ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
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Three Months Ended
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Six Months Ended
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Mortgage Servicing Rights
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June 30, 2021
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June 30, 2020
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June 30, 2021
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June 30, 2020
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(dollars in thousands)
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Fair value, beginning of period
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$
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113,080
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$
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280,558
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$
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100,895
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$
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378,078
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Purchases (1)
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98,983
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—
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98,983
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—
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Sales
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(376)
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—
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(376)
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—
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Change in fair value due to:
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Changes in valuation inputs or assumptions (2)
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4,621
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(27,629)
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32,296
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(106,854)
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Other changes, including realization of expected cash flows
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(13,692)
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(25,529)
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(29,182)
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(43,824)
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Fair value, end of period
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$
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202,616
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$
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227,400
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$
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202,616
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$
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227,400
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(1) Includes adjustments to original purchase price from early payoffs, defaults, or loans that were delivered but were deemed to not be acceptable.
(2) Principally represents changes in discount rates and prepayment speed inputs used in valuation model, primarily due to changes in interest rates.
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Interests in MSR
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Six Months Ended
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June 30, 2021
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(dollars in thousands)
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Beginning balance
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$
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—
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Purchases (1)
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47,098
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Gain (loss) included in net income
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1,937
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Ending balance June 30, 2021
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$
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49,035
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(1) Includes adjustments to original purchase price from early payoffs, defaults, or loans that were delivered but were deemed to not be acceptable.
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For the three and six months ended June 30, 2021, the Company recognized $7.9 million and $14.8 million, respectively, and for the three and six months ended June 30, 2020, the Company recognized $16.4 million and $39.2 million, respectively, of net servicing income from MSR in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).
For the three and six months ended June 30, 2021, the Company recognized $2.0 million, and for the three and six months ended June 30, 2020, the Company did not recognize net income from Interests in MSR in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).
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8. VARIABLE INTEREST ENTITIES
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At June 30, 2021, commercial trusts, commercial securitizations and the collateralized loan obligation are reported in Assets of disposal group held for sale in the Consolidated Statements of Financial Condition. Refer to the “Sale of Commercial Real Estate Business” Note for additional information.
Multifamily Securitization
In November 2019, the Company repackaged Fannie Mae guaranteed multifamily mortgage-backed securities with a principal cut-off balance of $1.0 billion and retained interest-only securities with a notional balance of $1.0 billion and senior securities with a principal balance of $28.5 million. In March 2020, the Company repackaged Fannie Mae guaranteed multifamily mortgage-backed securities with a principal cut-off balance of $0.5 billion and retained interest-only securities with a notional balance of $0.5 billion. At the inception of the arrangements, the Company determined that it was the primary beneficiary based upon its involvement in the design of these VIEs and through the retention of a significant variable interest in the VIEs. The Company elected the fair value option for the financial liabilities of these VIEs in order to simplify the accounting; however, the financial assets were not eligible for the fair value option as it was not elected at purchase. In 2020, the Company deconsolidated the 2019 multifamily VIE since it sold all of its interest-only securities and no longer retains a significant variable interest in the entity. The Company incurred $1.1 million of costs in connection with the 2020 multifamily securitization that were expensed as incurred during the six months ended June 30, 2020.
Residential Trusts
The Company consolidates a securitization trust, which is included in “Residential Trusts” in the tables below, that issued residential mortgage-backed securities that are collateralized by residential mortgage loans that had been transferred to the trust by one of the Company’s subsidiaries. The Company owns the subordinate securities, and a subsidiary of the Company
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
continues to be the master servicer. As such, the Company is deemed to be the primary beneficiary of the residential mortgage trust and consolidates the entity. The Company has elected the fair value option for the financial assets and liabilities of this VIE, but has not elected to apply the practical expedient under ASU 2014-13 as prices of both the financial assets and financial liabilities of the residential mortgage trust are available from third party pricing services. The contractual principal amount of the residential mortgage trust’s debt held by third parties was $14.4 million and $23.0 million at June 30, 2021 and December 31, 2020, respectively. As of June 30, 2021, a total of $14.5 million of bonds were held by third parties and the Company retained $12.6 million of mortgage-backed securities, which were eliminated in consolidation.
Residential Securitizations
The Company also invests in residential mortgage-backed securities issued by entities that are VIEs because they do not have sufficient equity at risk for the entities to finance their activities without additional subordinated financial support from other parties, but the Company is not the primary beneficiary because it does not have the power to direct the activities that most significantly impact the VIEs’ economic performance. For these entities, the Company’s maximum exposure to loss is the amortized cost basis of the securities it owns and it does not provide any liquidity arrangements, guarantees or other commitments to these VIEs. See the “Securities” Note for further information on Residential Securities.
OBX Trusts
The entities in the table below are referred to collectively as the “OBX Trusts.” These securitizations represent financing transactions which provide non-recourse financing to the Company that are collateralized by residential mortgage loans purchased by the Company.
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Securitization
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Date of Closing
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Face Value at Closing
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(dollars in thousands)
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OBX 2018-1
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March 2018
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$
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327,162
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OBX 2018-EXP1
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August 2018
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$
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383,451
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OBX 2018-EXP2
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October 2018
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$
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384,027
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OBX 2019-INV1
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January 2019
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$
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393,961
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OBX 2019-EXP1
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April 2019
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$
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388,156
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OBX 2019-INV2
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June 2019
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$
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383,760
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OBX 2019-EXP2
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July 2019
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$
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463,405
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OBX 2019-EXP3
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October 2019
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$
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465,492
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OBX 2020-INV1
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January 2020
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$
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374,609
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OBX 2020-EXP1
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February 2020
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$
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467,511
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OBX 2020-EXP2
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July 2020
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$
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489,352
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OBX 2020-EXP3
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September 2020
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$
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514,609
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OBX 2021-NQM1
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March 2021
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$
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257,135
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OBX 2021-J1
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April 2021
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$
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353,840
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OBX 2021-NQM2
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June 2021
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$
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376,004
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As of June 30, 2021, a total of $2.7 billion of bonds were held by third parties and the Company retained $642.3 million of mortgage-backed securities, which were eliminated in consolidation. The Company is deemed to be the primary beneficiary and consolidates the OBX Trusts because it has power to direct the activities that most significantly impact the OBX Trusts’ performance and holds a variable interest that could be potentially significant to these VIEs. The Company has elected the fair value option for the financial assets and liabilities of these VIEs, but has not elected the practical expedient under ASU 2014-13 as prices of both the financial assets and financial liabilities of the residential mortgage trusts are available from third party pricing services. The Company incurred $1.2 million and $0.0 million of costs during the three months ended June 30, 2021 and 2020, respectively, and $1.8 million and $3.7 million of costs during the six months ended June 30, 2021 and 2020, respectively, in connection with these securitizations that were expensed as incurred. The contractual principal amount of the OBX Trusts’ debt held by third parties was $2.7 billion at June 30, 2021.
Although the residential mortgage loans have been sold for bankruptcy and state law purposes, the transfers of the residential mortgage loans to the OBX Trusts did not qualify for sale accounting and are reflected as intercompany secured borrowings that are eliminated upon consolidation.
Credit Facility VIEs
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
In June 2016, a consolidated subsidiary of the Company entered into a credit facility with a third party financial institution. As of June 30, 2021, the borrowing limit on this facility was $675.0 million. The subsidiary was deemed to be a VIE and the Company was determined to be the primary beneficiary due to its role as collateral manager and because it holds a variable interest in the entity that could potentially be significant to the entity. The Company has pledged as collateral for this facility corporate loans with a carrying amount of $670.4 million at June 30, 2021. The transfers did not qualify for sale accounting and are reflected as an intercompany secured borrowing that is eliminated upon consolidation. At June 30, 2021, the subsidiary had an intercompany receivable of $441.4 million, which eliminates upon consolidation and a secured financing of $441.4 million to the third party financial institution.
In July 2017, a consolidated subsidiary of the Company entered into a credit facility with a third party financial institution. As of June 30, 2021, the borrowing limit on this facility was $400.0 million. The subsidiary was deemed to be a VIE and the Company was determined to be the primary beneficiary due to its role as servicer and because it holds a variable interest in the entity that could potentially be significant to the entity. The Company has transferred corporate loans to the subsidiary with a carrying amount of $366.4 million at June 30, 2021, which continue to be reflected in the Company’s Consolidated Statements of Financial Condition under Loans, net. At June 30, 2021, the subsidiary had a secured financing of $239.2 million to the third party financial institution.
In January 2019, a consolidated subsidiary of the Company entered into a credit facility with a third party financial institution. As of June 30, 2021, the borrowing limit on this facility was $400.0 million. The Company has pledged as collateral for this facility corporate loans with a carrying amount of $341.2 million at June 30, 2021. As of June 30, 2021, the subsidiary had a secured financing of $229.1 million to the third party financial institution.
MSR VIEs
The Company owns variable interests in an entity that invests in MSR and has structured its operations, funding and capitalization into pools of assets and liabilities, each referred to as a “silo.” Owners of variable interests in a given silo are entitled to all of the returns and subjected to the risk of loss on the investments and operations of that silo and have no substantive recourse to the assets of any other silo. While the Company previously held 100% of the voting interests in this entity, in August 2017, the Company sold 100% of such interests, and entered into an agreement with the entity’s affiliated portfolio manager giving the Company the power over the silo in which it owns all of the beneficial interests. As a result, the Company is considered to be the primary beneficiary and consolidates this silo.
The Company also owns variable interests in entities that invest in Interests in MSR. These entities are VIEs because they do not have sufficient equity at risk to finance their activities and the Company is the primary beneficiary because it has power to remove the decision makers with or without cause and holds substantially all of the variable interests in the entities.
The Company’s exposure to the obligations of its VIEs is generally limited to the Company’s investment in the VIEs of $2.3 billion at June 30, 2021. Assets of the VIEs may only be used to settle obligations of the VIEs. Creditors of the VIEs have no recourse to the general credit of the Company. The Company is not contractually required to provide and has not provided any form of financial support to the VIEs. No gains or losses were recognized upon consolidation of existing VIEs. Interest income and expense are recognized using the effective interest method.
The statements of financial condition of the Company’s VIEs, excluding the multifamily securitization, credit facility VIEs and OBX Trusts as the transfers of loans or securities did not meet the criteria to be accounted for as sales, that are reflected in the Company’s Consolidated Statements of Financial Condition at June 30, 2021 and December 31, 2020 are as follows:
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
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June 30, 2021
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Residential Trusts
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MSR VIEs
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Assets
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(dollars in thousands)
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Cash and cash equivalents
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$
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—
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$
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17,240
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Loans
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—
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3,709
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Assets transferred or pledged to securitization vehicles
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28,151
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—
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Mortgage servicing rights
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—
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89,546
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Interests in MSR
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—
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49,035
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Principal and interest receivable
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173
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—
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Other assets
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—
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14,764
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Total assets
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$
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28,324
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$
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174,294
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Liabilities
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Debt issued by securitization vehicles (non-recourse)
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$
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14,547
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$
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—
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Payable for unsettled trades
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—
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1,716
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Interest payable
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34
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—
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Other liabilities
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410
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10,038
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Total liabilities
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$
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14,991
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$
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11,754
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December 31, 2020
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Residential Trusts
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MSR VIEs
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Assets
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(dollars in thousands)
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Cash and cash equivalents
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$
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—
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$
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22,241
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Loans
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—
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47,048
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Assets transferred or pledged to securitization vehicles
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40,035
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—
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Mortgage servicing rights
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—
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100,895
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Principal and interest receivable
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226
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—
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Total assets
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$
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40,261
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$
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170,184
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Liabilities
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Debt issued by securitization vehicles (non-recourse)
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$
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23,351
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$
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—
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Other secured financing
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—
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30,420
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Payable for unsettled trades
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—
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3,076
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Interest payable
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55
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—
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Other liabilities
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|
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246
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13,345
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Total liabilities
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$
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23,652
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$
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46,841
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The geographic concentrations of credit risk exceeding 5% of the total loan unpaid principal balances related to the Company’s VIEs, excluding the multifamily securitization, OBX Trusts and credit facility VIEs, at June 30, 2021 are as follows:
Securitized Loans at Fair Value Geographic Concentration of Credit Risk
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Residential Trusts
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Property Location
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Principal Balance
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% of Balance
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California
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$
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14,222
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51.4
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%
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Illinois
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|
3,542
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|
|
12.8
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%
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|
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Texas
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2,938
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|
|
10.6
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%
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Other (1)
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|
6,983
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|
|
25.2
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%
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Total
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$
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27,685
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|
|
100.0
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%
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(1) No individual state greater than 5%.
Corporate Debt Transfers
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The Company manages parallel funds investing in senior secured first and second lien corporate loans (the “Fund Entities”). The Fund Entities are considered VIEs because the investors do not have substantive liquidation, kick-out or participating rights. The fees that the Company earns are not considered variable interests of the VIE. The Company is not the primary beneficiary of the Fund Entities and therefore does not consolidate the Fund Entities. During the three and six months ended June 30, 2021, the Company transferred $59.9 million and $75.0 million of loans for cash. The loan transfers were accounted for as sales.
Residential Credit Fund
The Company manages a fund investing in participations in residential mortgage loans. The residential credit fund is deemed to be a VIE because the entity does not have sufficient equity at risk to permit the legal entity to finance its activities without additional subordinated financial support provided by any parties, including equity holders, as capital commitments are not considered equity at risk. The Company is not the primary beneficiary and does not consolidate the residential credit fund as its only interest in the fund is the management and performance fees that it earns, which are not considered variable interests in the entity. As of June 30, 2021 and December 31, 2020, the Company has issued participating interests in residential mortgage loans in the amount of $315.8 million and $39.2 million, respectively. These transfers do not meet the criteria for sale accounting and are accounted for as secured borrowings, thus the residential loans are reported as Loans, net and the associated liability is reported as Participations issued in the Consolidated Statements of Financial Condition. The Company elected to fair value the participations issued through earnings to more accurately reflect the economics of the transfers as the underlying loans are carried at fair value through earnings.
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9. SALE OF COMMERCIAL REAL ESTATE BUSINESS
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On March 25, 2021, the Company entered into a definitive agreement to sell substantially all of the assets that comprise its CRE business to Slate Asset Management L.P. and Slate Grocery REIT (together, “Slate”) for $2.33 billion. The transaction includes equity interests, loan assets and associated liabilities, and CMBS (other than commercial CRTs). The Company also intends to sell nearly all of the remaining CRE business assets that are not included in the transaction with Slate. A real estate property that was held for sale, which is not included in the transaction with Slate, was sold during the quarter ended June 30, 2021 and resulted in the recognition of a gain of $4.8 million in Business divestiture-related gains (losses) in the Consolidated Statements of Comprehensive Income (Loss). As of June 30, 2021, the Company met the conditions for held-for-sale accounting which requires that assets and liabilities be carried at the lower of cost or fair value less costs to sell on the Consolidated Statements of Financial Condition. In connection with the execution of the definitive agreement to sell the CRE business, during the three months ended March 31, 2021 the Company performed an assessment of goodwill, which was related to the Company’s 2013 acquisition of CreXus Investment Corp., and recognized an impairment of $71.8 million. During the three and six months ended June 30, 2021, the Company reported Business divestiture-related gains (losses) of $1.5 million and ($248.0) million, respectively, in its Consolidated Statements of Comprehensive Income (Loss) which includes the aforementioned goodwill impairment as well as valuation adjustments resulting from classifying the assets as held for sale and estimated transaction costs. In addition, as a result of classifying the loans as held for sale, the previously recognized allowance for loan losses of $135.0 million, which includes $5.1 million on unfunded loan commitments, was reversed during the three months ended March 31, 2021. Since assets held for sale are recorded at lower of cost or fair value, any gains on sale will not be recorded until such sale closes. The pretax income (loss) of the CRE business was $42.0 million and ($30.7) million for the three and six months ended June 30, 2021, respectively and ($66.9) million and ($162.3) million for the three and six months ended June 30, 2020, respectively. Certain employees who primarily support the CRE business will join Slate in connection with the sale. Subject to customary closing conditions, including applicable regulatory approvals, the disposition of the CRE business is expected to be completed in the second half of 2021.
The carrying values of the major classes of assets and liabilities of the disposal group held for sale as of June 30, 2021 are presented in the table below:
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
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|
|
|
|
|
|
June 30, 2021
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
14,175
|
|
Securities
|
55,172
|
|
Loans, net
|
478,274
|
|
Assets transferred or pledged to securitization vehicles
|
2,139,944
|
|
Real estate, net
|
566,477
|
|
Intangible assets, net
|
14,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
33,431
|
|
Total assets of disposal group held for sale
|
$
|
3,302,001
|
|
|
|
Repurchase agreements
|
$
|
270,650
|
|
Debt issued by securitization vehicles
|
1,610,109
|
|
Mortgages payable
|
425,873
|
|
|
|
|
|
|
|
Interest payable
|
1,230
|
|
|
|
Other liabilities
|
54,828
|
|
Total liabilities of disposal group held for sale
|
$
|
2,362,690
|
|
|
|
|
|
Certain assets and liabilities of the disposal group held for sale are in VIEs that are consolidated by the Company because it is the primary beneficiary.
The securities in the disposal group held for sale are carried at fair value and are categorized in Level 2 of the fair value measurement hierarchy as the valuation is based upon quoted prices in active markets for similar assets. The loans and assets pledged to securitization vehicles held for sale are carried at lower of cost or fair value and as such those loans that required a valuation allowance had a nonrecurring fair value measurement at June 30, 2021. These fair value measurements are categorized as Level 2 if they are based upon quoted prices in active markets for similar assets. If quotes were unavailable, a discounted cash flow or market based valuation technique based upon the underlying property to project property cash flows was used. In projecting these cash flows, the Company reviewed the borrower financial statements, rent rolls, economic trends and other factors management deems important. These nonrecurring fair value measurements are categorized as Level 3 of the fair value measurement hierarchy as there are unobservable inputs, which are significant to the overall fair value. The real estate held for sale is carried at lower of cost or fair value and was based upon the sale price and allocated to individual properties to determine if a valuation allowance was necessary. These fair value measurements are considered Level 3 of the fair value measurement hierarchy as there are unobservable inputs, which are significant to the overall fair value. The repurchase agreements and debt issued by securitization vehicles are categorized in Level 2 of the fair value measurement hierarchy as the valuation is based upon quoted market prices for similar liabilities. The mortgage loans payable fair value measurement are valued using Level 3 inputs.
At June 30, 2021, the repurchase agreements included in the liabilities of disposal group held for sale had remaining maturities of over 119 days with commercial loans pledged as collateral.
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|
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10. DERIVATIVE INSTRUMENTS
|
|
Derivative instruments include, but are not limited to, interest rate swaps, options to enter into interest rate swaps (“swaptions”), TBA derivatives, options on TBA securities (“MBS options”), U.S. Treasury and Eurodollar futures contracts and certain forward purchase commitments. The Company may also enter into other types of mortgage derivatives such as interest-only securities, credit derivatives referencing the commercial mortgage-backed securities index and synthetic total return swaps.
In connection with the Company’s investment/market rate risk management strategy, the Company economically hedges a portion of its interest rate risk by entering into derivative financial instrument contracts, which include interest rate swaps, swaptions and futures contracts. The Company may also enter into TBA derivatives, MBS options and U.S. Treasury or Eurodollar futures contracts, certain forward purchase commitments and credit derivatives to economically hedge its exposure to market risks. The purpose of using derivatives is to manage overall portfolio risk with the potential to generate additional income for distribution to stockholders. These derivatives are subject to changes in market values resulting from changes in interest rates, volatility, Agency mortgage-backed security spreads to U.S. Treasuries and market liquidity. The use of derivatives also creates exposure to credit risk relating to potential losses that could be recognized if the counterparties to these instruments fail to perform their obligations under the stated contract. Additionally, the Company may have to pledge cash or
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
assets as collateral for the derivative transactions, the amount of which may vary based on the market value and terms of the derivative contract. In the case of market agreed coupon (“MAC”) interest rate swaps, the Company may make or receive a payment at the time of entering into such interest rate swaps, which represents fair value of these swaps, to compensate for the out of market nature of such interest rate swaps. Subsequent changes in fair value from inception of these interest rate swaps are reflected within Unrealized gains (losses) on interest rate swaps in the Consolidated Statements of Comprehensive Income (Loss). Similar to other interest rate swaps, the Company may have to pledge cash or assets as collateral for the MAC interest rate swap transactions. In the event of a default by the counterparty, the Company could have difficulty obtaining its pledged collateral as well as receiving payments in accordance with the terms of the derivative contracts.
Derivatives are accounted for in accordance with FASB ASC 815, Derivatives and Hedging, which requires recognition of all derivatives as either assets or liabilities at fair value in the Consolidated Statements of Financial Condition with changes in fair value recognized in the Consolidated Statements of Comprehensive Income (Loss). The changes in the estimated fair value are presented within Net gains (losses) on other derivatives and financial instruments with the exception of interest rate swaps which are separately presented. None of the Company’s derivative transactions have been designated as hedging instruments for accounting purposes.
The Company also maintains collateral in the form of cash on margin with counterparties to its interest rate swaps and other derivatives. In accordance with a clearing organization’s rulebook, the Company presents the fair value of centrally cleared interest rate swaps net of variation margin pledged under such transactions. At June 30, 2021 and December 31, 2020, $1.1 billion and $1.5 billion, respectively, of variation margin was reported as an adjustment to interest rate swaps, at fair value.
Interest Rate Swap Agreements – Interest rate swap agreements are the primary instruments used to mitigate interest rate risk. In particular, the Company uses interest rate swap agreements to manage its exposure to changing interest rates on its repurchase agreements by economically hedging cash flows associated with these borrowings. The Company may enter into interest rate swap agreements where the floating leg is linked to the London Interbank Offered Rate (“LIBOR”), the overnight index swap rate or another index. Interest rate swap agreements may or may not be cleared through a derivatives clearing organization (“DCO”). Uncleared interest rate swaps are fair valued using internal pricing models and compared to the counterparty market values. Centrally cleared interest rate swaps, including MAC interest rate swaps, are generally fair valued using the DCO’s market values. If an interest rate swap is terminated, the realized gain (loss) on the interest rate swap would be equal to the difference between the cash received or paid and fair value.
Swaptions – Swaptions are purchased or sold to mitigate the potential impact of increases or decreases in interest rates. Interest rate swaptions provide the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future. The Company’s swaptions are not centrally cleared. The premium paid or received for swaptions is reported as an asset or liability in the Consolidated Statements of Financial Condition. If a swaption expires unexercised, the realized gain (loss) on the swaption would be equal to the premium received or paid. If the Company sells or exercises a swaption, the realized gain (loss) on the swaption would be equal to the difference between the cash received or the fair value of the underlying interest rate swap received and the premium paid. The fair value of swaptions are estimated using internal pricing models and compared to the counterparty market values.
TBA Dollar Rolls – TBA dollar roll transactions are accounted for as a series of derivative transactions. The fair value of TBA derivatives is based on methods similar to those used to value Agency mortgage-backed securities.
MBS Options – MBS options are generally options on TBA contracts, which help manage mortgage market risks and volatility while providing the potential to enhance returns. MBS options are over-the-counter traded instruments and those written on current-coupon mortgage-backed securities are typically the most liquid. MBS options are measured at fair value using internal pricing models and compared to the counterparty market value at the valuation date.
Futures Contracts – Futures contracts are derivatives that track the prices of specific assets or benchmark rates. Short sales of futures contracts help to mitigate the potential impact of changes in interest rates on the portfolio performance. The Company maintains margin accounts which are settled daily with Futures Commission Merchants (“FCMs”). The margin requirement varies based on the market value of the open positions and the equity retained in the account. Futures contracts are fair valued based on exchange pricing.
Forward Purchase Commitments – The Company may enter into forward purchase commitments with counterparties whereby the Company commits to purchasing residential mortgage loans at a particular price, provided the residential mortgage loans close with the counterparties. The counterparties are required to deliver the committed loans on a “best efforts” basis.
Credit Derivatives – The Company may enter into credit derivatives referencing a commercial mortgage-backed securities index, such as the CMBX index, and synthetic total return swaps.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The table below summarizes fair value information about our derivative assets and liabilities at June 30, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Instruments
|
|
|
June 30, 2021
|
|
December 31, 2020
|
Assets
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
Interest rate swaptions
|
|
|
$
|
134,434
|
|
|
$
|
74,470
|
|
TBA derivatives
|
|
|
31,944
|
|
|
96,109
|
|
Futures contracts
|
|
|
8,141
|
|
|
506
|
|
Purchase commitments
|
|
|
3,174
|
|
|
49
|
|
Credit derivatives (1)
|
|
|
4,196
|
|
|
—
|
|
Total derivative assets
|
|
|
$
|
181,889
|
|
|
$
|
171,134
|
|
Liabilities
|
|
|
|
|
|
Interest rate swaps
|
|
|
$
|
806,952
|
|
|
$
|
1,006,492
|
|
|
|
|
|
|
|
TBA derivatives
|
|
|
2,837
|
|
|
—
|
|
Futures contracts
|
|
|
87,814
|
|
|
19,413
|
|
Purchase commitments
|
|
|
2,656
|
|
|
—
|
|
Credit derivatives (1)
|
|
|
—
|
|
|
7,440
|
|
Total derivative liabilities
|
|
|
$
|
900,259
|
|
|
$
|
1,033,345
|
|
|
(1) The maximum potential amount of future payments is the notional amount of credit derivatives in which the Company sold protection of $445.0 million and $504.0 million at June 30, 2021 and December 31, 2020, respectively, plus any coupon shortfalls on the underlying tranche. As of June 30, 2021 and December 31, 2020 the credit derivative tranches referencing the basket of bonds had a range of ratings between AAA and A.
The following table summarizes certain characteristics of the Company’s interest rate swaps at June 30, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
Maturity
|
Current Notional (1)(2)
|
|
Weighted Average Pay Rate
|
|
Weighted Average Receive Rate
|
|
Weighted Average Years to Maturity (3)
|
(dollars in thousands)
|
0 - 3 years
|
$
|
31,164,200
|
|
|
0.24
|
%
|
|
0.09
|
%
|
|
1.55
|
3 - 6 years
|
3,100,000
|
|
|
0.13
|
%
|
|
0.08
|
%
|
|
3.88
|
6 - 10 years
|
5,730,500
|
|
|
1.25
|
%
|
|
0.61
|
%
|
|
8.18
|
Greater than 10 years
|
1,984,000
|
|
|
2.68
|
%
|
|
0.28
|
%
|
|
17.50
|
Total / Weighted average
|
$
|
41,978,700
|
|
|
0.81
|
%
|
|
0.34
|
%
|
|
3.38
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
Maturity
|
Current Notional (1)(2)
|
|
Weighted Average
Pay Rate
|
|
Weighted Average Receive Rate
|
|
Weighted Average Years to Maturity (3)
|
(dollars in thousands)
|
0 - 3 years
|
$
|
23,680,150
|
|
|
0.27
|
%
|
|
0.11
|
%
|
|
1.96
|
3 - 6 years
|
3,600,000
|
|
|
0.18
|
%
|
|
0.09
|
%
|
|
4.21
|
6 - 10 years
|
5,565,500
|
|
|
1.40
|
%
|
|
0.62
|
%
|
|
7.76
|
Greater than 10 years
|
1,484,000
|
|
|
3.06
|
%
|
|
0.36
|
%
|
|
20.52
|
Total / Weighted average
|
$
|
34,329,650
|
|
|
0.92
|
%
|
|
0.37
|
%
|
|
3.94
|
|
(1) As of June 30, 2021, 13%, 59% and 28% of the Company’s interest rate swaps were linked to LIBOR, the Federal funds rate and the Secured Overnight Financing Rate, respectively. As of December 31, 2020, 17%, 72% and 11% of the Company’s interest rate swaps were linked to LIBOR, the Federal funds rate and the Secured Overnight Financing Rate, respectively.
(2) There were no forward starting swaps at June 30, 2021 and December 31, 2020.
(3) At June 30, 2021 and December 31, 2020, the weighted average years to maturity of payer interest rate swaps is offset by the weighted average years to maturity of receiver interest rate swaps. As such, the net weighted average years to maturity for each maturity bucket may fall outside of the range listed.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The following table presents swaptions outstanding at June 30, 2021 and December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
|
Current Underlying Notional
|
|
Weighted Average Underlying Fixed Rate
|
|
Weighted Average Underlying Floating Rate
|
|
Weighted Average Underlying Years to Maturity
|
|
Weighted Average Months to Expiration
|
(dollars in thousands)
|
Long pay
|
|
$4,550,000
|
|
1.35%
|
|
3M LIBOR
|
|
10.14
|
|
2.80
|
Long receive
|
|
$1,500,000
|
|
1.51%
|
|
3M LIBOR
|
|
11.40
|
|
16.93
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
Current Underlying Notional
|
|
Weighted Average Underlying Fixed Rate
|
|
Weighted Average Underlying Floating Rate
|
|
Weighted Average Underlying Years to Maturity
|
|
Weighted Average Months to Expiration
|
(dollars in thousands)
|
Long pay
|
|
$8,050,000
|
|
1.27%
|
|
3M LIBOR
|
|
10.40
|
|
5.42
|
Long receive
|
|
$250,000
|
|
1.66%
|
|
3M LIBOR
|
|
10.02
|
|
0.13
|
The following table summarizes certain characteristics of the Company’s TBA derivatives at June 30, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
Purchase and sale contracts for derivative TBAs
|
Notional
|
|
Implied Cost Basis
|
|
Implied Market Value
|
|
Net Carrying Value
|
(dollars in thousands)
|
Purchase contracts
|
$
|
17,314,000
|
|
|
$
|
17,662,043
|
|
|
$
|
17,691,150
|
|
|
$
|
29,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
Purchase and sale contracts for derivative TBAs
|
Notional
|
|
Implied Cost Basis
|
|
Implied Market Value
|
|
Net Carrying Value
|
(dollars in thousands)
|
Purchase contracts
|
$
|
19,635,000
|
|
|
$
|
20,277,088
|
|
|
$
|
20,373,197
|
|
|
$
|
96,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes certain characteristics of the Company’s futures derivatives at June 30, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
Notional - Long
Positions
|
|
Notional - Short
Positions
|
|
Weighted Average
Years to Maturity
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury futures - 5 year
|
—
|
|
|
(2,884,000)
|
|
|
4.42
|
U.S. Treasury futures - 10 year and greater
|
$
|
—
|
|
|
$
|
(10,227,500)
|
|
|
7.47
|
Total
|
$
|
—
|
|
|
$
|
(13,111,500)
|
|
|
6.80
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Notional - Long
Positions
|
|
Notional - Short
Positions
|
|
Weighted Average
Years to Maturity
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury futures - 5 year
|
—
|
|
|
(1,240,000)
|
|
|
4.40
|
U.S. Treasury futures - 10 year and greater
|
—
|
|
|
(9,183,800)
|
|
|
6.90
|
Total
|
$
|
—
|
|
|
$
|
(10,423,800)
|
|
|
6.60
|
|
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
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 be offset on our Consolidated Statements of Financial Condition at June 30, 2021 and December 31, 2020, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
|
|
Amounts Eligible for Offset
|
|
|
|
Gross Amounts
|
|
Financial Instruments
|
|
Cash Collateral
|
|
Net Amounts
|
Assets
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
Interest rate swaptions, at fair value
|
$
|
134,434
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
134,434
|
|
TBA derivatives, at fair value
|
31,944
|
|
|
(2,596)
|
|
|
—
|
|
|
29,348
|
|
Futures contracts, at fair value
|
8,141
|
|
|
(8,141)
|
|
|
—
|
|
|
—
|
|
Purchase commitments
|
3,174
|
|
|
—
|
|
|
—
|
|
|
3,174
|
|
Credit derivatives
|
4,196
|
|
|
—
|
|
|
—
|
|
|
4,196
|
|
Liabilities
|
|
Interest rate swaps, at fair value
|
$
|
806,952
|
|
|
$
|
—
|
|
|
$
|
(83,737)
|
|
|
$
|
723,215
|
|
TBA derivatives, at fair value
|
2,837
|
|
|
(2,596)
|
|
|
—
|
|
|
241
|
|
Futures contracts, at fair value
|
87,814
|
|
|
(8,141)
|
|
|
(79,673)
|
|
|
—
|
|
Purchase commitments
|
2,656
|
|
|
—
|
|
|
—
|
|
|
2,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
Amounts Eligible for Offset
|
|
|
|
Gross Amounts
|
|
Financial Instruments
|
|
Cash Collateral
|
|
Net Amounts
|
Assets
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
Interest rate swaptions, at fair value
|
$
|
74,470
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
74,470
|
|
TBA derivatives, at fair value
|
96,109
|
|
|
—
|
|
|
—
|
|
|
96,109
|
|
Futures contracts, at fair value
|
506
|
|
|
(506)
|
|
|
—
|
|
|
—
|
|
Purchase commitments
|
49
|
|
|
—
|
|
|
—
|
|
|
49
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
Interest rate swaps, at fair value
|
$
|
1,006,492
|
|
|
$
|
—
|
|
|
$
|
(108,757)
|
|
|
$
|
897,735
|
|
|
|
|
|
|
|
|
|
Futures contracts, at fair value
|
19,413
|
|
|
(506)
|
|
|
(18,907)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Credit derivatives
|
7,440
|
|
|
—
|
|
|
(7,440)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
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)
|
|
Net Interest Component of Interest Rate Swaps
|
|
Realized Gains (Losses) on Termination of Interest Rate Swaps
|
|
Unrealized Gains (Losses) on Interest Rate Swaps
|
For the three months ended
|
(dollars in thousands)
|
June 30, 2021
|
$
|
(83,087)
|
|
|
$
|
—
|
|
|
$
|
(141,067)
|
|
June 30, 2020
|
$
|
(64,561)
|
|
|
$
|
(1,521,732)
|
|
|
$
|
1,494,628
|
|
For the six months ended
|
|
June 30, 2021
|
$
|
(162,834)
|
|
|
$
|
—
|
|
|
$
|
631,195
|
|
June 30, 2020
|
$
|
(78,541)
|
|
|
$
|
(1,919,293)
|
|
|
$
|
(1,333,095)
|
|
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The effect of other derivative contracts on the Company’s Consolidated Statements of Comprehensive Income (Loss) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2021
|
Derivative Instruments
|
Realized Gain (Loss)
|
|
Unrealized Gain (Loss)
|
|
Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives and Financial Instruments
|
(dollars in thousands)
|
Net TBA derivatives
|
$
|
10,045
|
|
|
$
|
275,226
|
|
|
$
|
285,271
|
|
Net interest rate swaptions
|
(22,787)
|
|
|
(232,860)
|
|
|
(255,647)
|
|
Futures
|
183,383
|
|
|
(577,899)
|
|
|
(394,516)
|
|
Purchase commitments
|
—
|
|
|
2,376
|
|
|
2,376
|
|
Credit derivatives
|
2,777
|
|
|
1,931
|
|
|
4,708
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
$
|
(357,808)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2020
|
Derivative Instruments
|
Realized Gain (Loss)
|
|
Unrealized Gain (Loss)
|
|
Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives and Financial Instruments
|
(dollars in thousands)
|
Net TBA derivatives
|
$
|
250,525
|
|
|
$
|
(46,363)
|
|
|
$
|
204,162
|
|
Net interest rate swaptions
|
(29,880)
|
|
|
(22,634)
|
|
|
(52,514)
|
|
Futures
|
246
|
|
|
(17,579)
|
|
|
(17,333)
|
|
Purchase commitments
|
—
|
|
|
9,666
|
|
|
9,666
|
|
Credit derivatives
|
1,203
|
|
|
25,732
|
|
|
26,935
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
$
|
170,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2021
|
Derivative Instruments
|
Realized Gain (Loss)
|
|
Unrealized Gain (Loss)
|
|
Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives
|
(dollars in thousands)
|
Net TBA derivatives
|
$
|
(277,844)
|
|
|
$
|
(67,002)
|
|
|
$
|
(344,846)
|
|
Net interest rate swaptions
|
(44,997)
|
|
|
73,130
|
|
|
28,133
|
|
Futures
|
479,547
|
|
|
(60,766)
|
|
|
418,781
|
|
Purchase commitments
|
—
|
|
|
469
|
|
|
469
|
|
Credit derivatives
|
4,408
|
|
|
10,954
|
|
|
15,362
|
|
Total
|
|
|
|
|
$
|
117,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2020
|
Derivative Instruments
|
Realized Gain (Loss)
|
|
Unrealized Gain (Loss)
|
|
Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives
|
(dollars in thousands)
|
Net TBA derivatives
|
$
|
521,610
|
|
|
$
|
114,331
|
|
|
$
|
635,941
|
|
Net interest rate swaptions
|
21,566
|
|
|
47,499
|
|
|
69,065
|
|
Futures
|
(279,230)
|
|
|
(10,687)
|
|
|
(289,917)
|
|
Purchase commitments
|
—
|
|
|
(1,143)
|
|
|
(1,143)
|
|
Credit derivatives
|
3,128
|
|
|
(39,732)
|
|
|
(36,604)
|
|
Total
|
|
|
|
|
$
|
377,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
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.
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 June 30, 2021 was approximately $725.2 million, which represents the maximum amount the Company would be required to pay upon termination. This amount is fully collateralized.
|
|
|
11. FAIR VALUE MEASUREMENTS
|
|
The Company follows fair value guidance in accordance with GAAP to account for its financial instruments and MSR that are accounted for at fair value. The fair value of a financial instrument and MSR is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Refer to the “Sale of Commercial Real Estate Business” Note for fair value measurements related to the assets and liabilities of the disposal group held for sale as of June 30, 2021.
GAAP requires classification of financial instruments and MSR into a three-level hierarchy based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
If the inputs used to measure the financial instruments and MSR fall within different levels of the hierarchy, the categorization is based on the lowest priority input that is significant to the fair value measurement of the instrument. Financial assets and liabilities recorded at fair value on the Consolidated Statements of Financial Condition or disclosed in the related notes are categorized based on the inputs to the valuation techniques as follows:
Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets and liabilities in active markets.
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – inputs to the valuation methodology are unobservable and significant to overall fair value.
The Company designates its securities as trading, available-for-sale or held-to-maturity depending upon the type of security and the Company’s intent and ability to hold such security to maturity. Securities classified as available-for-sale and trading are reported at fair value on a recurring basis.
The following is a description of the valuation methodologies used for instruments carried at fair value. These methodologies are applied to assets and liabilities across the three-level fair value hierarchy, with the observability of inputs determining the appropriate level.
Futures contracts are valued using quoted prices for identical instruments in active markets and are classified as Level 1.
Residential Securities, interest rate swaps, swaptions and other derivatives are valued using quoted prices or internally estimated prices for similar assets using internal models. The Company incorporates common market pricing methods, including a spread measurement to the Treasury curve as well as underlying characteristics of the particular security including coupon, prepayment speeds, periodic and life caps, rate reset period and expected life of the security in its estimates of fair value. Fair value estimates for residential mortgage loans are generated by a discounted cash flow model and are primarily based on observable market-based inputs including discount rates, prepayment speeds, delinquency levels, and credit losses. Management reviews and indirectly corroborates its estimates of the fair value derived using internal models by comparing its results to independent prices provided by dealers in the securities and/or third party pricing services. Certain liquid asset classes, such as Agency fixed-rate pass-throughs, may be priced using independent sources such as quoted prices for TBA securities.
Residential Securities, residential mortgage loans, interest rate swap and swaption markets, TBA derivatives and MBS options are considered to be active markets such that participants transact with sufficient frequency and volume to provide transparent pricing information on an ongoing basis. The liquidity of the Residential Securities, residential mortgage loans, interest rate swaps, swaptions, TBA derivatives and MBS options markets and the similarity of the Company’s securities to those actively traded enable the Company to observe quoted prices in the market and utilize those prices as a basis for formulating fair value measurements. Consequently, the Company has classified Residential Securities, residential mortgage loans, interest rate swaps, swaptions, TBA derivatives and MBS options as Level 2 inputs in the fair value hierarchy.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The fair value of commercial mortgage-backed securities classified as available-for-sale is determined based upon quoted prices of similar assets in recent market transactions and requires the application of judgment due to differences in the underlying collateral. Consequently, commercial real estate debt investments carried at fair value are classified as Level 2.
For the fair value of debt issued by securitization vehicles, refer to the “Variable Interest Entities” Note for additional information.
The Company classifies its investments in MSR and Interests in MSR as Level 3 in the fair value measurements hierarchy. Fair value estimates for these investments are obtained from models, which use significant unobservable inputs in their valuations. These valuations primarily utilize discounted cash flow models that incorporate unobservable market data inputs including prepayment rates, delinquency levels, costs to service and discount rates. Model valuations are then compared to valuations obtained from third party pricing providers. Management reviews the valuations received from third party pricing providers and uses them as a point of comparison to modeled values. The valuation of MSR and Interests in MSR require significant judgment by management and the third party pricing providers. Assumptions used for which there is a lack of observable inputs may significantly impact the resulting fair value and therefore the Company’s financial statements.
The following tables present the estimated fair values of financial instruments and MSR measured at fair value on a recurring basis. There were no transfers between levels of the fair value hierarchy during the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
(dollars in thousands)
|
Securities
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
$
|
—
|
|
|
$
|
66,468,519
|
|
|
$
|
—
|
|
|
$
|
66,468,519
|
|
Credit risk transfer securities
|
—
|
|
|
827,328
|
|
|
—
|
|
|
827,328
|
|
Non-Agency mortgage-backed securities
|
—
|
|
|
1,582,323
|
|
|
—
|
|
|
1,582,323
|
|
Commercial mortgage-backed securities
|
—
|
|
|
154,165
|
|
|
—
|
|
|
154,165
|
|
Loans
|
|
|
|
|
|
|
|
Residential mortgage loans
|
—
|
|
|
1,029,928
|
|
|
—
|
|
|
1,029,928
|
|
Mortgage servicing rights
|
—
|
|
|
—
|
|
|
202,616
|
|
|
202,616
|
|
Interests in MSR
|
—
|
|
|
—
|
|
|
49,035
|
|
|
49,035
|
|
Assets transferred or pledged to securitization vehicles
|
—
|
|
|
4,073,156
|
|
|
—
|
|
|
4,073,156
|
|
Derivative assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other derivatives
|
8,141
|
|
|
173,748
|
|
|
—
|
|
|
181,889
|
|
Total assets
|
$
|
8,141
|
|
|
$
|
74,309,167
|
|
|
$
|
251,651
|
|
|
$
|
74,568,959
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt issued by securitization vehicles
|
—
|
|
|
3,315,087
|
|
|
—
|
|
|
3,315,087
|
|
Participations issued
|
—
|
|
|
315,810
|
|
|
—
|
|
|
315,810
|
|
Derivative liabilities
|
|
|
|
|
|
|
|
Interest rate swaps
|
—
|
|
|
806,952
|
|
|
—
|
|
|
806,952
|
|
Other derivatives
|
87,814
|
|
|
5,493
|
|
|
—
|
|
|
93,307
|
|
Total liabilities
|
$
|
87,814
|
|
|
$
|
4,443,342
|
|
|
$
|
—
|
|
|
$
|
4,531,156
|
|
|
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
(dollars in thousands)
|
Securities
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
$
|
—
|
|
|
$
|
74,067,059
|
|
|
$
|
—
|
|
|
$
|
74,067,059
|
|
Credit risk transfer securities
|
—
|
|
|
532,403
|
|
|
—
|
|
|
532,403
|
|
Non-Agency mortgage-backed securities
|
—
|
|
|
972,192
|
|
|
—
|
|
|
972,192
|
|
Commercial mortgage-backed securities
|
—
|
|
|
80,742
|
|
|
—
|
|
|
80,742
|
|
Loans
|
|
|
|
|
|
|
|
Residential mortgage loans
|
—
|
|
|
345,810
|
|
|
—
|
|
|
345,810
|
|
Mortgage servicing rights
|
—
|
|
|
—
|
|
|
100,895
|
|
|
100,895
|
|
Assets transferred or pledged to securitization vehicles
|
—
|
|
|
6,035,671
|
|
|
—
|
|
|
6,035,671
|
|
Derivative assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other derivatives
|
506
|
|
|
170,628
|
|
|
—
|
|
|
171,134
|
|
Total assets
|
$
|
506
|
|
|
$
|
82,204,505
|
|
|
$
|
100,895
|
|
|
$
|
82,305,906
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt issued by securitization vehicles
|
$
|
—
|
|
|
$
|
5,652,982
|
|
|
$
|
—
|
|
|
$
|
5,652,982
|
|
Participations issued
|
—
|
|
|
39,198
|
|
|
—
|
|
|
39,198
|
|
Derivative liabilities
|
|
|
|
|
|
|
|
Interest rate swaps
|
—
|
|
|
1,006,492
|
|
|
—
|
|
|
1,006,492
|
|
Other derivatives
|
19,413
|
|
|
7,440
|
|
|
—
|
|
|
26,853
|
|
Total liabilities
|
$
|
19,413
|
|
|
$
|
6,706,112
|
|
|
$
|
—
|
|
|
$
|
6,725,525
|
|
|
Qualitative and Quantitative Information about Level 3 Fair Value Measurements
The Company considers unobservable inputs to be those for which market data is not available and that are developed using the best information available to us about the assumptions that market participants would use when pricing the asset. Relevant inputs vary depending on the nature of the instrument being measured at fair value. The sensitivities of significant unobservable inputs along with interrelationships between and among the significant unobservable inputs and their impact on the fair value measurements are described below. The effect of a change in a particular assumption in the sensitivity analysis below is considered independently from changes in any other assumptions. In practice, simultaneous changes in assumptions may not always have a linear effect on the inputs discussed below. Interrelationships may also exist between observable and unobservable inputs. Such relationships have not been included in the discussion below. For each of the individual relationships described below, the inverse relationship would also generally apply. For MSR and Interests in MSR, in general, increases in the discount, prepayment or delinquency rates or in annual servicing costs in isolation would result in a lower fair value measurement. A decline in interest rates could lead to higher-than-expected prepayments of mortgages underlying the Company’s investments in MSR and Interests in MSR, which in turn could result in a decline in the estimated fair value of MSR and Interests in MSR. Refer to the “Mortgage Servicing Rights” Note for additional information, including rollforwards.
The table below presents information about the significant unobservable inputs used for recurring fair value measurements for Level 3 MSR and Interests in MSR. The table does not give effect to the Company’s risk management practices that might offset risks inherent in these Level 3 investments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
Unobservable Input (1) / Range (Weighted Average) (2)
|
|
Discount rate
|
|
Prepayment rate
|
|
Delinquency rate
|
|
Cost to service
|
MSR consolidated with VIE
|
9.0% - 12.0% (9.0%)
|
|
9.4% - 30.7% (20.2%)
|
|
0.0% - 6.0% (2.4%)
|
|
$84 - $114 ($99)
|
MSR held directly
|
1.8% - 21.7% (9.0%)
|
|
6.7% - 14.4% (7.5%)
|
|
0.9% - 1.8% (1.1%)
|
|
$99 - $106 ($101)
|
Interests in MSR
|
9.5% - 11.4% (10.0%)
|
|
4.8% - 14.6% (9.0%)
|
|
0.6% - 5.0% (1.8%)
|
|
$78 - $86 ($85)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Unobservable Input (1) / Range (Weighted Average) (2)
|
|
Discount rate
|
|
Prepayment rate
|
|
Delinquency rate
|
|
Cost to service
|
MSR consolidated with VIE
|
9.0% - 12.0% (9.4%)
|
|
19.3% - 55.5% (42.0%)
|
|
0.0% - 6.0% (2.5%)
|
|
$83 - $108 ($98)
|
(1) Represents rates, estimates and assumptions that the Company believes would be used by market participants when valuing these assets.
|
(2) Weighted average discount rate computed based on the fair value of MSR, weighted average prepayment rate, delinquency rate and cost to service based on unpaid principal balances of loans underlying the MSR.
|
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The following table summarizes the estimated fair values for financial assets and liabilities that are not carried at fair value at June 30, 2021 and December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
|
|
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
Financial assets
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate debt and preferred equity, held for investment (1)
|
|
|
$—
|
|
$—
|
|
$1,372,430
|
|
$1,442,071
|
|
|
|
|
|
|
|
|
|
|
Corporate debt, held for investment
|
|
|
2,066,709
|
|
2,080,002
|
|
2,239,930
|
|
2,226,045
|
Assets transferred or pledged to securitization vehicles
|
|
|
—
|
|
—
|
|
874,349
|
|
928,732
|
Corporate debt, held for sale
|
|
|
466,370
|
|
466,370
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
|
$60,221,067
|
|
$60,221,067
|
|
$64,825,239
|
|
$64,825,239
|
Other secured financing
|
|
|
909,655
|
|
909,655
|
|
917,876
|
|
917,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages payable
|
|
|
—
|
|
—
|
|
426,256
|
|
474,779
|
(1) Includes assets of consolidated VIEs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate debt and preferred equity, held for investment, corporate debt, held for investment, corporate debt, held for sale and mortgages payable are valued using Level 3 inputs. The carrying values of repurchase agreements and short term other secured financing approximates fair value and are considered Level 2 fair value measurements. Long term other secured financing are valued using Level 2 inputs.
|
|
|
12. GOODWILL AND INTANGIBLE ASSETS
|
|
Goodwill
The Company’s acquisitions are accounted for using the acquisition method if the acquisition is deemed to be a business. Under the acquisition method, net assets and results of operations of acquired companies are included in the consolidated financial statements from the date of acquisition. The purchase prices are allocated to the assets acquired, including identifiable intangible assets, and the liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired is recognized as goodwill. Conversely, any excess of the fair value of the net assets acquired over the purchase price is recognized as a bargain purchase gain.
The Company tests goodwill for impairment on an annual basis or more frequently when events or circumstances may make it more likely than not that an impairment has occurred. If a qualitative analysis indicates that there may be an impairment, a quantitative analysis is performed. The quantitative impairment test for goodwill compares the fair value of a reporting unit with its carrying value, including goodwill. If the carrying value of a reporting unit exceeds its fair value, an impairment loss is recognized in amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. At June 30, 2021 and December 31, 2020, goodwill totaled $0 and $71.8 million, respectively. The change reflects the goodwill impairment in connection with the sale of the CRE business. Refer to the “Sale of Commercial Real Estate Business” Note for additional information.
Intangible assets, net
Finite life intangible assets are amortized over their expected useful lives. As part of the Internalization, which closed on June 30, 2020, the Company recognized an intangible asset for the acquired assembled workforce of approximately $41.2 million based on the replacement cost of the employee base acquired by the Company. During the three months ended June 30, 2021, the Company recognized an impairment of $4.3 million in Other income (loss) and $5.2 million in Business divestiture-related gains (losses) in the Consolidated Statements of Comprehensive Income (Loss) for changes to the assembled workforce.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The following table presents the activity of finite lived intangible assets for the six months ended June 30, 2021.
|
|
|
|
|
|
Intangible Assets, net
|
(dollars in thousands)
|
Balance at December 31, 2020
|
$
|
55,526
|
|
|
|
|
|
Impairment
|
(9,549)
|
|
Intangible assets included in disposal group held for sale
|
(14,528)
|
|
Less: amortization expense
|
(4,947)
|
|
Balance at June 30, 2021
|
$
|
26,502
|
|
|
Reverse Repurchase and Repurchase Agreements – The Company finances a significant portion of its assets with repurchase agreements. At the inception of each transaction, the Company assessed each of the specified criteria in ASC 860, Transfers and Servicing, and has determined that each of the financing agreements should be treated as a securing financing.
The Company enters into reverse repurchase agreements to earn a yield on excess cash balances. The Company receives collateral for reverse repurchase agreements and is required to post collateral for repurchase agreements. To mitigate credit exposure, the Company monitors the market value of these securities and delivers or obtains additional collateral based on changes in market value of these securities. Generally, the Company receives or posts collateral with a fair value approximately equal to or greater than the value of the secured financing.
Reverse repurchase agreements and 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 meet the criteria to permit netting. The Company reports cash flows on repurchase agreements as financing activities and cash flows on reverse repurchase agreements as investing activities in the Consolidated Statements of Cash Flows.
The Company had outstanding $60.2 billion and $64.8 billion of repurchase agreements with weighted average remaining maturities of 88 days and 64 days at June 30, 2021 and December 31, 2020, respectively. The Company has select arrangements with counterparties to enter into repurchase agreements for select credit assets for $1.6 billion with remaining capacity of $1.4 billion at June 30, 2021.
At June 30, 2021 and December 31, 2020, the repurchase agreements had the following remaining maturities, collateral types and weighted average rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
Agency Mortgage-Backed Securities
|
|
CRTs
|
|
Non-Agency Mortgage-Backed Securities
|
|
Residential Mortgage Loans
|
|
|
|
Commercial Mortgage-Backed Securities (1)
|
|
|
|
Total Repurchase Agreements
|
|
Weighted Average Rate
|
|
(dollars in thousands)
|
1 day
|
$
|
10,052,550
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
142,617
|
|
|
|
|
$
|
10,195,167
|
|
|
0.09
|
%
|
2 to 29 days
|
15,688,201
|
|
|
178,719
|
|
|
290,174
|
|
|
—
|
|
|
|
|
64,188
|
|
|
|
|
16,221,282
|
|
|
0.14
|
%
|
30 to 59 days
|
5,981,872
|
|
|
66,309
|
|
|
212,087
|
|
|
177,401
|
|
|
|
|
—
|
|
|
|
|
6,437,669
|
|
|
0.27
|
%
|
60 to 89 days
|
4,495,510
|
|
|
3,147
|
|
|
126,747
|
|
|
—
|
|
|
|
|
14,549
|
|
|
|
|
4,639,953
|
|
|
0.16
|
%
|
90 to 119 days
|
5,873,992
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
5,873,992
|
|
|
0.16
|
%
|
Over 119 days (2)
|
16,713,446
|
|
|
—
|
|
|
98,417
|
|
|
41,141
|
|
|
|
|
—
|
|
|
|
|
16,853,004
|
|
|
0.18
|
%
|
Total
|
$
|
58,805,571
|
|
|
$
|
248,175
|
|
|
$
|
727,425
|
|
|
$
|
218,542
|
|
|
|
|
$
|
221,354
|
|
|
|
|
$
|
60,221,067
|
|
|
0.16
|
%
|
|
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Agency Mortgage-Backed Securities
|
|
CRTs
|
|
Non-Agency Mortgage-Backed Securities
|
|
Residential Mortgage Loans
|
|
Commercial
Loans
|
|
Commercial Mortgage-Backed Securities
|
|
|
|
Total Repurchase Agreements
|
|
Weighted
Average
Rate
|
|
(dollars in thousands)
|
1 day
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
|
—
|
%
|
2 to 29 days
|
30,151,875
|
|
|
129,993
|
|
|
354,904
|
|
|
$
|
76,799
|
|
|
—
|
|
|
128,267
|
|
|
|
|
30,841,838
|
|
|
0.29
|
%
|
30 to 59 days
|
10,247,972
|
|
|
16,073
|
|
|
161,274
|
|
|
$
|
—
|
|
|
—
|
|
|
142,336
|
|
|
|
|
10,567,655
|
|
|
0.42
|
%
|
60 to 89 days
|
8,181,410
|
|
|
99,620
|
|
|
259,401
|
|
|
$
|
—
|
|
|
—
|
|
|
28,406
|
|
|
|
|
8,568,837
|
|
|
0.30
|
%
|
90 to 119 days
|
2,154,733
|
|
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
2,154,733
|
|
|
0.23
|
%
|
Over 119 days (2)
|
12,008,920
|
|
|
—
|
|
|
274,860
|
|
|
$
|
107,924
|
|
|
271,801
|
|
|
28,671
|
|
|
|
|
12,692,176
|
|
|
0.36
|
%
|
Total
|
$
|
62,744,910
|
|
|
$
|
245,686
|
|
|
$
|
1,050,439
|
|
|
$
|
184,723
|
|
|
$
|
271,801
|
|
|
$
|
327,680
|
|
|
|
|
$
|
64,825,239
|
|
|
0.32
|
%
|
|
(1) Includes commercial mortgage-backed securities held for sale.
(2) No repurchase agreements had a remaining maturity over 1 year at June 30, 2021. Less than 1% of the total repurchase agreements had a remaining maturity over 1 year at December 31, 2020.
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 at June 30, 2021 and December 31, 2020. Refer to the “Derivative Instruments” Note for information related to the effect of netting arrangements on the Company’s derivative instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
|
Reverse Repurchase Agreements
|
|
Repurchase Agreements
|
|
Reverse Repurchase Agreements
|
|
Repurchase Agreements
|
|
(dollars in thousands)
|
Gross amounts
|
$
|
—
|
|
|
$
|
60,221,067
|
|
|
$
|
250,000
|
|
|
$
|
65,075,239
|
|
Amounts offset
|
—
|
|
|
—
|
|
|
(250,000)
|
|
|
(250,000)
|
|
Netted amounts
|
$
|
—
|
|
|
$
|
60,221,067
|
|
|
$
|
—
|
|
|
$
|
64,825,239
|
|
|
The fair value of mortgage-backed securities received as collateral in connection with reverse repurchase agreements was approximately $0 and $250.0 million, which the Company fully repledged, at June 30, 2021 and December 31, 2020, respectively.
Other Secured Financing - Refer to the “Variable Interest Entities” Note for additional information on the Company’s other secured financing arrangements.
Investments pledged as collateral under secured financing arrangements and interest rate swaps, excluding residential and senior securitized commercial mortgage loans of consolidated VIEs, had an estimated fair value and accrued interest of $65.2 billion and $176.8 million, respectively, at June 30, 2021 and $70.6 billion and $196.9 million, respectively, at December 31, 2020.
(A) Common Stock
The following table provides a summary of the Company’s common shares authorized, and issued and outstanding at June 30, 2021 and December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares authorized
|
|
Shares issued and outstanding
|
|
|
June 30, 2021
|
|
December 31, 2020
|
|
June 30, 2021
|
|
December 31, 2020
|
Par Value
|
Common stock
|
2,936,500,000
|
|
|
2,914,850,000
|
|
|
1,444,156,029
|
|
|
1,398,240,618
|
|
$0.01
|
In June 2019, the Company announced that its board of directors (“Board”) had authorized the repurchase of up to $1.5 billion of its outstanding shares of common stock, which expired on December 31, 2020 (the “Prior Share Repurchase Program”). In
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
December 2020, the Company announced that its Board authorized the repurchase of up to $1.5 billion of its outstanding common shares through December 31, 2021 (the “Current Share Repurchase Program”). The Current Share Repurchase Program replaced the Prior Share Repurchase Program. During the three and six months ended June 30, 2021, no shares were purchased under the Current Share Repurchase Program. During the three and six months ended June 30, 2020, the Company repurchased 22.9 million shares of its common stock for an aggregate amount of $143.3 million, excluding commission costs, under the Prior Share Repurchase Program. All common shares were purchased in open-market transactions.
In January 2018, the Company entered into separate Distribution Agency Agreements (as amended and restated on August 6, 2020, collectively, the “Sales Agreements”) with each of Wells Fargo Securities, LLC, BofA Securities, Inc. (formerly known as Merrill Lynch, Pierce, Fenner & Smith, Incorporated), Barclays Capital Inc., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, Keefe, Bruyette & Woods, Inc., RBC Capital Markets, LLC and UBS Securities LLC (the “Sales Agents”). The Company may offer and sell shares of its common stock, having an aggregate offering price of up to $1.5 billion from time to time through any of the Sales Agents. During the three and six months ended June 30, 2021, the Company issued 45.5 million shares, for proceeds of $420.4 million, net of commissions and fees under the at-the-market sales program. No shares were issued under the at-the-market sales program during the three and six months ended June 30, 2020.
(B) Preferred Stock
The following is a summary of the Company’s cumulative redeemable preferred stock outstanding at June 30, 2021 and December 31, 2020. In the event of a liquidation or dissolution of the Company, the Company’s then outstanding preferred stock takes precedence over the Company’s common stock with respect to payment of dividends and the distribution of assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Authorized
|
|
Shares Issued And Outstanding
|
|
Carrying Value
|
Contractual Rate
|
Earliest Redemption Date (1)
|
Date At Which Dividend Rate Becomes Floating
|
Floating Annual Rate
|
|
June 30, 2021
|
|
December 31, 2020
|
|
June 30, 2021
|
|
December 31, 2020
|
|
June 30, 2021
|
|
December 31, 2020
|
Fixed-rate
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series D
|
—
|
|
|
18,400,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
7.50%
|
9/13/2017
|
NA
|
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-to-floating rate
|
Series F
|
28,800,000
|
|
|
28,800,000
|
|
|
28,800,000
|
|
|
28,800,000
|
|
|
696,910
|
|
|
696,910
|
|
6.95%
|
9/30/2022
|
9/30/2022
|
3M LIBOR + 4.993%
|
Series G
|
17,000,000
|
|
|
19,550,000
|
|
|
17,000,000
|
|
|
17,000,000
|
|
|
411,335
|
|
|
411,335
|
|
6.50%
|
3/31/2023
|
3/31/2023
|
3M LIBOR + 4.172%
|
Series I
|
17,700,000
|
|
|
18,400,000
|
|
|
17,700,000
|
|
|
17,700,000
|
|
|
428,324
|
|
|
428,324
|
|
6.75%
|
6/30/2024
|
6/30/2024
|
3M LIBOR + 4.989%
|
Total
|
63,500,000
|
|
|
85,150,000
|
|
|
63,500,000
|
|
|
63,500,000
|
|
|
$
|
1,536,569
|
|
|
$
|
1,536,569
|
|
|
|
|
|
|
(1) Subject to the Company’s right under limited circumstances to redeem preferred stock earlier in order to preserve its qualification as a REIT or under limited circumstances related to a change in control of the Company.
|
Each series of preferred stock has a par value of $0.01 per share and a liquidation and redemption price of $25.00, plus accrued and unpaid dividends through their redemption date. Through June 30, 2021, the Company had declared and paid all required quarterly dividends on the Company’s preferred stock.
The Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, Series G Preferred Stock and Series I Preferred Stock rank senior to the common stock of the Company.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
(C) Distributions to Stockholders
The following table provides a summary of the Company’s dividend distribution activity for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
June 30, 2021
|
|
June 30, 2020
|
|
June 30, 2021
|
|
June 30, 2020
|
|
(dollars in thousands, except per share data)
|
Dividends and dividend equivalents declared on common stock and share-based awards
|
$
|
318,534
|
|
|
$
|
309,972
|
|
|
$
|
626,880
|
|
|
$
|
667,791
|
|
Distributions declared per common share
|
$
|
0.22
|
|
|
$
|
0.22
|
|
|
$
|
0.44
|
|
|
$
|
0.47
|
|
Distributions paid to common stockholders after period end
|
$
|
317,714
|
|
|
$
|
309,686
|
|
|
$
|
317,714
|
|
|
$
|
309,686
|
|
Distributions paid per common share after period end
|
$
|
0.22
|
|
|
$
|
0.22
|
|
|
$
|
0.22
|
|
|
$
|
0.22
|
|
Date of distributions paid to common stockholders after period end
|
July 30, 2021
|
|
July 31, 2020
|
|
July 30, 2021
|
|
July 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared to series D preferred stockholders
|
$
|
—
|
|
|
$
|
8,625
|
|
|
$
|
—
|
|
|
$
|
17,250
|
|
Dividends declared per share of series D preferred stock
|
$
|
—
|
|
|
$
|
0.469
|
|
|
$
|
—
|
|
|
$
|
0.938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared to series F preferred stockholders
|
$
|
12,510
|
|
|
$
|
12,510
|
|
|
$
|
25,020
|
|
|
$
|
25,020
|
|
Dividends declared per share of series F preferred stock
|
$
|
0.434
|
|
|
$
|
0.434
|
|
|
$
|
0.869
|
|
|
$
|
0.869
|
|
Dividends declared to series G preferred stockholders
|
$
|
6,906
|
|
|
$
|
6,906
|
|
|
$
|
13,812
|
|
|
$
|
13,812
|
|
Dividends declared per share of series G preferred stock
|
$
|
0.406
|
|
|
$
|
0.406
|
|
|
$
|
0.813
|
|
|
$
|
0.813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared to series I preferred stockholders
|
$
|
7,467
|
|
|
$
|
7,468
|
|
|
$
|
14,934
|
|
|
$
|
14,936
|
|
Dividends declared per share of series I preferred stock
|
$
|
0.422
|
|
|
$
|
0.422
|
|
|
$
|
0.844
|
|
|
$
|
0.844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15. INTEREST INCOME AND INTEREST EXPENSE
|
|
Refer to the “Significant Accounting Policies” Note for details surrounding the Company’s accounting policy related to net interest income on securities and loans.
The following table summarizes the interest income recognition methodology for Residential Securities:
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|
|
|
|
|
|
Interest Income Methodology
|
Agency
|
|
Fixed-rate pass-through (1)
|
Effective yield (3)
|
Adjustable-rate pass-through (1)
|
Effective yield (3)
|
Multifamily (1)
|
Contractual Cash Flows
|
CMO (1)
|
Effective yield (3)
|
|
|
Reverse mortgages (2)
|
Prospective
|
Interest-only (2)
|
Prospective
|
Residential credit
|
|
CRT (2)
|
Prospective
|
Alt-A (2)
|
Prospective
|
Prime (2)
|
Prospective
|
Subprime (2)
|
Prospective
|
|
|
NPL/RPL (2)
|
Prospective
|
Prime jumbo (2)
|
Prospective
|
Prime jumbo interest-only (2)
|
Prospective
|
(1) Changes in fair value are recognized in Other comprehensive income (loss) on the accompanying Consolidated Statements of Comprehensive Income (Loss).
(2) Changes in fair value are recognized in Net unrealized gains (losses) on instruments measured at fair value through earnings on the accompanying Consolidated Statements of Comprehensive Income (Loss).
(3) Effective yield is recalculated for differences between estimated and actual prepayments and the amortized cost is adjusted as if the new effective yield had been applied since inception.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The following presents the components of the Company’s interest income and interest expense for the three and six months ended June 30, 2021 and June 30, 2020.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Interest income
|
(dollars in thousands)
|
Residential Securities (1)
|
$
|
275,278
|
|
|
$
|
457,684
|
|
|
$
|
919,912
|
|
|
$
|
868,064
|
|
Residential mortgage loans (1)
|
38,963
|
|
|
42,871
|
|
|
76,072
|
|
|
90,428
|
|
Commercial investment portfolio (1) (2)
|
69,663
|
|
|
84,208
|
|
|
151,264
|
|
|
179,884
|
|
|
|
|
|
|
|
|
|
Reverse repurchase agreements
|
2
|
|
|
49
|
|
|
36
|
|
|
1,462
|
|
Total interest income
|
$
|
383,906
|
|
|
$
|
584,812
|
|
|
$
|
1,147,284
|
|
|
$
|
1,139,838
|
|
Interest expense
|
|
|
|
|
|
|
|
Repurchase agreements
|
29,140
|
|
|
136,962
|
|
|
71,725
|
|
|
570,983
|
|
|
|
|
|
|
|
|
|
Debt issued by securitization vehicles
|
23,216
|
|
|
38,757
|
|
|
49,492
|
|
|
80,876
|
|
|
|
|
|
|
|
|
|
Participations issued
|
1,739
|
|
|
—
|
|
|
2,336
|
|
|
—
|
|
Other
|
6,952
|
|
|
10,313
|
|
|
13,467
|
|
|
37,646
|
|
Total interest expense
|
61,047
|
|
|
186,032
|
|
|
137,020
|
|
|
689,505
|
|
Net interest income
|
$
|
322,859
|
|
|
$
|
398,780
|
|
|
$
|
1,010,264
|
|
|
$
|
450,333
|
|
|
|
|
|
|
|
|
|
(1) Includes assets transferred or pledged to securitization vehicles.
(2 ) Includes commercial real estate debt and preferred equity and corporate debt.
|
|
|
|
|
|
|
|
16. 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 three and six months ended June 30, 2021 and June 30, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
June 30, 2021
|
|
June 30, 2020
|
|
June 30, 2021
|
|
June 30, 2020
|
|
(dollars in thousands, except per share data)
|
Net income (loss)
|
$
|
(294,848)
|
|
|
$
|
856,234
|
|
|
$
|
1,456,286
|
|
|
$
|
(2,783,955)
|
|
Net income (loss) attributable to noncontrolling interests
|
794
|
|
|
32
|
|
|
1,115
|
|
|
98
|
|
Net income (loss) attributable to Annaly
|
(295,642)
|
|
|
856,202
|
|
|
1,455,171
|
|
|
(2,784,053)
|
|
Dividends on preferred stock
|
26,883
|
|
|
35,509
|
|
|
53,766
|
|
|
71,018
|
|
Net income (loss) available (related) to common stockholders
|
$
|
(322,525)
|
|
|
$
|
820,693
|
|
|
$
|
1,401,405
|
|
|
$
|
(2,855,071)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding-basic
|
1,410,239,138
|
|
|
1,423,909,112
|
|
|
1,404,755,496
|
|
|
1,427,451,716
|
|
Add: Effect of stock awards, if dilutive
|
—
|
|
|
—
|
|
|
1,008,776
|
|
|
—
|
|
Weighted average shares of common stock outstanding-diluted
|
1,410,239,138
|
|
|
1,423,909,112
|
|
|
1,405,764,272
|
|
|
1,427,451,716
|
|
Net income (loss) per share available (related) to common share
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.23)
|
|
|
$
|
0.58
|
|
|
$
|
1.00
|
|
|
$
|
(2.00)
|
|
Diluted
|
$
|
(0.23)
|
|
|
$
|
0.58
|
|
|
$
|
1.00
|
|
|
$
|
(2.00)
|
|
The computations of diluted net income (loss) per share available (related) to common share for the three months ended June 30, 2021 excludes 3.2 million and the three and six months ended June 30, 2020 excludes 0.5 million and 0.4 million, respectively, of potentially dilutive restricted stock units because their effect would have been anti-dilutive.
For the three months ended June 30, 2021 the Company was qualified to be taxed as a REIT under Code Sections 856 through 860. As a REIT, the Company will not incur 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 that relate to, among other things, 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.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
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.
The Company and certain of its direct and indirect subsidiaries, including Annaly TRS, Inc. and certain subsidiaries of Mountain Merger Sub Corp., have made separate joint elections to treat these subsidiaries as TRSs. As such, each of these TRSs is taxable as a domestic C corporation and subject to federal, state and local income taxes based upon their taxable income.
The provisions of ASC 740, Income Taxes (“ASC 740”), clarify the accounting for uncertainty in income taxes recognized in financial statements and prescribe a recognition threshold and measurement attribute for uncertain tax positions taken or expected to be taken on a tax return. ASC 740 also requires that interest and penalties related to unrecognized tax benefits be recognized in the financial statements. The Company does not have any unrecognized tax benefits that would affect its financial position. Thus, no accruals for penalties and interest were deemed necessary at June 30, 2021 and December 31, 2020.
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 three and six months ended June 30, 2021, the Company recorded $5.1 million and $4.8 million, respectively, of income tax expense attributable to its TRSs. During the three and six months ended June 30, 2020, the Company recorded $2.1 million and ($24.6) million, respectively, of income tax expense (benefit) attributable to its TRSs. The Company’s federal, state and local tax returns from 2017 and forward remain open for examination.
The primary risks to the Company are capital, liquidity and funding risk, investment/market risk, credit risk and operational risk. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond the Company’s control. Changes in the general level of interest rates can affect net interest income, which is the difference between the interest income earned on interest earning assets and the interest expense incurred in connection with the interest bearing liabilities, by affecting the spread between the interest earning assets and interest bearing liabilities. Changes in the level of interest rates 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 or liquidating 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, changes in the expectations for the volatility of future interest rates and deterioration of financial conditions in general 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 investments at an inopportune time when prices are depressed. The Company has established policies and procedures for mitigating risks, including conducting scenario and sensitivity 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, which exclude CRT securities issued by Freddie Mac and Fannie Mae, is guaranteed by those respective agencies and the payment of principal and interest on Ginnie Mae Agency mortgage-backed securities is backed by the full faith and credit of the U.S. government. Substantially all of the Company’s Agency mortgage-backed 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, real estate investments, commercial mortgage-backed securities, residential mortgage loans, CRT securities, other non-Agency mortgage-backed securities and corporate debt. MSR values may also be adversely impacted by rising borrower delinquencies which would reduce servicing income and increase the overall costs to service the underlying mortgage loans. 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, pre-purchase due diligence, maintaining qualifying collateral and continually assessing the creditworthiness of issuers, borrowers, tenants and counterparties, credit rating monitoring and active servicer oversight.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The Company depends on third-party service providers to perform various business processes related to its operations, including mortgage loan servicers and sub-servicers. The Company’s vendor management policy establishes procedures for engaging, onboarding and monitoring the performance of third-party vendors. These procedures include assessing a vendor’s financial health as well as oversight of its compliance with applicable laws and regulations, cybersecurity and business continuity programs and security of personally identifiable information.
|
|
|
19. RELATED PARTY TRANSACTIONS
|
|
Closing of the Internalization and Termination of Management Agreement
On February 12, 2020, the Company entered into an internalization agreement (the “Internalization Agreement”) with the Former Manager and certain affiliates of the Former Manager. Pursuant to the Internalization Agreement, the Company agreed to acquire all of the outstanding equity interests of the Former Manager and the Former Manager’s direct and indirect parent companies from their respective owners (the “Internalization”) for nominal cash consideration ($1.00). In connection with the closing of the Internalization, on June 30, 2020, the Company acquired all of the assets and liabilities of the Former Manager (the net effect of which was immaterial in amount), and the Company transitioned from an externally-managed REIT to an internally-managed REIT. At the closing, all employees of the Former Manager became employees of the Company. The parties also terminated the Amended and Restated Management Agreement by and between the Company and the Former Manager (the “Management Agreement”) and therefore the Company no longer pays a management fee to, or reimburses expenses of, the Former Manager. Pursuant to the Internalization Agreement, the Former Manager waived any Acceleration Fee (as defined in the Management Agreement).
Prior to the closing of the Internalization, the Former Manager, under the Management Agreement and subject to the supervision and direction of the Board, was responsible for (i) the selection, purchase and sale of assets for the Company’s investment portfolio; (ii) recommending alternative forms of capital raising; (iii) supervising the Company’s financing and hedging activities; and (iv) day to day management functions. The Former Manager also performed such other supervisory and management services and activities relating to the Company’s assets and operations as appropriate. In exchange for the management services, the Company paid the Former Manager a monthly management fee, and the Former Manager was responsible for providing personnel to manage the Company. Prior to the closing of the Internalization, the Company had paid the Former Manager a monthly management fee for its management services in an amount equal to 1/12th of the sum of (i) 1.05% of Stockholders' Equity (as defined in the Management Agreement) up to $17.28 billion, and (ii) 0.75% of Stockholders' Equity (as defined in the Management Agreement) in excess of $17.28 billion. The Company did not pay the Former Manager any incentive fees.
For the three and six months ended June 30, 2020, the compensation and management fee computed in accordance with the Management Agreement was $37.0 million and $77.9 million, respectively, and reimbursement payments to the Former Manager were $7.1 million and $14.2 million, respectively.
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|
|
20. LEASE COMMITMENTS AND CONTINGENCIES
|
|
The Company’s operating leases are primarily comprised of a corporate office lease with a remaining lease term of approximately four years. The corporate office lease includes an option to extend for up to five years, however the extension term was not included in the operating lease liability calculation. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The lease cost for the three and six months ended June 30, 2021 was $0.7 million and $1.6 million, respectively.
Supplemental information related to leases as of and for the six months ended June 30, 2021 was as follows:
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
|
|
|
|
|
|
|
|
|
Operating Leases
|
Classification
|
June 30, 2021
|
|
Assets
|
(dollars in thousands)
|
Operating lease right-of-use assets
|
Other assets
|
$
|
11,843
|
|
|
|
|
Liabilities
|
Operating lease liabilities (1)
|
Other liabilities
|
$
|
15,437
|
|
|
|
|
Lease term and discount rate
|
Weighted average remaining lease term
|
|
4.2 years
|
|
|
|
Weighted average discount rate (1)
|
|
2.9%
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
Operating cash flows from operating leases
|
|
$
|
1,983
|
|
(1) As the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at adoption date in determining the present value of lease payments.
|
|
The following table provides details related to maturities of lease liabilities:
|
|
|
|
|
|
|
Maturity of Lease Liabilities
|
Years ending December 31,
|
(dollars in thousands)
|
2021 (remaining)
|
$
|
1,935
|
|
2022
|
3,862
|
|
2023
|
3,862
|
|
2024
|
3,862
|
|
2025
|
2,895
|
|
|
|
|
|
Total lease payments
|
$
|
16,416
|
|
Less imputed interest
|
979
|
|
Present value of lease liabilities
|
$
|
15,437
|
|
|
Contingencies
From time to time, the Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Company’s consolidated financial statements. There were no material contingencies at June 30, 2021 and December 31, 2020.
|
|
|
21. ARCOLA REGULATORY REQUIREMENTS
|
|
Arcola is the Company’s wholly owned and consolidated broker-dealer. Arcola 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.
Arcola is a member of various clearing organizations with which it maintains cash required to conduct its day-to-day clearance activities. Arcola enters into reverse repurchase agreements and repurchase agreements as part of its matched book trading activity. Reverse repurchase agreements are recorded on settlement date at the contractual amount and are collateralized by mortgage-backed or other securities. Arcola generates income from the spread between what is earned on the reverse repurchase agreements and what is paid on the matched repurchase agreements. Arcola’s policy is to obtain possession of collateral with a market value in excess of the principal amount loaned under reverse repurchase agreements. To ensure that the market value of the underlying collateral remains sufficient, collateral is valued daily, and Arcola will require counterparties to deposit additional collateral, when necessary. All reverse repurchase activities are transacted under master repurchase agreements or other documentation that give Arcola the right, in the event of default, to liquidate collateral held and in some instances, to offset receivables and payables with the same counterparty.
As a member of the Financial Industry Regulatory Authority (“FINRA”), Arcola is required to maintain a minimum net capital balance. At June 30, 2021, Arcola had a minimum net capital requirement of $0.3 million. Arcola consistently operates with capital in excess of its regulatory capital requirements. Arcola’s regulatory net capital as defined by SEC Rule 15c3-1 at June 30, 2021 was $516.9 million with excess net capital of $516.6 million.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
In July 2021, the Company completed and closed the securitization of residential mortgage loans, OBX 2021-J2 Trust, with a face value of $382.5 million. The securitization represented a financing transaction which provided non-recourse financing to the Company collateralized by residential mortgage loans purchased by the Company.
In July 2021, in the previously announced divestiture of the Company’s CRE business, a significant majority of the assets, including the platform, were transferred to Slate as part of the first closing of the transaction with remaining assets expected to be transferred in the second half of 2021.
In July 2021, the Company syndicated $466.4 million of corporate loans, which were classified as held for sale as of June 30, 2021.
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, risks and uncertainties related to the COVID-19 pandemic, including as related to adverse economic conditions on real estate-related assets and financing conditions (and our outlook for our business in light of these conditions, which is uncertain); 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 financing; changes in the market value of our assets; changes in business conditions and the general economy; operational risks or risk management failures by us or critical third parties, including cybersecurity incidents; our ability to grow our residential credit business; our ability to grow our middle market lending business; credit risks related to our investments in credit risk transfer securities, residential mortgage-backed securities and related residential mortgage credit assets, and corporate debt; risks related to investments in MSR; our ability to consummate any contemplated investment opportunities; changes in government regulations or policy affecting our business; our ability to maintain our qualification as a REIT for U.S. federal income tax purposes; our ability to maintain our exemption from registration under the Investment Company Act; and the timing and ultimate completion of the sale of our commercial real estate business. For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see “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.
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
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|
|
|
|
|
INDEX TO ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
Overview
We are a leading diversified capital manager with investment strategies across mortgage finance and corporate middle market lending. Our principal business objective is to generate net income for distribution to our stockholders and optimize our returns through prudent management of our diversified investment strategies. We are an internally-managed Maryland corporation founded in 1997 that has elected to be taxed as a REIT. Prior to the closing of the Internalization (as defined in the “Related Party Transactions” Note located within Item 1) on June 30, 2020, we were externally managed by Annaly Management Company LLC (the “Former Manager”). Our common stock is listed on the New York Stock Exchange under the symbol “NLY.”
We use our capital coupled with borrowed funds to invest primarily in real estate related investments, earning the spread between the yield on our assets and the cost of our borrowings and hedging activities.
For a full discussion of our business, refer to the section titled “Business Overview” in our most recent Annual Report on Form 10-K.
Recent Developments
Sale of Commercial Real Estate Business
On March 25, 2021, we announced that we entered into a definitive agreement to sell and exit our Commercial Real Estate (“CRE”) business to Slate Asset Management L.P. and Slate Grocery REIT (together, “Slate”). The transaction represents the sale of substantially all of the assets that comprise our CRE business, which include equity interests, loan assets and commercial mortgage-backed securities (other than commercial CRTs). Certain employees who primarily support the CRE business will join Slate in connection with the sale. Subject to customary closing conditions, including applicable regulatory approvals, the transfer of the CRE business is expected to be completed in the second half of 2021. Revenues and expenses associated with the CRE business will be reflected in our results of operations and key financial metrics through closing. Refer to the “Sale of Commercial Real Estate Business” and “Subsequent Events” Notes located within Item 1 for additional information related to the announced transaction.
Business Environment and COVID-19
The second quarter of 2021 saw 10-year Treasury rates decline by nearly 30 basis points despite peak economic reopening momentum and a meaningful acceleration in inflation readings. Spreads on Agency mortgage-backed securities (“MBS”), which entered the quarter at tight levels signaling full valuations, widened while credit sector spreads remained well supported. The challenging environment led us to generate a (4.0%) economic return (loss) and tangible economic return (loss), during the quarter on ($0.23) in GAAP net income (loss) per common share, and a $0.58 decline in our book value to $8.37 per common share as of June 30, 2021. Our total portfolio net of securitized debt (which includes market value of TBA purchase contracts and CMBX derivatives and excludes held for sale assets) decreased during the quarter to $92.9 billion, while credit investments as a share of the aggregate portfolio rose from 27% to 29% during the quarter.
The rally in interest rates during the quarter was somewhat contradictory relative to the strong economy seen during the period. Despite the economic reopening and inflation at multi-year highs, the yield curve flattened as rate markets viewed the pace of the current economic expansion as likely to fade, with growth and inflation expected to slow back to pre-pandemic levels in the medium-term. Meanwhile, the Federal Reserve (“Fed”) began signaling a shift in its reaction function at the June Federal Open Market Committee (“FOMC”) meeting. Having become concerned around an upside surprise in inflation, the FOMC signaled that it might raise short-term interest rates sooner than previously anticipated should inflation remain elevated.
Agency MBS, meanwhile, underperformed its rate hedges in this environment as banks slowed their purchases from record pace, investors recalibrated their taper expectations, and mortgage supply continued to remain elevated. More specifically, higher coupon Agency MBS, those with coupons of or above 3.5 percent, continued to face elevated prepayment speeds, which led investors to adjust their models to reflect this reality, thereby lowering the valuations of these securities. Faced with this challenging operating environment in Agency MBS, Annaly continued to prudently manage its portfolio, reducing leverage and hedging incremental moves in interest rates, while allocating capital towards credit investments with more attractive risk-adjusted returns.
As such, our residential credit business experienced another active quarter as we took advantage of opportunities in the unrated non- and re-performing securities market, as well as non-qualified loan market, activity which was boosted by the initiation of our in-house aggregation through Onslow Bay’s correspondent channel. Launched in April 2021, the program offers a diversified suite of mortgage products to purchase residential mortgage loans on a best-efforts flow basis that adhere to our credit standards. Outside of residential credit, we committed to increase our exposure to MSR during the quarter, through direct
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
purchases and third party partnerships bringing Annaly’s total MSR economic exposure (for both portfolios already settled and those committed to be settled at a future date) to approximately $409 million market value as of June 30, 2021. Finally, we also saw considerable portfolio activity in our Middle Market Lending business, which originated six deals for a total of approximately $450 million during the quarter, net of originations subsequently classified as held for sale at the end of the quarter.
The previously announced sale of our Commercial Real Estate business remains on track to be completed in the second half of 2021. After quarter end, the bulk of the platform – including a number of Annaly employees who supported the business – was successfully transferred as part of the first closing of the transaction. A significant majority of the assets were sold during this first close and we have received over 80% of the capital by the time of this filing.
Business Continuity
Our well-established Business Continuity Plan (“BCP”) has been designed to ensure continued, effective operations through a variety of scenarios including natural disasters and disease pandemics. It identifies critical systems, processes, roles and third parties, and can be adjusted on a real-time basis to address situations as they arise.
The BCP is regularly updated and tested. Annual testing includes extensive, remote Disaster Recovery testing and tabletop exercise scenarios with management. Key tenets of the plan include active communication between our Crisis Response Team, which is comprised of senior leaders across a number of functions, and our internal and external stakeholders to afford efficient, thoughtful, effective responses to evolving emergency situations.
Historical tabletop exercises have included use of Center for Disease Control and Prevention Influenza Pandemic exercise materials. That exercise documented our response and possible impacts to a variety of scenarios, including those in which “shelter in place orders” were required and response/impact assessments to those scenarios. Regular meetings were commenced to implement and review active internal and external communications planning. These exercises, along with regulatory and industry guidance, informed our staged response to the conditions created by COVID-19. We took proactive actions, which included canceling non-essential travel and instituting 100% remote working, ahead of New York State-mandated requirements. To protect the health and well-being of our employees, their families and communities remote work requirements began in phases in early March 2020, culminating with a company-wide exercise on March 13, 2020 to test connectivity and functionality. All employees were able to successfully perform their duties in this testing and we have operated largely remotely since that time.
Business activities continue to be performed primarily remotely, though we have seen a number of employees return to the office on a voluntary and periodic basis. At the present, we expect employees to return to the office more regularly starting in the fourth quarter of 2021 subject to continued successful vaccine rollout and accomodative guidance from federal, state and local authorities.
Economic Environment
The pace of growth accelerated in the second quarter, with U.S. gross domestic product (“GDP”) rising 6.5% percent on a seasonally adjusted annualized rate. Growth was boosted as the U.S. economy reopened and service sector consumption rose strongly, while consumers, supported by healthy balance sheets and recent stimulus payments, continued to spend on goods as well.
The unemployment rate fell 0.1 percentage points in the second quarter to 5.9% in June according to the Bureau of Labor Statistics. Meanwhile, seasonally adjusted total non-farm payroll employment rose by an average 567 thousand workers per month to 145.8 million employees, but remains roughly 6.7 million employees below the number of employed in February 2020 at the onset of the COVID-19 pandemic. Employment gains generally disappointed expectations for even better gains into the economic reopening, yet a number of factors including lingering COVID-19 fears, job skill mismatches, and elevated employment benefits appear to have held back employment growth. Wage growth, as measured by the year-over-year change in private sector average hourly earnings, contracted further during the quarter, reading 3.6% in June compared to 4.3% in March 2021. The slowdown in wage growth remains mostly a statistical anomaly, driven by a relatively larger share of job losses among lower-paid employees at the height of the pandemic, which inflated wage gains for most of 2020. As these wage gains fall out of year-over-year calculations, wage gains tend to be somewhat depressed on these metrics. Of note, wage growth has been relatively strong in reopening sectors of late. For example, average hourly earnings in the leisure and hospitality sector have exceeded 1.0% month-over-month growth for four consecutive months, suggesting healthy earnings growth in a sector that is seeing strong demand for labor in the middle of the economic reopening.
Inflation readings, as measured by the year-over-year changes in the Personal Consumption Expenditure Chain Price Index (“PCE”), have risen sharply from their pandemic lows and are currently running meaningfully above the Fed’s 2% inflation target. The headline PCE measure increased by 3.99% year-over-year in June 2021, while the more stable core PCE measure, which excludes volatile food and energy prices, registered 3.54% year-over-year increase, above the 1.97% year-over-year
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
growth measured in March 2021. The acceleration in price increases was driven by the combination of strong demand for goods and services and simultaneous supply bottlenecks. For example, consumers, wary of COVID-19 related risks on public transportation but supported by excess savings from financial stimulus, opted to purchase increased amounts of cars. Car manufacturers, meanwhile, were unable to meet increased demand as the pandemic led to disruptions to supply chains and a shortage in microchip production limited total production of new cars. These bottlenecks are likely to ease in months ahead as production catches up to demand, thereby lowering price pressures.
Disregarding the current sharp rise in inflation measures for now, the FOMC maintained the Federal Funds Target Rate in the 0.00% - 0.25% range and continued to signal that it will maintain the rate at current levels for an extended period of time. In addition, the FOMC continued its quantitative easing program. The combined Fed actions have continued to support financial conditions and market functioning, which in turn has helped the economic recovery.
The following table below presents interest rates and spreads at each date presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
|
June 30, 2020
|
30-Year mortgage current coupon
|
1.83%
|
|
1.34%
|
|
1.57%
|
Mortgage basis
|
36 bps
|
|
43 bps
|
|
91 bps
|
10-Year U.S. Treasury rate
|
1.47%
|
|
0.91%
|
|
0.66%
|
LIBOR
|
|
|
|
|
|
1-Month
|
0.10%
|
|
0.14%
|
|
0.15%
|
6-Month
|
0.16%
|
|
0.26%
|
|
0.26%
|
London Interbank Offered Rate (“LIBOR”) Transition Working Group
On March 5, 2021, the United Kingdom Financial Conduct Authority (“FCA”), which regulates LIBOR, announced that all LIBOR tenors relevant to us will cease to be published or will no longer be representative after June 30, 2023. The FCA's announcement coincides with the March 5, 2021 announcement of LIBOR's administrator, the ICE Benchmark Administration Limited (“IBA”), indicating that, as a result of not having access to input data necessary to calculate LIBOR tenors relevant to us on a representative basis after June 30, 2023, IBA would have to cease publication of such LIBOR tenors immediately after the last publication on June 30, 2023. These announcements mean that any of our LIBOR-based borrowings that extend beyond June 30, 2023 will need to be converted to a replacement rate.
We have established a cross-functional LIBOR transition committee to determine our transition plan and facilitate an orderly transition to alternative reference rates. Our plan includes steps to evaluate exposure, review contracts, assess impact to our business, process and technology and define a communication strategy with shareholders, regulators and other stakeholders. The committee also continues to engage with industry working groups and other market participants regarding the transition. We continue to remain on track with our LIBOR transition plan, which requires different solutions depending on the underlying asset or liability. Similar to the rest of the market, the bulk of our exposure is in derivatives contracts. Certain contracts, such as interest rate swaps, have an orderly market transition already in process, whereas other contracts, such as loan agreements require bilateral amendments with transition currently in process and adequate time left to resolve.
Results of Operations
The results of our operations are affected by various factors, many of which are beyond our control. Certain of such risks and uncertainties are described herein (see “Special Note Regarding Forward-Looking Statements” above) and in Part I, Item 1A. “Risk Factors” of our most recent Annual Report on Form 10-K and in Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q.
This Management Discussion and Analysis section contains analysis and discussion of financial results computed in accordance with U.S. generally accepted accounting principles (“GAAP”) and non-GAAP measurements. To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide non-GAAP financial measures to enhance investor understanding of our period-over-period operating performance and business trends, as well as for assessing our performance versus that of industry peers.
Refer to the “Non-GAAP Financial Measures” section for additional information.
Commencing with our financial results for the quarter ended June 30, 2021 and for subsequent reporting periods, we relabeled “Core Earnings (excluding PAA)” as “Earnings Available for Distribution” (“EAD”). Earnings Available for Distribution, which is a non-GAAP financial measure intended to supplement our financial results computed in accordance with U.S.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
generally accepted accounting principles (“GAAP”), has replaced our prior presentation of Core Earnings (excluding PAA). In addition, Core Earnings (excluding PAA) results from prior reporting periods has been relabeled Earnings Available for Distribution. In line with evolving industry practices, we believe the term Earnings Available for Distribution more accurately reflects the principal purpose of the measure than the term Core Earnings (excluding PAA) and will serve as a useful indicator for investors in evaluating our performance and our ability to pay dividends.
The definition of Earnings Available for Distribution is identical to the definition of Core Earning (excluding PAA) from prior reporting periods. As such, Earnings Available for Distribution is defined as the sum of (a) economic net interest income, (b) TBA dollar roll income and CMBX coupon income, (c) realized amortization of MSR, (d) other income (loss) (excluding depreciation expense related to commercial real estate and amortization of intangibles, non-EAD income allocated to equity method investments and other non-EAD components of other income (loss)), (e) general and administrative expenses (excluding transaction expenses and non-recurring items) and (f) income taxes (excluding the income tax effect of non-EAD income (loss) items) and excludes (g) the premium amortization adjustment (“PAA”) representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency mortgage-backed securities.
Earnings Available for Distribution should not be considered a substitute for, or superior to, GAAP net income. Please refer to the “Non-GAAP Financial Measures” section for a detailed discussion of Earnings Available for Distribution.
Beginning with the quarter ended June 30, 2021, we began classifying certain portfolio activity-related or volume-related expenses as Other income (loss) rather than Other general and administrative expenses in the Consolidated Statements of Comprehensive Income (Loss) to better reflect the nature of the items. As such, prior periods have been conformed to the current presentation. Refer to the “General and Administrative Expenses” section for additional information.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
Net Income (Loss) Summary
The following table presents financial information related to our results of operations as of and for the three and six months ended June 30, 2021 and 2020.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Three Months Ended June 30,
|
|
As of and for the Six Months Ended June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
(dollars in thousands, except per share data)
|
Interest income
|
$
|
383,906
|
|
|
$
|
584,812
|
|
|
$
|
1,147,284
|
|
|
$
|
1,139,838
|
|
Interest expense
|
61,047
|
|
|
186,032
|
|
|
137,020
|
|
|
689,505
|
|
Net interest income
|
322,859
|
|
|
398,780
|
|
|
1,010,264
|
|
|
450,333
|
|
Realized and unrealized gains (losses)
|
(560,722)
|
|
|
511,951
|
|
|
537,123
|
|
|
(3,143,790)
|
|
Other income (loss)
|
1,675
|
|
|
12,328
|
|
|
15,143
|
|
|
19,490
|
|
Less: Total general and administrative expenses
|
53,526
|
|
|
64,770
|
|
|
101,431
|
|
|
134,635
|
|
Income (loss) before income taxes
|
(289,714)
|
|
|
858,289
|
|
|
1,461,099
|
|
|
(2,808,602)
|
|
Income taxes
|
5,134
|
|
|
2,055
|
|
|
4,813
|
|
|
(24,647)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
(294,848)
|
|
|
856,234
|
|
|
1,456,286
|
|
|
(2,783,955)
|
|
Less: Net income (loss) attributable to noncontrolling interests
|
794
|
|
|
32
|
|
|
1,115
|
|
|
98
|
|
Net income (loss) attributable to Annaly
|
(295,642)
|
|
|
856,202
|
|
|
1,455,171
|
|
|
(2,784,053)
|
|
Less: Dividends on preferred stock
|
26,883
|
|
|
35,509
|
|
|
53,766
|
|
|
71,018
|
|
Net income (loss) available (related) to common stockholders
|
$
|
(322,525)
|
|
|
$
|
820,693
|
|
|
$
|
1,401,405
|
|
|
$
|
(2,855,071)
|
|
Net income (loss) per share available (related) to common stockholders
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.23)
|
|
|
$
|
0.58
|
|
|
$
|
1.00
|
|
|
$
|
(2.00)
|
|
Diluted
|
$
|
(0.23)
|
|
|
$
|
0.58
|
|
|
$
|
1.00
|
|
|
$
|
(2.00)
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
Basic
|
1,410,239,138
|
|
|
1,423,909,112
|
|
|
1,404,755,496
|
|
|
1,427,451,716
|
|
Diluted
|
1,410,239,138
|
|
|
1,423,909,112
|
|
|
1,405,764,272
|
|
|
1,427,451,716
|
|
Other information
|
|
|
|
|
|
|
|
Investment portfolio at period-end
|
$
|
80,222,151
|
|
|
$
|
90,442,332
|
|
|
$
|
80,222,151
|
|
|
$
|
90,442,332
|
|
Average total assets
|
$
|
83,872,947
|
|
|
$
|
95,187,964
|
|
|
$
|
85,400,332
|
|
|
$
|
106,890,336
|
|
Average equity
|
$
|
13,853,386
|
|
|
$
|
13,252,567
|
|
|
$
|
13,909,522
|
|
|
$
|
14,100,492
|
|
GAAP leverage at period-end (1)
|
4.7:1
|
|
5.5:1
|
|
4.7:1
|
|
5.5:1
|
GAAP capital ratio at period-end (2)
|
16.6
|
%
|
|
14.8
|
%
|
|
16.6
|
%
|
|
14.8
|
%
|
Annualized return on average total assets
|
(1.41
|
%)
|
|
3.60
|
%
|
|
3.41
|
%
|
|
(5.21
|
%)
|
Annualized return on average equity
|
(8.51
|
%)
|
|
25.84
|
%
|
|
20.94
|
%
|
|
(39.49
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (3)
|
1.66
|
%
|
|
1.89
|
%
|
|
2.54
|
%
|
|
0.90
|
%
|
|
|
|
|
|
|
|
|
Average yield on interest earning assets (4)
|
1.97
|
%
|
|
2.77
|
%
|
|
2.89
|
%
|
|
2.27
|
%
|
|
|
|
|
|
|
|
|
Average GAAP cost of interest bearing liabilities (5)
|
0.35
|
%
|
|
0.96
|
%
|
|
0.39
|
%
|
|
1.48
|
%
|
|
|
|
|
|
|
|
|
Net interest spread
|
1.62
|
%
|
|
1.81
|
%
|
|
2.50
|
%
|
|
0.79
|
%
|
|
|
|
|
|
|
|
|
Weighted average experienced CPR for the period
|
26.4
|
%
|
|
19.5
|
%
|
|
25.2
|
%
|
|
16.6
|
%
|
Weighted average projected long-term CPR at period-end
|
12.9
|
%
|
|
18.0
|
%
|
|
12.9
|
%
|
|
18.0
|
%
|
Common stock book value per share
|
$
|
8.37
|
|
|
$
|
8.39
|
|
|
$
|
8.37
|
|
|
$
|
8.39
|
|
Non-GAAP metrics (6)
|
|
|
|
|
|
|
|
Interest income (excluding PAA)
|
$
|
537,513
|
|
|
$
|
636,554
|
|
|
$
|
1,086,321
|
|
|
$
|
1,482,302
|
|
Economic interest expense (5)
|
$
|
144,134
|
|
|
$
|
250,593
|
|
|
$
|
299,854
|
|
|
$
|
768,046
|
|
Economic net interest income (excluding PAA)
|
$
|
393,379
|
|
|
$
|
385,961
|
|
|
$
|
786,467
|
|
|
$
|
714,256
|
|
|
|
|
|
|
|
|
|
Premium amortization adjustment cost (benefit)
|
$
|
153,607
|
|
|
$
|
51,742
|
|
|
$
|
(60,963)
|
|
|
$
|
342,464
|
|
Earnings available for distribution (7)
|
$
|
451,358
|
|
|
$
|
424,580
|
|
|
$
|
890,877
|
|
|
$
|
754,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings available for distribution per common share
|
$
|
0.30
|
|
|
$
|
0.27
|
|
|
$
|
0.59
|
|
|
$
|
0.48
|
|
Annualized EAD return on average equity (excluding PAA)
|
13.05
|
%
|
|
12.82
|
%
|
|
12.82
|
%
|
|
10.71
|
%
|
Economic leverage at period-end (1)
|
5.8:1
|
|
6.4:1
|
|
5.8:1
|
|
6.4:1
|
Economic capital ratio at period-end (2)
|
14.3
|
%
|
|
13.0
|
%
|
|
14.3
|
%
|
|
13.0
|
%
|
Net interest margin (excluding PAA) (3)
|
2.09
|
%
|
|
1.88
|
%
|
|
2.00
|
%
|
|
1.50
|
%
|
Average yield on interest earning assets (excluding PAA) (4)
|
2.76
|
%
|
|
3.01
|
%
|
|
2.73
|
%
|
|
2.96
|
%
|
Average economic cost of interest bearing liabilities (5)
|
0.83
|
%
|
|
1.29
|
%
|
|
0.85
|
%
|
|
1.65
|
%
|
Net interest spread (excluding PAA)
|
1.93
|
%
|
|
1.72
|
%
|
|
1.88
|
%
|
|
1.31
|
%
|
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) GAAP leverage is computed as the sum of repurchase agreements, other secured financing, debt issued by securitization vehicles, participations issued and mortgages payable divided by total equity. Economic leverage is computed as the sum of recourse debt, cost basis of to-be-announced (“TBA”) and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity. Recourse debt consists of repurchase agreements and other secured financing (excluding certain non-recourse credit facilities). Certain credit facilities (included within other secured financing), debt issued by securitization vehicles, participations issued, and mortgages payable are non-recourse to the Company and are excluded from economic leverage.
(2) GAAP capital ratio is computed as total equity divided by total assets. Economic capital ratio is computed as total equity divided by total economic assets. Total economic assets include the implied market value of TBA derivatives and net of debt issued by securitization vehicles.
(3) Net interest margin represents our interest income less interest expense divided by the average interest earning assets. Net interest margin (excluding PAA) represents the sum of our interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swaps divided by the sum of average interest earning assets plus average outstanding TBA contract and CMBX balances.
(4) Average yield on interest earning assets represents annualized interest income divided by average interest earning assets. Average interest earning assets reflects the average amortized cost of our investments during the period. Average yield on interest earning assets (excluding PAA) is calculated using annualized interest income (excluding PAA).
(5) Average GAAP cost of interest bearing liabilities represents annualized interest expense divided by average interest bearing liabilities. Average interest bearing liabilities reflects the average balances during the period. Average economic cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities. Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps.
(6) Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information.
(7) Excludes dividends on preferred stock.
|
GAAP
Net income (loss) was ($294.8) million, which includes $0.8 million attributable to noncontrolling interests, or ($0.23) per average basic common share, for the three months ended June 30, 2021 compared to $856.2 million, which includes $0.0 million attributable to noncontrolling interests, or $0.58 per average basic common share, for the same period in 2020. We attribute the majority of the change in net income (loss) to unfavorable changes in unrealized gains (losses) on interest rate swaps, net gains (losses) on other derivatives and financial instruments, net unrealized gains (losses) on instruments measured at fair value through earnings and net gains (losses) on disposal of investments and other, partially offset by a favorable change in realized gains (losses) on termination or maturity of interest rate swaps. Net unrealized gains (losses) on interest rate swaps was ($141.1) million for the three months ended June 30, 2021 compared to $1.5 billion for the same period in 2020. Net gains (losses) on other derivatives and financial instruments was ($357.8) million for the three months ended June 30, 2021 compared to $170.9 million for the same period in 2020. Net unrealized gains (losses) on instruments measured at fair value through earnings was $4.0 million for the three months ended June 30, 2021 compared to $254.8 million for the same period in 2020. Net gains (losses) on disposal of investments and other was $16.2 million for the three months ended June 30, 2021 compared to $246.7 million for the same period in 2020. Realized gains (losses) on termination or maturity of interest rate swaps was $0 for the three months ended June 30, 2021 compared to ($1.5) billion for the same period in 2020. Refer to the section titled “Realized and Unrealized Gains (Losses)” located within this Item 2 for additional information related to these changes.
Net income (loss) was $1.5 billion, which includes $1.1 million attributable to noncontrolling interests, or $1.00 per average basic common share, for the six months ended June 30, 2021 compared to ($2.8) billion which includes $0.1 million attributable to noncontrolling interests, or ($2.00) per average basic common share, for the same period in 2020. We attribute the majority of the change in net income (loss) to favorable changes in unrealized gains (losses) on interest rate swaps, realized gains (losses) on termination or maturity of interest rate swaps, net unrealized gains (losses) on instruments measured at fair value through earnings and net interest income, partially offset by unfavorable changes in net gains (losses) on disposal of investments and other and net gains (losses) on other derivatives and financial instruments. Realized losses on termination or maturity of interest rate swaps was $0 for the six months ended June 30, 2021 compared to ($1.9) billion for the same period in 2020. Net unrealized gains (losses) on interest rate swaps was $631.2 million for the six months ended June 30, 2021 compared to ($1.3) billion for the same period in 2020. Net unrealized gains (losses) on instruments measured at fair value through earnings for the six months ended June 30, 2021 was $108.2 million compared to ($475.4) million for the same period in 2020. Net interest income for the six months ended June 30, 2021 was $1.0 billion compared to $450.3 million for the same period in 2020. Net gains (losses) on disposal of investments and other was ($49.6) million for the six months ended June 30, 2021 compared to $453.3 million for the same period in 2020. Net gains (losses) on other derivatives was $119.1 million for the six months ended June 30, 2021 compared to $377.3 million for the same period in 2020. Refer to the section titled “Realized and Unrealized Gains (Losses)” located within this Item 2 for additional information related to these changes.
Non-GAAP
Earnings available for distribution were $451.4 million, or $0.30 per average common share, for the three months ended June 30, 2021, compared to $424.6 million, or $0.27 per average common share, for the same period in 2020. The change in earnings available for distribution during the three months ended June 30, 2021 compared to the same period in 2020 was primarily due to lower interest expense from lower borrowing rates and average interest bearing liabilities, and higher TBA dollar roll
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
income, partially offset by lower coupon income resulting from lower average interest earning assets and unfavorable changes in the net interest component of interest rate swaps.
Earnings available for distribution were $890.9 million, or $0.59 per average common share, for the six months ended June 30, 2021, compared to $754.8 million, or $0.48 per average common share, for the same period in 2020. The change in earnings available for distribution during the six months ended June 30, 2021 compared to the same period in 2020 was primarily due to lower interest expense from lower borrowing rates and average interest bearing liabilities and higher TBA dollar roll income, partially offset by unfavorable changes in the net interest component of interest rate swaps.
Non-GAAP Financial Measures
To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide the following non-GAAP financial measures:
•earnings available for distribution (“EAD”);
•earnings available for distribution attributable to common stockholders;
•earnings available for distribution per average common share;
•annualized EAD return on average equity;
•economic leverage;
•economic capital ratio;
•interest income (excluding PAA);
•economic interest expense;
•economic net interest income (excluding PAA);
•average yield on interest earning assets (excluding PAA);
•average economic cost of interest bearing liabilities;
•net interest margin (excluding PAA); and
•net interest spread (excluding PAA).
These measures should not be considered a substitute for, or superior to, financial measures computed in accordance with GAAP. While intended to offer a fuller understanding of our results and operations, non-GAAP financial measures also have limitations. For example, we may calculate our non-GAAP metrics, such as earnings available for distribution, or the PAA, differently than our peers making comparative analysis difficult. Additionally, in the case of non-GAAP measures that exclude the PAA, the amount of amortization expense excluding the PAA is not necessarily representative of the amount of future periodic amortization nor is it indicative of the term over which we will amortize the remaining unamortized premium. Changes to actual and estimated prepayments will impact the timing and amount of premium amortization and, as such, both GAAP and non-GAAP results.
These non-GAAP measures provide additional detail to enhance investor understanding of our period-over-period operating performance and business trends, as well as for assessing our performance versus that of industry peers. Additional information pertaining to our use of these non-GAAP financial measures, including discussion of how each such measure may be useful to investors, and reconciliations to their most directly comparable GAAP results are provided below.
Earnings available for distribution, earnings available for distribution attributable to common stockholders, earnings available for distribution per average common share and annualized EAD return on average equity
Our principal business objective is to generate net income for distribution to our stockholders and optimize our returns through prudent management of our diversified investment strategies. We generate net income by earning a net interest spread on our investment portfolio, which is a function of interest income from our investment portfolio less financing, hedging and operating costs. Earnings available for distribution, which is defined as the sum of (a) economic net interest income, (b) TBA dollar roll income and CMBX coupon income, (c) realized amortization of MSR, (d) other income (loss) (excluding depreciation and amortization expense on real estate and related intangibles, non-EAD income allocated to equity method investments and other non-EAD components of other income (loss)), (e) general and administrative expenses (excluding transaction expenses and non-recurring items), and (f) income taxes (excluding the income tax effect of non-EAD income (loss) items), and excludes (g) the premium amortization adjustment (“PAA”) representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency mortgage-backed securities, is used by management and, we believe, used by analysts and investors to measure our progress in achieving our principal business objective.
We seek to fulfill our principal business objective through a variety of factors including portfolio construction, the degree of market risk exposure and related hedge profile, and the use and forms of leverage, all while operating within the parameters of our capital allocation policy and risk governance framework.
We believe these non-GAAP measures provide management and investors with additional details regarding our underlying operating results and investment portfolio trends by (i) making adjustments to account for the disparate reporting of changes in fair value where certain instruments are reflected in GAAP net income (loss) while others are reflected in other comprehensive income (loss), and (ii) by excluding certain unrealized, non-cash or episodic components of GAAP net income (loss) in order to
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
provide additional transparency into the operating performance of our portfolio. In addition, EAD serves as a useful indicator for investors in evaluating the Company's performance and ability to pay dividends. Annualized EAD return on average equity, which is calculated by dividing earnings available for distribution over average stockholders’ equity, provides investors with additional detail on the earnings available for distribution generated by our invested equity capital.
The following table presents a reconciliation of GAAP financial results to non-GAAP earnings available for distribution for the periods presented:
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|
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|
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|
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|
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For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
(dollars in thousands, except per share data)
|
GAAP net income (loss)
|
$
|
(294,848)
|
|
|
$
|
856,234
|
|
|
$
|
1,456,286
|
|
|
$
|
(2,783,955)
|
|
Net income (loss) attributable to noncontrolling interests
|
794
|
|
|
32
|
|
|
1,115
|
|
|
98
|
|
Net income (loss) attributable to Annaly
|
(295,642)
|
|
|
856,202
|
|
|
1,455,171
|
|
|
(2,784,053)
|
|
Adjustments to exclude reported realized and unrealized (gains) losses
|
|
|
|
|
|
|
Realized (gains) losses on termination or maturity of interest rate swaps
|
—
|
|
|
1,521,732
|
|
|
—
|
|
|
1,919,293
|
|
Unrealized (gains) losses on interest rate swaps
|
141,067
|
|
|
(1,494,628)
|
|
|
(631,195)
|
|
|
1,333,095
|
|
Net (gains) losses on disposal of investments and other
|
(16,223)
|
|
|
(246,679)
|
|
|
49,563
|
|
|
(453,262)
|
|
Net (gains) losses on other derivatives and financial instruments
|
357,808
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|
|
(170,916)
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|
|
(119,060)
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|
|
(377,342)
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|
Net unrealized (gains) losses on instruments measured at fair value through earnings
|
(3,984)
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|
|
(254,772)
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|
|
(108,175)
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|
|
475,388
|
|
Loan loss provision (reversal) (1)
|
1,078
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|
|
72,544
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|
|
(143,792)
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|
|
172,537
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|
Business divestiture-related (gains) losses
|
(1,527)
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|
|
—
|
|
|
248,036
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|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Other adjustments
|
|
|
|
|
|
|
Depreciation expense related to commercial real estate and amortization of intangibles (2)
|
5,635
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|
|
8,714
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|
|
12,959
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|
|
16,648
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|
Non-EAD (income) loss allocated to equity method investments (3)
|
3,141
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|
|
4,218
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|
|
(6,539)
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|
|
23,616
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Transaction expenses and non-recurring items (4)
|
1,150
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|
|
1,075
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|
|
1,845
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|
|
8,320
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|
Income tax effect of non-EAD income (loss) items
|
7,147
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|
|
3,353
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|
|
11,481
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|
|
(20,509)
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|
|
|
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|
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TBA dollar roll income and CMBX coupon income (5)
|
111,592
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|
|
97,524
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|
|
210,525
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|
|
142,428
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|
MSR amortization (6)
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(13,491)
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|
|
(25,529)
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|
|
(28,979)
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|
|
(43,825)
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|
|
|
|
|
|
|
|
|
Plus:
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|
|
|
|
|
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Premium amortization adjustment cost (benefit)
|
153,607
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|
|
51,742
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|
|
(60,963)
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|
|
342,464
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|
Earnings available for distribution (7)
|
451,358
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|
|
424,580
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|
|
890,877
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|
|
754,798
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|
|
|
|
|
|
|
|
|
Dividends on preferred stock
|
26,883
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|
|
35,509
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|
|
53,766
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|
|
71,018
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|
|
|
|
|
|
|
|
|
Earnings available for distribution attributable to common stockholders (7)
|
$
|
424,475
|
|
|
$
|
389,071
|
|
|
$
|
837,111
|
|
|
$
|
683,780
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|
GAAP net income (loss) per average common share
|
$
|
(0.23)
|
|
|
$
|
0.58
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|
|
$
|
1.00
|
|
|
$
|
(2.00)
|
|
|
|
|
|
|
|
|
|
Earnings available for distribution per average common share (7)
|
$
|
0.30
|
|
|
$
|
0.27
|
|
|
$
|
0.59
|
|
|
$
|
0.48
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|
Annualized GAAP return (loss) on average equity
|
(8.51
|
%)
|
|
25.84
|
%
|
|
20.94
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%
|
|
(39.49
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%)
|
Annualized EAD return on average equity (7)
|
13.05
|
%
|
|
12.82
|
%
|
|
12.82
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%
|
|
10.71
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%
|
(1) Includes $0.6 million and $3.8 million for the three months ended June 30, 2021 and 2020, respectively, and ($4.7) million and $4.5 million for the six months ended June 30, 2021 and 2020, respectively, of loss provision (reversal) on unfunded loan commitments which is reported in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).
(2) Includes depreciation and amortization expense related to equity method investments.
(3) Represents unrealized (gains) losses allocated to equity interests in a portfolio of MSR which is a component of Other income (loss).
(4) The three and six months ended June 30, 2021 includes costs incurred in connection with securitizations of residential whole loans. The three and six months ended June 30, 2020 includes costs incurred in connection with the Internalization and costs incurred in connection with the CEO search process. The six months ended June 30, 2020 also includes costs incurred in connection with securitizations of residential whole loans and Agency mortgage-backed securities.
(5) TBA dollar roll income and CMBX coupon income each represent a component of Net gains (losses) on other derivatives and financial instruments. CMBX coupon income totaled $1.4 million and $1.6 million for the three months ended June 30, 2021 and 2020, respectively, and $2.9 million and $2.7 million for the six months ended June 30, 2021 and 2020, respectively.
(6) MSR amortization represents the portion of changes in fair value that is attributable to the realization of estimated cash flows on our MSR portfolio and is reported as a component of Net unrealized gains (losses) on instruments measured at fair value.
(7) Represents a non-GAAP financial measure.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
From time to time, we enter into TBA forward contracts as an alternate means of investing in and financing Agency MBS. A TBA contract is an agreement to purchase or sell, for future delivery, an Agency MBS with a specified issuer, term and coupon. A TBA dollar roll represents a transaction where TBA contracts with the same terms but different settlement dates are simultaneously bought and sold. The TBA contract settling in the later month typically prices at a discount to the earlier month contract with the difference in price commonly referred to as the “drop”. The drop is a reflection of the expected net interest income from an investment in similar Agency MBS, net of an implied financing cost, that would be foregone as a result of settling the contract in the later month rather than in the earlier month. The drop between the current settlement month price and the forward settlement month price occurs because in the TBA dollar roll market, the party providing the financing is the party that would retain all principal and interest payments accrued during the financing period. Accordingly, TBA dollar roll income generally represents the economic equivalent of the net interest income earned on the underlying Agency MBS less an implied financing cost.
TBA dollar roll transactions are accounted for under GAAP as a series of derivatives transactions. The fair value of TBA derivatives is based on methods similar to those used to value Agency MBS. We record TBA derivatives at fair value on our Consolidated Statements of Financial Condition and recognize periodic changes in fair value in Net gains (losses) on other derivatives and financial instruments in our Consolidated Statements of Comprehensive Income (Loss), which includes both unrealized and realized gains and losses on derivatives (excluding interest rate swaps).
TBA dollar roll income is calculated as the difference in price between two TBA contracts with the same terms but different settlement dates multiplied by the notional amount of the TBA contract. Although accounted for as derivatives, TBA dollar rolls capture the economic equivalent of net interest income, or carry, on the underlying Agency MBS (interest income less an implied cost of financing). TBA dollar roll income is reported as a component of Net gains (losses) on other derivatives and financial instruments in the Consolidated Statements of Comprehensive Income (Loss).
The CMBX index is a synthetic tradable index referencing a basket of 25 commercial mortgage-backed securities of a particular rating and vintage. The CMBX index allows investors to take a long position (referred to as selling protection) or short position (referred to as purchasing protection) on the respective basket of commercial mortgage-backed securities and is structured as a “pay-as-you-go” contract whereby the protection seller receives and the protection buyer pays a standardized running coupon on the contracted notional amount. Additionally, the protection seller is obligated to pay to the protection buyer the amount of principal losses and/or coupon shortfalls on the underlying commercial mortgage-backed securities as they occur. We report income (expense) on CMBX positions in Net gains (losses) on other derivatives and financial instruments in the Consolidated Statements of Comprehensive Income (Loss). The coupon payments received or paid on CMBX positions is equivalent to interest income (expense) and therefore included in earnings available for distribution.
Premium Amortization Expense
In accordance with GAAP, we amortize or accrete premiums or discounts into interest income for our Agency MBS, excluding interest-only securities, multifamily and reverse mortgages, taking into account estimates of future principal prepayments in the calculation of the effective yield. We recalculate the effective yield as differences between anticipated and actual prepayments occur. Using third party 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 date of the security’s acquisition. The amortized cost of the security 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.
Our GAAP metrics include the unadjusted impact of amortization and accretion associated with this method. Certain of our non-GAAP metrics exclude the effect of the PAA, which quantifies the component of premium amortization representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term Constant Prepayment Rate (“CPR”).
The following table illustrates the impact of the PAA on premium amortization expense for our Residential Securities portfolio and residential securities transferred or pledged to securitization vehicles, for the periods presented:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
(dollars in thousands)
|
Premium amortization expense
|
$
|
320,108
|
|
|
$
|
270,688
|
|
|
$
|
308,217
|
|
|
$
|
887,625
|
|
Less: PAA cost (benefit)
|
153,607
|
|
|
51,742
|
|
|
(60,963)
|
|
|
342,464
|
|
Premium amortization expense (excluding PAA)
|
$
|
166,501
|
|
|
$
|
218,946
|
|
|
$
|
369,180
|
|
|
$
|
545,161
|
|
|
|
|
|
|
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
Economic leverage and economic capital ratios
We use capital coupled with borrowed funds to invest primarily in real estate related investments, earning the spread between the yield on our assets and the cost of our borrowings and hedging activities. Our capital structure is designed to offer an efficient complement of funding sources to generate positive risk-adjusted returns for our stockholders while maintaining appropriate liquidity to support our business and meet our financial obligations under periods of market stress. To maintain our desired capital profile, we utilize a mix of debt and equity funding. Debt funding may include the use of repurchase agreements, loans, securitizations, participations issued, lines of credit, asset backed lending facilities, corporate bond issuance, convertible bonds, mortgages payable or other liabilities. Equity capital primarily consists of common and preferred stock.
Our economic leverage ratio is computed as the sum of recourse debt, cost basis of TBA and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity. Recourse debt consists of repurchase agreements and other secured financing (excluding certain non-recourse credit facilities). Certain credit facilities (included within other secured financing), debt issued by securitization vehicles, participations issued, and mortgages payable are non-recourse to us and are excluded from economic leverage.
The following table presents a reconciliation of GAAP debt to economic debt for purposes of calculating our economic leverage ratio for the periods presented:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
June 30,
2021
|
|
|
|
June 30,
2020
|
Economic leverage ratio reconciliation
|
(dollars in thousands)
|
Repurchase agreements
|
$
|
60,221,067
|
|
|
|
|
$
|
67,163,598
|
|
Other secured financing
|
909,655
|
|
|
|
|
1,538,996
|
|
Debt issued by securitization vehicles
|
3,315,087
|
|
|
|
|
6,458,130
|
|
Participations issued
|
315,810
|
|
|
|
|
—
|
|
Mortgages payable
|
—
|
|
|
|
|
508,565
|
|
Debt included in liabilities of disposal group held for sale
|
2,306,633
|
|
|
|
|
—
|
|
Total GAAP debt
|
$
|
67,068,252
|
|
|
|
|
$
|
75,669,289
|
|
Less:
|
|
|
|
|
|
Credit facilities (1)
|
(909,655)
|
|
|
|
|
(895,793)
|
|
Debt issued by securitization vehicles
|
(3,315,087)
|
|
|
|
|
(6,458,130)
|
|
Participations issued
|
(315,810)
|
|
|
|
|
—
|
|
Mortgages payable
|
—
|
|
|
|
|
(508,565)
|
|
Non-recourse debt included in liabilities of disposal group held for sale
|
(2,035,982)
|
|
|
|
|
—
|
|
Total non-recourse debt
|
$
|
60,491,718
|
|
|
|
|
$
|
67,806,801
|
|
Plus / (Less):
|
|
|
|
|
|
Cost basis of TBA and CMBX derivatives
|
18,107,549
|
|
|
|
|
19,525,825
|
|
Payable for unsettled trades
|
154,405
|
|
|
|
|
2,122,735
|
|
Receivable for unsettled trades
|
(14,336)
|
|
|
|
|
(747,082)
|
|
Economic debt *
|
$
|
78,739,336
|
|
|
|
|
$
|
88,708,279
|
|
Total equity
|
$
|
13,639,176
|
|
|
|
|
$
|
13,797,603
|
|
Economic leverage ratio *
|
5.8:1
|
|
|
|
6.4:1
|
|
|
|
|
|
|
* Represents a non-GAAP financial measure.
(1) Included in Other secured financing in the Consolidated Statements of Financial Condition.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
The following table presents a reconciliation of GAAP total assets to economic total assets for purposes of calculating our economic capital ratio for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
June 30,
2021
|
|
|
|
June 30,
2020
|
Economic capital ratio reconciliation
|
(dollars in thousands)
|
Total GAAP assets
|
$
|
82,376,305
|
|
|
|
|
$
|
93,458,653
|
|
Less:
|
|
|
|
|
|
Gross unrealized gains on TBA derivatives (1)
|
(31,943)
|
|
|
|
|
(123,974)
|
|
Debt issued by securitization vehicles (2)
|
(4,925,196)
|
|
|
|
|
(6,458,130)
|
|
Plus:
|
|
|
|
|
|
Implied market value of TBA derivatives
|
17,691,150
|
|
|
|
|
19,148,701
|
|
Total economic assets *
|
$
|
95,110,316
|
|
|
|
|
$
|
106,025,250
|
|
Total equity
|
$
|
13,639,176
|
|
|
|
|
$
|
13,797,603
|
|
Economic capital ratio (3) *
|
14.3%
|
|
|
|
13.0%
|
|
|
|
|
|
|
* Represents a non-GAAP financial measure.
(1) Included in Derivative assets in the Consolidated Statements of Financial Condition.
(2) Includes debt issued by securitization vehicles reported in Liabilities of disposal group held for sale in the Consolidated Statements of Financial Condition.
(3) Economic capital ratio is computed as total equity divided by total economic assets.
Interest income (excluding PAA), economic interest expense and economic net interest income (excluding PAA)
Interest income (excluding PAA) represents interest income excluding the effect of the premium amortization adjustment, and serves as the basis for deriving average yield on interest earning assets (excluding PAA), net interest spread (excluding PAA) and net interest margin (excluding PAA), which are discussed below. We believe this measure provides management and investors with additional detail to enhance their understanding of our operating results and trends by excluding the component of premium amortization expense representing the cumulative effect of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency MBS (other than interest-only securities, multifamily and reverse mortgages), which can obscure underlying trends in the performance of the portfolio.
Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps. We use interest rate swaps to manage our exposure to changing interest rates on repurchase agreements by economically hedging cash flows associated with these borrowings. Accordingly, adding the net interest component of interest rate swaps to interest expense, as computed in accordance with GAAP, reflects the total contractual interest expense and thus, provides investors with additional information about the cost of our financing strategy. We may use market agreed coupon (“MAC”) interest rate swaps in which we may receive or make a payment at the time of entering into such interest rate swap to compensate for the off-market nature of such interest rate swap. In accordance with GAAP, upfront payments associated with MAC interest rate swaps are not reflected in the net interest component of interest rate swaps in the Consolidated Statements of Comprehensive Income (Loss). We did not enter into any MAC interest rate swaps during the three and six months ended June 30, 2021.
Similarly, economic net interest income (excluding PAA), as computed below, provides investors with additional information to enhance their understanding of the net economics of our primary business operations.
The following tables provide GAAP measures of interest expense and net interest income and details with respect to reconciling the aforementioned line items on a non-GAAP basis for each respective period:
Interest Income (excluding PAA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP Interest Income
|
|
PAA Cost
(Benefit)
|
|
Interest Income (excluding PAA) (1)
|
For the three months ended
|
(dollars in thousands)
|
June 30, 2021
|
$
|
383,906
|
|
|
$
|
153,607
|
|
|
$
|
537,513
|
|
June 30, 2020
|
$
|
584,812
|
|
|
$
|
51,742
|
|
|
$
|
636,554
|
|
For the six months ended
|
|
|
|
|
|
June 30, 2021
|
$
|
1,147,284
|
|
|
$
|
(60,963)
|
|
|
$
|
1,086,321
|
|
June 30, 2020
|
$
|
1,139,838
|
|
|
$
|
342,464
|
|
|
$
|
1,482,302
|
|
(1) Represents a non-GAAP financial measure. Refer to disclosures within this section above for additional information on non-GAAP financial measures.
|
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
Economic Interest Expense and Economic Net Interest Income (excluding PAA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP
Interest
Expense
|
|
Add: Net Interest Component of Interest Rate Swaps
|
|
Economic Interest
Expense (1)
|
|
GAAP Net
Interest
Income
|
|
Less: Net Interest Component
of Interest Rate Swaps
|
|
Economic
Net Interest
Income (1)
|
|
Add: PAA
Cost
(Benefit)
|
|
Economic Net Interest Income (excluding PAA) (1)
|
For the three months ended
|
(dollars in thousands)
|
June 30, 2021
|
$
|
61,047
|
|
|
$
|
83,087
|
|
|
$
|
144,134
|
|
|
$
|
322,859
|
|
|
$
|
83,087
|
|
|
$
|
239,772
|
|
|
$
|
153,607
|
|
|
$
|
393,379
|
|
June 30, 2020
|
$
|
186,032
|
|
|
$
|
64,561
|
|
|
$
|
250,593
|
|
|
$
|
398,780
|
|
|
$
|
64,561
|
|
|
$
|
334,219
|
|
|
$
|
51,742
|
|
|
$
|
385,961
|
|
For the six months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
$
|
137,020
|
|
|
$
|
162,834
|
|
|
$
|
299,854
|
|
|
$
|
1,010,264
|
|
|
$
|
162,834
|
|
|
$
|
847,430
|
|
|
$
|
(60,963)
|
|
|
$
|
786,467
|
|
June 30, 2020
|
$
|
689,505
|
|
|
$
|
78,541
|
|
|
$
|
768,046
|
|
|
$
|
450,333
|
|
|
$
|
78,541
|
|
|
$
|
371,792
|
|
|
$
|
342,464
|
|
|
$
|
714,256
|
|
(1) Represents a non-GAAP financial measure. Refer to disclosures within this section above for additional information on non-GAAP financial measures.
|
Experienced and Projected Long-Term CPR
Prepayment speeds, as reflected by the CPR and interest rates vary according to the type of investment, conditions in financial markets, competition and other factors, none of which can be predicted with any certainty. In general, as prepayment speeds and expectations of prepayment speeds on our Agency MBS portfolio increase, related purchase premium amortization increases, thereby reducing the yield on such assets. The following table presents the weighted average experienced CPR and weighted average projected long-term CPR on our Agency MBS portfolio as of and for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
Experienced CPR (1)
|
|
Projected Long-term CPR (2)
|
For the three months ended
|
|
|
|
June 30, 2021
|
26.4
|
%
|
|
12.9
|
%
|
June 30, 2020
|
19.5
|
%
|
|
18.0
|
%
|
For the six months ended
|
|
|
|
June 30, 2021
|
25.2
|
%
|
|
12.9
|
%
|
June 30, 2020
|
16.6
|
%
|
|
18.0
|
%
|
(1) For the three and six months ended June 30, 2021 and 2020, respectively.
(2) At June 30, 2021 and 2020, respectively.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
Average Yield on Interest Earning Assets (excluding PAA), Net Interest Spread (excluding PAA), Net Interest Margin (excluding PAA) and Average Economic Cost of Interest Bearing Liabilities
Net interest spread (excluding PAA), which is the difference between the average yield on interest earning assets (excluding PAA) and the average economic cost of interest bearing liabilities, which represents annualized economic interest expense divided by average interest bearing liabilities, and net interest margin (excluding PAA), which is calculated as the sum of interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swaps divided by the sum of average interest earning assets plus average TBA contract and CMBX balances, provide management with additional measures of our profitability that management relies upon in monitoring the performance of the business.
Disclosure of these measures, which are presented below, provides investors with additional detail regarding how management evaluates our performance.
Net Interest Spread (excluding PAA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Interest Earning
Assets (1)
|
|
Interest Income (excluding PAA) (2)
|
|
Average Yield on Interest Earning Assets (excluding PAA) (2)
|
|
Average Interest Bearing Liabilities
|
|
Economic Interest Expense (2)(3)
|
|
Average Economic Cost of Interest Bearing Liabilities (2)(3)
|
|
Economic Net Interest Income (excluding PAA) (2)
|
|
Net Interest Spread (excluding PAA) (2)
|
|
|
For the three months ended
|
(dollars in thousands)
|
|
|
June 30, 2021
|
$
|
77,916,766
|
|
|
$
|
537,513
|
|
|
2.76
|
%
|
|
$
|
68,469,413
|
|
|
$
|
144,134
|
|
|
0.83
|
%
|
|
393,379
|
|
|
1.93
|
%
|
|
|
June 30, 2020
|
$
|
84,471,839
|
|
|
$
|
636,554
|
|
|
3.01
|
%
|
|
$
|
76,712,894
|
|
|
$
|
250,593
|
|
|
1.29
|
%
|
|
385,961
|
|
|
1.72
|
%
|
|
|
For the six months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
$
|
79,519,053
|
|
|
$
|
1,086,321
|
|
|
2.73
|
%
|
|
$
|
70,235,722
|
|
|
$
|
299,854
|
|
|
0.85
|
%
|
|
786,467
|
|
|
1.88
|
%
|
|
|
June 30, 2020
|
$
|
100,267,867
|
|
|
$
|
1,482,302
|
|
|
2.96
|
%
|
|
$
|
91,871,180
|
|
|
$
|
768,046
|
|
|
1.65
|
%
|
|
714,256
|
|
|
1.31
|
%
|
|
|
(1)Based on amortized cost.
(2)Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information.
(3)Average economic cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities. Average interest bearing liabilities reflects the average balances during the period. Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps.
Net Interest Margin (excluding PAA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income (excluding PAA) (1)
|
|
TBA Dollar Roll and CMBX Coupon Income (2)
|
|
Interest Expense
|
|
Net Interest Component of Interest Rate Swaps
|
|
Subtotal
|
|
Average Interest Earnings Assets
|
|
Average TBA Contract and CMBX Balances
|
|
Subtotal
|
|
Net Interest Margin (excluding PAA) (1)
|
For the three months ended
|
|
(dollars in thousands)
|
June 30, 2021
|
$
|
537,513
|
|
|
111,592
|
|
|
(61,047)
|
|
|
(83,087)
|
|
|
$
|
504,971
|
|
|
$
|
77,916,766
|
|
|
18,761,062
|
|
|
$
|
96,677,828
|
|
|
2.09
|
%
|
June 30, 2020
|
$
|
636,554
|
|
|
97,524
|
|
|
(186,032)
|
|
|
(64,561)
|
|
|
$
|
483,485
|
|
|
$
|
84,471,839
|
|
|
18,628,343
|
|
|
$
|
103,100,182
|
|
|
1.88
|
%
|
For the six months ended
|
|
|
June 30, 2021
|
$
|
1,086,321
|
|
|
210,525
|
|
|
(137,020)
|
|
|
(162,834)
|
|
|
$
|
996,992
|
|
|
$
|
79,519,053
|
|
|
20,313,516
|
|
|
$
|
99,832,569
|
|
|
2.00
|
%
|
June 30, 2020
|
$
|
1,482,302
|
|
|
142,428
|
|
|
(689,505)
|
|
|
(78,541)
|
|
|
$
|
856,684
|
|
|
$
|
100,267,867
|
|
|
14,296,743
|
|
|
$
|
114,564,610
|
|
|
1.50
|
%
|
(1)Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information.
(2)TBA dollar roll income and CMBX coupon income each represent a component of Net gains (losses) on other derivatives and financial instruments. CMBX coupon income totaled $1.4 million and $2.9 million for the three and six months ended June 30, 2021, respectively. CMBX coupon income totaled $1.6 million and $2.7 million for the three and six months ended June 30, 2020, respectively.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities
Typically, our largest expense is the cost of interest bearing liabilities and the net interest component of interest rate swaps. The table below shows our average interest bearing liabilities and average economic cost of interest bearing liabilities as compared to average one-month and average six-month LIBOR for the periods presented.
Economic Cost of Funds on Average Interest Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Interest Bearing
Liabilities
|
|
Interest Bearing Liabilities at
Period End
|
|
Economic
Interest
Expense (1)
|
|
Average Economic
Cost of
Interest
Bearing
Liabilities (2)
|
|
Average
One-
Month
LIBOR
|
|
Average
Six-
Month
LIBOR
|
|
Average
One-Month LIBOR
Relative to
Average Six-
Month LIBOR
|
|
Average Economic Cost
of Interest
Bearing
Liabilities
Relative to
Average One-
Month LIBOR
|
|
Average Economic Cost
of Interest
Bearing
Liabilities
Relative to
Average Six-Month LIBOR
|
For the three months ended
|
June 30, 2021
|
$
|
68,469,413
|
|
|
$
|
66,642,378
|
|
|
$
|
144,134
|
|
|
0.83
|
%
|
|
0.10
|
%
|
|
0.19
|
%
|
|
(0.09
|
%)
|
|
0.73
|
%
|
|
0.64
|
%
|
June 30, 2020
|
$
|
76,712,894
|
|
|
$
|
75,160,724
|
|
|
$
|
250,593
|
|
|
1.29
|
%
|
|
0.35
|
%
|
|
0.70
|
%
|
|
(0.35
|
%)
|
|
0.94
|
%
|
|
0.59
|
%
|
For the six months ended
|
June 30, 2021
|
$
|
70,235,722
|
|
|
$
|
64,761,619
|
|
|
$
|
299,854
|
|
|
0.85
|
%
|
|
0.11
|
%
|
|
0.20
|
%
|
|
(0.09
|
%)
|
|
0.74
|
%
|
|
0.65
|
%
|
June 30, 2020
|
$
|
91,871,180
|
|
|
$
|
75,160,724
|
|
|
$
|
768,046
|
|
|
1.65
|
%
|
|
0.89
|
%
|
|
1.10
|
%
|
|
(0.21
|
%)
|
|
0.76
|
%
|
|
0.55
|
%
|
(1) Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps.
(2) Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information.
|
Economic interest expense decreased by $106.5 million for the three months ended June 30, 2021 compared to the same period in 2020. Economic interest expense decreased by $468.2 million for the six months ended June 30, 2021 compared to the same period in 2020. The change was due to lower borrowing rates and a decrease in average interest bearing liabilities, partially offset by the change in the net interest component of interest rate swaps, which was ($83.1) million for the three months ended June 30, 2021 compared to ($64.6) million for the same period in 2020 and ($162.8) million for the six months ended June 30, 2021 compared to ($78.5) million for the same period in 2020.
We do not manage our portfolio to have a pre-designated amount of borrowings at quarter or year end. Our borrowings at period end are a snapshot of our borrowings as of a date, and this number may differ from average borrowings over the period for a number of reasons. The mortgage-backed securities we own pay principal and interest towards the end of each month and the mortgage-backed securities we purchase are typically settled during the beginning of the month. As a result, depending on the amount of mortgage-backed securities we have committed to purchase, we may retain the principal and interest we receive in the prior month, or we may use it to pay down our borrowings. Moreover, we generally use interest rate swaps, swaptions and other derivative instruments to hedge our portfolio, and as we pledge or receive collateral under these agreements, our borrowings on any given day may be increased or decreased. Our average borrowings during a quarter may differ from period end borrowings as we implement our portfolio management strategies and risk management strategies over changing market conditions by increasing or decreasing leverage. Additionally, these numbers may differ during periods when we conduct equity capital raises, as in certain instances we may purchase additional assets and increase leverage in anticipation of an equity capital raise. Since our average borrowings and period end borrowings can be expected to differ, we believe our average borrowings during a period provide a more accurate representation of our exposure to the risks associated with leverage than our period end borrowings.
At June 30, 2021 and December 31, 2020, the majority of our debt represented repurchase agreements and other secured financing arrangements collateralized by a pledge of our Residential Securities, residential mortgage loans, commercial real estate investments and corporate loans. All of our Residential Securities are currently accepted as collateral for these borrowings. However, we limit our borrowings, and thus our potential asset growth, in order to maintain unused borrowing capacity and maintain the liquidity and strength of our balance sheet.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
Realized and Unrealized Gains (Losses)
Realized and unrealized gains (losses) is comprised of net gains (losses) on interest rate swaps, net gains (losses) on disposal of investments and other, net gains (losses) on other derivatives and financial instruments and net unrealized gains (losses) on instruments measured at fair value through earnings. These components of realized and unrealized gains (losses) for the three and nine months ended June 30, 2021 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
(dollars in thousands)
|
Net gains (losses) on interest rate swaps (1)
|
$
|
(224,154)
|
|
|
$
|
(91,665)
|
|
|
$
|
468,361
|
|
|
$
|
(3,330,929)
|
|
Net gains (losses) on disposal of investments and other
|
16,223
|
|
|
246,679
|
|
|
(49,563)
|
|
|
453,262
|
|
Net gains (losses) on other derivatives and financial instruments
|
(357,808)
|
|
|
170,916
|
|
|
119,060
|
|
|
377,342
|
|
Net unrealized gains (losses) on instruments measured at fair value through earnings
|
3,984
|
|
|
254,772
|
|
|
108,175
|
|
|
(475,388)
|
|
Loan loss (provision) reversal
|
(494)
|
|
|
(68,751)
|
|
|
139,126
|
|
|
(168,077)
|
|
Business divestiture-related gains (losses)
|
1,527
|
|
|
—
|
|
|
(248,036)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
(560,722)
|
|
|
$
|
511,951
|
|
|
$
|
537,123
|
|
|
$
|
(3,143,790)
|
|
|
|
|
|
|
(1)Includes the net interest component of interest rate swaps, realized gains (losses) on termination or maturity of interest rate swaps and unrealized gains (losses) on interest rate swaps.
For the Three Months Ended June 30, 2021 and 2020
Net gains (losses) on interest rate swaps for the three months ended June 30, 2021 was ($224.2) million compared to ($91.7) million for the same period in 2020, primarily attributable to an unfavorable change in unrealized gains (losses) on interest rate swaps, partially offset by a favorable change in Realized gains (losses) on termination or maturity of interest rate swaps. Unrealized gains (losses) on interest rate swaps was ($141.1) million for the three months ended June 30, 2021, reflecting a decline in forward interest rates during the period, compared to $1.5 billion for the same period in 2020, resulting from the unwinding of interest rate swaps during the earlier period. Realized gains (losses) on termination or maturity of interest rate swaps was $0 for the three months ended June 30, 2021 compared to ($1.5) billion for the same period in 2020, resulting from terminations of fixed-rate payer and receiver interest rate swaps with notional amounts of $38.2 billion and $38.1 billion, respectively.
Net gains (losses) on disposal of investments and other was $16.2 million for the three months ended June 30, 2021 compared to $246.7 million for the same period in 2020. For the three months ended June 30, 2021, we disposed of Residential Securities with a carrying value of $3.3 billion for an aggregate net gain of $34.8 million. For the same period in 2020, we disposed of Residential Securities with a carrying value of $5.5 billion for an aggregate net gain of $259.9 million.
Net gains (losses) on other derivatives and financial instruments was ($357.8) million for the three months ended June 30, 2021 compared to $170.9 million for the same period in 2020. The change in net gains (losses) on other derivatives and financial instruments was primarily comprised of higher net losses on futures derivatives, which was ($394.5) million for the three months ended June 30, 2021 compared to ($17.3) million for the same period in 2020, and interest rate swaptions, which was ($255.6) million for the three months ended June 30, 2021 compared to ($52.5) million for the same period in 2020, partially offset by higher net gains on TBA derivatives, which was $285.3 million for the three months ended June 30, 2021 compared to $204.2 million for the same period in 2020.
Net unrealized gains (losses) on instruments measured at fair value through earnings was $4.0 million for the three months ended June 30, 2021 compared to $254.8 million for the same period in 2020, primarily due to unfavorable changes in unrealized gains (losses) on securitized commercial loans of ($190.8) million, credit risk transfer securities of ($173.7) million, securitized residential whole loans of consolidated VIEs of ($76.9) million, Agency interest-only securities of ($69.2) million and non-Agency MBS of ($67.2) million, partially offset by favorable changes in unrealized gains (losses) on commercial securitized debt of consolidated VIEs of $219.9 million, residential securitized debt of consolidated VIEs of $76.9 million and MSR, including Interests in MSR, of $44.2 million for the three months ended June 30, 2021 compared to the same period in 2020.
For the three months ended June 30, 2021 and 2020, net loan loss (provisions) were ($0.5) million on corporate loans and ($68.8) million on commercial mortgage and corporate loans, respectively. Refer to the “Loans” Note located within Item 1 for additional information related to the loan loss (provisions) reversals.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
For the Six Months Ended June 30, 2021 and 2020
Net gains (losses) on interest rate swaps for the six months ended June 30, 2021 was $468.4 million compared to ($3.3) billion for the same period in 2020, primarily attributable to favorable changes in unrealized gains (losses) on interest rate swaps and realized gains (losses) on termination or maturity of interest rate swaps. Unrealized gains (losses) on interest rate swaps was $631.2 million for the six months ended June 30, 2021, reflecting a decline in forward interest rates during the period, compared to ($1.3) billion for the same period in 2020, reflecting a rise in forward interest rates during the earlier period. Realized gains (losses) on termination or maturity of interest rate swaps was zero for the six months ended June 30, 2021 compared to ($1.9) billion, resulting from fixed-rate payer and receiver interest rate swaps with notional amounts of $65.0 billion and $38.1 billion, respectively, for the same period in 2020.
Net gains (losses) on disposal of investments and other was ($49.6) million for the six months ended June 30, 2021 compared to $453.3 million for the same period in 2020. For the six months ended June 30, 2021, we disposed of Residential Securities with a carrying value of $6.2 billion for an aggregate net loss of ($25.9) million. For the same period in 2020, we disposed of Residential Securities with a carrying value of $47.4 billion for an aggregate net loss of $527.1 million.
Net gains (losses) on other derivatives was $119.1 million for the six months ended June 30, 2021 compared to $377.3 million for the same period in 2020. The change in net gains (losses) on other derivatives was primarily due to the change in net gains (losses) on TBA derivatives, which was ($344.8) million for the six months ended June 30, 2021 compared to $635.9 million for the same period in 2020, partially offset by the change in futures derivatives, which was $418.8 million for the six months ended June 30, 2021 compared to ($289.9) million for the same period in 2020.
Net unrealized gains (losses) on instruments measured at fair value through earnings was $108.2 million for the six months ended June 30, 2021 compared to ($475.4) million for the same period in 2020, primarily due to favorable changes in unrealized gains (losses) on securitized commercial loans of $320.8 million, MSR, including Interests in MSR, of $154.0 million, securitized debt of consolidated VIEs backed by Agency mortgage-backed securities of $132.2 million, securitized residential whole loans of consolidated VIEs of $98.8 million, credit risk transfer securities of $86.5 million and non-Agency MBS of $59.6 million, partially offset by unfavorable changes on commercial securitized debt of consolidated VIEs of ($270.8) million for the six months ended June 30, 2021 compared to the same period in 2020.
For the six months ended June 30, 2021 and 2020, net loan loss (provisions) reversals of $139.1 million and ($168.1) million, respectively, was recorded on commercial mortgage and corporate loans. Refer to the “Loans” Note located within Item 1 for additional information related to these loan loss provisions.
Other Income (Loss)
Other income (loss) includes certain revenues and costs associated with our investments in commercial real estate, including rental income and recoveries, operating costs as well as depreciation and amortization expense, net servicing income on MSRs, brokerage and commission fees, due diligence costs and securitization expenses. We report in Other income (loss) items whose amounts, either individually or in the aggregate, would not, in the opinion of management, be meaningful to readers of the financial statements. Given the nature of certain components of this line item, balances may fluctuate from period to period.
General and Administrative Expenses
General and administrative (“G&A”) expenses consist of compensation and management fee (until closing of the Internalization on June 30, 2020) and other expenses. Beginning with the quarter ended June 30, 2021, we began classifying certain portfolio activity- or volume-related expenses (including but not limited to brokerage and commission fees, due diligence costs and securitization expenses) as Other income (loss) rather than Other general and administrative expenses in the Consolidated Statements of Comprehensive Income (Loss) to better reflect the nature of the items. As such, prior periods have been conformed to the current presentation with Other general and administrative expenses for the three months ended March 31, 2021 adjusted downward by $1.8 million and for the three and six months ended June 30, 2020 adjusted downward by $2.9 million and $10.7 million, respectively. The following table shows our total G&A expenses as compared to average total assets and average equity for the periods presented.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
G&A Expenses and Operating Expense Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total G&A
Expenses (1)
|
|
Total G&A Expenses/Average Assets (1)
|
|
Total G&A Expenses/Average Equity (1)
|
For the three months ended
|
(dollars in thousands)
|
June 30, 2021
|
$
|
53,526
|
|
|
0.26
|
%
|
|
1.55
|
%
|
June 30, 2020
|
$
|
64,770
|
|
|
0.27
|
%
|
|
1.95
|
%
|
For the six months ended
|
|
June 30, 2021
|
$
|
101,431
|
|
|
0.24
|
%
|
|
1.46
|
%
|
June 30, 2020
|
$
|
134,635
|
|
|
0.25
|
%
|
|
1.91
|
%
|
|
|
|
|
|
|
(1) Includes $0.5 million and $2.9 million of costs incurred in connection with the Internalization and costs incurred in connection with the CEO search process for the three and six months ended June 30, 2020, respectively. Excluding these transaction costs, G&A expenses as a percentage of average total assets were unchanged at 0.27% and 0.25% and as a percentage of average equity were 1.94% and 1.87% for the three and six months ended June 30, 2020, respectively.
G&A expenses were $53.5 million for the three months ended June 30, 2021, a decrease of $11.2 million compared to the same period in 2020. G&A expenses were $101.4 million for the six months ended June 30, 2021, a decrease of $33.2 million compared to the same period in 2020. The change in each period was largely attributable to cost savings generated from the Internalization which closed on June 30, 2020 and lower professional fees during the second quarter and first half of 2021 compared with the same periods in 2020.
Return on Average Equity
The following table shows the components of our annualized return on average equity for the periods presented.
Components of Annualized Return on Average Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic Net Interest Income/ Average Equity (1)
|
|
Realized and Unrealized Gains and Losses/Average Equity (2)
|
|
Other Income (Loss)/Average Equity
|
|
G&A Expenses/ Average Equity
|
|
Income
Taxes/ Average Equity
|
|
Return on
Average Equity
|
For the three months ended
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
6.92
|
%
|
|
(13.79
|
%)
|
|
0.06
|
%
|
|
(1.55
|
%)
|
|
(0.15
|
%)
|
|
(8.51
|
%)
|
June 30, 2020
|
10.09
|
%
|
|
17.40
|
%
|
|
0.37
|
%
|
|
(1.95
|
%)
|
|
(0.07
|
%)
|
|
25.84
|
%
|
For the six months ended
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
12.18
|
%
|
|
10.06
|
%
|
|
0.25
|
%
|
|
(1.48
|
%)
|
|
(0.07
|
%)
|
|
20.94
|
%
|
June 30, 2020
|
5.27
|
%
|
|
(43.48
|
%)
|
|
0.28
|
%
|
|
(1.91
|
%)
|
|
0.35
|
%
|
|
(39.49
|
%)
|
(1) Economic net interest income includes the net interest component of interest rate swaps.
(2) Realized and unrealized gains and losses excludes the net interest component of interest rate swaps.
|
Unrealized Gains and Losses - Available-for-Sale Investments
With our available-for-sale accounting treatment on our Agency MBS, which represent the largest portion of assets on balance sheet, as well as certain commercial mortgage-backed securities, unrealized fluctuations in market values of assets do not impact our GAAP net income (loss) but rather are reflected on our balance sheet by changing the carrying value of the asset and stockholders’ equity under accumulated other comprehensive income (loss). As a result of this fair value accounting treatment, our book value and book value per share are likely to fluctuate far more than if we used amortized cost accounting. As a result, comparisons with companies that use amortized cost accounting for some or all of their balance sheet may not be meaningful.
The table below shows cumulative unrealized gains and losses on our available-for-sale investments reflected in the Consolidated Statements of Financial Condition.
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
|
(dollars in thousands)
|
Unrealized gain
|
$
|
2,040,648
|
|
|
$
|
3,378,523
|
|
Unrealized loss
|
(260,373)
|
|
|
(4,188)
|
|
Accumulated other comprehensive income (loss)
|
$
|
1,780,275
|
|
|
$
|
3,374,335
|
|
|
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
Unrealized changes in the estimated fair value of available-for-sale investments may have a direct effect on our potential earnings and dividends: positive changes will increase our equity base and allow us to increase our borrowing capacity while negative changes tend to reduce borrowing capacity. A very large negative change in the net fair value of our available-for-sale Residential Securities might impair our liquidity position, requiring us to sell assets with the potential result of realized losses upon sale.
The fair value of these securities being less than amortized cost at June 30, 2021 is solely due to market conditions and not the quality of the assets. Substantially all of the Agency MBS are “AAA” rated or carry an implied “AAA” rating. The investments are not considered to be other-than-temporarily impaired because we currently have the ability and intent to hold the investments to maturity or for a period of time sufficient for a forecasted market price recovery up to or beyond the cost of the investments, and it is not more likely than not that we will be required to sell the investments before recovery of the amortized cost bases, which may be maturity. Also, we are guaranteed payment of the principal and interest amounts of the securities by the respective issuing Agency.
Financial Condition
Total assets were $82.4 billion and $88.5 billion at June 30, 2021 and December 31, 2020, respectively. The change was primarily due to a decrease in Agency MBS, including assets transferred or pledged to securitization vehicles, of $7.6 billion partially offset by increases in residential mortgage loans, including assets transferred or pledged to securitization vehicles, of $0.9 billion and non-Agency MBS of $0.6 billion. Our portfolio composition, net equity allocation and debt-to-net equity ratio by asset class were as follows at June 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
Commercial
|
|
|
|
Agency MBS and MSR
|
|
|
|
Residential Credit (1)
|
|
Commercial Real Estate (2)
|
|
Corporate Debt
|
|
Total
|
|
Assets
|
(dollars in thousands)
|
Fair value/carrying value
|
$
|
67,325,333
|
|
|
|
|
$
|
6,907,573
|
|
|
$
|
3,394,032
|
|
|
$
|
2,533,079
|
|
|
$
|
80,160,017
|
|
|
Implied market value of derivatives (3)
|
17,691,150
|
|
|
|
|
—
|
|
|
449,196
|
|
|
—
|
|
|
18,140,346
|
|
|
Debt
|
Repurchase agreements
|
58,805,571
|
|
|
|
|
1,194,142
|
|
|
221,354
|
|
|
—
|
|
|
60,221,067
|
|
|
Implied cost basis of derivatives (3)
|
17,662,043
|
|
|
|
|
—
|
|
|
445,506
|
|
|
—
|
|
|
18,107,549
|
|
|
Other secured financing
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
909,655
|
|
|
909,655
|
|
|
Debt issued by securitization vehicles
|
558,894
|
|
|
|
|
2,756,193
|
|
|
—
|
|
|
—
|
|
|
3,315,087
|
|
|
Participations issued
|
—
|
|
|
|
|
315,810
|
|
|
—
|
|
|
—
|
|
|
315,810
|
|
|
Net forward purchases
|
145,138
|
|
|
|
|
(5,069)
|
|
|
—
|
|
|
—
|
|
|
140,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of disposal group held for sale
|
—
|
|
|
|
|
—
|
|
|
2,306,632
|
|
|
—
|
|
|
2,306,632
|
|
|
Other
|
Other assets / liabilities (4)
|
1,821,036
|
|
|
|
|
2,090
|
|
|
(857,773)
|
|
|
(310,672)
|
|
|
654,681
|
|
|
Net equity allocated
|
$
|
9,665,873
|
|
|
|
|
$
|
2,648,587
|
|
|
$
|
11,963
|
|
|
$
|
1,312,752
|
|
|
$
|
13,639,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net equity allocated (%)
|
71
|
%
|
|
|
|
19
|
%
|
|
—
|
%
|
|
10
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt/net equity ratio
|
6.1:1
|
|
|
|
1.6:1
|
|
NM
|
|
0.7:1
|
|
4.7:1
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Fair value/carrying includes residential loans held for sale.
(2) Fair value/carrying includes commercial real estate investments held for sale.
(3) Derivatives include TBA contracts under Agency MBS and MSRs and CMBX balances under Commercial Real Estate.
(4) Dedicated capital allocations as of June 30, 2021 assume capital related to held for sale assets will be redeployed within the Agency business line.
(5) Represents the debt/net equity ratio as determined using amounts on the Consolidated Statements of Financial Condition. Excludes liabilities of disposal group held for sale.
NM Not meaningful.
|
Residential Securities
Substantially all of our Agency MBS at June 30, 2021 and December 31, 2020 were backed by single-family residential mortgage loans and were secured with a first lien position on the underlying single-family properties. Our mortgage-backed securities were largely Freddie Mac, Fannie Mae or Ginnie Mae pass through certificates or CMOs, which carry an actual or implied “AAA” rating. We carry all of our Agency MBS at fair value on the Consolidated Statements of Financial Condition.
We accrete discount balances as an increase to interest income over the expected life of the related interest earning assets and we amortize premium balances as a decrease to interest income over the expected life of the related interest earning assets. At June 30, 2021 and December 31, 2020 we had on our Consolidated Statements of Financial Condition a total of $84.3 million and $88.3 million, respectively, of unamortized discount (which is the difference between the remaining principal value and
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
current amortized cost of our Residential Securities, excluding securities transferred or pledged to securitization vehicles, acquired at a price below principal value) and a total of $4.0 billion and $4.0 billion, respectively, of unamortized premium (which is the difference between the remaining principal value and the current amortized cost of our Residential Securities, excluding securities transferred or pledged to securitization vehicles, acquired at a price above principal value).
The weighted average experienced prepayment speed on our Agency MBS portfolio for the three months ended June 30, 2021 and 2020 was 26.4% and 19.5%, respectively. The weighted average projected long-term prepayment speed on our Agency MBS portfolio as of June 30, 2021 and 2020 was 12.9% and 18.0%, respectively.
Given our current portfolio composition, if mortgage principal prepayment rates were to increase over the life of our mortgage-backed securities, all other factors being equal, our net interest income would decrease during the life of these mortgage-backed securities as we would be required to amortize our net premium balance into income over a shorter time period. Similarly, if mortgage principal prepayment rates were to decrease over the life of our mortgage-backed securities, all other factors being equal, our net interest income would increase during the life of these mortgage-backed securities as we would amortize our net premium balance over a longer time period.
The following tables present our Residential Securities, excluding securities transferred or pledged to securitization vehicles, that were carried at fair value at June 30, 2021 and December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value
|
Agency
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Fixed-rate pass-through
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
64,718,925
|
|
|
$
|
71,302,578
|
|
Adjustable-rate pass-through
|
|
|
|
|
|
|
|
|
|
|
|
|
395,020
|
|
|
477,516
|
|
CMO
|
|
|
|
|
|
|
|
|
|
|
|
|
136,356
|
|
|
149,767
|
|
Interest-only
|
|
|
|
|
|
|
|
|
|
|
|
|
362,692
|
|
|
421,909
|
|
Multifamily
|
|
|
|
|
|
|
|
|
|
|
|
|
811,382
|
|
|
1,663,507
|
|
Reverse mortgages
|
|
|
|
|
|
|
|
|
|
|
|
|
44,144
|
|
|
51,782
|
|
Total agency securities
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
66,468,519
|
|
|
$
|
74,067,059
|
|
Residential credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential CRT
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
827,328
|
|
|
$
|
532,403
|
|
Alt-A
|
|
|
|
|
|
|
|
|
|
|
|
|
65,851
|
|
|
80,328
|
|
Prime
|
|
|
|
|
|
|
|
|
|
|
|
|
194,073
|
|
|
181,509
|
|
Prime interest-only
|
|
|
|
|
|
|
|
|
|
|
|
|
524
|
|
|
1,240
|
|
Subprime
|
|
|
|
|
|
|
|
|
|
|
|
|
182,596
|
|
|
188,433
|
|
NPL/RPL
|
|
|
|
|
|
|
|
|
|
|
|
|
1,064,084
|
|
|
475,847
|
|
Prime jumbo (>= 2010 vintage)
|
|
|
|
|
|
|
|
|
|
|
|
|
74,302
|
|
|
43,283
|
|
Prime jumbo (>= 2010 vintage) interest-only
|
|
|
|
|
|
|
|
|
|
|
|
|
893
|
|
|
1,552
|
|
Total residential credit securities
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,409,651
|
|
|
$
|
1,504,595
|
|
Total Residential Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
68,878,170
|
|
|
$
|
75,571,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
The following table summarizes certain characteristics of our Residential Securities (excluding interest-only mortgage-backed securities) and interest-only mortgage-backed securities, excluding securities transferred or pledged to securitization vehicles, at June 30, 2021 and December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
Residential Securities (1)
|
(dollars in thousands)
|
Principal amount
|
$
|
63,371,277
|
|
|
$
|
68,521,464
|
|
Net premium
|
3,226,135
|
|
|
3,280,439
|
|
Amortized cost
|
66,597,412
|
|
|
71,801,903
|
|
Amortized cost / principal amount
|
105.09
|
%
|
|
104.79
|
%
|
Carrying value
|
68,351,303
|
|
|
75,116,466
|
|
Carrying value / principal amount
|
107.86
|
%
|
|
109.62
|
%
|
Weighted average coupon rate
|
3.45
|
%
|
|
3.58
|
%
|
Weighted average yield
|
2.98
|
%
|
|
2.86
|
%
|
Adjustable-rate Residential Securities (1)
|
|
|
|
Principal amount
|
$
|
1,419,815
|
|
|
$
|
1,257,966
|
|
Weighted average coupon rate
|
2.79
|
%
|
|
3.20
|
%
|
Weighted average yield
|
7.72
|
%
|
|
5.20
|
%
|
Weighted average term to next adjustment
|
13 Months
|
|
15 Months
|
Weighted average lifetime cap (2)
|
0.24
|
%
|
|
0.41
|
%
|
Principal amount at period end as % of total residential securities
|
2.24
|
%
|
|
1.84
|
%
|
Fixed-rate Residential Securities (1)
|
|
|
|
Principal amount
|
$
|
61,951,462
|
|
|
$
|
67,263,498
|
|
Weighted average coupon rate
|
3.46
|
%
|
|
3.58
|
%
|
Weighted average yield
|
2.87
|
%
|
|
2.82
|
%
|
Principal amount at period end as % of total residential securities
|
97.76
|
%
|
|
98.16
|
%
|
Interest-only Residential Securities
|
|
|
|
Notional amount
|
$
|
4,842,596
|
|
|
$
|
3,642,143
|
|
Net premium
|
688,627
|
|
|
602,790
|
|
Amortized cost
|
688,627
|
|
|
602,790
|
|
Amortized cost / notional amount
|
14.22
|
%
|
|
16.55
|
%
|
Carrying value
|
526,867
|
|
|
455,188
|
|
Carrying value / notional amount
|
10.88
|
%
|
|
12.50
|
%
|
Weighted average coupon rate
|
2.94
|
%
|
|
3.99
|
%
|
Weighted average yield
|
1.13
|
%
|
|
NM
|
(1) Excludes interest-only MBS.
(2) Excludes non-Agency MBS and CRT securities as this attribute is not applicable to these asset classes.
NM Not meaningful.
|
The following tables summarize certain characteristics of our Residential Credit portfolio at June 30, 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Structure
|
Investment Characteristics
|
Product
|
Total
|
|
Senior
|
|
Subordinate
|
|
Coupon
|
|
Credit Enhancement
|
|
60+
Delinquencies
|
|
3M VPR (1)
|
(dollars in thousands)
|
Agency credit risk transfer
|
$
|
789,895
|
|
|
$
|
—
|
|
|
$
|
789,895
|
|
|
3.21
|
%
|
|
2.26
|
%
|
|
4.94
|
%
|
|
46.94
|
%
|
Private label credit risk transfer
|
37,433
|
|
|
—
|
|
|
37,433
|
|
|
3.93
|
%
|
|
0.58
|
%
|
|
2.73
|
%
|
|
5.68
|
%
|
Alt-A
|
65,851
|
|
|
16,852
|
|
|
48,999
|
|
|
3.09
|
%
|
|
8.95
|
%
|
|
16.90
|
%
|
|
24.97
|
%
|
Prime
|
194,073
|
|
|
66,128
|
|
|
127,945
|
|
|
4.15
|
%
|
|
9.04
|
%
|
|
6.16
|
%
|
|
37.67
|
%
|
Prime interest-only
|
524
|
|
|
524
|
|
|
—
|
|
|
0.48
|
%
|
|
—
|
|
|
3.65
|
%
|
|
64.95
|
%
|
Subprime
|
182,596
|
|
|
110,264
|
|
|
72,332
|
|
|
2.04
|
%
|
|
19.74
|
%
|
|
13.24
|
%
|
|
12.72
|
%
|
Re-performing loan securitizations
|
707,958
|
|
|
305,775
|
|
|
402,183
|
|
|
3.82
|
%
|
|
25.69
|
%
|
|
24.14
|
%
|
|
10.82
|
%
|
Non-performing loan securitizations
|
356,126
|
|
|
330,875
|
|
|
25,251
|
|
|
2.38
|
%
|
|
27.80
|
%
|
|
43.70
|
%
|
|
5.40
|
%
|
Prime jumbo (>=2010 vintage)
|
74,302
|
|
|
—
|
|
|
74,302
|
|
|
3.44
|
%
|
|
4.39
|
%
|
|
2.75
|
%
|
|
57.08
|
%
|
Prime jumbo (>=2010 vintage) interest-only
|
893
|
|
|
893
|
|
|
—
|
|
|
0.37
|
%
|
|
—
|
|
|
6.54
|
%
|
|
55.85
|
%
|
Total/weighted average (2)
|
$
|
2,409,651
|
|
|
$
|
831,311
|
|
|
$
|
1,578,340
|
|
|
3.26
|
%
|
|
14.99
|
%
|
|
17.25
|
%
|
|
27.78
|
%
|
|
(1) Represents the 3 month voluntary prepayment rate (“VPR”).
(2) Total investment characteristics exclude the impact of interest-only securities.
|
|
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bond Coupon
|
|
|
Product
|
ARM
|
|
Fixed
|
|
Floater
|
|
Interest-Only
|
|
Estimated Fair Value
|
(dollars in thousands)
|
Agency credit risk transfer
|
$
|
—
|
|
|
$
|
51
|
|
|
$
|
789,793
|
|
|
$
|
51
|
|
|
$
|
789,895
|
|
Private label credit risk transfer
|
—
|
|
|
—
|
|
|
37,433
|
|
|
—
|
|
|
37,433
|
|
Alt-A
|
7,043
|
|
|
46,545
|
|
|
12,263
|
|
|
—
|
|
|
65,851
|
|
Prime
|
35,635
|
|
|
153,507
|
|
|
4,931
|
|
|
—
|
|
|
194,073
|
|
Prime interest-only
|
—
|
|
|
—
|
|
|
—
|
|
|
524
|
|
|
524
|
|
Subprime
|
7,377
|
|
|
77,896
|
|
|
97,124
|
|
|
199
|
|
|
182,596
|
|
Re-performing loan securitizations
|
—
|
|
|
707,958
|
|
|
—
|
|
|
—
|
|
|
707,958
|
|
Non-performing loan securitizations
|
—
|
|
|
356,126
|
|
|
—
|
|
|
—
|
|
|
356,126
|
|
Prime jumbo (>=2010 vintage)
|
—
|
|
|
74,302
|
|
|
—
|
|
|
—
|
|
|
74,302
|
|
Prime jumbo (>=2010 vintage) interest-only
|
—
|
|
|
—
|
|
|
—
|
|
|
893
|
|
|
893
|
|
Total
|
$
|
50,055
|
|
|
$
|
1,416,385
|
|
|
$
|
941,544
|
|
|
$
|
1,667
|
|
|
$
|
2,409,651
|
|
|
Contractual Obligations
The following table summarizes the effect on our liquidity and cash flows from contractual obligations at June 30, 2021. The table does not include the effect of net interest rate payments on our interest rate swap agreements and excludes assets and liabilities of the disposal group held for sale. The net swap payments will fluctuate based on monthly changes in the floating rate. At June 30, 2021, the interest rate swaps had a net fair value of ($0.8) billion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within One
Year
|
|
One to Three
Years
|
|
Three to Five
Years
|
|
More than
Five Years
|
|
Total
|
|
(dollars in thousands)
|
Repurchase agreements
|
$
|
60,221,067
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
60,221,067
|
|
Interest expense on repurchase agreements (1)
|
25,356
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25,356
|
|
Other secured financing
|
—
|
|
|
—
|
|
|
909,655
|
|
|
—
|
|
|
909,655
|
|
Interest expense on other secured financing (1)
|
19,416
|
|
|
38,885
|
|
|
29,181
|
|
|
—
|
|
|
87,482
|
|
Debt issued by securitization vehicles (principal)
|
—
|
|
|
—
|
|
|
—
|
|
|
3,239,390
|
|
|
3,239,390
|
|
Interest expense on debt issued by securitization vehicles
|
76,651
|
|
|
153,302
|
|
|
153,302
|
|
|
2,101,560
|
|
|
2,484,815
|
|
Participations issued (principal)
|
—
|
|
|
—
|
|
|
—
|
|
|
302,865
|
|
|
302,865
|
|
Interest expense on participations issued
|
10,398
|
|
|
20,797
|
|
|
20,797
|
|
|
268,710
|
|
|
320,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term operating lease obligations
|
3,865
|
|
|
7,724
|
|
|
4,827
|
|
|
—
|
|
|
16,416
|
|
Total
|
$
|
60,356,753
|
|
|
$
|
220,708
|
|
|
$
|
1,117,762
|
|
|
$
|
5,912,525
|
|
|
$
|
67,607,748
|
|
|
(1) Interest expense on repurchase agreements and other secured financing calculated based on rates at June 30, 2021.
In the coming periods, we expect to continue to finance our Residential Securities in a manner that is largely consistent with our current operations via repurchase agreements. We may use securitization structures, credit facilities or other term financing structures to finance certain of our assets. During the six months ended June 30, 2021, we received $10.2 billion from principal repayments and $6.4 billion in cash from disposal of securities. During the six months ended June 30, 2020, we received $9.3 billion from principal repayments and $46.8 billion in cash from disposal of securities.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships which would have been established for the sole purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
We have limited future funding commitments related to certain of our unconsolidated joint ventures. In addition, we have provided customary non-recourse carve-out and environmental guarantees (or underlying indemnities with respect thereto) with respect to mortgage loans held by subsidiaries of these unconsolidated joint ventures. We believe that the likelihood of making any payments under these guarantees is remote, and have not accrued a related liability at June 30, 2021.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
Maintaining a strong balance sheet that can support the business even in times of economic stress and market volatility is of critical importance to our business strategy. A strong and robust capital position is essential to executing our investment strategy. Our capital strategy is predicated on a strong capital position, which enables us to execute our investment strategy regardless of the market environment. Our capital policy defines the parameters and principles supporting a comprehensive capital management practice.
The major risks impacting capital are capital, liquidity and funding risk, investment/market risk, credit risk, counterparty risk, operational risk and compliance, regulatory and legal risk. For further discussion of the risks we are subject to, please see Part I, Item 1A. “Risk Factors” in our most recent Annual Report on Form 10-K and in Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q.
Capital requirements are based on maintaining levels above approved thresholds, ensuring the quality of our capital appropriately reflects our asset mix, market and funding structure. In the event we fall short of our internal thresholds, we will consider appropriate actions which may include asset sales, changes in asset mix, reductions in asset purchases or originations, issuance of capital or other capital enhancing or risk reduction strategies.
Stockholders’ Equity
The following table provides a summary of total stockholders’ equity at June 30, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
Stockholders’ equity
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.95% Series F fixed-to-floating rate cumulative redeemable preferred stock
|
696,910
|
|
|
696,910
|
|
6.50% Series G fixed-to-floating rate cumulative redeemable preferred stock
|
411,335
|
|
|
411,335
|
|
|
|
|
|
6.75% Series I fixed-to-floating rate cumulative redeemable preferred stock
|
428,324
|
|
|
428,324
|
|
Common stock
|
14,442
|
|
|
13,982
|
|
Additional paid-in capital
|
20,178,692
|
|
|
19,750,818
|
|
Accumulated other comprehensive income (loss)
|
1,780,275
|
|
|
3,374,335
|
|
Accumulated deficit
|
(9,892,863)
|
|
|
(10,667,388)
|
|
Total stockholders’ equity
|
$
|
13,617,115
|
|
|
$
|
14,008,316
|
|
|
Capital Stock
Common Stock
During the three and six months ended June 30, 2021, we issued 45.5 million shares for proceeds of $420.4 million, net of commissions and fees, under the at-the-market sales program. No shares were issued under the at-the-market sales program during the three and six months ended June 30, 2020.
In June 2019, we announced that our Board authorized the repurchase of up to $1.5 billion of our outstanding shares of common stock, which expired on December 31, 2020 (“the Prior Share Repurchase Program”). In December 2020, we announced that our Board authorized the repurchase of up to $1.5 billion of our outstanding common shares through December 31, 2021 (the “Current Share Repurchase Program”). The Current Share Repurchase Program replaced the Prior Share Repurchase Program. During the three and six months ended June 30, 2021, no shares were purchased pursuant to these authorizations. During the three and six months ended June 30, 2020, we repurchased an aggregate of 22.9 million shares of our common stock for an aggregate amount of $143.3 million, excluding commission costs. All common shares purchased were part of a publicly announced plan in open-market transactions.
Leverage and Capital
We believe that it is prudent to maintain conservative GAAP leverage ratios and economic leverage ratios as there may be continued volatility in the mortgage and credit markets. Our capital policy governs our capital and leverage position including setting limits. Based on the guidelines, we generally expect to maintain an economic leverage ratio of less than 10:1. Our actual economic leverage ratio varies from time to time based upon various factors, including our management’s opinion of the level of risk of our assets and liabilities, our liquidity position, our level of unused borrowing capacity, the availability of credit, over-collateralization levels required by lenders when we pledge assets to secure borrowings and our assessment of domestic and international market conditions.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
Our GAAP leverage ratio at June 30, 2021 and December 31, 2020 was 4.7:1 and 5.1:1, respectively. Our economic leverage ratio, which is computed as the sum of Recourse Debt, cost basis of TBA and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity was 5.8:1 and 6.2:1 at June 30, 2021 and December 31, 2020, respectively. Our GAAP capital ratio at June 30, 2021 and December 31, 2020 was 16.6% and 15.9%, respectively. Our economic capital ratio, which represents our ratio of stockholders’ equity to total economic assets (inclusive of the implied market value of TBA derivatives and net of debt issued by securitization vehicles), was 14.3% and 13.6% at June 30, 2021 and December 31, 2020, respectively. Economic leverage ratio and economic capital ratio are non-GAAP financial measures. Refer to the “Non-GAAP Financial Measures” section for additional information, including reconciliations to their most directly comparable GAAP results.
Risk Management
For more information on COVID-19, including actions we have taken in response, please refer to the section titled “Business Environment and COVID-19” within this Item 2.
We are subject to a variety of risks in the ordinary conduct of our business. The effective management of these risks is of critical importance to the overall success of Annaly. The objective of our risk management framework is to identify, measure and monitor these risks.
Our risk management framework is intended to facilitate a holistic, enterprise wide view of risk. We believe we have built a strong and collaborative risk management culture throughout Annaly focused on awareness which supports appropriate understanding and management of our key risks. Each employee is accountable for identifying, monitoring and managing risk within their area of responsibility.
Risk Appetite
We maintain a firm-wide risk appetite statement which defines the types and levels of risk we are willing to take in order to achieve our business objectives, and reflects our risk management philosophy. We engage in risk activities based on our core expertise that aim to enhance value for our stockholders. Our activities focus on income generation and capital preservation through proactive portfolio management, supported by a conservative liquidity and leverage posture.
The risk appetite statement asserts the following key risk parameters to guide our investment management activities:
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Risk Parameter
|
|
Description
|
Portfolio Composition
|
|
We will maintain a portfolio comprised of target assets approved by our Board and in accordance with our capital allocation policy.
|
Leverage
|
|
We generally expect to maintain an economic leverage ratio no greater than 10:1.
|
Liquidity Risk
|
|
We will seek to maintain an unencumbered asset portfolio sufficient to meet our liquidity needs under adverse market conditions.
|
Interest Rate Risk
|
|
We will seek to manage interest rate risk to protect the portfolio from adverse rate movements utilizing derivative instruments targeting both income and capital preservation.
|
Credit Risk
|
|
We will seek to manage credit risk by making investments which conform within our specific investment policy parameters and optimize risk-adjusted returns.
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Capital Preservation
|
|
We will seek to protect our capital base through disciplined risk management practices.
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Operational
|
|
We will seek to limit impacts to our business through disciplined operational risk management practices.
|
Compliance, Regulatory and Legal
|
|
We will seek to comply with regulatory requirements needed to maintain our REIT status and our exemption from registration under the Investment Company Act and the licenses and approvals of our regulated and licensed subsidiaries.
|
Governance
Risk management begins with our Board, through the review and oversight of the risk management framework, and executive management, through the ongoing formulation of risk management practices and related execution in managing risk. The Board exercises its oversight of risk management primarily through the Board Risk Committee (“BRC”) and Board Audit Committee (“BAC”) with support from the other Board Committees. The BRC is responsible for oversight of our risk governance structure, risk management and risk assessment guidelines and policies and our risk appetite. The BAC is responsible for oversight of the quality and integrity of our accounting, internal controls and financial reporting practices, including independent auditor selection, evaluation and review, and oversight of the internal audit function. The Management Development and Compensation Committee is responsible for oversight of risk related to our compensation policies and practices. The Corporate Responsibility Committee assists the Board in its oversight of any matters that may present reputational or Environment, Social,
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
and Governance risk to us, and the Nominating/Corporate Governance Committee assists the Board in its oversight of our corporate governance framework and the annual self-evaluation of the Board.
Risk assessment and risk management are the responsibility of our management. A series of management committees has oversight or decision-making responsibilities for risk management activities. Membership of these committees is reviewed regularly to ensure the appropriate personnel are engaged in the risk management process. Four primary management committees have been established to provide a comprehensive framework for risk management. The management committees responsible for our risk management include the Enterprise Risk Committee (“ERC”), Asset and Liability Committee (“ALCO”), Investment Committee and the Financial Reporting and Disclosure Committee (“FRDC”). Each of these committees reports to our management Operating Committee which is responsible for oversight and management of our operations, including oversight and approval authority over all aspects of our enterprise risk management.
Audit Services is an independent function with reporting lines to the BAC. Audit Services is responsible for performing our internal audit activities, which includes independently assessing and validating key controls within the risk management framework.
Our compliance group is responsible for oversight of our regulatory compliance. Our Chief Compliance Officer has reporting lines to the BAC.
Description of Risks
We are subject to a variety of risks due to the business we operate. Risk categories are an important component of a robust enterprise wide risk management framework.
We have identified the following primary categories that we utilize to identify, assess, measure and monitor risk.
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Risk
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Description
|
Capital, Liquidity and Funding Risk
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|
Risk to earnings, capital or business resulting from our inability to meet our obligations when they come due without incurring unacceptable losses because of inability to liquidate assets or obtain adequate funding.
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Investment/Market Risk
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Risk to earnings, capital or business resulting in the decline in value of our assets or an increase in the costs of financing caused by changes in market variables, such as interest rates, which affect the values of investment securities and other investment instruments.
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Credit Risk
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|
Risk to earnings, capital or business resulting from an obligor’s failure to meet the terms of any contract or otherwise failure to perform as agreed. This risk is present in lending and investing activities.
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Counterparty Risk
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|
Risk to earnings, capital or business resulting from a counterparty’s failure to meet the terms of any contract or otherwise failure to perform as agreed. This risk is present in funding, hedging and investing activities.
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Operational Risk
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|
Risk to earnings, capital, reputation or business arising from inadequate or failed internal processes or systems (including proprietary and third party models), human factors or external events. This risk also applies to our use of software vendors and data providers.
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Compliance, Regulatory and Legal Risk
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|
Risk to earnings, capital, reputation or conduct of business arising from violations of, or nonconformance with internal and external applicable rules and regulations, losses resulting from lawsuits or adverse judgments, or from changes in the regulatory environment that may impact our business model.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
Capital, Liquidity and Funding Risk Management
Our capital, liquidity and funding risk management strategy is designed to ensure the availability of sufficient resources to support our business and meet our financial obligations under both normal and adverse market and business environments. Our capital, liquidity and funding risk management practices consist of the following primary elements:
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Element
|
|
Description
|
Funding
|
|
Availability of diverse and stable sources of funds.
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Excess Liquidity
|
|
Excess liquidity primarily in the form of unencumbered assets and cash.
|
Maturity Profile
|
|
Diversity and tenor of liabilities and modest use of leverage.
|
Stress Testing
|
|
Scenario modeling to measure the resiliency of our liquidity position.
|
Liquidity Management Policies
|
|
Comprehensive policies including monitoring, risk limits and an escalation protocol.
|
Funding
Our primary financing sources are repurchase agreements provided through counterparty arrangements and through Arcola, other secured financing, debt issued by securitization vehicles, mortgages, credit facilities, note sales and various forms of equity. We maintain excess liquidity by holding unencumbered liquid assets that could be either used to collateralize additional borrowings or sold.
We seek to conservatively manage our repurchase agreement funding position through a variety of methods including diversity, breadth and depth of counterparties and maintaining a staggered maturity profile.
Our wholly-owned subsidiary, Arcola, provides direct access to third party funding as a FINRA member broker-dealer. Arcola borrows funds through the General Collateral Finance Repo service offered by the FICC, with FICC acting as the central counterparty. In addition, Arcola borrows funds through direct repurchase agreements.
To reduce our liquidity risk we maintain a laddered approach to our repurchase agreements. At June 30, 2021 and December 31, 2020, the weighted average days to maturity was 88 days and 64 days, respectively.
Our repurchase agreements generally provide that in the event of a margin call we must provide additional securities or cash on the same business day that a margin call is made. Should prepayment speeds on the mortgages underlying our Agency and Residential mortgage-backed securities and/or market interest rates or other factors move suddenly and cause declines in the market value of assets posted as collateral, resulting margin calls may cause an adverse change in our liquidity position.
At June 30, 2021, we had total financial assets and cash pledged against existing liabilities of $66.4 billion. The weighted average haircut was approximately 3% on repurchase agreements. The quality and character of the Residential Securities and commercial real estate investments that we pledge as collateral under the repurchase agreements and interest rate swaps did not materially change at June 30, 2021 compared to the same period in 2020, and our counterparties did not materially alter any requirements, including required haircuts, related to the collateral we pledge under repurchase agreements and interest rate swaps during the three months ended June 30, 2021.
The following table presents our quarterly average and quarter-end repurchase agreement and reverse repurchase agreement balances outstanding for the periods presented:
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|
|
|
|
Repurchase Agreements
|
Reverse Repurchase Agreements
|
|
Average Daily
Amount Outstanding
|
|
Ending Amount Outstanding
|
|
Average Daily
Amount Outstanding
|
|
Ending Amount Outstanding
|
For the three months ended
|
(dollars in thousands)
|
June 30, 2021
|
$
|
62,440,803
|
|
|
$
|
60,221,067
|
|
|
$
|
42,581
|
|
|
$
|
—
|
|
March 31, 2021
|
65,461,539
|
|
|
61,202,477
|
|
|
143,395
|
|
|
—
|
|
December 31, 2020
|
65,528,297
|
|
|
64,825,239
|
|
|
210,484
|
|
|
—
|
|
September 30, 2020
|
67,542,187
|
|
|
64,633,447
|
|
|
286,792
|
|
|
—
|
|
June 30, 2020
|
68,468,813
|
|
|
67,163,598
|
|
|
183,423
|
|
|
—
|
|
March 31, 2020
|
96,756,341
|
|
|
72,580,183
|
|
|
461,123
|
|
|
—
|
|
December 31, 2019
|
102,760,107
|
|
|
101,740,728
|
|
|
1,006,487
|
|
|
—
|
|
September 30, 2019
|
108,389,796
|
|
|
102,682,104
|
|
|
1,459,070
|
|
|
—
|
|
June 30, 2019
|
101,983,828
|
|
|
105,181,241
|
|
|
3,478,510
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
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|
|
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|
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|
|
|
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|
|
|
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|
|
|
|
|
|
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
The following table provides information on our repurchase agreements and other secured financing by maturity date at June 30, 2021. The weighted average remaining maturity on our repurchase agreements and other secured financing was 111 days at June 30, 2021:
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
Principal
Balance
|
|
Weighted
Average Rate
|
|
% of Total
|
|
(dollars in thousands)
|
1 day
|
$
|
10,195,167
|
|
|
0.09
|
%
|
|
16.7
|
%
|
2 to 29 days
|
16,221,281
|
|
|
0.14
|
%
|
|
26.5
|
%
|
30 to 59 days
|
6,437,669
|
|
|
0.27
|
%
|
|
10.5
|
%
|
60 to 89 days
|
4,639,954
|
|
|
0.16
|
%
|
|
7.6
|
%
|
90 to 119 days
|
5,873,992
|
|
|
0.16
|
%
|
|
9.6
|
%
|
Over 120 days (1)
|
17,762,659
|
|
|
0.28
|
%
|
|
29.1
|
%
|
Total
|
$
|
61,130,722
|
|
|
0.19
|
%
|
|
100.0
|
%
|
|
(1) Approximately 1% of the total repurchase agreements and other secured financing had a remaining maturity over 1 year.
The table below presents our outstanding debt balances and associated weighted average rates and days to maturity at June 30, 2021:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Rate
|
|
|
|
Principal Balance
|
|
As of Period End
|
|
For the Quarter
|
|
Weighted Average
Days to Maturity (1)
|
|
(dollars in thousands)
|
Repurchase agreements
|
$
|
60,221,067
|
|
|
0.16
|
%
|
|
0.17
|
%
|
|
88
|
Other secured financing (2)
|
909,655
|
|
|
2.13
|
%
|
|
2.92
|
%
|
|
1,645
|
Debt issued by securitization vehicles (3)
|
3,239,390
|
|
|
2.29
|
%
|
|
2.20
|
%
|
|
11,599
|
Participations issued (3)
|
302,865
|
|
|
3.43
|
%
|
|
2.22
|
%
|
|
11,257
|
|
|
|
|
|
|
|
|
Total indebtedness
|
$
|
64,672,977
|
|
|
|
|
|
|
|
|
(1) Determined based on estimated weighted-average lives of the underlying debt instruments.
(2) Includes financing under credit facilities.
(3) Non-recourse to Annaly.
|
Excess Liquidity
Our primary source of liquidity is the availability of unencumbered assets which may be provided as collateral to support additional funding needs. We target minimum thresholds of available, unencumbered assets to maintain excess liquidity. The following table illustrates our asset portfolio available to support potential collateral obligations and funding needs.
Assets are considered encumbered if pledged as collateral against an existing liability, and therefore are no longer available to support additional funding. An asset is considered unencumbered if it has not been pledged or securitized. The following table also provides the carrying amount of our encumbered and unencumbered financial assets at June 30, 2021:
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Encumbered Assets
|
|
Unencumbered Assets
|
|
Total
|
Financial assets
|
(dollars in thousands)
|
Cash and cash equivalents
|
$
|
1,207,566
|
|
|
$
|
172,890
|
|
|
$
|
1,380,456
|
|
|
|
|
|
|
|
Investments, at carrying value (1)
|
|
|
|
|
|
Agency mortgage-backed securities (2)
|
62,375,349
|
|
|
4,565,421
|
|
|
66,940,770
|
|
Credit risk transfer securities
|
244,907
|
|
|
587,490
|
|
|
832,397
|
|
Non-agency mortgage-backed securities
|
610,320
|
|
|
972,003
|
|
|
1,582,323
|
|
Commercial mortgage-backed securities
|
—
|
|
|
154,165
|
|
|
154,165
|
|
Residential mortgage loans (2)
|
3,244,342
|
|
|
1,253,580
|
|
|
4,497,922
|
|
MSR
|
—
|
|
|
202,616
|
|
|
202,616
|
|
Interests in MSR
|
—
|
|
|
49,035
|
|
|
49,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt, held for investment
|
1,378,036
|
|
|
688,673
|
|
|
2,066,709
|
|
Corporate debt, held for sale
|
—
|
|
|
466,370
|
|
|
466,370
|
|
Assets of disposal group held for sale (3)
|
2,185,727
|
|
|
487,663
|
|
|
2,673,390
|
|
Other assets (4)
|
—
|
|
|
45,121
|
|
|
45,121
|
|
Total financial assets
|
$
|
71,246,247
|
|
|
$
|
9,645,027
|
|
|
$
|
80,891,274
|
|
|
(1) The amounts reflected in the table above are on a settlement date basis and may differ from the total positions reported on the Consolidated Statements of Financial Condition.
(2) Includes assets transferred or pledged to securitization vehicles.
(3) Comprised of commercial real estate investments held for sale.
(4) Includes interests in certain joint ventures.
We maintain liquid assets in order to satisfy our current and future obligations in normal and stressed operating environments. These are held as the primary means of liquidity risk mitigation. The composition of our liquid assets is also considered and is subject to certain parameters. The composition is monitored for concentration risk and asset type. We believe the assets we consider liquid can be readily converted into cash, through liquidation or by being used as collateral in financing arrangements (including as additional collateral to support existing financial arrangements). Our balance sheet also generates liquidity on an on-going basis through mortgage principal and interest repayments and net earnings held prior to payment of dividends. The following table presents our liquid assets as a percentage of total assets at June 30, 2021:
|
|
|
|
|
|
|
Carrying Value (1)
|
Liquid assets
|
(dollars in thousands)
|
Cash and cash equivalents
|
$
|
1,380,456
|
|
|
|
Residential Securities (2) (3)
|
68,750,128
|
|
Commercial mortgage-backed securities
|
154,165
|
|
Residential mortgage loans (4)
|
1,029,929
|
|
|
|
|
|
Corporate debt, held for investment (5)
|
1,630,452
|
|
Corporate debt, held for sale
|
466,370
|
|
Assets of disposal group held for sale (6)
|
55,172
|
|
|
|
Total liquid assets
|
$
|
73,466,672
|
|
Percentage of liquid assets to carrying amount of encumbered and unencumbered financial assets (7)
|
98.38
|
%
|
(1)Carrying value approximates the market value of assets. The assets listed in this table include $66.4 billion of assets that have been pledged as collateral against existing liabilities at June 30, 2021. Please refer to the Encumbered and Unencumbered Assets table for related information.
(2)The amounts reflected in the table above are on a settlement date basis and may differ from the total positions reported on the Consolidated Statements of Financial Condition.
(3)Excludes securitized Agency MBS of consolidated VIEs carried at fair value of $0.6 billion.
(4)Excludes securitized residential mortgage loans transferred or pledged to consolidated VIEs carried at fair value of $3.5 billion.
(5)Excludes certain second lien loans.
(6)Comprised of commercial real estate investments held for sale. Excludes securitized commercial mortgage loans and senior securitized commercial mortgage loans of consolidated VIEs carried at fair value of $2.1 billion.
(7)Denominator is computed based on the carrying amount of encumbered and unencumbered financial assets, excluding assets transferred or pledged to securitization vehicles of $6.2 billion.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
Maturity Profile
We consider the profile of our assets, liabilities and derivatives when managing both liquidity risk as well as investment/market risk employing a measurement of both the maturity gap and interest rate sensitivity gap. We determine the amount of liquid assets that are required to be held by monitoring several liquidity metrics. We utilize several modeling techniques to analyze our current and potential obligations including the expected cash flows from our assets, liabilities and derivatives. The following table illustrates the expected final maturities and cash flows of our assets, liabilities and derivatives. The table is based on a static portfolio and assumes no reinvestment of asset cash flows and no future liabilities are entered into. In assessing the maturity of our assets, liabilities and off balance sheet obligations, we use the stated maturities, or our prepayment expectations for assets and liabilities that exhibit prepayment characteristics. Cash and cash equivalents are included in the ‘Less than 3 Months’ maturity bucket, as they are typically held for a short period of time.
With respect to each maturity bucket, our maturity gap is considered negative when the amount of maturing liabilities exceeds the amount of maturing assets. A negative gap increases our liquidity risk as we must enter into future liabilities.
Our interest rate sensitivity gap is the difference between interest earning assets and interest bearing liabilities maturing or re-pricing within a given time period. Unlike the calculation of maturity gap, interest rate sensitivity gap includes the effect of our interest rate swaps. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities. A gap is considered negative when the amount of interest-rate sensitive liabilities exceeds interest-rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to affect net interest income adversely. Because different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market rates or conditions, changes in interest rates may affect net interest income positively or negatively even if assets and liabilities were perfectly matched in each maturity category. The amount of assets and liabilities utilized to compute our interest rate sensitivity gap was determined in accordance with the contractual terms of the assets and liabilities, except that adjustable-rate loans and securities are included in the period in which their interest rates are first scheduled to adjust and not in the period in which they mature. The effects of interest rate swaps, whereby we generally pay a fixed rate and receive a floating rate and effectively lock in our financing costs for a longer term, are also reflected in our interest rate sensitivity gap.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
The interest rate sensitivity of our assets and liabilities, excluding assets and liabilities of the disposal group held for sale and corporate loans held for sale, in the following table at June 30, 2021 could vary substantially based on actual prepayment experience.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 3
Months
|
|
3-12
Months
|
|
More than 1 Year to 3 Years
|
|
3 Years and Over
|
|
Total
|
Financial assets
|
(dollars in thousands)
|
Cash and cash equivalents
|
$
|
1,380,456
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,380,456
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities (principal)
|
—
|
|
|
5,508
|
|
|
1,037,144
|
|
|
59,923,449
|
|
|
60,966,101
|
|
Residential credit risk transfer securities (principal)
|
—
|
|
|
6,700
|
|
|
440,615
|
|
|
366,470
|
|
|
813,785
|
|
Non-agency mortgage-backed securities (principal)
|
458
|
|
|
219,907
|
|
|
880,186
|
|
|
490,840
|
|
|
1,591,391
|
|
Commercial mortgage-backed securities (principal)
|
—
|
|
|
—
|
|
|
—
|
|
|
154,000
|
|
|
154,000
|
|
Total securities
|
458
|
|
|
232,115
|
|
|
2,357,945
|
|
|
60,934,759
|
|
|
63,525,277
|
|
Residential mortgage loans (principal)
|
—
|
|
|
—
|
|
|
—
|
|
|
996,221
|
|
|
996,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt (principal)
|
—
|
|
|
—
|
|
|
241,280
|
|
|
1,886,093
|
|
|
2,127,373
|
|
Total loans
|
—
|
|
|
—
|
|
|
241,280
|
|
|
2,882,314
|
|
|
3,123,594
|
|
Assets transferred or pledged to securitization vehicles (principal)
|
—
|
|
|
—
|
|
|
—
|
|
|
3,848,719
|
|
|
3,848,719
|
|
Total financial assets - maturity
|
1,380,914
|
|
|
232,115
|
|
|
2,599,225
|
|
|
67,665,792
|
|
|
71,878,046
|
|
Effect of utilizing reset dates (1)
|
5,360,341
|
|
|
1,452,698
|
|
|
(468,887)
|
|
|
(6,344,152)
|
|
|
—
|
|
Total financial assets - interest rate sensitive
|
$
|
6,741,255
|
|
|
$
|
1,684,813
|
|
|
$
|
2,130,338
|
|
|
$
|
61,321,640
|
|
|
$
|
71,878,046
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
$
|
37,494,071
|
|
|
$
|
22,726,996
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
60,221,067
|
|
Other secured financing
|
—
|
|
|
—
|
|
|
—
|
|
|
909,655
|
|
|
909,655
|
|
Debt issued by securitization vehicles (principal)
|
—
|
|
|
—
|
|
|
—
|
|
|
3,239,390
|
|
|
3,239,390
|
|
Participations issued (principal)
|
—
|
|
|
—
|
|
|
—
|
|
|
302,865
|
|
|
302,865
|
|
Total financial liabilities - maturity
|
37,494,071
|
|
|
22,726,996
|
|
|
—
|
|
|
4,451,910
|
|
|
64,672,977
|
|
Effect of utilizing reset dates (1)(2)
|
(39,411,653)
|
|
|
11,548,513
|
|
|
18,874,400
|
|
|
8,988,740
|
|
|
|
Total financial liabilities - interest rate sensitive
|
$
|
(1,917,582)
|
|
|
$
|
34,275,509
|
|
|
$
|
18,874,400
|
|
|
$
|
13,440,650
|
|
|
$
|
64,672,977
|
|
|
|
|
|
|
|
|
|
|
|
Maturity gap
|
$
|
(36,113,157)
|
|
|
$
|
(22,494,881)
|
|
|
$
|
2,599,225
|
|
|
$
|
63,213,882
|
|
|
$
|
7,205,069
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative maturity gap
|
$
|
(36,113,157)
|
|
|
$
|
(58,608,038)
|
|
|
$
|
(56,008,813)
|
|
|
$
|
7,205,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate sensitivity gap
|
$
|
8,658,837
|
|
|
$
|
(32,590,696)
|
|
|
$
|
(16,744,062)
|
|
|
$
|
47,880,990
|
|
|
$
|
7,205,069
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative rate sensitivity gap
|
$
|
8,658,837
|
|
|
$
|
(23,931,859)
|
|
|
$
|
(40,675,921)
|
|
|
$
|
7,205,069
|
|
|
|
|
(1)Maturity gap utilizes stated maturities, or prepayment expectations for assets that exhibit prepayment characteristics, while interest rate sensitivity gap utilizes reset dates, if applicable.
(2)Includes effect of interest rate swaps.
The methodologies we employ for evaluating interest rate risk include an analysis of our interest rate “gap,” measurement of the duration and convexity of our portfolio and sensitivities to interest rates and spreads.
Stress Testing
We utilize liquidity stress testing to ensure we have sufficient liquidity under a variety of scenarios and stresses. These stress tests assist with the management of our pool of liquid assets and influence our current and future funding plans. The stresses applied include market-wide and firm-specific stresses.
Liquidity Management Policies
We utilize a comprehensive liquidity policy structure to inform our liquidity risk management practices including monitoring and measurement, along with well-defined key risk indicators. Both quantitative and qualitative targets are utilized to measure the ongoing stability and condition of the liquidity position, and include the level and composition of unencumbered assets, as well as sustainability of the funding composition under stress conditions.
We also monitor early warning metrics designed to measure the quality and depth of liquidity sources based upon both company-specific and market conditions. The metrics assist in assessing our liquidity conditions and are integrated into our escalation protocol.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
Investment/Market Risk Management
One of the primary risks we are subject to is investment/market risk. Changes in the level of interest rates can affect our net interest income, which is the difference between the income we earn on our interest earning assets and the interest expense incurred from interest bearing liabilities and derivatives. Changes in the level of interest rates and spreads can also affect the value of our assets and potential realization of gains or losses from the sale of these assets. We may utilize a variety of financial instruments, including interest rate swaps, swaptions, options, futures and other hedges, in order to limit the adverse effects of interest rates on our results. In the case of interest rate swaps, we utilize contracts linked to LIBOR but may also enter into interest rate swaps where the floating leg is linked to the overnight index swap rate or another index, particularly in light of a potential transition away from LIBOR. In addition, we may use MAC interest rate swaps in which we may receive or make a payment at the time of entering such interest rate swap to compensate for the off-market nature of such interest rate swap. MAC interest rate swaps offer price transparency, flexibility and more efficient portfolio administration through compression which is the process of reducing the number of unique interest rate swap contracts and replacing them with fewer contracts containing market defined terms. Our portfolio and the value of our portfolio, including derivatives, may be adversely affected as a result of changing interest rates and spreads.
We simulate a wide variety of interest rate scenarios in evaluating our risk. Scenarios are run to capture our sensitivity to changes in interest rates, spreads and the shape of the yield curve. We also consider the assumptions affecting our analysis such as those related to prepayments. In addition to predefined interest rate scenarios, we utilize Value-at-Risk measures to estimate potential losses in the portfolio over various time horizons utilizing various confidence levels. The following tables estimate the potential changes in economic net interest income over a twelve month period and the immediate effect on our portfolio market value (inclusive of derivative instruments), should interest rates instantaneously increase or decrease by 25, 50 or 75 basis points, and the effect of portfolio market value if mortgage option-adjusted spreads instantaneously increase or decrease by 5, 15 or 25 basis points (assuming shocks are parallel and instantaneous). All changes to income and portfolio market value are measured as percentage changes from the projected net interest income and portfolio value at the base interest rate scenario. The net interest income simulations incorporate the interest expense effect of rate resets on liabilities and derivatives as well as the amortization expense and reinvestment of principal based on the prepayments on our securities, which varies based on the level of rates. The results assume no management actions in response to the rate or spread changes. The following table presents estimates at June 30, 2021. Actual results could differ materially from these estimates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Interest Rate (1)
|
Projected Percentage Change in Economic Net Interest Income (2)
|
|
Estimated Percentage Change in Portfolio Value (3)
|
|
Estimated Change as a
% on NAV (3)(4)
|
-75 Basis points
|
(34.1%)
|
|
(0.2%)
|
|
(1.1%)
|
-50 Basis points
|
(20.6%)
|
|
—%
|
|
(0.2%)
|
-25 Basis points
|
(8.7%)
|
|
0.1%
|
|
0.3%
|
|
|
|
|
|
|
+25 Basis points
|
10.3%
|
|
(0.1%)
|
|
(0.6%)
|
+50 Basis points
|
18.9%
|
|
(0.4%)
|
|
(2.2%)
|
+75 Basis points
|
26.9%
|
|
(0.8%)
|
|
(4.5%)
|
MBS Spread Shock (1)
|
Estimated Change in
Portfolio Market Value
|
|
Estimated Change as a
% on NAV (3)(4)
|
|
|
-25 Basis points
|
1.6%
|
|
9.2%
|
|
|
-15 Basis points
|
1.0%
|
|
5.5%
|
|
|
-5 Basis points
|
0.3%
|
|
1.8%
|
|
|
|
|
|
|
|
|
+5 Basis points
|
(0.3%)
|
|
(1.8%)
|
|
|
+15 Basis points
|
(0.9%)
|
|
(5.5%)
|
|
|
+25 Basis points
|
(1.6%)
|
|
(9.0%)
|
|
|
(1) Interest rate and MBS spread sensitivity are based on results from third party models in conjunction with inputs from our internal investment professionals. Actual results could differ materially from these estimates.
(2) Scenarios include Residential Securities, commercial real estate investments, corporate debt, repurchase agreements, other secured financing and interest rate swaps. Economic net interest income includes the net interest component of interest rate swaps.
(3) Scenarios include Residential Securities, residential mortgage loans, MSR and derivative instruments.
(4) NAV represents book value of equity.
|
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
Credit Risk Management
Key risk parameters have been established to specify our credit risk appetite. We seek to manage credit risk by making investments which conform within the firm’s specific investment policy parameters and optimize risk-return attributes.
While we do not expect to encounter credit risk in our Agency mortgage-backed securities, we face credit risk on the non-Agency mortgage-backed securities and CRT securities in our portfolio. In addition, we are also exposed to credit risk on residential mortgage loans, commercial real estate investments and corporate debt. MSR values may also be impacted through reduced servicing fees and higher costs to service the underlying mortgage loans due to borrower performance. We are subject to risk of loss if an issuer or borrower fails to perform its contractual obligations. We have established policies and procedures for mitigating credit risk, including establishing and reviewing limits for credit exposure. We will originate or purchase investments that meet our comprehensive underwriting process and credit standards and are approved by the appropriate committee. In the case of residential mortgage loans and MSR, we may engage a third party to perform due diligence on a sample of loans that we believe sufficiently represents the entire pool. Once an investment is made, our ongoing surveillance process includes regular reviews, analysis and oversight of investments by our investment personnel and appropriate committee. We review credit and other risks of loss associated with each investment. Our management monitors the overall portfolio risk and determines estimates of provision for loss. Additionally, ALCO has oversight of our credit risk exposure. Our portfolio composition, based on balance sheet values, at June 30, 2021 and December 31, 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
Category
|
|
|
|
Agency mortgage-backed securities (1)
|
87.2
|
%
|
|
86.4
|
%
|
Credit risk transfer securities
|
1.1
|
%
|
|
0.6
|
%
|
Non-agency mortgage-backed securities
|
2.1
|
%
|
|
1.1
|
%
|
Residential mortgage loans (1)
|
5.8
|
%
|
|
4.2
|
%
|
Mortgage servicing rights (2)
|
0.3
|
%
|
|
0.1
|
%
|
|
|
|
|
Commercial real estate (1) (3)
|
0.2
|
%
|
|
5.0
|
%
|
Corporate debt (4)
|
3.3
|
%
|
|
2.6
|
%
|
(1) Includes assets transferred or pledged to securitization vehicles.
(2) Includes Interests in MSR.
(3) Net of unamortized origination fees. Excludes commercial real estate assets held for sale as of June 30, 2021.
(4) Includes corporate loans held for sale as of June 30, 2021.
|
Counterparty Risk Management
Our use of repurchase and derivative agreements and trading activities create exposure to counterparty risk relating to potential losses that could be recognized if the counterparties to these agreements fail to perform their obligations under the contracts. In the event of default by a counterparty, we could have difficulty obtaining our assets pledged as collateral. A significant portion of our investments are financed with repurchase agreements by pledging our Residential Securities and certain commercial real estate investments as collateral to the applicable lender. The collateral we pledge generally exceeds the amount of the borrowings under each agreement. If the counterparty to the repurchase agreement defaults on its obligations and we are not able to recover our pledged asset, we are at risk of losing the over-collateralization or haircut. The amount of this exposure is the difference between the amount loaned to us plus interest due to the counterparty and the fair value of the collateral pledged by us to the lender including accrued interest receivable on such collateral.
We also use interest rate swaps and other derivatives to manage interest rate risk. Under these agreements, we pledge securities and cash as collateral or settle variation margin payments as part of a margin arrangement.
If a counterparty were to default on its obligations, we would be exposed to a loss to a derivative counterparty to the extent that the amount of our securities or cash pledged exceeded the unrealized loss on the associated derivative and we were not able to recover the excess collateral. Additionally, we would be exposed to a loss to a derivative counterparty to the extent that our unrealized gains on derivative instruments exceeded the amount of the counterparty’s securities or cash pledged to us.
We monitor our exposure to counterparties across several dimensions including by type of arrangement, collateral type, counterparty type, ratings and geography. Additionally, ALCO has oversight of our counterparty exposure.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
The following table summarizes our exposure to counterparties by geography at June 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Counterparties
|
|
Secured Financing (1)
|
|
Interest Rate Swaps at Fair Value
|
|
Exposure - Secured Financing (2)
|
|
Exposure - Interest Rate Swaps (2)
|
Geography
|
(dollars in thousands)
|
North America
|
22
|
|
|
$
|
50,546,684
|
|
|
$
|
(290,239)
|
|
|
$
|
3,367,896
|
|
|
$
|
(1,216,620)
|
|
Europe
|
9
|
|
|
7,567,356
|
|
|
(516,713)
|
|
|
1,345,823
|
|
|
(678,276)
|
|
|
|
|
|
|
|
|
|
|
|
Japan
|
3
|
|
|
3,016,682
|
|
|
—
|
|
|
63,402
|
|
|
—
|
|
Total
|
34
|
|
|
$
|
61,130,722
|
|
|
$
|
(806,952)
|
|
|
$
|
4,777,121
|
|
|
$
|
(1,894,896)
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes repurchase agreements and other secured financing.
|
(2) Represents the amount of cash and/or securities pledged as collateral to each counterparty less the aggregate of repurchase agreement and other secured financing and unrealized loss on swaps for each counterparty.
|
Operational Risk Management
We are subject to operational risk in each of our business and support functions. Operational risk may arise from internal or external sources including human error, fraud, systems issues, process change, vendors, business interruptions and other external events. Model risk considers potential errors with a model’s results due to uncertainty in model parameters and inappropriate methodologies used. The result of these risks may include financial loss and reputational damage. We manage operational risk through a variety of tools including policies and procedures that cover topics such as business continuity, personal conduct, cybersecurity and vendor management. Other tools include testing, including disaster recovery testing; systems controls, including access controls; training, including cybersecurity awareness training; and monitoring, which includes the use of key risk indicators. Employee-level lines of defense against operational risk include proper segregation of incompatible duties, activity-level internal controls over financial reporting, the empowerment of business units to identify and mitigate operational risk sources, testing by our internal audit staff, and our overall governance framework.
We have established a Cybersecurity Committee to help mitigate cybersecurity risks. The role of the committee is to oversee cyber risk assessments, monitor applicable key risk indicators, review cybersecurity training procedures, oversee our Cybersecurity Incident Response Plan and engage third parties to conduct periodic penetration testing. Our cybersecurity risk assessment includes an evaluation of cyber risk related to sensitive data held by third parties on their systems. The Cybersecurity Committee periodically reports to the ERC, and the Board via the BRC and the BAC. There is no assurance that these efforts will effectively mitigate cybersecurity risk and mitigation efforts are not an assurance that no cybersecurity incidents will occur. We currently maintain cybersecurity insurance, however, there is no assurance that the insurance policy will cover all cybersecurity breaches or that the policy will cover all losses.
We depend on third party service providers to perform various business processes related to our operations, including mortgage loan servicers and sub-servicers. Our vendor management policy establishes procedures for engaging, onboarding and monitoring the performance of third party vendors. These procedures include assessing a vendor’s financial health as well as oversight of its compliance with applicable laws and regulations, cybersecurity and business continuity programs and security of personally identifiable information.
Compliance, Regulatory and Legal Risk Management
Our business is organized as a REIT, and we seek to continue to meet the requirements for taxation as a REIT. The determination that we are a REIT requires an analysis of various factual matters and circumstances. Accordingly, we closely monitor our REIT status within our risk management program. We also regularly assess our risk management in respect of our regulated and licensed subsidiaries, which include our registered broker-dealer subsidiary Arcola, our subsidiary that is registered with the SEC as an investment adviser under the Investment Advisers Act and our subsidiary that operates as a licensed mortgage aggregator and master servicer.
The financial services industry is highly regulated and receives significant attention from regulators, which may impact both our company as well as our business strategy. Our investments in residential whole loans and MSR require us to comply with applicable state and federal laws and regulations, and maintain appropriate governmental licenses, approvals and exemptions. We proactively monitor the potential impact regulation may have both directly and indirectly on us. We maintain a process to actively monitor both actual and potential legal action that may affect us. Our risk management framework is designed to identify, measure and monitor these risks under the oversight of the ERC.
We currently rely on the exemption from registration provided by Section 3(c)(5)(C) of the Investment Company Act, and we seek to continue to meet the requirements for this exemption from registration. The determination that we qualify for this
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
exemption from registration depends on various factual matters and circumstances. Accordingly, in conjunction with our legal department, we closely monitor our compliance with Section 3(c)(5)(C) within our risk management program. The monitoring of this risk is also under the oversight of the ERC.
As a result of the Dodd-Frank Act, the U.S. Commodity Futures Trading Commission (“CFTC”) gained jurisdiction over the regulation of interest rate swaps. The CFTC has asserted that this causes the operators of mortgage real estate investment trusts that use swaps as part of their business model to fall within the statutory definition of Commodity Pool Operator (“CPO”), and, absent relief from the Division of Swap Dealer and Intermediary Oversight or the CFTC, to register as CPOs. On December 7, 2012, as a result of numerous requests for no-action relief from the CPO registration requirement for operators of mortgage real estate investment trusts, the Division of Swap Dealer and Intermediary Oversight of the CFTC issued no-action relief entitled “No-Action Relief from the Commodity Pool Operator Registration Requirement for Commodity Pool Operators of Certain Pooled Investment Vehicles Organized as Mortgage Real Estate Investment Trusts” that permits a CPO to receive relief by filing a claim to perfect the use of the relief. A claim submitted by a CPO will be effective upon filing, so long as the claim is materially complete. The conditions that must be met relate to initial margin and premiums requirements, net income derived annually from commodity interest positions that are not qualifying hedging transactions, marketing of interests in the mortgage real estate investment trust to the public, and identification of the entity as a mortgage real estate investment trust in its federal tax filings with the Internal Revenue Service. While we disagree with the CFTC’s position that mortgage REITs that use swaps as part of their business model fall within the statutory definition of a CPO, we have submitted a claim for the relief set forth in the no-action relief entitled “No-Action Relief from the Commodity Pool Operator Registration Requirement for Commodity Pool Operators of Certain Pooled Investment Vehicles Organized as Mortgage Real Estate Investment Trusts” and believe we meet the criteria for such relief set forth therein.
Critical Accounting Policies and Estimates
Our critical accounting policies that require us to make significant judgments or estimates are described below. For more information on these critical accounting policies and other significant accounting policies, see “Significant Accounting Policies” in the notes to the consolidated financial statements.
Valuation of Financial Instruments
Residential Securities
There is an active market for our Agency mortgage-backed securities, CRT securities and non-Agency mortgage-backed securities. Since we primarily invest in securities that can be valued using actively quoted prices for actively traded assets, there is a high degree of observable inputs and less subjectivity in measuring fair value. Internal fair values are determined using quoted prices from the TBA securities market, the Treasury curve and the underlying characteristics of the individual securities, which may include coupon, periodic and life caps, reset dates and the expected life of the security. While prepayment rates may be difficult to predict and require estimation and judgment in the valuation of Agency mortgage-backed securities, we use several third party models to validate prepayment speeds used in fair value measurements of residential securities. All internal fair values are compared to external pricing sources and/or dealer quotes to determine reasonableness. Additionally, securities used as collateral for repurchase agreements are priced daily by counterparties to ensure sufficient collateralization, providing additional verification of our internal pricing.
Residential Mortgage Loans
There is an active market for the residential whole loans in which we invest. Since we primarily invest in residential loans that can be valued using actively quoted prices for similar assets, there are observable inputs in measuring fair value. Internal fair values are determined using quoted prices for similar market transactions, the swap curve and the underlying characteristics of the individual loans, which may include loan term, coupon, and reset dates. While prepayment rates may be difficult to predict and are a significant estimate requiring judgment in the valuation of residential whole loans, we validate prepayment speeds against those provided by independent pricing analytic providers specializing in residential mortgage loans. Internal fair values are generally compared to external pricing sources to determine reasonableness.
MSR
Fair value estimates for our investment in MSR are obtained from models, which use significant unobservable inputs in their valuations. These valuations primarily utilize discounted cash flow models that incorporate unobservable market data inputs including prepayment rates, delinquency levels, costs to service and discount rates. Model valuations are then compared to valuations obtained from third party pricing providers. Management reviews the valuations received from third party pricing
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
providers and uses them as a point of comparison to modeled values. The valuation of MSR requires significant judgment by management and the third party pricing providers.
Commercial Real Estate Investments
The fair value of commercial mortgage-backed securities classified as available-for-sale is determined based upon quoted prices of similar assets in recent market transactions and requires the application of judgment due to differences in the underlying collateral. These securities must also be evaluated for impairment if the fair value of the security is lower than its amortized cost. Determining whether there is an impairment may require us to exercise significant judgment and make estimates to determine expected cash flows incorporating assumptions such as changes in interest rates and loss expectations. For commercial real estate loans and preferred equity investments classified as held for investment, we apply significant judgment in evaluating the need for a loss reserve. Estimated net recoverable value of the commercial real estate loans and preferred equity investments and other factors such as the fair value of any collateral, the amount and status of senior debt, the prospects of the borrower and the competitive landscape where the borrower conducts business must be considered in determining the allowance for loan losses. For commercial real estate loans held for sale, significant judgment may need to be applied in determining the fair value of the loans and whether a valuation allowance is necessary. Factors that may need to be considered to determine the fair value of a loan held for sale include the borrower’s credit quality, liquidity and other market factors and the fair value of the underlying collateral.
Interest Rate Swaps
We use the overnight indexed swap (“OIS”) curve as an input to value substantially all of our uncleared interest rate swaps. We believe using the OIS curve, which reflects the interest rate typically paid on cash collateral, enables us to most accurately determine the fair value of uncleared interest rate swaps. Consistent with market practice, we exchange collateral (also called margin) based on the fair values of our interest rate swaps. Through this margining process, we may be able to compare our recorded fair value with the fair value calculated by the counterparty or derivatives clearing organization, providing additional verification of our recorded fair value of the uncleared interest rate swaps. We value our cleared interest rate swaps using the prices provided by the derivatives clearing organization.
Revenue Recognition
Interest income from coupon payments is accrued based on the outstanding principal amounts of the Residential Securities and their contractual terms. Premiums and discounts associated with the purchase of the Residential Securities are amortized or accreted into interest income over the projected lives of the securities using the interest method. To aid in determining projected lives of the securities, we use third party model and market information to project prepayment speeds. Our prepayment speed projections incorporate underlying loan characteristics (i.e., coupon, term, original loan size, original loan-to-value ratio, etc.) and market data, including interest rate and home price index forecasts and expert judgment. Prepayment speeds vary according to the type of investment, conditions in the financial markets and other factors and cannot be predicted with any certainty. Changes to model assumptions, including interest rates and other market data, as well as periodic revisions to the model will cause changes in the results. Adjustments are made for actual prepayment activity as it relates to calculating the effective yield. Gains or losses on sales of Residential Securities are recorded on trade date based on the specific identification method.
Consolidation of Variable Interest Entities
Determining whether an entity has a controlling financial interest in a VIE requires significant judgment related to assessing the purpose and design of the VIE and determination of the activities that most significantly impact its economic performance. We must also identify explicit and implicit variable interests in the entity and consider our involvement in both the design of the VIE and its ongoing activities. To determine whether consolidation of the VIE is required, we must apply judgment to assess whether we have the power to direct the most significant activities of the VIE and whether we have either the rights to receive benefits or the obligation to absorb losses that could be potentially significant to the VIE.
Use of Estimates
The use of GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
Adjustable-Rate Loan / Security
A loan / security on which interest rates are adjusted at regular intervals according to predetermined criteria. The adjustable interest rate is tied to an objective, published interest rate index.
Agency
Refers to a federally chartered corporation, such as the Federal National Mortgage Association, or the Federal Home Loan Mortgage Corporation, or an agency of the U.S. Government, such as the Government National Mortgage Association.
Agency Mortgage-Backed Securities
Refers to residential mortgage-backed securities that are issued or guaranteed by an Agency.
Amortization
Liquidation of a debt through installment payments. Amortization also refers to the process of systematically reducing a recognized asset or liability (e.g., a purchase premium or discount for a debt security) with an offset to earnings.
Average GAAP Cost of Interest Bearing Liabilities and Average Economic Cost of Interest Bearing Liabilities
Average GAAP cost of interest bearing liabilities represents annualized interest expense divided by average interest bearing liabilities. Average interest bearing liabilities reflects the average balances during the period. Average economic cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities.
Average Life
On a mortgage-backed security, the average time to receipt of each dollar of principal, weighted by the amount of each principal prepayment, based on prepayment assumptions.
Average Yield on Interest Earnings Assets and Average Yield on Interest Earnings Assets (excluding PAA)
Average yield on interest earning assets represents annualized interest income divided by average interest earning assets. Average interest earning assets reflects the average amortized cost of our investments during the period. Average yield on interest earning assets (excluding PAA) is calculated using annualized interest income (excluding PAA).
Basis Point (“bp”)
One hundredth of one percent, used in expressing differences in interest rates. One basis point is 0.01% of yield. For example, a bond’s yield that changed from 3.00% to 3.50% would be said to have moved 50 basis points.
Benchmark
A bond or an index referencing a basket of bonds whose terms are used for comparison with other bonds of similar maturity. The global financial market typically looks to U.S. Treasury securities as benchmarks.
Beneficial Owner
One who benefits from owning a security, even if the security’s title of ownership is in the name of a broker or bank.
B-Note
Subordinate mortgage notes and/or subordinate mortgage loan participations.
B-Piece
The most subordinate commercial mortgage-backed security bond class.
Board
Refers to the board of directors of Annaly.
Bond
The written evidence of debt, bearing a stated rate or stated rates of interest, or stating a formula for determining that rate, and maturing on a date certain, on which date and upon presentation a fixed sum of money plus interest (usually represented by interest coupons attached to the bond) is payable to the holder or owner. Bonds are long-term securities with an original maturity of greater than one year.
Book Value Per Share
Calculated by summing common stock, additional paid-in capital, accumulated other comprehensive income (loss) and accumulated deficit and dividing that number by the total common shares outstanding.
Broker
Generic name for a securities firm engaged in both buying and selling securities on behalf of customers or its own account.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
Capital Buffer
Includes unencumbered financial assets which can be either sold or utilized as collateral to meet liquidity needs.
Capital Ratio (GAAP Capital Ratio)
Calculated as total stockholders’ equity divided by total assets.
Carry
The amount an asset earns over its hedging and financing costs. A positive carry happens when the rate on the securities being financed is greater than the rate on the funds borrowed. A negative carry is when the rate on the funds borrowed is greater than the rate on the securities that are being financed.
CMBX
The CMBX index is a synthetic tradable index referencing a basket of 25 CMBS of a particular rating and vintage. The CMBX index allows investors to take a long position (referred to as selling protection) or short position (referred to as purchasing protection) on the respective basket of CMBS securities and is structured as a “pay-as-you-go” contract whereby the protection seller receives and the protection buyer pays a standardized running coupon on the contracted notional amount. Additionally, the protection seller is obligated to pay to the protection buyer the amount of principal losses and/or coupon shortfalls on the underlying CMBS securities as they occur.
Collateral
Securities, cash or property pledged by a borrower or party to a derivative contract to secure payment of a loan or derivative. If the borrower fails to repay the loan or defaults under the derivative contract, the secured party may take ownership of the collateral.
Collateralized Loan Obligation (“CLO”)
A securitization collateralized by loans and other debt instruments.
Collateralized Mortgage Obligation (“CMO”)
A multiclass bond backed by a pool of mortgage pass-through securities or mortgage loans.
Commodity Futures Trading Commission (“CFTC”)
An independent U.S. federal agency established by the Commodity Futures Trading Commission Act of 1974. The CFTC regulates the swaps, commodity futures and options markets. Its goals include the promotion of competitive and efficient futures markets and the protection of investors against manipulation, abusive trade practices and fraud.
Commercial Mortgage-Backed Security
Securities collateralized by a pool of mortgages on commercial real estate in which all principal and interest from the mortgages flow to certificate holders in a defined sequence or manner.
Constant Prepayment Rate (“CPR”)
The percentage of outstanding mortgage loan principal that prepays in one year, based on the annualization of the Single Monthly Mortality, which reflects the outstanding mortgage loan principal that prepays in one month.
Convexity
A measure of the change in a security’s duration with respect to changes in interest rates. The more convex a security is, the more its duration will change with interest rate changes.
Corporate Debt
Non-government debt instruments issued by corporations. Long-term corporate debt can be issued as bonds or loans.
Counterparty
One of two entities in a transaction. For example, in the bond market a counterparty can be a state or local government, a broker-dealer or a corporation.
Coupon
The interest rate on a bond that is used to compute the amount of interest due on a periodic basis.
Credit and Counterparty Risk
Risk to earnings, capital or business, resulting from an obligor’s or counterparty’s failure to meet the terms of any contract or otherwise failure to perform as agreed. Credit and counterparty risk is present in lending, investing, funding and hedging activities.
Credit Derivatives
Derivative instruments that have one or more underlyings related to the credit risk of a specified entity (or group of entities) or an index that exposes the seller to potential loss from specified credit-risk related events. An example is credit derivatives referencing the commercial mortgage-backed securities index.
Credit Risk Transfer (“CRT”) Securities
Credit Risk Transfer securities are risk sharing transactions issued by Fannie Mae and Freddie Mac and similarly structured transactions arranged by third party market participants. The securities issued in the CRT sector are designed to synthetically transfer mortgage credit risk from Fannie Mae, Freddie Mac and/or third parties to private investors.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
Current Face
The current remaining monthly principal on a mortgage security. Current face is computed by multiplying the original face value of the security by the current principal balance factor.
Dealer
Person or organization that underwrites, trades and sells securities, e.g., a principal market-maker in securities.
Default Risk
Possibility that a bond issuer will fail to pay principal or interest when due.
Derivative
A financial product that derives its value from the price, price fluctuations and price expectations of an underlying instrument, index or reference pool (e.g. futures contracts, options, interest rate swaps, interest rate swaptions and certain to-be-announced securities).
Discount Price
When the dollar price is below face value, it is said to be selling at a discount.
Duration
The weighted maturity of a fixed-income investment’s cash flows, used in the estimation of the price sensitivity of fixed-income securities for a given change in interest rates.
Earnings available for distribution (“EAD”) and Earnings available for distribution Per Average Common Share
Earnings available for distribution is defined as the sum of (a) economic net interest income, (b) TBA dollar roll income and CMBX coupon income, (c) realized amortization of MSR, (d) other income (loss) (excluding depreciation expense related to commercial real estate and amortization of intangibles, non-EAD income allocated to equity method investments and other non-EAD components of other income (loss)), (e) general and administrative expenses (excluding transaction expenses and non-recurring items), and (f) income taxes (excluding the income tax effect of non-EAD income (loss) items) and excludes (g) the premium amortization adjustment representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency mortgage-backed securities. Earnings available for distribution per average common share is calculated by dividing earnings available for distribution by average basic common shares for the period.
This metric was previously labeled Core Earnings (excluding PAA) and Core Earnings (excluding PAA) Per Average Common Share). The definition of EAD is identical to the definition of Core Earnings (excluding PAA) from prior reporting periods.
Economic Capital
A measure of the risk a firm is subject to. It is the amount of capital a firm needs as a buffer to protect against risk. It is a probabilistic measure of potential future losses at a given confidence level over a given time horizon.
Economic Capital Ratio
Non-GAAP financial measure that is calculated as total stockholders’ equity divided by total economic assets. Total economic assets includes the implied market value of TBA derivatives and are net of debt issued by securitization vehicles.
Economic Interest Expense
Non-GAAP financial measure that is comprised of GAAP interest expense and the net interest component of interest rate swaps.
Economic Leverage Ratio (Economic Debt-to-Equity Ratio)
Non-GAAP financial measure that is calculated as the sum of recourse debt, cost basis of TBA and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity. Recourse debt consists of repurchase agreements and other secured financing (excluding certain non-recourse credit facilities). Certain credit facilities (included within other secured financing), debt issued by securitization vehicles, participations issued, and mortgages payable are non-recourse to us and are excluded from this measure.
Economic Net Interest Income
Non-GAAP financial measure that is composed of GAAP net interest income less Economic Interest Expense.
Economic Return
Refers to the Company’s change in book value plus dividends declared divided by the prior period’s book value.
Encumbered Assets
Assets on the company’s balance sheet which have been pledged as collateral against a liability.
Eurodollar
A U.S. dollar deposit held in Europe or elsewhere outside the United States.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
Face Amount
The par value (i.e., principal or maturity value) of a security appearing on the face of the instrument.
Factor
A decimal value reflecting the proportion of the outstanding principal balance of a mortgage security, which changes over time, in relation to its original principal value.
Fannie Mae
Federal National Mortgage Association.
Federal Deposit Insurance Corporation (“FDIC”)
An independent agency created by the U.S. Congress to maintain stability and public confidence in the nation’s financial system by insuring deposits, examining and supervising financial institutions for safety and soundness and consumer protection, and managing receiverships.
Federal Funds Rate
The interest rate charged by banks on overnight loans of their excess reserve funds to other banks.
Federal Housing Financing Agency (“FHFA”)
The FHFA is an independent regulatory agency that oversees vital components of the secondary mortgage market including Fannie Mae, Freddie Mac and the Federal Home Loan Banks.
Financial Industry Regulatory Authority, Inc. (“FINRA”)
FINRA is a non-governmental organization tasked with regulating all business dealings conducted between dealers, brokers and all public investors.
Fixed-Rate Mortgage
A mortgage featuring level monthly payments, determined at the outset, which remain constant over the life of the mortgage.
Fixed Income Clearing Corporation (“FICC”)
The FICC is an agency that deals with the confirmation, settlement and delivery of fixed-income assets in the U.S. The agency ensures the systematic and efficient settlement of U.S. Government securities and mortgage-backed security transactions in the market.
Floating Rate Bond
A bond for which the interest rate is adjusted periodically according to a predetermined formula, usually linked to an index.
Floating Rate CMO
A CMO tranche which pays an adjustable rate of interest tied to a representative interest rate index such as the LIBOR, the Constant Maturity Treasury or the Cost of Funds Index.
Freddie Mac
Federal Home Loan Mortgage Corporation.
Futures Contract
A legally binding agreement to buy or sell a commodity or financial instrument in a designated future month at a price agreed upon at the initiation of the contract by the buyer and seller. Futures contracts are standardized according to the quality, quantity, and delivery time and location for each commodity. A futures contract differs from an option in that an option gives one of the counterparties a right and the other an obligation to buy or sell, while a futures contract represents an obligation of both counterparties, one to deliver and the other to accept delivery. A futures contract is part of a class of financial instruments called derivatives.
GAAP
U.S. generally accepted accounting principles.
Ginnie Mae
Government National Mortgage Association.
Hedge
An investment made with the intention of minimizing the impact of adverse movements in interest rates or securities prices.
In-the-Money
Description for an option that has intrinsic value and can be sold or exercised for a profit; a call option is in-the-money when the strike price (execution price) is below the market price of the underlying security.
Interest Bearing Liabilities
Refers to repurchase agreements, debt issued by securitization vehicles and credit facilities. Average interest bearing liabilities is based on daily balances.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
Interest Earning Assets
Refers to Residential Securities, U.S. Treasury securities, reverse repurchase agreements, commercial real estate debt and preferred equity interests, residential mortgage loans and corporate debt. Average interest earning assets is based on daily balances.
Interest-Only (IO) Bond
The interest portion of mortgage, Treasury or bond payments, which is separated and sold individually from the principal portion of those same payments.
Interests in MSR
Represents agreements to purchase all, or a component of, net servicing cash flows.
Interest Rate Risk
The risk that an investment’s value will change due to a change in the absolute level of interest rates, in the spread between two rates, in the shape of the yield curve or in any other interest rate relationship. As market interest rates rise, the value of current fixed income investment holdings declines. Diversifying, deleveraging and hedging techniques are utilized to mitigate this risk. Interest rate risk is a form of market risk.
Interest Rate Swap
A binding agreement between counterparties to exchange periodic interest payments on some predetermined dollar principal, which is called the notional principal amount. For example, one party will pay fixed and receive a variable rate.
Interest Rate Swaption
Options on interest rate swaps. The buyer of a swaption has the right to enter into an interest rate swap agreement at some specified date in the future. The swaption agreement will specify whether the buyer of the swaption will be a fixed-rate receiver or a fixed-rate payer.
International Swaps and Derivatives Association (“ISDA”) Master Agreement
Standardized contract developed by ISDA used as an umbrella under which bilateral derivatives contracts are entered into.
Inverse IO Bond
An interest-only bond whose coupon is determined by a formula expressing an inverse relationship to a benchmark rate, such as LIBOR. As the benchmark rate changes, the IO coupon adjusts in the opposite direction. When the benchmark rate is relatively low, the IO pays a relatively high coupon payment, and vice versa.
Investment/Market Risk
Risk to earnings, capital or business resulting in the decline in value of our assets caused from changes in market variables, such as interest rates, which affect the values of Residential Securities and other investment instruments.
Investment Advisers Act
Refers to the Investment Advisers Act of 1940, as amended.
Investment Company Act
Refers to the Investment Company Act of 1940, as amended.
Leverage
The use of borrowed money to increase investing power and economic returns.
Leverage Ratio (GAAP Leverage Ratio or Debt-to-Equity Ratio)
Calculated as total debt to total stockholders’ equity. For purposes of calculating this ratio total debt includes repurchase agreements, other secured financing, debt issued by securitization vehicles, participations issued and mortgages payable. Certain credit facilities (included within other secured financing), debt issued by securitization vehicles, participations issued and mortgages payable are non-recourse to us.
LIBOR (London Interbank Offered Rate)
The rate banks charge each other for short-term Eurodollar loans. LIBOR is frequently used as the base for resetting rates on floating-rate securities and the floating-rate legs of interest rate swaps.
Liquidity Risk
Risk to earnings, capital or business arising from our inability to meet our obligations when they come due without incurring unacceptable losses because of inability to liquidate assets or obtain adequate funding.
Long-Term CPR
Our projected prepayment speeds for certain Agency mortgage-backed securities using third party model and market information. Our prepayment speed projections incorporate underlying loan characteristics (e.g., coupon, term, original loan size, original loan-to-value ratio, etc.) and market data, including interest rate and home price index forecasts. Changes to model assumptions, including interest rates and other market data, as well as periodic revisions to the model will cause changes in the results.
Long-Term Debt
Debt which matures in more than one year.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
Market Agreed Coupon (“MAC”) Interest Rate Swap
An interest rate swap contract structure with pre-defined, market agreed terms, developed by SIFMA and ISDA with the purpose of promoting liquidity and simplified administration.
Monetary Policy
Action taken by the Federal Open Market Committee of the Federal Reserve System to influence the money supply or interest rates.
Mortgage-Backed Security (“MBS”)
A security representing a direct interest in a pool of mortgage loans. The pass-through issuer or servicer collects the payments on the loans in the pool and “passes through” the principal and interest to the security holders on a pro rata basis.
Mortgage Loan
A mortgage loan granted by a bank, thrift or other financial institution that is based solely on real estate as security and is not insured or guaranteed by a government agency.
Mortgage Servicing Rights (“MSR”)
Contractual agreements constituting the right to service an existing mortgage where the holder receives the benefits and bears the costs and risks of servicing the mortgage.
NAV
Net asset value.
Net Interest Income
Represents interest income earned on our portfolio investments, less interest expense paid for borrowings.
Net Interest Margin and Net Interest Margin (excluding PAA)
Net interest margin represents our interest income less interest expense divided by average interest earning assets. Net interest margin (excluding PAA) represents the sum of our interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swaps divided by the sum of average interest earning assets plus average outstanding TBA contract and CMBX balances.
Net Interest Spread and Net Interest Spread (excluding PAA)
Net interest spread represents the average yield on interest earning assets less the average GAAP cost of interest bearing liabilities. Net interest spread (excluding PAA) represents the average yield on interest earning assets (excluding PAA) less the average economic cost of interest bearing liabilities.
Non-Performing Loan (“NPL”)
A loan that is close to defaulting or is in default.
Notional Amount
A stated principal amount in a derivative contract on which the contract is based.
Operational Risk
Risk to earnings, capital, reputation or business arising from inadequate or failed internal processes or systems, human factors or external events.
Option Contract
A contract in which the buyer has the right, but not the obligation, to buy or sell an asset at a set price on or before a given date. Buyers of call options bet that a security will be worth more than the price set by the option (the strike price), plus the price they pay for the option itself. Buyers of put options bet that the security’s price will drop below the price set by the option. An option is part of a class of financial instruments called derivatives, which means these financial instruments derive their value from the worth of an underlying investment.
Original Face
The face value or original principal amount of a security on its issue date.
Out-of-the-Money
Description for an option that has no intrinsic value and would be worthless if it expired today; for a call option, this situation occurs when the strike price is higher than the market price of the underlying security; for a put option, this situation occurs when the strike price is less than the market price of the underlying security.
Overnight Index Swaps (“OIS”)
An interest rate swap in which a fixed rate is exchanged for an overnight floating rate.
Over-The-Counter (“OTC”) Market
A securities market that is conducted by dealers throughout the country through negotiation of price rather than through the use of an auction system as represented by a stock exchange.
Par
Price equal to the face amount of a security; 100%.
Par Amount
The principal amount of a bond or note due at maturity. Also known as par value.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
Pass-Through Security
A securitization structure where a GSE or other entity “passes” the amount collected from the borrowers every month to the investor, after deducting fees and expenses.
Pool
A collection of mortgage loans assembled by an originator or master servicer as the basis for a security. In the case of Ginnie Mae, Fannie Mae, or Freddie Mac mortgage pass-through securities, pools are identified by a number assigned by the issuing agency.
Premium
The amount by which the price of a security exceeds its principal amount. When the dollar price of a bond is above its face value, it is said to be selling at a premium.
Premium Amortization Adjustment (“PAA”)
The cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency mortgage-backed securities.
Prepayment
The unscheduled partial or complete payment of the principal amount outstanding on a mortgage loan or other debt before it is due.
Prepayment Risk
The risk that falling interest rates will lead to increased prepayments of mortgage or other loans, forcing the investor to reinvest at lower prevailing rates.
Prepayment Speed
The estimated rate at which mortgage borrowers will pay off the mortgages that underlie an MBS.
Primary Market
Market for offers or sales of new bonds by the issuer.
Prime Rate
The indicative interest rate on loans that banks quote to their best commercial customers.
Principal and Interest
The term used to refer to regularly scheduled payments or prepayments of principal and payments of interest on a mortgage or other security.
Rate Reset
The adjustment of the interest rate on a floating-rate security according to a prescribed formula.
Real Estate Investment Trust (“REIT”)
A special purpose investment vehicle that provides investors with the ability to participate directly in the
ownership or financing of real-estate related assets by pooling their capital to purchase and manage mortgage loans and/or income property.
Recourse Debt
Debt on which the economic borrower is obligated to repay the entire balance regardless of the value of the pledged collateral. By contrast, the economic borrower’s obligation to repay non-recourse debt is limited to the value of the pledged collateral. Recourse debt consists of repurchase agreements and other secured financing (excluding certain non-recourse credit facilities). Certain credit facilities (included within other secured financing), debt issued by securitization vehicles, participations issued and mortgages payable are non-recourse to us and are excluded from this measure.
Reinvestment Risk
The risk that interest income or principal repayments will have to be reinvested at lower rates in a declining rate environment.
Re-Performing Loan (“RPL”)
A type of loan in which payments were previously delinquent by at least 90 days but have resumed.
Repurchase Agreement
The sale of securities to investors with the agreement to buy them back at a higher price after a specified time period; a form of short-term borrowing. For the party on the other end of the transaction (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement.
Residential Securities
Refers to Agency mortgage-backed securities, CRT securities and non-Agency mortgage-backed securities.
Residual
In securitizations, the residual is the tranche that collects any cash flow from the collateral that remains after obligations to the other tranches have been met.
Return on Average Equity
Calculated by taking earnings divided by average stockholders’ equity.
Reverse Repurchase Agreement
Refer to Repurchase Agreement. The buyer of securities effectively provides a collateralized loan to the seller.
Risk Appetite Statement
Defines the types and levels of risk we are willing to take in order to achieve our business objectives, and reflects our risk management philosophy.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
Secondary Market
Ongoing market for bonds previously offered or sold in the primary market.
Secured Overnight Financing Rate (“SOFR”)
Broad measure of the cost of borrowing cash overnight collateralized by Treasury securities and was chosen by the Alternative Reference Rate Committee as the preferred benchmark rate to replace dollar LIBOR in coming years.
Settlement Date
The date securities must be delivered and paid for to complete a transaction.
Short-Term Debt
Generally, debt which matures in one year or less. However, certain securities that mature in up to three years may be considered short-term debt.
Spread
When buying or selling a bond through a brokerage firm, investors will be charged a commission or spread, which is the difference between the market price and cost of purchase, and sometimes a service fee. Spreads differ based on several factors including liquidity.
Target Assets
Includes Agency mortgage-backed securities, to-be-announced forward contracts, CRT securities, MSR, non-Agency mortgage-backed securities, residential mortgage loans, commercial real estate investments, and corporate debt.
Tangible Economic Return
Refers to the Company’s change in tangible book value (calculated by summing common stock, additional paid-in capital, accumulated other comprehensive income (loss) and accumulated deficit less intangible assets) plus dividends declared divided by the prior period’s tangible book value.
Taxable REIT Subsidiary (“TRS”)
An entity that is owned directly or indirectly by a REIT and has jointly elected with the REIT to be treated as a TRS for tax purposes. Annaly and certain of its direct and indirect subsidiaries have made separate joint elections to treat these subsidiaries as TRSs.
To-Be-Announced Securities (“TBAs”)
A contract for the purchase or sale of a mortgage-backed security to be delivered at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date but does not include a specified pool number and number of pools.
TBA Dollar Roll Income
TBA dollar roll income is defined as the difference in price between two TBA contracts with the same terms but different settlement dates. The TBA contract settling in the later month typically prices at a discount to the earlier month contract with the difference in price commonly referred to as the “drop”. TBA dollar roll income represents the equivalent of interest income on the underlying security less an implied cost of financing.
Total Return
Investment performance measure over a stated time period which includes coupon interest, interest on interest, and any realized and unrealized gains or losses.
Total Return Swap
A derivative instrument where one party makes payments at a predetermined rate (either fixed or variable) while receiving a return on a specific asset (generally an equity index, loan or bond) held by the counterparty.
Unencumbered Assets
Assets on our balance sheet which have not been pledged as collateral against an existing liability.
U.S. Government-Sponsored Enterprise (“GSE”) Obligations
Obligations of Agencies originally established or chartered by the U.S. government to serve public purposes as specified by the U.S. Congress, such as Fannie Mae and Freddie Mac; these obligations are not explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the U.S. government.
Value-at-Risk (“VaR”)
A statistical technique which measures the potential loss in value of an asset or portfolio over a defined period for a given confidence interval.
Variable Interest Entity (“VIE”)
An entity in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.
Variation Margin
Cash or securities provided by a party to collateralize its obligations under a transaction as a result of a change in value of such transaction since the trade was executed or the last time collateral was provided.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
Volatility
A statistical measure of the variance of price or yield over time. Volatility is low if the price does not change very much over a short period of time, and high if there is a greater change.
Voting Interest Entity (“VOE”)
An entity that has sufficient equity to finance its activities without additional subordinated financial support from other parties and in which equity investors have a controlling financial interest.
Warehouse Lending
A line of credit extended to a loan originator to fund mortgages extended by the loan originators to property purchasers. The loan typically lasts from the time the mortgage is originated to when the mortgage is sold into the secondary market, whether directly or through a securitization. Warehouse lending can provide liquidity to the loan origination market.
Weighted Average Coupon
The weighted average interest rate of the underlying mortgage loans or pools that serve as collateral for a security, weighted by the size of the principal loan balances.
Weighted Average Life (“WAL”)
The assumed weighted average amount of time that will elapse from the date of a security’s issuance until each dollar of principal is repaid to the investor. The WAL will change as the security ages and depending on the actual realized rate at which principal, scheduled and unscheduled, is paid on the loans underlying the MBS.
Yield-to-Maturity
The expected rate of return of a bond if it is held to its maturity date; calculated by taking into account the current market price, stated redemption value, coupon payments and time to maturity and assuming all coupons are reinvested at the same rate; equivalent to the internal rate of return.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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Quantitative and qualitative disclosures about market risk are contained within the section titled “Risk Management” of Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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ITEM 4. CONTROLS AND PROCEDURES
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Our management, including our Chief Executive Officer (the CEO) and Chief Financial Officer (the CFO), reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act) as of the end of the period covered by this report. Based on that review and evaluation, the CEO and CFO have concluded that our current disclosure controls and procedures, as designed, (1) were effective in ensuring that information required to be disclosed by the Company in reports it files or submits under the Securities Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure and (2) were effective in ensuring that information required to be disclosed by the Company in reports it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.
There have been no changes in our internal controls over financial reporting that occurred during the three months ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES