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 as well and is subject to certain parameters. The composition is monitored for concentration risk and asset type and ratings.type. We believe the assets we consider liquid can be readily converted into cash, through liquidation or by being used ascollateral in financing arrangements (including certainas additional collateral | | currently supporting 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 as ofat December 31, 2014.2017: | | | | | Liquid Assets | Carrying Value (1) | | (dollars in thousands) | Cash and cash equivalents | $ | 706,589 |
| Residential Investment Securities (2) | 91,652,198 |
| Residential mortgage loans | 1,438,322 |
| Commercial real estate debt investments (3) | 262,751 |
| Commercial real estate debt and preferred equity, held for investment | 667,413 |
| Corporate debt | 661,940 |
| Total liquid assets | $ | 95,389,213 |
| | | Percentage of liquid assets to carrying amount of encumbered and unencumbered financial assets (3) | 98.66 | % |
| | | | Liquid Assets | | Carrying Value(1) | | | | (dollars in thousands) | | Cash and cash equivalents | | $ | 1,741,244 | | Investment Securities(2) | | | 83,665,318 | | Total liquid assets | | $ | 85,406,562 | | | | | | | Percentage of liquid assets to total assets | | | 96.66 | % |
(1) | Carrying value represents the market value of assets. The assets listed in this table include $77.0 billion of assets that have been pledged as collateral against existing liabilities as of December 31, 2014. | (1) | Carrying value approximates the market value of assets. The assets listed in this table include $87.6 billion of assets that have been pledged as collateral against existing liabilities at December 31, 2017. 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 senior securitized commercial mortgage loans of consolidated VIEs carried at fair value of $2.8 billion. |
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 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 ‘within‘Less than 3 months’Months’ maturity bucket, as they are typically held for a short period of time.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis
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. |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
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 an institutionassets 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 forthat 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, which effectively lock in our financing costs for a longer term, are also reflected in our interest rate sensitivity gap. The interest rate sensitivity of our assets and liabilities in the table below at December 31, 2017 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 | $ | 706,589 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 706,589 |
| Agency mortgage-backed securities (principal) | 410,000 |
| | — |
| | 2,627,679 |
| | 82,758,400 |
| | 85,796,079 |
| Credit risk transfer securities (principal) | — |
| | — |
| | — |
| | 593,027 |
| | 593,027 |
| Non-Agency mortgage-backed securities (principal) | — |
| | 42,692 |
| | 114,185 |
| | 972,172 |
| | 1,129,049 |
| Residential mortgage loans (principal) | — |
| | — |
| | — |
| | 1,419,807 |
| | 1,419,807 |
| Commercial real estate debt investments (principal) | — |
| | — |
| | — |
| | 3,041,113 |
| | 3,041,113 |
| Commercial real estate debt and preferred equity (principal) | 118,678 |
| | 342,952 |
| | 476,225 |
| | 95,303 |
| | 1,033,158 |
| Corporate debt (principal) | — |
| | — |
| | 22,855 |
| | 1,001,761 |
| | 1,024,616 |
| Total financial assets - maturity | 1,235,267 |
| | 385,644 |
| | 3,240,944 |
| | 89,881,583 |
| | 94,743,438 |
| Effect of utilizing reset dates (1) | 6,394,221 |
| | 1,984,457 |
| | 306,103 |
| | (8,684,781 | ) | | | Total financial assets - interest rate sensitive | $ | 7,629,488 |
| | $ | 2,370,101 |
| | $ | 3,547,047 |
| | $ | 81,196,802 |
| | $ | 94,743,438 |
| | | | | | | | | | | Financial Liabilities: | | | | | | | | | | Repurchase agreements | $ | 58,641,116 |
| | $ | 18,570,114 |
| | $ | 485,113 |
| | $ | — |
| | $ | 77,696,343 |
| Other secured financing | — |
| | 3,657 |
| | 1,449,081 |
| | 2,384,790 |
| | 3,837,528 |
| Securitized debt of consolidated VIEs (principal) | — |
| | — |
| | — |
| | 2,911,628 |
| | 2,911,628 |
| Total financial liabilities - maturity | 58,641,116 |
| | 18,573,771 |
| | 1,934,194 |
| | 5,296,418 |
| | 84,445,499 |
| Effect of utilizing reset dates (1)(2) | (24,010,939 | ) | | (3,180,242 | ) | | 3,654,645 |
| | 23,536,536 |
| | | Total financial liabilities - interest rate sensitive | $ | 34,630,177 |
| | $ | 15,393,529 |
| | $ | 5,588,839 |
| | $ | 28,832,954 |
| | $ | 84,445,499 |
| | | | | | | | | | | Maturity gap | $ | (57,405,849 | ) | | $ | (18,188,127 | ) | | $ | 1,306,750 |
| | $ | 84,585,165 |
| | $ | 10,297,939 |
| | | | | | | | | | | Cumulative maturity gap | $ | (57,405,849 | ) | | $ | (75,593,976 | ) | | $ | (74,287,226 | ) | | $ | 10,297,939 |
| | | | | | | | | | | | | Interest rate sensitivity gap | $ | (27,000,689 | ) | | $ | (13,023,428 | ) | | $ | (2,041,792 | ) | | $ | 52,363,848 |
| | $ | 10,297,939 |
| | | | | | | | | | | Cumulative rate sensitivity gap | $ | (27,000,689 | ) | | $ | (40,024,117 | ) | | $ | (42,065,909 | ) | | $ | 10,297,939 |
| | |
| | (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. |
| | 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 | | $ | 1,741,244 | | | $ | - | | | $ | - | | | $ | - | | | $ | 1,741,244 | | Reverse repurchase agreements | | | 100,000 | | | | - | | | | - | | | | - | | | | 100,000 | | Agency Mortgage-backed securities (principal) | | | 3,648 | | | | 38,184 | | | | 1,521,631 | | | | 74,419,536 | | | | 75,982,999 | | Agency debentures (principal) | | | - | | | | - | | | | - | | | | 1,408,805 | | | | 1,408,805 | | Corporate debt (principal) | | | - | | | | - | | | | 10,036 | | | | 157,979 | | | | 168,015 | | Commercial real estate debt and preferred equity (principal) | | | 28,457 | | | | 511,510 | | | | 684,946 | | | | 296,059 | | | | 1,520,972 | | Total financial assets | | $ | 1,873,349 | | | $ | 549,694 | | | $ | 2,216,613 | | | $ | 76,282,379 | | | $ | 80,922,035 | | | | | | | | | | | | | | | | | | | | | | | Financial Liabilities: | | | | | | | | | | | | | | | | | | | | | Repurchase agreements | | $ | 49,731,313 | | | $ | 10,830,811 | | | $ | 10,699,802 | | | $ | 100,000 | | | $ | 71,361,926 | | Convertible Senior Notes (principal) | | | 107,541 | | | | 750,000 | | | | - | | | | - | | | | 857,541 | | Securitized debt of consolidated VIE (principal) | | | - | | | | 153,954 | | | | 106,746 | | | | - | | | | 260,700 | | Participation sold (principal) | | | 76 | | | | 220 | | | | 13,138 | | | | - | | | | 13,434 | | Total financial liabilities | | $ | 49,838,930 | | | $ | 11,734,985 | | | $ | 10,819,686 | | | $ | 100,000 | | | $ | 72,493,601 | | | | | | | | | | | | | | | | | | | | | | | Maturity gap | | $ | (47,965,581 | ) | | $ | (11,185,291 | ) | | $ | (8,603,073 | ) | | $ | 76,182,379 | | | $ | 8,428,434 | | | | | | | | | | | | | | | | | | | | | | | Cumulative maturity gap | | $ | (47,965,581 | ) | | $ | (59,150,872 | ) | | $ | (67,753,945 | ) | | $ | 8,428,434 | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate sensitivity gap | | $ | (15,682,226 | ) | | $ | (10,118,428 | ) | | $ | (11,556,723 | ) | | $ | 45,785,811 | | | $ | 8,428,434 | | | | | | | | | | | | | | | | | | | | | | | Cumulative rate sensitivity gap | | $ | (15,682,226 | ) | | $ | (25,800,654 | ) | | $ | (37,357,377 | ) | | $ | 8,428,434 | | | | | | | | | | | | | | | | | | | | | | | | | | | Cumulative rate sensitivity gap as a % of total rate sensitive assets | | | (19.38 | %) | | | (31.88 | %) | | | (46.16 | %) | | | 10.42 | % | | | | |
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. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis
Our stress tests are modeled over both short term and longer time horizons. 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 limits. 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 both short-term and long-term 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 macro environmentalmarket conditions. The metrics assess both the short-term and long-termassist in assessing our liquidity conditions and are integrated into our escalation protocol, with various liquidity ratings influencing management actions with respect to contingency planning and potential related actions. |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Stress Testing
We utilize liquidity stress testing to ensure we have sufficient liquidity under a variety of scenarios and stresses. These stress tests are considered and assist with the management of our pool of liquid assets, and influence our current and future funding plans. Our stress tests are modeled over both short term and longer time horizons. The stresses applied include market-wide and firm-specific stresses.
Investment/Market Risk Management
One of the primary risks we are subject to is interest rateinvestment/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 securities 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 may use market agreed coupon (“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 out of market nature of such interest rate swap. MAC interest rate swaps offer increased liquidity 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 base interest rate scenario assumes interest rates at December 31, 20142017. The net interest income simulations incorporate the interest expense effect of rate resets on liabilities and various estimates regardingderivatives as well as the amortization expense and reinvestment of principal based on the prepayments and all activities are made at eachon our securities, which varies based on the level of rates. The results assume no management actions in response to the rate shock.or spread changes. Actual results could differ significantly from these estimates in the following table at December 31, 2017. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis
| | | | | | | 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 | (14.7%) | | 0.3% | | 2.1% | -50 Basis Points | (8.2%) | | 0.4% | | 2.6% | -25 Basis Points | (2.6%) | | 0.3% | | 1.9% | Base Interest Rate | — | | — | | — | +25 Basis Points | (0.5%) | | (0.4%) | | (2.6%) | +50 Basis Points | (2.9%) | | (0.8%) | | (5.8%) | +75 Basis Points | (6.4%) | | (1.4%) | | (9.7%) | MBS Spread Shock (1) | Estimated Change in Portfolio Market Value | | Estimated Change as a % on NAV (3)(4) | | | -25 Basis Points | 1.6% | | 11.2% | | | -15 Basis Points | 0.9% | | 6.7% | | | -5 Basis Points | 0.3% | | 2.3% | | | Base Interest Rate | — | | — | | | +5 Basis Points | (0.3%) | | (2.1%) | | | +15 Basis Points | (0.9%) | | (6.5%) | | | +25 Basis Points | (1.5%) | | (10.8%) | | |
| | (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. |
Change in Interest Rate | Projected Percentage Change in Economic Net Interest Income(1) | Estimated Percentage Change in Portfolio Value(2) | Estimated Change as a % on NAV(2)(3) | -75 Basis Points | (10.6%) | 0.2% | 1.3% | -50 Basis Points | (3.5%) | 0.3% | 1.8% | -25 Basis Points | (1.9%) | 0.2% | 1.4% | Base Interest Rate | - | - | - | +25 Basis Points | 1.2% | (0.3%) | (2.0%) | +50 Basis Points | 2.6% | (0.7%) | (4.7%) | +75 Basis Points | 2.6% | (1.2%) | (8.0%) | | | | | | | | | MBS Spread Shock | Estimated Change in Portfolio Market Value | Estimated Change as a % on NAV(2)(3) | | -25 Basis Points | 1.2% | 7.7% | | -15 Basis Points | 0.7% | 4.6% | | -5 Basis Points | 0.2% | 1.6% | | Base Interest Rate | - | - | | +5 Basis Points | (0.2%) | (1.4%) | | +15 Basis Points | (0.7%) | (4.4%) | | +25 Basis Points | (1.1%) | (7.4%) | |
(1) | Scenarios include Investment Securities, repurchase agreements and interest rate swaps only. | | (2) | Scenarios include Residential Investment Securities, commercial real estate investments, corporate debt, repurchase agreements, other secured financing and interest rate swaps. Economic net interest income includes interest expense on interest rate swaps. | (2) | Scenarios include Investment Securities and derivative instruments.
| (3) | NAV represents book value of equity.
|
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
| | (3) | Scenarios include Residential Investment Securities, residential mortgage loans, MSRs and derivative instruments. |
| | (4) | NAV represents book value of equity. |
Credit and Counterparty Risk Management
Key risk parameters have been established to specify Annaly’sour credit risk appetite. We will maintain a high quality asset portfolio with at least 75% ofseek to manage credit risk by making investments which conform within the portfolio to be high quality mortgage-backed securitiesfirm’s specific investment policy parameters and short term investments (equivalency rating of AA+ or better), and an aggregate weighted average equivalency rating of single “A” or better.optimize risk-return attributes.
While we do not expect to encounter credit risk in our Agency investments, we face credit risk on the non-Agency portions ofmortgage-backed securities and CRT securities in our portfolio. WeIn addition, we are also exposed to credit risk on residential mortgage loans, commercial real estate investments and corporate debt. We generally face more credit risk on investments where we hold subordinated debt or equity positions.MSR values may also be impacted if overall costs to service the underlying mortgage loans increase due to borrower performance. We are exposed subject to risk of loss if an issuer borrower or counterpartyborrower fails to perform its contractual obligations. We have established policies and procedures for mitigating credit risk, including establishing and reviewing and | | establishing limits for credit exposure, limiting transactions with specific counterparties, maintaining qualifying collateral and continually assessing the creditworthiness of counterparties, borrowers and issuers.exposure. We onlywill originate or purchase commercial investments that meet our comprehensive underwriting process and credit standards and are approved by the appropriate committee. Once a commercial 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 and determine the appropriate allocation of capital to apply to each investment under our capital policy.investment. Our management will monitormonitors the overall portfolio risk and determinedetermines estimates of provision for loss. Our portfolio composition as ofat December 31, 20142017 and December 31, 20132016 was as follows: |
Asset Portfolio (using balance sheet values) | | | | | | | Category | December 31, 2017 |
| | December 31, 2016 |
| Agency mortgage-backed securities | 90.6 | % | | 88.5 | % | Credit risk transfer securities | 0.7 | % | | 0.8 | % | Non-Agency mortgage-backed securities | 1.1 | % | | 1.7 | % | Residential mortgage loans | 1.4 | % | | 0.4 | % | Mortgage servicing rights | 0.6 | % | | 0.8 | % | Commercial real estate (1) (2) | 4.6 | % | | 6.9 | % | Corporate debt | 1.0 | % | | 0.9 | % |
Asset Portfolio (using balance sheet values) | Category | 2014 | 2013 | Agency mortgage-backed securities(1) | 96.2% | 93.7% | Agency debentures | 1.6% | 4.0% | Commercial real estate debt and equity investments(2) | 2.0% | 2.1% | Other mortgage-backed-securities | 0.0% | 0.0% | Corporate debt, held for investment | 0.2% | 0.2% | | | |
| | (1) | Including TBAs held for delivery. | (2) | Net of unamortized origination fees. |
| | (2) | Including commercial loans held for sale, net. |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis
Counterparty Risk Management
Our use of repurchase and derivative agreements and trading activities create exposure to creditcounterparty 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 Agency securitiesinvestments are financed with repurchase agreements by pledging our agency securitiesResidential Investment Securities and certain commercial real estate investments as collateral to the 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 exceedsexceeded 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.
The following table summarizes our exposure to counterparties by geography as ofat December 31, 2014:2017: |
| | | | | | | | | | | | | | | | Country | Number of Counterparties | | Repurchase Agreement Financing | | Interest Rate Swaps at Fair Value | | Exposure (1) | | (dollars in thousands) | North America | 22 |
| | $ | 57,144,070 |
| | $ | (200,794 | ) | | $ | 2,137,709 |
| Europe | 13 |
| | 15,086,569 |
| | (338,063 | ) | | 1,022,946 |
| Asia (non-Japan) | 1 |
| | 490,834 |
| | — |
| | 31,393 |
| Japan | 4 |
| | 4,974,870 |
| | — |
| | 323,234 |
| Total | 40 |
| | $ | 77,696,343 |
| | $ | (538,857 | ) | | $ | 3,515,282 |
|
| | (1) | Represents the amount of cash and/or securities pledged as collateral to each counterparty less the aggregate of repurchase agreement financing and unrealized loss on swaps for each counterparty. |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Country | | Number of Counterparties | | | Repurchase Agreement Financing | | | Interest Rate Swaps at Fair Value | | | Exposure(1) | | | | (dollars in thousands) | | North America | | | 17 | | | $ | 49,751,635 | | | $ | (1,157,868 | ) | | $ | 2,993,453 | | Europe | | | 10 | | | | 17,710,251 | | | | (375,193 | ) | | | 943,289 | | Asia (non-Japan) | | | 1 | | | | 627,059 | | | | - | | | | 34,339 | | Japan | | | 4 | | | | 3,272,981 | | | | - | | | | 190,091 | | Total | | | 32 | | | $ | 71,361,926 | | | $ | (1,533,061 | ) | | $ | 4,161,172 | |
(1) | Represents the amount of cash and/or securities pledged as collateral to each counterparty less the aggregate of repurchase agreement 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 whichthat cover topics such as business continuity, personal conduct, cybersecurity and vendor management. Other tools include training on topics such as cyber security awareness; 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, an independent operational risk group which reports to the Chief Risk Officer of our Manager, 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 the Company’s 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 Risk and Audit Committees of the Board. 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 have purchased cybersecurity insurance, however, there is no assurance that the insurance policy will cover all cybersecurity breaches or that the policy will cover all losses. Compliance, Regulatory and Legal Risk Management
Our business is organized as a REIT, and we plan 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. The financial services industry is highly regulated and continues to receive increasing attention from regulators, which may impact both our company as well as our business strategy. 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, monitor and manage these risks under the oversight of the Enterprise Risk Committee.ERC. We currently rely on the exemption from registration provided by Section 3(c)(5)(C) of the Investment Company Act, and we plan to continue to meet the requirements for this exemption from registration. The determination that we qualify for this exemption from registration depends on various factual matters and circumstances. Accordingly, in conjunction with theour 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 Enterprise Risk Committee.ERC.
As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the U.S. Commodity Futures Trading Commission (or CFTC)(“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 (or CPO)(“CPO”), and, absent relief from the Division of Swap Dealer and Intermediary Oversight or the Commission,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 to claim the relief are that the mortgage real estate investment trust relate to initial margin and premiums requirements, net income derived annually from commodity interest positions that are not qualifying hedging |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
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 thatwith the CFTC’s position that mortgage real estate investment trusts 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 whichthat 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. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis
Valuation of Financial Instruments
Agency mortgage-backed securities and debenturesResidential Investment Securities
There is an active market for our Agency mortgage-backed securities, Agency debentures, CRT securities and debentures.non-Agency mortgage-backed securities. Since we primarily invest in securities that can be measured fromvalued using actively quoted prices for actively traded assets, there is a high degree of observable inputs and less subjectivity in measuring fair value. Internal marketfair values are determined using quoted prices from the To-Be-Announced (or TBA) securityTBA 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. Prepayment rates are difficult to predict and are a significant estimate requiringrequire estimation and judgment in the valuation of Agency mortgage-backed securities. All internal marketfair 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 Treasury curve and the underlying characteristics of the individual loans, which may include loan term, coupon, and reset dates. Prepayment rates are difficult to predict and are a significant estimate requiring judgment in the valuation of residential whole loans. All internal fair values are compared to external pricing sources to determine reasonableness.
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 other-than-temporary impairment if the fair value of the security is lower than its amortized cost. Determining whether there is an other-than-temporary 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 fair value of the loans and whether a valuation allowance is necessary. Factors that may need to be considered to determine 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 swapsRate Swaps
We use the overnight indexed swap (or OIS)(“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 have negotiated agreements with certain counterparties to exchange collateral (or margining)(also called margin) based on the level of fair values of theour interest rate swaps. Through this margining process, one party or each partywe may be able to a derivative contract provides the other partycompare our recorded fair value with information about the fair value ofcalculated by the derivative contract to calculate the amount of collateral required,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 Investment Securities and their contractual terms. Premiums and discounts associated with the purchase of the Residential Investment Securities are amortized or accreted into interest income over the projected lives of the securities using the interest method. We use a third-party supplied model and market information to project prepayment speeds. Our prepayment speed projections incorporate underlying loan characteristics (e.g.(i.e., coupon, term, original loan size, original loan to value,loan-to-value ratio, etc.) and market data, including interest rate and home price index forecasts and expert judgement.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 investment securitiessales of Residential Investment Securities are recorded on trade date based on the average cost of the security.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 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis
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. |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
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. A
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIESItem 7. Management’s Discussion and Analysis
A Adjustable-Rate Mortgage (ARM)Loan / Security A mortgage loan / security on which interest rates are adjusted at regular intervals according to predetermined criteria. An ARM’sThe 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 Debentures Debt issued by a federal agency or a government-sponsored enterprise (GSE)(“GSE”) for financing purposes. These types of debentures are not backed by collateral, but by the integrity and credit worthinesscredit-worthiness of the issuer. Agency debentures issued by a GSE are backed only by that GSE'sGSE’s ability to pay. The callable feature allows the agencyAgency to repay the bond prior to maturity.
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 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.
Basis Point (BPs)(“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 (1) 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. (2)Bonds are long-term securities with an original maturity of greater than one year. For purposes of computations tied in to “per bond,” a $1,000 increment of an issue is used (no matter what the actual denominations are); (3) 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 onor its own account.
Capital Buffer Includes unencumbered financial assets which can be either sold or utilized as collateral to meet liquidity needs.
Capital Ratio Calculated as total stockholders’ equity divided by total assets.assets inclusive of outstanding market value of TBA positions and exclusive of consolidated VIEs.
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. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis
CollateralA negative carry is when the rate on the funds borrowed is greater than the rate on the securities that are being financed.
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. |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Collateralized Mortgage Obligation (CMO)(“CMO”) A multiclass bond backed by a pool of mortgage pass-through securities or mortgage loans.
Commodity Futures Trading Commission (CFTC)(“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 (“CMBS”) 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)(“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.
Conventional Mortgage Loan
A mortgage loan granted by a bank or thrift institution that is based solely on real estate as security and is not insured or guaranteed by a government agency.
Convertible Securities Securities which may be converted into shares of another security under stated terms, often into the issuing company'scompany’s common stock.
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.
Core Earnings and Core Earnings Per BasicAverage Common Share Non-GAAP measure that is defined as net income (loss) excluding gains or losses on disposals of investments and termination of interest rate swaps, unrealized gains or losses on interest rate swaps and Agency interest-only mortgage-backed securities,investments measured at fair value through earnings, net gains and losses(losses) on trading assets, impairment losses, net income (loss) attributable to noncontrolling interest, corporate acquisition related expenses and certain other non-recurring gains or losses.losses, and inclusive of TBA dollar roll income (a component of Net gains (losses) on trading assets) and realized amortization of MSRs. Core earnings per average common share is calculated by dividing core earnings by average basic common shares for the period.
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.
| | 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'scounterparty’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. 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.
D
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, ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis
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.
E 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. |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Economic Interest Expense Non-GAAP financial measure that is composed of GAAP interest expense adjusted for realized gains or losses on interest rate swaps.swaps used to hedge cost of funds.
Economic Leverage Ratio (Economic Debt-to-Equity Ratio) Calculated as the sum of recourse debt, TBA derivative notional outstanding and net forward purchases of investments divided by total equity.
Economic Net Interest Income Non-GAAP financial measure that is composed of GAAP net interest income adjusted for realized gains or losses on interest rate swaps.swaps used to hedge cost of funds.
Encumbered Assets Assets on the company’s balance sheet which have been pledged as collateral against an existinga liability.
Eurodollar A U.S. dollar deposit held in Europe or elsewhere outside the United States.
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)(“FDIC”) An independent agency created by the U.S. Congress to maintain stability and public confidence in the nation'snation’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 Home Loan Banks (“FHLB”) U.S. Government-sponsored banks that provide reliable liquidity to member financial institutions to support housing finance and community investment.
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 (“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 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis
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.derivatives.
GAAP Accounting principlesU.S. generally accepted in the United States of America.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.
I
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, convertible senior notes,Convertible Senior Notes, securitized debt of consolidated VIE,VIEs, participation sold, FHLB Des Moines advances, credit facilities, U.S. Treasury securities sold, not yet purchased and securities loaned. Average Interest Bearing Liabilities is based on daily balances. |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Interest Earning Assets Refers to Residential Investment Securities, securities borrowed, U.S. Treasury securities, reverse repurchase agreements, cash and cash equivalents andcommercial real estate debt investments, commercial real estate debt and preferred equity interests.interests, residential mortgage loans and corporate debt. Average Interest Earning Assets is based on daily balances.
Interest OnlyInterest-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.
Interest Rate Risk The risk that an investment'sinvestment’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.amount. For example, one party will pay fixed and receive a variable rate.rate.
Interest Rate Swaption Options on interest rate swaps.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.payer.
Internal Capital Adequacy Assessment Program (ICAAP)(“ICAAP”) The ongoing assessment and measurement of risks, and the amount of capital which is necessary to hold against those risks. The objective is to ensure that a firm is appropriately capitalized relative to the risks in its business.
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 invested securitiesResidential Investment Securities and other investment instruments.
Investment SecuritiesCompany Act Refers to Agency mortgage-backed securities and Agency debentures.the Investment Company Act of 1940, as amended.
Leverage The use of borrowed money to increase investing power and economic returns.
Leverage Ratio (Debt-to-Equity Ratio) Calculated as total debt to total stockholders'stockholders’ equity. For purposes of calculating this ratio total debt includes repurchase agreements, Convertible Senior Notesother secured financing, securitized ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and non-recourse securitized Analysis
debt of consolidated VIE,VIEs, Convertible Senior Notes, loan participation sold and mortgages payable.payable which are non-recourse to us, subject to customary carveouts.
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 The Company’s projected prepayment speeds for certain Agency mortgage-backed securities using third-party model and market information. The Company’s 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.
M Master Netting AgreementMarket Agreed Coupon (“MAC”) Interest Rate Swap
An agreement between two counterparties who have multiple derivative contracts or repurchase / reverse repurchase agreementsinterest rate swap contract structure with each other that provides forpre-defined, market agreed terms, developed by SIFMA and ISDA with the net settlementpurpose of all contracts, as well as cash collateral, through a single payment, in a single currency, in the event of default on or termination of any one contract.promoting liquidity and simplified administration. |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
Monetary Policy Action taken by the Board of Governors of the Federal Reserve System to influence the money supply or interest rates.
Mortgage-Backed Security (MBS)(“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"“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 (“MSRs”) 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.
N
NAV Net asset value.
Net Equity Yield Calculated using GAAP net income, excluding depreciation and amortization expense, divided by average net equity.
Net Interest Income Represents interest income earned on our portfolio investments, less interest expense paid for borrowings.
Net Interest Margin Represents annualized economic net interest income, inclusive of interest expense on interest rate swaps used to hedge cost of funds, plus TBA dollar roll income less interest expense on interest rate swaps used to hedge dollar roll transactions divided by the sum of its average Interest Earning Assets.Assets plus average outstanding TBA derivative balances.
Net Interest Spread Calculated by taking the average yield on interest earning assetsInterest Earning Assets minus the average cost of interest bearing liabilities,Interest Bearing Liabilities, including the net interest payments on interest rate swaps.swaps used to hedge cost of funds.
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.
O O
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.
| | 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 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis
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.
Over-The-Counter (OTC)(“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.
P
Pass Through Security
The 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.
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.
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.
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 component of premium amortization representing the quarter-over-quarter change in estimated long-term CPR.
Prepayment ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
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 heavyincreased prepayments of mortgage or other loans, forcing the investor to reinvest at lower prevailing rates.
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.
R
Rate Reset The adjustment of the interest rate on a floating-rate security according to a prescribed formula.
Real Estate Investment Trust (REIT)(“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, convertible senior notes, and other secured financing.
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.
ResidentialInvestment Securities Refers to Agency mortgage-backed securities, Agency debentures, CRT securities and non-Agency mortgage-backed securities.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis
Residual In a CMO, the residual is thatthe tranche whichthat 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'stockholders’ equity.
Reverse Repurchase Agreement Refer to Repurchase Agreement. From the customer's perspective, the customerThe 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.
S
Secondary Market Ongoing market for bonds previously offered or sold in the primary market.
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, an individual investor 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, Agency debentures, CRT securities, MSRs, non-Agency mortgage-backed securities, residential mortgage loans, commercial real estate investments, other mortgage-backed securities and corporate debt.
To-Be-Announced Securities (TBAs)(“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. |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 7. Management’s Discussion and Analysis
U
Unencumbered Assets Assets on our balance sheet which have not been pledged as collateral against an existing liability.
U.S. Government-Sponsored Enterprise (GSE)(“GSE”) Obligations Obligations of agenciesAgencies originally established or chartered by the U.S. government to serve public purposes as specified by the U.S. Congress;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)(“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 7. 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.
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)(“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
| | | ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Quantitative and qualitative disclosures about market risk are contained within the section titled “Risk Management” of Part II, Item 77. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” | | | | | ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Our financial statements and the related notes, together with the Report of Independent Registered PublicAccounting Firm thereon, are set forth beginning on page F-1 of this Form 10-K. | | | | | ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None. | | | ITEM 9A. | CONTROLS AND PROCEDURES |
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, and implemented, (1) were effective in ensuring that information regardingrequired to be disclosed by the Company and its subsidiariesin reports it files or submits under the Securities Exchange Act is accumulated and communicated to our management, including our CEO and CFO, by our employees, as appropriate to allow timely decisions regarding required disclosure and (2) were effective in providing reasonable assuranceensuring that information required to be disclosed by the Company must disclose in its periodic reports it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods prescribedspecified by the SEC’s rules and forms. There have been no changes in our internal controls over financial reporting that occurred during the quarter ended December 31, 20142017 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting. ManagementManagement’s Annual Report On Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act asAct. Our internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executiveCEO and principal financial officersCFO and effected by the Company’s board of directors, management and other personnel to | | to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: ● pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
● provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
●provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. As a result, even systems determined to be effective can provide only reasonable assurance regarding the preparation and presentation of financial statements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014.2017. In making this assessment, the Company’s management used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission's (or COSO)ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Commission’s (“COSO”) Internal Control-Integrated Framework (2013). | |
Based on management’s assessment management believes that as of December 31, 2014, the Company’s management’s evaluation under the framework in Internal Control—Integrated Framework (2013), the Company’s management concluded that its internal control over financial reporting was effective based on those criteria.as of December 31, 2017. The Company’s independent registered public accounting firm, Ernst and& Young LLP, has issued an attestation report on the Company’s internal control over financial reporting, which is included herein. |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Annaly Capital Management, Inc. and Subsidiaries
Opinion on Internal Control over Financial Reporting We have audited Annaly Capital Management, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO criteria”). In our opinion, Annaly Capital Management, Inc. and Subsidiaries’ (the “Company”) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated statements of financial condition of the Company as of December 31, 2017 and 2016, and the related consolidated statements of comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes, and our report dated February 15, 2018 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP
New York, NY February 15, 2018 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
| | | ITEM 9B. | OTHER INFORMATION |
None. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
The Board of Directors and Stockholders of
Annaly Capital Management, Inc. and Subsidiaries
We have audited Annaly Capital Management, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Annaly Capital Management, Inc. and Subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Annaly Capital Management, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition of Annaly Capital Management, Inc. and Subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2014 of Annaly Capital Management Inc. and Subsidiaries and our report dated February 26, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
New York, NY
February 26, 2015
ANNALY CAPITAL MANAGEMENT, INC. & SUBSIDIARIES
ANNALY CAPITAL MANAGEMENT, INC. & SUBSIDIARIES
PART III ITEM 10. | | | ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 as to our directors is incorporated herein by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2014. The information regarding our executive officers required by Item 10 appears in Part I of this Form 10-K. The information required by Item 10 as to our compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2014.
We have adopted a Code of Business Conduct and Ethics within the meaning of Item 406(b) of Regulation S-K. This Code of Business Conduct and Ethics applies to our principal executive officer, principal financial
| | officer and principal accounting officer. This Code of Business Conduct and Ethics is publicly available on our website at www.annaly.com. If we make substantive amendments to this Code of Business Conduct and Ethics or grant any waiver, including any implicit waiver, we intend to disclose these events on our website.
The information regarding certain matters pertaining to our corporate governance required by Item 407(c)(3), (d)(4) and (d)(5) of Regulation S-K is incorporated by reference to the Proxy Statement to be filed with the SEC within 120 days after December 31, 2014.
|
The information required by Item 10 as to our directors is incorporated herein by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2017. The information regarding our executive officers required by Item 10 appears in Part I of this Form 10-K. The information required by Item 10 as to our compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2017. We have adopted a Code of Business Conduct and Ethics within the meaning of Item 406(b) of Regulation S-K. This Code of Business Conduct and Ethics applies to our principal executive officer, principal financial officer and principal accounting officer. This Code of Business Conduct and Ethics is publicly available on our website at www.annaly.com. We intend to satisfy the disclosure requirements regarding amendments to, or waivers from, certain provisions of this Code of Business Conduct and Ethics by posting on our website. The information regarding certain matters pertaining to our corporate governance required by Item 407(c)(3), (d)(4) and (d)(5) of Regulation S-K is incorporated by reference to the Proxy Statement to be filed with the SEC within 120 days after December 31, 2017.
The information required by Item 11 is incorporated herein by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2014.2017. | | | ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Equity Compensation Plan Information
On May 27, 2010, at our 2010 Annual Meeting of Stockholders, our stockholders approved the 2010 Equity Incentive Plan. The 2010 Equity Incentive Plan authorizes the Compensation Committee of the Board to grant options, stock appreciation rights, dividend equivalent rights, or other share-based awards, including restricted shares up to an aggregate of 25,000,000 shares, subject to adjustments as provided in the 2010 Equity Incentive Plan. For a description of our 2010 Equity Incentive Plan, see note titled “Long-Term Stock Incentive Plan” located in Item 15. “Exhibits, Financial Statement Schedules.” We had previously adopted a long-term stock incentive plan for executive officers, key employees and nonemployee directors (the “Prior Incentive Plan”). Since the adoption of the 2010 Equity Incentive Plan, no further awards will be made under the Prior Incentive Plan, although existing awards will remain effective. All stock options issued under the 2010 Equity Incentive Plan and the Prior Incentive Plan (collectively the “Incentive Plans”) were issued at the current market price on the date of grant, subject to an immediate or four year vesting in four equal installments with a contractual term of 5 or 10 years. The grant date fair value is calculated using the Black-Scholes option valuation model. For additional information on our Incentive Plans, see Notes to Consolidated Financial Statements. The following table provides information as of December 31, 2017 concerning shares of our common stock authorized for issuance under the Incentive Plans. | | | | | | | | | | | | (a) | | (b) | | (c) | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under the Incentive Plans (excluding securities in column ‘a’) | Equity compensation plans approved by security holders | 794,125 |
| | $ | 15.30 |
| | 29,298,571 |
| Equity compensation plans not approved by security holders | — |
| | — |
| | — |
| Total | 794,125 |
| | $ | 15.30 |
| | 29,298,571 |
|
The information required by Item 12Information with respect to security ownership of certain beneficial owners and management is incorporated herein by
reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2014.2017.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
| | | ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by Item 13 is incorporated herein by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2014.2017.
| | | ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by Item 14 is incorporated herein by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2014.2017. ANNALY CAPITAL MANAGEMENT, INC. &AND SUBSIDIARIES Exhibits, Financial Statement Schedules
PART IV | | | ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a) Documents filed as part of this report:
1. Financial Statements. See Index to Financial Statements below.
2. Schedules to Financial Statements:Statements. See Index to Financial Statements below
All financial statement schedules not included have been omitted because they are either inapplicable or the information required is provided in our Financial Statements and Notes thereto, included in Part II, Item 8, of this annual report on Form 10-K.thereto.
3. Exhibits:
EXHIBIT INDEX | | | Exhibit Number | Exhibit Description | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
| | | | Articles Supplementary reclassifying and designating (1) 7,412,500 authorized but unissued shares of the Registrant’s preferred stock, $0.01 par value per share, without designation as to series or class, as shares of undesignated Common Stock; (2) 650,000 authorized but unissued shares of the Registrant’s 7.625% Series C Cumulative Redeemable Preferred Stock, $0.01 par value per share, as shares of undesignated Common Stock; and (3) 3,400,000 authorized but unissued shares of the Registrant’s 6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, $0.01 par value per share, as shares of undesignated Common Stock. (incorporated by reference to Exhibit 3.15 of the Registrant’s Quarterly Report on Form 10-Q filed November 3, 2017). | | | | |
ANNALY CAPITAL MANAGEMENT, INC. & SUBSIDIARIES
Exhibits, Financial Statement Schedules
3.12 | Amendment to the Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.12 of the Registrant’s QuarterlyCurrent Report on Form 10-Q8-K filed on August 8, 2013)November 1, 2017). | | | | | | | | | | | | | | | | | | | | | 4.8 | | 4.9 | | 4.10 | | 4.11 | | 10.1 | | | | | | | | | Amendment No. 1 to Management Agreement, dated as of November 5, 2014, by and between the Registrant and Annaly Management Company LLC (incorporated by reference from Exhibit 10.1 to the Registrant’s Form 10-Q filed with the Securities and Exchange Commission on November 6, 2014).* | 10.5 | | 12. 1 | | | |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ANNALY CAPITAL MANAGEMENT, INC. & SUBSIDIARIES
Exhibits, Financial Statement Schedules
99.1 | Exhibit 101.INS XBRL | Instance Document † | Exhibit 101.SCH XBRL | Taxonomy Extension Schema Document † | Exhibit 101.CAL XBRL | Taxonomy Extension Calculation Linkbase Document † | Exhibit 101.DEF XBRL | Additional Taxonomy Extension Definition Linkbase Document Created† | Exhibit 101.LAB XBRL | Taxonomy Extension Label Linkbase Document † | Exhibit 101.PRE XBRL | Taxonomy Extension Presentation Linkbase Document † | * Exhibit Numbers 10.1, 10.3, 10.4 and 10.5 are management contracts or compensatory plans required to be filed as Exhibits to this Form 10-K.
† Submitted electronically herewith. Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Financial Condition at December 31, 20142017 and December 31, 2013;2016; (ii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2014, 20132017, 2016 and 2012;2015; (iii) Consolidated Statements of Stockholders'Stockholders’ Equity for the years ended December 31, 2014, 20132017, 2016 and 2012;2015; (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2014, 20132017, 2016 and 2012;2015; and (v) Notes to Consolidated Financial Statements. Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under these sections.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES | | | | | ITEM 16. | FORM 10-K SUMMARY |
None. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
| | | | FINANCIAL STATEMENTS | | | | Page | REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMReport of the Independent Registered Public Accounting Firm | | | | | CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2014 AND 2013 AND FOR | | THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012 | | | | Consolidated Statements of Financial Condition | F-2 | | | | Consolidated Financial Statements as of December 31, 2017 and 2016 and for the Years Ended December 31, 2017, 2016 and 2015 | | | | | | �� | | | | | | | | | F-5 | | | | | F-6 | | | | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | | | | | | | F-8 | | | F-8 | | | F-8 | | Agency Mortgage-backed Securities | F-16 | | Acquisition of Crexus | F-17 | | | | | | | | | F-18 | | | | | | | | | F-23 | | | F-26 | | | F-26 | | | F-30 | | | F-31 | | | F-33 | | | F-33 | | | F-33 | | Long-term | F-34 | | | F-34 | | | F-35 | | | | | | | | | | | Subsequent Events | | Note 18. | Risk Management | F-35 | Note 19. | RCAP Regulatory Requirements | F-36 | Note 20. | Related Party Transactions | F-36 | Note 21.26. | Summarized Quarterly Results (Unaudited) | F-38 |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 15. Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TheTo the Stockholders and the Board of Directors and Stockholders of
Annaly Capital Management, Inc. and Subsidiaries
Opinion on the Financial Statements We have audited the accompanying consolidated statements of financial condition of Annaly Capital Management, Inc. and Subsidiaries (the “Company”) as of December 31, 20142017 and 2013,2016, and the related consolidated statements of comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are2017, and the responsibility ofrelated notes, collectively referred to as the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States)“financial statements”. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Annaly Capital Management, Inc. and Subsidiariesthe Company at December 31, 20142017 and 2013,2016, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2014,2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), Annaly Capital Management, Inc. and Subsidiaries'the Company’s internal control over financial reporting as of December 31, 2014,2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 201515, 2018 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Ernst & Young LLP
We have served as the Company’s auditor since 2012.
New York, NY February 26, 201515, 2018 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 15. Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES | | | CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION | | | (dollars in thousands, except per share data) | | | | | | | | | | | | | December 31, | | | December 31, | | | | | | | ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (dollars in thousands, except per share data) | | ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (dollars in thousands, except per share data) | | | 2014 | | | 2013 | | December 31, 2017 (1) | | December 31, 2016 | ASSETS | | | | | | | | | | | | | | | | | | Cash and cash equivalents (including cash pledged as collateral of $1,584,701 and $371,790, respectively) | | $ | 1,741,244 | | | $ | 552,436 | | | Reverse repurchase agreements | | | 100,000 | | | | 100,000 | | | Securities borrowed | | | - | | | | 2,582,893 | | | Cash and cash equivalents (including cash pledged as collateral of $579,213 and $1,428,475, respectively) (2) | | $ | 706,589 |
| | $ | 1,539,746 |
| Investments, at fair value: | | | | | | | | | |
| | |
| U.S. Treasury securities (including pledged assets of $0 and $1,113,027, respectively) | | | - | | | | 1,117,915 | | | Agency mortgage-backed securities (including pledged assets of $74,006,480 and $63,897,873, respectively) | | | 81,565,256 | | | | 70,388,949 | | | Agency debentures (including pledged assets of $1,368,350 and $2,931,261, respectively) | | | 1,368,350 | | | | 2,969,885 | | | Investment in affiliates | | | 143,045 | | | | 139,447 | | | Commercial real estate debt and preferred equity(1) | | | 1,518,165 | | | | 1,583,969 | | | Agency mortgage-backed securities (including pledged assets of $83,628,132 and $70,796,872, respectively) | | 90,551,763 |
| | 75,589,873 |
| Credit risk transfer securities (including pledged assets of $363,944 and $608,707, respectively) | | 651,764 |
| | 724,722 |
| Non-Agency mortgage-backed securities (including pledged assets of $516,078 and $1,064,603, respectively) (3) | | 1,097,294 |
| | 1,401,307 |
| Residential mortgage loans (including pledged assets of $1,169,496 and $314,746, respectively) (4) | | 1,438,322 |
| | 342,289 |
| Mortgage servicing rights (including pledged assets of $5,224 and $5,464, respectively) | | 580,860 |
| | 652,216 |
| Commercial real estate debt investments (including pledged assets of $3,070,993 and $4,321,739, respectively) (5) | | 3,089,108 |
| | 4,321,739 |
| Commercial real estate debt and preferred equity, held for investment (including pledged assets of $520,329 and $506,997, respectively) | | 1,029,327 |
| | 970,505 |
| Commercial loans held for sale, net | | — |
| | 114,425 |
| Investments in commercial real estate | | | 210,032 | | | | 60,132 | | 485,953 |
| | 474,567 |
| Corporate debt, held for investment | | | 166,464 | | | | 117,687 | | | Corporate debt (including pledged assets of $600,049 and $592,871, respectively) | | 1,011,275 |
| | 773,274 |
| Interest rate swaps, at fair value | | 30,272 |
| | 68,194 |
| Other derivatives, at fair value | | 283,613 |
| | 171,266 |
| Receivable for investments sold | | | 1,010,094 | | | | 1,193,730 | | 1,232 |
| | 51,461 |
| Accrued interest and dividends receivable | | | 278,489 | | | | 273,079 | | 323,526 |
| | 270,400 |
| Receivable for investment advisory income (including from affiliates of $10,402 and $6,839, respectively) | | | 10,402 | | | | 6,839 | | | Other assets | | 384,117 |
| | 333,063 |
| Goodwill | | | 94,781 | | | | 94,781 | | 71,815 |
| | 71,815 |
| Intangible assets, net | | 23,220 |
| | 34,184 |
| Total assets | | $ | 101,760,050 |
| | $ | 87,905,046 |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | |
| | |
| Liabilities: | | |
| | |
| Repurchase agreements | | $ | 77,696,343 |
| | $ | 65,215,810 |
| Other secured financing | | 3,837,528 |
| | 3,884,708 |
| Securitized debt of consolidated VIEs (6) | | 2,971,771 |
| | 3,655,802 |
| Participation sold | | — |
| | 12,869 |
| Mortgages payable | | 309,686 |
| | 311,636 |
| Interest rate swaps, at fair value | | | 75,225 | | | | 559,044 | | 569,129 |
| | 1,443,765 |
| Other derivatives, at fair value | | | 5,499 | | | | 146,725 | | 38,725 |
| | 86,437 |
| Other assets | | | 68,321 | | | | 34,949 | | | Total assets | | $ | 88,355,367 | | | $ | 81,922,460 | | | | | | | | | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | Liabilities: | | | | | | | | | | U.S. Treasury securities sold, not yet purchased, at fair value | | $ | - | | | $ | 1,918,394 | | | Repurchase agreements | | | 71,361,926 | | | | 61,781,001 | | | Securities loaned | | | - | | | | 2,527,668 | | | Dividends payable | | 347,876 |
| | 305,674 |
| Payable for investments purchased | | | 264,984 | | | | 764,131 | | 656,581 |
| | 65,041 |
| Convertible Senior Notes | | | 845,295 | | | | 825,262 | | | Securitized debt of consolidated VIE | | | 260,700 | | | | - | | | Mortgages payable | | | 146,553 | | | | 19,332 | | | Participation sold | | | 13,693 | | | | 14,065 | | | Accrued interest payable | | | 180,501 | | | | 160,921 | | 253,068 |
| | 163,013 |
| Dividends payable | | | 284,293 | | | | 284,230 | | | Interest rate swaps, at fair value | | | 1,608,286 | | | | 1,141,828 | | | Other derivatives, at fair value | | | 8,027 | | | | 55,518 | | | Accounts payable and other liabilities | | | 47,328 | | | | 25,055 | | 207,770 |
| | 184,319 |
| Total liabilities | | | 75,021,586 | | | | 69,517,405 | | 86,888,477 |
| | 75,329,074 |
| | | | | | | | | | | Stockholders’ Equity: | | | | | | | | | |
| | |
| 7.875% Series A Cumulative Redeemable Preferred Stock: 7,412,500 authorized, issued and outstanding | | | 177,088 | | | | 177,088 | | | 7.625% Series C Cumulative Redeemable Preferred Stock: 12,650,000 authorized, 12,000,000 issued and outstanding | | | 290,514 | | | | 290,514 | | | 7.875% Series A Cumulative Redeemable Preferred Stock: 0 and 7,412,500 authorized, issued and outstanding, respectively | | — |
| | 177,088 |
| 7.625% Series C Cumulative Redeemable Preferred Stock: 12,000,000 and 12,650,000 authorized, 12,000,000 issued and outstanding, respectively | | 290,514 |
| | 290,514 |
| 7.50% Series D Cumulative Redeemable Preferred Stock: 18,400,000 authorized, issued and outstanding | | | 445,457 | | | | 445,457 | | 445,457 |
| | 445,457 |
| Common stock, par value $0.01 per share, 1,956,937,500 authorized, 947,643,079 and 947,432,862 issued and outstanding, respectively | | | 9,476 | | | | 9,474 | | | 7.625% Series E Cumulative Redeemable Preferred Stock: 11,500,000 authorized, issued and outstanding | | 287,500 |
| | 287,500 |
| 6.95% Series F Cumulative Redeemable Preferred Stock: 28,800,000 and 0 authorized, issued and outstanding, respectively | | 696,910 |
| | — |
| Common stock, par value $0.01 per share, 1,929,300,000 and 1,945,437,500 authorized, 1,159,585,078 and 1,018,913,249 issued and outstanding, respectively | | 11,596 |
| | 10,189 |
| Additional paid-in capital | | | 14,786,509 | | | | 14,765,761 | | 17,221,265 |
| | 15,579,342 |
| Accumulated other comprehensive income (loss) | | | 204,883 | | | | (2,748,933 | ) | (1,126,020 | ) | | (1,085,893 | ) | Accumulated deficit | | | (2,585,436 | ) | | | (534,306 | ) | (2,961,749 | ) | | (3,136,017 | ) | Total stockholders’ equity | | | 13,328,491 | | | | 12,405,055 | | 14,865,473 |
| | 12,568,180 |
| Noncontrolling interest | | | 5,290 | | | | - | | 6,100 |
| | 7,792 |
| Total equity | | | 13,333,781 | | | | 12,405,055 | | 14,871,573 |
| | 12,575,972 |
| Total liabilities and equity | | $ | 88,355,367 | | | $ | 81,922,460 | | $ | 101,760,050 |
| | $ | 87,905,046 |
|
| | (1) | As a result of a change to a clearing organization’s rulebook effective January 3, 2017, beginning with the first quarter 2017 and in subsequent periods the Company is presenting the fair value of centrally cleared interest rate swaps net of variation margin pledged under such transactions. The variation margin was previously reported under cash and cash equivalents and is currently reported as a reduction to interest rate swaps, at fair value. Balances reported prior to the effective date will not be adjusted. |
| | (2) | Includes cash of consolidated VIEs of $42.3 million and $23.2 million at December 31, 2017 and 2016, respectively. |
| | (3) | Includes $66.3 million and $88.6 million at December 31, 2017 and 2016, respectively, of non-Agency mortgage-backed securities in a consolidated VIE pledged as collateral and eliminated from the Company’s Consolidated Statements of Financial Condition. |
| | (4) | Includes securitized residential mortgage loans of a consolidated VIE carried at fair value of $478.8 million and $165.9 million at December 31, 2017 and 2016, respectively. |
| | (5) | Includes senior securitized mortgagescommercial mortgage loans of consolidated VIE with a carryingVIEs carried at fair value of $398.6 million$2.8 billion and $0$3.9 billion at December 31, 20142017 and 2013,2016, respectively. |
| | (6) | Includes securitized debt of consolidated VIEs carried at fair value of $3.0 billion and $3.7 billion at December 31, 2017 and 2016, respectively. |
See notes to consolidated financial statements. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
| | | | | | | | | | | | | ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (dollars in thousands, except per share data) | | For The Years Ended December 31, | | 2017 | | 2016 | | 2015 | Net interest income: | | | | | | Interest income | $ | 2,493,126 |
| | $ | 2,210,951 |
| | $ | 2,170,697 |
| Interest expense | 1,008,354 |
| | 657,752 |
| | 471,596 |
| Net interest income | 1,484,772 |
| | 1,553,199 |
| | 1,699,101 |
| Realized and unrealized gains (losses): | |
| | |
| | |
| Realized gains (losses) on interest rate swaps (1) | (371,108 | ) | | (506,681 | ) | | (624,495 | ) | Realized gains (losses) on termination of interest rate swaps | (160,133 | ) | | (113,941 | ) | | (226,462 | ) | Unrealized gains (losses) on interest rate swaps | 512,918 |
| | 282,190 |
| | (124,869 | ) | Subtotal | (18,323 | ) | | (338,432 | ) | | (975,826 | ) | Net gains (losses) on disposal of investments | (3,938 | ) | | 33,089 |
| | 50,987 |
| Net gains (losses) on trading assets | 261,438 |
| | 230,580 |
| | 29,623 |
| Net unrealized gains (losses) on investments measured at fair value through earnings | (39,684 | ) | | 86,391 |
| | (103,169 | ) | Bargain purchase gain | — |
| | 72,576 |
| | — |
| Impairment of goodwill | — |
| | — |
| | (22,966 | ) | Subtotal | 217,816 |
| | 422,636 |
| | (45,525 | ) | Total realized and unrealized gains (losses) | 199,493 |
| | 84,204 |
| | (1,021,351 | ) | Other income (loss): | | | | | | Investment advisory income | — |
| | — |
| | 24,848 |
| Dividend income from affiliate | — |
| | — |
| | 8,636 |
| Other income (loss) | 115,857 |
| | 44,144 |
| | (47,201 | ) | Total other income (loss) | 115,857 |
| | 44,144 |
| | (13,717 | ) | General and administrative expenses: | |
| | |
| | |
| Compensation and management fee | 164,322 |
| | 151,599 |
| | 150,286 |
| Other general and administrative expenses | 59,802 |
| | 98,757 |
| | 49,954 |
| Total general and administrative expenses | 224,124 |
| | 250,356 |
| | 200,240 |
| Income (loss) before income taxes | 1,575,998 |
| | 1,431,191 |
| | 463,793 |
| Income taxes | 6,982 |
| | (1,595 | ) | | (1,954 | ) | Net income (loss) | 1,569,016 |
| | 1,432,786 |
| | 465,747 |
| Net income (loss) attributable to noncontrolling interest | (588 | ) | | (970 | ) | | (809 | ) | Net income (loss) attributable to Annaly | 1,569,604 |
| | 1,433,756 |
| | 466,556 |
| Dividends on preferred stock | 109,635 |
| | 82,260 |
| | 71,968 |
| Net income (loss) available (related) to common stockholders | $ | 1,459,969 |
| | $ | 1,351,496 |
| | $ | 394,588 |
| Net income (loss) per share available (related) to common stockholders: | | | |
| | |
| Basic | $ | 1.37 |
| | $ | 1.39 |
| | $ | 0.42 |
| Diluted | $ | 1.37 |
| | $ | 1.39 |
| | $ | 0.42 |
| Weighted average number of common shares outstanding: | |
| | |
| | |
| Basic | 1,065,923,652 |
| | 969,787,583 |
| | 947,062,099 |
| Diluted | 1,066,351,616 |
| | 970,102,353 |
| | 947,276,742 |
| Net income (loss) | $ | 1,569,016 |
| | $ | 1,432,786 |
| | $ | 465,747 |
| Other comprehensive income (loss): | |
| | |
| | |
| Unrealized gains (losses) on available-for-sale securities | (89,997 | ) | | (686,414 | ) | | (531,952 | ) | Reclassification adjustment for net (gains) losses included in net income (loss) | 49,870 |
| | (21,883 | ) | | (50,527 | ) | Other comprehensive income (loss) | $ | (40,127 | ) | | $ | (708,297 | ) | | $ | (582,479 | ) | Comprehensive income (loss) | 1,528,889 |
| | 724,489 |
| | (116,732 | ) | Comprehensive income (loss) attributable to noncontrolling interest | (588 | ) | | (970 | ) | | (809 | ) | Comprehensive income (loss) attributable to Annaly | 1,529,477 |
| | 725,459 |
| | (115,923 | ) | Dividends on preferred stock | 109,635 |
| | 82,260 |
| | 71,968 |
| Comprehensive income (loss) attributable to common stockholders | $ | 1,419,842 |
| | $ | 643,199 |
| | $ | (187,891 | ) |
| | (1) | Consists of interest expense on interest rate swaps. |
See notes to consolidated financial statements. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015 (dollars in thousands, except per share data) | | 7.875% Series A Cumulative Redeemable Preferred Stock | | 7.625% Series C Cumulative Redeemable Preferred Stock | | 7.50% Series D Cumulative Redeemable Preferred Stock | | 7.625% Series E Cumulative Redeemable Preferred Stock | | 6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock | | Common Stock Par Value | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total Stockholders’ Equity | | Noncontrolling Interest | | Total | BALANCE, December 31, 2014 | $ | 177,088 |
| | $ | 290,514 |
| | $ | 445,457 |
| | $ | — |
| | $ | — |
| | $ | 9,476 |
| | $ | 14,786,509 |
| | $ | 204,883 |
| | $ | (2,585,436 | ) | | $ | 13,328,491 |
| | $ | 5,290 |
| | $ | 13,333,781 |
| Net income (loss) attributable to Annaly | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 466,556 |
| | 466,556 |
| | — |
| | 466,556 |
| Net income (loss) attributable to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (809 | ) | | (809 | ) | Unrealized gains (losses) on available-for-sale securities | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (531,952 | ) | | — |
| | (531,952 | ) | | — |
| | (531,952 | ) | Reclassification adjustment for net (gains) losses included in net income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (50,527 | ) | | — |
| | (50,527 | ) | | — |
| | (50,527 | ) | Stock compensation expense | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,156 |
| | — |
| | — |
| | 1,156 |
| | — |
| | 1,156 |
| Net proceeds from direct purchase and dividend reinvestment | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 2,244 |
| | — |
| | — |
| | 2,246 |
| | — |
| | 2,246 |
| Buyback of common stock | — |
| | — |
| | — |
| | — |
| | — |
| | (119 | ) | | (114,141 | ) | | — |
| | — |
| | (114,260 | ) | | — |
| | (114,260 | ) | Equity contributions from (distributions to) noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,467 |
| | 5,467 |
| Preferred Series A dividends, declared $1.969 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (14,593 | ) | | (14,593 | ) | | — |
| | (14,593 | ) | Preferred Series C dividends, declared $1.906 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (22,875 | ) | | (22,875 | ) | | — |
| | (22,875 | ) | Preferred Series D dividends, declared $1.875 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (34,500 | ) | | (34,500 | ) | | — |
| | (34,500 | ) | Common dividends declared, $1.20 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,133,768 | ) | | (1,133,768 | ) | | — |
| | (1,133,768 | ) | BALANCE, December 31, 2015 | $ | 177,088 |
| | $ | 290,514 |
| | $ | 445,457 |
| | $ | — |
| | $ | — |
| | $ | 9,359 |
| | $ | 14,675,768 |
| | $ | (377,596 | ) | | $ | (3,324,616 | ) | | $ | 11,895,974 |
| | $ | 9,948 |
| | $ | 11,905,922 |
| Net income (loss) attributable to Annaly | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,433,756 |
| | 1,433,756 |
| | — |
| | 1,433,756 |
| Net income (loss) attributable to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (970 | ) | | (970 | ) | Unrealized gains (losses) on available-for-sale securities | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (686,414 | ) | | — |
| | (686,414 | ) | | — |
| | (686,414 | ) | Reclassification adjustment for net (gains) losses included in net income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (21,883 | ) | | — |
| | (21,883 | ) | | — |
| | (21,883 | ) | Stock compensation expense | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7,047 |
| | — |
| | — |
| | 7,047 |
| | — |
| | 7,047 |
| Net proceeds from direct purchase and dividend reinvestment | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 2,360 |
| | — |
| | — |
| | 2,362 |
| | — |
| | 2,362 |
| Buyback of common stock | — |
| | — |
| | — |
| | — |
| | — |
| | (111 | ) | | (102,601 | ) | | — |
| | — |
| | (102,712 | ) | | — |
| | (102,712 | ) | Acquisition of subsidiary | — |
| | — |
| | — |
| | 287,500 |
| | — |
| | 939 |
| | 996,768 |
| | — |
| | — |
| | 1,285,207 |
| | — |
| | 1,285,207 |
| Equity contributions from (distributions to) noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,186 | ) | | (1,186 | ) | Preferred Series A dividends, declared $1.969 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (14,593 | ) | | (14,593 | ) | | — |
| | (14,593 | ) | Preferred Series C dividends, declared $1.906 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (22,875 | ) | | (22,875 | ) | | — |
| | (22,875 | ) | Preferred Series D dividends, declared $1.875 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (34,500 | ) | | (34,500 | ) | | — |
| | (34,500 | ) | Preferred Series E dividends, declared $0.953 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (10,292 | ) | | (10,292 | ) | | — |
| | (10,292 | ) | Common dividends declared, $1.20 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,162,897 | ) | | (1,162,897 | ) | | — |
| | (1,162,897 | ) | BALANCE, December 31, 2016 | $ | 177,088 |
| | $ | 290,514 |
| | $ | 445,457 |
| | $ | 287,500 |
| | $ | — |
| | $ | 10,189 |
| | $ | 15,579,342 |
| | $ | (1,085,893 | ) | | $ | (3,136,017 | ) | | $ | 12,568,180 |
| | $ | 7,792 |
| | $ | 12,575,972 |
| Net income (loss) attributable to Annaly | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,569,604 |
| | 1,569,604 |
| | — |
| | 1,569,604 |
| Net income (loss) attributable to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (588 | ) | | (588 | ) | Unrealized gains (losses) on available-for-sale securities | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (89,997 | ) | | — |
| | (89,997 | ) | | — |
| | (89,997 | ) | Reclassification adjustment for net (gains) losses included in net income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 49,870 |
| | — |
| | 49,870 |
| | — |
| | 49,870 |
| Stock compensation expense | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,406 |
| | — |
| | — |
| | 1,406 |
| | — |
| | 1,406 |
| Redemption of preferred stock | (177,088 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (8,224 | ) | | — |
| | — |
| | (185,312 | ) | | — |
| | (185,312 | ) | Net proceeds from direct purchase and dividend reinvestment | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 2,540 |
| | — |
| | — |
| | 2,542 |
| | — |
| | 2,542 |
| Net proceeds from issuance of common stock | — |
| | — |
| | — |
| | — |
| | — |
| | 1,405 |
| | 1,646,201 |
| | — |
| | — |
| | 1,647,606 |
| | — |
| | 1,647,606 |
| Net proceeds from issuance of preferred stock | — |
| | — |
| | — |
| | — |
| | 696,910 |
| | — |
| | — |
| | — |
| | — |
| | 696,910 |
| | — |
| | 696,910 |
| Equity contributions from (distributions to) noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,104 | ) | | (1,104 | ) | Preferred Series A dividends, declared $1.285 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (9,527 | ) | | (9,527 | ) | | — |
| | (9,527 | ) | Preferred Series C dividends, declared $1.906 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (22,875 | ) | | (22,875 | ) | | — |
| | (22,875 | ) | Preferred Series D dividends, declared $1.875 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (34,500 | ) | | (34,500 | ) | | — |
| | (34,500 | ) | Preferred Series E dividends, declared $1.906 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (21,922 | ) | | (21,922 | ) | | — |
| | (21,922 | ) | Preferred Series F dividends, declared $0.724 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (20,811 | ) | | (20,811 | ) | | ��� |
| | (20,811 | ) | Common dividends declared, $1.20 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,285,701 | ) | | (1,285,701 | ) | | — |
| | (1,285,701 | ) | BALANCE, December 31, 2017 | $ | — |
| | $ | 290,514 |
| | $ | 445,457 |
| | $ | 287,500 |
| | $ | 696,910 |
| | $ | 11,596 |
| | $ | 17,221,265 |
| | $ | (1,126,020 | ) | | $ | (2,961,749 | ) | | $ | 14,865,473 |
| | $ | 6,100 |
| | $ | 14,871,573 |
|
See notes to consolidated financial statements. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 15. Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES | | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) | | (dollars in thousands, except per share data) | | | | | | | | | | | | | | | | | | | | | | | | For The Years Ended December 31, | | | | 2014 | | | 2013 | | | 2012 | | Net interest income: | | | | | | | | | | Interest income | | $ | 2,632,647 | | | $ | 2,918,562 | | | $ | 3,259,145 | | Interest expense | | | 512,659 | | | | 624,714 | | | | 667,172 | | Net interest income | | | 2,119,988 | | | | 2,293,848 | | | | 2,591,973 | | Other income (loss): | | | | | | | | | | | | | Realized gains (losses) on interest rate swaps(1) | | | (825,360 | ) | | | (908,294 | ) | | | (893,769 | ) | Realized gains (losses) on termination of interest rate swaps | | | (779,333 | ) | | | (101,862 | ) | | | (2,385 | ) | Unrealized gains (losses) on interest rate swaps | | | (948,755 | ) | | | 2,002,200 | | | | (32,219 | ) | Subtotal | | | (2,553,448 | ) | | | 992,044 | | | | (928,373 | ) | Investment advisory income | | | 31,343 | | | | 43,643 | | | | 82,138 | | Net gains (losses) on disposal of investments | | | 93,716 | | | | 403,045 | | | | 432,139 | | Net loss on extinguishment of 4% Convertible Senior Notes | | | - | | | | - | | | | (162,340 | ) | Dividend income from affiliates | | | 25,189 | | | | 18,575 | | | | 28,336 | | Net gains (losses) on trading assets | | | (245,495 | ) | | | 1,509 | | | | 22,910 | | Net unrealized gains (losses) on interest-only Agency mortgage-backed securities | | | (86,172 | ) | | | 244,730 | | | | (59,937 | ) | Impairment of goodwill | | | - | | | | (23,987 | ) | | | - | | Loss on previously held equity interest in CreXus | | | - | | | | (18,896 | ) | | | - | | Other income (loss) | | | (12,737 | ) | | | 15,481 | | | | 525 | | Subtotal | | | (194,156 | ) | | | 684,100 | | | | 343,771 | | Total other income (loss) | | | (2,747,604 | ) | | | 1,676,144 | | | | (584,602 | ) | General and administrative expenses: | | | | | | | | | | | | | Compensation and management fee | | | 155,560 | | | | 167,366 | | | | 190,702 | | Other general and administrative expenses | | | 53,778 | | | | 64,715 | | | | 44,857 | | Total general and administrative expenses | | | 209,338 | | | | 232,081 | | | | 235,559 | | Income (loss) before income taxes | | | (836,954 | ) | | | 3,737,911 | | | | 1,771,812 | | Income taxes | | | 5,325 | | | | 8,213 | | | | 35,912 | | Net income (loss) | | | (842,279 | ) | | | 3,729,698 | | | | 1,735,900 | | Net income (loss) attributable to noncontrolling interest | | | (196 | ) | | | - | | | | - | | Net income (loss) attributable to Annaly | | | (842,083 | ) | | | 3,729,698 | | | | 1,735,900 | | Dividends on preferred stock | | | 71,968 | | | | 71,968 | | | | 39,530 | | Net income (loss) available (related) to common stockholders | | $ | (914,051 | ) | | $ | 3,657,730 | | | $ | 1,696,370 | |
Statement continued on following page.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
Net income (loss) per share available (related) to common stockholders: | | | | | | | | Basic | | $ | (0.96 | ) | | $ | 3.86 | | | $ | 1.74 | | Diluted | | $ | (0.96 | ) | | $ | 3.74 | | | $ | 1.71 | | Weighted average number of common shares outstanding: | | | | | | | | | | | | | Basic | | | 947,539,294 | | | | 947,337,915 | | | | 972,902,459 | | Diluted | | | 947,539,294 | | | | 995,557,026 | | | | 1,005,755,057 | | Dividends declared per share of common stock | | $ | 1.20 | | | $ | 1.50 | | | $ | 2.05 | | Net income (loss) | | $ | (842,279 | ) | | $ | 3,729,698 | | | $ | 1,735,900 | | Other comprehensive income (loss): | | | | | | | | | | | | | Unrealized gains (losses) on available-for-sale securities | | | 3,048,291 | | | | (5,378,089 | ) | | | 482,765 | | Reclassification adjustment for net (gains) losses included in net income (loss) | | | (94,475 | ) | | | (424,086 | ) | | | (438,511 | ) | Other comprehensive income (loss) | | | 2,953,816 | | | | (5,802,175 | ) | | | 44,254 | | Comprehensive income (loss) | | | 2,111,537 | | | | (2,072,477 | ) | | | 1,780,154 | | Comprehensive income (loss) attributable to noncontrolling interest | | | (196 | ) | | | - | | | | - | | Comprehensive income (loss) attributable to Annaly | | $ | 2,111,733 | | | $ | (2,072,477 | ) | | $ | 1,780,154 | |
(1) | Interest expense related to the Company’s interest rate swaps is recorded in Realized losses on interest rate swaps on the Consolidated Statements of Operations and Comprehensive Income (Loss).
|
| | | | | | | | | | | | | ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
| | For The Years Ended December 31, | | 2017 | | 2016 | | 2015 | Cash flows from operating activities: | | | | | | Net income (loss) | $ | 1,569,016 |
| | $ | 1,432,786 |
| | $ | 465,747 |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | Amortization of Residential Investment Securities premiums and discounts, net | 879,305 |
| | 814,575 |
| | 793,657 |
| Amortization of residential mortgage loans premiums and discounts, net | 1,523 |
| | 942 |
| | — |
| Amortization of securitized debt premiums and discounts, net | (5,604 | ) | | 24 |
| | — |
| Amortization of commercial real estate investment premiums and discounts, net | (3,865 | ) | | (2,978 | ) | | (1,321 | ) | Amortization of intangibles | 9,214 |
| | 12,893 |
| | 7,309 |
| Amortization of deferred financing costs | 2,008 |
| | 1,609 |
| | 5,419 |
| Amortization of net origination fees and costs, net | (4,617 | ) | | (4,967 | ) | | (4,263 | ) | Amortization of contingent beneficial conversion feature and equity component of Convertible Senior Notes | — |
| | — |
| | 12,246 |
| Depreciation expense | 17,336 |
| | 21,868 |
| | 12,661 |
| Bargain purchase gain | — |
| | (72,576 | ) | | — |
| Net (gains) losses on sale of commercial real estate | (5,050 | ) | | (2,865 | ) | | — |
| Net (gains) losses on sales of commercial loans held for sale | 3 |
| | 74 |
| | (120 | ) | Net (gains) losses on sales of Residential Investment Securities | 6,352 |
| | (31,039 | ) | | (63,317 | ) | Net (gains) losses on sales of residential mortgage loans | 4,704 |
| | 921 |
| | — |
| Net (gain) on sale of subsidiary | (904 | ) | | — |
| | — |
| Net (gains) losses on sales of MSRs | (3 | ) | | — |
| | — |
| Net (gains) losses on sales of corporate debt | — |
| | (180 | ) | | — |
| Net (gains) losses on sales of other investments | (1,164 | ) | | — |
| | — |
| Net (gain) loss on sale of investment in affiliate | — |
| | — |
| | 12,450 |
| Stock compensation expense | 1,406 |
| | 7,047 |
| | 1,156 |
| Impairment of goodwill | — |
| | — |
| | 22,966 |
| Unrealized (gains) losses on interest rate swaps | (512,918 | ) | | (282,190 | ) | | 124,869 |
| Net unrealized (gains) losses on investments measured at fair value through earnings | 39,684 |
| | (86,391 | ) | | 103,169 |
| Equity in net income from unconsolidated joint venture | 1,594 |
| | 4,592 |
| | 2,782 |
| Distributions of cumulative earnings from unconsolidated joint venture | 1,270 |
| | — |
| | 1,384 |
| Net (gains) losses on trading assets | (261,438 | ) | | (230,580 | ) | | (29,623 | ) | Originations of loans held for sale, net | — |
| | — |
| | (1,231,400 | ) | Proceeds from sale of commercial loans held for sale | 114,422 |
| | 164,101 |
| | 458,270 |
| Payments on purchases of residential mortgage loans | (289,979 | ) | | (99,590 | ) | | — |
| Proceeds from repayments from residential mortgage loans | 276,258 |
| | 134,959 |
| | — |
| Payments on purchases of corporate debt held for sale | (19,494 | ) | | — |
| | — |
| Proceeds from sales of corporate debt held for sale | 19,605 |
| | — |
| | — |
| Proceeds from repurchase agreements of RCap | 3,395,222,385 |
| | 2,270,520,000 |
| | 2,029,822,000 |
| Payments on repurchase agreements of RCap | (3,389,922,385 | ) | | (2,265,245,000 | ) | | (2,034,322,000 | ) | Proceeds from reverse repurchase agreements | 67,675,100 |
| | 60,990,000 |
| | 52,950,000 |
| Payments on reverse repurchase agreements | (67,675,100 | ) | | (60,990,000 | ) | | (52,850,000 | ) | Net payments on derivatives | (233,915 | ) | | (168,812 | ) | | 55,214 |
| Net change in: | |
| | |
| | |
| Due to / from brokers | (16 | ) | | (12 | ) | | — |
| Other assets | (58,715 | ) | | (110,417 | ) | | (24,339 | ) | Accrued interest and dividends receivable | (52,202 | ) | | 27,712 |
| | 47,893 |
| Receivable for investment advisory income | — |
| | — |
| | 10,402 |
| Accrued interest payable | 89,777 |
| | 6,337 |
| | (28,658 | ) | Accounts payable and other liabilities | 48,646 |
| | 43,020 |
| | 2,028 |
| Net cash provided by (used in) operating activities | 6,932,239 |
| | 6,855,863 |
| | (3,643,419 | ) | Cash flows from investing activities: | |
| | |
| | |
| Payments on purchases of Residential Investment Securities | (40,287,765 | ) | | (25,529,322 | ) | | (19,703,098 | ) | Proceeds from sales of Residential Investment Securities | 13,402,428 |
| | 12,488,907 |
| | 24,801,165 |
| Principal payments on Residential Investment Securities | 12,016,190 |
| | 12,470,168 |
| | 9,926,030 |
| Purchases of MSRs | (11,493 | ) | | (174,167 | ) | | — |
| Sales of MSRs | 33 |
| | — |
| | — |
| Proceeds from sale of investment in affiliate | — |
| | — |
| | 126,402 |
| Purchases of corporate debt | (693,095 | ) | | (399,713 | ) | | (397,639 | ) | Principal payments on corporate debt | 462,622 |
| | 117,282 |
| | 76,568 |
| Purchases of commercial real estate debt investments | (56,650 | ) | | (151,862 | ) | | (411,511 | ) | Sales of commercial real estate debt investments | — |
| | — |
| | 41,016 |
| Purchases of securitized loans at fair value | — |
| | (1,489,268 | ) | | (2,574,353 | ) | Originations of commercial real estate investments, net | (403,441 | ) | | (271,152 | ) | | (4,050 | ) | Proceeds from sale of commercial real estate investments | 11,960 |
| | 39,530 |
| | 227,450 |
| Principal payments on commercial real estate debt investments | 226,592 |
| | 80,441 |
| | 10,820 |
| Principal payments on securitized loans at fair value | 1,094,088 |
| | 182,440 |
| | 78 |
| Principal payments on commercial real estate investments | 349,220 |
| | 654,117 |
| | 444,998 |
| Purchases of investments in real estate | (1,265 | ) | | (2,918 | ) | | (274,856 | ) | Investments in unconsolidated joint ventures | (43,596 | ) | | (3,645 | ) | | (69,902 | ) | Distributions in excess of cumulative earnings from unconsolidated joint ventures | 7,998 |
| | 4,620 |
| | — |
| Purchases of residential mortgage loans held for investment | (928,512 | ) | | (65,623 | ) | | — |
| Principal payments on residential mortgage loans held for investment | 185,391 |
| | 18,268 |
| | — |
| Purchases of equity securities | (2,104 | ) | | (88,062 | ) | | (102,198 | ) | Proceeds from sales of equity securities | — |
| | 16,112 |
| | 28,395 |
| Cash acquired in business combinations | — |
| | 41,698 |
| | — |
| Net proceeds from disposal of subsidiary | 5,451 |
| | — |
| | — |
| Net cash provided by (used in) investing activities | (14,665,948 | ) | | (2,062,149 | ) | | 12,145,315 |
| Cash flows from financing activities: | |
| | |
| | |
| Proceeds from repurchase agreements | 211,420,622 |
| | 179,641,180 |
| | 202,273,148 |
| Principal payments on repurchase agreements | (204,240,089 | ) | | (186,353,987 | ) | | (212,904,214 | ) | Payments on maturity of convertible senior notes | — |
| | — |
| | (857,541 | ) | Proceeds from other secured financing | 272,734 |
| | 2,438,641 |
| | 2,554,913 |
| Payments on other secured financing | (319,945 | ) | | (438,169 | ) | | (709,865 | ) | Proceeds from issuances of securitized debt | — |
| | 1,381,640 |
| | 2,382,810 |
| Principal repayments on securitized debt | (1,022,994 | ) | | (343,071 | ) | | (86,648 | ) | Principal repayments on securitized loans | — |
| | — |
| | 201 |
| Payments of deferred financing cost | (2,054 | ) | | (3,076 | ) | | (2,608 | ) | Net proceeds from issuances of preferred stock | 696,910 |
| | — |
| | — |
| Redemptions of preferred stock | (185,312 | ) | | — |
| | — |
| Net proceeds from direct purchases and dividend reinvestments | 2,542 |
| | 2,362 |
| | 2,246 |
| Net proceeds from issuances of common stock | 1,647,606 |
| | — |
| | — |
| Proceeds from mortgages payable | — |
| | — |
| | 192,375 |
| Principal payments on participation sold | (12,827 | ) | | (336 | ) | | (296 | ) | Principal payments on mortgages payable | (2,365 | ) | | (23,581 | ) | | (360 | ) | Contributions from noncontrolling interests | 31 |
| | 14 |
| | 6,116 |
| Distributions to noncontrolling interests | (1,135 | ) | | (1,200 | ) | | (649 | ) | Net payments on share repurchases | — |
| | (102,712 | ) | | (114,260 | ) | Dividends paid | (1,353,172 | ) | | (1,220,931 | ) | | (1,209,250 | ) | Net cash provided by (used in) financing activities | 6,900,552 |
| | (5,023,226 | ) | | (8,473,882 | ) | Net (decrease) increase in cash and cash equivalents | (833,157 | ) | | (229,512 | ) | | 28,014 |
| Cash and cash equivalents, beginning of period | 1,539,746 |
| | 1,769,258 |
| | 1,741,244 |
| Cash and cash equivalents, end of period | $ | 706,589 |
| | $ | 1,539,746 |
| | $ | 1,769,258 |
| Supplemental disclosure of cash flow information: | |
| | |
| | |
| Interest received | $ | 3,447,308 |
| | $ | 2,968,161 |
| | $ | 2,965,887 |
| Dividends received | $ | 5,238 |
| | $ | 2,520 |
| | $ | 12,684 |
| Fees received | $ | — |
| | $ | 4,266 |
| | $ | — |
| Investment advisory income received | $ | — |
| | $ | — |
| | $ | 35,250 |
| Interest paid (excluding interest paid on interest rate swaps) | $ | 987,958 |
| | $ | 624,784 |
| | $ | 427,632 |
| Net interest paid on interest rate swaps | $ | 369,660 |
| | $ | 536,674 |
| | $ | 612,111 |
| Taxes paid | $ | (1,502 | ) | | $ | 934 |
| | $ | 1,929 |
| Noncash investing activities: | |
| | |
| | |
| Receivable for investments sold | $ | 1,232 |
| | $ | 51,461 |
| | $ | 121,625 |
| Payable for investments purchased | $ | 656,581 |
| | $ | 65,041 |
| | $ | 1,530,631 |
| Net change in unrealized gains (losses) on available-for-sale securities, net of reclassification adjustment | $ | (40,127 | ) | | $ | (708,297 | ) | | $ | (582,479 | ) | Reclassification of loans held for sale to investments in commercial real estate | $ | — |
| | $ | — |
| | $ | 18,500 |
| Residential mortgage loans acquired through consolidation of VIEs | $ | 349,200 |
| | $ | — |
| | $ | — |
| Noncash financing activities: | |
| | |
| | |
| Dividends declared, not yet paid | $ | 347,876 |
| | $ | 305,674 |
| | $ | 280,779 |
| Securitized debt assumed through consolidation of VIEs | $ | 315,111 |
| | $ | — |
| | $ | — |
|
See notes to consolidated financial statements.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 15. Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES | | CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY | | YEARS ENDED DECEMBER 31, 2014, 2013, AND 2012 | | (dollars in thousands, except per share data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 7.875% Series A Cumulative Redeemable Preferred Stock | | | 7.625% SeriesC Cumulative Redeemable Preferred Stock | | | 7.50% Series D Cumulative Redeemable Preferred Stock | | | Common Stock Par Value | | | Additional Paid-In Capital | | | Accumulated Other Comprehensive Income (Loss) | | | Accumulated Deficit | | | Total stockholders’ equity | | | Noncontrolling Interest | | | Total | | BALANCE, December 31, 2011 | | | 177,088 | | | | - | | | | - | | | | 9,702 | | | | 15,068,870 | | | | 3,008,988 | | | | (2,504,006 | ) | | | 15,760,642 | | | | - | | | | 15,760,642 | | Net income (loss) attributable to Annaly | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,735,900 | | | | 1,735,900 | | | | - | | | | 1,735,900 | | Unrealized gains (losses) on available-for-sale securities | | | - | | | | - | | | | - | | | | - | | | | - | | | | 482,765 | | | | - | | | | 482,765 | | | | - | | | | 482,765 | | Reclassification adjustment for net (gains) losses included in net income (loss) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (438,511 | ) | | | - | | | | (438,511 | ) | | | - | | | | (438,511 | ) | Exercise of stock options | | | - | | | | - | | | | - | | | | 6 | | | | 8,432 | | | | - | | | | - | | | | 8,438 | | | | - | | | | 8,438 | | Stock compensation expense | | | - | | | | - | | | | - | | | | - | | | | 5,584 | | | | - | | | | - | | | | 5,584 | | | | - | | | | 5,584 | | Conversion of Series B cumulative preferred stock | | | - | | | | - | | | | - | | | | 40 | | | | 32,232 | | | | - | | | | - | | | | 32,272 | | | | - | | | | 32,272 | | Net proceeds from direct purchase and dividend reinvestment | | | - | | | | - | | | | - | | | | 2 | | | | 2,792 | | | | - | | | | - | | | | 2,794 | | | | - | | | | 2,794 | | Contingent beneficial conversion feature on 4% Convertible Senior Notes | | | - | | | | - | | | | - | | | | - | | | | 61,725 | | | | - | | | | - | | | | 61,725 | | | | - | | | | 61,725 | | Equity component on 5% Convertible Senior Notes | | | - | | | | - | | | | - | | | | - | | | | 11,717 | | | | - | | | | - | | | | 11,717 | | | | - | | | | 11,717 | | Offering expenses | | | - | | | | - | | | | - | | | | - | | | | (248 | ) | | | - | | | | - | | | | (248 | ) | | | - | | | | (248 | ) | Net proceeds from 7.625% Series C Cumulative Redeemable Preferred Stock offering | | | - | | | | 290,514 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 290,514 | | | | - | | | | 290,514 | | Net proceeds from 7.50% Series D Cumulative Redeemable Preferred Stock offering | | | - | | | | - | | | | 445,457 | | | | - | | | | - | | | | - | | | | - | | | | 445,457 | | | | - | | | | 445,457 | | Extinguishment of convertible debt | | | - | | | | - | | | | - | | | | - | | | | (53,558 | ) | | | - | | | | - | | | | (53,558 | ) | | | - | | | | (53,558 | ) | Buyback of common stock | | | - | | | | - | | | | - | | | | (278 | ) | | | (396,772 | ) | | | - | | | | - | | | | (397,050 | ) | | | - | | | | (397,050 | ) | Disposal of subsidiary | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 5,223 | | | | 5,223 | | | | - | | | | 5,223 | | Preferred Series A dividends, declared $1.97 per share | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (14,593 | ) | | | (14,593 | ) | | | - | | | | (14,593 | ) | Preferred Series B dividends, declared $0.375 per share | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (289 | ) | | | (289 | ) | | | - | | | | (289 | ) | Preferred Series C dividends, declared $1.19 per share | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (14,297 | ) | | | (14,297 | ) | | | - | | | | (14,297 | ) | Preferred Series D dividends, declared $0.56 per share | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (10,351 | ) | | | (10,351 | ) | | | - | | | | (10,351 | ) | Common dividends declared, $2.05 per share | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1,989,690 | ) | | | (1,989,690 | ) | | | - | | | | (1,989,690 | ) | BALANCE, December 31, 2012 | | | 177,088 | | | | 290,514 | | | | 445,457 | | | | 9,472 | | | | 14,740,774 | | | | 3,053,242 | | | | (2,792,103 | ) | | | 15,924,444 | | | | - | | | | 15,924,444 | | Net income (loss) attributable to Annaly | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 3,729,698 | | | | 3,729,698 | | | | - | | | | 3,729,698 | | Unrealized gains (losses) on available-for-sale securities | | | - | | | | - | | | | - | | | | - | | | | - | | | | (5,378,089 | ) | | | - | | | | (5,378,089 | ) | | | - | | | | (5,378,089 | ) | Reclassification adjustment for net (gains) losses included in net income (loss) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (424,086 | ) | | | - | | | | (424,086 | ) | | | - | | | | (424,086 | ) | Exercise of stock options | | | - | | | | - | | | | - | | | | 2 | | | | 2,202 | | | | - | | | | - | | | | 2,204 | | | | - | | | | 2,204 | | Stock compensation expense | | | - | | | | - | | | | - | | | | (2 | ) | | | 2,549 | | | | - | | | | - | | | | 2,547 | | | | - | | | | 2,547 | | Net proceeds from direct purchase and dividend reinvestment | | | - | | | | - | | | | - | | | | 2 | | | | 2,853 | | | | - | | | | - | | | | 2,855 | | | | - | | | | 2,855 | | Contingent beneficial conversion feature on 4% Convertible Senior Notes | | | - | | | | - | | | | - | | | | - | | | | 17,383 | | | | - | | | | - | | | | 17,383 | | | | - | | | | 17,383 | | Disposal of subsidiary | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 20,923 | | | | 20,923 | | | | - | | | | 20,923 | | Preferred Series A dividends, declared $1.97 per share | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (14,593 | ) | | | (14,593 | ) | | | - | | | | (14,593 | ) | Preferred Series C dividends, declared $1.91 per share | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (22,875 | ) | | | (22,875 | ) | | | - | | | | (22,875 | ) | Preferred Series D dividends, declared $1.88 per share | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (34,500 | ) | | | (34,500 | ) | | | - | | | | (34,500 | ) | Common dividends declared, $1.50 per share | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1,420,856 | ) | | | (1,420,856 | ) | | | - | | | | (1,420,856 | ) | BALANCE, December 31, 2013 | | | 177,088 | | | | 290,514 | | | | 445,457 | | | | 9,474 | | | | 14,765,761 | | | | (2,748,933 | ) | | | (534,306 | ) | | | 12,405,055 | | | | - | | | | 12,405,055 | | Net income (loss) attributable to Annaly | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (842,083 | ) | | | (842,083 | ) | | | - | | | | (842,083 | ) | Net income (loss) attributable to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (196 | ) | | | (196 | ) | Unrealized gains (losses) on available-for-sale securities | | | - | | | | - | | | | - | | | | - | | | | - | | | | 3,048,291 | | | | - | | | | 3,048,291 | | | | - | | | | 3,048,291 | | Reclassification adjustment for net (gains) losses included in net income (loss) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (94,475 | ) | | | - | | | | (94,475 | ) | | | - | | | | (94,475 | ) | Stock compensation expense | | | - | | | | - | | | | - | | | | - | | | | 1,072 | | | | - | | | | - | | | | 1,072 | | | | - | | | | 1,072 | | Net proceeds from direct purchase and dividend reinvestment | | | - | | | | - | | | | - | | | | 2 | | | | 2,368 | | | | - | | | | - | | | | 2,370 | | | | - | | | | 2,370 | | Contingent beneficial conversion feature on 4% Convertible Senior Notes | | | - | | | | - | | | | - | | | | - | | | | 17,308 | | | | - | | | | - | | | | 17,308 | | | | - | | | | 17,308 | | Contributions from noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 5,486 | | | | 5,486 | | Preferred Series A dividends, declared $1.97 per share | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (14,593 | ) | | | (14,593 | ) | | | - | | | | (14,593 | ) | Preferred Series C dividends, declared $1.91 per share | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (22,875 | ) | | | (22,875 | ) | | | - | | | | (22,875 | ) | Preferred Series D dividends, declared $1.88 per share | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (34,500 | ) | | | (34,500 | ) | | | - | | | | (34,500 | ) | Common dividends declared, $1.20 per share | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1,137,079 | ) | | | (1,137,079 | ) | | | - | | | | (1,137,079 | ) | BALANCE, December 31, 2014 | | | 177,088 | | | | 290,514 | | | | 445,457 | | | | 9,476 | | | | 14,786,509 | | | | 204,883 | | | | (2,585,436 | ) | | | 13,328,491 | | | | 5,290 | | | | 13,333,781 | |
See notes to consolidated financial statements.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 15. Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES | | CONSOLIDATED STATEMENTS OF CASH FLOWS | | (dollars in thousands) | | | | | | | | | | | | | | For The Years Ended December 31, | | | | 2014 | | | 2013 | | | 2012 | | Cash flows from operating activities: | | | | | | | | | | Net income (loss) | | $ | (842,279 | ) | | $ | 3,729,698 | | | $ | 1,735,900 | | Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | | | | | | | Amortization of Investment Securities premiums and discounts, net | | | 664,379 | | | | 973,968 | | | | 1,470,801 | | Amortization of commercial real estate investment premiums and discounts, net | | | 616 | | | | (238 | ) | | | - | | Amortization of intangibles | | | 1,390 | | | | 2,614 | | | | 4,080 | | Amortization of deferred financing costs | | | 9,951 | | | | 8,152 | | | | 6,965 | | Amortization of net origination fees and costs, net | | | (4,917 | ) | | | - | | | | - | | Amortization of contingent beneficial conversion feature and equity component of Convertible Senior Notes | | | 37,341 | | | | 17,101 | | | | 18,017 | | Depreciation expense | | | 3,205 | | | | - | | | | - | | Net gain on sale of commercial real estate | | | (2,748 | ) | | | - | | | | - | | Net (gains) losses on sales of Agency mortgage-backed securities and debentures | | | (94,476 | ) | | | (424,086 | ) | | | (432,139 | ) | Net loss on extinguishment of 4% Convertible Senior Notes | | | - | | | | - | | | | 162,340 | | Stock compensation expense | | | 1,072 | | | | 2,547 | | | | 5,584 | | Impairment of goodwill | | | - | | | | 23,987 | | | | - | | Loss on previously held equity interest in CreXus | | | - | | | | 18,896 | | | | - | | Non-cash component of disposal of subsidiary | | | - | | | | - | | | | (1,177 | ) | Realized loss on disposal of subsidiary | | | - | | | | 21,041 | | | | - | | Unrealized (gains) losses on interest rate swaps | | | 948,755 | | | | (2,002,200 | ) | | | 32,219 | | Net unrealized (gains) losses on interest-only Agency mortgage-backed securities | | | 86,172 | | | | (244,730 | ) | | | 59,937 | | Net (gains) losses on trading assets | | | 245,495 | | | | (1,509 | ) | | | (20,525 | ) | Proceeds from repurchase agreements of RCap | | | 881,680,774 | | | | 1,453,216,892 | | | | 733,739,097 | | Payments on repurchase agreements of RCap | | | (875,782,907 | ) | | | (1,471,279,777 | ) | | | (727,275,192 | ) | Proceeds from reverse repurchase agreements | | | 107,898,578 | | | | 450,898,777 | | | | 402,606,536 | | Payments on reverse repurchase agreements | | | (107,898,578 | ) | | | (449,187,682 | ) | | | (403,556,765 | ) | Proceeds from securities borrowed | | | 23,888,955 | | | | 263,155,068 | | | | 74,361,498 | | Payments on securities borrowed | | | (21,306,062 | ) | | | (263,577,019 | ) | | | (75,593,708 | ) | Proceeds from securities loaned | | | 41,939,298 | | | | 484,836,546 | | | | 185,657,591 | | Payments on securities loaned | | | (44,466,966 | ) | | | (484,117,193 | ) | | | (184,654,177 | ) | Proceeds from U.S. Treasury securities | | | 3,159,253 | | | | 142,054,631 | | | | 64,028,348 | | Payments on U.S. Treasury securities | | | (3,920,425 | ) | | | (141,019,615 | ) | | | (64,746,420 | ) | Net payments on derivatives | | | (134,284 | ) | | | (133,023 | ) | | | (10,173 | ) | Net change in: | | | | | | | | | | | | | Due to / from brokers | | | 8,596 | | | | 503 | | | | - | | Other assets | | | (2,657 | ) | | | 3,897 | | | | (9,243 | ) | Accrued interest and dividends receivable | | | (21,376 | ) | | | 141,207 | | | | (6,151 | ) | Receivable for investment advisory income | | | (3,563 | ) | | | 10,891 | | | | 1,820 | | Receivable from prime broker | | | - | | | | - | | | | 3,272 | | Accrued interest payable | | | 34,889 | | | | (25,975 | ) | | | 47,931 | | Accounts payable and other liabilities | | | 987 | | | | 3,909 | | | | 3,241 | | Net cash provided by (used in) operating activities | | | 6,128,468 | | | | (12,892,722 | ) | | | 7,639,507 | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | Payments on purchases of Agency mortgage-backed securities and debentures | | | (38,626,689 | ) | | | (39,071,377 | ) | | | (86,161,777 | ) | Proceeds from sales of Agency mortgage-backed securities and debentures | | | 22,654,547 | | | | 54,328,560 | | | | 30,542,875 | | Principal payments on Agency mortgage-backed securities | | | 8,312,784 | | | | 21,748,131 | | | | 35,133,544 | | Proceeds from Agency debentures called | | | - | | | | 2,147,205 | | | | 1,801,283 | | Payments on purchases of corporate debt | | | (136,953 | ) | | | (82,502 | ) | | | (81,090 | ) | Proceeds from corporate debt called | | | - | | | | 24,252 | | | | 67,649 | | Principal payments on corporate debt | | | 88,909 | | | | 4,716 | | | | 4,247 | | Acquisition of CreXus | | | - | | | | (724,889 | ) | | | - | | Origination of commercial real estate investments, net | | | (246,833 | ) | | | (984,743 | ) | | | - | | Proceeds from sales of commercial real estate held for sale | | | 26,019 | | | | 20,192 | | | | - | | Principal payments on commercial real estate investments | | | 316,082 | | | | 114,999 | | | | - | | Purchase of investments in real estate | | | (190,743 | ) | | | - | | | | - | | Earn out payment | | | - | | | | - | | | | (13,387 | ) | Proceeds from derivatives | | | - | | | | 7,465 | | | | 10,379 | | Proceeds from sales of equity securities | | | - | | | | - | | | | 4,048 | | Payment on disposal of subsidiary | | | - | | | | 16,209 | | | | (800 | ) | Net cash provided by (used in) investing activities | | | (7,802,877 | ) | | | 37,548,218 | | | | (18,693,029 | ) |
Statement continued on following page.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
Cash flows from financing activities: | | | | | | | | | | | | | Proceeds from repurchase agreements | | | 195,370,377 | | | | 381,641,327 | | | | 352,497,651 | | Principal payments on repurchase agreements | | | (191,687,319 | ) | | | (404,583,138 | ) | | | (340,273,744 | ) | Proceeds from issuance of securitized debt | | | 260,700 | | | | - | | | | - | | Payment of deferred financing cost | | | (6,382 | ) | | | - | | | | - | | Proceeds from exercise of stock options | | | - | | | | 2,204 | | | | 8,438 | | Net proceeds from Series C Preferred offering | | | - | | | | - | | | | 290,514 | | Net proceeds from Series D Preferred offering | | | - | | | | - | | | | 445,457 | | Net proceeds from issuance of 5% Convertible Senior Notes offering | | | - | | | | - | | | | 727,500 | | Net payment on extinguishment of 4% Convertible Senior Notes | | | - | | | | - | | | | (617,476 | ) | Net proceeds from direct purchases and dividend reinvestments | | | 2,370 | | | | 2,855 | | | | 2,794 | | Net (payments) proceeds from follow-on offerings | | | - | | | | - | | | | (248 | ) | Proceeds from mortgages payable | | | 127,325 | | | | - | | | | - | | Principal payments on participation sold | | | (309 | ) | | | (200 | ) | | | - | | Principal payments on mortgages payable | | | (47 | ) | | | - | | | | - | | Contributions from noncontrolling interests | | | 5,486 | | | | - | | | | - | | Net payment on share repurchase | | | - | | | | (141,149 | ) | | | (255,901 | ) | Dividends paid | | | (1,208,984 | ) | | | (1,640,748 | ) | | | (2,149,872 | ) | Net cash provided by (used in) financing activities | | | 2,863,217 | | | | (24,718,849 | ) | | | 10,675,113 | | | | | | | | | | | | | | | Net (decrease) increase in cash and cash equivalents | | | 1,188,808 | | | | (63,353 | ) | | | (378,409 | ) | | | | | | | | | | | | | | Cash and cash equivalents, beginning of period | | | 552,436 | | | | 615,789 | | | | 994,198 | | Cash and cash equivalents, end of period | | $ | 1,741,244 | | | $ | 552,436 | | | $ | 615,789 | | | | | - | | | | - | | | | - | | Supplemental disclosure of cash flow information: | | | | | | | | | | | | | Interest received | | $ | 3,307,238 | | | $ | 4,035,661 | | | $ | 4,718,524 | | Dividends received | | $ | 25,189 | | | $ | 21,624 | | | $ | 29,522 | | Investment advisory income received | | $ | 27,780 | | | $ | 54,534 | | | $ | 84,483 | | Interest paid (excluding interest paid on interest rate swaps) | | $ | 496,033 | | | $ | 656,648 | | | $ | 595,152 | | Net interest paid on interest rate swaps | | $ | 812,108 | | | $ | 885,234 | | | $ | 892,656 | | Taxes paid | | $ | 8,314 | | | $ | 10,447 | | | $ | 52,590 | | | | $ | - | | | $ | - | | | $ | - | | Noncash investing activities: | | | | | | | | | | | | | Receivable for investments sold | | $ | 1,010,094 | | | $ | 1,193,730 | | | $ | 290,722 | | Payable for investments purchased | | $ | 264,984 | | | $ | 764,131 | | | $ | 8,256,957 | | Net change in unrealized gains (losses) on available-for-sale securities, net of reclassification adjustment | | $ | 2,953,816 | | | $ | (5,802,175 | ) | | $ | 44,254 | | | | $ | - | | | $ | - | | | $ | - | | Noncash financing activities: | | | | | | | | | | | | | Dividends declared, not yet paid | | $ | 284,293 | | | $ | 284,230 | | | $ | 432,154 | | Conversion of Series B cumulative preferred stock | | $ | - | | | $ | - | | | $ | 32,272 | | Contingent beneficial conversion feature on 4% Convertible Senior Notes | | $ | 17,308 | | | $ | 17,383 | | | $ | 61,725 | | Equity component of 5% Convertible Senior Notes | | $ | - | | | $ | - | | | $ | 11,717 | |
See notes to consolidated financial statements.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCommercial Real Estate Investments
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013The 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 2012
requires the application of judgment due to differences in the underlying collateral. These securities must also be evaluated for other-than-temporary impairment if the fair value of the security is lower than its amortized cost. Determining whether there is an other-than-temporary 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 fair value of the loans and whether a valuation allowance is necessary. Factors that may need to be considered to determine 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. 1. DESCRIPTION OF BUSINESS
Annaly Capital Management, Inc. (the “Company” or “Annaly”) is a Maryland corporation that commenced operations on February 18, 1997. The Company owns a portfolio of real estate related investments, including mortgage pass-through certificates, collateralized mortgage obligations, agency callable debentures, other securities representing interests in or obligations backed by pools of mortgage loans, commercial real estate assets
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 Investment Securities and their contractual terms. Premiums and discounts associated with the purchase of the Residential Investment Securities are amortized or accreted into interest income over the projected lives of the securities using the interest method. 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 Investment 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 corporate loans. The Company’s principal business objective is to generate net income for distribution to its stockholders from its investments. The Company is externally managed by Annaly Management Company LLC (the “Manager”). The Company’s business operations are primarily comprised of the following:
– Annaly, the parent company, which invests primarily in various types of Agency mortgage-backed securities and related derivatives to hedge these investments.
– Annaly Commercial Real Estate Group, Inc. (“ACREG,” formerly known as CreXus Investment Corp. (“CreXus”)), a wholly-owned subsidiary that was acquired during the second quarter of 2013 which specializes in acquiring, financing and managing commercial real estate loans and other commercial real estate debt, commercial mortgage-backed securities and other commercial real estate-related assets.
– RCap Securities, Inc. (“RCap”), a wholly-owned subsidiary which operates as a broker-dealer, and is a member of the Financial Industry Regulatory Authority (“FINRA”).
– Fixed Income Discount Advisory Company (“FIDAC”), a wholly-owned subsidiary which manages an affiliated real estate investment trust (“REIT”) for which it earns fee income.
– Annaly Middle Market Lending LLC (“MML”) (formerly known as Charlesfort Capital Management LLC), a wholly-owned subsidiary which engages in corporate middle market lending transactions.
– Shannon Funding LLC (“Shannon”), a wholly-owned subsidiary which acquires residential mortgage loans and provides warehouse financing to residential mortgage originators in the United States.
| | The Company has elected to be taxed as a REIT as defined under the Internal Revenue Code of 1986, as amended, and regulations promulgated thereunder (the “Code”).
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP").
3. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation – The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
The Company has evaluated all of its investments in legal entities in order to determine if they are variable interests in Variable Interest Entities ("VIEs"). A VIE is defined as 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. A variable interest is an investment or other interest that will absorb portions of a VIE's expected losses or receive portions of the entity’s expected residual returns. A VIE is required to be consolidated by its primary beneficiary, which is defined as the party that (i) has the power to control the activities that most significantly impact the VIE’s economic performance and (ii) has the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
To assess whether the Company has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, the Company considers all facts and circumstances, including the Company’s role in establishing the VIE and the Company’s ongoing rights and responsibilities. This assessment includes first, identifying the activities that most significantly impact the VIE’s economic performance; and second, identifying which party, if any, has power over those activities. In general, the parties that make the most significant decisions affecting the VIE or have the right to unilaterally remove those decision makers are deemed to have the power to direct the activities of a VIE.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 15. Financial Statements7. Management’s Discussion and Analysis
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 To assess whether the Company has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, the Company considers all of its economic interests, including debt and equity investments and other arrangements deemed to be variable interests in the VIE. This assessment requires that the Company applies judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE. Factors considered in assessing significance include: the design of the VIE, including its capitalization structure; subordination of interests; payment priority; relative share of interests held across various classes within the VIE’s capital structure; and the reasons why the interests are held by the Company.
The Company performs ongoing reassessments of whether changes in the facts and circumstances regarding the Company’s involvement with a VIE causes the Company’s consolidation conclusion regarding the VIE to change.
Cash and Cash Equivalents – Cash and cash equivalents include cash on hand and cash held in money market funds on an overnight basis. RCap is a member of various clearing organizations with which it maintains cash required to conduct its day-to-day clearance activities. Cash and securities deposited with clearing organizations are carried at cost, which approximates fair value. The Company also maintains collateral in the form of cash on margin with counterparties to its interest rate swaps and other derivatives. Cash and securities deposited with clearing organizations and collateral held in the form of cash on margin with counterparties to its interest rate swaps and other derivatives totaled approximately $1.6 billion and $371.8 million at December 31, 2014 and December 31, 2013, respectively.
Fair Value Measurements – The Company reports various financial instruments at fair value. A complete discussion of the methodology utilized by the Company to estimate the fair value of certain financial instruments is included in these Notes to Consolidated Financial Statements.
Revenue Recognition – The revenue recognition policy by asset class is discussed below.
| | Agency Mortgage-Backed Securities and Agency Debentures – The Company invests primarily in mortgage pass-through certificates, collateralized mortgage obligations and other mortgage-backed securities representing interests in or obligations backed by pools of mortgage loans and certificates guaranteed by the Government National Mortgage Association (“Ginnie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”) or the Federal National Mortgage Association (“Fannie Mae”) (collectively, “Agency mortgage-backed securities”). These Agency mortgage-backed securities may include forward contracts for Agency mortgage-backed securities purchases or sales of a generic pool, on a to-be-announced basis (“TBA securities”). The Company also invests in Agency debentures issued by the Federal Home Loan Banks, Freddie Mac and Fannie Mae.
Agency mortgage-backed securities and Agency debentures are referred to herein as “Investment Securities.” Although the Company generally intends to hold most of its Investment Securities until maturity, it may, from time to time, sell any of its Investment Securities as part of its overall management of its portfolio. Investment Securities are classified as available-for-sale and are reported at fair values estimated by management that are compared to independent sources for reasonableness, with unrealized gains and losses reported as a component of other comprehensive income (loss). Investment Securities transactions are recorded on trade date, including TBA securities that meet the regular-way securities scope exception from derivative accounting. Realized gains and losses on sales of Investment Securities are determined using the average cost method.
The Company elected the fair value option for Agency interest-only mortgage-backed securities. Interest-only securities and inverse interest-only securities are collectively referred to as “interest-only securities.” These Agency interest-only mortgage-backed securities represent the Company’s right to receive a specified proportion of the contractual interest flows of specific Agency mortgage-backed securities. Agency interest-only mortgage-backed securities are measured at fair value with changes in fair value recorded as Net unrealized gains (losses) on interest-only Agency mortgage-backed securities in the Company’s Consolidated Statements of Comprehensive Income (Loss). The interest-only securities are included in Agency mortgage-backed securities at fair value on the accompanying Consolidated Statements of Financial Condition.
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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 15. Financial Statements7. Management’s Discussion and Analysis
A 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 Debentures Debt issued by a federal agency or a government-sponsored enterprise (“GSE”) for financing purposes. These types of debentures are not backed by collateral, but by the integrity and credit-worthiness of the issuer. Agency debentures issued by a GSE are backed only by that GSE’s ability to pay. The callable feature allows the Agency to repay the bond prior to maturity.
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 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.
B 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 Interest income from coupon payments is accrued based on the outstanding principal amounts of the Investment Securities and their contractual terms. Premiums and discounts associated with the purchase of the Investment Securities are amortized or accreted into interest income over the projected lives of the securities using the interest method. The Company uses a third-party supplied model to project prepayment speeds. The Company’s prepayment speed projections incorporate underlying loan characteristics (e.g., coupon, term, original loan size, original loan to value, etc.) and market data, including interest rate and home price index forecasts. Adjustments are made for actual prepayment activity.
Corporate Debt – The Company’s investments in corporate debt are designated as held for investment, and are carried at their principal balance outstanding plus any premiums or discounts less allowances for loan losses. No allowance for loan losses was deemed necessary as of December 31, 2014 and December 31, 2013.
Equity Securities – The Company may invest in equity securities that are classified as available-for-sale or trading. Equity securities classified as available-for-sale are reported at fair value, based on market quotes, with unrealized gains and losses reported as a component of other comprehensive income (loss). Equity securities classified as trading are reported at fair value, based on market quotes, with unrealized gains and losses reported in the Consolidated Statements of Comprehensive Income (Loss) as Net gains (losses) on trading assets. Dividends are recorded in earnings based on the declaration date.
Derivative Instruments – The Company may use a variety of derivative instruments to economically hedge some of its exposure to market risks, including interest rate and prepayment risk. These instruments include, but are not limited to, interest rate swaps, options to enter into interest rate swaps (“swaptions”), TBA securities with the intent to net settle (“TBA derivatives”), options on TBA securities (“MBS options”) and U.S. Treasury and Eurodollar futures contracts. The Company may also invest in other types of mortgage derivatives such as interest-only securities and synthetic total return swaps, such as the Markit IOS Synthetic Total Return Swap Index. Derivatives are accounted for in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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). None of the Company’s derivative transactions have been designated as hedging instruments for accounting purposes.
| | Some derivative agreements contain provisions that allow for netting or setting off by counterparty; however, the Company elected to present related assets and liabilities on a gross basis in the Consolidated Statements of Financial Condition.
Interest rate swap agreements - Interest rate swaps are the primary instrument used to mitigate interest rate risk. In particular, the Company uses interest rate swaps to manage its exposure to changing interest rates on its repurchase agreements by economically hedging cash flows associated with these borrowings. Swap agreements may or may not be cleared through a derivatives clearing organization (“DCO”). Uncleared swaps are fair valued using internal pricing models and compared to the counterparty market values. Centrally cleared swaps are fair valued using internal pricing models and compared to the DCO’s market values.
Interest rate swaptions - Interest rate swaptions are purchased/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. They are not centrally cleared. The premium paid/received for interest rate swaptions is reported as an asset/liability in the Consolidated Statement of Financial Condition. The difference between the premium and the fair value of the swaption is reported in Net gains (losses) on trading assets in the Consolidated Statements of Comprehensive Income (Loss). If a swaption expires unexercised, the realized gain (loss) on the swaption would be equal to the premium received/paid. If the Company sells or exercises a swaption, the realized gain or 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 interest rate swaptions is estimated using internal pricing models and compared to the counterparty market value.
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 similar methods used to value Agency mortgage-backed securities with gains and losses recorded in Net gains (losses) on trading assets in the Consolidated Statements of Comprehensive Income (Loss).
| One who benefits from owning a security, even if the security’s title of ownership is in the name of a broker or bank.
F-10Subordinate 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. For purposes of computations tied in to “per bond,” a $1,000 increment of an issue is used (no matter what the actual denominations are).
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.
C Capital Buffer Includes unencumbered financial assets which can be either sold or utilized as collateral to meet liquidity needs.
Capital Ratio Calculated as total stockholders’ equity divided by total assets inclusive of outstanding market value of TBA positions and exclusive of consolidated VIEs.
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. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 15. Financial Statements7. Management’s Discussion and Analysis
A negative carry is when the rate on the funds borrowed is greater than the rate on the securities that are being financed.
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 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 (“CMBS”) 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.
Convertible Securities Securities which may be converted into shares of another security under stated terms, often into the issuing company’s common stock.
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.
Core Earnings and Core Earnings Per Average Common Share Non-GAAP measure that is defined as net income (loss) excluding gains or losses on disposals of investments and termination of interest rate swaps, unrealized gains or losses on interest rate swaps and investments measured at fair value through earnings, net gains (losses) on trading assets, impairment losses, net income (loss) attributable to noncontrolling interest, corporate acquisition related expenses and certain other non-recurring gains or losses, and inclusive of TBA dollar roll income (a component of Net gains (losses) on trading assets) and realized amortization of MSRs. Core earnings per average common share is calculated by dividing core earnings by average basic common shares for the period. Corporate Debt 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 fair valued using internal pricing models and compared to the counterparty market value at the valuation date with gains and losses recorded in Net gains (losses) on trading assets in the Consolidated Statements of Comprehensive Income (Loss).
Futures Contracts - Futures contracts are derivatives that track the prices of specific assets. Short sales of futures contracts help 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 with gains and losses recorded in Net gains (losses) on trading assets in the Consolidated Statements of Comprehensive Income (Loss).
Other-Than-Temporary Impairment – Management evaluates available-for-sale securities for other-than-temporary impairment at least quarterly, and more frequently when economic or market conditions warrant such evaluation. When the fair value of an available-for-sale security is less than its amortized cost the security is considered impaired. For securities that are impaired, the Company determines if it (1) has the intent to sell the security, (2) is more likely than not that it will be required to sell the security before recovery of its amortized cost basis, or (3) does not expect to recover the entire amortized cost basis of the security. Further, the security is analyzed for credit loss (the difference between the present value of cash flows expected to be collected and the amortized cost basis). The credit loss, if any, will then be recognized in the Consolidated Statements of Comprehensive Income (Loss), while the balance of losses related to other factors will be recognized as a component of other comprehensive income (loss). There was no other-than-temporary impairment recognized for the years ended December 31, 2014, 2013 and 2012.
Loan Loss Reserves – To determine if loan loss allowances are required on investments in corporate debt, the Company reviews the monthly and/or quarterly financial statements of the borrowers to verify they meet the covenants of the loan documents. If based on the financial review it is deemed probable that the Company will be unable to collect contractual principal and interest amounts (e.g. financial performance and delinquencies), a loan loss provision would be recorded. No allowance for loan losses was deemed necessary as of December 31, 2014 and 2013.
| | Repurchase Agreements – The Company finances the acquisition of a significant portion of its Agency mortgage-backed securities with repurchase agreements. The Company examines each of the specified criteria in ASC 860, Transfers and Servicing, at the inception of each transaction and has determined that each of the financings meet the specified criteria in this guidance. None of the Company’s repurchase agreements are accounted for as components of linked transactions. As a result, the Company separately accounts for the financial assets and related repurchase financings in the accompanying consolidated financial statements.
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 in the Consolidated Statements of Cash Flows. The Company reports cash flows on reverse repurchase and repurchase agreements entered into by RCap and Shannon as operating activities in the Consolidated Statements of Cash Flows.
Goodwill and Intangible Assets – The Company’s acquisitions of FIDAC, Merganser Capital Management, Inc. (“Merganser”) and CreXus were accounted for using the acquisition method. In October 2013, the Company sold the operations of Merganser. 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 of FIDAC, Merganser and CreXus were 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 purchase price over the fair value of the net assets acquired was recognized as goodwill.
The Company tests goodwill for impairment on an annual basis and at interim periods 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 utilizes a two-step approach, whereby the Company compares the carrying value of each identified reporting unit to its fair value. If the carrying value of the reporting unit is greater than its fair value, the second step is performed, where the implied fair value of goodwill is compared to its carrying value. The Company recognizes an impairment charge for the amount by which the carrying amount of goodwill exceeds its fair value.
| 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. F-11The 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.
D 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, ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis
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.
E 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 Interest Expense Non-GAAP financial measure that is composed of GAAP interest expense adjusted for realized gains or losses on interest rate swaps used to hedge cost of funds.
Economic Leverage Ratio (Economic Debt-to-Equity Ratio) Calculated as the sum of recourse debt, TBA derivative notional outstanding and net forward purchases of investments divided by total equity.
Economic Net Interest Income Non-GAAP financial measure that is composed of GAAP net interest income adjusted for realized gains or losses on interest rate swaps used to hedge cost of funds.
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.
F 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 Home Loan Banks (“FHLB”) U.S. Government-sponsored banks that provide reliable liquidity to member financial institutions to support housing finance and community investment.
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 (“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 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis
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.
G GAAP U.S. generally accepted accounting principles.
Ginnie Mae Government National Mortgage Association.
H Hedge An investment made with the intention of minimizing the impact of adverse movements in interest rates or securities prices.
I 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, Convertible Senior Notes, securitized debt of consolidated VIEs, participation sold, FHLB Des Moines advances, credit facilities, U.S. Treasury securities sold, not yet purchased and securities loaned. Average Interest Bearing Liabilities is based on daily balances.
Interest Earning Assets Refers to Residential Investment Securities, securities borrowed, U.S. Treasury securities, reverse repurchase agreements, commercial real estate debt investments, 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.
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. Internal Capital Adequacy Assessment Program (“ICAAP”) The ongoing assessment and measurement of risks, and the amount of capital which is necessary to hold against those risks. The objective is to ensure that a firm is appropriately capitalized relative to the risks in its business.
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 Investment Securities and other investment instruments.
Investment Company Act Refers to the Investment Company Act of 1940, as amended.
L Leverage The use of borrowed money to increase investing power and economic returns.
Leverage Ratio (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, securitized ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis
debt of consolidated VIEs, Convertible Senior Notes, loan participation sold and mortgages payable which are non-recourse to us, subject to customary carveouts.
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 The Company’s projected prepayment speeds for certain Agency mortgage-backed securities using third-party model and market information. The Company’s 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.
M 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 Board of Governors 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 (“MSRs”) 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.
N NAV Net asset value.
Net Equity Yield Calculated using GAAP net income, excluding depreciation and amortization expense, divided by average net equity. Net Interest Income Represents interest income earned on our portfolio investments, less interest expense paid for borrowings.
Net Interest Margin Represents annualized economic net interest income, inclusive of interest expense on interest rate swaps used to hedge cost of funds, plus TBA dollar roll income less interest expense on interest rate swaps used to hedge dollar roll transactions divided by the sum of its average Interest Earning Assets plus average outstanding TBA derivative balances.
Net Interest Spread Calculated by taking the average yield on Interest Earning Assets minus the average cost of Interest Bearing Liabilities, including the net interest payments on interest rate swaps used to hedge cost of funds.
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.
O 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 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis
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.
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.
P 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.
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 component of premium amortization representing the quarter-over-quarter change in estimated long-term CPR.
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.
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.
R 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, convertible senior notes, and other secured financing.
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.
ResidentialInvestment Securities Refers to Agency mortgage-backed securities, Agency debentures, CRT securities and non-Agency mortgage-backed securities.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis
Residual In a CMO, 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.
S Secondary Market Ongoing market for bonds previously offered or sold in the primary market.
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, an individual investor 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.
T Target Assets Includes Agency mortgage-backed securities, to-be-announced forward contracts, Agency debentures, CRT securities, MSRs, non-Agency mortgage-backed securities, residential mortgage loans, commercial real estate investments, and corporate debt.
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.
U 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.
V 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 7. 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.
W 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.
Y 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
| | | ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Quantitative and qualitative disclosures about market risk are contained within the section titled “Risk Management” of Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” | | | ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Our financial statements and the related notes, together with the Report of Independent Registered Public Accounting Firm thereon, are set forth beginning on page F-1 of this Form 10-K. | | | ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None. | | | ITEM 9A. | CONTROLS AND PROCEDURES |
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 quarter ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting. Management’s Annual Report On Internal Control Over Financial Reporting Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act. Our internal control over financial reporting is a process designed by, or under the supervision of, the Company’s CEO and CFO and effected by the Company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. As a result, even systems determined to be effective can provide only reasonable assurance regarding the preparation and presentation of financial statements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. In making this assessment, the Company’s management used criteria set forth by the Committee of Sponsoring Organizations of the Treadway ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Commission’s (“COSO”) Internal Control-Integrated Framework (2013).
Based on the Company’s management’s evaluation under the framework in Internal Control—Integrated Framework (2013), the Company’s management concluded that its internal control over financial reporting was effective as of December 31, 2017. The Company’s independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on the Company’s internal control over financial reporting, which is included herein. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Annaly Capital Management, Inc. and Subsidiaries
Opinion on Internal Control over Financial Reporting We have audited Annaly Capital Management, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO criteria”). In our opinion, Annaly Capital Management, Inc. and Subsidiaries’ (the “Company”) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated statements of financial condition of the Company as of December 31, 2017 and 2016, and the related consolidated statements of comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes, and our report dated February 15, 2018 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP
New York, NY February 15, 2018 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
| | | ITEM 9B. | OTHER INFORMATION |
None. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
PART III | | | ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by Item 10 as to our directors is incorporated herein by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2017. The information regarding our executive officers required by Item 10 appears in Part I of this Form 10-K. The information required by Item 10 as to our compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2017. We have adopted a Code of Business Conduct and Ethics within the meaning of Item 406(b) of Regulation S-K. This Code of Business Conduct and Ethics applies to our principal executive officer, principal financial officer and principal accounting officer. This Code of Business Conduct and Ethics is publicly available on our website at www.annaly.com. We intend to satisfy the disclosure requirements regarding amendments to, or waivers from, certain provisions of this Code of Business Conduct and Ethics by posting on our website. The information regarding certain matters pertaining to our corporate governance required by Item 407(c)(3), (d)(4) and (d)(5) of Regulation S-K is incorporated by reference to the Proxy Statement to be filed with the SEC within 120 days after December 31, 2017. | | | ITEM 11. | EXECUTIVE COMPENSATION |
The information required by Item 11 is incorporated herein by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2017. | | | ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Equity Compensation Plan Information
On May 27, 2010, at our 2010 Annual Meeting of Stockholders, our stockholders approved the 2010 Equity Incentive Plan. The 2010 Equity Incentive Plan authorizes the Compensation Committee of the Board to grant options, stock appreciation rights, dividend equivalent rights, or other share-based awards, including restricted shares up to an aggregate of 25,000,000 shares, subject to adjustments as provided in the 2010 Equity Incentive Plan. For a description of our 2010 Equity Incentive Plan, see note titled “Long-Term Stock Incentive Plan” located in Item 15. “Exhibits, Financial StatementsStatement Schedules.” We had previously adopted a long-term stock incentive plan for executive officers, key employees and nonemployee directors (the “Prior Incentive Plan”). Since the adoption of the 2010 Equity Incentive Plan, no further awards will be made under the Prior Incentive Plan, although existing awards will remain effective. All stock options issued under the 2010 Equity Incentive Plan and the Prior Incentive Plan (collectively the “Incentive Plans”) were issued at the current market price on the date of grant, subject to an immediate or four year vesting in four equal installments with a contractual term of 5 or 10 years. The grant date fair value is calculated using the Black-Scholes option valuation model. For additional information on our Incentive Plans, see Notes to Consolidated Financial Statements. The following table provides information as of December 31, 2017 concerning shares of our common stock authorized for issuance under the Incentive Plans. | | | | | | | | | | | | (a) | | (b) | | (c) | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under the Incentive Plans (excluding securities in column ‘a’) | Equity compensation plans approved by security holders | 794,125 |
| | $ | 15.30 |
| | 29,298,571 |
| Equity compensation plans not approved by security holders | — |
| | — |
| | — |
| Total | 794,125 |
| | $ | 15.30 |
| | 29,298,571 |
|
Information with respect to security ownership of certain beneficial owners and management is incorporated herein by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2017.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
| | | ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by Item 13 is incorporated herein by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2017. Intangible assets | | | ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by Item 14 is incorporated herein by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2017. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
PART IV | | | ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a) Documents filed as part of this report:
1. Financial Statements. See Index to Financial Statements below.
2. Schedules to Financial Statements. See Index to Financial Statements below
All financial statement schedules not included have been omitted because they are either inapplicable or the information required is provided in our Financial Statements and Notes thereto.
3. Exhibits. See Exhibit Index below.
EXHIBIT INDEX | | | Exhibit Number | Exhibit Description | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
| | | | Articles Supplementary reclassifying and designating (1) 7,412,500 authorized but unissued shares of the Registrant’s preferred stock, $0.01 par value per share, without designation as to series or class, as shares of undesignated Common Stock; (2) 650,000 authorized but unissued shares of the Registrant’s 7.625% Series C Cumulative Redeemable Preferred Stock, $0.01 par value per share, as shares of undesignated Common Stock; and (3) 3,400,000 authorized but unissued shares of the Registrant’s 6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, $0.01 par value per share, as shares of undesignated Common Stock. (incorporated by reference to Exhibit 3.15 of the Registrant’s Quarterly Report on Form 10-Q filed November 3, 2017). | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
| | | | | | | | | | | | | | | | | | | Exhibit 101.INS XBRL | Instance Document † | Exhibit 101.SCH XBRL | Taxonomy Extension Schema Document † | Exhibit 101.CAL XBRL | Taxonomy Extension Calculation Linkbase Document † | Exhibit 101.DEF XBRL | Additional Taxonomy Extension Definition Linkbase Document Created† | Exhibit 101.LAB XBRL | Taxonomy Extension Label Linkbase Document † | Exhibit 101.PRE XBRL | Taxonomy Extension Presentation Linkbase Document † |
* Exhibit Numbers 10.1, 10.3, 10.4 and 10.5 are management contracts or compensatory plans required to be filed as Exhibits to this Form 10-K.
† Submitted electronically herewith. Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Financial Condition at December 31, 2017 and December 31, 2016; (ii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016 and 2015; (iii) Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015; (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015; and (v) Notes to Consolidated Financial Statements. Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under these sections.
| | | ITEM 16. | FORM 10-K SUMMARY |
None. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
| | | | FINANCIAL STATEMENTS | | | | Page | Report of the Independent Registered Public Accounting Firm | | | | | Consolidated Financial Statements as of December 31, 2017 and 2016 and for the Years Ended December 31, 2017, 2016 and 2015 | | | | | | �� | | | | | | | | | | | | | | | | | | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Subsequent Events | | Note 26. | Summarized Quarterly Results (Unaudited) | |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Annaly Capital Management, Inc. and Subsidiaries
Opinion on the Financial Statements We have audited the accompanying consolidated statements of financial condition of Annaly Capital Management, Inc. and Subsidiaries (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes, collectively referred to as the “financial statements”. In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2017 and 2016, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 15, 2018 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Ernst & Young LLP
We have served as the Company’s auditor since 2012.
New York, NY February 15, 2018
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
| | | | | | | | | ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (dollars in thousands, except per share data) | | December 31, 2017 (1) | | December 31, 2016 | ASSETS | | | | Cash and cash equivalents (including cash pledged as collateral of $579,213 and $1,428,475, respectively) (2) | $ | 706,589 |
| | $ | 1,539,746 |
| Investments, at fair value: | |
| | |
| Agency mortgage-backed securities (including pledged assets of $83,628,132 and $70,796,872, respectively) | 90,551,763 |
| | 75,589,873 |
| Credit risk transfer securities (including pledged assets of $363,944 and $608,707, respectively) | 651,764 |
| | 724,722 |
| Non-Agency mortgage-backed securities (including pledged assets of $516,078 and $1,064,603, respectively) (3) | 1,097,294 |
| | 1,401,307 |
| Residential mortgage loans (including pledged assets of $1,169,496 and $314,746, respectively) (4) | 1,438,322 |
| | 342,289 |
| Mortgage servicing rights (including pledged assets of $5,224 and $5,464, respectively) | 580,860 |
| | 652,216 |
| Commercial real estate debt investments (including pledged assets of $3,070,993 and $4,321,739, respectively) (5) | 3,089,108 |
| | 4,321,739 |
| Commercial real estate debt and preferred equity, held for investment (including pledged assets of $520,329 and $506,997, respectively) | 1,029,327 |
| | 970,505 |
| Commercial loans held for sale, net | — |
| | 114,425 |
| Investments in commercial real estate | 485,953 |
| | 474,567 |
| Corporate debt (including pledged assets of $600,049 and $592,871, respectively) | 1,011,275 |
| | 773,274 |
| Interest rate swaps, at fair value | 30,272 |
| | 68,194 |
| Other derivatives, at fair value | 283,613 |
| | 171,266 |
| Receivable for investments sold | 1,232 |
| | 51,461 |
| Accrued interest and dividends receivable | 323,526 |
| | 270,400 |
| Other assets | 384,117 |
| | 333,063 |
| Goodwill | 71,815 |
| | 71,815 |
| Intangible assets, net | 23,220 |
| | 34,184 |
| Total assets | $ | 101,760,050 |
| | $ | 87,905,046 |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | |
| Liabilities: | |
| | |
| Repurchase agreements | $ | 77,696,343 |
| | $ | 65,215,810 |
| Other secured financing | 3,837,528 |
| | 3,884,708 |
| Securitized debt of consolidated VIEs (6) | 2,971,771 |
| | 3,655,802 |
| Participation sold | — |
| | 12,869 |
| Mortgages payable | 309,686 |
| | 311,636 |
| Interest rate swaps, at fair value | 569,129 |
| | 1,443,765 |
| Other derivatives, at fair value | 38,725 |
| | 86,437 |
| Dividends payable | 347,876 |
| | 305,674 |
| Payable for investments purchased | 656,581 |
| | 65,041 |
| Accrued interest payable | 253,068 |
| | 163,013 |
| Accounts payable and other liabilities | 207,770 |
| | 184,319 |
| Total liabilities | 86,888,477 |
| | 75,329,074 |
| Stockholders’ Equity: | |
| | |
| 7.875% Series A Cumulative Redeemable Preferred Stock: 0 and 7,412,500 authorized, issued and outstanding, respectively | — |
| | 177,088 |
| 7.625% Series C Cumulative Redeemable Preferred Stock: 12,000,000 and 12,650,000 authorized, 12,000,000 issued and outstanding, respectively | 290,514 |
| | 290,514 |
| 7.50% Series D Cumulative Redeemable Preferred Stock: 18,400,000 authorized, issued and outstanding | 445,457 |
| | 445,457 |
| 7.625% Series E Cumulative Redeemable Preferred Stock: 11,500,000 authorized, issued and outstanding | 287,500 |
| | 287,500 |
| 6.95% Series F Cumulative Redeemable Preferred Stock: 28,800,000 and 0 authorized, issued and outstanding, respectively | 696,910 |
| | — |
| Common stock, par value $0.01 per share, 1,929,300,000 and 1,945,437,500 authorized, 1,159,585,078 and 1,018,913,249 issued and outstanding, respectively | 11,596 |
| | 10,189 |
| Additional paid-in capital | 17,221,265 |
| | 15,579,342 |
| Accumulated other comprehensive income (loss) | (1,126,020 | ) | | (1,085,893 | ) | Accumulated deficit | (2,961,749 | ) | | (3,136,017 | ) | Total stockholders’ equity | 14,865,473 |
| | 12,568,180 |
| Noncontrolling interest | 6,100 |
| | 7,792 |
| Total equity | 14,871,573 |
| | 12,575,972 |
| Total liabilities and equity | $ | 101,760,050 |
| | $ | 87,905,046 |
|
| | (1) | As a result of a beneficial conversion featurechange to a clearing organization’s rulebook effective January 3, 2017, beginning with the first quarter 2017 and in subsequent periods the Company is presenting the fair value of centrally cleared interest rate swaps net of variation margin pledged under such transactions. The variation margin was previously reported under cash and cash equivalents and is currently reported as a contingent beneficial conversion feature (collectively,reduction to interest rate swaps, at fair value. Balances reported prior to the “Conversion Features”). The Conversion Features’ intrinsic value is includedeffective date will not be adjusted. |
| | (2) | Includes cash of consolidated VIEs of $42.3 million and $23.2 million at December 31, 2017 and 2016, respectively. |
| | (3) | Includes $66.3 million and $88.6 million at December 31, 2017 and 2016, respectively, of non-Agency mortgage-backed securities in “Additional paid-in capital” ona consolidated VIE pledged as collateral and eliminated from the Company’s Consolidated Statements of Financial ConditionCondition. |
| | (4) | Includes securitized residential mortgage loans of a consolidated VIE carried at fair value of $478.8 million and reduces the recorded liability amount associated with the Convertible Senior Notes. A Conversion Feature may be recognized as a result$165.9 million at December 31, 2017 and 2016, respectively. |
| | (5) | Includes senior securitized commercial mortgage loans of adjustments to the conversion price for dividends declared to common stockholders.
Stock Based Compensation – The Company is required to measureconsolidated VIEs carried at fair value of $2.8 billion and recognize in the$3.9 billion at December 31, 2017 and 2016, respectively.
|
| | (6) | Includes securitized debt of consolidated financial statements the compensation cost relating to share-based payment transactions. The Company recognizes compensationVIEs carried at fair value of $3.0 billion and $3.7 billion at December 31, 2017 and 2016, respectively. |
See notes to consolidated financial statements. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
| | | | | | | | | | | | | ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (dollars in thousands, except per share data) | | For The Years Ended December 31, | | 2017 | | 2016 | | 2015 | Net interest income: | | | | | | Interest income | $ | 2,493,126 |
| | $ | 2,210,951 |
| | $ | 2,170,697 |
| Interest expense | 1,008,354 |
| | 657,752 |
| | 471,596 |
| Net interest income | 1,484,772 |
| | 1,553,199 |
| | 1,699,101 |
| Realized and unrealized gains (losses): | |
| | |
| | |
| Realized gains (losses) on interest rate swaps (1) | (371,108 | ) | | (506,681 | ) | | (624,495 | ) | Realized gains (losses) on termination of interest rate swaps | (160,133 | ) | | (113,941 | ) | | (226,462 | ) | Unrealized gains (losses) on interest rate swaps | 512,918 |
| | 282,190 |
| | (124,869 | ) | Subtotal | (18,323 | ) | | (338,432 | ) | | (975,826 | ) | Net gains (losses) on disposal of investments | (3,938 | ) | | 33,089 |
| | 50,987 |
| Net gains (losses) on trading assets | 261,438 |
| | 230,580 |
| | 29,623 |
| Net unrealized gains (losses) on investments measured at fair value through earnings | (39,684 | ) | | 86,391 |
| | (103,169 | ) | Bargain purchase gain | — |
| | 72,576 |
| | — |
| Impairment of goodwill | — |
| | — |
| | (22,966 | ) | Subtotal | 217,816 |
| | 422,636 |
| | (45,525 | ) | Total realized and unrealized gains (losses) | 199,493 |
| | 84,204 |
| | (1,021,351 | ) | Other income (loss): | | | | | | Investment advisory income | — |
| | — |
| | 24,848 |
| Dividend income from affiliate | — |
| | — |
| | 8,636 |
| Other income (loss) | 115,857 |
| | 44,144 |
| | (47,201 | ) | Total other income (loss) | 115,857 |
| | 44,144 |
| | (13,717 | ) | General and administrative expenses: | |
| | |
| | |
| Compensation and management fee | 164,322 |
| | 151,599 |
| | 150,286 |
| Other general and administrative expenses | 59,802 |
| | 98,757 |
| | 49,954 |
| Total general and administrative expenses | 224,124 |
| | 250,356 |
| | 200,240 |
| Income (loss) before income taxes | 1,575,998 |
| | 1,431,191 |
| | 463,793 |
| Income taxes | 6,982 |
| | (1,595 | ) | | (1,954 | ) | Net income (loss) | 1,569,016 |
| | 1,432,786 |
| | 465,747 |
| Net income (loss) attributable to noncontrolling interest | (588 | ) | | (970 | ) | | (809 | ) | Net income (loss) attributable to Annaly | 1,569,604 |
| | 1,433,756 |
| | 466,556 |
| Dividends on preferred stock | 109,635 |
| | 82,260 |
| | 71,968 |
| Net income (loss) available (related) to common stockholders | $ | 1,459,969 |
| | $ | 1,351,496 |
| | $ | 394,588 |
| Net income (loss) per share available (related) to common stockholders: | | | |
| | |
| Basic | $ | 1.37 |
| | $ | 1.39 |
| | $ | 0.42 |
| Diluted | $ | 1.37 |
| | $ | 1.39 |
| | $ | 0.42 |
| Weighted average number of common shares outstanding: | |
| | |
| | |
| Basic | 1,065,923,652 |
| | 969,787,583 |
| | 947,062,099 |
| Diluted | 1,066,351,616 |
| | 970,102,353 |
| | 947,276,742 |
| Net income (loss) | $ | 1,569,016 |
| | $ | 1,432,786 |
| | $ | 465,747 |
| Other comprehensive income (loss): | |
| | |
| | |
| Unrealized gains (losses) on available-for-sale securities | (89,997 | ) | | (686,414 | ) | | (531,952 | ) | Reclassification adjustment for net (gains) losses included in net income (loss) | 49,870 |
| | (21,883 | ) | | (50,527 | ) | Other comprehensive income (loss) | $ | (40,127 | ) | | $ | (708,297 | ) | | $ | (582,479 | ) | Comprehensive income (loss) | 1,528,889 |
| | 724,489 |
| | (116,732 | ) | Comprehensive income (loss) attributable to noncontrolling interest | (588 | ) | | (970 | ) | | (809 | ) | Comprehensive income (loss) attributable to Annaly | 1,529,477 |
| | 725,459 |
| | (115,923 | ) | Dividends on preferred stock | 109,635 |
| | 82,260 |
| | 71,968 |
| Comprehensive income (loss) attributable to common stockholders | $ | 1,419,842 |
| | $ | 643,199 |
| | $ | (187,891 | ) |
| | (1) | Consists of interest expense on a straight-line basis over the requisite service period for the entire award.
Income Taxes – The Company has elected to be taxed as a REIT and intends to comply with the provisions of the Code, with respect thereto. Accordingly, the Company will not be subject to federal income tax to the extent of its distributions to stockholders and as long as certain asset, income and stock ownership tests are met. The Company and certain of its direct and indirect subsidiaries, including FIDAC, RCap and certain subsidiaries of ACREG, have made separate joint elections to treat these subsidiaries as taxable REIT subsidiaries (“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 necessary as of December 31, 2014 and 2013. rate swaps. | | Use of Estimates – The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
|
See notes to consolidated financial statements. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015 (dollars in thousands, except per share data) | | 7.875% Series A Cumulative Redeemable Preferred Stock | | 7.625% Series C Cumulative Redeemable Preferred Stock | | 7.50% Series D Cumulative Redeemable Preferred Stock | | 7.625% Series E Cumulative Redeemable Preferred Stock | | 6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock | | Common Stock Par Value | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total Stockholders’ Equity | | Noncontrolling Interest | | Total | BALANCE, December 31, 2014 | $ | 177,088 |
| | $ | 290,514 |
| | $ | 445,457 |
| | $ | — |
| | $ | — |
| | $ | 9,476 |
| | $ | 14,786,509 |
| | $ | 204,883 |
| | $ | (2,585,436 | ) | | $ | 13,328,491 |
| | $ | 5,290 |
| | $ | 13,333,781 |
| Net income (loss) attributable to Annaly | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 466,556 |
| | 466,556 |
| | — |
| | 466,556 |
| Net income (loss) attributable to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (809 | ) | | (809 | ) | Unrealized gains (losses) on available-for-sale securities | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (531,952 | ) | | — |
| | (531,952 | ) | | — |
| | (531,952 | ) | Reclassification adjustment for net (gains) losses included in net income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (50,527 | ) | | — |
| | (50,527 | ) | | — |
| | (50,527 | ) | Stock compensation expense | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,156 |
| | — |
| | — |
| | 1,156 |
| | — |
| | 1,156 |
| Net proceeds from direct purchase and dividend reinvestment | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 2,244 |
| | — |
| | — |
| | 2,246 |
| | — |
| | 2,246 |
| Buyback of common stock | — |
| | — |
| | — |
| | — |
| | — |
| | (119 | ) | | (114,141 | ) | | — |
| | — |
| | (114,260 | ) | | — |
| | (114,260 | ) | Equity contributions from (distributions to) noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,467 |
| | 5,467 |
| Preferred Series A dividends, declared $1.969 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (14,593 | ) | | (14,593 | ) | | — |
| | (14,593 | ) | Preferred Series C dividends, declared $1.906 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (22,875 | ) | | (22,875 | ) | | — |
| | (22,875 | ) | Preferred Series D dividends, declared $1.875 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (34,500 | ) | | (34,500 | ) | | — |
| | (34,500 | ) | Common dividends declared, $1.20 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,133,768 | ) | | (1,133,768 | ) | | — |
| | (1,133,768 | ) | BALANCE, December 31, 2015 | $ | 177,088 |
| | $ | 290,514 |
| | $ | 445,457 |
| | $ | — |
| | $ | — |
| | $ | 9,359 |
| | $ | 14,675,768 |
| | $ | (377,596 | ) | | $ | (3,324,616 | ) | | $ | 11,895,974 |
| | $ | 9,948 |
| | $ | 11,905,922 |
| Net income (loss) attributable to Annaly | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,433,756 |
| | 1,433,756 |
| | — |
| | 1,433,756 |
| Net income (loss) attributable to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (970 | ) | | (970 | ) | Unrealized gains (losses) on available-for-sale securities | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (686,414 | ) | | — |
| | (686,414 | ) | | — |
| | (686,414 | ) | Reclassification adjustment for net (gains) losses included in net income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (21,883 | ) | | — |
| | (21,883 | ) | | — |
| | (21,883 | ) | Stock compensation expense | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7,047 |
| | — |
| | — |
| | 7,047 |
| | — |
| | 7,047 |
| Net proceeds from direct purchase and dividend reinvestment | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 2,360 |
| | — |
| | — |
| | 2,362 |
| | — |
| | 2,362 |
| Buyback of common stock | — |
| | — |
| | — |
| | — |
| | — |
| | (111 | ) | | (102,601 | ) | | — |
| | — |
| | (102,712 | ) | | — |
| | (102,712 | ) | Acquisition of subsidiary | — |
| | — |
| | — |
| | 287,500 |
| | — |
| | 939 |
| | 996,768 |
| | — |
| | — |
| | 1,285,207 |
| | — |
| | 1,285,207 |
| Equity contributions from (distributions to) noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,186 | ) | | (1,186 | ) | Preferred Series A dividends, declared $1.969 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (14,593 | ) | | (14,593 | ) | | — |
| | (14,593 | ) | Preferred Series C dividends, declared $1.906 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (22,875 | ) | | (22,875 | ) | | — |
| | (22,875 | ) | Preferred Series D dividends, declared $1.875 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (34,500 | ) | | (34,500 | ) | | — |
| | (34,500 | ) | Preferred Series E dividends, declared $0.953 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (10,292 | ) | | (10,292 | ) | | — |
| | (10,292 | ) | Common dividends declared, $1.20 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,162,897 | ) | | (1,162,897 | ) | | — |
| | (1,162,897 | ) | BALANCE, December 31, 2016 | $ | 177,088 |
| | $ | 290,514 |
| | $ | 445,457 |
| | $ | 287,500 |
| | $ | — |
| | $ | 10,189 |
| | $ | 15,579,342 |
| | $ | (1,085,893 | ) | | $ | (3,136,017 | ) | | $ | 12,568,180 |
| | $ | 7,792 |
| | $ | 12,575,972 |
| Net income (loss) attributable to Annaly | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,569,604 |
| | 1,569,604 |
| | — |
| | 1,569,604 |
| Net income (loss) attributable to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (588 | ) | | (588 | ) | Unrealized gains (losses) on available-for-sale securities | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (89,997 | ) | | — |
| | (89,997 | ) | | — |
| | (89,997 | ) | Reclassification adjustment for net (gains) losses included in net income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 49,870 |
| | — |
| | 49,870 |
| | — |
| | 49,870 |
| Stock compensation expense | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,406 |
| | — |
| | — |
| | 1,406 |
| | — |
| | 1,406 |
| Redemption of preferred stock | (177,088 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (8,224 | ) | | — |
| | — |
| | (185,312 | ) | | — |
| | (185,312 | ) | Net proceeds from direct purchase and dividend reinvestment | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 2,540 |
| | — |
| | — |
| | 2,542 |
| | — |
| | 2,542 |
| Net proceeds from issuance of common stock | — |
| | — |
| | — |
| | — |
| | — |
| | 1,405 |
| | 1,646,201 |
| | — |
| | — |
| | 1,647,606 |
| | — |
| | 1,647,606 |
| Net proceeds from issuance of preferred stock | — |
| | — |
| | — |
| | — |
| | 696,910 |
| | — |
| | — |
| | — |
| | — |
| | 696,910 |
| | — |
| | 696,910 |
| Equity contributions from (distributions to) noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,104 | ) | | (1,104 | ) | Preferred Series A dividends, declared $1.285 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (9,527 | ) | | (9,527 | ) | | — |
| | (9,527 | ) | Preferred Series C dividends, declared $1.906 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (22,875 | ) | | (22,875 | ) | | — |
| | (22,875 | ) | Preferred Series D dividends, declared $1.875 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (34,500 | ) | | (34,500 | ) | | — |
| | (34,500 | ) | Preferred Series E dividends, declared $1.906 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (21,922 | ) | | (21,922 | ) | | — |
| | (21,922 | ) | Preferred Series F dividends, declared $0.724 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (20,811 | ) | | (20,811 | ) | | ��� |
| | (20,811 | ) | Common dividends declared, $1.20 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,285,701 | ) | | (1,285,701 | ) | | — |
| | (1,285,701 | ) | BALANCE, December 31, 2017 | $ | — |
| | $ | 290,514 |
| | $ | 445,457 |
| | $ | 287,500 |
| | $ | 696,910 |
| | $ | 11,596 |
| | $ | 17,221,265 |
| | $ | (1,126,020 | ) | | $ | (2,961,749 | ) | | $ | 14,865,473 |
| | $ | 6,100 |
| | $ | 14,871,573 |
|
See notes to consolidated financial statements. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
| | | | | | | | | | | | | ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
| | For The Years Ended December 31, | | 2017 | | 2016 | | 2015 | Cash flows from operating activities: | | | | | | Net income (loss) | $ | 1,569,016 |
| | $ | 1,432,786 |
| | $ | 465,747 |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | Amortization of Residential Investment Securities premiums and discounts, net | 879,305 |
| | 814,575 |
| | 793,657 |
| Amortization of residential mortgage loans premiums and discounts, net | 1,523 |
| | 942 |
| | — |
| Amortization of securitized debt premiums and discounts, net | (5,604 | ) | | 24 |
| | — |
| Amortization of commercial real estate investment premiums and discounts, net | (3,865 | ) | | (2,978 | ) | | (1,321 | ) | Amortization of intangibles | 9,214 |
| | 12,893 |
| | 7,309 |
| Amortization of deferred financing costs | 2,008 |
| | 1,609 |
| | 5,419 |
| Amortization of net origination fees and costs, net | (4,617 | ) | | (4,967 | ) | | (4,263 | ) | Amortization of contingent beneficial conversion feature and equity component of Convertible Senior Notes | — |
| | — |
| | 12,246 |
| Depreciation expense | 17,336 |
| | 21,868 |
| | 12,661 |
| Bargain purchase gain | — |
| | (72,576 | ) | | — |
| Net (gains) losses on sale of commercial real estate | (5,050 | ) | | (2,865 | ) | | — |
| Net (gains) losses on sales of commercial loans held for sale | 3 |
| | 74 |
| | (120 | ) | Net (gains) losses on sales of Residential Investment Securities | 6,352 |
| | (31,039 | ) | | (63,317 | ) | Net (gains) losses on sales of residential mortgage loans | 4,704 |
| | 921 |
| | — |
| Net (gain) on sale of subsidiary | (904 | ) | | — |
| | — |
| Net (gains) losses on sales of MSRs | (3 | ) | | — |
| | — |
| Net (gains) losses on sales of corporate debt | — |
| | (180 | ) | | — |
| Net (gains) losses on sales of other investments | (1,164 | ) | | — |
| | — |
| Net (gain) loss on sale of investment in affiliate | — |
| | — |
| | 12,450 |
| Stock compensation expense | 1,406 |
| | 7,047 |
| | 1,156 |
| Impairment of goodwill | — |
| | — |
| | 22,966 |
| Unrealized (gains) losses on interest rate swaps | (512,918 | ) | | (282,190 | ) | | 124,869 |
| Net unrealized (gains) losses on investments measured at fair value through earnings | 39,684 |
| | (86,391 | ) | | 103,169 |
| Equity in net income from unconsolidated joint venture | 1,594 |
| | 4,592 |
| | 2,782 |
| Distributions of cumulative earnings from unconsolidated joint venture | 1,270 |
| | — |
| | 1,384 |
| Net (gains) losses on trading assets | (261,438 | ) | | (230,580 | ) | | (29,623 | ) | Originations of loans held for sale, net | — |
| | — |
| | (1,231,400 | ) | Proceeds from sale of commercial loans held for sale | 114,422 |
| | 164,101 |
| | 458,270 |
| Payments on purchases of residential mortgage loans | (289,979 | ) | | (99,590 | ) | | — |
| Proceeds from repayments from residential mortgage loans | 276,258 |
| | 134,959 |
| | — |
| Payments on purchases of corporate debt held for sale | (19,494 | ) | | — |
| | — |
| Proceeds from sales of corporate debt held for sale | 19,605 |
| | — |
| | — |
| Proceeds from repurchase agreements of RCap | 3,395,222,385 |
| | 2,270,520,000 |
| | 2,029,822,000 |
| Payments on repurchase agreements of RCap | (3,389,922,385 | ) | | (2,265,245,000 | ) | | (2,034,322,000 | ) | Proceeds from reverse repurchase agreements | 67,675,100 |
| | 60,990,000 |
| | 52,950,000 |
| Payments on reverse repurchase agreements | (67,675,100 | ) | | (60,990,000 | ) | | (52,850,000 | ) | Net payments on derivatives | (233,915 | ) | | (168,812 | ) | | 55,214 |
| Net change in: | |
| | |
| | |
| Due to / from brokers | (16 | ) | | (12 | ) | | — |
| Other assets | (58,715 | ) | | (110,417 | ) | | (24,339 | ) | Accrued interest and dividends receivable | (52,202 | ) | | 27,712 |
| | 47,893 |
| Receivable for investment advisory income | — |
| | — |
| | 10,402 |
| Accrued interest payable | 89,777 |
| | 6,337 |
| | (28,658 | ) | Accounts payable and other liabilities | 48,646 |
| | 43,020 |
| | 2,028 |
| Net cash provided by (used in) operating activities | 6,932,239 |
| | 6,855,863 |
| | (3,643,419 | ) | Cash flows from investing activities: | |
| | |
| | |
| Payments on purchases of Residential Investment Securities | (40,287,765 | ) | | (25,529,322 | ) | | (19,703,098 | ) | Proceeds from sales of Residential Investment Securities | 13,402,428 |
| | 12,488,907 |
| | 24,801,165 |
| Principal payments on Residential Investment Securities | 12,016,190 |
| | 12,470,168 |
| | 9,926,030 |
| Purchases of MSRs | (11,493 | ) | | (174,167 | ) | | — |
| Sales of MSRs | 33 |
| | — |
| | — |
| Proceeds from sale of investment in affiliate | — |
| | — |
| | 126,402 |
| Purchases of corporate debt | (693,095 | ) | | (399,713 | ) | | (397,639 | ) | Principal payments on corporate debt | 462,622 |
| | 117,282 |
| | 76,568 |
| Purchases of commercial real estate debt investments | (56,650 | ) | | (151,862 | ) | | (411,511 | ) | Sales of commercial real estate debt investments | — |
| | — |
| | 41,016 |
| Purchases of securitized loans at fair value | — |
| | (1,489,268 | ) | | (2,574,353 | ) | Originations of commercial real estate investments, net | (403,441 | ) | | (271,152 | ) | | (4,050 | ) | Proceeds from sale of commercial real estate investments | 11,960 |
| | 39,530 |
| | 227,450 |
| Principal payments on commercial real estate debt investments | 226,592 |
| | 80,441 |
| | 10,820 |
| Principal payments on securitized loans at fair value | 1,094,088 |
| | 182,440 |
| | 78 |
| Principal payments on commercial real estate investments | 349,220 |
| | 654,117 |
| | 444,998 |
| Purchases of investments in real estate | (1,265 | ) | | (2,918 | ) | | (274,856 | ) | Investments in unconsolidated joint ventures | (43,596 | ) | | (3,645 | ) | | (69,902 | ) | Distributions in excess of cumulative earnings from unconsolidated joint ventures | 7,998 |
| | 4,620 |
| | — |
| Purchases of residential mortgage loans held for investment | (928,512 | ) | | (65,623 | ) | | — |
| Principal payments on residential mortgage loans held for investment | 185,391 |
| | 18,268 |
| | — |
| Purchases of equity securities | (2,104 | ) | | (88,062 | ) | | (102,198 | ) | Proceeds from sales of equity securities | — |
| | 16,112 |
| | 28,395 |
| Cash acquired in business combinations | — |
| | 41,698 |
| | — |
| Net proceeds from disposal of subsidiary | 5,451 |
| | — |
| | — |
| Net cash provided by (used in) investing activities | (14,665,948 | ) | | (2,062,149 | ) | | 12,145,315 |
| Cash flows from financing activities: | |
| | |
| | |
| Proceeds from repurchase agreements | 211,420,622 |
| | 179,641,180 |
| | 202,273,148 |
| Principal payments on repurchase agreements | (204,240,089 | ) | | (186,353,987 | ) | | (212,904,214 | ) | Payments on maturity of convertible senior notes | — |
| | — |
| | (857,541 | ) | Proceeds from other secured financing | 272,734 |
| | 2,438,641 |
| | 2,554,913 |
| Payments on other secured financing | (319,945 | ) | | (438,169 | ) | | (709,865 | ) | Proceeds from issuances of securitized debt | — |
| | 1,381,640 |
| | 2,382,810 |
| Principal repayments on securitized debt | (1,022,994 | ) | | (343,071 | ) | | (86,648 | ) | Principal repayments on securitized loans | — |
| | — |
| | 201 |
| Payments of deferred financing cost | (2,054 | ) | | (3,076 | ) | | (2,608 | ) | Net proceeds from issuances of preferred stock | 696,910 |
| | — |
| | — |
| Redemptions of preferred stock | (185,312 | ) | | — |
| | — |
| Net proceeds from direct purchases and dividend reinvestments | 2,542 |
| | 2,362 |
| | 2,246 |
| Net proceeds from issuances of common stock | 1,647,606 |
| | — |
| | — |
| Proceeds from mortgages payable | — |
| | — |
| | 192,375 |
| Principal payments on participation sold | (12,827 | ) | | (336 | ) | | (296 | ) | Principal payments on mortgages payable | (2,365 | ) | | (23,581 | ) | | (360 | ) | Contributions from noncontrolling interests | 31 |
| | 14 |
| | 6,116 |
| Distributions to noncontrolling interests | (1,135 | ) | | (1,200 | ) | | (649 | ) | Net payments on share repurchases | — |
| | (102,712 | ) | | (114,260 | ) | Dividends paid | (1,353,172 | ) | | (1,220,931 | ) | | (1,209,250 | ) | Net cash provided by (used in) financing activities | 6,900,552 |
| | (5,023,226 | ) | | (8,473,882 | ) | Net (decrease) increase in cash and cash equivalents | (833,157 | ) | | (229,512 | ) | | 28,014 |
| Cash and cash equivalents, beginning of period | 1,539,746 |
| | 1,769,258 |
| | 1,741,244 |
| Cash and cash equivalents, end of period | $ | 706,589 |
| | $ | 1,539,746 |
| | $ | 1,769,258 |
| Supplemental disclosure of cash flow information: | |
| | |
| | |
| Interest received | $ | 3,447,308 |
| | $ | 2,968,161 |
| | $ | 2,965,887 |
| Dividends received | $ | 5,238 |
| | $ | 2,520 |
| | $ | 12,684 |
| Fees received | $ | — |
| | $ | 4,266 |
| | $ | — |
| Investment advisory income received | $ | — |
| | $ | — |
| | $ | 35,250 |
| Interest paid (excluding interest paid on interest rate swaps) | $ | 987,958 |
| | $ | 624,784 |
| | $ | 427,632 |
| Net interest paid on interest rate swaps | $ | 369,660 |
| | $ | 536,674 |
| | $ | 612,111 |
| Taxes paid | $ | (1,502 | ) | | $ | 934 |
| | $ | 1,929 |
| Noncash investing activities: | |
| | |
| | |
| Receivable for investments sold | $ | 1,232 |
| | $ | 51,461 |
| | $ | 121,625 |
| Payable for investments purchased | $ | 656,581 |
| | $ | 65,041 |
| | $ | 1,530,631 |
| Net change in unrealized gains (losses) on available-for-sale securities, net of reclassification adjustment | $ | (40,127 | ) | | $ | (708,297 | ) | | $ | (582,479 | ) | Reclassification of loans held for sale to investments in commercial real estate | $ | — |
| | $ | — |
| | $ | 18,500 |
| Residential mortgage loans acquired through consolidation of VIEs | $ | 349,200 |
| | $ | — |
| | $ | — |
| Noncash financing activities: | |
| | |
| | |
| Dividends declared, not yet paid | $ | 347,876 |
| | $ | 305,674 |
| | $ | 280,779 |
| Securitized debt assumed through consolidation of VIEs | $ | 315,111 |
| | $ | — |
| | $ | — |
|
See notes to consolidated financial statements.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 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 other-than-temporary impairment if the fair value of the security is lower than its amortized cost. Determining whether there is an other-than-temporary 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 fair value of the loans and whether a valuation allowance is necessary. Factors that may need to be considered to determine 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 Investment Securities and their contractual terms. Premiums and discounts associated with the purchase of the Residential Investment Securities are amortized or accreted into interest income over the projected lives of the securities using the interest method. 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 Investment 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 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis
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 7. Management’s Discussion and Analysis
A 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 Debentures Debt issued by a federal agency or a government-sponsored enterprise (“GSE”) for financing purposes. These types of debentures are not backed by collateral, but by the integrity and credit-worthiness of the issuer. Agency debentures issued by a GSE are backed only by that GSE’s ability to pay. The callable feature allows the Agency to repay the bond prior to maturity.
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 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.
B 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. For purposes of computations tied in to “per bond,” a $1,000 increment of an issue is used (no matter what the actual denominations are).
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.
C Capital Buffer Includes unencumbered financial assets which can be either sold or utilized as collateral to meet liquidity needs.
Capital Ratio Calculated as total stockholders’ equity divided by total assets inclusive of outstanding market value of TBA positions and exclusive of consolidated VIEs.
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. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis
A negative carry is when the rate on the funds borrowed is greater than the rate on the securities that are being financed.
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 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 (“CMBS”) 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.
Convertible Securities Securities which may be converted into shares of another security under stated terms, often into the issuing company’s common stock.
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.
Core Earnings and Core Earnings Per Average Common Share Non-GAAP measure that is defined as net income (loss) excluding gains or losses on disposals of investments and termination of interest rate swaps, unrealized gains or losses on interest rate swaps and investments measured at fair value through earnings, net gains (losses) on trading assets, impairment losses, net income (loss) attributable to noncontrolling interest, corporate acquisition related expenses and certain other non-recurring gains or losses, and inclusive of TBA dollar roll income (a component of Net gains (losses) on trading assets) and realized amortization of MSRs. Core earnings per average common share is calculated by dividing core earnings by average basic common shares for the period. 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. 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.
D 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, ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis
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.
E 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 Interest Expense Non-GAAP financial measure that is composed of GAAP interest expense adjusted for realized gains or losses on interest rate swaps used to hedge cost of funds.
Economic Leverage Ratio (Economic Debt-to-Equity Ratio) Calculated as the sum of recourse debt, TBA derivative notional outstanding and net forward purchases of investments divided by total equity.
Economic Net Interest Income Non-GAAP financial measure that is composed of GAAP net interest income adjusted for realized gains or losses on interest rate swaps used to hedge cost of funds.
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.
F 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 Home Loan Banks (“FHLB”) U.S. Government-sponsored banks that provide reliable liquidity to member financial institutions to support housing finance and community investment.
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 (“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 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis
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.
G GAAP U.S. generally accepted accounting principles.
Ginnie Mae Government National Mortgage Association.
H Hedge An investment made with the intention of minimizing the impact of adverse movements in interest rates or securities prices.
I 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, Convertible Senior Notes, securitized debt of consolidated VIEs, participation sold, FHLB Des Moines advances, credit facilities, U.S. Treasury securities sold, not yet purchased and securities loaned. Average Interest Bearing Liabilities is based on daily balances.
Interest Earning Assets Refers to Residential Investment Securities, securities borrowed, U.S. Treasury securities, reverse repurchase agreements, commercial real estate debt investments, 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.
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. Internal Capital Adequacy Assessment Program (“ICAAP”) The ongoing assessment and measurement of risks, and the amount of capital which is necessary to hold against those risks. The objective is to ensure that a firm is appropriately capitalized relative to the risks in its business.
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 Investment Securities and other investment instruments.
Investment Company Act Refers to the Investment Company Act of 1940, as amended.
L Leverage The use of borrowed money to increase investing power and economic returns.
Leverage Ratio (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, securitized ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis
debt of consolidated VIEs, Convertible Senior Notes, loan participation sold and mortgages payable which are non-recourse to us, subject to customary carveouts.
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 The Company’s projected prepayment speeds for certain Agency mortgage-backed securities using third-party model and market information. The Company’s 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.
M 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 Board of Governors 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 (“MSRs”) 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.
N NAV Net asset value.
Net Equity Yield Calculated using GAAP net income, excluding depreciation and amortization expense, divided by average net equity. Net Interest Income Represents interest income earned on our portfolio investments, less interest expense paid for borrowings.
Net Interest Margin Represents annualized economic net interest income, inclusive of interest expense on interest rate swaps used to hedge cost of funds, plus TBA dollar roll income less interest expense on interest rate swaps used to hedge dollar roll transactions divided by the sum of its average Interest Earning Assets plus average outstanding TBA derivative balances.
Net Interest Spread Calculated by taking the average yield on Interest Earning Assets minus the average cost of Interest Bearing Liabilities, including the net interest payments on interest rate swaps used to hedge cost of funds.
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.
O 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 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis
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.
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.
P 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.
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 component of premium amortization representing the quarter-over-quarter change in estimated long-term CPR.
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.
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.
R 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, convertible senior notes, and other secured financing.
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.
ResidentialInvestment Securities Refers to Agency mortgage-backed securities, Agency debentures, CRT securities and non-Agency mortgage-backed securities.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis
Residual In a CMO, 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.
S Secondary Market Ongoing market for bonds previously offered or sold in the primary market.
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, an individual investor 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.
T Target Assets Includes Agency mortgage-backed securities, to-be-announced forward contracts, Agency debentures, CRT securities, MSRs, non-Agency mortgage-backed securities, residential mortgage loans, commercial real estate investments, and corporate debt.
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.
U 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.
V 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 7. 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.
W 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.
Y 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
| | | ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Quantitative and qualitative disclosures about market risk are contained within the section titled “Risk Management” of Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” | | | ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Our financial statements and the related notes, together with the Report of Independent Registered Public Accounting Firm thereon, are set forth beginning on page F-1 of this Form 10-K. | | | ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None. | | | ITEM 9A. | CONTROLS AND PROCEDURES |
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 quarter ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting. Management’s Annual Report On Internal Control Over Financial Reporting Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act. Our internal control over financial reporting is a process designed by, or under the supervision of, the Company’s CEO and CFO and effected by the Company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. As a result, even systems determined to be effective can provide only reasonable assurance regarding the preparation and presentation of financial statements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. In making this assessment, the Company’s management used criteria set forth by the Committee of Sponsoring Organizations of the Treadway ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Commission’s (“COSO”) Internal Control-Integrated Framework (2013).
Based on the Company’s management’s evaluation under the framework in Internal Control—Integrated Framework (2013), the Company’s management concluded that its internal control over financial reporting was effective as of December 31, 2017. The Company’s independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on the Company’s internal control over financial reporting, which is included herein. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Annaly Capital Management, Inc. and Subsidiaries
Opinion on Internal Control over Financial Reporting We have audited Annaly Capital Management, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO criteria”). In our opinion, Annaly Capital Management, Inc. and Subsidiaries’ (the “Company”) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated statements of financial condition of the Company as of December 31, 2017 and 2016, and the related consolidated statements of comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes, and our report dated February 15, 2018 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP
New York, NY February 15, 2018 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
| | | ITEM 9B. | OTHER INFORMATION |
None. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
PART III | | | ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by Item 10 as to our directors is incorporated herein by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2017. The information regarding our executive officers required by Item 10 appears in Part I of this Form 10-K. The information required by Item 10 as to our compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2017. We have adopted a Code of Business Conduct and Ethics within the meaning of Item 406(b) of Regulation S-K. This Code of Business Conduct and Ethics applies to our principal executive officer, principal financial officer and principal accounting officer. This Code of Business Conduct and Ethics is publicly available on our website at www.annaly.com. We intend to satisfy the disclosure requirements regarding amendments to, or waivers from, certain provisions of this Code of Business Conduct and Ethics by posting on our website. The information regarding certain matters pertaining to our corporate governance required by Item 407(c)(3), (d)(4) and (d)(5) of Regulation S-K is incorporated by reference to the Proxy Statement to be filed with the SEC within 120 days after December 31, 2017. | | | ITEM 11. | EXECUTIVE COMPENSATION |
The information required by Item 11 is incorporated herein by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2017. | | | ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Equity Compensation Plan Information
On May 27, 2010, at our 2010 Annual Meeting of Stockholders, our stockholders approved the 2010 Equity Incentive Plan. The 2010 Equity Incentive Plan authorizes the Compensation Committee of the Board to grant options, stock appreciation rights, dividend equivalent rights, or other share-based awards, including restricted shares up to an aggregate of 25,000,000 shares, subject to adjustments as provided in the 2010 Equity Incentive Plan. For a description of our 2010 Equity Incentive Plan, see note titled “Long-Term Stock Incentive Plan” located in Item 15. “Exhibits, Financial Statement Schedules.” We had previously adopted a long-term stock incentive plan for executive officers, key employees and nonemployee directors (the “Prior Incentive Plan”). Since the adoption of the 2010 Equity Incentive Plan, no further awards will be made under the Prior Incentive Plan, although existing awards will remain effective. All stock options issued under the 2010 Equity Incentive Plan and the Prior Incentive Plan (collectively the “Incentive Plans”) were issued at the current market price on the date of grant, subject to an immediate or four year vesting in four equal installments with a contractual term of 5 or 10 years. The grant date fair value is calculated using the Black-Scholes option valuation model. For additional information on our Incentive Plans, see Notes to Consolidated Financial Statements. The following table provides information as of December 31, 2017 concerning shares of our common stock authorized for issuance under the Incentive Plans. | | | | | | | | | | | | (a) | | (b) | | (c) | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under the Incentive Plans (excluding securities in column ‘a’) | Equity compensation plans approved by security holders | 794,125 |
| | $ | 15.30 |
| | 29,298,571 |
| Equity compensation plans not approved by security holders | — |
| | — |
| | — |
| Total | 794,125 |
| | $ | 15.30 |
| | 29,298,571 |
|
Information with respect to security ownership of certain beneficial owners and management is incorporated herein by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2017.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
| | | ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by Item 13 is incorporated herein by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2017. | | | ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by Item 14 is incorporated herein by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2017. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
PART IV | | | ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a) Documents filed as part of this report:
1. Financial Statements. See Index to Financial Statements below.
2. Schedules to Financial Statements. See Index to Financial Statements below
All financial statement schedules not included have been omitted because they are either inapplicable or the information required is provided in our Financial Statements and Notes thereto.
3. Exhibits. See Exhibit Index below.
EXHIBIT INDEX | | | Exhibit Number | Exhibit Description | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
| | | | Articles Supplementary reclassifying and designating (1) 7,412,500 authorized but unissued shares of the Registrant’s preferred stock, $0.01 par value per share, without designation as to series or class, as shares of undesignated Common Stock; (2) 650,000 authorized but unissued shares of the Registrant’s 7.625% Series C Cumulative Redeemable Preferred Stock, $0.01 par value per share, as shares of undesignated Common Stock; and (3) 3,400,000 authorized but unissued shares of the Registrant’s 6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, $0.01 par value per share, as shares of undesignated Common Stock. (incorporated by reference to Exhibit 3.15 of the Registrant’s Quarterly Report on Form 10-Q filed November 3, 2017). | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
| | | | | | | | | | | | | | | | | | | Exhibit 101.INS XBRL | Instance Document † | Exhibit 101.SCH XBRL | Taxonomy Extension Schema Document † | Exhibit 101.CAL XBRL | Taxonomy Extension Calculation Linkbase Document † | Exhibit 101.DEF XBRL | Additional Taxonomy Extension Definition Linkbase Document Created† | Exhibit 101.LAB XBRL | Taxonomy Extension Label Linkbase Document † | Exhibit 101.PRE XBRL | Taxonomy Extension Presentation Linkbase Document † |
* Exhibit Numbers 10.1, 10.3, 10.4 and 10.5 are management contracts or compensatory plans required to be filed as Exhibits to this Form 10-K.
† Submitted electronically herewith. Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Financial Condition at December 31, 2017 and December 31, 2016; (ii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016 and 2015; (iii) Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015; (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015; and (v) Notes to Consolidated Financial Statements. Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under these sections.
| | | ITEM 16. | FORM 10-K SUMMARY |
None. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
| | | | FINANCIAL STATEMENTS | | | | Page | Report of the Independent Registered Public Accounting Firm | | | | | Consolidated Financial Statements as of December 31, 2017 and 2016 and for the Years Ended December 31, 2017, 2016 and 2015 | | | | | | �� | | | | | | | | | | | | | | | | | | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Subsequent Events | | Note 26. | Summarized Quarterly Results (Unaudited) | |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Annaly Capital Management, Inc. and Subsidiaries
Opinion on the Financial Statements We have audited the accompanying consolidated statements of financial condition of Annaly Capital Management, Inc. and Subsidiaries (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes, collectively referred to as the “financial statements”. In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2017 and 2016, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 15, 2018 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Ernst & Young LLP
We have served as the Company’s auditor since 2012.
New York, NY February 15, 2018
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
| | | | | | | | | ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (dollars in thousands, except per share data) | | December 31, 2017 (1) | | December 31, 2016 | ASSETS | | | | Cash and cash equivalents (including cash pledged as collateral of $579,213 and $1,428,475, respectively) (2) | $ | 706,589 |
| | $ | 1,539,746 |
| Investments, at fair value: | |
| | |
| Agency mortgage-backed securities (including pledged assets of $83,628,132 and $70,796,872, respectively) | 90,551,763 |
| | 75,589,873 |
| Credit risk transfer securities (including pledged assets of $363,944 and $608,707, respectively) | 651,764 |
| | 724,722 |
| Non-Agency mortgage-backed securities (including pledged assets of $516,078 and $1,064,603, respectively) (3) | 1,097,294 |
| | 1,401,307 |
| Residential mortgage loans (including pledged assets of $1,169,496 and $314,746, respectively) (4) | 1,438,322 |
| | 342,289 |
| Mortgage servicing rights (including pledged assets of $5,224 and $5,464, respectively) | 580,860 |
| | 652,216 |
| Commercial real estate debt investments (including pledged assets of $3,070,993 and $4,321,739, respectively) (5) | 3,089,108 |
| | 4,321,739 |
| Commercial real estate debt and preferred equity, held for investment (including pledged assets of $520,329 and $506,997, respectively) | 1,029,327 |
| | 970,505 |
| Commercial loans held for sale, net | — |
| | 114,425 |
| Investments in commercial real estate | 485,953 |
| | 474,567 |
| Corporate debt (including pledged assets of $600,049 and $592,871, respectively) | 1,011,275 |
| | 773,274 |
| Interest rate swaps, at fair value | 30,272 |
| | 68,194 |
| Other derivatives, at fair value | 283,613 |
| | 171,266 |
| Receivable for investments sold | 1,232 |
| | 51,461 |
| Accrued interest and dividends receivable | 323,526 |
| | 270,400 |
| Other assets | 384,117 |
| | 333,063 |
| Goodwill | 71,815 |
| | 71,815 |
| Intangible assets, net | 23,220 |
| | 34,184 |
| Total assets | $ | 101,760,050 |
| | $ | 87,905,046 |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | |
| Liabilities: | |
| | |
| Repurchase agreements | $ | 77,696,343 |
| | $ | 65,215,810 |
| Other secured financing | 3,837,528 |
| | 3,884,708 |
| Securitized debt of consolidated VIEs (6) | 2,971,771 |
| | 3,655,802 |
| Participation sold | — |
| | 12,869 |
| Mortgages payable | 309,686 |
| | 311,636 |
| Interest rate swaps, at fair value | 569,129 |
| | 1,443,765 |
| Other derivatives, at fair value | 38,725 |
| | 86,437 |
| Dividends payable | 347,876 |
| | 305,674 |
| Payable for investments purchased | 656,581 |
| | 65,041 |
| Accrued interest payable | 253,068 |
| | 163,013 |
| Accounts payable and other liabilities | 207,770 |
| | 184,319 |
| Total liabilities | 86,888,477 |
| | 75,329,074 |
| Stockholders’ Equity: | |
| | |
| 7.875% Series A Cumulative Redeemable Preferred Stock: 0 and 7,412,500 authorized, issued and outstanding, respectively | — |
| | 177,088 |
| 7.625% Series C Cumulative Redeemable Preferred Stock: 12,000,000 and 12,650,000 authorized, 12,000,000 issued and outstanding, respectively | 290,514 |
| | 290,514 |
| 7.50% Series D Cumulative Redeemable Preferred Stock: 18,400,000 authorized, issued and outstanding | 445,457 |
| | 445,457 |
| 7.625% Series E Cumulative Redeemable Preferred Stock: 11,500,000 authorized, issued and outstanding | 287,500 |
| | 287,500 |
| 6.95% Series F Cumulative Redeemable Preferred Stock: 28,800,000 and 0 authorized, issued and outstanding, respectively | 696,910 |
| | — |
| Common stock, par value $0.01 per share, 1,929,300,000 and 1,945,437,500 authorized, 1,159,585,078 and 1,018,913,249 issued and outstanding, respectively | 11,596 |
| | 10,189 |
| Additional paid-in capital | 17,221,265 |
| | 15,579,342 |
| Accumulated other comprehensive income (loss) | (1,126,020 | ) | | (1,085,893 | ) | Accumulated deficit | (2,961,749 | ) | | (3,136,017 | ) | Total stockholders’ equity | 14,865,473 |
| | 12,568,180 |
| Noncontrolling interest | 6,100 |
| | 7,792 |
| Total equity | 14,871,573 |
| | 12,575,972 |
| Total liabilities and equity | $ | 101,760,050 |
| | $ | 87,905,046 |
|
| | (1) | As a result of a change to a clearing organization’s rulebook effective January 3, 2017, beginning with the first quarter 2017 and in subsequent periods the Company is presenting the fair value of centrally cleared interest rate swaps net of variation margin pledged under such transactions. The variation margin was previously reported under cash and cash equivalents and is currently reported as a reduction to interest rate swaps, at fair value. Balances reported prior to the effective date will not be adjusted. |
| | (2) | Includes cash of consolidated VIEs of $42.3 million and $23.2 million at December 31, 2017 and 2016, respectively. |
| | (3) | Includes $66.3 million and $88.6 million at December 31, 2017 and 2016, respectively, of non-Agency mortgage-backed securities in a consolidated VIE pledged as collateral and eliminated from the Company’s Consolidated Statements of Financial Condition. |
| | (4) | Includes securitized residential mortgage loans of a consolidated VIE carried at fair value of $478.8 million and $165.9 million at December 31, 2017 and 2016, respectively. |
| | (5) | Includes senior securitized commercial mortgage loans of consolidated VIEs carried at fair value of $2.8 billion and $3.9 billion at December 31, 2017 and 2016, respectively. |
| | (6) | Includes securitized debt of consolidated VIEs carried at fair value of $3.0 billion and $3.7 billion at December 31, 2017 and 2016, respectively. |
See notes to consolidated financial statements. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
| | | | | | | | | | | | | ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (dollars in thousands, except per share data) | | For The Years Ended December 31, | | 2017 | | 2016 | | 2015 | Net interest income: | | | | | | Interest income | $ | 2,493,126 |
| | $ | 2,210,951 |
| | $ | 2,170,697 |
| Interest expense | 1,008,354 |
| | 657,752 |
| | 471,596 |
| Net interest income | 1,484,772 |
| | 1,553,199 |
| | 1,699,101 |
| Realized and unrealized gains (losses): | |
| | |
| | |
| Realized gains (losses) on interest rate swaps (1) | (371,108 | ) | | (506,681 | ) | | (624,495 | ) | Realized gains (losses) on termination of interest rate swaps | (160,133 | ) | | (113,941 | ) | | (226,462 | ) | Unrealized gains (losses) on interest rate swaps | 512,918 |
| | 282,190 |
| | (124,869 | ) | Subtotal | (18,323 | ) | | (338,432 | ) | | (975,826 | ) | Net gains (losses) on disposal of investments | (3,938 | ) | | 33,089 |
| | 50,987 |
| Net gains (losses) on trading assets | 261,438 |
| | 230,580 |
| | 29,623 |
| Net unrealized gains (losses) on investments measured at fair value through earnings | (39,684 | ) | | 86,391 |
| | (103,169 | ) | Bargain purchase gain | — |
| | 72,576 |
| | — |
| Impairment of goodwill | — |
| | — |
| | (22,966 | ) | Subtotal | 217,816 |
| | 422,636 |
| | (45,525 | ) | Total realized and unrealized gains (losses) | 199,493 |
| | 84,204 |
| | (1,021,351 | ) | Other income (loss): | | | | | | Investment advisory income | — |
| | — |
| | 24,848 |
| Dividend income from affiliate | — |
| | — |
| | 8,636 |
| Other income (loss) | 115,857 |
| | 44,144 |
| | (47,201 | ) | Total other income (loss) | 115,857 |
| | 44,144 |
| | (13,717 | ) | General and administrative expenses: | |
| | |
| | |
| Compensation and management fee | 164,322 |
| | 151,599 |
| | 150,286 |
| Other general and administrative expenses | 59,802 |
| | 98,757 |
| | 49,954 |
| Total general and administrative expenses | 224,124 |
| | 250,356 |
| | 200,240 |
| Income (loss) before income taxes | 1,575,998 |
| | 1,431,191 |
| | 463,793 |
| Income taxes | 6,982 |
| | (1,595 | ) | | (1,954 | ) | Net income (loss) | 1,569,016 |
| | 1,432,786 |
| | 465,747 |
| Net income (loss) attributable to noncontrolling interest | (588 | ) | | (970 | ) | | (809 | ) | Net income (loss) attributable to Annaly | 1,569,604 |
| | 1,433,756 |
| | 466,556 |
| Dividends on preferred stock | 109,635 |
| | 82,260 |
| | 71,968 |
| Net income (loss) available (related) to common stockholders | $ | 1,459,969 |
| | $ | 1,351,496 |
| | $ | 394,588 |
| Net income (loss) per share available (related) to common stockholders: | | | |
| | |
| Basic | $ | 1.37 |
| | $ | 1.39 |
| | $ | 0.42 |
| Diluted | $ | 1.37 |
| | $ | 1.39 |
| | $ | 0.42 |
| Weighted average number of common shares outstanding: | |
| | |
| | |
| Basic | 1,065,923,652 |
| | 969,787,583 |
| | 947,062,099 |
| Diluted | 1,066,351,616 |
| | 970,102,353 |
| | 947,276,742 |
| Net income (loss) | $ | 1,569,016 |
| | $ | 1,432,786 |
| | $ | 465,747 |
| Other comprehensive income (loss): | |
| | |
| | |
| Unrealized gains (losses) on available-for-sale securities | (89,997 | ) | | (686,414 | ) | | (531,952 | ) | Reclassification adjustment for net (gains) losses included in net income (loss) | 49,870 |
| | (21,883 | ) | | (50,527 | ) | Other comprehensive income (loss) | $ | (40,127 | ) | | $ | (708,297 | ) | | $ | (582,479 | ) | Comprehensive income (loss) | 1,528,889 |
| | 724,489 |
| | (116,732 | ) | Comprehensive income (loss) attributable to noncontrolling interest | (588 | ) | | (970 | ) | | (809 | ) | Comprehensive income (loss) attributable to Annaly | 1,529,477 |
| | 725,459 |
| | (115,923 | ) | Dividends on preferred stock | 109,635 |
| | 82,260 |
| | 71,968 |
| Comprehensive income (loss) attributable to common stockholders | $ | 1,419,842 |
| | $ | 643,199 |
| | $ | (187,891 | ) |
| | (1) | Consists of interest expense on interest rate swaps. |
See notes to consolidated financial statements. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015 (dollars in thousands, except per share data) | | 7.875% Series A Cumulative Redeemable Preferred Stock | | 7.625% Series C Cumulative Redeemable Preferred Stock | | 7.50% Series D Cumulative Redeemable Preferred Stock | | 7.625% Series E Cumulative Redeemable Preferred Stock | | 6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock | | Common Stock Par Value | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total Stockholders’ Equity | | Noncontrolling Interest | | Total | BALANCE, December 31, 2014 | $ | 177,088 |
| | $ | 290,514 |
| | $ | 445,457 |
| | $ | — |
| | $ | — |
| | $ | 9,476 |
| | $ | 14,786,509 |
| | $ | 204,883 |
| | $ | (2,585,436 | ) | | $ | 13,328,491 |
| | $ | 5,290 |
| | $ | 13,333,781 |
| Net income (loss) attributable to Annaly | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 466,556 |
| | 466,556 |
| | — |
| | 466,556 |
| Net income (loss) attributable to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (809 | ) | | (809 | ) | Unrealized gains (losses) on available-for-sale securities | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (531,952 | ) | | — |
| | (531,952 | ) | | — |
| | (531,952 | ) | Reclassification adjustment for net (gains) losses included in net income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (50,527 | ) | | — |
| | (50,527 | ) | | — |
| | (50,527 | ) | Stock compensation expense | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,156 |
| | — |
| | — |
| | 1,156 |
| | — |
| | 1,156 |
| Net proceeds from direct purchase and dividend reinvestment | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 2,244 |
| | — |
| | — |
| | 2,246 |
| | — |
| | 2,246 |
| Buyback of common stock | — |
| | — |
| | — |
| | — |
| | — |
| | (119 | ) | | (114,141 | ) | | — |
| | — |
| | (114,260 | ) | | — |
| | (114,260 | ) | Equity contributions from (distributions to) noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,467 |
| | 5,467 |
| Preferred Series A dividends, declared $1.969 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (14,593 | ) | | (14,593 | ) | | — |
| | (14,593 | ) | Preferred Series C dividends, declared $1.906 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (22,875 | ) | | (22,875 | ) | | — |
| | (22,875 | ) | Preferred Series D dividends, declared $1.875 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (34,500 | ) | | (34,500 | ) | | — |
| | (34,500 | ) | Common dividends declared, $1.20 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,133,768 | ) | | (1,133,768 | ) | | — |
| | (1,133,768 | ) | BALANCE, December 31, 2015 | $ | 177,088 |
| | $ | 290,514 |
| | $ | 445,457 |
| | $ | — |
| | $ | — |
| | $ | 9,359 |
| | $ | 14,675,768 |
| | $ | (377,596 | ) | | $ | (3,324,616 | ) | | $ | 11,895,974 |
| | $ | 9,948 |
| | $ | 11,905,922 |
| Net income (loss) attributable to Annaly | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,433,756 |
| | 1,433,756 |
| | — |
| | 1,433,756 |
| Net income (loss) attributable to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (970 | ) | | (970 | ) | Unrealized gains (losses) on available-for-sale securities | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (686,414 | ) | | — |
| | (686,414 | ) | | — |
| | (686,414 | ) | Reclassification adjustment for net (gains) losses included in net income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (21,883 | ) | | — |
| | (21,883 | ) | | — |
| | (21,883 | ) | Stock compensation expense | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7,047 |
| | — |
| | — |
| | 7,047 |
| | — |
| | 7,047 |
| Net proceeds from direct purchase and dividend reinvestment | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 2,360 |
| | — |
| | — |
| | 2,362 |
| | — |
| | 2,362 |
| Buyback of common stock | — |
| | — |
| | — |
| | — |
| | — |
| | (111 | ) | | (102,601 | ) | | — |
| | — |
| | (102,712 | ) | | — |
| | (102,712 | ) | Acquisition of subsidiary | — |
| | — |
| | — |
| | 287,500 |
| | — |
| | 939 |
| | 996,768 |
| | — |
| | — |
| | 1,285,207 |
| | — |
| | 1,285,207 |
| Equity contributions from (distributions to) noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,186 | ) | | (1,186 | ) | Preferred Series A dividends, declared $1.969 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (14,593 | ) | | (14,593 | ) | | — |
| | (14,593 | ) | Preferred Series C dividends, declared $1.906 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (22,875 | ) | | (22,875 | ) | | — |
| | (22,875 | ) | Preferred Series D dividends, declared $1.875 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (34,500 | ) | | (34,500 | ) | | — |
| | (34,500 | ) | Preferred Series E dividends, declared $0.953 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (10,292 | ) | | (10,292 | ) | | — |
| | (10,292 | ) | Common dividends declared, $1.20 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,162,897 | ) | | (1,162,897 | ) | | — |
| | (1,162,897 | ) | BALANCE, December 31, 2016 | $ | 177,088 |
| | $ | 290,514 |
| | $ | 445,457 |
| | $ | 287,500 |
| | $ | — |
| | $ | 10,189 |
| | $ | 15,579,342 |
| | $ | (1,085,893 | ) | | $ | (3,136,017 | ) | | $ | 12,568,180 |
| | $ | 7,792 |
| | $ | 12,575,972 |
| Net income (loss) attributable to Annaly | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,569,604 |
| | 1,569,604 |
| | — |
| | 1,569,604 |
| Net income (loss) attributable to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (588 | ) | | (588 | ) | Unrealized gains (losses) on available-for-sale securities | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (89,997 | ) | | — |
| | (89,997 | ) | | — |
| | (89,997 | ) | Reclassification adjustment for net (gains) losses included in net income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 49,870 |
| | — |
| | 49,870 |
| | — |
| | 49,870 |
| Stock compensation expense | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,406 |
| | — |
| | — |
| | 1,406 |
| | — |
| | 1,406 |
| Redemption of preferred stock | (177,088 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (8,224 | ) | | — |
| | — |
| | (185,312 | ) | | — |
| | (185,312 | ) | Net proceeds from direct purchase and dividend reinvestment | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 2,540 |
| | — |
| | — |
| | 2,542 |
| | — |
| | 2,542 |
| Net proceeds from issuance of common stock | — |
| | — |
| | — |
| | — |
| | — |
| | 1,405 |
| | 1,646,201 |
| | — |
| | — |
| | 1,647,606 |
| | — |
| | 1,647,606 |
| Net proceeds from issuance of preferred stock | — |
| | — |
| | — |
| | — |
| | 696,910 |
| | — |
| | — |
| | — |
| | — |
| | 696,910 |
| | — |
| | 696,910 |
| Equity contributions from (distributions to) noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,104 | ) | | (1,104 | ) | Preferred Series A dividends, declared $1.285 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (9,527 | ) | | (9,527 | ) | | — |
| | (9,527 | ) | Preferred Series C dividends, declared $1.906 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (22,875 | ) | | (22,875 | ) | | — |
| | (22,875 | ) | Preferred Series D dividends, declared $1.875 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (34,500 | ) | | (34,500 | ) | | — |
| | (34,500 | ) | Preferred Series E dividends, declared $1.906 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (21,922 | ) | | (21,922 | ) | | — |
| | (21,922 | ) | Preferred Series F dividends, declared $0.724 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (20,811 | ) | | (20,811 | ) | | ��� |
| | (20,811 | ) | Common dividends declared, $1.20 per share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,285,701 | ) | | (1,285,701 | ) | | — |
| | (1,285,701 | ) | BALANCE, December 31, 2017 | $ | — |
| | $ | 290,514 |
| | $ | 445,457 |
| | $ | 287,500 |
| | $ | 696,910 |
| | $ | 11,596 |
| | $ | 17,221,265 |
| | $ | (1,126,020 | ) | | $ | (2,961,749 | ) | | $ | 14,865,473 |
| | $ | 6,100 |
| | $ | 14,871,573 |
|
See notes to consolidated financial statements. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
| | | | | | | | | | | | | ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
| | For The Years Ended December 31, | | 2017 | | 2016 | | 2015 | Cash flows from operating activities: | | | | | | Net income (loss) | $ | 1,569,016 |
| | $ | 1,432,786 |
| | $ | 465,747 |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | Amortization of Residential Investment Securities premiums and discounts, net | 879,305 |
| | 814,575 |
| | 793,657 |
| Amortization of residential mortgage loans premiums and discounts, net | 1,523 |
| | 942 |
| | — |
| Amortization of securitized debt premiums and discounts, net | (5,604 | ) | | 24 |
| | — |
| Amortization of commercial real estate investment premiums and discounts, net | (3,865 | ) | | (2,978 | ) | | (1,321 | ) | Amortization of intangibles | 9,214 |
| | 12,893 |
| | 7,309 |
| Amortization of deferred financing costs | 2,008 |
| | 1,609 |
| | 5,419 |
| Amortization of net origination fees and costs, net | (4,617 | ) | | (4,967 | ) | | (4,263 | ) | Amortization of contingent beneficial conversion feature and equity component of Convertible Senior Notes | — |
| | — |
| | 12,246 |
| Depreciation expense | 17,336 |
| | 21,868 |
| | 12,661 |
| Bargain purchase gain | — |
| | (72,576 | ) | | — |
| Net (gains) losses on sale of commercial real estate | (5,050 | ) | | (2,865 | ) | | — |
| Net (gains) losses on sales of commercial loans held for sale | 3 |
| | 74 |
| | (120 | ) | Net (gains) losses on sales of Residential Investment Securities | 6,352 |
| | (31,039 | ) | | (63,317 | ) | Net (gains) losses on sales of residential mortgage loans | 4,704 |
| | 921 |
| | — |
| Net (gain) on sale of subsidiary | (904 | ) | | — |
| | — |
| Net (gains) losses on sales of MSRs | (3 | ) | | — |
| | — |
| Net (gains) losses on sales of corporate debt | — |
| | (180 | ) | | — |
| Net (gains) losses on sales of other investments | (1,164 | ) | | — |
| | — |
| Net (gain) loss on sale of investment in affiliate | — |
| | — |
| | 12,450 |
| Stock compensation expense | 1,406 |
| | 7,047 |
| | 1,156 |
| Impairment of goodwill | — |
| | — |
| | 22,966 |
| Unrealized (gains) losses on interest rate swaps | (512,918 | ) | | (282,190 | ) | | 124,869 |
| Net unrealized (gains) losses on investments measured at fair value through earnings | 39,684 |
| | (86,391 | ) | | 103,169 |
| Equity in net income from unconsolidated joint venture | 1,594 |
| | 4,592 |
| | 2,782 |
| Distributions of cumulative earnings from unconsolidated joint venture | 1,270 |
| | — |
| | 1,384 |
| Net (gains) losses on trading assets | (261,438 | ) | | (230,580 | ) | | (29,623 | ) | Originations of loans held for sale, net | — |
| | — |
| | (1,231,400 | ) | Proceeds from sale of commercial loans held for sale | 114,422 |
| | 164,101 |
| | 458,270 |
| Payments on purchases of residential mortgage loans | (289,979 | ) | | (99,590 | ) | | — |
| Proceeds from repayments from residential mortgage loans | 276,258 |
| | 134,959 |
| | — |
| Payments on purchases of corporate debt held for sale | (19,494 | ) | | — |
| | — |
| Proceeds from sales of corporate debt held for sale | 19,605 |
| | — |
| | — |
| Proceeds from repurchase agreements of RCap | 3,395,222,385 |
| | 2,270,520,000 |
| | 2,029,822,000 |
| Payments on repurchase agreements of RCap | (3,389,922,385 | ) | | (2,265,245,000 | ) | | (2,034,322,000 | ) | Proceeds from reverse repurchase agreements | 67,675,100 |
| | 60,990,000 |
| | 52,950,000 |
| Payments on reverse repurchase agreements | (67,675,100 | ) | | (60,990,000 | ) | | (52,850,000 | ) | Net payments on derivatives | (233,915 | ) | | (168,812 | ) | | 55,214 |
| Net change in: | |
| | |
| | |
| Due to / from brokers | (16 | ) | | (12 | ) | | — |
| Other assets | (58,715 | ) | | (110,417 | ) | | (24,339 | ) | Accrued interest and dividends receivable | (52,202 | ) | | 27,712 |
| | 47,893 |
| Receivable for investment advisory income | — |
| | — |
| | 10,402 |
| Accrued interest payable | 89,777 |
| | 6,337 |
| | (28,658 | ) | Accounts payable and other liabilities | 48,646 |
| | 43,020 |
| | 2,028 |
| Net cash provided by (used in) operating activities | 6,932,239 |
| | 6,855,863 |
| | (3,643,419 | ) | Cash flows from investing activities: | |
| | |
| | |
| Payments on purchases of Residential Investment Securities | (40,287,765 | ) | | (25,529,322 | ) | | (19,703,098 | ) | Proceeds from sales of Residential Investment Securities | 13,402,428 |
| | 12,488,907 |
| | 24,801,165 |
| Principal payments on Residential Investment Securities | 12,016,190 |
| | 12,470,168 |
| | 9,926,030 |
| Purchases of MSRs | (11,493 | ) | | (174,167 | ) | | — |
| Sales of MSRs | 33 |
| | — |
| | — |
| Proceeds from sale of investment in affiliate | — |
| | — |
| | 126,402 |
| Purchases of corporate debt | (693,095 | ) | | (399,713 | ) | | (397,639 | ) | Principal payments on corporate debt | 462,622 |
| | 117,282 |
| | 76,568 |
| Purchases of commercial real estate debt investments | (56,650 | ) | | (151,862 | ) | | (411,511 | ) | Sales of commercial real estate debt investments | — |
| | — |
| | 41,016 |
| Purchases of securitized loans at fair value | — |
| | (1,489,268 | ) | | (2,574,353 | ) | Originations of commercial real estate investments, net | (403,441 | ) | | (271,152 | ) | | (4,050 | ) | Proceeds from sale of commercial real estate investments | 11,960 |
| | 39,530 |
| | 227,450 |
| Principal payments on commercial real estate debt investments | 226,592 |
| | 80,441 |
| | 10,820 |
| Principal payments on securitized loans at fair value | 1,094,088 |
| | 182,440 |
| | 78 |
| Principal payments on commercial real estate investments | 349,220 |
| | 654,117 |
| | 444,998 |
| Purchases of investments in real estate | (1,265 | ) | | (2,918 | ) | | (274,856 | ) | Investments in unconsolidated joint ventures | (43,596 | ) | | (3,645 | ) | | (69,902 | ) | Distributions in excess of cumulative earnings from unconsolidated joint ventures | 7,998 |
| | 4,620 |
| | — |
| Purchases of residential mortgage loans held for investment | (928,512 | ) | | (65,623 | ) | | — |
| Principal payments on residential mortgage loans held for investment | 185,391 |
| | 18,268 |
| | — |
| Purchases of equity securities | (2,104 | ) | | (88,062 | ) | | (102,198 | ) | Proceeds from sales of equity securities | — |
| | 16,112 |
| | 28,395 |
| Cash acquired in business combinations | — |
| | 41,698 |
| | — |
| Net proceeds from disposal of subsidiary | 5,451 |
| | — |
| | — |
| Net cash provided by (used in) investing activities | (14,665,948 | ) | | (2,062,149 | ) | | 12,145,315 |
| Cash flows from financing activities: | |
| | |
| | |
| Proceeds from repurchase agreements | 211,420,622 |
| | 179,641,180 |
| | 202,273,148 |
| Principal payments on repurchase agreements | (204,240,089 | ) | | (186,353,987 | ) | | (212,904,214 | ) | Payments on maturity of convertible senior notes | — |
| | — |
| | (857,541 | ) | Proceeds from other secured financing | 272,734 |
| | 2,438,641 |
| | 2,554,913 |
| Payments on other secured financing | (319,945 | ) | | (438,169 | ) | | (709,865 | ) | Proceeds from issuances of securitized debt | — |
| | 1,381,640 |
| | 2,382,810 |
| Principal repayments on securitized debt | (1,022,994 | ) | | (343,071 | ) | | (86,648 | ) | Principal repayments on securitized loans | — |
| | — |
| | 201 |
| Payments of deferred financing cost | (2,054 | ) | | (3,076 | ) | | (2,608 | ) | Net proceeds from issuances of preferred stock | 696,910 |
| | — |
| | — |
| Redemptions of preferred stock | (185,312 | ) | | — |
| | — |
| Net proceeds from direct purchases and dividend reinvestments | 2,542 |
| | 2,362 |
| | 2,246 |
| Net proceeds from issuances of common stock | 1,647,606 |
| | — |
| | — |
| Proceeds from mortgages payable | — |
| | — |
| | 192,375 |
| Principal payments on participation sold | (12,827 | ) | | (336 | ) | | (296 | ) | Principal payments on mortgages payable | (2,365 | ) | | (23,581 | ) | | (360 | ) | Contributions from noncontrolling interests | 31 |
| | 14 |
| | 6,116 |
| Distributions to noncontrolling interests | (1,135 | ) | | (1,200 | ) | | (649 | ) | Net payments on share repurchases | — |
| | (102,712 | ) | | (114,260 | ) | Dividends paid | (1,353,172 | ) | | (1,220,931 | ) | | (1,209,250 | ) | Net cash provided by (used in) financing activities | 6,900,552 |
| | (5,023,226 | ) | | (8,473,882 | ) | Net (decrease) increase in cash and cash equivalents | (833,157 | ) | | (229,512 | ) | | 28,014 |
| Cash and cash equivalents, beginning of period | 1,539,746 |
| | 1,769,258 |
| | 1,741,244 |
| Cash and cash equivalents, end of period | $ | 706,589 |
| | $ | 1,539,746 |
| | $ | 1,769,258 |
| Supplemental disclosure of cash flow information: | |
| | |
| | |
| Interest received | $ | 3,447,308 |
| | $ | 2,968,161 |
| | $ | 2,965,887 |
| Dividends received | $ | 5,238 |
| | $ | 2,520 |
| | $ | 12,684 |
| Fees received | $ | — |
| | $ | 4,266 |
| | $ | — |
| Investment advisory income received | $ | — |
| | $ | — |
| | $ | 35,250 |
| Interest paid (excluding interest paid on interest rate swaps) | $ | 987,958 |
| | $ | 624,784 |
| | $ | 427,632 |
| Net interest paid on interest rate swaps | $ | 369,660 |
| | $ | 536,674 |
| | $ | 612,111 |
| Taxes paid | $ | (1,502 | ) | | $ | 934 |
| | $ | 1,929 |
| Noncash investing activities: | |
| | |
| | |
| Receivable for investments sold | $ | 1,232 |
| | $ | 51,461 |
| | $ | 121,625 |
| Payable for investments purchased | $ | 656,581 |
| | $ | 65,041 |
| | $ | 1,530,631 |
| Net change in unrealized gains (losses) on available-for-sale securities, net of reclassification adjustment | $ | (40,127 | ) | | $ | (708,297 | ) | | $ | (582,479 | ) | Reclassification of loans held for sale to investments in commercial real estate | $ | — |
| | $ | — |
| | $ | 18,500 |
| Residential mortgage loans acquired through consolidation of VIEs | $ | 349,200 |
| | $ | — |
| | $ | — |
| Noncash financing activities: | |
| | |
| | |
| Dividends declared, not yet paid | $ | 347,876 |
| | $ | 305,674 |
| | $ | 280,779 |
| Securitized debt assumed through consolidation of VIEs | $ | 315,111 |
| | $ | — |
| | $ | — |
|
See notes to consolidated financial statements.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 and 2015
| | | 1. | DESCRIPTION OF BUSINESS |
Annaly Capital Management, Inc. (the “Company” or “Annaly”) is a Maryland corporation that commenced operations on February 18, 1997. The Company is a leading diversified capital manager that invests in and finances residential and commercial assets. The Company owns a portfolio of real estate related investments, including mortgage pass-through certificates, collateralized mortgage obligations, credit risk transfer (“CRT”) securities, other securities representing interests in or obligations backed by pools of mortgage loans, residential mortgage loans, mortgage servicing rights (“MSRs”), commercial real estate assets and corporate debt. The Company’s principal business objective is to generate net income for distribution to its stockholders and to preserve capital through prudent selection of investments and continuous management of its portfolio. The Company is externally managed by Annaly Management Company LLC (the “Manager”).
The Company’s investment groups are primarily comprised of the following:
The Annaly Agency Group invests in Agency mortgage-backed securities collateralized by residential mortgages which are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. The Annaly Residential Credit Group invests primarily in non-Agency residential mortgage assets within securitized product and residential mortgage loan markets. The Annaly Commercial Real Estate Group (“ACREG”) originates and invests in commercial mortgage loans, securities and other commercial real estate debt and equity investments. The Annaly Middle Market Lending Group (“AMML”) provides financing to private equity-backed middle-market businesses across the capital structure.
The Company has elected to be taxed as a Real Estate Investment Trust (“REIT”) as defined under the Internal Revenue Code of 1986, as amended, and regulations promulgated thereunder (the “Code”). The accompanying consolidated financial statements and related notes of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).
| | | 3. | SIGNIFICANT ACCOUNTING POLICIES |
Principles of Consolidation – The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and consolidated variable interest entities. All intercompany balances and transactions have been eliminated in consolidation. The Company reclassified previously presented financial information so that amounts previously presented conform to the current presentation.
Variable Interest Entities - The Company has evaluated all of its investments in legal entities in order to determine if they are variable interests in Variable Interest Entities (“VIEs”). A VIE is defined as 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. A variable interest is an investment or other interest that will absorb portions of a VIE’s expected losses or receive portions of the entity’s expected residual returns. A VIE is required to be consolidated by its primary beneficiary, which is defined as the party that (i) has the power to control the activities that most significantly impact the VIE’s economic performance and (ii) has the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
To assess whether the Company has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, the Company considers all facts and circumstances, including the Company’s role in establishing the VIE and the Company’s ongoing rights and responsibilities. This assessment includes first, identifying the activities that most significantly impact the VIE’s economic performance; and second, identifying which party, if any, has power over those activities. In general, the parties that make the most significant decisions affecting the VIE or have the right to unilaterally remove those decision makers are deemed to have the power to direct the activities of a VIE.
To assess whether the Company has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, the Company applies significant judgment and considers all of its economic interests, including debt and equity investments and other arrangements deemed to be variable interests, both explicit and implicit, in the VIE. This assessment requires that the Company apply judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE. Factors considered in assessing significance include: the design of the VIE, including its capitalization structure; subordination of interests; payment ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
priority; relative share of interests held across various classes within the VIE’s capital structure; and the reasons why the interests are held by the Company.
The Company performs ongoing reassessments of whether changes in the facts and circumstances regarding the Company’s involvement with a VIE causes the Company’s consolidation conclusion regarding the VIE to change.
Cash and Cash Equivalents – Cash and cash equivalents include cash on hand, cash held in money market funds on an overnight basis and cash pledged as collateral with counterparties. Cash deposited with clearing organizations are carried at cost, which approximates fair value. The Company also maintains collateral in the form of cash on margin with counterparties to its interest rate swaps and other derivatives. As a result of a change to a clearing organization’s rulebook effective January 3, 2017, beginning with the first quarter of 2017 and in subsequent periods, the Company is presenting the fair value of centrally cleared interest rate swaps net of variation margin pledged under such transactions. The variation margin was previously reported under cash and cash equivalents. At December 31, 2017, $218.3 million of variation margin was reported as a reduction to interest rate swaps, at fair value. RCap Securities, Inc., the Company’s wholly-owned broker-dealer (“RCap”) is a member of various clearing organizations with which it maintains cash required to conduct its day-to-day clearance activities. Cash and securities deposited with clearing organizations and collateral held in the form of cash on margin with counterparties to the Company’s interest rate swaps and other derivatives totaled approximately $579.2 million and $1.4 billion at December 31, 2017 and December 31, 2016.
Fair Value Measurements – The Company reports various financial instruments at fair value. A complete discussion of the methodology utilized by the Company to estimate the fair value of certain financial instruments is included in these Notes to Consolidated Financial Statements.
Revenue Recognition– The revenue recognition policy by asset class is discussed below.
Agency Mortgage-Backed Securities, Agency Debentures, Non-Agency Mortgage-Backed Securities and Credit Risk Transfer Securities – The Company invests in mortgage pass-through certificates, collateralized mortgage obligations and other mortgage-backed securities representing interests in or obligations backed by pools of residential or multifamily mortgage loans and certificates guaranteed by the Government National Mortgage Association (“Ginnie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”) or the Federal National Mortgage Association (“Fannie Mae”) (collectively, “Agency mortgage-backed securities”). These Agency mortgage-backed securities may include forward contracts for Agency mortgage-backed securities purchases or sales of a generic pool, on a to-be-announced basis (“TBA securities”). The Company also invests in Agency debentures issued by the Federal Home Loan Banks, Freddie Mac and Fannie Mae, as well as CRT securities. CRT securities are risk sharing instruments issued by Fannie Mae and Freddie Mac, and similarly structured transactions arranged by third party market participants. CRT securities are designed to synthetically transfer mortgage credit risk from Fannie Mae and Freddie Mac to private investors. The Company also invests in non-Agency mortgage-backed securities such as those issued in non-performing loan (“NPL”) and re-performing loan (“RPL”) securitizations.
Agency mortgage-backed securities, Agency debentures, non-Agency mortgage-backed securities and CRT securities are referred to herein as “Residential Investment Securities.” Although the Company generally intends to hold most of its Residential Investment Securities until maturity, it may, from time to time, sell any of its Residential Investment Securities as part of the overall management of its portfolio. Residential Investment Securities classified as available-for-sale are reported at fair value with unrealized gains and losses reported as a component of Other comprehensive income (loss) unless the Company has elected the fair value option, where the unrealized gains and losses on these financial instruments are recorded through earnings (e.g., interest-only securities). The fair value of Residential Investment Securities classified as available-for-sale are estimated by management and are compared to independent sources for reasonableness. Residential Investment Securities transactions are recorded on trade date, including TBA securities that meet the regular-way securities scope exception from derivative accounting. Gains and losses on sales of Residential Investment Securities are recorded on trade date based on the specific identification method.
The Company elected the fair value option for interest-only mortgage-backed securities, non-Agency mortgage-backed securities, reverse mortgages and CRT securities as this election simplifies the accounting. Interest-only securities and inverse interest-only securities are collectively referred to as “interest-only securities.” These interest-only mortgage-backed securities represent the Company’s right to receive a specified proportion of the contractual interest flows of specific mortgage-backed securities. Interest-only mortgage-backed securities, non-Agency mortgage-backed securities, reverse mortgages and CRT securities are measured at fair value with changes in fair value recorded as Net unrealized gains (losses) on investments measured at fair value through earnings in the Company’s Consolidated Statements of Comprehensive Income (Loss). The interest-only securities are included in Agency mortgage-backed securities at fair value on the accompanying Consolidated Statements of Financial Condition. The Company recognizes coupon income, which is a component of interest income, based upon the outstanding principal amounts of the Residential Investment Securities and their contractual terms. In addition, the Company amortizes or accretes premiums or discounts into interest ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
income for its Agency mortgage-backed securities (other than debentures and multifamily securities), taking into account estimates of future principal prepayments in the calculation of the effective yield. The Company recalculates 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, which results in a cumulative premium amortization adjustment in each period. 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. Premiums or discounts associated with the purchase of Agency interest-only securities, reverse mortgages and residential credit securities are amortized or accreted into interest income based upon current expected future cash flows with any adjustment to yield made on a prospective basis. Interest income for Agency debentures and multifamily securities is recognized by applying the interest method using contractual cash flows without estimating prepayments. The table below summarizes the interest income recognition methodology for Residential Investment Securities: | | | | 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 | Collateralized Mortgage Obligation (“CMO”) (1) | Effective yield (3) | Debentures (1) | Contractual cash flows | 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 investments 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. Residential Mortgage Loans – The Company’s residential mortgage loans are primarily comprised of new origination, performing adjustable-rate and fixed-rate whole loans acquired in connection with the Company’s acquisition of Hatteras Financial Corp. (“Hatteras” and such acquisition, the “Hatteras Acquisition”) and through subsequent purchases. Additionally, in connection with the Hatteras Acquisition, the Company consolidates a collateralized financing entity that securitized prime adjustable-rate jumbo residential mortgage loans. The Company also consolidates securitization trusts in which it had purchased subordinated securities. Please refer to the “Variable Interest Entities” Note for further information related to the Company’s consolidated Residential Mortgage Loan Trusts.
The Company made elections to account for the investments in residential mortgage loans held in its portfolio and in the securitization trusts at fair value as these elections simplify the accounting. Residential mortgage loans are recognized at fair value on the accompanying Consolidated Statements of Financial Condition. Changes in the estimated fair value are presented in Net unrealized gains (losses) on investments measured at fair value through earnings in the Consolidated Statements of Comprehensive Income (Loss).
Premiums and discounts associated with the purchase of residential mortgage loans and with those held in the securitization trusts are primarily amortized or accreted into interest income over their estimated remaining lives using the effective interest rates inherent in the estimated cash flows from the mortgage loans. Amortization of premiums and accretion of discounts are presented in Interest income in the Consolidated Statements of Comprehensive Income (Loss).
There was no real estate acquired in settlement of residential mortgage loans at December 31, 2017 or December 31, 2016 other than that held by securitization trusts that the Company was required to consolidate in the fourth quarter of 2017. The Company would be considered to have received physical possession of residential real estate property collateralizing a residential mortgage loan, so that the loan is derecognized and the real estate property would be recognized, if either (i) the Company obtains legal title to the residential real estate property upon completion of a foreclosure or (ii) the borrower conveys all interest in the residential real estate property to the Company to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement.
MSRs – MSRs represent the rights associated with servicing contracts obtained in connection with the Hatteras Acquisition or through the subsequent purchase of such rights from third parties with the intention of holding them as ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
investments. The Company and its subsidiaries do not originate or directly service mortgage loans. Rather, these activities are carried out by duly licensed subservicers who perform substantially all servicing functions for the loans underlying the MSRs. The Company elected to account for all of its investments in MSRs at fair value. As such, they are recognized at fair value on the accompanying Consolidated Statements of Financial Condition with changes in the estimated fair value presented as a component of Net unrealized gains (losses) on investments measured at fair value through earnings in the Consolidated Statements of Comprehensive Income (Loss). Servicing income, net of servicing expenses, is reported in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).
Equity Securities– The Company may invest in equity securities that are classified as available-for-sale or trading. Equity securities classified as available-for-sale are reported at fair value, based on market quotes, with unrealized gains and losses reported as a component of Other comprehensive income (loss). Equity securities classified as trading are reported at fair value, based on market quotes, with unrealized gains and losses reported in the Consolidated Statements of Comprehensive Income (Loss) as Net gains (losses) on trading assets. Dividends are recorded in earnings based on the declaration date. Equity securities that do not have readily determinable fair values, do not result in consolidation of the investee and are not required to be accounted for under the equity method are carried at cost. Dividends from cost method equity securities are recognized as income when received to the extent they are distributed from net accumulated earnings.
Derivative Instruments – The Company may use a variety of derivative instruments to economically hedge some of its exposure to market risks, including interest rate and prepayment risk. These instruments include, but are not limited to, interest rate swaps, options to enter into interest rate swaps (“swaptions”), TBA securities without intent to accept delivery (“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. Derivatives are accounted for in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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). None of the Company’s derivative transactions have been designated as hedging instruments for accounting purposes.
Some derivative agreements contain provisions that allow for netting or setting off by counterparty; however, the Company elected to present related assets and liabilities on a gross basis in the Consolidated Statements of Financial Condition.
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. 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 are fair valued using internal pricing models and compared to the DCO’s market values. 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 the swap to compensate for the out of the market nature of such interest rate swap. MAC interest rate swaps are also centrally cleared and fair valued using internal pricing models and compared to the DCO’s market 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. They are not centrally cleared. The premium paid or received for swaptions is reported as an asset or liability in the Consolidated Statement of Financial Condition. The difference between the premium and the fair value of the swaption is reported in Net gains (losses) on trading assets in the Consolidated Statements of Comprehensive Income (Loss). 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 or 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 is estimated using internal pricing models and compared to the counterparty market value. 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 with gains and losses recorded in Net gains (losses) on trading assets in the Consolidated Statements of Comprehensive Income (Loss).
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 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
fair value using internal pricing models and compared to the counterparty market value at the valuation date with gains and losses recorded in Net gains (losses) on trading assets in the Consolidated Statements of Comprehensive Income (Loss). 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 with gains and losses recorded in Net gains (losses) on trading assets in the Consolidated Statements of Comprehensive Income (Loss). 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. Gains and losses are recorded in Net gains (losses) on trading assets in the Consolidated Statements of Comprehensive Income (Loss). Goodwill and Intangible Assets – The Company’s acquisitions are accounted for using the acquisition method. 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 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 and at interim periods 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 utilizes a two-step approach, whereby the Company compares the carrying value of each identified reporting unit to its fair value. If the carrying value of the reporting unit is greater than its fair value, the second step is performed, where the implied fair value of goodwill is compared to its carrying value. The Company recognizes an impairment charge for the amount by which the carrying amount of goodwill exceeds its fair value. An impairment of the goodwill associated with the Company’s acquisition of Fixed Income Discount Advisory Company (“FIDAC”) was recorded in the year ended December 31, 2015.
Finite life intangible assets are amortized over their expected useful lives.
Repurchase Agreements – The Company finances the acquisition of a significant portion of its assets with repurchase agreements. At the inception of each transaction, the Company assesses each of the specified criteria in ASC 860, Transfers and Servicing, and has determined that each of the financing agreements meet the specified criteria in this guidance.
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 in the Consolidated Statements of Cash Flows. The Company reports cash flows on reverse repurchase and repurchase agreements entered into by RCap as operating activities in the Consolidated Statements of Cash Flows.
Convertible Senior Notes– The Company recorded the 4% Convertible Senior Notes and 5% Convertible Senior Notes (collectively, the “Convertible Senior Notes”) at their contractual amounts, adjusted by the effects of a beneficial conversion feature and a contingent beneficial conversion feature (collectively, the “Conversion Features”). The Conversion Features’ intrinsic value is included in “Additional paid-in capital” on the Company’s Consolidated Statements of Financial Condition and reduces the recorded liability amount associated with the Convertible Senior Notes. A Conversion Feature may be recognized as a result of adjustments to the conversion price for dividends declared to common stockholders. The 4% and 5% Convertible Senior Notes matured in February 2015 and May 2015, respectively. Stock Based Compensation – The Company is required to measure and recognize in the consolidated financial statements the compensation cost relating to share-based payment transactions. The Company recognizes compensation expense on a straight-line basis over the requisite service period for the entire award.
Income Taxes – The Company has elected to be taxed as a REIT and intends to comply with the provisions of the Code, with respect thereto. Accordingly, the Company will not be subject to federal income tax to the extent of its distributions to stockholders and as long as certain asset, income and stock ownership tests are met. The Company and certain of its direct and indirect subsidiaries, including RCap and certain subsidiaries of ACREG and Hatteras, have made separate joint elections to treat these subsidiaries as taxable REIT subsidiaries (“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. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
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 necessary at December 31, 2017 and 2016.
Use of Estimates– The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Commercial Real Estate Investments
Commercial Real Estate Debt Investments – The Company’s commercial real estate debt investments are comprised of commercial mortgage backed securities and loans held by consolidated collateralized financing entities. Commercial mortgage backed securities are classified as available-for-sale and reported at fair value with unrealized gains and losses reported as a component of Other comprehensive income (loss), except for conduit commercial mortgage-backed securities for which the Company has elected to fair value through earnings to simplify the accounting. Management evaluates commercial mortgage backed securities, excluding conduit commercial mortgage-backed securities, for other-than-temporary impairment at least quarterly. See the “Commercial Real Estate Investments” Note for additional information regarding the consolidated collateralized financing entities.
Commercial Real Estate Loans and Preferred Equity Interests (collectively referred to as “CRE Debt and Preferred Equity Investments”)– The Company'sCompany’s commercial real estate loans are comprised of fixed-rate and adjustable-rate loans. Commercial real estateThe Company designates loans are designated as held for investment if it has the intent and are carried at their outstanding principal balance, net of unamortized origination fees and costs, premiumsability to hold the loans until maturity or discounts, less a reserve for estimated losses if necessary.payoff. The difference between the principal amount of a loan and proceeds at acquisition is recorded as either a discount or premium. Commercial real estate loans that are designated as held for investment and are originated or purchased by the Company are carried at their outstanding principal balance, net of unamortized origination fees and costs, premiums or discounts, less an allowance for losses if necessary. Origination fees and costs, premiums andor discounts are amortized or accreted into interest income over the estimated life of the loan.
Preferred Equity Interests HeldIf the Company intends to sell or securitize the loans and the securitization vehicle is not expected to be consolidated, they
are classified as held for Investment – sale. Commercial real estate loans that are designated as held for sale are carried at the lower of amortized cost or fair value and recorded as Commercial loans held for sale, net in the accompanying Consolidated Statements of Financial Condition. Any origination fees and costs or purchase premiums or discounts are deferred and recognized upon sale. The Company determines the fair value of commercial real estate loans held for sale on an individual loan basis.
Preferred equity interests are designated as held for investment and are carried at their outstanding principal balance, net of unamortized origination fees and costs, premiums or discounts, less a reserve for estimated losses if necessary. See the “Commercial Real Estate Investments” Note for additional information.
Investments in Commercial Real Estate – Investments in commercial real estate are carried at historical cost less accumulated depreciation. Historical cost includes all costs necessary to bring the asset to the condition and location necessary for its intended use, including financing during the construction period. Costs directly related to acquisitions deemed to be business combinations are expensed. Ordinary repairs and maintenance which are not reimbursed by tenants are expensed as incurred. Major replacements and improvements that extend the useful life of the asset are capitalized and depreciated over their useful life. Investments in commercial real estate are depreciated using the straight-line method over the estimated useful lives of the assets, summarized as follows: | | | Category | Term | Building | 30 - 40 years | Site improvements | 1 - 28 years |
The Company follows the acquisition method of accounting for acquisitions of operating real estate held for investment, where the purchase price of operating real estate is allocated to tangible assets such as land, building, site improvements and other identified intangibles such as above/below market and in-place leases.
The Company applies the equity method of accounting for its investments in joint ventures where it is not considered to have a controlling financial interest. Under the equity method of accounting, the Company will recognize its share of earnings or losses of the investee in the period in which they are reported by the investee. The Company also considers whether there are any indicators of other-than-temporary impairment of joint ventures accounted for under the equity method.
The Company evaluates whether real estate acquired in connection with a foreclosure or deed in lieu of foreclosure, herein collectively referred to as a foreclosure, (“REO”) ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
constitutes a business and whether business combination accounting is applicable. Upon foreclosure of a property, the excess of the carrying value of a loan, if any, over the estimated fair value of the property, less estimated costs to sell, is charged to provision for loan losses.
Investments in commercial real estate, including REO, that do not meet the criteria to be classified as held for sale are separately presented in the Consolidated Statements of Financial Condition as held for investment. Real estate held for sale is reported at the lower of its carrying value or its estimated fair value less estimated costs to sell. Once a property is determined to be held for sale, depreciation is no longer recorded.
The Company’s real estate portfolio (REO and real estate held for investment) is reviewed on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value of its operating real estate may be impaired or that its carrying value may not be recoverable. A property’s value is considered impaired if the Company’s estimate of the aggregate future undiscounted cash flows to be generated by the property is less than the carrying value of the property. In conducting this review, the Company considers U.S. macroeconomic factors, including real estate sector conditions, together with asset specific and other factors. To the extent impairment has occurred and is considered to be other than temporary, the loss will be measured as the excess of the carrying amount of the property over the calculated fair value of the property.
Revenue Recognition – Commercial Real Estate Investments- Interest income is accrued based on the outstanding principal amount of CRE Debt and Preferred Equity Investments and their contractual terms. Origination fees and costs, premiums or discounts associated with the purchase of CRE Debt and Preferred Equity Investments are amortized or accreted into interest income over the lives of the CRE Debt and Preferred Equity Investments using the interest method.
Corporate Debt
Corporate Loans– The Company’s investments in corporate loans are designated as held for investment when the Company has the intent and ability to hold the investment until maturity or payoff. These investments are carried at their principal balance outstanding plus any premiums or discounts less allowances for loan losses. Interest income from coupon payments is accrued based upon the outstanding principal amounts of the debt and its contractual terms. Premiums and discounts are amortized or accreted into interest income overusing the estimated lifeinterest method. These investments typically take the form of senior secured loans primarily in first or second lien positions. The Company’s senior secured loans generally have stated maturities of three to eight years. In connection with these senior secured loans the Company receives a security interest in certain of the investment.assets of the borrower and such assets support repayment of such loans. Senior secured loans are generally exposed to less amount of credit risk than more junior loans given their seniority to scheduled principal and interest and priority of security in the assets of the borrower. To date, the significant majority of the Company’s investments in corporate debt have been funded term loans versus bonds.
Corporate Debt Securities– The Company’s investments in corporate debt that are debt securities are designated as held-to-maturity when the Company has the intent and ability to hold the investment until maturity. These investments are carried at their principal balance outstanding plus any premiums or discounts less other-than-temporary impairment. Interest income from coupon payments is accrued based upon the outstanding principal amounts of the debt and its contractual terms. Premiums and discounts are amortized or accreted into interest income using the interest method. Impairment of Securities and Loans
Other-Than-Temporary Impairment – Management evaluates available-for-sale securities and held-to-maturity debt securities for other-than-temporary impairment at least quarterly, and more frequently when economic or market conditions warrant such evaluation. When the fair value of an available-for-sale security is less than its amortized cost, the security is considered impaired. For securities that are impaired, the Company determines if it (1) has the intent to sell the security, (2) is more likely than not that it will be required to sell the security before recovery of its amortized cost basis, or (3) does not expect to recover the entire amortized cost basis of the security. Further, the security is analyzed for credit loss (the difference between the present value of cash flows expected to be collected and the amortized cost basis). The credit loss, if any, will then be recognized in the Consolidated Statements of Comprehensive Income (Loss), while the balance of losses related to other factors will be recognized as a component of Other comprehensive income (loss). If the fair value is less than the cost of a held-to maturity-security, the Company performs an analysis to determine whether it expects to recover the entire cost basis of the security. There was no other-than-temporary impairment recognized for the years ended December 31, 2017, 2016 and 2015. Allowance for Losses – The Company evaluates the need for a loss reserve on its commercial real estate loans and preferred equity interests held for investment (collectively referred to as “CRECRE Debt and Preferred Equity Investments”).Investments and its corporate loans. A provision for losses related to CRE Debt and Preferred Equity Investments and corporate loans, including those accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, may be established when it is probable the Company will not collect amounts contractually due or all amounts previously estimated to be collectable.collectible. Management assesses the credit quality of the portfolio and adequacy of loan loss reserves on a quarterly basis, or more frequently as necessary. Significant judgment is required in ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
this analysis. Depending on the expected recovery of its investment, the Company considers the estimated net recoverable value of the CRE Debt and Preferred Equity Investments as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the competitive landscape where the borrower conducts business. To determine if loan loss allowances are required on investments in corporate debt, the Company reviews the monthly and/or quarterly financial statements of the borrowers, verifies loan compliance packages, if applicable, and analyzes current results relative to budgets and sensitivities performed at inception of the investment. Because this determination isthese determinations are based upon projections of future economic events, which are inherently subjective, the amounts ultimately realized may differ materially from the carrying value as of the reporting date. | |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
The Company may be exposed to various levels of credit risk depending on the nature of its investments and the nature of the assets underlying the investments and credit enhancements, if any, supporting its assets. The Company’s core investment process includes procedures related to the initial approval and periodic monitoring of credit risk and other risks associated with each investment. The Company’s investment underwriting procedures include evaluation of the underlying borrowers’ ability to manage and operate their respective properties.properties or companies. Management reviews loan-to-value metrics upon either the origination or the acquisition of a new investment but generally does not update the loan-to-value metrics in the course of quarterly surveillance. Management generally reviews the most recent financial information produced by the borrower, which may include, but is not limited to, net operating income (“NOI”), debt service coverage ratios, property debt yields (net cash flow or NOI divided by the amount of outstanding indebtedness), loan per unit and rent rolls relating to each of the Company’s CRE Debt and Preferred Equity Investments, and may consider other factors management deems important. Management also reviews market pricing to determine each borrower’s ability to refinance their respective assets at the maturity of each loan. Management also reviewsloan, economic trends both(both macro as well asand those directly affecting the property specifically), and the supply and demand of competing projects in the sub-market in which each subject property is located.
In connection with Management monitors the quarterly surveillance review process, loans are assigned an internal rating of “Performing”, “Watch List”, “Defaulted-Recovery” or “Impaired”. Loans that are deemed to be Performing meet all present contractual obligations and do not qualify for Watch List designation. Watch List loans are defined as Performing loans that are significantly lagging expectations and default is considered imminent. Defaulted–Recovery loans are currently in default; however full recovery of contractual principal and interest is expected. Impaired loans may or may not be in default, impairment is anticipated, and a loan loss provision has been recognized to reflect expected losses.
| | Investments in Commercial Real Estate – Investments in commercial real estate are carried at historical cost less accumulated depreciation. Historical cost includes all costs necessary to bring the asset to thefinancial condition and location necessary foroperating results of its intended use, including financing duringcorporate borrowers and continually assesses the construction period. Costs directly related to acquisitions deemed to be business combinations are expensed. Ordinary repairs and maintenance which are not reimbursed by tenants are expensed as incurred. Major replacements and improvements that extend the useful lifefuture outlook of the asset are capitalizedborrower’s financial performance in light of industry developments, management changes and depreciated over their useful life.
Investments in commercial real estate are depreciated using the straight-line method over the estimated useful lives of the assets, summarized as follows:
Category Term
Building 30-40 years
Site improvements 2-10 years
The Company follows the acquisition method of accounting for acquisitions of operating real estate held for investment, where the purchase price of operating real estate is allocated to tangible assets such as land, building, site improvements and other identified intangibles such as above/below market and in-place leases.company-specific considerations.
The Company evaluates whetherthe need for a loss reserve on at least a quarterly basis through its surveillance review process. In connection with the surveillance review process, the Company’s CRE Debt and Preferred Equity Investments are assigned an internal risk rating. The loan risk ratings were updated to conform to guidance provided by the Office of the Comptroller of the Currency for commercial real estate acquired in connection with a foreclosurelending. The initial internal risk ratings (“REO”Initial Ratings”) or UCC/deed in lieu of foreclosure (herein collectively referred to as a foreclosure) constitutes a businessare based on net operating income, debt service coverage ratios, property debt yields, loan per unit, rent rolls and whether business combination accounting is applicable. Upon foreclosure of a property, the excess of the carrying value of a loan, if any, over the estimated fair value of the property, less estimated costs to sell, is charged toother factors management deems important. A provision for loan losses.
Investments in commercial real estate, including REO, which dolosses may occur when it is probable the Company will not meet the criteriacollect amounts contractually due or all amounts previously estimated to be classified as held for sale, are separately presented in the Consolidated Statements of Financial Condition as held for investment. Real estate held for sale is reported at the lower of its carrying value or its estimated fair value less estimated costs to sell. Once a property is determined to be held for sale, depreciation is no longer recorded. In addition, if considered material to the overall consolidated financial statements, the results of operations are reclassified to income (loss) from discontinued operations in the Consolidated Statements of Comprehensive Income (Loss).
|
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
The Company's real estate portfolio (REO and real estate held for investment) is reviewed on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value of its operating real estate may be impaired or that its carrying value may not be recoverable. A property's value is considered impaired if the Company's estimatecollectible of the aggregate future undiscounted cash flows to be generated by the property is less than the carrying value of the property. In conducting this review, the Company considers U.S. macroeconomic factors, including real estate sector conditions, together with asset specific and other factors. To the extent impairment has occurred and is considered to be other than temporary, the loss will be measured as the excess of the carrying amount of the property over the calculated fair value of the property.
Revenue Recognition – Commercial Real Estate Investments - Interest income is accrued based on the outstanding principal amount of theCompany’s CRE Debt and Preferred Equity Investments and theirbased upon leverage and cash flow coverages of the borrowers’ debt and operating obligations. The final internal risk ratings are influenced by other quantitative and qualitative factors that can result in an adjustment to the Initial Ratings, subject to review and approval by the respective committee. The internal risk rating categories include “Performing”, “Performing - Closely Monitored”, “Performing - Special Mention”, “Substandard”, “Doubtful” or “Loss”. Performing loans meet all present contractual terms. Premiumsobligations. Performing - Closely Monitored loans meet all present contractual obligations, but are transitional or could be exhibiting some weakness in both leverage and discounts associatedliquidity. Performing - Special Mention loans exhibit potential weakness that deserves management’s close attention and if uncorrected, may result in deterioration of repayment prospects. Substandard loans are inadequately protected by sound worth and paying capacity of the obligor or of the collateral pledged with a distinct possibility that loss will be sustained if some of the purchasedeficiencies are not corrected. Doubtful loans are Substandard loans whereby collection of CRE Debtall contractual principal and Preferred Equity Investmentsinterest is highly questionable or improbable. Loss loans are amortizedconsidered uncollectible.
Nonaccrual Status – If collection of a loan’s principal or accreted intointerest is in doubt or the loan is 90 days or more past due, interest income over the projected livesis not accrued. For nonaccrual status loans carried at fair value or held for sale, interest is not accrued, but is recognized on a cash basis. For nonaccrual status loans carried at amortized cost, if collection of principal is not in doubt, but collection of interest is in doubt, interest income is recognized on a cash basis. If collection of principal is in doubt, any interest received is applied against principal until collectability of the CRE Debtremaining balance is no longer in doubt; at that point, any interest income is recognized on a cash basis. Generally, a loan is returned to accrual status when the borrower has resumed paying the full amount of the scheduled contractual obligation, if all principal and Preferred Equity Investments usinginterest amounts contractually due are reasonably assured of repayment within a reasonable period of time and there is a sustained period of repayment performance by the interest method.borrower. The Company did not have any impaired loans, nonaccrual loans, or loans in default as all of the loans were performing at December 31, 2017. There were no allowances for loan losses at December 31, 2017 and 2016.
Broker Dealer Activities
In January 2014, RCap ceased its trading activity in U.S. Treasury securities, derivatives and securities borrowed and loaned transactions.
Reverse Repurchase Agreements– – RCap enters into reverse repurchase agreements and repurchase agreements as part of its matched book trading activity. Reverse repurchase agreements are recorded on tradesettlement date at the contractcontractual amount and are collateralized by mortgage-backed or other securities. Margin calls are made by RCap as necessary based ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
on the daily valuation of the underlying collateral as compared to the contract price. RCap generates income from the spread between what is earned on the reverse repurchase agreements and what is paid on the matched repurchase agreements. RCap’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 RCap will require counterparties to deposit additional collateral, when necessary. All reverse repurchase activities are transacted under master repurchase agreements that give RCap the right, in the event of default, to liquidate collateral held and in some instances, to offset receivables and payables with the same counterparty. | | Securities Borrowed and Loaned Transactions – RCap recorded securities borrowed and loaned transactions as collateralized financings. Securities borrowed transactions required RCap to provide the counterparty Substantially all of RCap’s reverse repurchase activity is with collateral in the form of cash, or other securities. RCap received collateral in the form of cash or other securities for securities loaned transactions. RCap monitored the fair value of the securities borrowed and loaned on a daily basis, with additional collateral obtained or refunded as necessary. Securities borrowed and securities loaned transactions were recorded at contract value. For these transactions, the rebates accrued by RCap were recorded as interest income or expense.
U.S. Treasury Securities – RCap traded in U.S. Treasury securities for its proprietary portfolio, which consisted of long and short positions on U.S Treasury notes and bonds. U.S. Treasury securities were classified as trading investments and were recorded on the trade date at cost. Changes in fair value were reflected in Net gains (losses) on trading assets in the Company’s Consolidated Statement of Comprehensive Income (Loss). Interest income or expense on U.S. Treasury notes and bonds was accrued based on the outstanding principal amount of those investments and their stated terms.
Derivatives - RCap entered primarily into U.S. Treasury, Eurodollar, federal funds, German government and U.S. equity index and currency futures and options contracts. RCap maintained a margin account which was settled daily with FCMs. Changes in the unrealized gains or losses on the futures and options contracts as well as any foreign exchange gains and losses were reflected in Net gains (losses) on trading assets in the Company’s Consolidated Statements of Comprehensive Income (Loss). Unrealized gains (losses) were excluded from net income (loss) in arriving at cash flows from operating activities in the Consolidated Statements of Cash Flows.affiliated entities.
Recent Accounting Pronouncements
The following table provides a brief descriptionCompany considers the applicability and impact of recent accounting pronouncements that could potentially have a material effect on the Company’s consolidated financial statements: |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
Standard | | Description | | Date of Adoption | | Effect on the financial statements or other
significant matters
| all Accounting Standards thatUpdates (“ASUs”). ASUs not listed below were determined to be either not applicable, are not yet adopted | | | | | | | | | | | | | | ASU 2015-02 Consolidation (Topic 810) Amendments to the Consolidation Analysis | | This update affects the following areas of the consolidation analysis: limited partnerships and similar entities, evaluation of fees paid to a decision maker or service provider as a variable interest and in determination of the primary beneficiary, effect of related parties on the primary beneficiary determination and for certain investment funds. | | January 1, 2016 (early adoption permitted) | | Not expected to have a significant impact on theour consolidated financial statements | ASU 2015-01 Income Statement - Extraordinary and Unusual Items (Subtopic 225-20) | | This update eliminates from GAAP the concept of extraordinary items. | | January 1, 2016 (early adoption permitted) | | Not expected to have an impact on the consolidated financial statements. | ASU 2014-16 Derivatives and Hedging (Topic 815) Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt when adopted, or Equity | | This ASU provides additional guidance for evaluating whether conversion rights, redemption rights, voting rights, liquidation rights and dividend payment preferences and other features embedded in a share, including preferred stock, contain embedded derivatives requiring bifurcation. The update requires that an entity determine the nature of the host contract by considering all stated and implied terms and features in a hybrid instrument. | | January 1, 2016 (early adoption permitted) | | Not expected to have an impact on the consolidated financial statements. | ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-04) Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern | | This ASU requires management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. | | January 1, 2017 (early adoption permitted) | | Not expected to have an impact on the consolidated financial statements. | ASU 2014-13, Consolidation (Topic 810) Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity. | | This Update provides a practical expedient to measure the fair value of the financial assets and financial liabilities of a consolidated collateralized financing entity, which the reporting entity has elected to or is required to measure on a fair value basis. | | January 1, 2015 (early adoption permitted) | | Not expected to have an impact on the consolidated financial statements. | ASU 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosure. | | This update makes limited amendments to the guidance in ASC 860 on accounting for certain repurchase agreements. | | January 1, 2015, except for the disclosure requirements for transactions accounted for as secured borrowings, which are required to be presented for interim periods beginning after March 15, 2015 | | Will impact disclosures only and willdid not have a significant impact on theour consolidated financial statements. | ASU 2014-09, Revenue from Contracts with Customers | | This guidance applies to contracts with customers to transfer goods or services and contracts to transfer nonfinancial assets unless those contracts are within the scope of other standards (for example, lease transactions). | | January 1, 2017 | | Not expected to have a significant impact on the consolidated financial statements. | ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360) Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity | | This ASU raises the threshold for a disposal to be treated as discontinued operations. | | January 1, 2015 (early adoption permitted) | | Not expected to have a significant impact on the consolidated financial statements. | ASU 2014-04 Receivables–Troubled Debt Restructurings by Creditors, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure | | This Update clarifies that an in substance repossession or foreclosure has occurred, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, when the creditor obtains legal title to the property upon completion of a foreclosure or the borrower conveys all interest in the property to the creditor through a deed in lieu of foreclosure or similar arrangement | | | | Not expected to have a significant impact on the consolidated financial statements. | | | | | | | | Standards that were adopted | | | | | | | | | | | | | | ASU 2014-17 Business Combinations (Topic 805): Pushdown Accounting | | This amendment provides an acquired entity with the option to apply push down accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. | | November 18, 2014 | | Did not have a significant impact on the consolidated financial statements.adoption. | | | | | | | | Standard | | Description | | Effective Date | | Effect on the financial statements or other significant matters | Standards that are not yet adopted | | | | | | | ASU 2017-01 Business Combinations (Topic 805) Clarifying the Definition of a Business | | This update provides a screen to determine and a framework to evaluate when a set of assets and activities is a business. | | January 1, 2018 (early adoption permitted) | | The amendments are expected to result in fewer transactions being accounted for as business combinations. | ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments | | This ASU updates the existing incurred loss model to a current expected credit loss (“CECL”) model for financial assets and net investments in leases that are not accounted for at fair value through earnings. The amendments affect loans, held-to-maturity debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures and any other financial assets not excluded from the scope. There are also limited amendments to the impairment model for available-for-sale debt securities. | | January 1, 2020 (early adoption permitted) | | The Company currently plans to adopt the new standard on its effective date. While the Company is continuing to assess the impact the ASU will have on the consolidated financial statements, the measurement of expected credit losses under the CECL model will be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts of the financial assets in scope of the model. Further, based on the amended guidance for available-for-sale debt securities, the Company: • will be required to use an allowance approach to recognize credit impairment, with the allowance to be limited to the amount by which the security’s fair value is less than its amortized cost basis; • may not consider the length of time fair value has been below amortized cost, and • may not consider recoveries of fair value after the balance sheet date when assessing whether a credit loss exists. | ASU 2013-02, Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income | | This update requires the provision of information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, it requires presentation of significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period | | January 1, 2014 | | Did not have a significant impact on the consolidated financial statements. |
| | | 4. | ACQUISITION OF HATTERAS | ASU 2011-11, Balance Sheet: Disclosures about Offsetting Assets and Liabilities | | Under this update, the Company is required to disclose both gross and net information about both instruments and transactions eligible for offset |
As previously disclosed in the Company’s filings with the SEC, on July 12, 2016 the Company completed its acquisition of Hatteras, an externally managed mortgage REIT that invested primarily in single-family residential mortgage real estate assets, for aggregate consideration to Hatteras common stockholders of $1.5 billion, consisting of $1.0 billion in equity consideration and $521.1 million in cash consideration. The Company issued 93.9 million shares of common stock as part of the consideration for the Hatteras Acquisition, which includes replacement share-based payment awards.
In addition, as part of the Hatteras Acquisition, each share of Hatteras’ 7.625% Series A Cumulative Redeemable Preferred Stock, par value $0.001 per share (the “Hatteras Preferred Stock”), that was outstanding immediately prior to the completion of the Hatteras Acquisition was converted into one share of a newly-designated series of the Company’s preferred stock, par value $0.01 per share, which the Company classified and designated as 7.625% Series E Cumulative Redeemable Preferred Stock, and which has rights, preferences, privileges and voting powers substantially the same as the Hatteras Preferred Stock.
The following table summarizes the aggregate consideration and fair value of the assets acquired and liabilities assumed recognized at the acquisition date: ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
| | | | | | July 12, 2016 | Consideration Transferred: | (dollars in thousands) | Cash | $ | 521,082 |
| Common equity | 997,707 |
| Preferred shares: | | Exchange of Hatteras preferred stock for Annaly preferred stock | 278,252 |
| Preferred stock fair value adjustment | 9,248 |
| Preferred stock | 287,500 |
| Total consideration | $ | 1,806,289 |
| | | Net Assets: | | Cash | $ | 562,780 |
| Agency mortgage-backed securities, at fair value | 10,863,070 |
| Credit risk transfer securities, at fair value | 116,770 |
| Residential mortgage loans | 360,447 |
| Mortgage servicing rights | 355,820 |
| Other derivatives, at fair value | 8,677 |
| Principal receivable | 438,005 |
| Accrued interest and dividend receivable | 83,814 |
| Other assets | 57,250 |
| Total assets acquired | $ | 12,846,633 |
| | | Repurchase agreements | $ | 10,422,757 |
| Other secured financing | 35,769 |
| Securitized debt of consolidated VIEs | 54,135 |
| Other derivatives, at fair value | 349,922 |
| Dividends payable | 670 |
| Payable for investments purchased | 2,643 |
| Accrued interest payable | 4,833 |
| Accounts payable and other liabilities | 97,039 |
| Total liabilities assumed | 10,967,768 |
| Net assets acquired | $ | 1,878,865 |
| Bargain purchase gain | $ | 72,576 |
|
For additional details regarding the terms and conditions of the Hatteras Acquisition and related matters, please refer to the Company’s other filings with the Securities and Exchange Commission (“SEC”) that were made in connection with the Hatteras Acquisition, including the Prospectus/Offer to Exchange filed with the SEC pursuant to Rule 424(b)(3) on July 8, 2016 and the Current Report on Form 8-K filed with the SEC on July 12, 2016.
| | | 5. | RESIDENTIAL INVESTMENT SECURITIES |
The following tables present the Company’s Residential Investment Securities portfolio that was carried at their fair value at December 31, 2017 and 2016: ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2017 | | Principal / Notional | | Remaining Premium | | Remaining Discount | | Amortized Cost | | Unrealized Gains (1) | | Unrealized Losses (1) | | Estimated Fair Value | Agency | (dollars in thousands) | Fixed-rate pass-through | $ | 78,509,335 |
| | $ | 4,514,815 |
| | $ | (1,750 | ) | | $ | 83,022,400 |
| | $ | 140,115 |
| | $ | (1,178,673 | ) | | $ | 81,983,842 |
| Adjustable-rate pass-through | 6,760,991 |
| | 277,212 |
| | (1,952 | ) | | 7,036,251 |
| | 15,776 |
| | (103,121 | ) | | 6,948,906 |
| Interest-only | 6,804,715 |
| | 1,326,761 |
| | — |
| | 1,326,761 |
| | 1,863 |
| | (242,862 | ) | | 1,085,762 |
| Multifamily | 490,753 |
| | 5,038 |
| | (341 | ) | | 495,450 |
| | 84 |
| | (1,845 | ) | | 493,689 |
| Reverse mortgages | 35,000 |
| | 4,527 |
| | — |
| | 39,527 |
| | 37 |
| | — |
| | 39,564 |
| Total Agency investments | $ | 92,600,794 |
| | $ | 6,128,353 |
| | $ | (4,043 | ) | | $ | 91,920,389 |
| | $ | 157,875 |
| | $ | (1,526,501 | ) | | $ | 90,551,763 |
| Residential Credit | |
| | |
| | |
| | |
| | |
| | |
| | |
| CRT | $ | 593,027 |
| | $ | 25,463 |
| | $ | (3,456 | ) | | $ | 615,034 |
| | $ | 36,730 |
| | $ | — |
| | $ | 651,764 |
| Alt-A | 204,213 |
| | 499 |
| | (34,000 | ) | | 170,712 |
| | 13,976 |
| | (802 | ) | | 183,886 |
| Prime | 197,756 |
| | 358 |
| | (24,158 | ) | | 173,956 |
| | 18,804 |
| | — |
| | 192,760 |
| Subprime | 554,470 |
| | 2,037 |
| | (78,561 | ) | | 477,946 |
| | 56,024 |
| | (90 | ) | | 533,880 |
| NPL/RPL | 42,585 |
| | 14 |
| | (117 | ) | | 42,482 |
| | 506 |
| | — |
| | 42,988 |
| Prime Jumbo (>=2010 Vintage) | 130,025 |
| | 627 |
| | (3,956 | ) | | 126,696 |
| | 1,038 |
| | (1,112 | ) | | 126,622 |
| Prime Jumbo (>=2010 Vintage) Interest-Only | 989,052 |
| | 15,287 |
| | — |
| | 15,287 |
| | 1,871 |
| | — |
| | 17,158 |
| Total residential credit investments | $ | 2,711,128 |
| | $ | 44,285 |
| | $ | (144,248 | ) | | $ | 1,622,113 |
| | $ | 128,949 |
| | $ | (2,004 | ) | | $ | 1,749,058 |
| Total Residential Investment Securities | $ | 95,311,922 |
| | $ | 6,172,638 |
| | $ | (148,291 | ) | | $ | 93,542,502 |
| | $ | 286,824 |
| | $ | (1,528,505 | ) | | $ | 92,300,821 |
| | | | | | | | | | | | | | | | December 31, 2016 | | Principal / Notional | | Remaining Premium | | Remaining Discount | | Amortized Cost | | Unrealized Gains (1) | | Unrealized Losses (1) | | Estimated Fair Value | Agency | (dollars in thousands) | Fixed-rate pass-through | $ | 60,759,317 |
| | $ | 3,633,354 |
| | $ | (1,956 | ) | | $ | 64,390,715 |
| | $ | 228,430 |
| | $ | (1,307,771 | ) | | $ | 63,311,373 |
| Adjustable-rate pass-through | 10,653,109 |
| | 391,267 |
| | (4,081 | ) | | 11,040,295 |
| | 47,250 |
| | (53,795 | ) | | 11,033,751 |
| Interest-only | 8,133,805 |
| | 1,436,192 |
| | — |
| | 1,436,192 |
| | 4,225 |
| | (195,668 | ) | | 1,244,749 |
| Total Agency investments | $ | 79,546,231 |
| | $ | 5,460,813 |
| | $ | (6,037 | ) | | $ | 76,867,202 |
| | $ | 279,905 |
| | $ | (1,557,234 | ) | | $ | 75,589,873 |
| Residential Credit | |
| | |
| | |
| | |
| | |
| | |
| | |
| CRT | $ | 690,491 |
| | $ | 11,113 |
| | $ | (10,907 | ) | | $ | 690,697 |
| | $ | 34,046 |
| | $ | (21 | ) | | $ | 724,722 |
| Alt-A | 173,108 |
| | 1,068 |
| | (23,039 | ) | | 151,137 |
| | 3,721 |
| | (685 | ) | | 154,173 |
| Prime | 248,176 |
| | 287 |
| | (35,068 | ) | | 213,395 |
| | 7,050 |
| | (253 | ) | | 220,192 |
| Subprime | 697,983 |
| | 380 |
| | (96,331 | ) | | 602,032 |
| | 12,578 |
| | (1,061 | ) | | 613,549 |
| NPL/RPL | 269,802 |
| | 670 |
| | (209 | ) | | 270,263 |
| | 1,004 |
| | (429 | ) | | 270,838 |
| Prime Jumbo (>=2010 Vintage) | 129,453 |
| | 852 |
| | (345 | ) | | 129,960 |
| | 267 |
| | (308 | ) | | 129,919 |
| Prime Jumbo (>=2010 Vintage) Interest-Only | 863,370 |
| | 15,129 |
| | — |
| | 15,129 |
| | — |
| | (2,493 | ) | | 12,636 |
| Total residential credit investments | $ | 3,072,383 |
| | $ | 29,499 |
| | $ | (165,899 | ) | | $ | 2,072,613 |
| | $ | 58,666 |
| | $ | (5,250 | ) | | $ | 2,126,029 |
| Total Residential Investment Securities | $ | 82,618,614 |
| | $ | 5,490,312 |
| | $ | (171,936 | ) | | $ | 78,939,815 |
| | $ | 338,571 |
| | $ | (1,562,484 | ) | | $ | 77,715,902 |
|
(1) Unrealized gains and losses on Agency investments, excluding interest-only investments and reverse mortgages, are reported as a component of Other comprehensive income (loss). Unrealized gains and losses on residential credit securities, reverse mortgages and Agency interest-only investments are reported in Net unrealized gains (losses) on investments measured at fair value through earnings in the Consolidated Statements of Financial ConditionComprehensive Income (Loss).
The following table presents the Company’s Agency mortgage-backed securities portfolio by issuing Agency concentration at December 31, 2017 and transactions subject to an agreement similar to a master netting arrangement. The scope includes derivatives, sale and repurchase agreements and reverse sale and repurchase agreements and securities borrowing and securities lending arrangements. | | | | Did not have a significant impact on the consolidated financial statements. |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
4. AGENCY MORTGAGE-BACKED SECURITIES
The following tables present the Company’s available-for-sale Agency mortgage-backed securities portfolio as of December 31, 2014 and 2013 which were carried at their fair value:
December 31, 2014 | | Freddie Mac | | | Fannie Mae | | | Ginnie Mae | | | Total | | | | (dollars in thousands) | | | | | | | | | | | | | | | Principal outstanding | | $ | 27,906,221 | | | $ | 47,979,778 | | | $ | 97,000 | | | $ | 75,982,999 | | Unamortized premium | | | 1,951,798 | | | | 3,396,368 | | | | 20,560 | | | | 5,368,726 | | Unamortized discount | | | (8,985 | ) | | | (8,857 | ) | | | (358 | ) | | | (18,200 | ) | Amortized cost | | | 29,849,034 | | | | 51,367,289 | | | | 117,202 | | | | 81,333,525 | | Gross unrealized gains | | | 313,761 | | | | 660,230 | | | | 8,010 | | | | 982,001 | | Gross unrealized losses | | | (322,094 | ) | | | (424,800 | ) | | | (3,376 | ) | | | (750,270 | ) | Estimated fair value | | $ | 29,840,701 | | | $ | 51,602,719 | | | $ | 121,836 | | | $ | 81,565,256 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fixed Rate | | | Adjustable Rate | | | Total | | | | | | | | (dollars in thousands) | | | | | | Amortized cost | | $ | 78,250,313 | | | $ | 3,083,212 | | | $ | 81,333,525 | | | | | | Gross unrealized gains | | | 847,615 | | | | 134,386 | | | | 982,001 | | | | | | Gross unrealized losses | | | (732,533 | ) | | | (17,737 | ) | | | (750,270 | ) | | | | | Estimated fair value | | $ | 78,365,395 | | | $ | 3,199,861 | | | $ | 81,565,256 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2013 | | Freddie Mac | | | Fannie Mae | | | Ginnie Mae | | | Total | | | | (dollars in thousands) | | Principal outstanding | | $ | 24,458,925 | | | $ | 43,564,657 | | | $ | 120,739 | | | $ | 68,144,321 | | Unamortized premium | | | 1,627,966 | | | | 2,970,813 | | | | 27,085 | | | | 4,625,864 | | Unamortized discount | | | (9,533 | ) | | | (11,568 | ) | | | (383 | ) | | | (21,484 | ) | Amortized cost | | | 26,077,358 | | | | 46,523,902 | | | | 147,441 | | | | 72,748,701 | | Gross unrealized gains | | | 227,423 | | | | 456,057 | | | | 9,845 | | | | 693,325 | | Gross unrealized losses | | | (1,267,106 | ) | | | (1,781,683 | ) | | | (4,288 | ) | | | (3,053,077 | ) | Estimated fair value | | $ | 25,037,675 | | | $ | 45,198,276 | | | $ | 152,998 | | | $ | 70,388,949 | | | | | | | | | | | | | | | | | | | | | Fixed Rate | | | Adjustable Rate | | | Total | | | | | | | | (dollars in thousands) | | | | | | Amortized cost | | $ | 68,784,424 | | | $ | 3,964,277 | | | $ | 72,748,701 | | | | | | Gross unrealized gains | | | 538,556 | | | | 154,769 | | | | 693,325 | | | | | | Gross unrealized losses | | | (3,040,153 | ) | | | (12,924 | ) | | | (3,053,077 | ) | | | | | Estimated fair value | | $ | 66,282,827 | | | $ | 4,106,122 | | | $ | 70,388,949 | | | | | |
2016: | | | | | | | | | Investment Type | December 31, 2017 | | December 31, 2016 | | (dollars in thousands) | Fannie Mae | $ | 63,361,415 |
| | $ | 51,658,391 |
| Freddie Mac | 27,091,978 |
| | 23,858,110 |
| Ginnie Mae | 98,370 |
| | 73,372 |
| Total | $ | 90,551,763 |
| | $ | 75,589,873 |
|
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
Actual maturities of Agency mortgage-backed securitiesthe Company’s Residential Investment Securities portfolio are generally shorter than stated contractual maturities because actual maturities of Agency mortgage-backed securitiesthe portfolio are generally affected by periodic payments and prepayments of principal on the | | underlying mortgages.The following table summarizes the Company’s Agency mortgage-backed securities as ofavailable for sale Residential Investment Securities at December 31, 20142017 and 2013,2016, according to their estimated weighted average life classifications: |
| | December 31, 2014 | | | December 31, 2013 | | Weighted Average Life | | Estimated Fair Value | | | Amortized Cost | | | Estimated Fair Value | | | Amortized Cost | | | | | | | | | | | | | | | Less than one year | | $ | 43,248 | | | $ | 42,831 | | | $ | 65,584 | | | $ | 64,561 | | Greater than one year through five years | | | 42,222,114 | | | | 41,908,586 | | | | 50,046,013 | | | | 51,710,059 | | Greater than five years through ten years | | | 39,018,833 | | | | 39,098,352 | | | | 14,915,716 | | | | 15,292,973 | | Greater than ten years | | | 281,061 | | | | 283,756 | | | | 5,361,636 | | | | 5,681,108 | | Total | | $ | 81,565,256 | | | $ | 81,333,525 | | | $ | 70,388,949 | | | $ | 72,748,701 | |
| | | | | | | | | | | | | | | | | | December 31, 2017 | | December 31, 2016 | Weighted Average Life | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value | | Amortized Cost | | (dollars in thousands) | Less than one year | $ | 471,977 |
| | $ | 476,538 |
| | $ | 63,510 |
| | $ | 61,775 |
| Greater than one year through five years | 13,838,890 |
| | 13,925,749 |
| | 12,626,932 |
| | 12,666,394 |
| Greater than five years through ten years | 77,273,833 |
| | 78,431,852 |
| | 56,785,601 |
| | 57,738,588 |
| Greater than ten years | 716,121 |
| | 708,363 |
| | 8,239,859 |
| | 8,473,058 |
| Total | $ | 92,300,821 |
| | $ | 93,542,502 |
| | $ | 77,715,902 |
| | $ | 78,939,815 |
|
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
The weighted average lives of the Agency mortgage-backed securities at December 31, 20142017 and 20132016 in the table above are based upon projected principal prepayment rates. The actual weighted average lives of the Agency mortgage-backed securities could be longer or shorter than projected. | |
The following table presents the gross unrealized losses and estimated fair value of the Company’s Agency mortgage-backed securities and debentures, accounted for as available-for-sale where the fair value option has not been elected, by length of time that such securities have been in a continuous unrealized loss position at December 31, 20142017 and 2013. | 2016. | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2017 | | December 31, 2016 | | Estimated Fair Value (1) | | Gross Unrealized Losses (1) | | Number of Securities (1) | | Estimated Fair Value (1) | | Gross Unrealized Losses (1) | | Number of Securities (1) | | (dollars in thousands) | Less than 12 Months | $ | 39,878,158 |
| | $ | (272,234 | ) | | 1,114 |
| | $ | 52,465,045 |
| | $ | (1,094,957 | ) | | 1,368 |
| 12 Months or More | 39,491,238 |
| | (1,011,405 | ) | | 911 |
| | 6,277,814 |
| | (266,609 | ) | | 54 |
| Total | $ | 79,369,396 |
| | $ | (1,283,639 | ) | | 2,025 |
| | $ | 58,742,859 |
| | $ | (1,361,566 | ) | | 1,422 |
|
(1) Excludes interest-only mortgage-backed securities.
| | December 31, 2014 | | | December 31, 2013 | | | | Estimated Fair Value | | | Gross Unrealized Losses | | | Number of Securities | | | Estimated Fair Value | | | Gross Unrealized Losses | | | Number of Securities | | | | (dollars in thousands) | | Less than 12 Months | | $ | 4,613,599 | | | $ | (36,959 | ) | | | 205 | | | $ | 47,677,197 | | | $ | (2,569,474 | ) | | | 583 | | 12 Months or More | | | 35,175,194 | | | | (713,311 | ) | | | 302 | | | | 6,102,283 | | | | (483,603 | ) | | | 55 | | Total | | $ | 39,788,793 | | | $ | (750,270 | ) | | | 507 | | | $ | 53,779,480 | | | $ | (3,053,077 | ) | | | 638 | |
The decline in value of these securities is solely due to market conditions and not the quality of the assets. Substantially all of the Agency mortgage-backed securities are “AAA” rated or carry an implied “AAA” rating. The investments are not considered to be other-than-temporarily impaired because the Company currently has 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 the Company will be required to sell the investments before recovery of the amortized cost bases, which may be maturity. Also, the Company is guaranteed payment of the principal amount of the securities by the respective issuing government agency.
During the year ended December 31, 2014,2017, the Company disposed of $20.6$12.9 billion of Agency mortgage-backed securities,Residential Investment Securities, resulting in a net realized gainloss of $179.7$6.4 million. During the year ended December 31, 2013,2016, the Company disposed of $54.5$12.3 billion of Agency mortgage-backed securities,Residential Investment Securities, resulting in a net realized gain of $440.2$31.0 million. During the year ended December 31, 2012,2015, the Company sold $30.4disposed of $23.9 billion of Agency mortgage-backed securities,Residential Investment Securities, resulting in a net realized gain of $438.5$63.3 million. Average cost is used as the basis on which the realized gain or loss on sale is determined. Agency interest-only mortgage-backed securities represent the right to receive a specified portion of the contractual interest flows of the underlying outstanding principal balance of specific Agency mortgage-backed | | securities. Agency interest-only mortgage-backed securities in the Company’s portfolio as of December 31, 2014 and 2013 had net unrealized gains (losses) of ($8.0) million and $78.1 million and an amortized cost of $1.2 billion and $1.0 billion, respectively. | | | 6. | RESIDENTIAL MORTGAGE LOANS |
5. ACQUISITION OF CREXUS
On April 17, 2013, the Company, through its wholly-owned subsidiary CXS Acquisition Corporation obtained control of CreXus pursuant to the merger agreement dated January 30, 2013. CreXus owned a portfolio of commercial real estate assets which are now owned by the Company. Following the acquisition, CXS Acquisition Corporation was renamed Annaly Commercial Real Estate Group, Inc.
The business combination was accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations, (“ASC 805”). Accordingly, goodwill was measured as the excess of the aggregate of the acquisition-date fair value of the consideration transferred and the acquisition-date fair value of the Company’s previously held equity interest in CreXus overfollowing table presents the fair value at acquisition date,and the unpaid principal balances of the identifiable assets acquired net of assumed liabilities. residential mortgage loan portfolio at December 31, 2017 and 2016: | | | | | | | | | December 31, 2017 | December 31, 2016 | | (dollars in thousands) | Fair value | $ | 1,438,322 |
| $ | 342,289 |
| Unpaid principal balance | $ | 1,419,807 |
| $ | 338,323 |
|
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
The following table summarizesprovides information regarding the aggregate considerationline items and preliminary fair value of the assets acquired and liabilities assumedamounts recognized at the acquisition date: |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
| | April 17, 2013 | | | | (dollars in thousands) | | Cash consideration transferred | | $ | 876,267 | | Fair value of equity interest in CreXus held before the business combination | | | 106,521 | | | | $ | 982,788 | | | | | | | Recognized amounts of identifiable assets acquired and liabilities assumed | | | | | Cash and cash equivalents | | $ | 151,843 | | Commercial real estate investments | | | 796,950 | | Accrued interest receivable | | | 3,485 | | Other assets | | | 5,617 | | Mortgages payable | | | (19,376 | ) | Participation sold | | | (14,352 | ) | Accounts payable and accrued expenses | | | (12,729 | ) | Total identifiable net assets | | | 911,438 | | Goodwill | | | 71,350 | | | | $ | 982,788 | |
The Company recorded $71.4 million of goodwill during the second quarter of 2013 associated with the acquisition of CreXus in the Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017 and 2016 for these investments:
| | | | | | | | | For the Years Ended: | | December 31, 2017 | December 31, 2016 | | (dollars in thousands) | Net interest income | $ | 28,817 |
| $ | 3,452 |
| Net gains (losses) on disposal of investments | (4,704 | ) | (922 | ) | Net unrealized gains (losses) on investments measured at fair value through earnings | 8,468 |
| (5,614 | ) | Total included in net income (loss) | $ | 32,581 |
| $ | (3,084 | ) |
The following table provides the geographic concentrations based on the unpaid principal balances at December 31, 2017 and 2016 for the residential mortgage loans, including loans held in securitization trusts: | | | | | | Geographic Concentrations of Residential Mortgage Loans | December 31, 2017 | | December 31, 2016 | Property Location | % of Balance | | Property Location | % of Balance | California | 49.8% | | California | 46.3% | Florida | 9.3% | | Texas | 9.6% | New York | 7.1% | | Illinois | 5.7% | All other (none individually greater than 5%) | 33.8% | | Florida | 5.2% | | | | Washington | 5.1% | | | | All other (none individually greater than 5%) | 28.1% | Total | 100.0% | | | 100.0% |
The table below provides additional data on the Company’s residential mortgage loans, including loans held in securitization trusts, at December 31, 2017 and 2016: | | | | | | | | | | | | | December 31, 2017 | December 31, 2016 | | Portfolio Range | | Portfolio Weighted Average | Portfolio Range | | Portfolio Weighted Average | | (dollars in thousands) | Unpaid principal balance | $1 - $3,663 | | $ | 514 |
| $22 - $1,905 | | $ | 691 |
| Interest rate | 1.63% - 7.50% | | 4.25 | % | 2.50% - 6.75% | | 3.72 | % | Maturity | 1/1/2028 - 5/1/2057 | | 2/1/2043 |
| 4/8/2044 - 11/1/2046 | | 8/20/2045 |
| FICO score at loan origination | 468 - 823 | | 748 |
| 665 - 814 | | 761 |
| Loan-to-value ratio at loan origination | 11% - 100% | | 68 | % | 24% - 90% | | 71 | % |
At December 31, 2017 and 2016, approximately 78% and 85% of the carrying value of the Company’s residential mortgage loans, including loans held in securitization trusts, were adjustable-rate. The following table presents the activity related to residential mortgage loans for the years ended December 31, 2017 and 2016: | | | | | | | | | December 31, 2017 | December 31, 2016 | | (dollars in thousands) | Fair value, beginning of period | $ | 342,289 |
| $ | — |
| Obtained through Hatteras Acquisition | — |
| 360,447 |
| Purchases | 1,218,491 |
| 165,213 |
| Consolidation of VIEs | 349,200 |
| — |
| Sales | (278,305 | ) | (134,203 | ) | Principal repayments | (189,465 | ) | (42,612 | ) | Amortization of premiums | (1,523 | ) | (942 | ) | Change in fair value | (2,365 | ) | (5,614 | ) | Fair value, end of period | $ | 1,438,322 |
| $ | 342,289 |
|
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Condition. The Company recognized additional goodwill of $0.4 million during the second half of 2013. In management’s opinion, the goodwill represents the synergies that resulted from integrating CreXus’ commercial real estate platform into the Company, which the Company believes is complementary to its existing business and return profile.Statements
| | | 7. | MORTGAGE SERVICING RIGHTS |
The acquisition-dateCompany invests in MSRs and has elected to carry them at fair value ofvalue. The following table presents activity related to MSRs for the previously held equityyears ended December 31, 2017 and 2016: | | | | | | | | | | December 31, 2017 | | December 31, 2016 | | (dollars in thousands) | Fair value, beginning of period | $ | 652,216 |
| | $ | — |
| Obtained through Hatteras Acquisition | — |
| | 355,820 |
| Purchases | — |
| | 166,585 |
| Sales | (33 | ) | | — |
| Other | (27 | ) | | — |
| Change in fair value due to: | | | | Changes in valuation inputs or assumptions (1) | (4,629 | ) | | 178,463 |
| Other changes, including realization of expected cash flows | (66,667 | ) | | (48,652 | ) | Fair value, end of period | $ | 580,860 |
| | $ | 652,216 |
| | |
| | |
(1) Principally represents changes in discount rates and prepayment speed inputs used in valuation model, primarily due to changes in interest in CreXus excludedrates.
For the estimated fair value | | ofyears ended December 31, 2017 and 2016, the control premium that resulted from the merger transaction. The Company recognized a loss$129.4 million and $60.5 million of $18.9 million during the second quarter of 2013 as a result of remeasuring the fair value of its equity interestnet servicing income from MSRs in CreXus held before the business combination.
Under ASC 805, merger-related transaction costs (such as advisory, legal, valuation and other professional fees) are not included as components of consideration transferred but are expensed in the periods in which the costs are incurred. Transaction costs of $7.3 million were incurred during 2013 and were included in other general and administrative expensesOther income (loss) in the Consolidated Statements of Comprehensive Income (Loss).
| | | 8. | COMMERCIAL REAL ESTATE INVESTMENTS |
6. COMMERCIAL REAL ESTATE INVESTMENTS
At December 31, 2014 and 2013, commercial real estate investments were composed of the following:
CRE Debt and Preferred Equity Investments | | December 31, 2014 | | | December 31, 2013 | | | | Outstanding Principal | | | Carrying Value(1) | | | Percentage of Loan Portfolio(2) | | | Outstanding Principal | | | Carrying Value(1) | | | Percentage of Loan Portfolio(2) | | | | (dollars in thousands) | | Senior mortgages | | $ | 384,304 | | | $ | 383,895 | | | | 25.2 | % | | $ | 669,512 | | | $ | 667,299 | | | | 42.2 | % | Senior securitized mortgages(3) | | | 399,541 | | | | 398,634 | | | | 26.3 | % | | | - | | | | - | | | | 0.0 | % | Subordinate notes | | | - | | | | - | | | | 0.0 | % | | | 41,059 | | | | 41,408 | | | | 2.6 | % | Mezzanine loans | | | 522,474 | | | | 522,731 | | | | 34.4 | % | | | 626,883 | | | | 628,102 | | | | 39.5 | % | Preferred equity | | | 214,653 | | | | 212,905 | | | | 14.1 | % | | | 249,769 | | | | 247,160 | | | | 15.7 | % | Total | | $ | 1,520,972 | | | $ | 1,518,165 | | | | 100.0 | % | | $ | 1,587,223 | | | $ | 1,583,969 | | | | 100.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | | (1) Carrying value includes unamortized origination fees of $3.0 million and $4.9 million as of December 31, 2014 and December 31, 2013, respectively. | | (2) Based on outstanding principal. | | (3) Assets of consolidated VIE. | |
At December 31, 2017 and 2016, commercial real estate investments held for investment were comprised of the following: | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2017 | | December 31, 2016 | | Outstanding Principal | | Carrying Value (1) | | Percentage of Loan Portfolio (2) | | Outstanding Principal | | Carrying Value (1) | | Percentage of Loan Portfolio (2) | | (dollars in thousands) | Senior mortgages | $ | 629,143 |
| | $ | 625,900 |
| | 60.9 | % | | $ | 512,322 |
| | $ | 510,071 |
| | 52.6 | % | Mezzanine loans | 395,015 |
| | 394,442 |
| | 38.2 | % | | 453,693 |
| | 451,467 |
| | 46.5 | % | Preferred equity | 9,000 |
| | 8,985 |
| | 0.9 | % | | 9,000 |
| | 8,967 |
| | 0.9 | % | Total (3) | $ | 1,033,158 |
| | $ | 1,029,327 |
| | 100.0 | % | | $ | 975,015 |
| | $ | 970,505 |
| | 100.0 | % |
(1) Carrying value includes unamortized origination fees of $3.8 million and $4.5 million at December 31, 2017 and 2016, respectively. (2) Based on outstanding principal. (3) Excludes loans held for sale, net. | | | | | | | | | | | | | | | | | | December 31, 2017 | | Senior Mortgages | | Mezzanine Loans | | Preferred Equity | | Total | | (dollars in thousands) | Beginning balance | $ | 510,071 |
| | $ | 451,467 |
| | $ | 8,967 |
| | $ | 970,505 |
| Originations & advances (principal) | 338,242 |
| | 69,121 |
| | — |
| | 407,363 |
| Principal payments | (221,421 | ) | | (127,799 | ) | | — |
| | (349,220 | ) | Amortization & accretion of (premium) discounts | (44 | ) | | 28 |
| | — |
| | (16 | ) | Net (increase) decrease in origination fees | (3,317 | ) | | (605 | ) | | — |
| | (3,922 | ) | Amortization of net origination fees | 2,369 |
| | 2,230 |
| | 18 |
| | 4,617 |
| Net carrying value | $ | 625,900 |
| | $ | 394,442 |
| | $ | 8,985 |
| | $ | 1,029,327 |
|
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 15. Financial Statements
| | December 31, 2014 | | | | | Senior Mortgages | | | Senior Securitized Mortgages(1) | | | Subordinate Notes | | | Mezzanine Loans | | | Preferred Equity | | | Total | | | | | (dollars in thousands) | | | Beginning balance | | $ | 667,299 | | | $ | - | | | $ | 41,408 | | | $ | 628,102 | | | $ | 247,160 | | | $ | 1,583,969 | | | Originations & advances (principal) | | | 127,112 | | | | - | | | | - | | | | 122,742 | | | | - | | | | 249,854 | | | Principal payments | | | (12,756 | ) | | | - | | | | (41,059 | ) | | | (227,151 | ) | | | (35,116 | ) | | | (316,082 | ) | | Sales (principal) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | Amortization & accretion of (premium) discounts | | | (138 | ) | | | - | | | | (349 | ) | | | (1,093 | ) | | | 108 | | | | (1,472 | ) | | Net (increase) decrease in origination fees | | | (2,427 | ) | | | (116 | ) | | | - | | | | (478 | ) | | | - | | | | (3,021 | ) | | Amortization of net origination fees | | | 2,783 | | | | 772 | | | | - | | | | 609 | | | | 753 | | | | 4,917 | | | Transfers | | | (397,978 | ) | | | 397,978 | | | | - | | | | - | | | | - | | | | - | | | Allowance for loan losses | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | Net carrying value | | $ | 383,895 | | | $ | 398,634 | | | $ | - | | | $ | 522,731 | | | $ | 212,905 | | | $ | 1,518,165 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2013 | | December 31, 2016 | | | Senior Mortgages | | | Senior Securitized Mortgages(1) | | | Subordinate Notes | | | Mezzanine Loans | | | Preferred Equity | | | Total | | Senior Mortgages | | Senior Securitized Mortgages (1) | | Mezzanine Loans | | Preferred Equity | | Total | | | (dollars in thousands) | | (dollars in thousands) | Beginning balance | | $ | 101,473 | | | $ | - | | | $ | 41,851 | | | $ | 547,068 | | | $ | 39,060 | | | $ | 729,452 | | $ | 385,838 |
| | $ | 262,703 |
| | $ | 578,503 |
| | $ | 121,773 |
| | $ | 1,348,817 |
| Originations & advances (principal) | | | 590,039 | | | | - | | | | - | | | | 184,704 | | | | 210,000 | | | | 984,743 | | 211,318 |
| | — |
| | 62,390 |
| | — |
| | 273,708 |
| Principal payments | | | (24,333 | ) | | | - | | | | (235 | ) | | | (90,431 | ) | | | - | | | | (114,999 | ) | (86,310 | ) | | (263,072 | ) | | (191,291 | ) | | (113,444 | ) | | (654,117 | ) | Sales (principal) | | | (13,750 | ) | | | - | | | | - | | | | - | | | | - | | | | (13,750 | ) | | Amortization & accretion of (premium) discounts | | | (109 | ) | | | - | | | | (208 | ) | | | (484 | ) | | | 85 | | | | (716 | ) | (136 | ) | | — |
| | (178 | ) | | — |
| | (314 | ) | Net (increase) decrease in origination fees | | | 151 | | | | - | | | | - | | | | (285 | ) | | | (2,118 | ) | | | (2,252 | ) | (2,086 | ) | | — |
| | (472 | ) | | — |
| | (2,558 | ) | Amortization of net origination fees | | | 1,328 | | | | - | | | | - | | | | 30 | | | | 133 | | | | 1,491 | | 1,447 |
| | 369 |
| | 2,515 |
| | 638 |
| | 4,969 |
| Transfers | | | 12,500 | | | | - | | | | - | | | | (12,500 | ) | | | - | | | | - | | | Allowance for loan losses | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | Net carrying value | | $ | 667,299 | | | $ | - | | | $ | 41,408 | | | $ | 628,102 | | | $ | 247,160 | | | $ | 1,583,969 | | | Net carrying value (2) | | $ | 510,071 |
| | $ | — |
| | $ | 451,467 |
| | $ | 8,967 |
| | $ | 970,505 |
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(1) Assets of consolidated VIE. (2) Excludes loans held for sale, net.
Internal CRE Debt and Preferred Equity Investment Ratings The Company’s internal loan risk ratings are based on the guidance provided by the Office of the Comptroller of the Currency for commercial real estate lending. The Company’s internal risk rating categories include “Performing”, “Performing - Closely Monitored”, “Performing - Special Mention”, “Substandard”, “Doubtful” or “Loss”. Performing loans meet all present contractual obligations. Performing - Closely Monitored loans meet all present contractual obligations, but are transitional or could be exhibiting some weakness in both leverage and liquidity. Performing - Special Mention loans meet all present contractual obligations, but exhibit potential weakness that deserves management’s close attention and if uncorrected, may result in deterioration of repayment prospects. Substandard loans are inadequately protected by sound worth and paying capacity of the obligor or of the collateral pledged with a distinct possibility that loss will be sustained if some of the deficiencies are not corrected. Doubtful loans are Substandard loans whereby collection of all contractual principal and interest is highly questionable or improbable. Loss loans are considered uncollectible. | | December 31, 2014 | | | | | | | Percentage of CRE Debt and | | | Internal Ratings | | Investment Type | | Outstanding Principal | | | Preferred Equity Portfolio | | | Performing | | | Watch List | | | Defaulted-Recovery | | | Workout | | | | (dollars in thousands) | | Senior mortgages | | $ | 384,304 | | | | 25.2 | % | | $ | 371,331 | | | $ | - | | | $ | 12,973 | (2) | | $ | - | | Senior securitized mortgages(1) | | | 399,541 | | | | 26.3 | % | | | 390,291 | | | | 9,250 | | | | - | | | | - | | Subordinate notes | | | - | | | | 0.0 | % | | | - | | | | - | | | | - | | | | - | | Mezzanine loans | | | 522,474 | | | | 34.4 | % | | | 522,474 | | | | - | | | | - | | | | - | | Preferred equity | | | 214,653 | | | | 14.1 | % | | | 214,653 | | | | - | | | | - | | | | - | | | | $ | 1,520,972 | | | | 100.0 | % | | $ | 1,498,749 | | | $ | 9,250 | | | $ | 12,973 | | | $ | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2013 | | | | | | | | Percentage of CRE Debt and | | | Internal Ratings | | Investment Type | | Outstanding Principal | | | Preferred Equity Portfolio | | | Performing | | | Watch List | | | Defaulted-Recovery | | | Workout | | | | (dollars in thousands) | | Senior mortgages | | $ | 669,512 | | | | 42.2 | % | | $ | 644,039 | | | $ | - | | | $ | 25,473 | (3) | | $ | - | | Subordinate notes | | | 41,059 | | | | 2.6 | % | | | 41,059 | | | | - | | | | - | | | | - | | Mezzanine loans | | | 626,883 | | | | 39.5 | % | | | 620,883 | | | | - | | | | 6,000 | | | | - | | Preferred equity | | | 249,769 | | | | 15.7 | % | | | 249,769 | | | | - | | | | - | | | | - | | | | $ | 1,587,223 | | | | 100.0 | % | | $ | 1,555,750 | | | $ | - | | | $ | 31,473 | | | $ | - | | | | | | | | | | | | | | | | | | | | | | | | | | | (1) Assets of consolidated VIE. | | (2) Relates to one loan on nonaccrual status. | | (3) Includes one loan on non-accrual status with a carrying value of $12.9 million. | |
The Company did not have any impaired loans, nonaccrual loans, or loans in default in the commercial loans portfolio as all of the loans were performing at December 31, 2017 and 2016. As such, no provision for loan loss was deemed necessary at December 31, 2017 and 2016. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2017 | | | | | | Internal Ratings | Investment Type | Outstanding Principal | | Percentage of CRE Debt and Preferred Equity Portfolio | | Performing | | Performing - Closely Monitored | | Performing - Special Mention | | Substandard (1) | | Doubtful | | Loss | | Total | | (dollars in thousands) | Senior mortgages | $ | 629,143 |
| | 60.9 | % | | $ | 409,878 |
| | $ | 115,075 |
| | $ | 36,800 |
| | $ | 67,390 |
| | $ | — |
| | $ | — |
| | $ | 629,143 |
| Mezzanine loans | 395,015 |
| | 38.2 | % | | 206,169 |
| | 66,498 |
| | 122,348 |
| | — |
| | — |
| | — |
| | 395,015 |
| Preferred equity | 9,000 |
| | 0.9 | % | | — |
| | — |
| | 9,000 |
| | — |
| | — |
| | — |
| | 9,000 |
| Total | $ | 1,033,158 |
| | 100.0 | % | | $ | 616,047 |
| | $ | 181,573 |
| | $ | 168,148 |
| | $ | 67,390 |
| | $ | — |
| | $ | — |
| | $ | 1,033,158 |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2016 | | |
| | | | Internal Ratings | Investment Type | Outstanding Principal (2) | | Percentage of CRE Debt and Preferred Equity Portfolio | | Performing | | Performing - Closely Monitored | | Performing - Special Mention | | Substandard | | Doubtful | | Loss | | Total | | (dollars in thousands) | Senior mortgages | $ | 512,322 |
| | 52.6 | % | | $ | 144,434 |
| | $ | 243,448 |
| | $ | 124,440 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 512,322 |
| Mezzanine loans | 453,693 |
| | 46.5 | % | | 254,337 |
| | 170,039 |
| | 29,317 |
| | — |
| | — |
| | — |
| | 453,693 |
| Preferred equity | 9,000 |
| | 0.9 | % | | — |
| | — |
| | 9,000 |
| | — |
| | — |
| | — |
| | 9,000 |
| Total | $ | 975,015 |
| | 100.0 | % | | $ | 398,771 |
| | $ | 413,487 |
| | $ | 162,757 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 975,015 |
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(1) The Company transferred one loan to Substandard during the year ended December 31, 2017. The downgrade in risk rating was based on the borrower’s failure to meet originally projected performance targets. The Company evaluated whether an impairment exists and determined that, based on quantitative and qualitative factors, including that the borrower is current, the Company expects timely repayment of contractual amounts due. (2) Excludes Loans held for sale, net. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 15. Financial Statements
At December 31, 2017, and 2016, approximately 86% and 77%, respectively,of the carrying value of the Company’s CRE Debt and Preferred Equity Investments, excluding commercial loans held for sale, were adjustable-rate. Investments in Commercial Real Estate There were no acquisitions of new real estate holdings during the year ended December 31, 2017. The company sold one of its wholly-owned triple net leased properties during the year ended December 31, 2017 for $12.0 million and recognized a gain on sale of $5.1 million.
Real Estate Acquisitions
In November 2014, a joint venture, in which the Company has a 90% interest, acquired eleven retail properties located in New York, Ohio and Georgia. The purchase price was funded with cash and a new $104.0 million, ten-year, 4.03% fixed-rate interest-only mortgage loan.
| | The following table summarizes acquisitions of real estate held for investment during the year ended December 31, 2014:
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The weighted average amortization period for intangible assets and liabilities at December 31, 2017 is 4.5 years. Above market leases and leasehold intangible assets are included in Intangible assets, net and below market leases are included in Accounts payable and other liabilities in the Consolidated Statements of Financial Condition. | | | | | Date of Acquisition | Type | Location | Purchase Price | Remaining Lease Term (Years) (1) | (dollars in thousands) | April 2014 | Single-tenant retail | Tennessee | $ 19,000 | 8 | June 2014 | Multi-tenant retail | Virginia | $ 17,743 | 7 | November 2014 | Multi-tenant retail | New York, Ohio, Georgia | $ 154,000 | 4.6 | (1) Does not include extension options. | | | |
| | | | | | | | | | December 31, 2017 | | December 31, 2016 | | (dollars in thousands) | Real estate held for investment, at amortized cost | | | | Land | $ | 111,012 |
| | $ | 112,675 |
| Buildings and improvements | 330,959 |
| | 335,945 |
| Subtotal | 441,971 |
| | 448,620 |
| Less: accumulated depreciation | (48,920 | ) | | (34,221 | ) | Total real estate held for investment, at amortized cost, net | 393,051 |
| | 414,399 |
| Equity in unconsolidated joint ventures | 92,902 |
| | 60,168 |
| Investments in commercial real estate, net | $ | 485,953 |
| | $ | 474,567 |
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The aforementioned acquisitions were accounted for using the acquisition method of accounting. The Company incurred approximately $2.3 million of transaction costs in connection with the acquisitions, which were expensed during the year ended December 31, 2014 and are reflected in Other general and administrative | | expensesDepreciation expense was $15.8 million and $20.4 million for the years ended December 31, 2017 and 2016, respectively and is included in Other income (loss) in the accompanying Consolidated Statements of Comprehensive Income (Loss).
The following table presents the aggregate allocation of the purchase price:
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| | Tennessee | | | Virginia | | | Joint Venture | | | Total | | | | (dollars in thousands) | | Purchase Price Allocation: | | | | | | | | | | | | | Land | | $ | 3,503 | | | $ | 6,394 | | | $ | 21,581 | | | $ | 31,478 | | Buildings | | | 11,960 | | | | 10,862 | | | | 97,133 | | | | 119,955 | | Site improvements | | | 1,349 | | | | 1,184 | | | | 12,952 | | | | 15,485 | | Tenant Improvements | | | - | | | | - | | | | 9,601 | | | | 9,601 | | Real estate held for investment | | | 16,812 | | | | 18,440 | | | | 141,267 | | | | 176,519 | | | | | | | | | | | | | | | | | | | Intangible assets (liabilities): | | | | | | | | | | | | | | | | | Leasehold intangible assets | | | 4,288 | | | | 3,218 | | | | 22,555 | | | | 30,061 | | Above market lease | | | - | | | | - | | | | 5,463 | | | | 5,463 | | Below market lease value | | | (2,100 | ) | | | (3,915 | ) | | | (15,285 | ) | | | (21,300 | ) | Total purchase price | | $ | 19,000 | | | $ | 17,743 | | | $ | 154,000 | | | $ | 190,743 | |
The weighted average amortization period for intangible assets and liabilities is 4.25 years. Above market leases and leasehold intangible assets are included in Other assets and below market leases are included in Accounts payable and other liabilities in the Consolidated Statements of Financial Condition. The fair value of the 10% non-controlling interest in the | | joint venture at the acquisition date was $15.4 million. The fair value of the acquisition and the related non-controlling interest was determined based on the purchase price. |
Total Commercial Real Estate Investment
| | December 31, 2014 | | | December 31, 2013 | | | | (dollars in thousands) | | Real estate held for investment, at amortized cost | | | | | | | Land | | $ | 38,117 | | | $ | 6,639 | | Buildings and improvements | | | 176,139 | | | | 31,100 | | Subtotal | | | 214,256 | | | | 37,739 | | Less: accumulated depreciation | | | (4,224 | ) | | | (877 | ) | Total real estate held for investment at amortized cost, net | | | 210,032 | | | | 36,862 | | Real estate held for sale at fair value | | | - | | | | 23,270 | | Total investment in commercial real estate, net | | | 210,032 | | | | 60,132 | | Net carrying value of CRE Debt and Preferred Equity Investments | | | 1,518,165 | | | | 1,583,969 | | Total commercial real estate investments | | $ | 1,728,197 | | | $ | 1,644,101 | |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
Depreciation expense was $3.2 million and $0.9 million for the year ended December 31, 2014 and 2013, respectively and is included in General and administrative expenses in the Consolidated Statements of Comprehensive Income (Loss). The table below presents the minimum future rentals on noncancelable leases of the Company’s commercial real estate investments as of December 31, 2014.
| | The minimum rental amounts due under the leases are generally either subject to scheduled fixed increases or adjustments. The leases generally also require that the tenants reimburse us for certain operating costs. Approximate future minimum rents to be received over the next five years and thereafter for non-cancelable operating leases in effect at December 31, 2014 for the consolidated properties, including consolidated joint venture properties are as follows (in thousands): |
Rental Income
The minimum rental amounts due under leases are generally either subject to scheduled fixed increases or adjustments. The leases generally also require that the tenants reimburse the Company for certain operating costs. Approximate future minimum rents to be received over the next five years and thereafter for non-cancelable operating leases in effect at December 31, 2017 for consolidated investments in real estate are as follows: | | | | | | December 31, 2017 | | (dollars in thousands) | 2018 | $ | 29,245 |
| 2019 | 25,845 |
| 2020 | 21,192 |
| 2021 | 17,029 |
| 2022 | 12,141 |
| Later years | 20,552 |
| Total | $ | 126,004 |
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Mortgage loans payable at December 31, 2017 and 2016, were as follows: | | December 31, 2014 | | | | (dollars in thousands) | | 2015 | | $ | 20,299 | | 2016 | | | 18,285 | | 2017 | | | 15,661 | | 2018 | | | 13,388 | | 2019 | | | 11,050 | | Later years | | | 51,087 | | | | $ | 129,770 | |
| | | | | | | | | | | | | | | | | | December 31, 2017 | Property | Mortgage Carrying Value | | Mortgage Principal | | Interest Rate | | Fixed/Floating Rate | | Maturity Date | | Priority | (dollars in thousands) | Joint Ventures | $ | 286,373 |
| | $ | 289,125 |
| | 4.03% - 4.61% |
| | Fixed | | 2024 and 2025 | | First liens | Tennessee | 12,294 |
| | 12,350 |
| | 4.01 | % | | Fixed | | 9/6/2019 | | First liens | Virginia | 11,019 |
| | 11,025 |
| | 3.58 | % | | Fixed | | 6/6/2019 | | First liens | Total | $ | 309,686 |
| | $ | 312,500 |
| | | | | | | | |
Mortgage loans payable as of December 31, 2014 and 2013, were as follows:
December 31, 2014 | Property | | Mortgage Carrying Value | | | Mortgage Principal | | | Interest Rate | | Fixed/Floating Rate | Maturity Date | Priority | | | | | | (dollars in thousands) | | | Joint Venture | | $ | 103,950 | | | $ | 103,950 | | | | 4.03 | % | Fixed | 9/6/2019 | First liens | Tennessee | | | 12,350 | | | | 12,350 | | | | 4.01 | % | Fixed | 6/6/2019 | First liens | Virginia | | | 11,025 | | | | 11,025 | | | | 3.58 | % | Fixed | 12/6/2024 | First liens | Arizona | | | 16,709 | | | | 16,600 | | | | 3.50 | % | Fixed | 1/1/2017 | First liens | Nevada | | | 2,519 | | | | 2,505 | | | | 3.45 | % | Floating (1) | 3/29/2017 | First liens | | | $ | 146,553 | | | $ | 146,430 | | | | | | | | | | | | | | | | | | | | | | | | | (1) Rate is fixed via an interest rate swap (pay fixed 3.45%, receive floating rate of L+200). | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2013 | Property | | Mortgage Carrying Value | | | Mortgage Principal | | | Interest Rate | | Fixed/Floating Rate | Maturity Date | Priority | | | | | | | (dollars in thousands) | | | Arizona | | $ | 16,762 | | | $ | 16,600 | | | | 3.50 | % | Fixed | 1/1/2017 | First liens | Nevada | | | 2,570 | | | | 2,550 | | | | 3.45 | % | Floating (1) | 3/29/2017 | First liens | | | $ | 19,332 | | | $ | 19,150 | | | | | | | | | | | | | | | | | | | | | | | | | (1) Rate is fixed via an interest rate swap (pay fixed 3.45%, receive floating rate of L+200). | | |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 15. Financial Statements
| | | | | | | | | | | | | | | | | | December 31, 2016 | Property | Mortgage Carrying Value | | Mortgage Principal | | Interest Rate | | Fixed/Floating Rate | | Maturity Date | | Priority | (dollars in thousands) | Joint Ventures | $ | 285,993 |
| | $ | 289,125 |
| | 4.03% - 4.61% |
| | Fixed | | 2024 and 2025 | | First liens | Tennessee | 12,261 |
| | 12,350 |
| | 4.01 | % | | Fixed | | 9/6/2019 | | First liens | Virginia | 11,015 |
| | 11,025 |
| | 3.58 | % | | Fixed | | 6/6/2019 | | First liens | Nevada | 2,367 |
| | 2,365 |
| | L + 200 |
| | Floating (1) | | 3/29/2017 | | First liens | Total | $ | 311,636 |
| | $ | 314,865 |
| | | | | | | | |
(1) Includes a mortgage with a fixed rate via an interest rate swap (pay fixed 3.45%, receive floating rate of L+200).
The following table details future mortgage loan principal payments as ofat December 31, 2014: 2017: Years Ending December 31, | | Mortgage Loan Principal Payments | | | | (dollars in thousands) | | 2015 | | $ | 334 | | 2016 | | | 399 | | 2017 | | | 18,372 | | 2018 | | | - | | 2019 | | | 23,375 | | Later years | | | 103,950 | | | | $ | 146,430 | |
VIE | | | | | | Mortgage Loan Principal Payments | | (dollars in thousands) | 2018 | $ | — |
| 2019 | 23,375 |
| 2020 | — |
| 2021 | — |
| 2022 | — |
| Later years | 289,125 |
| Total | $ | 312,500 |
|
Securitization
In January 2014, the Company closed NLY Commercial Mortgage Trust 2014-FL1 (the “Trust”), a $399.5 million securitization financing transaction which provides permanent, non-recourse financing collateralized by floating-rate first mortgage debt investments originated or co-originated by the Company and is not subject to margin calls. A total of $260.7 million of investment grade bonds were issued by the Trust, representing an advance rate of 65.3% at a weighted average coupon of LIBOR plus 1.74% at closing. The Company is using the proceeds to originate commercial real estate investments. The Company retained bonds rated below investment grade and the only interest-only bond issued by the Trust, which are referred to as the subordinate bonds.
The Company incurred approximately $4.3 million of costs in connection with the securitization that have been capitalized and are being amortized to interest expense. Deferred financing costs are included in Other assets in the accompanying Consolidated Statements of Financial Condition.
| | The Trust is structured as a pass-through entity that receives principal and interest on the underlying collateral and distributes those payments to the certificate holders. The Trust is a VIE and the Company is the primary beneficiary as a result of its ability to replace the special servicer without cause through its ownership interest in the subordinate bonds. The Company’s exposure to the obligations of the VIE is generally limited to the Company’s investment in the Trust. Assets of the Trust may only be used to settle obligations of the Trust. Creditors of the Trust 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 Trust. No gain or loss was recognized upon initial consolidation of the Trust.
As of December 31, 2014 the carrying value of the Trust’s assets was $398.6 million, net of $0.9 million of unamortized origination fees, which are included in Commercial real estate debt and preferred equity in the accompanying Consolidated Statements of Financial Condition. As of December 31, 2014, the carrying value of the Trust’s liabilities was $260.7 million, classified as Securitized debt in the accompanying Consolidated Statements of Financial Condition.
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On December 11, 2015, the Company originated a $335.0 million recapitalization financing with respect to eight class A/B office properties in Orange County California. The Company previously classified the senior mortgage loan as held for sale. The balance of the senior loan held for sale at December 31, 2016 was $115.0 million ($114.4 million, net origination fees). During the year ended December 31, 2017, the Company sold the remaining balance of $115.0 million ($114.4 million, net of origination fees) of the senior loan to unrelated third parties at carrying value. Accordingly, no gain or loss was recorded in connection with the sale. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIESItem 15. Financial Statements7. FAIR VALUE MEASUREMENTS
The Company follows fair value guidance in accordance with GAAP to account for its financial instruments. The fair value of a financial instrument 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.
GAAP requires classification of financial instruments 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 fall within different levels of the hierarchy, the categorization is based on the lowest level 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.
| | | 9. | 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 financial instruments as available for sale or trading depending upon the type of instrument and the Company’s intent and ability to hold such instrument to maturity. Instruments 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.
U.S. Treasury securities and investment in affiliates are valued using quoted prices for identical instruments in active markets. Agency mortgage-backed securities, Agency debentures, 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 CORPORATE DEBT |
The Company invests in corporate loans and corporate debt securities through AMML.
The industry and rate sensitivity dispersion of the portfolio at December 31, 2017 and 2016 are as follows: ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 15. Financial Statements
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. Management reviews the fair values generated by the internal models to determine whether prices are reflective of the current market. Management 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. | | The Agency mortgage-backed securities, interest rate swap and swaption markets 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 Agency mortgage-backed securities, interest rate swaps and swaptions 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 Agency mortgage-backed securities, interest rate swaps, swaptions, TBA derivatives and MBS options as Level 2 inputs in the fair value hierarchy.
The following table presents the estimated fair values of financial instruments measured at fair value on a recurring basis.
|
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | | December 31, 2014 | | (dollars in thousands) | | Assets: | | | | | | | | | | | | | U.S. Treasury securities | | $ | - | | | $ | - | | | $ | - | | | $ | - | | Agency mortgage-backed securities | | | - | | | | 81,565,256 | | | | - | | | | 81,565,256 | | Agency debentures | | �� | - | | | | 1,368,350 | | | | - | | | | 1,368,350 | | Investment in affiliates | | | 143,045 | | | | - | | | | - | | | | 143,045 | | Interest rate swaps | | | - | | | | 75,225 | | | | - | | | | 75,225 | | Other derivatives | | | 117 | | | | 5,382 | | | | - | | | | 5,499 | | Total Assets | | $ | 143,162 | | | $ | 83,014,213 | | | $ | - | | | $ | 83,157,375 | | Liabilities: | | | | | | | | | | | | | | | | | U.S. Treasury securities sold, not yet purchased | | $ | - | | | $ | - | | | $ | - | | | $ | - | | Interest rate swaps | | | - | | | | 1,608,286 | | | | - | | | | 1,608,286 | | Other derivatives | | | 3,769 | | | | 4,258 | | | | - | | | | 8,027 | | Total Liabilities | | $ | 3,769 | | | $ | 1,612,544 | | | $ | - | | | $ | 1,616,313 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | Industry Dispersion | | December 31, 2017 | | December 31, 2016 | | Fixed Rate | | Floating Rate | | Total | | Fixed Rate | | Floating Rate | | Total | | (dollars in thousands) | Aircraft and Parts | $ | — |
| | $ | 34,814 |
| | $ | 34,814 |
| | $ | — |
| | $ | 32,067 |
| | $ | 32,067 |
| Coating, Engraving and Allied Services | — |
| | 64,034 |
| | 64,034 |
| | — |
| | — |
| | — |
| Commercial Fishing | — |
| | — |
| | — |
| | — |
| | 40,600 |
| | 40,600 |
| Computer Programming, Data Processing & Other Computer Related Services | — |
| | 192,946 |
| | 192,946 |
| | — |
| | 146,547 |
| | 146,547 |
| Drugs | — |
| | 38,708 |
| | 38,708 |
| | — |
| | 34,042 |
| | 34,042 |
| Electronic Components & Accessories | — |
| | 23,916 |
| | 23,916 |
| | — |
| | — |
| | — |
| Groceries and Related Products | — |
| | 14,794 |
| | 14,794 |
| | — |
| | 14,856 |
| | 14,856 |
| Grocery Stores | — |
| | 23,531 |
| | 23,531 |
| | — |
| | 23,761 |
| | 23,761 |
| Home Health Care Services | — |
| | 23,779 |
| | 23,779 |
| | — |
| | 39,205 |
| | 39,205 |
| Insurance Agents, Brokers and Services | — |
| | 28,872 |
| | 28,872 |
| | 4,391 |
| | 73,267 |
| | 77,658 |
| Management and Public Relations Services | — |
| | 94,871 |
| | 94,871 |
| | — |
| | 16,493 |
| | 16,493 |
| Medical and Dental Laboratories | — |
| | 26,956 |
| | 26,956 |
| | — |
| | 17,292 |
| | 17,292 |
| Miscellaneous Business Services | — |
| | 19,723 |
| | 19,723 |
| | 84,486 |
| | — |
| | 84,486 |
| Miscellaneous Equipment Rental and Leasing | — |
| | 49,129 |
| | 49,129 |
| | — |
| | — |
| | — |
| Miscellaneous Health and Allied Services, not elsewhere classified | — |
| | 25,963 |
| | 25,963 |
| | — |
| | 9,791 |
| | 9,791 |
| Miscellaneous Nonmetallic Minerals, except Fuels | — |
| | 25,992 |
| | 25,992 |
| | — |
| | 24,688 |
| | 24,688 |
| Miscellaneous Plastic Products | — |
| | 9,879 |
| | 9,879 |
| | — |
| | 27,036 |
| | 27,036 |
| Motor Vehicles and Motor Vehicle Parts and Supplies | — |
| | 12,212 |
| | 12,212 |
| | — |
| | 12,319 |
| | 12,319 |
| Offices and Clinics of Doctors of Medicine | — |
| | 76,678 |
| | 76,678 |
| | — |
| | 83,386 |
| | 83,386 |
| Offices of Clinics and Other Health Practitioners | — |
| | 18,979 |
| | 18,979 |
| | — |
| | — |
| | — |
| Personnel Supply Services | — |
| | — |
| | — |
| | — |
| | 36,921 |
| | 36,921 |
| Public Warehousing and Storage | — |
| | 48,890 |
| | 48,890 |
| | — |
| | — |
| | — |
| Research, Development and Testing Services | — |
| | 33,155 |
| | 33,155 |
| | — |
| | 17,744 |
| | 17,744 |
| Schools and Educational Services, not elsewhere classified | — |
| | 20,625 |
| | 20,625 |
| | — |
| | 20,979 |
| | 20,979 |
| Services Allied with the Exchange of Securities | — |
| | 13,960 |
| | 13,960 |
| | — |
| | — |
| | — |
| Surgical, Medical, and Dental Instruments and Supplies | — |
| | 29,687 |
| | 29,687 |
| | — |
| | 13,403 |
| | 13,403 |
| Telephone Communications | — |
| | 59,182 |
| | 59,182 |
| | — |
| | — |
| | — |
| Total | $ | — |
| | $ | 1,011,275 |
| | $ | 1,011,275 |
| | $ | 88,877 |
| | $ | 684,397 |
| | $ | 773,274 |
|
The table below reflects the Company’s aggregate positions by their respective place in the capital structure of the borrowers at December 31, 2017 and 2016. | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | At December 31, 2013 | | (dollars in thousands) | | Assets: | | | | | | | | | | | | | U.S. Treasury securities | | $ | 1,117,915 | | | $ | - | | | $ | - | | | $ | 1,117,915 | | Agency mortgage-backed securities | | | - | | | | 70,388,949 | | | | - | | | | 70,388,949 | | Agency debentures | | | - | | | | 2,969,885 | | | | - | | | | 2,969,885 | | Investment in affiliates | | | 139,447 | | | | - | | | | - | | | | 139,447 | | Interest rate swaps | | | - | | | | 559,044 | | | | - | | | | 559,044 | | Other derivatives | | | 3,487 | | | | 143,238 | | | | - | | | | 146,725 | | Total Assets | | $ | 1,260,849 | | | $ | 74,061,116 | | | $ | - | | | $ | 75,321,965 | | Liabilities: | | | | | | | | | | | | | | | | | U.S. Treasury securities sold, not yet purchased | | $ | 1,918,394 | | | $ | - | | | $ | - | | | $ | 1,918,394 | | Interest rate swaps | | | - | | | | 1,141,828 | | | | - | | | | 1,141,828 | | Other derivatives | | | 439 | | | | 55,079 | | | | - | | | | 55,518 | | Total Liabilities | | $ | 1,918,833 | | | $ | 1,196,907 | | | $ | - | | | $ | 3,115,740 | |
| | | | | | | | | | December 31, 2017 | | December 31, 2016 | | (dollars in thousands) | First lien loans | $ | 582,724 |
| | $ | 505,956 |
| Second lien loans | 428,551 |
| | 178,441 |
| Second lien notes | — |
| | 84,486 |
| Subordinated notes | — |
| | 4,391 |
| Total | $ | 1,011,275 |
| | $ | 773,274 |
|
GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the financial statements, for which it is practical to estimate the value. In cases where quoted market prices are not available, fair values are based upon discounted | | | 10. | cash flows using market yields or other valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, fair values are not necessarily indicative of the amount the Company would realize on disposition of the financial instruments. The use ofVARIABLE INTEREST ENTITIES |
In February 2015, the Company purchased the junior-most tranche, Class C Certificate of the Freddie Mac securitization, FREMF Mortgage Trust 2015-KLSF (“FREMF 2015-KLSF”) for $102.1 million. The underlying portfolio is a pool of 11 floating rate multifamily mortgage loans with a cut-off principal balance of $1.4 billion. The Company was required to consolidate the FREMF 2015-KLSF Trust’s assets and liabilities of $574.1 million and $532.2 million, respectively, at December 31, 2017. In April 2015, the Company purchased the junior-most tranche, Class C Certificate of the Freddie Mac securitization, FREMF Mortgage Trust 2015-KF7 (“FREMF 2015-KF7”) for $89.4 million. The underlying portfolio is a pool of 40 floating rate multifamily mortgage loans with a cut-off principal balance of $1.2 billion. The Company was required to consolidate the FREMF 2015-KF7 Trust’s assets and liabilities of $712.3 million and $661.7 million, respectively, at December 31, 2017. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 15. Financial Statements
In February 2016, the Company purchased the junior- most tranche, Class C Certificate of the Freddie Mac securitization, FREMF Mortgage Trust 2016-KLH1 (“FREMF 2016-KLH1”) for $107.6 million, net of a $4.4 million discount to face value of $112.0 million. The underlying portfolio is a pool of 28 floating rate multifamily mortgage loans with a cut-off principal balance of $1.5 billion. The Company is required to consolidate the FREMF 2016-KLH1 Trust’s assets and liabilities of $1.5 billion and $1.4 billion, respectively, at December 31, 2017. FREMF 2015-KLSF, FREMF 2015-KF7 and FREMF 2016-KLH1 are collectively referred to herein as the FREMF Trusts.
The FREMF Trusts are structured as pass-through entities that receive principal and interest on the underlying collateral and distribute those payments to the certificate holders. The FREMF Trusts are VIEs and the Company is considered to be the primary beneficiary as a result of its ability to replace the special servicer without cause through its ownership of the Class C Certificates and its current designation as the directing certificate holder. The Company’s exposure to the obligations of the VIEs is generally limited to the Company’s investment in the FREMF Trusts of $205.4 million. Assets of the FREMF Trusts may only be used to settle obligations of the FREMF Trusts. Creditors of the FREMF Trusts 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 FREMF Trusts. No gain or loss was recognized upon initial consolidation of the FREMF Trusts, but $0.8 million of related costs were expensed. The FREMF Trusts’ assets are included in Commercial real estate debt investments and the FREMF Trusts’ liabilities are included in Securitized debt of consolidated VIEs in the accompanying Consolidated Statements of Financial Condition.
Upon consolidation, the Company elected the fair value option for the financial assets and liabilities of the FREMF Trusts in order to avoid an accounting mismatch, and to more faithfully represent the economics of its interest in the entities. The fair value option requires that changes in fair value be reflected in the Company’s Consolidated Statements of Comprehensive Income (Loss). The Company early adopted ASU 2014-13 and applied the practical expedient fair value measurement whereby the Company determines whether the fair value of the financial assets or financial liabilities is more observable as a basis for measuring the less observable financial instruments. The Company has determined that the fair value of the financial liabilities of the FREMF Trusts are more observable, since the prices for these liabilities are primarily available from third-party pricing services utilized for multifamily mortgage-backed securities, while the individual assets of the trusts are inherently less capable of precise measurement given their illiquid nature and the limitations on available information related to these assets. Given that the Company’s methodology for valuing the financial assets of the FREMF Trusts are an aggregate fair value derived from the fair value of the financial liabilities, the Company has determined that the fair value of each of the financial assets in their entirety should be classified in Level 2 of the fair value measurement hierarchy. different market assumptions or estimation methodologies could have a material effect on the estimated fair value amounts.
The carrying value of short term instruments, including cash and cash equivalents, reverse repurchase agreements and repurchase agreements whose term is less than twelve months, and securities borrowed and securities loaned, generally approximates fair value due to the short term nature of the instruments.
The estimated fair value of commercial real estate debt and preferred equity investments takes into consideration changes in credit spreads and interest rates from the date of origination or purchase to the reporting date. The fair value also reflects consideration of asset-specific maturity dates and other items that could have an impact on the fair value as of the reporting date.
Estimates of fair value of corporate debt require the use of judgments and inputs including, but not limited to, the enterprise value of the borrower (i.e., an estimate of the total fair value of the borrower's debt and equity), the nature and realizable value of any collateral, the borrower’s ability to make payments when due and its earnings history. Management also considers factors that affect the macro and local economic markets in which the borrower operates.
The fair value of repurchase agreements with remaining maturities greater than one year or with embedded
| | optionality are valued as structured notes, with term to maturity, LIBOR rates and the Treasury curve being primary determinants of estimated fair value.
The fair value of mortgages payable is calculated using the estimated yield of a new par loan to value the remaining terms in place. A par loan is created using the identical terms of the existing loan; however, the coupon is derived by using the original spread against the interpolated Treasury. The fair value of mortgages payable also reflects consideration of the value of the underlying collateral and changes in credit risk from the time the debt was originated.
The carrying value of participation sold is based on the loan’s amortized cost. The fair value of participation sold is based on the fair value of the underlying related commercial loan.
The fair value of convertible senior notes is determined using end of day quoted prices in active markets.
The fair value of securitized debt of consolidated VIE is determined using the average of external vendor pricing services.
The following table summarizes the estimated fair value for financial assets and liabilities as of December 31, 2014 and 2013.
|
The FREMF Trusts mortgage loans had an unpaid principal balance of $2.8 billion at December 31, 2017. At December 31, 2017 there are no loans 90 days or more past due or on nonaccrual status. There is no gain or loss attributable to instrument-specific credit risk of the underlying loans or securitized debt securities at December 31, 2017 based upon the Company’s process of monitoring events of default on the underlying mortgage loans. F-25The Company consolidates a residential mortgage trust 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 most of the mortgage-backed securities issued by this VIE, including the subordinate securities, and a subsidiary of the Company continues to be the 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 elected not to apply the practical expedient under ASU 2014-13 as prices of both the financial liabilities and financial assets 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 $35.8 million at December 31, 2017. In December 2017, the Company was required to consolidate residential securitization trusts in which it had purchased subordinated securities because its liquidation rights over the trusts became exercisable. The Company has elected the fair value option for the financial assets and liabilities of these VIEs, but has elected not to apply the practical expedient under ASU 2014-13 as prices of both the financial liabilities and financial assets 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 $312.9 million at December 31, 2017.
In June 2016, a consolidated subsidiary of the Company entered into a $300.0 million credit facility with a third party financial institution. 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 be potentially significant to the entity. The Company has pledged corporate loans with a carrying amount of $415.6 million at December 31, 2017 as collateral for this credit facility. The transfers did not qualify for sale accounting and are reflected as an intercompany secured borrowing that is eliminated upon consolidation. At December 31, 2017, the subsidiary had an intercompany receivable of $138.2 million, which eliminates upon consolidation and an Other secured financing of $138.2 million to the third party financial institution. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 15. Financial Statements
In July 2017, a consolidated subsidiary of the Company entered into a $150.0 million credit facility with a third party financial institution. 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 $184.5 million at December 31, 2017, which continue to be reflected in the Company’s Consolidated Statements of Financial Condition in Corporate debt. At December 31, 2017, the subsidiary had an Other secured financing of $100.5 million to the third party financial institution.
The Company also owns variable interests in an entity that invests in MSRs 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 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 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 that silo.
The Company’s exposure to the obligations of its VIEs is generally limited to the Company’s investment in the VIEs of $1.0 billion at December 31, 2017. 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. A $7.1 million gain was recognized upon initial consolidation of the securitization trust entities in the fourth quarter of 2017; no other gains or losses were recognized upon consolidation of other VIEs. Interest income and expense are recognized using the effective interest method.
The statements of financial condition of the Company’s VIEs that are reflected in the Company’s Consolidated Statements of Financial Condition at December 31, 2017 and 2016 are as follows: | | | | | December 31, 2014 | | | December 31, 2013 | | | | Level in Fair Value Hierarchy | | | Carrying Value | | | Fair Value | | | Carrying Value | | | Fair Value | | Financial assets: | | | | | (dollars in thousands) | | Cash and cash equivalents | | 1 | | | $ | 1,741,244 | | | $ | 1,741,244 | | | $ | 552,436 | | | $ | 552,436 | | Reverse repurchase agreements | | 1 | | | | 100,000 | | | | 100,000 | | | | 100,000 | | | | 100,000 | | Securities borrowed | | 1 | | | | - | | | | - | | | | 2,582,893 | | | | 2,582,893 | | U.S. Treasury securities | | 1 | | | | - | | | | - | | | | 1,117,915 | | | | 1,117,915 | | Agency mortgage-backed securities | | 2 | | | | 81,565,256 | | | | 81,565,256 | | | | 70,388,949 | | | | 70,388,949 | | Agency debentures | | 2 | | | | 1,368,350 | | | | 1,368,350 | | | | 2,969,885 | | | | 2,969,885 | | Investment in affiliates | | 1 | | | | 143,045 | | | | 143,045 | | | | 139,447 | | | | 139,447 | | Commercial real estate debt and preferred equity | | 3 | | | | 1,518,165 | | | | 1,528,444 | | | | 1,583,969 | | | | 1,581,836 | | Corporate debt | | 2 | | | | 166,464 | | | | 166,056 | | | | 117,687 | | | | 118,362 | | Interest rate swaps | | 2 | | | | 75,225 | | | | 75,225 | | | | 559,044 | | | | 559,044 | | Other derivatives | | 1,2 | | | | 5,499 | | | | 5,499 | | | | 146,725 | | | | 146,725 | | | | | | | | | | | | | | | | | | | | | | Financial liabilities: | | | | | | | | | | | | | | | | | | | | U.S. Treasury securities sold, not yet purchased | | 1 | | | $ | - | | | $ | - | | | $ | 1,918,394 | | | $ | 1,918,394 | | Repurchase agreements | | 1,2 | | | | 71,361,926 | | | | 71,587,222 | | | | 61,781,001 | | | | 62,134,133 | | Securities loaned | | 1 | | | | - | | | | - | | | | 2,527,668 | | | | 2,527,668 | | Convertible Senior Notes | | 1 | | | | 845,295 | | | | 863,470 | | | | 825,262 | | | | 870,199 | | Securitized debt of consolidated VIE | | 2 | | | | 260,700 | | | | 262,061 | | | | - | | | | - | | Mortgages payable | | 2 | | | | 146,553 | | | | 146,611 | | | | 19,332 | | | | 19,240 | | Participation sold | | 3 | | | | 13,693 | | | | 13,655 | | | | 14,065 | | | | 14,050 | | Interest rate swaps | | 2 | | | | 1,608,286 | | | | 1,608,286 | | | | 1,141,828 | | | | 1,141,828 | | Other derivatives | | 1,2 | | | | 8,027 | | | | 8,027 | | | | 55,518 | | | | 55,518 | |
8. SECURED FINANCING
The Company had outstanding $71.4 billion and $61.8 billion of repurchase agreements with weighted average borrowing rates of 1.62% and 2.33%, after giving effect to the Company’s interest rate swaps, and weighted
| | average remaining maturities of 141 days and 204 days as of December 31, 2014 and 2013, respectively.
At December 31, 2014 and 2013, the repurchase agreements had the following remaining maturities and weighted average rates:
|
| | December 31, 2014 | | | December 31, 2013 | | | | Repurchase Agreements | | | Weighted Average Rate | | | Repurchase Agreements | | | Weighted Average Rate | | | | | | | | | | | | | | | 1 day | | $ | - | | | | 0.00 | % | | $ | - | | | | 0.00 | % | 2 to 29 days | | | 28,354,167 | | | | 0.35 | % | | | 21,171,574 | | | | 0.36 | % | 30 to 59 days | | | 17,336,469 | | | | 0.43 | % | | | 13,373,921 | | | | 0.43 | % | 60 to 89 days | | | 4,040,677 | | | | 0.38 | % | | | 3,592,266 | | | | 0.44 | % | 90 to 119 days | | | 2,945,495 | | | | 0.50 | % | | | 4,010,334 | | | | 0.52 | % | Over 120 days(1) | | | 18,685,118 | | | | 1.24 | % | | | 19,632,906 | | | | 1.29 | % | Total | | $ | 71,361,926 | | | | 0.61 | % | | $ | 61,781,001 | | | | 0.68 | % | | | | | | | | | | | | | | | | | | (1) Approximately 15% and 16% of the total repurchase agreements had a remaining maturity over 1 year as of December 31, 2014 and 2013, respectively. | |
Repurchase agreements and reverse repurchase agreements with the same counterparty and the same maturity are presented net in the Consolidated Statements of Financial Condition when the terms of the agreements permit netting. The following table summarizes the gross amounts of reverse repurchase | | agreements and repurchase agreements, amounts offset in accordance with netting arrangements and net amounts of repurchase agreements and reverse repurchase agreements as presented in the Consolidated Statements of Financial Condition as of December 31, 2014 and 2013. |
| | | | | | | | | | | | | | December 31, 2017 | | FREMF Trusts | | Residential Mortgage Loan Trusts | | MSR Silo | | (dollars in thousands) | Assets | | | | | | Cash and cash equivalents | $ | — |
| | $ | — |
| | $ | 42,293 |
| Commercial real estate debt investments | 2,826,357 |
| | — |
| | — |
| Residential mortgages loans | — |
| | 478,811 |
| | 19,667 |
| Mortgage servicing rights | — |
| | — |
| | 580,860 |
| Accrued interest receivable | 10,339 |
| | 1,599 |
| | — |
| Other derivatives, at fair value | — |
| | — |
| | 1 |
| Other assets | — |
| | 1,418 |
| | 32,354 |
| Total assets | $ | 2,836,696 |
| | $ | 481,828 |
| | $ | 675,175 |
| Liabilities | |
| | |
| | |
| Securitized debt (non-recourse) at fair value | $ | 2,620,952 |
| | $ | 350,819 |
| | $ | — |
| Other secured financing | — |
| | — |
| | 10,496 |
| Accrued interest payable | 4,554 |
| | 931 |
| | — |
| Accounts payable and other liabilities | — |
| | 112 |
| | 4,856 |
| Total liabilities | $ | 2,625,506 |
| | $ | 351,862 |
| | $ | 15,352 |
|
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 15. Financial Statements
| | | | | | | | | | | | | | December 31, 2016 | | FREMF Trusts | | Residential Mortgage Loan Trust | | MSR Silos | | (dollars in thousands) | Assets | | | | | | Cash and cash equivalents | $ | — |
| | $ | — |
| | $ | 23,198 |
| Commercial real estate debt investments | 3,890,807 |
| | — |
| | — |
| Residential mortgage loans | — |
| | 165,869 |
| | 8,309 |
| Mortgage servicing rights | — |
| | — |
| | 652,216 |
| Accrued interest receivable | 8,690 |
| | 836 |
| | — |
| Other derivatives, at fair value | — |
| | — |
| | 9 |
| Other assets | 138 |
| | — |
| | 35,540 |
| Total assets | $ | 3,899,635 |
| | $ | 166,705 |
| | $ | 719,272 |
| Liabilities | |
| | | | |
| Securitized debt (non-recourse) at fair value | $ | 3,609,164 |
| | $ | 46,638 |
| | $ | — |
| Other secured financing | — |
| | — |
| | 3,825 |
| Other derivatives, at fair value | — |
| | — |
| | 9 |
| Accrued interest payable | 4,350 |
| | 107 |
| | — |
| Accounts payable and other liabilities | — |
| | 662 |
| | 14,007 |
| Total liabilities | $ | 3,613,514 |
| | $ | 47,407 |
| | $ | 17,841 |
|
The statement of comprehensive income (loss) of the Company’s VIEs that is reflected in the Company’s Consolidated Statements of Comprehensive Income (Loss) at December 31, 2017 is as follows:
| | December 31, 2014 | | | December 31, 2013 | | | | Reverse Repurchase Agreements | | | Repurchase Agreements | | Reverse Repurchase Agreements | | | Repurchase Agreements | | | | (dollars in thousands) | | Gross Amounts | | $ | 700,000 | | | $ | 71,961,926 | | | $ | 2,524,980 | | | $ | 64,205,981 | | Amounts Offset | | | (600,000 | ) | | | (600,000 | ) | | | (2,424,980 | ) | | | (2,424,980 | ) | Netted Amounts | | $ | 100,000 | | | $ | 71,361,926 | | | $ | 100,000 | | | $ | 61,781,001 | |
| | | | | | | | | | | | | | For the Year Ended December 31, 2017 | | FREMF Trusts | | Residential Mortgage Loan Trusts | | MSR Silo | | (dollars in thousands) | Net interest income: | | | | | | Interest income | $ | 110,712 |
| | $ | 5,436 |
| | $ | 1,500 |
| Interest expense | 58,583 |
| | 1,723 |
| | 374 |
| Net interest income | 52,129 |
| | 3,713 |
| | 1,126 |
| Realized gain (loss) on disposal of investments | — |
| | (831 | ) | | (2,044 | ) | Net gains (losses) on trading assets | — |
| | — |
| | 14 |
| Unrealized gain (loss) on investments at fair value (1) | 4,273 |
| | 7,865 |
| | (71,613 | ) | Other income (loss) | (24,541 | ) | | (361 | ) | | 129,325 |
| General and administration expenses | 1 |
| | 97 |
| | 2,567 |
| Net income (loss) | $ | 31,860 |
| | $ | 10,289 |
| | $ | 54,241 |
|
(1) Included in Net unrealized gains (losses) on investments measured at fair value through earnings. 9. DERIVATIVE INSTRUMENTS
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 U.S. Treasury futures contracts. The Company also enters into TBA derivatives and MBS options 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 assets as collateral for the derivative transactions, the amount of which may vary based on the market value, notional amount and remaining term of the derivative contract. In the event of a default by the counterparty, the Company could have difficulty obtaining its Investment Securities pledged as collateral as well as receiving payments in accordance with the terms of the derivative contracts.
The table below summarizes fair value information about our derivative assets and liabilities as of December 31, 2014 and 2013:
|
The geographic concentrations of credit risk exceeding 5% of the total loan unpaid principal balances related to the Company’s VIEs at December 31, 2017 are as follows: Derivatives Instruments | Balance Sheet Location | | December 31, 2014 | | | December 31, 2013 | | Assets: | | | (dollars in thousands) | | Interest rate swaps | Interest rate swaps, at fair value | | $ | 75,225 | | | $ | 559,044 | | Interest rate swaptions | Other derivative contracts, at fair value | | | 5,382 | | | | 110,361 | | TBA derivatives | Other derivative contracts, at fair value | | | - | | | | 20,693 | | MBS options | Other derivative contracts, at fair value | | | - | | | | 12,184 | | Futures contracts | Other derivative contracts, at fair value | | | 117 | | | | 3,487 | | | | | $ | 80,724 | | | $ | 705,769 | | | | | | | | | | | | Liabilities: | | | | | | | | | | Interest rate swaps | Interest rate swaps, at fair value | | | 1,608,286 | | | | 1,141,828 | | Interest rate swaptions | Other derivative contracts, at fair value | | | - | | | | 24,662 | | TBA derivatives | Other derivative contracts, at fair value | | | 4,258 | | | | 13,779 | | MBS options | Other derivative contracts, at fair value | | | - | | | | 16,638 | | Futures contracts | Other derivative contracts, at fair value | | | 3,769 | | | | 439 | | | | | $ | 1,616,313 | | | $ | 1,197,346 | |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 15. Financial Statements
Securitized Loans at Fair Value Geographic Concentration of Credit Risk | | | | | | | | | | | | | | | | | FREMF Trusts | | Residential Mortgage Loan Trusts | Property Location | Principal Balance | | % of Balance | | Property Location | | Principal Balance | | % of Balance | (dollars in thousands) | Maryland | $ | 494,885 |
| | 17.9 | % | | California | | $ | 191,804 |
| | 40.3 | % | Texas | 362,898 |
| | 13.1 | % | | Florida | | 36,159 |
| | 7.6 | % | Virginia | 329,250 |
| | 11.9 | % | | Illinois | | 24,446 |
| | 5.1 | % | New York | 280,925 |
| | 10.1 | % | | Virginia | | 24,437 |
| | 5.1 | % | North Carolina | 242,707 |
| | 8.8 | % | | Other (1) | | 199,516 |
| | 41.9 | % | Pennsylvania | 225,810 |
| | 8.1 | % | | | |
|
| |
|
| Massachusetts | 179,440 |
| | 6.5 | % | | | | | | | Ohio | 168,746 |
| | 6.1 | % | | | | | | | Florida | 146,960 |
| | 5.3 | % | | | | | | | Other (1) | 339,203 |
| | 12.2 | % | | | | | | | Total | $ | 2,770,824 |
| | 100.0 | % | | Total | | $ | 476,362 |
| | 100.0 | % |
(1) No individual state greater than 5%
| | | 11. | FAIR VALUE MEASUREMENTS |
The Company follows fair value guidance in accordance with GAAP to account for its financial instruments. The fair value of a financial instrument 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.
GAAP requires classification of financial instruments 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 fall within different levels of the hierarchy, the categorization is based on the lowest level 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.
Residential Investment 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.
Futures contracts are valued using quoted prices for identical instruments in active markets and are classified as Level 1.
Residential Investment Securities, residential mortgage loans, interest rate swap and swaption markets 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 Investment Securities, interest rate swaps, swaptions, TBA derivatives and MBS ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
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 Investment Securities, interest rate swaps, swaptions, TBA derivatives and MBS options as Level 2 inputs in the fair value hierarchy.
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, as discussed in the “Commercial Real Estate Investments” Note, Commercial real estate debt investments carried at fair value are classified as Level 2.
For the fair value of securitized debt of consolidated VIEs, refer to the Note titled “Variable Interest Entities” for additional information.
The Company classifies its investments in MSRs 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 its internally modeled values. The valuation of MSRs requires 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 measured at fair value on a recurring basis. There were no transfers between levels of the fair value hierarchy during the periods presented. | | | | | | | | | | | | | | | | | | December 31, 2017 | | Level 1 | | Level 2 | | Level 3 | | Total | | (dollars in thousands) | Assets: | | | | | | | | Agency mortgage-backed securities | $ | — |
| | $ | 90,551,763 |
| | $ | — |
| | $ | 90,551,763 |
| Credit risk transfer securities | — |
| | 651,764 |
| | — |
| | 651,764 |
| Non-Agency mortgage-backed securities | — |
| | 1,097,294 |
| | — |
| | 1,097,294 |
| Residential mortgage loans | — |
| | 1,438,322 |
| | — |
| | 1,438,322 |
| Mortgage servicing rights | — |
| | — |
| | 580,860 |
| | 580,860 |
| Commercial real estate debt investments | — |
| | 3,089,108 |
| | — |
| | 3,089,108 |
| Interest rate swaps | — |
| | 30,272 |
| | — |
| | 30,272 |
| Other derivatives | 218,361 |
| | 65,252 |
| | — |
| | 283,613 |
| Total assets | $ | 218,361 |
| | $ | 96,923,775 |
| | $ | 580,860 |
| | $ | 97,722,996 |
| Liabilities: | | | | | | | | Securitized debt of consolidated VIEs | $ | — |
| | $ | 2,971,771 |
| | $ | — |
| | $ | 2,971,771 |
| Interest rate swaps | — |
| | 569,129 |
| | — |
| | 569,129 |
| Other derivatives | 12,285 |
| | 26,440 |
| | — |
| | 38,725 |
| Total liabilities | $ | 12,285 |
| | $ | 3,567,340 |
| | $ | — |
| | $ | 3,579,625 |
|
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
| | | | | | | | | | | | | | | | | | December 31, 2016 | | Level 1 | | Level 2 | | Level 3 | | Total | | (dollars in thousands) | Assets: | |
| | |
| | |
| | |
| Agency mortgage-backed securities | $ | — |
| | $ | 75,589,873 |
| | $ | — |
| | $ | 75,589,873 |
| Credit risk transfer securities | — |
| | 724,722 |
| | — |
| | 724,722 |
| Non-Agency mortgage-backed securities | — |
| | 1,401,307 |
| | — |
| | 1,401,307 |
| Residential mortgage loans | — |
| | 342,289 |
| | — |
| | 342,289 |
| Mortgage servicing rights | — |
| | — |
| | 652,216 |
| | 652,216 |
| Commercial real estate debt investments | — |
| | 4,321,739 |
| | — |
| | 4,321,739 |
| Interest rate swaps | — |
| | 68,194 |
| | — |
| | 68,194 |
| Other derivatives | 168,209 |
| | 3,057 |
| | — |
| | 171,266 |
| Total assets | $ | 168,209 |
| | $ | 82,451,181 |
| | $ | 652,216 |
| | $ | 83,271,606 |
| Liabilities: | | | | | | | | Securitized debt of consolidated VIEs | $ | — |
| | $ | 3,655,802 |
| | $ | — |
| | $ | 3,655,802 |
| Interest rate swaps | — |
| | 1,443,765 |
| | — |
| | 1,443,765 |
| Other derivatives | 24,912 |
| | 61,525 |
| | — |
| | 86,437 |
| Total liabilities | $ | 24,912 |
| | $ | 5,161,092 |
| | $ | — |
| | $ | 5,186,004 |
|
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 following paragraph provides a general description of sensitivities of significant unobservable inputs along with interrelationships between and among the significant unobservable inputs and their impact on the fair value measurements. The effect of a change in a particular assumption in the sensitivity analysis below is considered independently of 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 MSRs, 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 MSRs, which in turn could result in a decline in the estimated fair value of MSRs. Refer to the Note titled “Mortgage Servicing Rights” for additional information.
The table below presents information about the significant unobservable inputs used for recurring fair value measurements for Level 3 MSRs. The table does not give effect to the Company’s risk management practices that might offset risks inherent in these Level 3 investments. | | | | | | | | | | December 31, 2017 | | December 31, 2016 | | | | Range | | | | Range | Valuation Technique | Unobservable Input (1) | | (Weighted Average ) | | Unobservable Input (1) | | (Weighted Average ) | Discounted cash flow | Discount rate | | 10.0% -15.0% (10.4%) | | Discount rate | | 10.0% -15.0% (10.4%) | | Prepayment rate | | 4.6% - 22.3% (9.4%) | | Prepayment rate | | 5.1% - 18.8% (8.7%) | | Delinquency rate | | 0.0% - 13.0% (2.2%) | | Delinquency rate | | 0.0% - 10.0% (2.3%) | | Cost to service | | $84 - $181 ($102) | | Cost to service | | $83 - $152 ($100) |
(1) Represents rates, estimates and assumptions that the Company believes would be used by market participants when valuing these assets.
Fair Value Information about Financial Instruments Not Carried at Fair Value
GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the financial statements, for which it is practical to estimate the value. In cases where quoted market prices are not available, fair values are based upon discounted cash flows using market yields, methodologies that incorporate market-based transactions or other valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, fair values are not necessarily indicative of the amount the Company would realize on disposition of the financial instruments. The use of different market assumptions or estimation methodologies ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
could have a material effect on the estimated fair value amounts.
The carrying value of short-term instruments, including cash and cash equivalents, reverse repurchase agreements, repurchase agreements and other secured financing whose term is less than twelve months, generally approximates fair value due to the short-term nature of the instruments.
The estimated fair value of commercial real estate debt and preferred equity investments takes into consideration changes in credit spreads and interest rates from the date of origination or purchase to the reporting date. The fair value also reflects consideration of asset-specific maturity dates and other items that could have an impact on the fair value as of the reporting date.
Estimates of fair value of corporate debt require the use of judgments and inputs including, but not limited to, the enterprise value of the borrower (i.e., an estimate of the total fair value of the borrower’s debt and equity), the nature and realizable value of any collateral, the borrower’s ability to make payments when due and its earnings history. Management also considers factors that affect the macro and local economic markets in which the borrower operates. The fair value of fixed-rate repurchase agreements with remaining maturities greater than one year or with embedded optionality are valued as structured notes, with term to maturity, LIBOR rates and the Treasury curve being primary determinants of estimated fair value.
The fair value of mortgages payable is calculated using the estimated yield of a new par loan to value the remaining terms in place. A par loan is created using the identical terms of the existing loan; however, the coupon is derived by using the original spread against the interpolated Treasury. The fair value of mortgages payable also reflects consideration of the value of the underlying collateral and changes in credit risk from the time the debt was originated.
The carrying value of participation sold is based on the loan’s amortized cost. The fair value of participation sold is based on the fair value of the underlying related commercial loan.
The following table summarizes the estimated fair values for financial assets and liabilities at December 31, 2017 and 2016. | | | | | | | | | | | | | | | | | | | | | | December 31, 2017 | | December 31, 2016 | | Level in Fair Value Hierarchy | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | Financial assets: | | | (dollars in thousands) | Cash and cash equivalents (1) | 1 | | $ | 706,589 |
| | $ | 706,589 |
| | $ | 1,539,746 |
| �� | $ | 1,539,746 |
| Agency mortgage-backed securities | 2 | | 90,551,763 |
| | 90,551,763 |
| | 75,589,873 |
| | 75,589,873 |
| Credit risk transfer securities | 2 | | 651,764 |
| | 651,764 |
| | 724,722 |
| | 724,722 |
| Non-Agency mortgage-backed securities | 2 | | 1,097,294 |
| | 1,097,294 |
| | 1,401,307 |
| | 1,401,307 |
| Residential mortgage loans | 2 | | 1,438,322 |
| | 1,438,322 |
| | 342,289 |
| | 342,289 |
| Mortgage servicing rights | 3 | | 580,860 |
| | 580,860 |
| | 652,216 |
| | 652,216 |
| Commercial real estate debt investments | 2 | | 3,089,108 |
| | 3,089,108 |
| | 4,321,739 |
| | 4,321,739 |
| Commercial real estate debt and preferred equity, held for investment | 3 | | 1,029,327 |
| | 1,035,095 |
| | 970,505 |
| | 968,824 |
| Commercial loans held for sale, net | 3 | | — |
| | — |
| | 114,425 |
| | 114,425 |
| Corporate debt (2) | 2 | | 1,011,275 |
| | 1,014,139 |
| | 773,274 |
| | 776,310 |
| Interest rate swaps (1) | 2 | | 30,272 |
| | 30,272 |
| | 68,194 |
| | 68,194 |
| Other derivatives | 1,2 | | 283,613 |
| | 283,613 |
| | 171,266 |
| | 171,266 |
| Financial liabilities: | | | | | | | | | | Repurchase agreements | 1,2 | | $ | 77,696,343 |
| | $ | 77,697,828 |
| | $ | 65,215,810 |
| | $ | 65,256,505 |
| Other secured financing | 1,2 | | 3,837,528 |
| | 3,837,595 |
| | 3,884,708 |
| | 3,885,430 |
| Securitized debt of consolidated VIEs | 2 | | 2,971,771 |
| | 2,971,771 |
| | 3,655,802 |
| | 3,655,802 |
| Participation sold | 2 | | — |
| | — |
| | 12,869 |
| | 12,827 |
| Mortgage payable | 3 | | 309,686 |
| | 310,218 |
| | 311,636 |
| | 312,442 |
| Interest rate swaps (1) | 2 | | 569,129 |
| | 569,129 |
| | 1,443,765 |
| | 1,443,765 |
| Other derivatives | 1,2 | | 38,725 |
| | 38,725 |
| | 86,437 |
| | 86,437 |
|
| | (1) | As a result of a change to a clearing organization’s rulebook effective January 3, 2017, beginning with the first quarter 2017 and in subsequent periods the Company is presenting the fair value of centrally cleared interest rate swaps net of variation margin pledged under such transactions. The variation margin was previously reported under cash and cash equivalents and is currently reported as a reduction to interest rate swaps, at fair value. |
| | (2) | Includes a held-to-maturity debt security carried at amortized cost of $84.5 million, with a fair value of $87.8 million, at December 31, 2016. The bond was repaid in April 2017. |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
The Company had outstanding $77.7 billion and $65.2 billion of repurchase agreements with weighted average borrowing rates of 1.89% and 1.64%, after giving effect to the Company’s interest rate swaps used to hedge cost of funds, and weighted average remaining maturities of 58 days and 96 days at December 31, 2017 and 2016, respectively.
At December 31, 2017 and 2016, the repurchase agreements had the following remaining maturities, collateral types and weighted average rates: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2017 | | Agency Mortgage-Backed Securities | | CRTs | | Non-Agency Mortgage-Backed Securities | | Commercial Loans | | Commercial Mortgage-Backed Securities | | Total Repurchase Agreements | | Weighted Average Rate | | (dollars in thousands) | 1 day | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | — |
| 2 to 29 days | 33,421,609 |
| | 263,528 |
| | 253,290 |
| | — |
| | 18,125 |
| | 33,956,552 |
| | 1.69 | % | 30 to 59 days | 10,811,515 |
| | 7,229 |
| | 3,658 |
| | — |
| | 6,375 |
| | 10,828,777 |
| | 1.44 | % | 60 to 89 days | 13,800,743 |
| | 7,214 |
| | 47,830 |
| | — |
| | — |
| | 13,855,787 |
| | 1.59 | % | 90 to 119 days | 10,128,006 |
| | — |
| | — |
| | — |
| | — |
| | 10,128,006 |
| | 1.39 | % | Over 120 days (1) | 8,542,108 |
| | — |
| | — |
| | 385,113 |
| | — |
| | 8,927,221 |
| | 1.77 | % | Total | $ | 76,703,981 |
| | $ | 277,971 |
| | $ | 304,778 |
| | $ | 385,113 |
| | $ | 24,500 |
| | $ | 77,696,343 |
| | 1.61 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2016 | | Agency Mortgage-Backed Securities | | CRTs | | Non-Agency Mortgage-Backed Securities | | Commercial Loans | | Total Repurchase Agreements | | Weighted Average Rate | | (dollars in thousands) | 1 day | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | — |
| 2 to 29 days | 29,657,705 |
| | 358,972 |
| | 377,366 |
| | — |
| | 30,394,043 |
| | 0.87 | % | 30 to 59 days | 11,373,300 |
| | 80,139 |
| | 241,360 |
| | — |
| | 11,694,799 |
| | 1.10 | % | 60 to 89 days | 6,966,827 |
| | 13,914 |
| | 101,491 |
| | — |
| | 7,082,232 |
| | 1.14 | % | 90 to 119 days | 2,063,561 |
| | — |
| | — |
| | — |
| | 2,063,561 |
| | 0.89 | % | Over 120 days (1) | 13,646,308 |
| | — |
| | — |
| | 334,867 |
| | 13,981,175 |
| | 1.47 | % | Total | $ | 63,707,701 |
| | $ | 453,025 |
| | $ | 720,217 |
| | $ | 334,867 |
| | $ | 65,215,810 |
| | 1.07 | % |
| | (1) | Approximately 1% and 7% of the total repurchase agreements had a remaining maturity over 1 year at December 31, 2017 and 2016, respectively. |
Repurchase agreements and reverse repurchase agreements with the same counterparty and the same maturity are presented net in the Consolidated Statements of Financial Condition when the terms of the agreements permit netting. The following table summarizes the gross amounts of reverse repurchase agreements and repurchase agreements, amounts offset in accordance with netting arrangements and net amounts of repurchase agreements and reverse repurchase agreements as presented in the Consolidated Statements of Financial Condition at December 31, 2017 and 2016. Refer to the “Derivative Instruments” Note for information related to the effect of netting arrangements on the Company’s derivative instruments.
| | | | | | | | | | | | | | | | | | December 31, 2017 | | December 31, 2016 | | Reverse Repurchase Agreements | | Repurchase Agreements | | Reverse Repurchase Agreements | | Repurchase Agreements | | (dollars in thousands) | Gross Amounts | $ | 1,250,000 |
| | $ | 78,946,343 |
| | $ | 400,000 |
| | $ | 65,615,810 |
| Amounts Offset | (1,250,000 | ) | | (1,250,000 | ) | | (400,000 | ) | | (400,000 | ) | Netted Amounts | $ | — |
| | $ | 77,696,343 |
| | $ | — |
| | $ | 65,215,810 |
|
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
The Company also finances a portion of its financial assets with advances from the Federal Home Loan Bank of Des Moines (“FHLB Des Moines”). Borrowings from FHLB Des Moines are reported in Other secured financing in the Company’s Consolidated Statements of Financial Condition. At December 31, 2017, $2.1 billion of advances from the FHLB Des Moines matures beyond three years and $1.4 billion matures between one to three years. At December 31, 2016, $3.6 billion of advances from the FHLB Des Moines matured beyond three years. The weighted average rate of the advances from the FHLB Des Moines was 1.49% and 0.76% at December 31, 2017 and 2016, respectively. The Company held $147.9 million and $145.8 million of membership and activity-based stock in the FHLB Des Moines at December 31, 2017 and 2016, respectively, which is reported at cost and included in Other assets on the Company’s Consolidated Statements of Financial Condition.
Financial instruments pledged as collateral under secured financing arrangements and interest rate swaps had an estimated fair value and accrued interest of $87.0 billion and $267.3 million, respectively, at December 31, 2017 and $74.3 billion and $229.2 million, respectively, at December 31, 2016.
| | | 13. | DERIVATIVE INSTRUMENTS |
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 and certain forward purchase commitments 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 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 MAC interest rate swaps, the Company may make or receive a payment at the time of entering into such interest rate swap to compensate for the out of market nature of such interest rate swap. 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 Residential Investment Securities pledged as collateral as well as receiving payments in accordance with the terms of the derivative contracts.
The table below summarizes fair value information about our derivative assets and liabilities at December 31, 2017 and 2016: | | | | | | | | | | | Derivatives Instruments | Balance Sheet Location | | December 31, 2017 |
| | December 31, 2016 |
| Assets: | | | (dollars in thousands) | Interest rate swaps | Interest rate swaps, at fair value | | $ | 30,272 |
| | $ | 68,194 |
| Interest rate swaptions | Other derivatives, at fair value | | 36,150 |
| | — |
| TBA derivatives | Other derivatives, at fair value | | 29,067 |
| | 2,774 |
| Futures contracts | Other derivatives, at fair value | | 218,361 |
| | 168,209 |
| Purchase commitments | Other derivatives, at fair value | | 35 |
| | 283 |
| | | | $ | 313,885 |
| | $ | 239,460 |
| Liabilities: | | | |
| | |
| Interest rate swaps | Interest rate swaps, at fair value | | $ | 569,129 |
| | $ | 1,443,765 |
| TBA derivatives | Other derivatives, at fair value | | 21,776 |
| | 60,972 |
| Futures contracts | Other derivatives, at fair value | | 12,285 |
| | 24,912 |
| Purchase commitments | Other derivatives, at fair value | | 157 |
| | 553 |
| Credit derivatives (1) | Other derivatives, at fair value | | 4,507 |
| | — |
| | | | $ | 607,854 |
| | $ | 1,530,202 |
|
(1) The maximum potential amount of future payments is the notional amount of $125.0 million at December 31, 2017.
The following table summarizes certain characteristics of the Company’s interest rate swaps at December 31, 20142017 and 2013: 2016: December 31, 2014 | | Maturity | | Current Notional (1) | | | Weighted Average Pay Rate (2) (3) | | | Weighted Average Receive Rate (2) | | | Weighted Average Years to Maturity (2) | | (dollars in thousands) | | 0 - 3 years | | $ | 2,502,505 | | | | 1.63 | % | | | 0.17 | % | | | 2.64 | | 3 - 6 years | | | 11,138,000 | | | | 2.06 | % | | | 0.22 | % | | | 5.18 | | 6 - 10 years | | | 13,069,200 | | | | 2.67 | % | | | 0.23 | % | | | 8.57 | | Greater than 10 years | | | 4,751,800 | | | | 3.58 | % | | | 0.20 | % | | | 19.53 | | Total / Weighted Average | | $ | 31,461,505 | | | | 2.49 | % | | | 0.22 | % | | | 8.38 | |
| (1) | Notional amount includes $500.0 million in forward starting pay fixed swaps. |
| (2) | Excludes forward starting swaps. |
| (3) | Weighted average fixed rate on forward starting pay fixed swaps was 3.25%. |
December 31, 2013 | | Maturity | | Current Notional | | | Weighted Average Pay Rate | | | Weighted Average Receive Rate | | | Weighted Average Years to Maturity | | (dollars in thousands) | | 0 - 3 years | | $ | 24,286,000 | | | | 1.83 | % | | | 0.18 | % | | | 1.98 | | 3 - 6 years | | | 8,865,410 | | | | 2.02 | % | | | 0.19 | % | | | 4.19 | | 6 - 10 years | | | 15,785,500 | | | | 2.37 | % | | | 0.23 | % | | | 7.66 | | Greater than 10 years | | | 3,490,000 | | | | 3.62 | % | | | 0.20 | % | | | 19.93 | | Total / Weighted Average | | $ | 52,426,910 | | | | 2.14 | % | | | 0.20 | % | | | 5.26 | |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
| | | | | | | | | | | | | December 31, 2017 | Maturity | Current Notional (1) | | Weighted Average Pay Rate (2) (3) | | Weighted Average Receive Rate (2) | | Weighted Average Years to Maturity (2) | (dollars in thousands) | 0 - 3 years | $ | 6,532,000 |
| | 1.56 | % | | 1.62 | % | | 2.08 | 3 - 6 years | 14,791,800 |
| | 2.12 | % | | 1.57 | % | | 4.51 | 6 - 10 years | 10,179,000 |
| | 2.35 | % | | 1.58 | % | | 8.04 | Greater than 10 years | 3,826,400 |
| | 3.65 | % | | 1.51 | % | | 18.47 | Total / Weighted Average | $ | 35,329,200 |
| | 2.22 | % | | 1.58 | % | | 6.72 | | | | | | | | | December 31, 2016 | Maturity | Current Notional (1) | | Weighted Average Pay Rate | | Weighted Average Receive Rate | | Weighted Average Years to Maturity | (dollars in thousands) | 0 - 3 years | $ | 3,444,365 |
| | 1.37 | % | | 1.00 | % | | 2.71 | 3 - 6 years | 10,590,000 |
| | 1.92 | % | | 0.99 | % | | 3.94 | 6 - 10 years | 8,206,900 |
| | 2.35 | % | | 1.10 | % | | 7.82 | Greater than 10 years | 3,634,400 |
| | 3.70 | % | | 0.83 | % | | 18.36 | Total / Weighted Average | $ | 25,875,665 |
| | 2.22 | % | | 1.02 | % | | 6.87 |
(1) Notional amount includes $8.1 billion forward starting pay fixed swaps at December 31, 2017. There were no forward starting swaps at December 31, 2016. (2) Excludes forward starting swaps. (3) Weighted average fixed rate on forward starting pay swaps was 1.86% at December 31, 2017.
The following table summarizes certain characteristics of the Company’s interest ratepresents swaptions outstanding at December 31, 2014 and 2013:2017. There were no swaptions outstanding at December 31, 2016. December 31, 2014 | Current Underlying Notional | | | Weighted Average Underlying Pay Rate | | Weighted Average Underlying Receive Rate | | | Weighted Average Underlying Years to Maturity | | | Weighted Average Months to Expiration | | | (dollars in thousands) | | Long | $ | 1,750,000 | | | 2.88% | | 3M LIBOR | | | | 9.17 | | | | 3.59 | | Short | $ | - | | | - | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | December 31, 2017 | | Current Underlying Notional | | Weighted Average Underlying Pay Rate | | Weighted Average Underlying Receive Rate | | Weighted Average Underlying Years to Maturity | | Weighted Average Months to Expiration |
| | (dollars in thousands) | | | Long | | $ | 6,000,000 |
| | 2.62 | % | | 3M LIBOR | | 9.97 | | 4.49 |
December 31, 2013 | Current Underlying Notional | | | Weighted Average Underlying Pay Rate | | Weighted Average Underlying Receive Rate | | | Weighted Average Underlying Years to Maturity | | | Weighted Average Months to Expiration | | | (dollars in thousands) | | | | | | | | | | Long | $ | 5,150,000 | | | 3.07% | | 3M LIBOR | | | | 10.10 | | | | 4.26 | | Short | $ | 1,000,000 | | | 3M LIBOR | | 2.83% | | | | 5.96 | | | | 23.71 | |
The following table summarizes certain characteristics of the Company’s TBA derivatives at December 31, 20142017 and 2013: 2016: December 31, 2014 | | | | | December 31, 2017 | | December 31, 2017 | Purchase and sale contracts for derivative TBAs | | Notional | | | Implied Cost Basis | | | Implied Market Value | | | Net Carrying Value | | Notional | | Implied Cost Basis | | Implied Market Value | | Net Carrying Value | (dollars in thousands) | (dollars in thousands) | | (dollars in thousands) | Purchase contracts | | $ | - | | | $ | - | | | $ | - | | | $ | - | | $ | 15,828,000 |
| | $ | 16,381,826 |
| | $ | 16,390,251 |
| | $ | 8,425 |
| Sale contracts | | | (375,000 | ) | | | (375,430 | ) | | | (379,688 | ) | | | (4,258 | ) | (250,000 | ) | | (254,804 | ) | | (255,938 | ) | | (1,134 | ) | Net TBA derivatives | | $ | (375,000 | ) | | $ | (375,430 | ) | | $ | (379,688 | ) | | $ | (4,258 | ) | 15,578,000 |
| | 16,127,022 |
| | 16,134,313 |
| | 7,291 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2013 | | | December 31, 2016 | | December 31, 2016 | Purchase and sale contracts for derivative TBAs | | Notional | | | Implied Cost Basis | | | Implied Market Value | | | Net Carrying Value | | Notional | | Implied Cost Basis | | Implied Market Value | | Net Carrying Value | (dollars in thousands) | (dollars in thousands) | | (dollars in thousands) | Purchase contracts | | $ | 2,625,000 | | | $ | 2,733,682 | | | $ | 2,722,324 | | | $ | (11,357 | ) | $ | 11,223,000 |
| | $ | 11,495,514 |
| | $ | 11,437,316 |
| | (58,198 | ) | Sale contracts | | | (3,875,000 | ) | | | (3,923,213 | ) | | | (3,904,941 | ) | | | 18,271 | | | Net TBA derivatives | | $ | (1,250,000 | ) | | $ | (1,189,531 | ) | | $ | (1,182,617 | ) | | $ | 6,914 | | |
The following table summarizes certain characteristics of the Company’s futures derivatives at December 31, 2017 and 2016: ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 15. Financial Statements
| | | | | | | | | | | | December 31, 2017 | | Notional - Long Positions | | Notional - Short Positions | | Weighted Average Years to Maturity | | (dollars in thousands) | 2-year swap equivalent Eurodollar contracts | $ | — |
| | $ | (17,161,000 | ) | | 2.00 | U.S. Treasury futures - 5 year | — |
| | (4,217,400 | ) | | 4.41 | U.S. Treasury futures - 10 year and greater | — |
| | (4,914,500 | ) | | 7.01 | Total | $ | — |
| | $ | (26,292,900 | ) | | 3.32 | | | | | | | | December 31, 2016 | | Notional - Long Positions | | Notional - Short Positions | | Weighted Average Years to Maturity | | (dollars in thousands) | 2-year swap equivalent Eurodollar contracts | $ | — |
| | $ | (14,968,250 | ) | | 2.00 | U.S. Treasury futures - 5 year | — |
| | (1,697,200 | ) | | 4.42 | U.S. Treasury futures - 10 year and greater | — |
| | (2,250,000 | ) | | 8.39 | Total | $ | — |
| | $ | (18,915,450 | ) | | 2.98 |
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 Company presents derivative contracts on a gross basis on the Consolidated Statements of Financial Condition. Derivative contracts may contain legally enforceable provisions that allow for netting or setting off receivables and payables with each counterparty. | | The following tables present information about derivative assets and liabilities that are subject to such provisions and can potentially be offset on our Consolidated Statements of Financial Condition as of December 31, 2014 and 2013,The following tables present information about derivative assets and liabilities that are subject to such provisions and can potentially be offset on our Consolidated Statements of Financial Condition at December 31, 2017 and 2016, respectively. |
December 31, 2014 | | | | | Amounts Eligible for Offset | | | | | | | | | | December 31, 2017 | | | | | Amounts Eligible for Offset | | | | | Gross Amounts | | | Financial Instruments | | | Cash Collateral | | | Net Amounts | | Gross Amounts | | Financial Instruments | | Cash Collateral | | Net Amounts | Assets: | | (dollars in thousands) | | (dollars in thousands) | Interest rate swaps, at fair value | | $ | 75,225 | | | $ | (66,180 | ) | | $ | - | | | $ | 9,045 | | $ | 30,272 |
| | $ | (27,379 | ) | | $ | — |
| | $ | 2,893 |
| Interest rate swaptions, at fair value | | | 5,382 | | | | - | | | | - | | | | 5,382 | | 36,150 |
| | — |
| | — |
| | 36,150 |
| TBA derivatives, at fair value | | | - | | | | - | | | | - | | | | - | | 29,067 |
| | (12,551 | ) | | — |
| | 16,516 |
| MBS options, at fair value | | | - | | | | - | | | | - | | | | - | | | Futures contracts, at fair value | | | 117 | | | | (117 | ) | | | - | | | | - | | 218,361 |
| | (12,285 | ) | | — |
| | 206,076 |
| | | | | | | | | | | | | | | | | | | Purchase commitments | | 35 |
| | — |
| | — |
| | 35 |
| Liabilities: | | | | | | | | | | | | | | | | | |
| | |
| | |
| | |
| Interest rate swaps, at fair value | | $ | 1,608,286 | | | $ | (66,180 | ) | | $ | (869,302 | ) | | $ | 672,804 | | $ | 569,129 |
| | $ | (27,379 | ) | | $ | — |
| | $ | 541,750 |
| Interest rate swaptions, at fair value | | | - | | | | - | | | | - | | | | - | | | TBA derivatives, at fair value | | | 4,258 | | | | - | | | | - | | | | 4,258 | | 21,776 |
| | (12,551 | ) | | — |
| | 9,225 |
| MBS options, at fair value | | | - | | | | - | | | | - | | | | - | | | Futures contracts, at fair value | | | 3,769 | | | | (117 | ) | | | - | | | | 3,652 | | 12,285 |
| | (12,285 | ) | | — |
| | — |
| Purchase commitments | | 157 |
| | — |
| | — |
| | 157 |
| Credit Derivatives | | 4,507 |
| | — |
| | (3,520 | ) | | 987 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2016 | | | | | | | Amounts Eligible for Offset | | | | | | |
| | Amounts Eligible for Offset | | |
| December 31, 2013 | | Gross Amounts | | | Financial Instruments | | | Cash Collateral | | | Net Amounts | | | | | Gross Amounts | | Financial Instruments | | Cash Collateral | | Net Amounts | Assets: | | (dollars in thousands) | | (dollars in thousands) | Interest rate swaps, at fair value | | $ | 559,044 | | | $ | (408,553 | ) | | $ | - | | | $ | 150,491 | | $ | 68,194 |
| | $ | (68,194 | ) | | $ | — |
| | $ | — |
| Interest rate swaptions, at fair value | | | 110,361 | | | | (24,662 | ) | | | - | | | | 85,699 | | | TBA derivatives, at fair value | | | 20,693 | | | | (9,775 | ) | | | - | | | | 10,918 | | 2,774 |
| | (2,172 | ) | | — |
| | 602 |
| MBS options, at fair value | | | 12,184 | | | | (3,292 | ) | | | - | | | | 8,892 | | | Futures contracts, at fair value | | | 3,487 | | | | (439 | ) | | | - | | | | 3,048 | | 168,209 |
| | (24,912 | ) | | — |
| | 143,297 |
| | | | | | | | | | | | | | | | | | | Purchase commitments | | 283 |
| | — |
| | — |
| | 283 |
| Liabilities: | | | | | | | | | | | | | | | | | |
| | | | | | | Interest rate swaps, at fair value | | $ | 1,141,828 | | | $ | (408,553 | ) | | $ | - | | | $ | 733,275 | | $ | 1,443,765 |
| | $ | (68,194 | ) | | $ | (768,877 | ) | | $ | 606,694 |
| Interest rate swaptions, at fair value | | | 24,662 | | | | (24,662 | ) | | | - | | | | - | | | TBA derivatives, at fair value | | | 13,779 | | | | (9,775 | ) | | | - | | | | 4,004 | | 60,972 |
| | (2,172 | ) | | — |
| | 58,800 |
| MBS options, at fair value | | | 16,638 | | | | (3,292 | ) | | | - | | | | 13,346 | | | Futures contracts, at fair value | | | 439 | | | | (439 | ) | | | - | | | | - | | 24,912 |
| | (24,912 | ) | | — |
| | — |
| Purchase commitments | | 553 |
| | — |
| | — |
| | 553 |
|
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
The effect of interest rate swaps on the Consolidated Statements of Comprehensive Income (Loss) is as follows: | | Location on Consolidated Statements of Comprehensive Income (Loss) | | | | Realized Gains (Losses) on Interest Rate Swaps(1) | | | Realized Gains (Losses) on Termination of Interest Rate Swaps | | | Unrealized Gains (Losses) on Interest Rate Swaps | | | | (dollars in thousands) | | For the Years Ended: | | | | | | | | | | December 31, 2014 | | $ | (825,360 | ) | | $ | (779,333 | ) | | $ | (948,755 | ) | December 31, 2013 | | $ | (908,294 | ) | | $ | (101,862 | ) | | $ | 2,002,200 | | December 31, 2012 | | $ | (893,769 | ) | | $ | (2,385 | ) | | $ | (32,219 | ) | (1) Interest expense related to interest rate swaps is recorded in realized gains (losses) on interest rate swaps on the Consolidated Statements of Operations and Comprehensive Income (Loss). | |
| | | | | | | | | | | | | | Location on Consolidated Statements of Comprehensive Income (Loss) | | Realized Gains (Losses) on Interest Rate Swaps (1) | | Realized Gains (Losses) on Termination of Interest Rate Swaps | | Unrealized Gains (Losses) on Interest Rate Swaps | | (dollars in thousands) | For the Years Ended: | | | | | | December 31, 2017 | $ | (371,108 | ) | | $ | (160,133 | ) | | $ | 512,918 |
| December 31, 2016 | $ | (506,681 | ) | | $ | (113,941 | ) | | $ | 282,190 |
| December 31, 2015 | $ | (624,495 | ) | | $ | (226,462 | ) | | $ | (124,869 | ) |
As of December 31, 2014, the swap portfolio, excluding forward starting | | (1) | Interest expense related to interest rate swaps had a weighted average payis recorded in Realized gains (losses) on interest rate of 2.49% and a weighted average receive rate of 0.22%. The weighted average pay rate at December 31, 2013 was 2.14% and the weighted average receive rate was 0.20%. | | The effect of other derivative contractsswaps on the Company’s Consolidated Statements of Comprehensive Income (Loss) is as follows:. |
The effect of other derivative contracts on the Company’s Consolidated Statements of Comprehensive Income (Loss) is as follows: | | | | | | | | | | | | | Year Ended December 31, 2017 | Derivative Instruments | Realized Gain (Loss) | | Unrealized Gain (Loss) | | Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Trading Assets | (dollars in thousands) | Net TBA derivatives | $ | 154,575 |
| | $ | 65,490 |
| | $ | 220,065 |
| Net interest rate swaptions | (935 | ) | | (42,660 | ) | | (43,595 | ) | Futures | 20,459 |
| | 62,778 |
| | 83,237 |
| Purchase commitments | — |
| | 162 |
| | 162 |
| Credit derivatives | 1,521 |
| | 28 |
| | 1,549 |
| | | | | | $ | 261,418 |
|
F-29 | | | | | | | | | | | | | Year Ended December 31, 2016 | Derivative Instruments | Realized Gain (Loss) | | Unrealized Gain (Loss) | | Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Trading Assets | (dollars in thousands) | Net TBA derivatives | $ | 164,008 |
| | $ | (50,636 | ) | | $ | 113,372 |
| Net interest rate swaptions | 4,850 |
| | — |
| | 4,850 |
| Futures | (51,148 | ) | | 163,631 |
| | 112,483 |
| Purchase commitments | — |
| | (123 | ) | | (123 | ) | | | | | | $ | 230,582 |
|
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 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 December 31, 2017 was approximately $302.0 million, which represents the maximum amount the Company would be required to pay upon termination. This amount is fully collateralized.
14. CONVERTIBLE SENIOR NOTES
In 2010, the Company issued $600.0 million in aggregate principal amount of its 4% Convertible Senior Notes for net proceeds of approximately $582.0 million. In 2012, the Company repurchased $492.5 million in aggregate principal amount of its 4% Convertible Senior Notes. In February 2015, the 4% Convertible Senior Notes matured and the Company repaid the remaining 4% Convertible Senior Notes for the face amount of $107.5 million.
In May 2012, the Company issued $750.0 million in aggregate principal amount of its 5% Convertible Senior Notes due 2015 for net proceeds of approximately $727.5 million. In May 2015, the 5% Convertible Senior Notes matured and the Company repaid the 5% Convertible Senior Notes for the face amount of $750.0 million. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 15. Financial Statements
15.COMMON STOCK AND PREFERRED STOCK
At December 31, 2017, the Company’s authorized shares of capital stock, par value of $0.01 per share, consists of 1,929,300,000 shares classified as common stock, 12,000,000 shares classified as 7.625% Series C Cumulative Redeemable Preferred Stock (“Series C Preferred Stock”), 18,400,000 shares classified as 7.50% Series D Cumulative Redeemable Preferred Stock (“Series D Preferred Stock”), 11,500,000 shares classified as 7.625% Series E Cumulative Redeemable Preferred Stock (“Series E Preferred Stock”), and 28,800,000 shares classified as 6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (“Series F Preferred Stock”). (A) Common Stock At December 31, 2017 and 2016, the Company had issued and outstanding 1,159,585,078 and 1,018,913,249 shares of common stock, respectively, with a par value of $0.01 per share.
No options were exercised during the years ended December 31, 2017, 2016, and 2015.
During the year ended December 31, 2017, the Company issued 140,450,700 shares of common stock for gross proceeds of approximately $1.7 billion before deducting offering expenses.
During the years ended December 31, 2017, 2016 and 2015 the Company raised $2.5 million (by issuing 219,000 shares), $2.4 million (by issuing 228,000 shares) and $2.2 million (by issuing 221,000 shares), respectively, through the Direct Purchase and Dividend Reinvestment Program.
In August 2015, the Company announced that its board of directors (“Board”) had authorized the repurchase of up to $1.0 billion of its outstanding common shares through December 31, 2017 (“Repurchase Program”). During the year ended December 31, 2016, the Company repurchased 11,132,226 shares of its common stock under the Repurchase Program for an aggregate amount of $102.7 million. All common shares purchased were part of a publicly announced plan in open-market transactions. There were no common shares repurchased during the year ended December 31, 2017.
In March 2012, the Company entered into six separate Distribution Agency Agreements (“Distribution Agency Agreements”) with each of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse Securities (USA) LLC, Goldman, Sachs & Co., J.P. Morgan Securities LLC, Morgan Stanley & Co. LLC and RCap Securities, Inc. (together, the Agents). Pursuant to the terms of the Distribution Agency Agreements, the Company may sell from time to time through the Agents, as its sales agents, up to 125,000,000 shares of the Company’s common stock. The Company did not make any sales under the Distribution Agency Agreements during the years ended December 31, 2017, 2016 and 2015. Years Ended December 31, 2014 | | Derivative Instruments | | Realized Gain (Loss) | | | Unrealized Gain (Loss) | | | Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Trading Assets | | (dollars in thousands) | | Net TBA derivatives (1) | | $ | (60,091 | ) | | $ | (12,763 | ) | | $ | (72,854 | ) | Net interest rate swaptions | | $ | (121,345 | ) | | $ | (20,167 | ) | | $ | (141,512 | ) | U.S. Treasury futures | | $ | (30,056 | ) | | $ | (6,701 | ) | | $ | (36,757 | ) | | | | | | | | | | | $ | (251,123 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2013 | | Derivative Instruments | | Realized Gain (Loss) | | | Unrealized Gain (Loss) | | | Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Trading Assets | | (dollars in thousands) | | Net TBA derivatives (1) | | $ | 33,728 | | | $ | 6,630 | | | $ | 40,358 | | Net interest rate swaptions | | $ | (2,697 | ) | | $ | (15,467 | ) | | $ | (18,164 | ) | U.S. Treasury futures | | $ | (38,514 | ) | | $ | (2,851 | ) | | $ | (41,365 | ) | | | | | | | | | | | $ | (19,171 | ) |
(B) Preferred Stock
During the year ended December 31, 2012, 1.3 million shares of 6.00% Series B Cumulative Convertible Preferred Stock (“Series B Preferred Stock”) were converted into 4.0 million shares of the Company’s common stock. Following such conversion, there were no shares of Series B Preferred Stock issued or outstanding. (1) Includes options
On July 27, 2017, the Company filed articles supplementary to its charter reclassifying 4,600,000 shares of Series B Preferred Stock as shares of undesignated common stock of the Company.
On August 25, 2017, the Company redeemed all 7,412,500 of its issued and outstanding shares of 7.875% Series A Cumulative Redeemable Preferred Stock (“Series A Preferred Stock”) for $187.5 million. The cash redemption amount for each share of Series A Preferred Stock was $25.00 plus accrued and unpaid dividends up to, and including, the redemption date of August 25, 2017. At December 31, 2016, the Company had issued and outstanding 7,412,500 shares of Series A Preferred Stock, with a par value of $0.01 per share and a liquidation preference of $25.00 per share plus accrued and unpaid dividends (whether or not declared). The Series A Preferred Stock was entitled to a dividend at a rate of 7.875% per year based on TBA securities. the $25.00 liquidation preference before the common stock is entitled to receive any dividends.
CertainAt December 31, 2017 and 2016, the Company had issued and outstanding 12,000,000 shares of Series C Preferred Stock, with a par value of $0.01 per share and a liquidation preference of $25.00 per share plus accrued and unpaid dividends (whether or not declared). The Series C Preferred Stock is entitled to a dividend at a rate of 7.625% per year based on the $25.00 liquidation preference before the common stock is entitled to receive any dividends. The Series C Preferred Stock is redeemable at $25.00 per share plus accrued and unpaid dividends (whether or not declared) exclusively at the Company’s option commencing on May 16, 2017 (subject to the Company’s right under limited circumstances to redeem the Series C Preferred Stock earlier in order to preserve its qualification as a REIT or under limited circumstances related to a change of control of the Company). Through December 31, 2017, the Company had declared and paid all required quarterly dividends on the Series C Preferred Stock.
At December 31, 2017 and 2016, the Company had issued and outstanding 18,400,000 shares of Series D Preferred Stock, with a par value of $0.01 per share and a liquidation preference of $25.00 per share plus accrued and unpaid dividends (whether or not declared). The Series D Preferred Stock is entitled to a dividend at a rate of 7.50% per year based on the $25.00 liquidation preference before the 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 Company’s failure to comply with limits on the amount of leverage, and (iv) the Company’s stock being delisted from the New York Stock Exchange (NYSE). Upon the occurrence of any one of items (i) through (iv), or another default under the agreement, the counterparty to the applicable agreement has a right to terminate the agreement in accordance with its provisions. The aggregate fair value of all derivative instruments with the aforementioned features that are in a net liability position at December 31, 2014 was approximately $1.5 billion, which represents the maximum amount the Company would be required to pay upon termination. This amount is fully collateralized.
10. CONVERTIBLE SENIOR NOTES
In 2010, the Company issued $600.0 million in aggregate principal amount of its 4% convertible senior notes due 2015 (“4% Convertible Senior Notes”) for net proceeds of approximately $582.0 million. The Company has repurchased $492.5 million in aggregate principal amount of its 4% Convertible Senior Notes as of December 31, 2014. Interest on the 4% Convertible Senior Notes is paid semi-annually at a rate of 4% per year and the 4% Convertible Senior Notes will mature on February 15, 2015 unless repurchased or converted earlier. The 4% Convertible Senior Notes are convertible into shares of Common Stock at a
| | conversion rate for each $1,000 principal amount of 4% Convertible Senior Notes. The initial conversion rate was 46.6070, which was equivalent to an initial conversion price of approximately $21.4560 per share of Common Stock. The conversion rate at December 31, 2014 was 88.7389, which is equivalent to a conversion price of approximately $11.2690 per share of Common Stock. The conversion rate is subject to adjustment in certain circumstances. There is no limit on the total number of shares of Common Stock that the Company would be required to issue upon a conversion.
The intrinsic value of the contingent beneficial conversion feature was $110.5 million and $93.2 million at December 31, 2014 and 2013, respectively, which is reflected in Additional paid-in capital on the Company’s Consolidated Statements of Financial Condition, and reduces the recorded liability on the 4% Convertible Senior Notes. The unamortized contingent beneficial conversion feature of the 4% Convertible Senior Notes at December 31, 2014 and 2013 of $10.8 million and $26.9 million, respectively, is recognized in interest expense over the remaining life of the notes.
In May 2012, the Company issued $750.0 million in aggregate principal amount of its 5% convertible senior notes due 2015 (“5% Convertible Senior Notes”) for net proceeds of approximately $727.5 million. Interest on the 5% Convertible Senior Notes is paid semi-annually at a rate of 5% per year and the 5% Convertible Senior Notes will mature on May 15, 2015 unless repurchased or converted earlier. The 5% Convertible Senior Notes are convertible into shares of Common Stock at a conversion rate for each $1,000 principal amount of 5% Convertible Senior Notes. The initial conversion rate and conversion rate at December 31, 2014 was 52.7969, which was equivalent to an
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 15. Financial Statements
common stock is entitled to receive any dividends. The Series D Preferred Stock is redeemable at $25.00 per share plus accrued and unpaid dividends (whether or not declared) exclusively at the Company’s option commencing on September 13, 2017 (subject to the Company’s right under limited circumstances to redeem the Series D Preferred Stock earlier in order to preserve its qualification as a REIT or under limited circumstances related to a change of control of the Company). Through December 31, 2017, the Company had declared and paid all required quarterly dividends on the Series D Preferred Stock.
At December 31, 2017, the Company had issued and outstanding 11,500,000 shares of Series E Preferred Stock, with a par value of $0.01 per share and a liquidation preference of $25.00 per share plus accrued and unpaid dividends (whether or not declared). The Series E Preferred Stock is entitled to a dividend at a rate of 7.625% per year based on the $25.00 liquidation preference before the common stock is entitled to receive any dividends. The Series E Preferred Stock is redeemable at $25.00 per share plus accrued and unpaid dividends (whether or not declared) exclusively at the Company’s option commencing on August 27, 2017 (subject to the Company’s right under limited circumstances to redeem the Series E Preferred Stock earlier in order to preserve its qualification as a REIT or under limited circumstances related to a change of control of the Company). The Series E Preferred Stock was issued in July 2016 as part of the Hatteras Acquisition. Refer to the “Acquisition of Hatteras” Note for additional information. Through December 31, 2017, the Company had declared and paid all required quarterly dividends on the Series E Preferred Stock. initial conversion price of approximately $18.94 per share of Common Stock, subject to adjustment in certain circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of Common Stock or a combination of cash and shares of Common Stock, at the Company’s sole discretion. There is no limit on the total number of shares of Common Stock that the Company would be required to issue upon a conversion.
At issuance, the Company determined that the 5% Convertible Senior Notes included an equity component of $11.7 million, which is reflected in Additional paid-in capital on the Company’s Consolidated Statements of Financial Condition, and reduces the recorded liability on the 5% Convertible Senior Notes. The $11.7 million discount to the principal amount of the Convertible Senior Notes is recognized in interest expense over the remaining life of the notes. At December 31, 2014 and 2013, $1.5 million and $5.4 million, respectively, of the unamortized discount had not been reflected in interest expense.
The 4% Convertible Senior Notes due 2015 and the 5% Convertible Senior Notes due 2015 rank pari-passu with each other. They are each a general corporate obligation and therefore rank junior to collateralized debt of the Company with respect to secured collateral.
The 4% Convertible Senior Notes and the 5% Convertible Senior Notes rank senior to the 7.875% Series A Cumulative Redeemable Preferred Stock, 7.625% Series C Cumulative Redeemable Preferred Stock and 7.50% Series D Cumulative Redeemable Preferred Stock. The 7.875% Series A Cumulative Redeemable Preferred Stock, 7.625% Series C Cumulative Redeemable Preferred Stock and 7.50% Series D Cumulative Redeemable Preferred Stock rank pari-passu with each other.
The 7.875% Series A Cumulative Redeemable Preferred Stock, 7.625% Series C Cumulative Redeemable Preferred Stock and 7.50% Series D Cumulative Redeemable
During the year ended December 31, 2017, the Company issued 28,800,000 shares of its 6.95% Series F Preferred Stock, liquidation preference of $25.00 per share, for gross proceeds of $720.0 million before deducting the underwriting discount and other offering expenses. The Series F Preferred Stock is redeemable at $25.00 per share plus accrued and unpaid dividends (whether or not declared) exclusively at the Company’s option commencing from and including the original issue date to, but excluding September 30, 2022, at a fixed rate equal to 6.95% per annum of the $25.00 liquidation preference, and from an including September 30, 2022, at a floating rate equal to three-month LIBOR plus a spread of 4.993% per annum.
The Series A Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock rank senior to the common stock of the Company.
11. COMMON STOCK AND PREFERRED STOCK
The Company’s authorized shares of capital stock, par value of $0.01 per share, consists of 1,956,937,500 shares classified as common stock, 7,412,500 shares classified as 7.875% Series A Cumulative Redeemable Preferred Stock, 4,600,000 shares classified as 6.00% Series B Cumulative Convertible Preferred Stock,
| | 12,650,000 shares classified as 7.625% Series C Cumulative Redeemable Preferred Stock and 18,400,000 shares classified as 7.50% Series D Cumulative Redeemable Preferred Stock.
(A) Common Stock
At December 31, 2014 and 2013, the Company had issued and outstanding 947,643,079 and 947,432,862 shares of common stock, with a par value of $0.01 per share.
No options were exercised during the year ended December 31, 2014. During the year ended December 31, 2013, 166,000 options were exercised for an aggregate exercise price of $2.2 million. During the year ended December 31, 2012, 603,000 options were exercised for an aggregate exercise price of $8.4 million.
During the year ended December 31, 2014, we raised $2.4 million, by issuing 210,000 shares, through the Direct Purchase and Dividend Reinvestment Program. During the year ended December 31, 2013, we raised $2.9 million, by issuing 219,000 shares, through the Direct Purchase and Dividend Reinvestment Program. During the year ended December 31, 2012, we raised $2.8 million, by issuing 170,000 shares, through the Direct Purchase and Dividend Reinvestment Program.
During the year ended December 31, 2012, 1.3 million shares of Series B Preferred Stock were converted into 4.0 million shares of common stock.
In October 2012, the Company announced that its board of directors (“Board of Directors”) had authorized the repurchase of up to $1.5 billion of its outstanding common shares over a 12 month period. All common shares purchased were part of a publicly announced plan in open-market transactions. The repurchase plan expired in October 2013. There were no purchases made by the Company under this repurchase plan during the year ended December 31, 2013.
In March 2012, the Company entered into six separate Distribution Agency Agreements (“Distribution Agency Agreements”) with each of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse Securities (USA) LLC, Goldman, Sachs & Co., J.P. Morgan Securities LLC, Morgan Stanley & Co. LLC and RCap Securities, Inc. (together, the Agents). Pursuant to the terms of the Distribution Agency Agreements, the Company may sell from time to time through the Agents, as its sales agents, up to 125,000,000 shares of the Company’s common stock.
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(C) Distributions to Stockholders
The following table provides a summary of the Company’s dividend distribution activity for the periods presented:
| | | | | | | | | | For the Years Ended | | December 31, 2017 | | December 31, 2016 | | (dollars in thousands, except per share data) | Distributions declared to common stockholders | $ | 1,285,701 |
| | $ | 1,162,897 |
| Distributions declared per common share | $ | 1.20 |
| | $ | 1.20 |
| Distributions paid to common stockholders after period end | $ | 347,876 |
| | $ | 305,674 |
| Distributions paid per common share after period end | $ | 0.30 |
| | $ | 0.30 |
| Date of distributions paid to common stockholders after period end | January 31, 2018 |
| | January 31, 2017 |
| Dividends declared to Series A Preferred stockholders | $ | 9,527 |
| | $ | 14,593 |
| Dividends declared per share of Series A Preferred Stock | $ | 1.285 |
| | $ | 1.969 |
| Dividends declared to Series C Preferred stockholders | $ | 22,875 |
| | $ | 22,875 |
| Dividends declared per share of Series C Preferred Stock | $ | 1.906 |
| | $ | 1.906 |
| Dividends declared to Series D Preferred stockholders | $ | 34,500 |
| | $ | 34,500 |
| Dividends declared per share of Series D Preferred Stock | $ | 1.875 |
| | $ | 1.875 |
| Dividends declared to Series E Preferred stockholders | $ | 21,922 |
| | $ | 10,292 |
| Dividends declared per share of Series E Preferred Stock | $ | 1.906 |
| | $ | 0.953 |
| Dividends declared to Series F Preferred stockholders | $ | 20,811 |
| | $ | — |
| Dividends declared per share of Series F Preferred Stock | $ | 0.724 |
| | $ | — |
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16.INTEREST INCOME AND INTEREST EXPENSE
The following presents the components of the Company’s interest income and interest expense for the years ended December 31, 2017, 2016 and 2015. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 15. Financial Statements
| | | | | | | | | | | | | | For the Years Ended December 31, | | 2017 | | 2016 | | 2015 | Interest income: | (dollars in thousands) | Residential Investment Securities | $ | 2,170,041 |
| | $ | 1,944,457 |
| | $ | 1,963,629 |
| Residential mortgage loans | 30,540 |
| | 4,147 |
| | — |
| Commercial investment portfolio (1) | 273,884 |
| | 252,436 |
| | 203,804 |
| Reverse repurchase agreements | 18,661 |
| | 9,911 |
| | 3,264 |
| Total interest income | 2,493,126 |
| | 2,210,951 |
| | 2,170,697 |
| Interest expense: | |
| | |
| | |
| Repurchase agreements | 891,819 |
| | 585,826 |
| | 420,325 |
| Convertible Senior Notes | — |
| | — |
| | 29,740 |
| Securitized debt of consolidated VIEs | 60,304 |
| | 44,392 |
| | 20,065 |
| Participation sold | 195 |
| | 627 |
| | 639 |
| Other | 56,036 |
| | 26,907 |
| | 827 |
| Total interest expense | 1,008,354 |
| | 657,752 |
| | 471,596 |
| Net interest income | $ | 1,484,772 |
| | $ | 1,553,199 |
| | $ | 1,699,101 |
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(1) Includes commercial real estate debt, preferred equity and corporate debt.
17.GOODWILL
At December 31, 2017 and 2016, Goodwill totaled $71.8 million. An impairment to Goodwill of $23.0 million related to FIDAC was recognized in 2015 as a result of the Company’s intention to wind down FIDAC’s investment advisory operations.
18.NET INCOME (LOSS) PER COMMON SHARE The Company did not make any sales under the Distribution Agency Agreements during the years ended December 31, 2014 and 2013.
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 years ended December 31, 2017, 2016 and 2015. | | | | | | | | | | | | | | For the Years Ended | | December 31, 2017 | | December 31, 2016 | | December 31, 2015 | | (dollars in thousands, except per share data) | Net income (loss) | $ | 1,569,016 |
| | $ | 1,432,786 |
| | $ | 465,747 |
| Less: Net income (loss) attributable to noncontrolling interest | (588 | ) | | (970 | ) | | (809 | ) | Net income (loss) attributable to Annaly | 1,569,604 |
| | 1,433,756 |
| | 466,556 |
| Less: Dividends on preferred stock | 109,635 |
| | 82,260 |
| | 71,968 |
| Net income (loss) per share available (related) to common stockholders, prior to adjustment for dilutive potential common shares, if necessary | 1,459,969 |
| | 1,351,496 |
| | 394,588 |
| Add: Interest on Convertible Senior Notes, if dilutive | — |
| | — |
| | — |
| Net income (loss) available to common stockholders, as adjusted | $ | 1,459,969 |
| | $ | 1,351,496 |
| | $ | 394,588 |
| Weighted average shares of common stock outstanding-basic | 1,065,923,652 |
| | 969,787,583 |
| | 947,062,099 |
| Add: Effect of stock awards and Convertible Senior Notes, if dilutive | 427,964 |
| | 314,770 |
| | 214,643 |
| Weighted average shares of common stock outstanding-diluted | 1,066,351,616 |
| | 970,102,353 |
| | 947,276,742 |
| Net income (loss) per share available (related) to common share: | | | | | | Basic | $ | 1.37 |
| | $ | 1.39 |
| | $ | 0.42 |
| Diluted | $ | 1.37 |
| | $ | 1.39 |
| | $ | 0.42 |
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(B) Preferred Stock
At December 31, 2014 and 2013, the Company had issued and outstanding 7,412,500 shares of Series A Cumulative Redeemable Preferred Stock (“Series A Preferred Stock”), with a par value of $0.01 per share and a liquidation preference of $25.00 per share plus accrued and unpaid dividends (whether or not declared). The Series A Preferred Stock is entitled to a dividend at a rate of 7.875% per year based on the $25.00 liquidation preference before the common stock is entitled to receive any dividends. The Series A Preferred Stock is redeemable at $25.00 per share plus accrued and unpaid dividends (whether or not declared) exclusively at the Company's option commencing on April 5, 2009 (subject to the Company's right under limited circumstances to redeem the Series A Preferred Stock earlier in order to preserve its qualification as a REIT). Through December 31, 2014, the Company had declared and paid all required quarterly dividends on the Series A Preferred Stock.
At December 31, 2014 and 2013, the Company had issued and outstanding 12,000,000 shares of Series C Preferred Stock, with a par value of $0.01 per share and a liquidation preference of $25.00 per share plus accrued and unpaid dividends (whether or not declared). The Series C Preferred Stock is entitled to a dividend at a rate of 7.625% per year based on the $25.00 liquidation preference before the common stock is entitled to receive any dividends. The Series C Preferred Stock is redeemable at $25.00 per share plus accrued and unpaid dividends (whether or not declared) exclusively at the Company’s option commencing on May 16, 2017 (subject to the Company’s right under limited circumstances to redeem the Series C Preferred Stock earlier in order to preserve its qualification as a REIT or under limited circumstances related to a change of control of the Company). Through December 31, 2014, the Company had declared and paid all required quarterly dividends on the Series C Preferred Stock.
At December 31, 2014 and 2013, the Company had issued and outstanding 18,400,000 shares of Series D Preferred Stock, with a par value of $0.01 per share and a liquidation preference of $25.00 per share plus accrued and unpaid dividends (whether or not declared). The Series D Preferred Stock is entitled to a dividend at a rate of 7.50% per year based on the $25.00 liquidation preference before the common stock
| | is entitled to receive any dividends. The Series D Preferred Stock is redeemable at $25.00 per share plus accrued and unpaid dividends (whether or not declared) exclusively at the Company’s option commencing on September 13, 2017 (subject to the Company’s right under limited circumstances to redeem the Series D Preferred Stock earlier in order to preserve its qualification as a REIT or under limited circumstances related to a change of control of the Company). Through December 31, 2014, the Company had declared and paid all required quarterly dividends on the Series D Preferred Stock.
(C) Distributions to Stockholders
During the year ended December 31, 2014, the Company declared dividends to common stockholders totaling $1.1 billion, or $1.20 per common share, of which $284.3 million, or $0.30 per common share, was paid to stockholders on January 29, 2015. During the year ended December 31, 2014, the Company declared dividends to Series A Preferred stockholders totaling approximately $14.6 million or $1.97 per share, Series C Preferred stockholders totaling approximately $22.9 million or $1.91 per share, Series D Preferred stockholders totaling approximately $34.5 million or $1.88 per share.
During the year ended December 31, 2013, the Company declared dividends to common stockholders totaling $1.4 billion, or $1.50 per common share, of which $284.2 million, or $0.30 per common share, was paid to stockholders on January 31, 2014. During the year ended December 31, 2013, the Company declared dividends to Series A Preferred stockholders totaling approximately $14.6 million or $1.97 per share, Series C Preferred stockholders totaling approximately $22.9 million or $1.91 per share, Series D Preferred stockholders totaling approximately $34.5 million or $1.88 per share.
During the year ended December 31, 2012, the Company declared dividends to common stockholders totaling $2.0 billion or $2.05 per share, of which $432.2 million were paid to stockholders on January 29, 2013. During the year ended December 31, 2012, the Company declared dividends to Series A Preferred stockholders totaling approximately $14.6 million or $1.97 per share, Series B Preferred stockholders totaling approximately $289,000 or $0.375 per share, Series C Preferred stockholders totaling approximately $14.3 million or $1.19 per share, Series D Preferred stockholders totaling approximately $10.4 million or $0.56 per share.
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Options to purchase 0.8 million shares, 1.1 million shares and 1.2 million shares of common stock were outstanding and considered anti-dilutive as their exercise price and option expense exceeded the average stock price for the years ended December 31, 2017, 2016 and 2015, respectively. 19.LONG-TERM STOCK INCENTIVE PLAN
The Company maintains the 2010 Equity Incentive Plan (the “Plan”), which authorizes the Compensation Committee of the Board to grant options, stock appreciation rights, dividend equivalent rights, or other share-based awards, including restricted shares up to an aggregate of 25,000,000 shares, subject to adjustments as provided in the 2010 Equity Incentive Plan. The Company had previously adopted a long term stock incentive plan for executive officers, key employees and non-employee directors (the “Prior Plan”). The Prior Plan authorized the Compensation Committee of the Board to grant awards, including non-qualified options as well as incentive stock options as defined under Section 422 of the Code. The Prior Plan authorized the granting of options or other awards for an aggregate of ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 15. Financial Statements
the greater of 500,000 shares or 9.5% of the diluted outstanding shares of the Company’s common stock, up to a ceiling of 8,932,921 shares. No further awards will be made under the Prior Plan, although existing awards remain effective.
Stock options were issued at the market price on the date of grant, subject to an immediate or four year vesting in four equal installments with a contractual term of 5 or 10 years. 12. INTEREST INCOME AND INTEREST EXPENSE | | The table below presents the components of the Company’s interest income and interest expense for the years ended December 31, 2014, 2013 and 2012. |
The following table sets forth activity related to the Company’s stock options awarded under the Plan: | | Years Ended December 31, | | | | December 31, | | | December 31, | | | December 31, | | | | 2014 | | | 2013 | | | 2012 | | Interest income: | | (dollars in thousands) | | Investment Securities | | $ | 2,467,783 | | | $ | 2,788,354 | | | $ | 3,217,648 | | Commercial investment portfolio(1) | | | 161,837 | | | | 81,445 | | | | 7,621 | | U.S. Treasury securities | | | 1,329 | | | | 29,081 | | | | 17,222 | | Securities loaned | | | 114 | | | | 8,788 | | | | 9,903 | | Reverse repurchase agreements | | | 1,335 | | | | 10,459 | | | | 6,218 | | Other | | | 249 | | | | 435 | | | | 533 | | Total interest income | | | 2,632,647 | | | | 2,918,562 | | | | 3,259,145 | | Interest expense: | | | | | | | | | | | | | Repurchase agreements | | | 417,194 | | | | 530,170 | | | | 577,243 | | Convertible Senior Notes | | | 87,293 | | | | 67,057 | | | | 67,221 | | U.S. Treasury securities sold, not yet purchased | | | 1,076 | | | | 20,235 | | | | 15,114 | | Securities borrowed | | | 95 | | | | 6,785 | | | | 7,594 | | Securitized debt of consolidated VIE | | | 6,350 | | | | - | | | | - | | Participation sold | | | 651 | | | | 467 | | | | - | | Total interest expense | | | 512,659 | | | | 624,714 | | | | 667,172 | | Net interest income | | $ | 2,119,988 | | | $ | 2,293,848 | | | $ | 2,591,973 | | | | | | | | | | | | | | | (1) Includes commercial real estate debt, preferred equity and corporate debt. | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | For the Years Ended | | December 31, 2017 | | December 31, 2016 | | Number of Shares | | Weighted Average Exercise Price | | Number of Shares | | Weighted Average Exercise Price | Options outstanding at the beginning of year | 1,125,625 |
| | $ | 15.43 |
| | 1,168,775 |
| | $ | 15.34 |
| Granted | — |
| | — |
| | — |
| | — |
| Exercised | — |
| | — |
| | — |
| | — |
| Forfeited | (132,000 | ) | | 15.74 |
| | (6,400 | ) | | 14.69 |
| Expired | (199,500 | ) | | 15.74 |
| | (36,750 | ) | | 12.90 |
| Options outstanding at the end of period | 794,125 |
| | $ | 15.30 |
| | 1,125,625 |
| | $ | 15.43 |
| Options exercisable at the end of the period | 794,125 |
| | $ | 15.30 |
| | 1,125,625 |
| | $ | 15.43 |
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The weighted average remaining contractual term was approximately 0.7 years and 1.5 years for stock options outstanding and exercisable at December 31, 2017 and 2016, respectively.
At December 31, 2017 and 2016, there was no unrecognized compensation cost related to nonvested share-based compensation awards.
20.INCOME TAXES
For the year ended December 31, 2017 the Company was qualified to be taxed as a REIT under Code Sections 856 through 860. As a REIT, the Company is not subject to federal income tax to the extent that it distributes its taxable income to its stockholders. To maintain qualification as a REIT, the Company must distribute at least 90% of its annual REIT taxable income to its stockholders and meet certain other requirements 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. 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 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 year ended December 31, 2017, the Company recorded a net income tax expense of $7.0 million, $2.7 million of which was current expenses related to its TRS 13. GOODWILLoperations and $4.3 million of deferred tax expense attributable to the unrealized gain on its MSR investments.
During the year ended December 31, 2016, the Company recorded a net income tax benefit of ($1.8) million attributable to tax losses at its TRS entities.
During the year ended December 31, 2015, the Company recorded a net income tax benefit of ($1.9) million attributable to tax losses at its TRS entities.
The Company’s federal, state and local tax returns from 2014 and forward remain open for examination.
On December 22, 2017, tax legislation was enacted, informally known as the Tax Cuts and Jobs Act (the “TCJA”), that significantly changes the U.S. federal income tax laws applicable to businesses and their owners, including REITs and their stockholders. While technical corrections or other amendments to the TCJA or administrative guidance interpreting the TCJA may be forthcoming at any time, GAAP requires the Company to apply the TCJA provisions, as written, to the Company’s consolidated financial statements in terms of recording and measuring deferred tax assets and liabilities that will be recognized in 2018 or further. Due to the timing of the enacted legislation as well as the technical corrections, amendments or administrative guidance that could clarify the treatment of certain provisions, the SEC issued guidance that allows for entities without the necessary information to complete the accounting analysis to determine a reasonable estimate of the effects of the TCJA. These amounts can then be revised once further clarity can be reached over the course of the coming year.
The provisions of the TCJA, as written, which includes the change to the federal corporate income tax rate from 35% to 21%, was applied and did not have a material impact on the Company’s consolidated financial statements. To the extent
At December 31, 2014 and 2013, goodwill totaled $94.8 million. In 2013, the Company recorded a $32.4 million reduction of goodwill related to Merganser, which was comprised of a $24.0 million impairment charge based on market information that became available to the Company and an $8.4 million reduction resulting from the sale of the net assets and operations of the entity. The Company also recorded $71.8 million
| | of additional goodwill associated with the acquisition of CreXus in 2013.
14. NET INCOME (LOSS) PER COMMON SHARE
The following table presents a reconciliation of net income (loss) and shares used in calculating basic and diluted net income (loss) per share for the years ended December 31, 2014, 2013 and 2012.
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technical corrections or other amendments to the TCJA or administrative guidance interpreting the TCJA are released, the Company will revisit its analysis and conclusions, if relevant.
21.LEASE COMMITMENTS AND CONTINGENCIES Commitments
In September 2014, the Company entered into a non-cancelable lease for office space which commenced in July 2014 and expires in September 2025. The lease expense for the years ended December 31, 2017, 2016, and 2015 was $3.1 million, $3.1 million and $2.9 million, respectively. The Company’s aggregate future minimum lease payments total $29.1 million.
The following table details the future lease payments:
| | For the Years Ended | | | | December 31, 2014 | | | December 31, 2013 | | | December 31, 2012 | | | | (dollars in thousands, except per share data) | | Net income (loss) attributable to Annaly | | | (842,083 | ) | | | 3,729,698 | | | | 1,735,900 | | Less: Preferred stock dividends | | | 71,968 | | | | 71,968 | | | | 39,530 | | Net income (loss) per share available (related) to common stockholders, prior to adjustment for dilutive potential common shares, if necessary | | | (914,051 | ) | | | 3,657,730 | | | | 1,696,370 | | Add: Interest on Convertible Senior Notes, if dilutive | | | - | | | | 67,056 | | | | 27,843 | | Net income (loss) available to common stockholders, as adjusted | | | (914,051 | ) | | | 3,724,786 | | | | 1,724,213 | | Weighted average shares of common stock outstanding-basic | | | 947,539,294 | | | | 947,337,915 | | | | 972,902,459 | | Add: Effect of stock awards and Convertible Senior Notes, if dilutive | | | - | | | | 48,219,111 | | | | 32,852,598 | | Weighted average shares of common stock outstanding-diluted | | | 947,539,294 | | | | 995,557,026 | | | | 1,005,755,057 | | Net income (loss) per share available (related) to common share: | | | | | | | | | | | | | Basic | | $ | (0.96 | ) | | $ | 3.86 | | | $ | 1.74 | | Diluted | | $ | (0.96 | ) | | $ | 3.74 | | | $ | 1.71 | |
| | | | | Years Ending December 31, | Lease Commitments | | (dollars in thousands) | 2018 | $ | 3,565 |
| 2019 | 3,565 |
| 2020 | 3,652 |
| 2021 | 3,862 |
| 2022 | 3,862 |
| Later years | 10,618 |
| Total | $ | 29,124 |
|
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 December 31, 2017 and 2016.
22. RISK MANAGEMENT Options to purchase 2.3 million shares of common stock were outstanding and considered anti-dilutive as their exercise price and option expense exceeded the average stock price for the year ended December 31, | | 2014. Options to purchase 3.5 million shares of common stock were outstanding and considered anti-dilutive as their exercise price and option expense exceeded the average stock price for the year ended | The primary risks to the Company are liquidity, investment/market risk and credit risk. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond the Company’s control. Changes in the general level of interest rates can affect net interest income, which is the difference between the interest income earned on interest earning assets and the interest expense incurred in connection with the interest bearing liabilities, by affecting the spread between the interest earning assets and interest bearing liabilities. Changes in the level of interest rates can also affect the value of the interest earning assets and the Company’s ability to realize gains from the sale of these assets. A decline in the value of the interest earning assets pledged as collateral for borrowings under repurchase agreements and derivative contracts could result in the counterparties demanding additional collateral pledges or liquidation of some of the existing collateral to reduce borrowing levels. The Company may seek to mitigate the potential financial impact by entering into interest rate agreements such as interest rate swaps, interest rate swaptions and other hedges. Weakness in the mortgage market, the shape of the yield curve and changes in the expectations for the volatility of future interest rates may adversely affect the performance and market value of the Company’s investments. This could negatively impact the Company’s book value. Furthermore, if many of the Company’s lenders are unwilling or unable to provide additional financing, the Company could be forced to sell its 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, excluding 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 are backed by the full faith and credit of the U.S. government. Principal and interest on Agency debentures is guaranteed by the Agency issuing the debenture. The majority 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 is not guaranteed by the respective Agency or by the full faith and credit of the U.S. government. The Company is exposed to credit risk on CRE Debt and Preferred Equity Investments, investments in commercial real estate, commercial mortgage-backed securities, residential mortgage loans, CRT securities, other non-Agency mortgage-backed securities and corporate debt. MSR values may also be adversely impacted if overall costs to service the underlying mortgage loans increase due to borrower performance. 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, ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 15. Financial Statements
maintaining qualifying collateral and continually assessing the creditworthiness of issuers, borrowers, tenants and counterparties.
23.RCAP REGULATORY REQUIREMENTS
RCap is subject to regulations of the securities business that include but are not limited to trade practices, use and safekeeping of funds and securities, capital structure, recordkeeping and conduct of directors, officers and employees.
As a self-clearing, registered broker dealer, RCap is required to maintain minimum net capital by FINRA. At December 31, 2017 RCap had a minimum net capital requirement of $0.3 million. RCap consistently operates with capital in excess of its regulatory capital requirements. RCap’s regulatory net capital as defined by SEC Rule 15c3-1, at December 31, 2017 was $397.5 million with excess net capital of $397.2 million.
24.RELATED PARTY TRANSACTIONS Management Agreement The Company and the Manager have entered into a management agreement pursuant to which the Company’s management is conducted by the Manager through the authority delegated to it in the Management Agreement and pursuant to the policies established by the Board (the “Externalization”). The management agreement was effective as of July 1, 2013 and was amended on November 5, 2014 and amended and restated on April 12, 2016 (the management agreement, as amended and restated, is referred to as “Management Agreement”).
Under the Management Agreement, the Manager, subject to the supervision and direction of the Company’s Board, is 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 Manager also performs such other supervisory and management services and activities relating to the Company’s assets and operations as may be appropriate. In exchange for the management services, the Company pays the Manager a monthly management fee in an amount equal to 1/12th of 1.05% of our stockholder's equity (as defined in the Management Agreement), and the Manager is responsible for providing personnel to manage the Company, and paying all compensation and benefit expenses associated with such personnel. The Company does not pay the Manager any incentive fees.
For the years ended December 31, 2017, 2016 and 2015, the compensation and management fee was $164.3 million (includes $7.2 million related to compensation expense for the employees of the Company’s subsidiaries), $151.6 December 31, 2013. Options to purchase 2.8 million shares of common stock were outstanding and considered anti-dilutive as their exercise price and option expense exceeded the average stock price for the year ended December 31, 2012.
15. LONG-TERM STOCK INCENTIVE PLAN
The Company adopted the 2010 Equity Incentive Plan (the “Plan”), which authorizes the Compensation Committee of the Board of Directors to grant options, stock appreciation rights, dividend equivalent rights, or other share-based awards, including restricted shares up to an aggregate of 25,000,000 shares, subject to adjustments as provided in the 2010 Equity Incentive Plan. The Company had previously adopted a long term stock incentive plan for executive officers, key employees and non-employee directors (the “Prior Plan”). The Prior Plan authorized the Compensation
| | Committee of the Board of Directors to grant awards, including non-qualified options as well as incentive stock options as defined under Section 422 of the Code. The Prior Plan authorized the granting of options or other awards for an aggregate of the greater of 500,000 shares or 9.5% of the diluted outstanding shares of the Company’s common stock, up to a ceiling of 8,932,921 shares. No further awards will be made under the Prior Plan, although existing awards remain effective.
Stock options were issued at the market price on the date of grant, subject to an immediate or four year vesting in four equal installments with a contractual term of 5 or 10 years.
The following table sets forth activity related to the Company’s stock options awarded under the Plan:
|
| | For the Years Ended | | | | December 31, 2014 | | | December 31, 2013 | | | | Number of Shares | | | Weighted Average Exercise Price | | | Number of Shares | | | Weighted Average Exercise Price | | Options outstanding at the beginning of year | | | 3,581,752 | | | $ | 15.44 | | | | 5,618,686 | | | $ | 15.74 | | Granted | | | - | | | | - | | | | - | | | | - | | Exercised | | | - | | | | - | | | | (166,375 | ) | | | 13.25 | | Forfeited | | | (1,016,667 | ) | | | 15.07 | | | | (1,513,934 | ) | | | 16.22 | | Expired | | | (305,750 | ) | | | 17.34 | | | | (356,625 | ) | | | 17.91 | | Options outstanding at the end of period | | | 2,259,335 | | | $ | 15.35 | | | | 3,581,752 | | | $ | 15.44 | | Options exercisable at the end of the period | | | 2,259,335 | | | $ | 15.35 | | | | 3,581,752 | | | $ | 15.44 | |
The weighted average remaining contractual term was approximately 3.1 years and 3.8 years for stock options outstanding and exercisable as of December 31, 2014 and 2013, respectively.
As of December 31, 2014 and 2013, there was no unrecognized compensation cost related to nonvested share-based compensation awards.
16. INCOME TAXESmillion (includes $8.4 million related to compensation expense for the employees of the Company’s subsidiaries), and $150.3 million (includes $7.5 million related to compensation expense for the employees of the Company’s subsidiaries), respectively. At December 31, 2017 and 2016, the Company had amounts payable to the Manager of $13.8 million and $11.2 million, respectively, which is included in Accounts payable and other liabilities in the Consolidated Statements of Financial Condition.
The Management Agreement’s current term ends on December 31, 2018 and will automatically renew for successive two-year terms unless at least two-thirds of the Company's independent directors or the holders of a majority of the Company's outstanding shares of common stock elect to terminate the agreement in their sole discretion for any or no reason. At any time during the term or any renewal term the Company may deliver to the Manager written notice of the Company’s intention to terminate the Management Agreement. The Company must designate a date not less than one year from the date of the notice on which the Management Agreement will terminate. The Management Agreement also provides that the Manager may terminate the Management Agreement by providing to the Company prior written notice of its intention to terminate the Management Agreement no less than one year prior to the date designated by the Manager on which the Manager would cease to provide services or such earlier date as determined by the Company in its sole discretion.
Following the Externalization, the Company continues to retain employees at certain of the Company’s subsidiaries for regulatory or corporate efficiency reasons. All compensation expenses associated with such retained employees reduce the amount paid to the Manager.
The Management Agreement may be amended or modified by agreement between the Company and the Manager. There is no termination fee for a termination of the Management Agreement by either the Company or the Manager.
Investment in Affiliate and Advisory Fees
In August 2015, FIDAC entered into an agreement with Chimera Investment Corporation (“Chimera”) to internalize the management of Chimera. As part of the agreement, the companies agreed to terminate the management agreement between FIDAC and Chimera effective August 5, 2015.
In connection with the transaction, Annaly and Chimera entered into a share repurchase agreement pursuant to which Chimera purchased the Company’s approximately 9.0 million shares of Chimera at an aggregate price of $126.4 million. The share repurchase agreement closed in August 2015.
For the year ended December 31, 2017 and 2016, the Company did not record any advisory fees. For the year ended December 31, 2014 the Company was qualified to be taxed as a REIT under Code Sections 856 through 860. As a REIT, the Company is not subject to federal income tax to the extent that it distributes its taxable income to its stockholders. To maintain qualification as a REIT, the Company must distribute at least 90% of its annual REIT taxable income to its stockholders and meet certain other requirements such as assets it may hold, income it may generate and its stockholder composition. It is generally the Company’s policy to distribute 100% of its REIT taxable income. To the extent there is any undistributed REIT taxable income at the end of a year, the Company distributes such shortfall within the next year as | | permitted by the Code. For years prior to 2013, the Company retained the amount of taxable income attributable to certain employee remuneration deductions disallowed for tax purposes pursuant to Section 162(m) of the Code (“Section 162(m)”). As a result of the externalization of management effective as of July 1, 2013, the Company was not subject to the Section 162(m) disallowance for the 2013 tax year.
The state and local tax jurisdictions for which the Company is subject to tax-filing obligations recognize the Company’s status as a REIT, and therefore, the Company generally does not pay income tax in such jurisdictions. The Company may, however, be subject to certain minimum state and local tax filing fees as well as certain excise, franchise or business taxes. The Company’s TRSs are subject to federal, state and local taxes.
During the year ended December 31, 2014, the Company recorded $5.9 million of income tax expense for income attributable to its TRSs.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 15. Financial Statements
During the year ended December 31, 2013, the Company recorded $8.2 million of income tax expense for income attributable to its TRSs.
During the year ended December 31, 2012, the Company recorded $13.8 million of income tax expense for income attributable its TRSs. During the year ended December 31, 2012, the Company also recorded $22.1 million of income tax expense for a portion of earnings retained based on Section 162(m) limitations.
The Company’s 2013, 2012 and 2011 federal, state and local tax returns remain open for examination.
17. LEASE COMMITMENTS AND CONTINGENCIES
| | Commitments
The Company had a non-cancelable lease for office space which commenced in May 2002 and expired in December 2014. In June 2014, the Company entered into a non-cancelable lease for office space which commenced in July 2014 and expires in September 2025. FIDAC has a lease for office space which commenced in October 2010 and expires in February 2016. The lease expense for the years ended December 31, 2014, 2013, and 2012 were $3.0 million, $2.3 million and $2.5 million, respectively. The Company’s aggregate future minimum lease payments total $37.5 million. The following table details the lease payments.
|
Years Ending December 31, | | Lease Commitments | | | | (dollars in thousands) | | 2015 | | $ | 1,199 | | 2016 | | | 3,591 | | 2017 | | | 3,565 | | 2018 | | | 3,565 | | 2019 | | | 3,565 | | Later years | | | 21,992 | | | | $ | 37,477 | |
The Company had no material unfunded loan commitments as of December 31, 2014 and 2013.
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.
18. RISK MANAGEMENT
The primary risks to the Company are liquidity and investment/market 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 pledges or liquidation of some of the existing collateral to reduce borrowing levels.
The Company may seek to mitigate the potential financial impact by entering into interest rate agreements such as interest rate swaps, interest rate swaptions and other hedges.
Weakness in the mortgage market, the shape of the yield curve and changes in the expectations for the volatility of future interest rates may adversely affect the performance and market value of the Company’s investments. This could negatively impact the Company’s book value. Furthermore, if many of the Company’s lenders are unwilling or unable to provide additional financing, the Company could be forced to sell its Investment Securities at an inopportune time when prices are depressed. The Company has established policies and procedures for mitigating risks, including conducting scenario analyses and utilizing a range of hedging strategies.
|
December 31, 2015, the Company recorded advisory fees from Chimera totaling $24.8 million. 25.SUBSEQUENT EVENTS
On January 3, 2018, the Company entered into an at-the-market sales program for sales of the Company’s common stock having an aggregate offering price of up to $1.5 billion, which can be sold from time to time pursuant to separate Distribution Agency Agreements with each of the agents under the program.
On January 9, 2018, the Company provided notice to the record holders of the Company’s Series E Preferred Stock of the redemption of all 11,500,000 of the issued and outstanding shares of Series E Preferred Stock. The cash redemption amount for each redeemed share of Series E ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIESPreferred Stock is $25.00 plus accrued and unpaid dividends to, but not including, the redemption date of February 8, 2018.
Item 15. Financial Statements
On January 9, 2018, the Company also provided notice to the record holders of the Company’s Series C Preferred Stock of the redemption of 5,000,000 of the issued and outstanding shares of Series C Preferred Stock. The cash redemption amount for each redeemed share of Series C Preferred Stock is $25.00 plus accrued and unpaid dividends to, but not including, the redemption date of February 8, 2018.
On January 12, 2018, the Company closed the public offering of 17,000,000 shares of its 6.50% Series G Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock for gross proceeds of approximately $425.0 million before deducting the underwriting discount and other estimated offering expenses.
The payment of principal and interest on the Freddie Mac and Fannie Mae Agency mortgage-backed securities are guaranteed by those respective agencies and the payment of principal and interest on Ginnie Mae Agency mortgage-backed securities are backed by the full faith and credit of the U.S. government. Principal and interest on Agency debentures are guaranteed by the agency issuing the debenture. Substantially all of the Company’s Investment Securities have an actual or implied “AAA” rating.
The Company faces credit risk on the portions of its portfolio which are not Agency mortgage-backed securities, Agency debentures or U.S. Treasury securities. The Company is exposed to credit risk on CRE Debt and Preferred Equity Investments, investments in commercial real estate and corporate debt. The Company is exposed to risk of loss if an issuer, borrower, tenant or counterparty fails to perform its obligations under contractual terms. The Company has established policies and procedures for mitigating credit risk, including reviewing and establishing limits for credit exposure, limiting transactions with specific counterparties, maintaining qualifying collateral and continually assessing the creditworthiness of issuers, borrowers, tenants and counterparties.
19. RCAP REGULATORY REQUIREMENTS
RCap is subject to regulations of the securities business that include but are not limited to trade practices, use and safekeeping of funds and securities, capital structure, recordkeeping and conduct of directors, officers and employees.
As a self-clearing, registered broker dealer, RCap is required to maintain minimum net capital by FINRA. As of December 31, 2014 RCap had a minimum net capital requirement of $0.3 million. RCap consistently operates with capital in excess of its regulatory capital requirements. RCap’s regulatory net capital as defined by SEC Rule 15c3-1, as of December 31, 2014 was $399.8 million with excess net capital of $399.5 million.
20. RELATED PARTY TRANSACTIONS
Investment in Affiliate, Available-For-Sale Equity Security
At December 31, 2014, the Company’s available-for-sale equity securities represented shares of Chimera Investment Corporation (“Chimera”), which are reported at fair value. The Company owned
| | 26.approximately 45.0 million shares of Chimera at a fair value of approximately $143.0 million at December 31, 2014 and approximately 45.0 million shares of Chimera at a fair value of approximately $139.4 million at December 31, 2013. The Company evaluates the near term prospects of its current investment in Chimera in relation to the severity and length of time of impairment, if any. At December 31, 2014 and 2013, the investment in Chimera had unrealized gains of $4.2 million and $0.6 million, respectively.
Advisory fees
For the year ended December 31, 2014, the Company recorded advisory fees from Chimera totaling $31.3 million. In August 2014, the management agreement between FIDAC and Chimera was amended and restated to amend certain of the terms and conditions of the prior agreement. Among other amendments to the terms of the prior agreement, effective August 8, 2014, the management fee was increased from 0.75% to 1.20% of Chimera’s gross stockholders’ equity (as defined in the amended and restated management agreement). For the year ended December 31, 2013, the Company recorded advisory fees from Chimera and CreXus, prior to its acquisition, totaling $31.1 million. At December 31, 2014 and 2013, the Company had amounts receivable from Chimera of $10.4 million and $6.8 million, respectively.
Management Agreement
The Company and the Manager have entered into a management agreement pursuant to which the Company’s management is conducted by the Manager through the authority delegated to it in the Management Agreement and pursuant to the policies established by the Board of Directors (the “Externalization”). The management agreement was effective as of July 1, 2013 and applicable for the entire 2013 calendar year and was amended on November 5, 2014 (the management agreement, as amended, is referred to as “Management Agreement”).
Pursuant to the terms of the Management Agreement, the Company pays the Manager a monthly management fee in an amount equal to 1/12th of 1.05% of stockholders’ equity, as defined in the Management Agreement, for its management services. For the year ended December 31, 2014 and 2013, the compensation and management fee was $155.6 million (includes $24.2 million related to compensation expense for the employees of the Company’s subsidiaries) and $167.4 million (includes $49.2 million related to compensation expense for the employees of the Company’s subsidiaries). At December 31, 2014 and 2013, the Company had amounts payable to the Manager of $11.0 million and $16.2 million, respectively.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
The Management Agreement provides for a two year term ending December 31, 2016 with automatic two-year renewals unless at least two-thirds of the Company’s independent directors or the holders of a majority of the Company’s outstanding shares of common stock elect to terminate the agreement in their sole discretion and for any or no reason. At any time during the term or any renewal term the Company may deliver to the Manager written notice of the Company’s intention to terminate the Management Agreement. The Company must designate a date not less than one year from the date of the notice on which the Management Agreement will terminate. The Management Agreement also provides that the Manager may terminate the Management Agreement by providing to the Company prior written notice of its intention to terminate the Management Agreement no less than one year prior to the date designated by the Manager on which the Manager would cease to provide services or such earlier date as determined by the Company in its sole discretion.
Effective July 1, 2013, a majority of the Company’s employees were terminated by the Company and were hired by the Manager. The Company has a limited number of employees following the Externalization, all of whom are employees of the Company’s subsidiaries for regulatory or corporate efficiency reasons. All
| | compensation expenses associated with such retained employees reduce the management fee. Pursuant to a pro forma calculation that computed the management fee as though it was in effect beginning January 1, 2013, the Company paid the Manager an amount equal to the pro forma calculation minus the actual compensation paid to the Company’s and its subsidiaries’ employees from January 1, 2013 to June 30, 2013.
The Management Agreement may be amended or modified by agreement between the Company and the Manager. There is no termination fee for a termination of the Management Agreement by either the Company or the Manager.
Other
During the year ended December 31, 2014, the Company made a one-time payment totaling $23.8 million to Chimera to resolve issues raised in derivative demand letters sent to Chimera’s board of directors. This amount is included as a component of Other income (loss) in the Company’s Consolidated Statements of Comprehensive Income (Loss).
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 15. Financial Statements
21. SUMMARIZED QUARTERLY RESULTS (UNAUDITED)
The following is a presentation of summarized quarterly results of operations for the years ended December 31, 20142017 and 2013. 2016. | | For the Quarters Ended | | | | | December 31, 2014 | | | September 30, 2014 | | | June 30, 2014 | | | March 31, 2014 | | | | | (dollars in thousands, expect per share data) | | | Interest income | | $ | 648,144 | | | $ | 644,640 | | | $ | 683,962 | | | $ | 655,901 | | | Interest expense | | | 134,512 | | | | 127,069 | | | | 126,107 | | | | 124,971 | | | Net interest income | | | 513,632 | | | | 517,571 | | | | 557,855 | | | | 530,930 | | | Total other income (loss) | | | (1,113,659 | ) | | | (109,013 | ) | | | (842,030 | ) | | | (682,902 | ) | | Less: Total general and administrative expenses | | | 58,454 | | | | 51,317 | | | | 52,189 | | | | 47,378 | | | Income before income taxes | | | (658,481 | ) | | | 357,241 | | | | (336,364 | ) | | | (199,350 | ) | | Less: Income taxes | | | (209 | ) | | | 2,385 | | | | (852 | ) | | | 4,001 | | | Net income (loss) | | | (658,272 | ) | | | 354,856 | | | | (335,512 | ) | | | (203,351 | ) | | Less: Net income attributable to noncontrolling interest | | | (196 | ) | | | - | | | | - | | | | - | | | Less: Dividends on preferred stock | | | 17,992 | | | | 17,992 | | | | 17,992 | | | | 17,992 | | | Net income (loss) available (related) to common stockholders | | $ | (676,068 | ) | | $ | 336,864 | | | $ | (353,504 | ) | | $ | (221,343 | ) | | Net income (loss) available (related) per share to common stockholders: | | | | | | | | | | | | | | | Basic | | $ | (0.71 | ) | | $ | 0.36 | | | $ | (0.37 | ) | | $ | (0.23 | ) | | Diluted | | $ | (0.71 | ) | | $ | 0.35 | | | $ | (0.37 | ) | | $ | (0.23 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Quarters Ended | | For the Quarters Ended | | | December 31, 2013 | | | September 30, 2013 | | | June 30, 2013 | | | March 31, 2013 | | December 31, 2017 | | September 30, 2017 | | June 30, 2017 | | March 31, 2017 | | | (dollars in thousands, expect per share data) | | (dollars in thousands, expect per share data) | Interest income | | $ | 771,249 | | | $ | 697,160 | | | $ | 712,936 | | | $ | 737,217 | | $ | 745,423 |
| | $ | 622,550 |
| | $ | 537,426 |
| | $ | 587,727 |
| Interest expense | | | 137,393 | | | | 145,476 | | | | 164,255 | | | | 177,590 | | 318,711 |
| | 268,937 |
| | 222,281 |
| | 198,425 |
| Net interest income | | | 633,856 | | | | 551,684 | | | | 548,681 | | | | 559,627 | | 426,712 |
| | 353,613 |
| | 315,145 |
| | 389,302 |
| Total realized and unrealized gains (losses) | | 359,215 |
| | 43,807 |
| | (277,794 | ) | | 74,265 |
| Total other income (loss) | | | 452,944 | | | | (299,925 | ) | | | 1,154,755 | | | | 368,370 | | 25,064 |
| | 28,282 |
| | 30,865 |
| | 31,646 |
| Less: Total general and administrative expenses | | | 56,294 | | | | 58,744 | | | | 65,131 | | | | 51,912 | | 59,257 |
| | 57,016 |
| | 54,023 |
| | 53,828 |
| Income before income taxes | | | 1,030,506 | | | | 193,015 | | | | 1,638,305 | | | | 876,085 | | | Income (loss) before income taxes | | 751,734 |
| | 368,686 |
| | 14,193 |
| | 441,385 |
| Less: Income taxes | | | 1,757 | | | | 557 | | | | 92 | | | | 5,807 | | 4,963 |
| | 1,371 |
| | (329 | ) | | 977 |
| Net income (loss) | | | 1,028,749 | | | | 192,458 | | | | 1,638,213 | | | | 870,278 | | 746,771 |
| | 367,315 |
| | 14,522 |
| | 440,408 |
| Less: Dividends on preferred stock | | | 17,992 | | | | 17,992 | | | | 17,992 | | | | 17,992 | | | Less: Net income attributable to noncontrolling interest | | (151 | ) | | (232 | ) | | (102 | ) | | (103 | ) | Less: Dividends on preferred stock (1) | | 32,334 |
| | 30,355 |
| | 23,473 |
| | 23,473 |
| Net income (loss) available (related) to common stockholders | | $ | 1,010,757 | | | $ | 174,466 | | | $ | 1,620,221 | | | $ | 852,286 | | $ | 714,588 |
| | $ | 337,192 |
| | $ | (8,849 | ) | | $ | 417,038 |
| Net income (loss) available (related) per share to common stockholders: | Net income (loss) available (related) per share to common stockholders: | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 1.07 | | | $ | 0.18 | | | $ | 1.71 | | | $ | 0.90 | | $ | 0.62 |
| | $ | 0.31 |
| | $ | (0.01 | ) | | $ | 0.41 |
| Diluted | | $ | 1.03 | | | $ | 0.18 | | | $ | 1.64 | | | $ | 0.87 | | $ | 0.62 |
| | $ | 0.31 |
| | $ | (0.01 | ) | | $ | 0.41 |
|
SCHEDULE III
Schedule III - Real Estate and Accumulated Depreciation | | | | December 31, 2014 | | | | (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Initial Cost to Company | | | Cost Capitalized Subsequent to Acquisition | | | Gross Amounts Carried at Close of Period 12/31/14 | | | | | | | | | Location | | Number of Properties | | | Encumbrances | | | Land | | | Buildings and Improvements | | | Improvements | | | Capitalized Costs | | | Land | | | Buildings and Improvements | | | Total | | | Accumulated Depreciation | | | Year of Construction | | Date Acquired | | Weighted- Average Depreciable Life (in years) | | Industrial - Phoenix - AZ | | 2 | | | $ | 16,600 | | | $ | 6,011 | | | $ | 27,046 | | | $ | - | | | $ | - | | | $ | 6,011 | | | $ | 27,046 | | | $ | 33,057 | | | $ | (1,836 | ) | | 1997-1999 | | 4/18/2013 | | 32 | | Industrial - Las Vegas - NV | | 1 | | | | 2,505 | | | | 628 | | | | 4,053 | | | | - | | | | - | | | | 628 | | | | 4,053 | | | | 4,681 | | | | (210 | ) | | 1988 | | 4/18/2013 | | 39 | | Retail - Knoxville - TN | | 1 | | | | 12,350 | | | | 3,503 | | | | 13,309 | | | | - | | | | - | | | | 3,503 | | | | 13,309 | | | | 16,812 | | | | (331 | ) | | 2002 | | 4/1/2014 | | 36 | | Retail - Newport News - VA | | 1 | | | | 11,025 | | | | 6,394 | | | | 12,046 | | | | - | | | | - | | | | 6,394 | | | | 12,046 | | | | 18,440 | | | | (245 | ) | | 1994 | | 6/2/2014 | | 37 | | Retail - Amherst - NY | | 1 | | | | 8,270 | | | | 2,131 | | | | 9,740 | | | | - | | | | - | | | | 2,131 | | | | 9,740 | | | | 11,871 | | | | (127 | ) | | 1986 | | 11/10/2014 | | 30 | | Retail - Cheektowaga - NY | | 1 | | | | 9,447 | | | | 1,961 | | | | 12,259 | | | | - | | | | - | | | | 1,961 | | | | 12,259 | | | | 14,220 | | | | (180 | ) | | 1978 | | 11/10/2014 | | 27 | | Retail - Jamestown - NY | | 1 | | | | 7,356 | | | | 820 | | | | 4,915 | | | | - | | | | - | | | | 820 | | | | 4,915 | | | | 5,735 | | | | (123 | ) | | 1997 | | 11/10/2014 | | 31 | | Retail - Penfield - NY | | 1 | | | | 23,558 | | | | 4,121 | | | | 22,413 | | | | - | | | | - | | | | 4,121 | | | | 22,413 | | | | 26,534 | | | | (341 | ) | | 1978 | | 11/10/2014 | | 26 | | Retail - Loganville - GA | | 1 | | | | 7,230 | | | | 3,217 | | | | 8,386 | | | | - | | | | - | | | | 3,217 | | | | 8,386 | | | | 11,603 | | | | (92 | ) | | 1996 | | 11/10/2014 | | 31 | | Retail - Chillicothe - OH | | 1 | | | | 7,887 | | | | 1,262 | | | | 10,819 | | | | - | | | | - | | | | 1,262 | | | | 10,819 | | | | 12,081 | | | | (102 | ) | | 1981 | | 11/10/2014 | | 28 | | Retail - Irondequoit - NY | | 1 | | | | 15,000 | | | | 2,438 | | | | 14,684 | | | | - | | | | - | | | | 2,438 | | | | 14,684 | | | | 17,122 | | | | (193 | ) | | 1972 | | 11/10/2014 | | 29 | | Retail - Orchard Park - NY | | 1 | | | | 12,888 | | | | 4,204 | | | | 20,617 | | | | - | | | | - | | | | 4,204 | | | | 20,617 | | | | 24,821 | | | | (264 | ) | | 1997, 2000 | | 11/10/2014 | | 34 | | Retail - LeRoy - NY | | 1 | | | | 3,492 | | | | 374 | | | | 4,922 | | | | - | | | | - | | | | 374 | | | | 4,922 | | | | 5,296 | | | | (62 | ) | | 1997 | | 11/10/2014 | | 30 | | Retail - Ontario - NY | | 1 | | | | 5,406 | | | | 575 | | | | 6,813 | | | | - | | | | - | | | | 575 | | | | 6,813 | | | | 7,388 | | | | (72 | ) | | 1998 | | 11/10/2014 | | 33 | | Retail - Warsaw - NY | | 1 | | | | 3,416 | | | | 478 | | | | 4,117 | | | | - | | | | - | | | | 478 | | | | 4,117 | | | | 4,595 | | | | (46 | ) | | 1998 | | 11/10/2014 | | 31 | | | | 16 | | | $ | 146,430 | | | $ | 38,117 | | | $ | 176,139 | | | $ | 0.00 | | | $ | 0.00 | | | $ | 38,117 | | | $ | 176,139 | | | $ | 214,256 | | | $ | (4,224 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | The following table presents our real estate activity during the year ended December 31, 2014 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Beginning balance, January 1, 2014 | | | $ | 60,132 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Additions during the year: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Acquisitions | | | | | | 176,519 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total additions | | | | | | 176,519 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deductions during the year: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Carrying value of real estate sold | | | | 23,270 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Depreciation | | | | | | 3,349 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total deductions | | | | | | 26,619 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Ending balance, December 31, 2014 | | | $ | 210,032 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
SCHEDULE IV
Schedule IV - Mortgage Loans on Real Estate | | | | December 31, 2014 | | | | (dollars in thousands) | | | | Description | Location | | Prior Liens (1) | | | Face Amount | | | Carrying Amount | | | Interest Rate (2) | | | Libor Floor | | Payment Terms | Maturity Date (3) | | Months to Open Period (2% Penalty or Less) | | First Mortgages: | | | | | | | | | | | | | | | | | | | | | Office | CA | | $ | - | | | $ | 65,000 | | | $ | 64,501 | | | LIBOR+3.00 | % | | | 0.25 | % | Interest Only | 3/1/2019 | | 8 | | Multi-Family | FL | | | - | | | | 26,000 | | | | 26,000 | | | LIBOR+4.50 | % | | | 0.25 | % | Interest Only | 5/9/2019 | | 5 | | Multi-Family | CA | | | - | | | | 13,000 | | | | 12,951 | | | LIBOR+4.70 | % | | | 0.20 | % | Interest Only | 8/1/2019 | | 3 | | Office | FL | | | - | | | | 12,166 | | | | 12,015 | | | EURIBOR+5.00 | % | | | N/A | | Interest Only | 12/6/2019 | | 11 | | Multi-Family | CA | | | - | | | | 8,000 | | | | 7,970 | | | LIBOR+4.70 | % | | | 0.20 | % | Interest Only | 8/1/2019 | | 7 | | Mixed | NY | | | - | | | | 230,000 | | | | 230,000 | | | 10.00 | % | | | N/A | | Interest Only | 6/30/2015 | | 0 | | Retail (4) | CO | | | 13,931 | | | | 17,164 | | | | 17,485 | | | 5.58 | % | | | N/A | | Amortizing | 5/1/2017 | | 23 | | Panoramic View | NY | | | - | | | | 12,973 | | | | 12,973 | | | Non-accrual | | | | N/A | | IO/Sellout | 12/1/2013 | | 0 | | First Mortgages - Securitized: | | | | | | | | | | | | | | | | | | | | | | Multi-Family | IL | | | - | | | | 115,000 | | | | 114,780 | | | LIBOR+4.10 | % | | | 0.20 | % | Interest Only | 11/1/2017 | | 0 | | Hotel | CO | | | - | | | | 51,000 | | | | 50,964 | | | LIBOR+5.45 | % | | | 0.25 | % | Interest Only | 11/9/2018 | | 3 | | Multi-Family | AZ | | | - | | | | 48,685 | | | | 48,462 | | | LIBOR+5.00 | % | | | 0.25 | % | Interest Only | 1/1/2018 | | 6 | | Industrial | TX | | | - | | | | 46,500 | | | | 46,432 | | | LIBOR+5.40 | % | | | 1.00 | % | Interest Only | 8/10/2017 | | 0 | | Office | OH | | | - | | | | 38,270 | | | | 38,221 | | | LIBOR+5.50 | % | | | 0.25 | % | Interest Only | 8/9/2018 | | 1 | | Retail | IN | | | - | | | | 37,680 | | | | 37,680 | | | LIBOR+5.75 | % | | | 0.92 | % | Interest Only | 11/9/2016 | | 0 | | Hotel | GA | | | - | | | | 20,156 | | | | 20,051 | | | LIBOR+4.95 | % | | | 0.20 | % | Interest Only | 8/9/2018 | | 0 | | Office | OK | | | - | | | | 17,500 | | | | 17,476 | | | LIBOR+5.75 | % | | | 0.25 | % | Interest Only | 9/6/2018 | | 0 | | Hotel | LA | | | - | | | | 15,500 | | | | 15,379 | | | LIBOR+5.75 | % | | | 1.00 | % | Interest Only | 8/9/2018 | | 14 | | Hotel | LA | | | - | | | | 9,250 | | | | 9,189 | | | LIBOR+6.5 | % | | | 0.25 | % | Interest Only | 10/1/2018 | | 15 | | Mezzanine Loans: | | | | | | | | | | | | | | | | | | | | | | | | | Retail | Various | | | 387,161 | | | | 86,067 | | | | 86,506 | | | 11.25 | % | | | N/A | | Amortizing | 4/10/2017 | | 25 | | Office | Various | | | 575,522 | | | | 65,968 | | | | 65,929 | | | LIBOR+8.75 | % | | | 0.75 | % | Interest Only | 1/20/2017 | | 4 | | Industrial | Various | | | 100,000 | | | | 50,000 | | | | 49,928 | | | 8.11 | % | | | N/A | | Interest Only | 6/28/2022 | | 6 | | Retail | Various | | | 574,600 | | | | 43,900 | | | | 43,945 | | | 7.71 | % | | | N/A | | Amortizing | 12/1/2015 | | 0 | | Mixed | OH | | | 137,250 | | | | 37,400 | | | | 37,400 | | | 9.50 | % | | | N/A | | Interest Only | 11/22/2023 | | 59 | | Hotel | Various | | | 175,000 | | | | 25,000 | | | | 25,034 | | | LIBOR+9.95 | % | | | 0.20 | % | Interest Only | 2/14/2019 | | 25 | | Office | NY | | | 157,449 | | | | 18,000 | | | | 18,041 | | | 11.15 | % | | | N/A | | Interest Only | 9/6/2021 | | 69 | | Hotel | NY | | | 49,051 | | | | 16,677 | | | | 16,677 | | | LIBOR+9.83 | % | | | 1.00 | % | Interest Only | 9/8/2015 | | 0 | | Office | GA | | | 50,604 | | | | 15,483 | | | | 15,452 | | | 12.17 | % | | | N/A | | Interest Only | 4/9/2015 | | 0 | | Hotel | NY | | | 65,728 | | | | 12,753 | | | | 12,753 | | | LIBOR+11.61 | % | | | 1.00 | % | Interest Only | 9/8/2015 | | 0 | | Hotel | Various | | | 50,525 | | | | 12,375 | | | | 12,408 | | | LIBOR+8.65 | % | | | 0.16 | % | Interest Only | 8/9/2019 | | 1 | | Office | CA | | | - | | | | 11,473 | | | | 11,419 | | | LIBOR+26.33 | % | | | 0.25 | % | Interest Only | 3/1/2019 | | 14 | | Office | MD | | | 56,280 | | | | 10,130 | | | | 10,091 | | | 11.20 | % | | | N/A | | Interest Only | 8/1/2017 | | 26 | | Office | MD | | | 55,547 | | | | 9,942 | | | | 9,904 | | | 11.70 | % | | | N/A | | Interest Only | 8/1/2017 | | 26 | | Retail | MA | | | 64,500 | | | | 10,000 | | | | 10,000 | | | 10.00 | % | | | N/A | | Interest Only | 9/6/2023 | | 21 | | Hotel | CA | | | 50,000 | | | | 10,000 | | | | 10,000 | | | 10.25 | % | | | N/A | | Interest Only | 2/6/2019 | | 46 | | Office | NY | | | 62,000 | | | | 10,000 | | | | 9,977 | | | 10.00 | % | | | N/A | | Interest Only | 10/6/2018 | | 22 | | Office | TX | | | 43,500 | | | | 9,187 | | | | 9,122 | | | 9.50 | % | | | N/A | | Interest Only | 9/1/2018 | | 24 | | Office | GA | | | 56,833 | | | | 9,000 | | | | 9,000 | | | 11.00 | % | | | N/A | | Interest Only | 7/10/2015 | | 0 | | Office | LA | | | 64,000 | | | | 8,700 | | | | 8,700 | | | 10.75 | % | | | N/A | | Interest Only | 10/29/2023 | | 46 | | Office | CA | | | 45,300 | | | | 8,700 | | | | 8,760 | | | LIBOR+9.50 | % | | | 0.25 | % | Interest Only | 3/31/2019 | | 13 | | Multi-Family | OH | | | 83,549 | | | | 8,300 | | | | 8,236 | | | 10.25 | % | | | N/A | | Interest Only | 12/1/2022 | | 16 | | Hotel | CA | | | 42,872 | | | | 8,000 | | | | 8,031 | | | 12.25 | % | | | N/A | | Interest Only | 4/1/2017 | | 3 | | Office | TX | | | 52,000 | | | | 7,000 | | | | 7,000 | | | 10.10 | % | | | N/A | | Interest Only | 12/1/2024 | | 35 | | Office | CO | | | 13,750 | | | | 6,000 | | | | 6,000 | | | 11.06 | % | | | N/A | | Interest Only | 8/6/2018 | | 7 | | Hotel | LA | | | - | | | | 5,000 | | | | 5,000 | | | 13.50 | % | | | N/A | | Interest Only | 8/9/2018 | | 14 | | Office | TX | | | 72,069 | | | | 7,418 | | | | 7,418 | | | 10.25 | % | | | N/A | | Interest Only | 8/1/2018 | | 19 | | Preferred Equity: | | | | | | | | | | | | | | | | | | | | | | | | | Multi-Family | CA | | | 361,304 | | | | 83,385 | | | | 82,767 | | | 10.00 | % | | | N/A | | Interest Only | 9/16/2020 | | 9 | | Multi-Family | CA | | | 70,468 | | | | 31,500 | | | | 31,266 | | | 10.00 | % | | | N/A | | Interest Only | 9/16/2020 | | 9 | | Condo | NY | | | 181,000 | | | | 51,000 | | | | 50,688 | | | 12.00 | % | | | N/A | | Interest Only | 11/21/2018 | | 0 | | Multi-Family | MD | | | 371,420 | | | | 39,770 | | | | 39,253 | | | 11.00 | % | | | N/A | | Interest Only | 8/1/2022 | | 56 | | Mixed | PA | | | 26,000 | | | | 9,000 | | | | 8,931 | | | 11.00 | % | | | N/A | | Interest Only | 11/27/2018 | | 11 | | | | | $ | 4,109,213 | | | $ | 1,520,972 | | | $ | 1,518,165 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (1) Represents third-party priority liens. | | (2) LIBOR represents the one month London Interbank Offer Rate, EURIBOR represents the one month Eurodollar deposit rate. | | (3) Assumes all extension options are exercised. | | (4) Includes senior position sold to third party that did not qualify for GAAP sale accounting. The Company’s economic interest is limited to a B-Note with an outstanding face of $3.8 million and a basis of approximately $1.9 million. | |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES SignaturesFinancial Statements
| | | | | | | | | | | | | | | | | | For the Quarters Ended | | December 31, 2016 | | September 30, 2016 | | June 30, 2016 | | March 31, 2016 | | (dollars in thousands, expect per share data) | Interest income | $ | 807,022 |
| | $ | 558,668 |
| | $ | 457,118 |
| | $ | 388,143 |
| Interest expense | 183,396 |
| | 174,154 |
| | 152,755 |
| | 147,447 |
| Net interest income | 623,626 |
| | 384,514 |
| | 304,363 |
| | 240,696 |
| Total realized and unrealized gains (losses) | 1,250,636 |
| | 412,906 |
| | (523,785 | ) | | (1,055,553 | ) | Total other income (loss) | 30,918 |
| | 29,271 |
| | (9,930 | ) | | (6,115 | ) | Less: Total general and administrative expenses | 55,453 |
| | 97,737 |
| | 49,221 |
| | 47,945 |
| Income (loss) before income taxes | 1,849,727 |
| | 728,954 |
| | (278,573 | ) | | (868,917 | ) | Less: Income taxes | 1,244 |
| | (1,926 | ) | | (76 | ) | | (837 | ) | Net income (loss) | 1,848,483 |
| | 730,880 |
| | (278,497 | ) | | (868,080 | ) | Less: Net income attributable to noncontrolling interest | (87 | ) | | (336 | ) | | (385 | ) | | (162 | ) | Less: Dividends on preferred stock | 23,473 |
| | 22,803 |
| | 17,992 |
| | 17,992 |
| Net income (loss) available (related) to common stockholders | $ | 1,825,097 |
| | $ | 708,413 |
| | $ | (296,104 | ) | | $ | (885,910 | ) | Net income (loss) available (related) per share to common stockholders: | | | | | | | | Basic | $ | 1.79 |
| | $ | 0.70 |
| | $ | (0.32 | ) | | $ | (0.96 | ) | Diluted | $ | 1.79 |
| | $ | 0.70 |
| | $ | (0.32 | ) | | $ | (0.96 | ) |
(1) The quarter ended December 31, 2017 excludes, and the quarter ended September 30, 2017 includes, cumulative and undeclared dividends of $8.3 million on the Company's Series F Preferred Stock as of September 30, 2017.
SIGNATURESSchedule III - Real Estate and Accumulated Depreciation December 31, 2017(dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Initial Cost to Company | | Cost Capitalized Subsequent to Acquisition | | Property Sold | | Gross Amounts Carried at Close of Period 12/31/17 | | | | | | | | | | | Location | Number of Properties | | Encumbrances | | Land | | Buildings and Improvements | | Improvements | | Purchase Price Allocation Adjustments | | Capitalized Costs | | Property Sold | | Land | | Buildings and Improvements | | Total | | Accumulated Depreciation | | Year of Construction | | Date Acquired | | Weighted-Average Depreciable Life (in years) | Retail - Carrollton, TX | 1 |
| | $ | 12,875 |
| | $ | 3,970 |
| | $ | 14,672 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3,970 |
| | $ | 14,672 |
| | $ | 18,642 |
| | $ | (1,553 | ) | | 1996 | | 11/25/2015 | | 38 | Retail - Plano, TX | 1 |
| | 11,817 |
| | 4,615 |
| | 12,692 |
| | 59 |
| | — |
| | — |
| | — |
| | 4,615 |
| | 12,751 |
| | 17,366 |
| | (1,535 | ) | | 1994 | | 11/25/2015 | | 38 | Retail - Grapevine, TX | 1 |
| | 12,692 |
| | 4,713 |
| | 13,888 |
| | — |
| | — |
| | — |
| | — |
| | 4,713 |
| | 13,888 |
| | 18,601 |
| | (1,373 | ) | | 1998 | | 11/25/2015 | | 38 | Retail - Flower Mound, TX | 1 |
| | 13,085 |
| | 4,963 |
| | 14,477 |
| | 9 |
| | — |
| | — |
| | — |
| | 4,963 |
| | 14,486 |
| | 19,449 |
| | (1,525 | ) | | 1999 | | 11/25/2015 | | 38 | Retail - Grapevine, TX | 1 |
| | 9,797 |
| | 3,931 |
| | 9,972 |
| | — |
| | — |
| | — |
| | — |
| | 3,931 |
| | 9,972 |
| | 13,903 |
| | (1,120 | ) | | 1994 | | 11/25/2015 | | 38 | Retail - Flower Mound, TX | 1 |
| | 7,492 |
| | 2,696 |
| | 7,351 |
| | 66 |
| | — |
| | — |
| | — |
| | 2,696 |
| | 7,417 |
| | 10,113 |
| | (1,146 | ) | | 1992 | | 11/25/2015 | | 38 | Retail - Flower Mound, TX | 1 |
| | 8,929 |
| | 3,571 |
| | 8,280 |
| | 8 |
| | — |
| | — |
| | — |
| | 3,571 |
| | 8,287 |
| | 11,858 |
| | (858 | ) | | 1996 | | 11/25/2015 | | 38 | Retail - Plano, TX | 1 |
| | 4,638 |
| | 1,459 |
| | 4,533 |
| | 31 |
| | — |
| | — |
| | — |
| | 1,459 |
| | 4,564 |
| | 6,023 |
| | (1,468 | ) | | 1995 | | 11/25/2015 | | 38 | Retail - Largo, FL | 1 |
| | 12,750 |
| | 4,973 |
| | 12,832 |
| | (1 | ) | | — |
| | — |
| | — |
| | 4,973 |
| | 12,831 |
| | 17,804 |
| | (1,582 | ) | | 1988 | | 8/14/2015 | | 27 | Retail - Grass Valley, CA | 1 |
| | 25,900 |
| | 9,872 |
| | 28,680 |
| | 284 |
| | — |
| | — |
| | — |
| | 9,872 |
| | 28,965 |
| | 38,837 |
| | (3,916 | ) | | 1988 | | 10/27/2015 | | 25 | Multifamily - Washington, DC | 1 |
| | 57,500 |
| | 31,999 |
| | 42,651 |
| | (308 | ) | | — |
| | — |
| | — |
| | 31,999 |
| | 42,342 |
| | 74,341 |
| | (3,546 | ) | | 1978, 2008 | | 10/20/2015 | | 28 | Retail - Penfield, NY | 1 |
| | 23,558 |
| | 4,122 |
| | 22,670 |
| | 757 |
| | — |
| | — |
| | — |
| | 4,122 |
| | 23,427 |
| | 27,549 |
| | (5,124 | ) | | 1957 | | 11/10/2014 | | 24 | Retail - Orchard Park, NY | 1 |
| | 12,888 |
| | 4,189 |
| | 20,658 |
| | 71 |
| | — |
| | — |
| | — |
| | 4,189 |
| | 20,729 |
| | 24,918 |
| | (3,765 | ) | | 1997, 2000 | | 11/10/2014 | | 32 | Retail - Cheektowaga, NY | 1 |
| | 9,447 |
| | 1,939 |
| | 12,514 |
| | 5 |
| | — |
| | — |
| | — |
| | 1,939 |
| | 12,519 |
| | 14,458 |
| | (2,005 | ) | | 1978 | | 11/10/2014 | | 25 | Retail - Amherst, NY | 1 |
| | 8,270 |
| | 2,132 |
| | 9,807 |
| | 96 |
| | — |
| | — |
| | — |
| | 2,132 |
| | 9,903 |
| | 12,035 |
| | (1,889 | ) | | 1986 | | 11/10/2014 | | 28 | Retail - Ontario, NY | 1 |
| | 5,406 |
| | 574 |
| | 6,839 |
| | 1 |
| | — |
| | — |
| | — |
| | 574 |
| | 6,841 |
| | 7,415 |
| | (1,369 | ) | | 1998 | | 11/10/2014 | | 31 | Retail - Irondequoit, NY | 1 |
| | 15,000 |
| | 2,438 |
| | 14,836 |
| | 143 |
| | — |
| | — |
| | — |
| | 2,438 |
| | 14,980 |
| | 17,418 |
| | (3,158 | ) | | 1972 | | 11/10/2014 | | 27 | Retail - LeRoy, NY | 1 |
| | 3,492 |
| | 343 |
| | 4,950 |
| | 10 |
| | — |
| | — |
| | — |
| | 343 |
| | 4,959 |
| | 5,302 |
| | (1,126 | ) | | 1997 | | 11/10/2014 | | 29 | Retail - Jamestown, NY | 1 |
| | 7,356 |
| | 820 |
| | 4,915 |
| | — |
| | — |
| | — |
| | — |
| | 820 |
| | 4,915 |
| | 5,735 |
| | (1,342 | ) | | 1997 | | 11/10/2014 | | 29 | Retail - Warsaw, NY | 1 |
| | 3,415 |
| | 407 |
| | 4,123 |
| | — |
| | — |
| | — |
| | — |
| | 407 |
| | 4,122 |
| | 4,529 |
| | (803 | ) | | 1998 | | 11/10/2014 | | 31 | Retail - Chillicothe, OH | 1 |
| | 7,888 |
| | 1,262 |
| | 10,819 |
| | — |
| | — |
| | — |
| | — |
| | 1,262 |
| | 10,819 |
| | 12,081 |
| | (1,897 | ) | | 1981, 1998 | | 11/10/2014 | | 26 | Retail - Loganville, GA | 1 |
| | 7,230 |
| | 3,217 |
| | 8,386 |
| | — |
| | — |
| | — |
| | — |
| | 3,217 |
| | 8,386 |
| | 11,603 |
| | (1,748 | ) | | 1996 | | 11/10/2014 | | 28 | Retail - Chillicothe, OH | 1 |
| | 7,700 |
| | 2,282 |
| | 9,775 |
| | — |
| | — |
| | — |
| | — |
| | 2,282 |
| | 9,775 |
| | 12,057 |
| | (1,293 | ) | | 1995 | | 7/22/2015 | | 25 | Retail - Newport News, VA | 1 |
| | 11,025 |
| | 6,394 |
| | 12,046 |
| | — |
| | — |
| | — |
| | — |
| | 6,394 |
| | 12,046 |
| | 18,440 |
| | (1,562 | ) | | 1994 | | 6/2/2014 | | 35 | Retail - Knoxville, TN | 1 |
| | 12,350 |
| | 3,504 |
| | 13,309 |
| | — |
| | — |
| | — |
| | — |
| | 3,503 |
| | 13,310 |
| | 16,813 |
| | (1,657 | ) | | 2002 | | 4/9/2014 | | 34 | Industrial - Las Vegas, NV | 1 |
| | — |
| | 628 |
| | 4,053 |
| | — |
| | — |
| | — |
| | — |
| | 628 |
| | 4,053 |
| | 4,681 |
| | (560 | ) | | 1988, 2009 | | 3/29/2012 | | 37 | Industrial - Phoenix, AZ | 1 |
| | — |
| | 1,662 |
| | 6,217 |
| | — |
| | — |
| | — |
| | (7,880 | ) | | — |
| | — |
| | — |
| | — |
| | 1999 | | 11/28/2011 | | 26 | | 27 |
| | $ | 312,500 |
| | $ | 112,675 |
| | $ | 335,945 |
| | $ | 1,231 |
| | $ | — |
| | $ | — |
| | $ | (7,880 | ) | | $ | 111,012 |
| | $ | 330,959 |
| | $ | 441,971 |
| | $ | (48,920 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The following table presents our real estate activity during the year ended December 31, 2017 (in thousands): | | | | | Real Estate: | | Beginning balance, January 1, 2017 | $ | 448,620 |
| Acquisitions and improvements | 1,231 |
| Property sold | (7,880 | ) | Ending balance, December 31, 2017 | $ | 441,971 |
| | | Accumulated Depreciation: | | Beginning balance, January 1, 2017 | $ | 34,221 |
| Property sold | (1,052 | ) | Depreciation | 15,751 |
| Ending balance, December 31, 2017 | $ | 48,920 |
| | |
| | | | | | | | | | | | | | | | | | | | | | | Schedule IV - Mortgage Loans on Commercial Real Estate | December 31, 2017 | (dollars in thousands) | Description | Location | | Prior Liens (1) |
| | Face Amount |
| | Carrying Amount |
| | Interest Rate (2) | | Libor Floor | | Payment Terms | | Maturity Date (3) | Mezzanine Debt Investments: | | |
| | |
| | | | | | | | | | | Hotel | CA | | $ | 50,000 |
| | $ | 10,000 |
| | $ | 10,000 |
| | 10.25% | | N/A | | Interest Only | | 2/6/2019 | Hotel | Various | | 103,800 |
| | 25,000 |
| | 25,000 |
| | LIBOR+9.95% | | 0.20% | | Interest Only | | 2/9/2018 | Hotel | Various | | 26,223 |
| | 10,335 |
| | 10,335 |
| | LIBOR+8.65% | | N/A | | Interest Only | | 8/9/2019 | Hotel | Various | | 26,223 |
| | 1,691 |
| | 1,691 |
| | LIBOR+8.65% | | N/A | | Interest Only | | 8/9/2019 | Hotel | Various | | 103,800 |
| | 6,500 |
| | 6,500 |
| | LIBOR+8.75% | | 0.20% | | Interest Only | | 2/9/2018 | Hotel | LA | | 85,370 |
| | 13,133 |
| | 13,010 |
| | LIBOR+9.50% | | N/A | | Interest Only | | 9/9/2022 | Mixed | OH | | 124,671 |
| | 36,603 |
| | 36,603 |
| | 9.50% | | N/A | | Interest Only | | 12/1/2023 | Multi-Family | NY | | 393,717 |
| | 47,775 |
| | 47,775 |
| | LIBOR+7.81% | | N/A | | Interest Only | | 10/1/2020 | Multi-Family | NY | | 393,717 |
| | 65,386 |
| | 65,385 |
| | LIBOR+6.38% | | N/A | | Interest Only | | 10/1/2020 | Office | CO | | 13,201 |
| | 6,000 |
| | 6,000 |
| | 10.86% | | N/A | | Interest Only | | 8/6/2018 | Office | TX | | 43,500 |
| | 9,187 |
| | 9,176 |
| | 9.50% | | N/A | | Interest Only | | 9/1/2018 | Office | LA | | 64,000 |
| | 8,700 |
| | 8,700 |
| | 10.75% | | N/A | | Interest Only | | 10/1/2023 | Office | Various | | 90,907 |
| | 10,169 |
| | 10,169 |
| | LIBOR+7.50% | | 0.25% | | Interest Only | | 1/20/2018 | Office | CA | | 46,151 |
| | 8,559 |
| | 8,575 |
| | LIBOR+9.50% | | 0.25% | | Interest Only | | 3/31/2019 | Office | TX | | 51,159 |
| | 7,000 |
| | 7,000 |
| | 10.10% | | N/A | | Interest Only | | 12/1/2024 | Office | CA | | 280,000 |
| | 49,509 |
| | 49,509 |
| | LIBOR+6.41% | | N/A | | Interest Only | | 1/2/2021 | Office | CA | | 280,000 |
| | 27,500 |
| | 27,500 |
| | LIBOR+6.54% | | N/A | | Interest Only | | 1/2/2021 | Office | FL | | 52,000 |
| | 11,303 |
| | 11,192 |
| | LIBOR+4.20% | | 0.50% | | Interest Only | | 10/9/2021 | Retail | MA | | 63,877 |
| | 10,000 |
| | 10,000 |
| | 10.14% | | N/A | | Interest Only | | 9/6/2023 | Retail | NY | | 23,750 |
| | 4,890 |
| | 4,857 |
| | LIBOR+3.95% | | N/A | | Interest Only | | 2/5/2022 | Retail | DC | | 50,325 |
| | 16,775 |
| | 16,665 |
| | LIBOR+4.45% | | 0.50% | | Interest Only | | 1/9/2022 | Retail | CO | | 21,000 |
| | 9,000 |
| | 8,800 |
| | LIBOR+5.00% | | 1.20% | | Interest Only | | 10/1/2022 | Preferred Equity Investments: | | |
| | |
| | |
| | | | | | | | | Mixed | PA | | 26,000 |
| | 9,000 |
| | 8,985 |
| | 11.00% | | N/A | | Interest Only | | 11/27/2018 | First Mortgages: | | | |
| | |
| | |
| | | | | | | | | Hotel | NY | | — |
| | 55,000 |
| | 54,588 |
| | LIBOR+4.50% | | 0.85% | | Interest Only | | 8/9/2022 | Multi-Family | FL | | — |
| | 34,161 |
| | 34,161 |
| | LIBOR+4.05% | | 0.20% | | Interest Only | | 6/5/2020 | Multi-Family | TX | | — |
| | 15,090 |
| | 15,079 |
| | 4.45% | | N/A | | Interest Only | | 10/1/2020 | Multi-Family | NC | | — |
| | 36,800 |
| | 36,749 |
| | 4.25% | | N/A | | Interest Only | | 11/1/2020 | Multi-Family | TX | | — |
| | 33,000 |
| | 32,679 |
| | LIBOR+3.25% | | N/A | | Interest Only | | 12/9/2022 | Office | NJ | | — |
| | 67,390 |
| | 67,334 |
| | LIBOR+4.50% | | 0.25% | | Interest Only | | 5/9/2020 | Office | AZ | | — |
| | 51,027 |
| | 50,911 |
| | LIBOR+4.35% | | 0.20% | | Interest Only | | 10/5/2018 | Office | VA | | — |
| | 41,000 |
| | 41,000 |
| | LIBOR+4.25% | | 0.20% | | Interest Only | | 12/9/2020 | Office | FL | | — |
| | 52,000 |
| | 51,697 |
| | LIBOR+4.20% | | 0.50% | | Interest Only | | 10/9/2021 | Office | CO | | — |
| | 112,400 |
| | 111,513 |
| | LIBOR+3.60% | | 1.00% | | Interest Only | | 8/9/2022 | Retail | NY | | — |
| | 23,750 |
| | 23,592 |
| | LIBOR+3.95% | | N/A | | Interest Only | | 2/5/2022 | Retail | DC | | — |
| | 50,325 |
| | 49,990 |
| | LIBOR+4.45% | | 0.50% | | Interest Only | | 1/9/2022 | Retail | CO | | — |
| | 21,000 |
| | 20,825 |
| | LIBOR+5.00% | | 1.20% | | Interest Only | | 10/1/2022 | Retail | TN | | — |
| | 36,200 |
| | 35,782 |
| | LIBOR+4.50% | | N/A | | Interest Only | | 6/6/2022 | | | | | | $ | 1,033,158 |
| | $ | 1,029,327 |
| | | | | | | | |
(1) Represents third-party priority liens. (2) LIBOR represents the one month London Interbank Offer Rate. (3) Assumes all extension options are exercised.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of New York, State of New York. | | | | ANNALY CAPITAL MANAGEMENT, INC. | | | Date: February 26, 201515, 2018 | By: /s/ Wellington J. Denahan/s/ Kevin G. Keyes | | Wellington J. DenahanKevin G. Keyes | | (Chairman, Chief Executive Officer and authorized officer of registrant)President (Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
| | | | Signature | Title | Date | Date/s/ Kevin G. Keyes
Kevin G. Keyes | Chairman, Chief Executive Officer, President and Director (Principal Executive Officer) | February 15, 2018 | /s/ Glenn A. Votek Glenn A. Votek | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | February 15, 2018 | /s/ Francine J. Bovich Francine J. Bovich | Director | February 15, 2018 | /s/ Kevin P. Brady Kevin P. Brady | Director | February 15, 2018 | /s/ Wellington J. Denahan Wellington J. Denahan | Chairman of the board of directors and Chief Executive Officer
(principal executive officer)
| Director | February 26, 2015 | | | 15, 2018 | /s/ Glenn A. VotekKatherine Beirne Fallon Glenn A. Votek
| Chief Financial Officer
(principal financial officer of the registrant)
| February 26, 2015 | | | | /s/ Kevin P. Brady
Kevin P. BradyKatherine Beirne Fallon
| Director | February 26, 2015 | | | | /s/ Francine J. Bovich
Francine J. Bovich
| Director | February 26, 2015 | | | 15, 2018 | /s/ Jonathan D. Green Jonathan D. Green | Director | February 26, 2015 | | | 15, 2018 | /s/ Michael E. Haylon Michael E. Haylon | Director | February 26, 2015 | | | | /s/ Kevin G. Keyes
Kevin G. Keyes
| President and Director | February 26, 2015
| | | 15, 2018 | /s/ E. Wayne Nordberg E. Wayne Nordberg | Director | February 26, 2015 | | | 15, 2018 | /s/ John H. Schaefer John H. Schaefer | Director | February 26, 2015 | | | 15, 2018 | /s/ Donnell A. Segalas Donnell A. Segalas | Director | February 26, 201515, 2018 | /s/ Vicki Williams Vicki Williams | Director | February 15, 2018 |
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