stock is redeemable at $25.00 per share plus accrued and unpaid dividends (whether or not declared)
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
exclusively at the Company's option commencing on April 5, 2009 (subject to the Company's right under limited circumstances to redeem the Series A Preferred Stock earlier in order to preserve its qualification as a REIT). Through March 31, 2016, the Company had declared and paid all required quarterly dividends on the Series A Preferred Stock.
At March 31, 2016 and December 31, 2015, the Company had issued and outstanding 12,000,000 shares of Series C Preferred Stock, with a par value of $0.01 per share and a liquidation preference of $25.00 per share plus accrued and unpaid dividends (whether or not declared). The Series C Preferred Stock is entitled to a dividend at a rate of 7.625% per year based on the $25.00 liquidation preference before the common stock is entitled to receive any dividends. The Series C Preferred Stock is redeemable at $25.00 per share plus accrued and unpaid dividends (whether or not declared) exclusively at the Company's option commencing on May 16, 2017 (subject to the Company's right under limited circumstances to redeem the Series C Preferred Stock earlier in order to preserve its qualification as a REIT or under limited circumstances related to a change of control of the Company). Through March 31, 2016, the Company had declared and paid all required quarterly dividends on the Series C Preferred Stock.
At March 31, 2016 and December 31, 2015, the Company had issued and outstanding 18,400,000 shares of Series D Preferred Stock, with a par value of $0.01 per share and a liquidation preference of $25.00 per share plus accrued and unpaid dividends (whether or not declared). The Series D Preferred Stock is entitled to a dividend at a rate of 7.50% per year based on the $25.00 liquidation preference before the common stock is entitled to receive any dividends. The Series D Preferred Stock is redeemable at $25.00 per share plus accrued and unpaid dividends (whether or not declared) exclusively at the Company's option commencing on September 13, 2017 (subject to the Company's right under limited circumstances to redeem the Series D Preferred Stock earlier in order to preserve its qualification as a REIT or under limited
circumstances related to a change of control of the Company). Through March 31, 2016, the Company had declared and paid all required quarterly dividends on the Series D Preferred Stock.
The 7.875% Series A Cumulative Redeemable Preferred Stock, 7.625% Series C Cumulative Redeemable Preferred Stock and 7.50% Series D Cumulative Redeemable Preferred Stock rank senior to the common stock of the Company.
(C) Distributions to Stockholders
During the
quarter
ended March 31, 2016, the Company declared dividends to common stockholders totaling $277.5 million, or $0.30 per common share which were paid to common stockholders on April 29, 2016. During the
quarter
ended March 31, 2016, the Company declared and paid dividends to Series A Preferred Stock stockholders totaling approximately $3.6 million, or $0.492 per preferred share, Series C Preferred Stock stockholders totaling approximately $5.7 million, or $0.477 per preferred share and Series D Preferred Stock stockholders totaling approximately $8.6 million, or $0.469 per preferred share.
During the
quarter
ended March 31, 2015, the Company declared dividends to common stockholders totaling $284.3 million, or $0.30 per common share which were paid to common stockholders on April 30, 2015. During the
quarter
ended March 31, 2015, the Company declared and paid dividends to Series A Preferred Stock stockholders totaling approximately $3.6 million, or $0.492 per preferred share, Series C Preferred Stock stockholders totaling approximately $5.7 million, or $0.477 per preferred share and Series D Preferred Stock stockholders totaling approximately $8.6 million, or $0.469 per preferred share.
12.
INTEREST INCOME AND INTEREST EXPENSE
The table below presents the components of the Company's interest income and interest expense for the quarters ended
March 31, 2016
and 2015.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
|
|
For the Quarters Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Interest income:
|
|
(dollars in thousands)
|
|
Residential Investment Securities
|
|
$
|
315,717
|
|
|
$
|
478,239
|
|
Commercial investment portfolio
(1)
|
|
|
70,187
|
|
|
|
40,336
|
|
Reverse repurchase agreements
|
|
|
2,239
|
|
|
|
539
|
|
Total interest income
|
|
|
388,143
|
|
|
|
519,114
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
|
132,891
|
|
|
|
102,748
|
|
Convertible Senior Notes
|
|
|
-
|
|
|
|
23,627
|
|
Securitized debt of consolidated VIEs
|
|
|
9,033
|
|
|
|
2,882
|
|
Participation sold
|
|
|
158
|
|
|
|
159
|
|
Other
|
|
|
5,365
|
|
|
|
4
|
|
Total interest expense
|
|
|
147,447
|
|
|
|
129,420
|
|
Net interest income
|
|
$
|
240,696
|
|
|
$
|
389,694
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes commercial real estate debt, preferred equity and corporate debt.
|
|
|
|
|
|
|
|
|
13.
GOODWILL
At March 31, 2016 and December 31, 2015, goodwill totaled $71.8 million.
14.
NET INCOME (LOSS) PER COMMON SHARE
The following table presents a reconciliation of net income (loss) and shares used in calculating basic and diluted net income (loss) per share for the quarters ended March 31, 2016
and 2015.
|
|
For the Quarters Ended
|
|
|
|
March 31, 2016
|
|
|
March 31, 2015
|
|
|
|
(dollars in thousands, except per share data)
|
|
Net income (loss)
|
|
$
|
(868,080
|
)
|
|
$
|
(476,499
|
)
|
Less: Net income (loss) attributable to noncontrolling interest
|
|
|
(162
|
)
|
|
|
(90
|
)
|
Net income (loss) attributable to Annaly
|
|
|
(867,918
|
)
|
|
|
(476,409
|
)
|
Less: Preferred stock dividends
|
|
|
17,992
|
|
|
|
17,992
|
|
Net income (loss) per share available (related) to common stockholders, prior to adjustment for dilutive potential common shares, if necessary
|
|
|
(885,910
|
)
|
|
|
(494,401
|
)
|
Add: Interest on Convertible Senior Notes, if dilutive
|
|
|
-
|
|
|
|
-
|
|
Net income (loss) available to common stockholders, as adjusted
|
|
$
|
(885,910
|
)
|
|
$
|
(494,401
|
)
|
Weighted average shares of common stock outstanding-basic
|
|
|
926,813,588
|
|
|
|
947,669,831
|
|
Add: Effect of stock awards and Convertible Senior Notes, if dilutive
|
|
|
-
|
|
|
|
-
|
|
Weighted average shares of common stock outstanding-diluted
|
|
|
926,813,588
|
|
|
|
947,669,831
|
|
Net income (loss) per share available (related) to common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.96
|
)
|
|
$
|
(0.52
|
)
|
Diluted
|
|
$
|
(0.96
|
)
|
|
$
|
(0.52
|
)
|
Options to purchase 1.1 million and 2.3 million shares of common stock were outstanding and considered anti-dilutive as their exercise price and option expense exceeded the average stock price for the quarters ended March 31, 2016 and 2015, respectively.
15.
LONG-TERM STOCK INCENTIVE PLAN
The Company adopted the 2010 Equity Incentive Plan (the "Plan"), which authorizes the Compensation Committee of the Board of Directors to grant options, stock appreciation rights, dividend equivalent rights, or other share-based awards, including restricted shares up to an aggregate of 25,000,000 shares, subject to adjustments as provided in the 2010 Equity Incentive Plan. The Company had previously adopted a long term stock incentive plan for executive officers, key employees and non-employee directors (the "Prior
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
Plan"). The Prior Plan authorized the Compensation Committee of the Board of Directors to grant awards, including non-qualified options as well as incentive stock options as defined under Section 422 of the Code. The Prior Plan authorized the granting of options or other awards for an aggregate of the greater of 500,000 shares or 9.5% of the diluted outstanding shares of the Company's common stock, up to a ceiling of 8,932,921 shares. No further awards will be made
under the Prior Plan, although existing awards remain effective.
Stock options were issued at the market price on the date of grant, subject to an immediate or four year vesting in four equal installments with a contractual term of 5 or 10 years.
The following table sets forth activity related to the Company's stock options awarded under the Plan:
|
|
For the Quarters Ended
|
|
|
|
March 31, 2016
|
|
|
March 31, 2015
|
|
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price
|
|
Options outstanding at the beginning of period
|
|
|
1,168,775
|
|
|
$
|
15.34
|
|
|
|
2,259,335
|
|
|
$
|
15.35
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(2,500
|
)
|
|
|
13.72
|
|
|
|
(8,799
|
)
|
|
|
14.80
|
|
Expired
|
|
|
(30,500
|
)
|
|
|
11.72
|
|
|
|
-
|
|
|
|
-
|
|
Options outstanding at the end of period
|
|
|
1,135,775
|
|
|
|
15.44
|
|
|
|
2,250,536
|
|
|
|
15.35
|
|
Options exercisable at the end of the period
|
|
|
1,135,775
|
|
|
$
|
15.44
|
|
|
|
2,250,536
|
|
|
$
|
15.35
|
|
The weighted average remaining contractual term was approximately 2.2 years and 2.8 years for stock options outstanding and exercisable as of
March 31, 2016
and 2015, respectively.
As of
March 31, 2016
and 2015, there was no unrecognized compensation cost related to nonvested share-based compensation awards.
16.
INCOME TAXES
For the quarter ended
March 31, 2016
the Company was qualified to be taxed as a REIT under Code Sections 856 through 860. As a REIT, the Company is not subject to federal income tax to the extent that it distributes its taxable income to its stockholders. To maintain qualification as a REIT, the Company must distribute at least 90% of its annual REIT taxable income to its stockholders and meet certain other requirements such as assets it may hold, income it may generate and its stockholder composition. It is generally the Company's policy to distribute 100% of its REIT taxable income. To the extent there is any undistributed REIT taxable income at the end of a year, the Company distributes such shortfall within the next year as permitted by the Code. For years prior to 2013, the Company retained the amount of taxable income attributable to certain employee remuneration deductions disallowed for tax purposes pursuant to Section 162(m) of the Code ("Section 162(m)"). As a result of the externalization of management effective as of July 1, 2013, the Company was not subject to the Section 162(m) disallowance for the 2013 tax year.
The state and local tax jurisdictions for which the Company is subject to tax-filing obligations recognize the Company's status as a REIT, and therefore, the Company generally does not pay income tax in such jurisdictions. The Company may, however, be subject to certain minimum state and local tax filing fees as well as certain excise, franchise or business taxes. The Company's TRSs are subject to federal, state and local taxes.
During the quarter ended
March 31, 2016
, the Company recorded an $837 thousand income tax benefit for income attributable to its TRSs. During the quarter ended
March 31, 2015
, the Company recorded $14 thousand of income tax expense for income attributable to its TRSs.
The Company's federal, state and local tax returns from 2012 and forward remain open for examination.
17.
LEASE COMMITMENTS AND CONTINGENCIES
Commitments
The Company had a non-cancelable lease for office space which commenced in May 2002 and expired in December 2014. In September 2014, the Company entered into a non-cancelable lease for office space which commenced in July 2014 and expires in September 2025. FIDAC has a lease for office space which commenced in October 2010 and expired in February 2016. The lease expense for the quarters ended
March 31, 2016 and 2015
was $0.8 million and $0.6 million, respectively. The Company's aggregate
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
future minimum lease payments totaled $35.4 million.
The following table details the lease payments.
Years Ending December 31,
|
|
Lease Commitments
|
|
|
|
(dollars in thousands)
|
|
2016 (remaining)
|
|
$
|
2,673
|
|
2017
|
|
|
3,565
|
|
2018
|
|
|
3,565
|
|
2019
|
|
|
3,565
|
|
2020
|
|
|
3,652
|
|
Later years
|
|
|
18,343
|
|
|
|
$
|
35,363
|
|
The Company had no material unfunded loan commitments as of March 31, 2016 and December 31, 2015.
Contingencies
From time to time, the Company is involved in various claims and legal actions arising in the ordinary course of business. There were no material contingencies as of March 31, 2016 and December 31, 2015.
18. RISK MANAGEMENT
The primary risks to the Company are liquidity, investment/market risk and credit risk. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond the Company's control. Changes in the general level of interest rates can affect net interest income, which is the difference between the interest income earned on Interest Earning Assets and the interest expense incurred in connection with the Interest Bearing Liabilities and hedges, by affecting the spread between the Interest Earning Assets and Interest Bearing Liabilities. Changes in the level of interest rates can also affect the value of the Interest Earning Assets and the Company's ability to realize gains from the sale of these assets. A decline in the value of the Interest Earning Assets pledged as collateral for borrowings under repurchase agreements and derivative contracts could result in the counterparties demanding additional collateral pledges or liquidation of some of the existing collateral to reduce borrowing levels.
The Company may seek to mitigate the potential financial impact by entering into interest rate agreements such as interest rate swaps, interest rate swaptions and other hedges.
Weakness in the mortgage market, the shape of the yield curve and changes in the expectations for the path and volatility of future interest rates may adversely affect the performance and market value of the Company's
investments. This could negatively impact the Company's book value. Furthermore, if many of the Company's lenders are unwilling or unable to provide additional financing, the Company could be forced to sell its Residential Investment Securities and commercial real estate investments at an inopportune time when prices are depressed. The Company has established policies and procedures for mitigating risks, including conducting scenario analyses and utilizing a range of hedging strategies.
The payment of principal and interest on the Freddie Mac and Fannie Mae Agency mortgage-backed securities, excluding
CRT
securities issued by Freddie Mac and Fannie Mae, are guaranteed by those respective agencies and the payment of principal and interest on Ginnie Mae Agency mortgage-backed securities are backed by the full faith and credit of the U.S. government. Principal and interest on Agency debentures are guaranteed by the Agency issuing the debenture. The majority of the Company's Residential Investment Securities have an actual or implied "AAA" rating.
The Company faces credit risk on the portions of its
portfolio which are not guaranteed by the respective Agency or by the full faith and credit of the U.S. government. The Company is exposed to credit risk on CRE Debt and Preferred Equity Investments, investments in commercial real estate, commercial mortgage-backed securities, CRT securities, other non-Agency mortgage-backed securities and corporate
debt. The Company is exposed to risk of loss if an issuer, borrower, tenant or counterparty fails to perform its obligations under contractual terms. The Company has established policies and procedures for mitigating credit risk, including reviewing and establishing limits for credit exposure, limiting transactions with specific counterparties, maintaining qualifying collateral and periodically assessing the creditworthiness of issuers, borrowers, tenants and counterparties.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
19.
RCAP REGULATORY REQUIREMENTS
RCap is subject to regulations of the securities business that include but are not limited to trade practices, use and safekeeping of funds and securities, capital structure, recordkeeping and conduct of directors, officers and employees.
As a self-clearing, registered broker dealer, RCap is required to maintain minimum net capital by FINRA. As of
March 31, 2016
RCap had a minimum net capital requirement of $0.3 million. RCap consistently operates with capital in excess of its regulatory capital requirements. RCap's regulatory net capital as defined by SEC Rule 15c3-1, as of
March 31, 2016
was $140.4 million with excess net capital of $140.1 million.
20.
RELATED PARTY TRANSACTIONS
Investment in Affiliate and Advisory Fees
In August 2015, FIDAC entered into an agreement with Chimera Investment Corporation ("Chimera") to internalize the management of Chimera. As part of the agreement, the companies agreed to terminate the management agreement between FIDAC and Chimera effective August 5, 2015.
In connection with the transaction, Annaly and Chimera entered into a share repurchase agreement pursuant to which Chimera purchased the Company's approximately 9.0 million shares of Chimera at an aggregate price of $126.4 million. The share repurchase agreement closed in August 2015.
For the quarter ended March 31, 2016, the Company did not record any advisory fees. For the quarter ended March 31, 2015, the Company recorded advisory fees from Chimera totaling $10.5 million. In August 2014, the management agreement between FIDAC and Chimera was amended and restated to amend certain of the terms and conditions of the prior agreement. Among other amendments to the terms of the prior agreement, effective August 8, 2014, the management fee was increased from 0.75% to 1.20% of Chimera's gross stockholders' equity (as defined in the amended and restated management agreement).
Management Agreement
The Company and the Manager have entered into a management agreement pursuant to which the Company's management is conducted by the Manager through the authority delegated to it in the Management Agreement and pursuant to the policies
established by the Board (the "Externalization"). The management agreement was effective as of July 1, 2013 and applicable for the entire 2013 calendar year and was amended on November 5, 2014 (the management agreement, as amended, is referred to as "Management Agreement").
Pursuant to the terms of the Management Agreement, the Company pays the Manager a monthly management fee in an amount equal to 1/12th of 1.05% of stockholders' equity, as defined in the Management Agreement, for its management services.
For the quarters ended March 31, 2016 and 2015, the compensation and management fee was $37.0 million
and $38.6 million, respectively
. At March 31, 2016 and December 31, 2015, the Company had amounts payable to the Manager of $12.0 million and $12.1 million, respectively.
The Management Agreement provides for a two year term ending December 31, 2016 with automatic two-year renewals unless at least two-thirds of the Company's independent directors or the holders of a majority of the Company's outstanding shares of common stock elect to terminate the agreement in their sole discretion for any or no reason. At any time during the term or any renewal term the Company may deliver to the Manager written notice of the Company's intention to terminate the Management Agreement. The Company must designate a date not less than one year from the date of the notice on which the Management Agreement will terminate. The Management Agreement also provides that the Manager may terminate the Management Agreement by providing to the Company prior written notice of its intention to terminate the Management Agreement no less than one year prior to the date designated by the Manager on which the Manager would cease to provide services or such earlier date as determined by the Company in its sole discretion.
The Company has a limited number of employees following the Externalization, all of whom are employees of the Company's subsidiaries for regulatory or corporate efficiency reasons. All compensation expenses associated with such retained employees reduce the amount paid to the Manager.
The Management Agreement may be amended or modified by agreement between the Company and the Manager. There is no termination fee for a termination of the Management Agreement by either the Company or the Manager.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
21.
SUBSEQUENT EVENTS
Pending Acquisition of Hatteras Financial Corp.
As previously disclosed in a Form 8-K filed with the SEC on April 11, 2016 (the "Merger 8-K"), on April 10, 2016, the Company, Ridgeback Merger Sub Corporation, a wholly-owned subsidiary of the Company ("Purchaser"), and Hatteras Financial Corp. ("Hatteras") entered into an agreement and plan of merger (the "Merger Agreement"), pursuant to which, subject to the terms and conditions contained therein, the Company agreed to acquire Hatteras (the "Hatteras Acquisition"), an externally managed mortgage REIT that invests primarily in single-family residential mortgage real estate assets, for aggregate consideration to Hatteras common shareholders of approximately $1.5 billion based on the closing price of the Company's common stock on April 8, 2016. Approximately 65% of such consideration will be payable in shares of the Company's common stock, and approximately 35% of which will be payable in cash. In addition, as part of the Hatteras Acquisition, each share of Hatteras 7.625% Series A Cumulative Redeemable Preferred Stock, par value $0.001 per share ("Hatteras Preferred Share"), that is outstanding as of immediately prior to the completion of the Hatteras Acquisition will be converted into one share of a newly-designated series of the Company's preferred stock, par value $0.01 per share, which the Company expects will be classified and designated as 7.625% Series E Cumulative Redeemable Preferred Stock, and which will have rights, preferences, privileges and voting powers substantially the same as a Hatteras Preferred Share.
The closing of the Hatteras Acquisition is subject to a number of conditions, including the receipt of specified regulatory approvals.
Prior to closing the Hatteras Acquisition, each of Hatteras and the Company will declare a prorated dividend to their respective shareholders with a record and payment date on the last business day prior to the completion of the Hatteras Acquisition. Each of the dividends will be prorated based on the number of days that elapsed since the record date for the most recent quarterly dividend paid to Hatteras and the Company's shareholders, respectively, and the amount of such prior quarterly dividend, as applicable.
In connection with the execution of the Merger Agreement, Hatteras and its external manager, Atlantic Capital Advisors LLC, a North Carolina limited liability company ("ACA"), entered into an amendment to the management agreement, dated February 23, 2012, by and between Hatteras and ACA. The amendment provides that upon the completion of the Hatteras Acquisition, the management agreement between Hatteras and ACA will terminate, and as a result of such termination, Hatteras will pay to ACA a termination fee of $45.4 million.
The Hatteras Acquisition is expected to be completed before the end of the third quarter of 2016.
For additional details regarding the terms and conditions of the Merger Agreement and related matters, please refer to the Merger Agreement and the Merger 8-K and the other documentation filed as exhibits thereto. Additional information regarding the transactions contemplated by the Merger Agreement, including associated risks, will be contained in a registration statement on Form S-4 that the Company expects to file with the SEC in connection with the Hatteras Acquisition.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements
Certain statements contained in this quarterly report, and certain statements contained in our future filings with the Securities and Exchange Commission (the SEC or the Commission), in our press releases or in our other public or stockholder communications 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; our ability to maintain our exemption from registration under the Investment Company Act; and our ability to consummate the proposed Hatteras Acquisition on a timely basis or at all, and potential business disruption following the Hatteras Acquisition. 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 Item 1A "Risk Factors" in this quarterly report 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, except as required by law.
This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our most recent annual report on Form 10-K. All references to "Annaly," "we," "us" or "our" mean Annaly Capital Management, Inc. and all entities owned by us, except where it is made clear that the term means only the parent company. Refer to the section titled "Glossary of Terms" located at the end of this Item 2 for definitions of commonly used terms in this quarterly report on Form 10-Q.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
INDEX TO ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
|
41
|
Pending Acquisition of Hatteras
|
41
|
Business Environment
|
42
|
Economic Environment
|
42
|
Financial Regulatory Reform
|
43
|
Results of Operations
|
43
|
Net Income (Loss) Summary
|
44
|
Non-GAAP Financial Measures
|
45
|
Core Earnings and Normalized Core Earnings
|
46
|
Normalized Interest Income, Economic Interest Expense, Economic Net Interest Income and Normalized Economic Net Interest Income
|
46
|
Experienced and Projected Long-term CPR
|
47
|
Normalized Interest Income and Normalized Average Yield on Interest Earning Assets
|
48
|
Economic Interest Expense and Average Cost of Interest Bearing Liabilities
|
48
|
Normalized Economic Net Interest Income
|
48
|
Realized and Unrealized Gains (Losses)
|
49
|
Other Income (Loss)
|
50
|
General Administrative Expenses
|
50
|
Unrealized Gains and Losses
|
50
|
Net Income (Loss) and Return on Average Equity
|
51
|
Financial Condition
|
51
|
Residential Investment Securities
|
52
|
Contractual Obligations
|
54
|
Off-Balance Sheet Arrangements
|
55
|
Capital Management
|
55
|
Stockholders' Equity
|
55
|
Common and Preferred Stock
|
56
|
Distributions to Stockholders
|
56
|
Leverage and Capital
|
57
|
Risk Management
|
57
|
Risk Appetite
|
57
|
Governance
|
58
|
Description of Risks
|
58
|
Liquidity Risk Management
|
59
|
Funding
|
59
|
Excess Liquidity
|
60
|
Maturity Profile
|
61
|
Stress Testing
|
63
|
Liquidity Management Policies
|
63
|
Investment/Market Risk Management
|
63
|
Credit Risk Management
|
64
|
Counterparty Risk Management
|
64
|
Operational Risk Management
|
65
|
Compliance, Regulatory and Legal Risk Management
|
65
|
Critical Accounting Policies and Estimates
|
66
|
Valuation of Financial Instruments
|
66
|
Residential Investment Securities
|
66
|
Commercial Real Estate Investments
|
66
|
Interest Rate Swaps
|
66
|
Revenue Recognition
|
67
|
Consolidation of Variable Interest Entities
|
67
|
Use of Estimates
|
67
|
Glossary of Terms
|
68
|
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
We are a leading mortgage REIT that is externally managed by Annaly Management Company LLC (or Manager). Our common stock is listed on the New York Stock Exchange under the symbol "NLY." Since our founding in 1997, we have strived to generate net income for distribution to our stockholders through the prudent selection and management of our investments.
We own a portfolio of real estate related investments. We use our capital coupled with borrowed funds to invest in real estate related investments, earning the spread between the yield on our assets and the cost of our borrowings and hedging activities.
We are primarily organized around the following operations:
|
|
Annaly, the parent company
|
Invests primarily in various types of Agency mortgage-backed securities and related derivatives to hedge these investments. Its portfolio also includes residential credit investments such as CRTs and non-Agency mortgage-backed securities.
|
Annaly Commercial Real Estate Group, Inc. (or ACREG)
|
Wholly-owned subsidiary that specializes in originating or acquiring, financing and managing commercial loans and other commercial real estate debt, commercial mortgage-backed securities and other commercial real estate-related assets.
|
Annaly Middle Market Lending LLC
(or MML)
|
Wholly-owned subsidiary that engages in corporate middle market lending transactions.
|
RCap Securities, Inc.
(or RCap)
|
Wholly-owned subsidiary that operates as a broker-dealer, and is a member of the Financial Industry Regulatory Authority (or FINRA)
|
For a full discussion of our business, refer to the section titled "Business Overview"
in our most recent Annual Report on Form 10-K.
Pending Acquisition of Hatteras
As previously disclosed in a Form 8-K filed with the SEC on April 11, 2016 (Merger 8-K), on April 10, 2016, Annaly, Ridgeback Merger Sub Corporation, a wholly-owned subsidiary of the Company (Purchaser), and Hatteras Financial Corp. (Hatteras) entered into an agreement and plan of merger (the Merger Agreement), pursuant to which, subject to the terms and conditions contained therein, we agreed to acquire Hatteras (the Hatteras Acquisition), an externally managed mortgage REIT that invests primarily in single-family residential mortgage real estate assets, for aggregate consideration to Hatteras common shareholders of approximately $1.5 billion based on the closing price of Annaly's common stock on April 8, 2016. Approximately 65% of such consideration will be payable in shares of our common stock, and approximately 35% of which will be payable in cash. In addition, as part of the Hatteras Acquisition, each share of Hatteras 7.625% Series A Cumulative Redeemable Preferred Stock, par value $0.001 per share (Hatteras Preferred Share), that is outstanding as of immediately prior to the completion of the Hatteras Acquisition will be
converted into one share of a newly-designated series of our preferred stock, par value $0.01 per share, which we expect will be classified and designated as 7.625% Series E Cumulative Redeemable Preferred Stock, and which will have rights, preferences, privileges and voting powers substantially the same as a Hatteras Preferred Share.
The closing of the Hatteras Acquisition is subject to a number of conditions, including the receipt of specified regulatory approvals.
Prior to closing the Hatteras Acquisition, each of Hatteras and Annaly will declare a prorated dividend to their respective shareholders with a record and payment date on the last business day prior to the completion of the Hatteras Acquisition. Each of the dividends will be prorated based on the number of days that elapsed since the record date for the most recent quarterly dividend paid to Hatteras and Annaly's shareholders, respectively, and the amount of such prior quarterly dividend, as applicable.
In connection with the execution of the Merger Agreement, Hatteras and its external manager, Atlantic Capital Advisors LLC, a North Carolina limited
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
liability company (ACA), entered into an amendment to the management agreement, dated February 23, 2012, by and between Hatteras and ACA. The amendment provides that upon the completion of the Hatteras Acquisition, the management agreement between Hatteras and ACA will terminate, and as a result of such termination, Hatteras will pay to ACA a termination fee of $45.4 million.
The Hatteras Acquisition is expected to be completed before the end of the third quarter of 2016.
For additional details regarding the terms and conditions of the Merger Agreement and related matters, please refer to the Merger Agreement and the Merger 8-K and the other documentation filed as exhibits thereto. Additional information regarding the transactions contemplated by the Merger Agreement, including associated risks, will be contained in a registration statement on Form S-4 that we expect to file with the SEC in connection with the Hatteras Acquisition.
The aggregate size of our Residential Investment Securities portfolio and commercial real estate investments (excluding assets held in consolidated VIEs) remained relatively unchanged in the first quarter of 2016 after growing modestly in the fourth quarter of 2015. The composition of our Residential Investment Securities portfolio continued to shift modestly from agency securities to residential credit securities during the current quarter. The first quarter of 2016 witnessed a meaningful bout of volatility that has since subsided, as markets reacted sharply to signs of slowing inflation and growth early in 2016. In light of this environment, we remain cautious with regard to portfolio positioning and leverage.
Economic Environment
Entering 2016, investors continued to face a low growth, low inflation environment in which asset prices are supported by unprecedented central bank policy accommodation. Within this fragile global growth environment, financial markets remained vulnerable to shocks, highlighted by a continued weakness in commodities and trade. Early readings of first quarter 2016 economic growth, as measured by real gross domestic product (or GDP) according to the Bureau of Economic Analysis, suggests that the U.S. economy expanded at a weak seasonally-adjusted annualized rate of 0.5%. This slowdown in economic activity was driven by more cautious consumer
spending amidst the presence of the same weak factors that were present in 2015: limited business spending and exports, largely driven by the drop in commodity prices and rise in foreign exchange value of the U.S. dollar. Housing continued to be a modest positive boost, driven by low interest rates and recovering consumer balance sheets.
Despite the slowdown in growth, unemployment continued to fall during the first quarter of 2016. The economy added 226,000 jobs per month during the first quarter of 2016 according to the Bureau of Labor Statistics, only modestly below the monthly average of 241,000 in 2015. Meanwhile, the unemployment rate remained unchanged at 5.0% as more people reentered the labor force, in turn resulting in an increase in the participation rate of 0.4% to 63.0%, its highest level in two years. Wage growth, meanwhile, continued to remain low, as the median wage increased 3.2% year-over-year in March 2016, according to the Federal Reserve Bank of Atlanta, unchanged from March 2015.
Realized inflation remained below the Fed's 2% target as measured by their preferred headline Personal Consumer Expenditure Chain Price Index (or PCE), which rose 0.8% year-over-year in March 2016, as well as the more stable core PCE measure, which excludes food and energy prices, at 1.6% year-over-year. Despite a modest upward trend in realized inflation in recent months, both market- and survey-based measures of inflation expectations fell during the quarter, providing the Fed with more time in its rate hike cycle than what would be anticipated by the realized inflation figures alone.
During the first quarter of 2016, the Federal Open Market Committee (FOMC) maintained the federal funds rate target at a range of one-quarter to one-half percent, while simultaneously reinvesting the runoff of its portfolio of U.S. Treasury and agency mortgage-backed securities. At their meeting on December 15-16, 2015, the FOMC raised the federal funds target rate by 25 BPs to the current target range – marking the first rate hike since June 2006 – and expected to further increase the target rate in 2016. However, global financial market uncertainty in early 2016 appears to have at least temporarily slowed the FOMC's forecast of higher short-term interest rates. The Fed's Summary of Economic Projections released with the March 2016 FOMC statement suggested that FOMC members expect to increase the federal funds target rate only twice in 2016, down from the previously expected four hikes. Chair Yellen subsequently argued that the significant changes in oil prices, interest rates, and stock values in the first quarter of 2016 did not change the FOMC's baseline outlook of future economic
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
activity, but increased the risks associated with achieving this outlook. She acknowledged investors had sharply marked "down their expectations for the future path of the federal funds rate, thereby putting downward pressure on longer-term interest rates" thereby supporting the continuation of the recovery. At their April 2016 FOMC meeting, the FOMC did not meaningfully update their view in the official statement, noting continued labor market improvement in the face of slowing growth, while somewhat downplaying the risks posed by foreign financial and economic developments.
Interest rates declined 33-56 basis points across the yield curve over the course of the first quarter of 2016, with 10-year Treasury yields reaching their lowest level since 2012/2013 when the Fed was actively engaged in its third round of quantitative easing (or QE). The sizeable decline in interest rates was driven by the aforementioned repricing of short-term rate
expectations related to an expected slower Fed rate hiking cycle and the decline in the market's expectations about future inflation. In addition, the increased global central bank accommodation – with the European Central Bank increasing its QE program and the Bank of Japan introducing negative interest rates – have left the United States with a large share of positive yielding developed market government debt, in turn increasing relative attractiveness of U.S. yields, despite their historically low levels. The mortgage basis, or the spread between the 30-year current coupon Agency mortgage-backed security and 10-year U.S. Treasury, widened modestly during the first quarter of 2016.
The following table provides interest rates as of each date presented:
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
March 31, 2015
|
|
30-Year mortgage current coupon
|
|
|
2.57
|
%
|
|
|
3.00
|
%
|
|
|
2.65
|
%
|
Mortgage basis
|
|
80 bps
|
|
73 bps
|
|
73 bps
|
10-Year U.S. Treasury rate
|
|
|
1.77
|
%
|
|
|
2.27
|
%
|
|
|
1.92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIBOR:
|
|
|
|
|
|
|
|
|
|
|
|
|
1-Month
|
|
|
0.44
|
%
|
|
|
0.43
|
%
|
|
|
0.18
|
%
|
6-Month
|
|
|
0.90
|
%
|
|
|
0.84
|
%
|
|
|
0.40
|
%
|
Financial Regulatory Reform
Uncertainty remains surrounding financial regulatory reform and its impact on the markets and the broader economy. In particular, the U.S. government is attempting to change its involvement through the Agencies in the mortgage market. There have been numerous legislative initiatives introduced regarding the Agencies, and it is unclear which approach, if any, may become law. In addition, regulators remain focused on the wholesale funding markets, bank capital levels and shadow banking. It is difficult to predict the ultimate legislative and other regulatory outcomes of these efforts. We continue to monitor these legislative and regulatory developments to evaluate their potential impact on our business.
In January 2016, the Federal Housing Finance Administration (or FHFA) issued final rules relating to captive insurance company membership in the Federal Home Loan Bank (or FHLBs), which provide that captive insurance companies will no longer be eligible for membership in the FHLBs. As part of their membership in the FHLBs, captive insurance companies typically pledge assets as collateral for
advances from the FHLBs. The rules allow captive insurance companies that are existing members of FHLBs to remain members for either one or five years depending on when that member was admitted as a member. Our captive insurance subsidiary Truman Insurance Company LLC (or Truman) was admitted as a member of the FHLB of Des Moines (or FHLB Des Moines) prior to September 2014 and, therefore, through February 2021, may remain a member of the FHLB Des Moines and maintain existing advances until their scheduled repayment dates.
The results of our operations are affected by various factors, many of which are beyond our control. Some of these risks and uncertainties are described herein (see "Special Note Regarding Forward-Looking Statements") and in Part I, Item 1A. "Risk factors" of our most recent annual report on Form 10-K.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
Net Income (Loss) Summary
The following table presents summarized financial information related to our results of operations as of and for the quarters ended March 31, 2016 and 2015.
|
|
For the Quarters Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(dollars in thousands, except per share data)
|
|
Interest income
|
|
$
|
388,143
|
|
|
$
|
519,114
|
|
Interest expense
|
|
|
147,447
|
|
|
|
129,420
|
|
Net interest income
|
|
|
240,696
|
|
|
|
389,694
|
|
Realized and unrealized gains (losses)
|
|
|
(1,055,553
|
)
|
|
|
(828,999
|
)
|
Other income (loss)
|
|
|
(6,115
|
)
|
|
|
13,758
|
|
General and administrative expenses
|
|
|
47,945
|
|
|
|
50,938
|
|
Income (loss) before income taxes
|
|
|
(868,917
|
)
|
|
|
(476,485
|
)
|
Income taxes
|
|
|
(837
|
)
|
|
|
14
|
|
Net income (loss)
|
|
|
(868,080
|
)
|
|
|
(476,499
|
)
|
Net income (loss) attributable to noncontrolling interest
|
|
|
(162
|
)
|
|
|
(90
|
)
|
Net income (loss) attributable to Annaly
|
|
|
(867,918
|
)
|
|
|
(476,409
|
)
|
Dividends on preferred stock
|
|
|
17,992
|
|
|
|
17,992
|
|
Net income (loss) available (related) to common stockholders
|
|
$
|
(885,910
|
)
|
|
$
|
(494,401
|
)
|
Net income (loss) per share available (related) to common stockholders:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.96
|
)
|
|
$
|
(0.52
|
)
|
Diluted
|
|
$
|
(0.96
|
)
|
|
$
|
(0.52
|
)
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
926,813,588
|
|
|
|
947,669,831
|
|
Diluted
|
|
|
926,813,588
|
|
|
|
947,669,831
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP financial measures
(1)
:
|
|
|
|
|
|
|
|
|
Normalized interest income
(2)
|
|
$
|
556,551
|
|
|
$
|
606,997
|
|
Economic interest expense
|
|
$
|
270,571
|
|
|
$
|
286,752
|
|
Normalized economic net interest income
(2)
|
|
$
|
285,980
|
|
|
$
|
320,245
|
|
Core earnings
|
|
$
|
123,349
|
|
|
$
|
254,082
|
|
Normalized core earnings
(2)
|
|
$
|
291,757
|
|
|
$
|
341,965
|
|
Core earnings per average basic common share
|
|
$
|
0.11
|
|
|
$
|
0.25
|
|
Normalized core earnings per average basic common share
(2)
|
|
$
|
0.30
|
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
Other information:
|
|
|
|
|
|
|
|
|
Asset portfolio at period-end
|
|
$
|
74,280,593
|
|
|
$
|
73,941,094
|
|
Average total assets
|
|
$
|
76,317,429
|
|
|
$
|
83,515,522
|
|
Average equity
|
|
$
|
11,781,965
|
|
|
$
|
13,229,186
|
|
Leverage at period-end
(3)
|
|
5.3:1
|
|
|
4.8:1
|
|
Economic leverage at period-end
(4)
|
|
6.2:1
|
|
|
5.7:1
|
|
Capital ratio
(5)
|
|
|
13.2
|
%
|
|
|
14.3
|
%
|
Annualized return on average total assets
|
|
|
(4.55
|
%)
|
|
|
(2.28
|
%)
|
Annualized return (loss) on average equity
|
|
|
(29.47
|
%)
|
|
|
(14.41
|
%)
|
Annualized core return on average equity
|
|
|
4.19
|
%
|
|
|
7.69
|
%
|
Annualized normalized core return on average equity
(2)
|
|
|
9.91
|
%
|
|
|
10.34
|
%
|
Net interest margin
(6)
|
|
|
0.79
|
%
|
|
|
1.29
|
%
|
Normalized net interest margin
(2)
|
|
|
1.54
|
%
|
|
|
1.68
|
%
|
Average yield on interest earning assets
|
|
|
2.09
|
%
|
|
|
2.54
|
%
|
Normalized average yield on interest earning assets
(2)
|
|
|
3.00
|
%
|
|
|
2.96
|
%
|
Average cost of interest bearing liabilities
|
|
|
1.73
|
%
|
|
|
1.64
|
%
|
Net interest spread
|
|
|
0.36
|
%
|
|
|
0.90
|
%
|
Normalized net interest spread
(2)
|
|
|
1.27
|
%
|
|
|
1.32
|
%
|
Constant prepayment rate
|
|
|
8.8
|
%
|
|
|
9.0
|
%
|
Long-term constant prepayment rate
|
|
|
11.8
|
%
|
|
|
9.2
|
%
|
Common stock book value per share
|
|
$
|
11.61
|
|
|
$
|
12.88
|
|
(1)
See "Non-GAAP Financial Measures" for a reconciliation of our non-GAAP measures to their corresponding GAAP amounts.
(2)
Includes the Premium Amortization Adjustment due to quarter-over-quarter changes in long-term CPR estimates.
(3)
Includes repurchase agreements, other secured financing, Convertible Senior Notes and non-recourse securitized debt, loan participation and mortgages payable.
(4)
Computed as the sum of recourse debt, TBA derivative notional outstanding and net forward purchases of investments divided by total equity.
(5)
Represents the ratio of stockholders' equity to total assets (inclusive of total market value of TBA derivatives and exclusive of consolidated VIEs associated with B-Piece commercial mortgage-backed securities).
(6)
Represents the sum of annualized economic net interest income, inclusive of interest expense on interest rate swaps used to hedge costs of funds, plus TBA dollar roll income less interest expense on interest rate swaps used to hedge dollar roll transactions divided by the sum of average Interest Earning Assets plus average outstanding TBA contract balances.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
This Management Discussion and Analysis section contains analysis and discussion of non-GAAP measurements. See "Non-GAAP Financial Measures" for further information.
GAAP
Net income (loss) was ($868.1) million, which includes ($0.2) million attributable to a noncontrolling interest, or ($0.96) per average basic common share, for the quarter ended March 31, 2016 compared to ($476.5) million, which includes ($0.1) million attributable to a noncontrolling interest, or ($0.52) per average basic common share, for the same period in 2015. We attribute the majority of the change in net income (loss) to the higher unrealized losses on interest rate swaps and lower interest income. Unrealized losses on interest rate swaps were ($1.0) billion for the quarter ended March 31, 2016 compared to ($466.2) million for the same period in 2015, reflecting an unfavorable change in the fair value of interest rate swaps due to lower forward interest rates for the quarter ended March 31, 2016 compared to the same period in 2015. Interest income decreased $131.0 million to $388.1 million for the quarter ended March 31, 2016 compared to the same period in 2015, primarily due to lower coupon income resulting from lower average Interest Earning Assets and lower average yield on Interest Earning Assets, and higher amortization expense reflecting higher projected long-term CPR on Residential Investment Securities, partially offset by higher interest income from the commercial investment portfolio.
Non-GAAP
Normalized core earnings were $291.8 million, or $0.30 per average common share, for the quarter ended March 31, 2016 compared to $342.0 million, or $0.34 per average common share, for the same period in 2015. Normalized core earnings declined during the quarter ended March 31, 2016 compared to the same period in 2015 primarily due to a reduction in normalized interest income earned on lower Residential Investment Securities balances, partially offset by increased interest income on a larger commercial investment portfolio. Core earnings were $123.3 million, or $0.11 per average basic common share, for the quarter ended March 31, 2016 compared to $254.1 million, or $0.25 per average basic common share, for the same period in 2015.
Non-GAAP Financial Measures
This Management Discussion and Analysis section contains analysis and discussion of non-GAAP measurements. The non-GAAP measurements include the following:
● core earnings;
● normalized core earnings;
● core earnings per average basic common share;
● normalized core earnings per average basic common share;
● normalized interest income;
● economic interest expense;
● economic net interest income; and
● normalized economic net interest income
Core earnings represents a non-GAAP measure and 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, GAAP net income (loss) attributable to noncontrolling interest and certain other non-recurring gains or losses, and inclusive of TBA dollar roll income (a component of Net gains (losses) on trading assets).
Normalized core earnings represents a non-GAAP measure and is defined as core earnings excluding the Premium Amortization Adjustment (or PAA). PAA is the component of premium amortization representing the quarter-over-quarter change in estimated long-term constant prepayment rates.
We believe that core earnings, normalized core earnings, core earnings per average basic common share, normalized core earnings per average basic common share, normalized interest income, economic interest expense, economic net interest income and normalized economic net interest income provide meaningful information to consider, in addition to the respective amounts prepared in accordance with GAAP. The non-GAAP measures help us to evaluate our financial position and performance without the effects of certain transactions and GAAP adjustments that are not necessarily indicative of our current investment portfolio and operations.
Our presentation of non-GAAP financial measures has important limitations. Other market participants may calculate core earnings, normalized core earnings, core earnings per average basic common share, normalized core earnings per average basic common share, normalized interest income, economic interest expense, economic net interest income and normalized economic net interest income differently than we calculate them, making comparative analysis difficult.
Although we believe that the calculation of non-GAAP financial measures described above helps evaluate and measure our financial position and performance
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
without the effects of certain transactions, it is of limited usefulness as an analytical tool. Therefore, the non-GAAP financial measures should not be viewed in isolation and are not a substitute for net income (loss), net income (loss) per basic share available (related) to common stockholders, interest expense and net interest income computed in accordance with GAAP.
Core Earnings and Normalized Core Earnings
The following table provides GAAP measures of net income (loss) and net income (loss) per basic share available to common stockholders for the quarters ended March 31, 2016 and 2015 and details with respect to reconciling the aforementioned line items on a non-GAAP basis:
|
|
For the Quarters Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(dollars in thousands, except per share data)
|
|
GAAP net income (loss)
|
|
$
|
(868,080
|
)
|
|
$
|
(476,499
|
)
|
Less:
|
|
|
|
|
|
|
|
|
Realized (gains) losses on termination of interest rate swaps
|
|
|
-
|
|
|
|
226,462
|
|
Unrealized (gains) losses on interest rate swaps
|
|
|
1,031,720
|
|
|
|
466,202
|
|
Net (gains) losses on disposal of investments
|
|
|
1,675
|
|
|
|
(62,356
|
)
|
Net (gains) losses on trading assets
|
|
|
(125,189
|
)
|
|
|
6,906
|
|
Net unrealized (gains) losses on financial instruments measured at fair value through earnings
|
|
|
(128
|
)
|
|
|
33,546
|
|
GAAP net (income) loss attributable to noncontrolling interest
|
|
|
162
|
|
|
|
90
|
|
Plus:
|
|
|
|
|
|
|
|
|
TBA dollar roll income (loss)
(1)
|
|
|
83,189
|
|
|
|
59,731
|
|
Core earnings
|
|
$
|
123,349
|
|
|
$
|
254,082
|
|
Premium Amortization Adjustment cost (benefit)
|
|
$
|
168,408
|
|
|
$
|
87,883
|
|
Normalized core earnings
|
|
$
|
291,757
|
|
|
$
|
341,965
|
|
|
|
|
|
|
|
|
|
|
GAAP net income (loss) per average basic common share
|
|
$
|
(0.96
|
)
|
|
$
|
(0.52
|
)
|
Core earnings per average basic common share
|
|
$
|
0.11
|
|
|
$
|
0.25
|
|
Normalized core earnings per average basic common share
|
|
$
|
0.30
|
|
|
$
|
0.34
|
|
(1) This amount is included as a component of Net gains (losses) on trading assets in the Consolidated Statements of Comprehensive Income (Loss).
Normalized Interest Income, Economic Interest Expense, Economic Net Interest Income and Normalized Economic Net Interest Income
We believe the economic value of our investment strategy is depicted by the economic and normalized net interest income we earn. We calculate normalized interest income by determining our GAAP interest income and adjusting it by the PAA. Our economic interest expense, which is composed of interest expense on our Interest Bearing Liabilities plus interest expense on interest rate swaps used to hedge cost of funds, reflects total contractual interest payments.
We calculate economic net interest income by determining our GAAP net interest income and reducing it by realized losses on interest rate swaps used to hedge cost of funds, which represents interest expense on interest rate swaps. We calculate normalized economic net interest income by adjusting economic net interest income by the PAA.
The following table illustrates the impact of the PAA on premium amortization expense for the periods presented: