UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 |
Maryland | 22-3479661 | |||||||
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |||||||
1211 Avenue of the Americas | ||||||||
New York, | New York | 10036 | ||||||
(Address of principal executive offices) | (Zip Code) |
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||||||
Common Stock, par value $0.01 per share | NLY | New York Stock Exchange | ||||||
6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock | NLY.F | New York Stock Exchange | ||||||
6.50% Series G Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock | NLY.G | New York Stock Exchange | ||||||
6.75% Series I Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock | NLY.I | New York Stock Exchange |
Large accelerated filer | ☑ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ | ||||||||||||||||||||||||||||||||
ANNALY CAPITAL MANAGEMENT, INC. 2020 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS | ||||||||
Page | ||||||||
ITEM 1. BUSINESS | ||
Page | |||||
Closing of the Internalization and Termination of the Management Agreement | |||||
Information about our Executive Officers | |||||
Investment Groups | Description | ||||
Annaly Agency Group | Invests in Agency mortgage-backed securities (“MBS”) collateralized by residential mortgages which are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. | ||||
Annaly Residential Credit Group | Invests primarily in non-Agency residential mortgage assets within | ||||
Annaly Commercial Real Estate Group | Originates and invests in commercial mortgage loans, securities, and other commercial real estate debt and equity investments. | ||||
Annaly Middle Market Lending Group | Provides |
December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||
Investment Group | Percentage of Portfolio | Capital Allocation (1) | Percentage of Portfolio | Capital Allocation (1) | |||||||||||||||||||
Residential | |||||||||||||||||||||||
Annaly Agency Group (2)(3) | 93% | 78% | 93% | 74% | |||||||||||||||||||
Annaly Residential Credit Group (3) | 3% | 7% | 3% | 10% | |||||||||||||||||||
Commercial | |||||||||||||||||||||||
Annaly Commercial Real Estate Group (3) | 2% | 5% | 2% | 7% | |||||||||||||||||||
Annaly Middle Market Lending Group | 2% | 10% | 2% | 9% |
December 31, 2019 | December 31, 2018 | ||||||
Investment Group | Percentage of Portfolio | Capital Allocation (1) | Percentage of Portfolio | Capital Allocation (1) | |||
Residential | |||||||
Annaly Agency Group (2)(3)(4) | 93% | 74% | 93% | 73% | |||
Annaly Residential Credit Group (3)(4) | 3% | 10% | 3% | 10% | |||
Commercial | |||||||
Annaly Commercial Real Estate Group (3)(4) | 2% | 7% | 2% | 7% | |||
Annaly Middle Market Lending Group | 2% | 9% | 2% | 10% |
Risk Parameter | Description | ||||
Portfolio composition | We will maintain a portfolio comprised of target assets approved by our Board and in accordance with our capital allocation policy. | ||||
Leverage | We generally expect to maintain an economic leverage ratio no greater than 10:1. | ||||
Liquidity risk | We will seek to maintain an unencumbered asset portfolio sufficient to meet our liquidity needs even under adverse market conditions. | ||||
Interest rate risk | We will seek to manage interest rate risk to protect the portfolio from adverse rate movements utilizing derivative instruments targeting both income generation and capital preservation. | ||||
Credit risk | We will seek to manage credit risk by making investments which conform within our specific investment policy parameters and optimize risk-adjusted returns. | ||||
Capital preservation | We will seek to protect our capital base through disciplined risk management practices. | ||||
Compliance | We will comply with regulatory requirements needed to maintain our REIT status, |
Investment Group | Targeted Asset Class | Description | ||||||
Annaly Agency Group | Agency mortgage-backed securities | Agency pass-through certificates issued or guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae. Other Agency MBS include collateralized mortgage obligations (“CMOs”), interest-only securities and inverse floaters | ||||||
To-be-announced forward contracts (“TBAs”) | Forward contracts for Agency pass-through certificates | |||||||
Agency commercial mortgage-backed securities | Pass-through certificates collateralized by commercial mortgages guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae | |||||||
Mortgage Servicing Rights (“MSRs”) | Rights to service a pool of residential loans in exchange for a portion of the interest payments made on the loans | |||||||
Annaly Residential Credit Group | Residential mortgage loans | Residential mortgage loans that are not guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae | ||||||
Residential mortgage-backed securities | Securities collateralized by pools of residential loans that are not guaranteed by one of the Agencies | |||||||
Agency or private label credit risk transfer securities (“CRT”) | Risk sharing transactions issued by Freddie Mac and Fannie Mae and similarly structured transactions arranged by third party market participants, designed to synthetically transfer mortgage credit risk to private investors | |||||||
Annaly Commercial Real Estate Group | Commercial mortgage loans | Loans collateralized by commercial real estate properties | ||||||
Commercial mortgage-backed securities | Securities collateralized by pools of commercial mortgage loans | |||||||
Mezzanine loans | Loans collateralized by commercial real estate properties subordinate to first mortgage loans | |||||||
Real property | Commercial real estate properties that generate current cash flow | |||||||
Annaly Middle Market Lending Group | First lien middle market loans | Senior secured loans made to middle market companies that are the first to be repaid in the event of a borrower default | ||||||
Second lien middle market loans | Senior secured loans to middle market companies that have a junior claim on collateral to those of first lien loans | |||||||
December 31, 2019 | December 31, 2018 | December 31, 2020 | December 31, 2019 | |||||||||||
Leverage ratio | 7.1:1 | 6.3:1 | Leverage ratio | 5.1:1 | 7.1:1 | |||||||||
Economic leverage ratio | 7.2:1 | 7.0:1 | Economic leverage ratio | 6.2:1 | 7.2:1 | |||||||||
Capital ratio | 12.0% | 12.1% | Capital ratio | 13.6% | 12.0% |
Name | Age | Title | ||||||
Serena Wolfe | Chief Financial Officer | |||||||
Chief | ||||||||
Timothy P. Coffey | Chief Credit Officer | |||||||
Ilker Ertas | 50 | Head of Securitized Products | ||||||
Anthony C. Green | Chief Corporate Officer, Chief Legal Officer and Secretary |
ITEM 1A. RISK FACTORS | ||
Page | |||||
12 | |||||
Risks Related to Our | |||||
ITEM 1B. UNRESOLVED STAFF COMMENTS | ||
ITEM 2. PROPERTIES | ||
ITEM 3. LEGAL PROCEEDINGS | ||
ITEM 4. MINE SAFETY DISCLOSURES | ||
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES | ||
12/31/2014 | 12/31/2015 | 12/31/2016 | 12/31/2017 | 12/31/2018 | 12/31/2019 | 12/31/2015 | 12/31/2016 | 12/31/2017 | 12/31/2018 | 12/31/2019 | 12/31/2020 | |||||||||||||||||||||||||||||||||||
Annaly Capital Management, Inc. | 100 | 98 | 117 | �� | 154 | 143 | 153 | Annaly Capital Management, Inc. | 100 | 119 | 157 | 146 | 156 | 160 | ||||||||||||||||||||||||||||||||
S&P 500 Index | 100 | 101 | 113 | 138 | 132 | 174 | S&P 500 Index | 100 | 112 | 136 | 130 | 171 | 203 | |||||||||||||||||||||||||||||||||
BBG REIT Index | 100 | 90 | 110 | 133 | 129 | 159 | BBG REIT Index | 100 | 122 | 147 | 143 | 177 | 137 |
Total Number of Shares Purchased | Average Price Paid Per Share (1) | The Total Number of Shares Purchased as Part of a Publicly Announced Repurchase Program | Maximum Dollar Value of Shares That May Yet Be Purchased Under The Plan (1) | |||||||||||
(dollars in thousands) | ||||||||||||||
October 1, 2020 - October 31, 2020 | 4,699,987 | $ | 7.29 | 4,699,987 | $ | 1,067,886 | ||||||||
Total | 4,699,987 | 4,699,987 | $ | 1,067,886 | ||||||||||
(1) Excludes commission costs. | ||||||||||||||
Total Number of Shares Purchased | Average Price Paid Per Share (1) | The Total Number of Shares Purchased as Part of a Publicly Announced Repurchase Program | Maximum Dollar Value of Shares That May Yet Be Purchased Under The Plan (1) | |||||||
(dollars in thousands) | ||||||||||
October 1, 2019 - October 31, 2019 | 7,858,267 | $ | 8.67 | 7,858,267 | $ | 1,276,818 | ||||
Total | 7,858,267 | 7,858,267 | $ | 1,276,818 | ||||||
(1) Excludes commission costs. | ||||||||||
ITEM 6. SELECTED FINANCIAL DATA | ||
As of and for the Years Ended December 31, | |||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
Statement of comprehensive income data | (dollars in thousands, except per share data) | ||||||||||||||||||
Interest income | $ | 3,787,297 | $ | 3,332,563 | $ | 2,493,126 | $ | 2,210,951 | $ | 2,170,697 | |||||||||
Interest expense | 2,784,875 | 1,897,860 | 1,008,354 | 657,752 | 471,596 | ||||||||||||||
Net interest income | 1,002,422 | 1,434,703 | 1,484,772 | 1,553,199 | 1,699,101 | ||||||||||||||
Realized and unrealized gains (losses) | (3,011,127 | ) | (1,162,984 | ) | 199,493 | 84,204 | (1,021,351 | ) | |||||||||||
Other income (loss) | 136,413 | 109,927 | 115,857 | 44,144 | (13,717 | ) | |||||||||||||
Less: Total general and administrative expenses | 301,634 | 329,873 | 224,124 | 250,356 | 200,240 | ||||||||||||||
Income (loss) before income taxes | (2,173,926 | ) | 51,773 | 1,575,998 | 1,431,191 | 463,793 | |||||||||||||
Less: Income taxes | (10,835 | ) | (2,375 | ) | 6,982 | (1,595 | ) | (1,954 | ) | ||||||||||
Net income (loss) | (2,163,091 | ) | 54,148 | 1,569,016 | 1,432,786 | 465,747 | |||||||||||||
Less: Net income (loss) attributable to noncontrolling interests | (226 | ) | (260 | ) | (588 | ) | (970 | ) | (809 | ) | |||||||||
Net income (loss) attributable to Annaly | (2,162,865 | ) | 54,408 | 1,569,604 | 1,433,756 | 466,556 | |||||||||||||
Dividends on preferred stock | 136,576 | 129,312 | 109,635 | 82,260 | 71,968 | ||||||||||||||
Net income (loss) available (related) to common stockholders | $ | (2,299,441 | ) | $ | (74,904 | ) | $ | 1,459,969 | $ | 1,351,496 | $ | 394,588 | |||||||
Net income (loss) per share available (related) to common stockholders | |||||||||||||||||||
Basic | $ | (1.60 | ) | $ | (0.06 | ) | $ | 1.37 | $ | 1.39 | $ | 0.42 | |||||||
Diluted | $ | (1.60 | ) | $ | (0.06 | ) | $ | 1.37 | $ | 1.39 | $ | 0.42 | |||||||
Weighted average number of common shares outstanding | |||||||||||||||||||
Basic | 1,434,912,682 | 1,209,601,809 | 1,065,923,652 | 969,787,583 | 947,062,099 | ||||||||||||||
Diluted | 1,434,912,682 | 1,209,601,809 | 1,066,351,616 | 970,102,353 | 947,276,742 | ||||||||||||||
Other financial data | |||||||||||||||||||
Total assets | $ | 130,295,081 | $ | 105,787,527 | $ | 101,760,050 | $ | 87,905,046 | $ | 75,190,893 | |||||||||
Total equity | $ | 15,796,344 | $ | 14,117,801 | $ | 14,871,573 | $ | 12,575,972 | $ | 11,905,922 | |||||||||
Dividends declared per common share | $ | 1.05 | $ | 1.20 | $ | 1.20 | $ | 1.20 | $ | 1.20 |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
INDEX TO ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |||||
Page | |||||
Business Environment and COVID-19 | |||||
Average Yield on Interest Earning Assets (excluding PAA), Net Interest Spread (excluding PAA) | |||||
Unrealized Gains and Losses - Available-for-Sale Investments | |||||
MSRs | |||||
As of December 31, | |||||
2019 | 2018 | 2017 | |||
30-Year mortgage current coupon | 2.71% | 3.50% | 3.00% | ||
Mortgage basis | 79 bps | 82 bps | 59 bps | ||
10-Year U.S. Treasury rate | 1.92% | 2.68% | 2.41% | ||
LIBOR | |||||
1-Month | 1.76% | 2.50% | 1.56% | ||
6-Month | 1.91% | 2.88% | 1.84% |
As of December 31, | |||||||||||||||||
2020 | 2019 | 2018 | |||||||||||||||
30-Year mortgage current coupon | 1.34% | 2.71% | 3.50% | ||||||||||||||
Mortgage basis | 43 bps | 79 bps | 82 bps | ||||||||||||||
10-Year U.S. Treasury rate | 0.91% | 1.92% | 2.68% | ||||||||||||||
LIBOR | |||||||||||||||||
1-Month | 0.14% | 1.76% | 2.50% | ||||||||||||||
6-Month | 0.26% | 1.91% | 2.88% |
As of and for the Years Ended December 31, | |||||||||||||||||||||||
2020 | 2019 | 2018 | |||||||||||||||||||||
(dollars in thousands, except per share data) | |||||||||||||||||||||||
Interest income | $ | 2,229,625 | $ | 3,787,297 | $ | 3,332,563 | |||||||||||||||||
Interest expense | 899,112 | 2,784,875 | 1,897,860 | ||||||||||||||||||||
Net interest income | 1,330,513 | 1,002,422 | 1,434,703 | ||||||||||||||||||||
Realized and unrealized gains (losses) | (2,062,824) | (3,011,127) | (1,162,984) | ||||||||||||||||||||
Other income (loss) | 53,314 | 136,413 | 109,927 | ||||||||||||||||||||
Less: Total general and administrative expenses | 239,198 | 301,634 | 329,873 | ||||||||||||||||||||
Income (loss) before income taxes | (918,195) | (2,173,926) | 51,773 | ||||||||||||||||||||
Income taxes | (28,423) | (10,835) | (2,375) | ||||||||||||||||||||
Net income (loss) | (889,772) | (2,163,091) | 54,148 | ||||||||||||||||||||
Less: Net income (loss) attributable to noncontrolling interests | 1,391 | (226) | (260) | ||||||||||||||||||||
Net income (loss) attributable to Annaly | (891,163) | (2,162,865) | 54,408 | ||||||||||||||||||||
Less: Dividends on preferred stock | 142,036 | 136,576 | 129,312 | ||||||||||||||||||||
Net income (loss) available (related) to common stockholders | $ | (1,033,199) | $ | (2,299,441) | $ | (74,904) | |||||||||||||||||
Net income (loss) per share available (related) to common stockholders | |||||||||||||||||||||||
Basic | $ | (0.73) | $ | (1.60) | $ | (0.06) | |||||||||||||||||
Diluted | $ | (0.73) | $ | (1.60) | $ | (0.06) | |||||||||||||||||
Weighted average number of common shares outstanding | |||||||||||||||||||||||
Basic | 1,414,659,439 | 1,434,912,682 | 1,209,601,809 | ||||||||||||||||||||
Diluted | 1,414,659,439 | 1,434,912,682 | 1,209,601,809 | ||||||||||||||||||||
Other information | |||||||||||||||||||||||
Asset portfolio at period-end | $ | 86,403,446 | $ | 127,402,106 | $ | 102,340,249 | |||||||||||||||||
Average total assets | $ | 99,663,704 | $ | 123,202,411 | $ | 102,544,922 | |||||||||||||||||
Average equity | $ | 14,103,589 | $ | 15,325,340 | $ | 14,332,404 | |||||||||||||||||
Leverage at period-end (1) | 5.1:1 | 7.1:1 | 6.3:1 | ||||||||||||||||||||
Economic leverage at period-end (2) | 6.2:1 | 7.2:1 | 7.0:1 | ||||||||||||||||||||
Capital ratio (3) | 13.6 | % | 12.0 | % | 12.1 | % | |||||||||||||||||
Annualized return on average total assets | (0.89) | % | (1.76) | % | 0.05 | % | |||||||||||||||||
Annualized return on average equity | (6.31) | % | (14.11) | % | 0.38 | % | |||||||||||||||||
Net interest margin (4) | 1.46 | % | 0.83 | % | 1.39 | % | |||||||||||||||||
Average yield on interest earning assets (5) | 2.44 | % | 3.15 | % | 3.23 | % | |||||||||||||||||
Average GAAP cost of interest bearing liabilities (6) | 1.09 | % | 2.57 | % | 2.15 | % | |||||||||||||||||
Net interest spread | 1.35 | % | 0.58 | % | 1.08 | % | |||||||||||||||||
Weighted average experienced CPR for the period | 20.2 | % | 12.7 | % | 9.3 | % | |||||||||||||||||
Weighted average projected long-term CPR at period-end | 16.4 | % | 13.9 | % | 10.1 | % | |||||||||||||||||
Common stock book value per share | $ | 8.92 | $ | 9.66 | $ | 9.39 | |||||||||||||||||
Non-GAAP metrics (7) | |||||||||||||||||||||||
Interest income (excluding PAA) | $ | 2,645,069 | $ | 4,042,191 | $ | 3,270,542 | |||||||||||||||||
Economic interest expense | $ | 1,106,989 | $ | 2,433,500 | $ | 1,797,307 | |||||||||||||||||
Economic net interest income (excluding PAA) | $ | 1,538,080 | $ | 1,608,691 | $ | 1,473,235 | |||||||||||||||||
Premium amortization adjustment cost (benefit) | $ | 415,444 | $ | 254,894 | $ | (62,021) | |||||||||||||||||
Core earnings (excluding PAA) (8) | $ | 1,696,167 | $ | 1,575,396 | $ | 1,574,920 | |||||||||||||||||
Core earnings (excluding PAA) per common share | $ | 1.10 | $ | 1.00 | $ | 1.20 | |||||||||||||||||
Annualized core return on average equity (excluding PAA) | 12.03 | % | 10.28 | % | 10.99 | % | |||||||||||||||||
Net interest margin (excluding PAA) (4) | 1.74 | % | 1.32 | % | 1.52 | % | |||||||||||||||||
Average yield on interest earning assets (excluding PAA) (5) | 2.90 | % | 3.36 | % | 3.17 | % | |||||||||||||||||
Average economic cost of interest bearing liabilities (6) | 1.34 | % | 2.25 | % | 2.04 | % | |||||||||||||||||
Net interest spread (excluding PAA) | 1.56 | % | 1.11 | % | 1.13 | % | |||||||||||||||||
(1) Debt consists of repurchase agreements, other secured financing, debt issued by securitization vehicles, participations issued and mortgages payable. Certain credit facilities (included within other secured financing), debt issued by securitization vehicles, participations issued and mortgages payable are non-recourse to us. (2) Computed as the sum of Recourse Debt, cost basis of TBA and CMBX derivatives outstanding and net forward purchases (sales) of investments divided by total equity. (3) Calculated as total stockholders’ equity divided by total assets inclusive of outstanding market value of TBA positions and exclusive of consolidated VIEs. (4) Net interest margin represents our interest income less interest expense divided by the average interest earning assets. Net interest margin (excluding PAA) represents the sum of our interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swaps divided by the sum of average interest earning assets plus average outstanding TBA contract and CMBX balances. (5) Average yield on interest earning assets represents annualized interest income divided by average interest earning assets. Average interest earning assets reflects the average amortized cost of our investments during the period. Average yield on interest earning assets (excluding PAA) is calculated using annualized interest income (excluding PAA). (6) Average GAAP cost of interest bearing liabilities represents annualized interest expense divided by average interest bearing liabilities. Average interest bearing liabilities reflects the average balances during the period. Average economic cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities. Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps. (7) Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information. (8) Excludes dividends on preferred stock. |
As of and for the Years Ended December 31, | |||||||||||
2019 | 2018 | 2017 | |||||||||
(dollars in thousands, except per share data) | |||||||||||
Interest income | $ | 3,787,297 | $ | 3,332,563 | $ | 2,493,126 | |||||
Interest expense | 2,784,875 | 1,897,860 | 1,008,354 | ||||||||
Net interest income | 1,002,422 | 1,434,703 | 1,484,772 | ||||||||
Realized and unrealized gains (losses) | (3,011,127 | ) | (1,162,984 | ) | 199,493 | ||||||
Other income (loss) | 136,413 | 109,927 | 115,857 | ||||||||
Less: Total general and administrative expenses | 301,634 | 329,873 | 224,124 | ||||||||
Income (loss) before income taxes | (2,173,926 | ) | 51,773 | 1,575,998 | |||||||
Income taxes | (10,835 | ) | (2,375 | ) | 6,982 | ||||||
Net income (loss) | (2,163,091 | ) | 54,148 | 1,569,016 | |||||||
Less: Net income (loss) attributable to noncontrolling interests | (226 | ) | (260 | ) | (588 | ) | |||||
Net income (loss) attributable to Annaly | (2,162,865 | ) | 54,408 | 1,569,604 | |||||||
Less: Dividends on preferred stock | 136,576 | 129,312 | 109,635 | ||||||||
Net income (loss) available (related) to common stockholders | $ | (2,299,441 | ) | $ | (74,904 | ) | $ | 1,459,969 | |||
Net income (loss) per share available (related) to common stockholders | |||||||||||
Basic | $ | (1.60 | ) | $ | (0.06 | ) | $ | 1.37 | |||
Diluted | $ | (1.60 | ) | $ | (0.06 | ) | $ | 1.37 | |||
Weighted average number of common shares outstanding | |||||||||||
Basic | 1,434,912,682 | 1,209,601,809 | 1,065,923,652 | ||||||||
Diluted | 1,434,912,682 | 1,209,601,809 | 1,066,351,616 | ||||||||
Other information | |||||||||||
Asset portfolio at period-end | $ | 127,402,106 | $ | 102,340,249 | $ | 99,935,666 | |||||
Average total assets | $ | 123,202,411 | $ | 102,544,922 | $ | 91,374,962 | |||||
Average equity | $ | 15,325,340 | $ | 14,332,404 | $ | 13,371,907 | |||||
Leverage at period-end (1) | 7.1:1 | 6.3:1 | 5.7:1 | ||||||||
Economic leverage at period-end (2) | 7.2:1 | 7.0:1 | 6.6:1 | ||||||||
Capital ratio (3) | 12.0 | % | 12.1 | % | 12.9 | % | |||||
Annualized return on average total assets | (1.76 | )% | 0.05 | % | 1.72 | % | |||||
Annualized return on average equity | (14.11 | )% | 0.38 | % | 11.73 | % | |||||
Annualized core return on average equity (excluding PAA) (4) | 10.28 | % | 10.99 | % | 10.54 | % | |||||
Net interest margin (5) | 1.13 | % | 1.57 | % | 1.38 | % | |||||
Net interest margin (excluding PAA) (4) | 1.32 | % | 1.52 | % | 1.51 | % | |||||
Average yield on interest earning assets | 3.15 | % | 3.23 | % | 2.78 | % | |||||
Average yield on interest earning assets (excluding PAA) (4) | 3.36 | % | 3.17 | % | 2.94 | % | |||||
Average cost of interest bearing liabilities (6) | 2.25 | % | 2.04 | % | 1.75 | % | |||||
Net interest spread | 0.90 | % | 1.19 | % | 1.03 | % | |||||
Net interest spread (excluding PAA) (4) | 1.11 | % | 1.13 | % | 1.19 | % | |||||
Constant prepayment rate | 12.7 | % | 9.3 | % | 10.6 | % | |||||
Long-term constant prepayment rate | 13.9 | % | 10.1 | % | 10.4 | % | |||||
Common stock book value per share | $ | 9.66 | $ | 9.39 | $ | 11.34 | |||||
Interest income (excluding PAA) (4) | $ | 4,042,191 | $ | 3,270,542 | $ | 2,634,962 | |||||
Economic interest expense (4) (6) | $ | 2,433,500 | $ | 1,797,307 | $ | 1,334,093 | |||||
Economic net interest income (excluding PAA) (4) | $ | 1,608,691 | $ | 1,473,235 | $ | 1,300,869 | |||||
Core earnings (4) | $ | 1,320,502 | $ | 1,636,941 | $ | 1,267,160 | |||||
Premium amortization adjustment cost (benefit) | $ | 254,894 | $ | (62,021 | ) | $ | 141,836 | ||||
Core earnings (excluding PAA) (4) (7) | $ | 1,575,396 | $ | 1,574,920 | $ | 1,408,996 | |||||
Core earnings per common share (4) | $ | 0.83 | $ | 1.25 | $ | 1.09 | |||||
PAA cost (benefit) per common share (4) | $ | 0.17 | $ | (0.05 | ) | $ | 0.13 | ||||
Core earnings (excluding PAA) per common share (4) | $ | 1.00 | $ | 1.20 | $ | 1.22 | |||||
(1) Debt consists of repurchase agreements, other secured financing, debt issued by securitization vehicles and mortgages payable. Debt issued by securitization vehicles, certain credit facilities (included within other secured financing) and mortgages payable are non-recourse to us. (2) Computed as the sum of Recourse Debt, cost basis of TBA and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity. (3) Calculated as total stockholders’ equity divided by total assets inclusive of outstanding market value of TBA positions and exclusive of consolidated VIEs. (4) Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information. (5) Represents the sum of our interest income plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swaps divided by the sum of average Interest Earning Assets plus average outstanding TBA contract and CMBX balances. (6) Average cost on interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities. Average interest bearing liabilities reflects the average amortized cost during the period. Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps. (7) Excludes dividends on preferred stock. |
For the Years Ended December 31, | |||||||||||||||||
2020 | 2019 | 2018 | |||||||||||||||
(dollars in thousands, except per share data) | |||||||||||||||||
GAAP net income (loss) | $ | (889,772) | $ | (2,163,091) | $ | 54,148 | |||||||||||
Net income (loss) attributable to noncontrolling interests | 1,391 | (226) | (260) | ||||||||||||||
Net income (loss) attributable to Annaly | (891,163) | (2,162,865) | 54,408 | ||||||||||||||
Adjustments to exclude reported realized and unrealized (gains) losses | |||||||||||||||||
Realized (gains) losses on termination or maturity of interest rate swaps | 1,917,628 | 1,442,964 | (1,409) | ||||||||||||||
Unrealized (gains) losses on interest rate swaps | 904,532 | 1,210,276 | (424,081) | ||||||||||||||
Net (gains) losses on disposal of investments and other | (661,513) | 47,944 | 1,124,448 | ||||||||||||||
Net (gains) losses on other derivatives | (756,305) | 680,770 | 403,001 | ||||||||||||||
Net unrealized (gains) losses on instruments measured at fair value through earnings | 303,024 | (36,021) | 158,082 | ||||||||||||||
Loan loss provision (1) | 151,188 | 16,569 | 3,496 | ||||||||||||||
Other adjustments | |||||||||||||||||
Depreciation expense related to commercial real estate and amortization of intangibles (2) | 39,108 | 40,058 | 20,278 | ||||||||||||||
Non-core (income) loss allocated to equity method investments (3) | 22,493 | 21,385 | (12,665) | ||||||||||||||
Non-core other (income) loss (4) | — | — | 44,525 | ||||||||||||||
Transaction expenses and non-recurring items (5) | 11,293 | 19,284 | 65,416 | ||||||||||||||
Income tax effect of non-core income (loss) items | (17,603) | (5,961) | 4,220 | ||||||||||||||
TBA dollar roll income and CMBX coupon income (6) | 355,547 | 123,818 | 276,986 | ||||||||||||||
MSR amortization (7) | (97,506) | (77,719) | (79,764) | ||||||||||||||
Plus: | |||||||||||||||||
Premium amortization adjustment cost (benefit) | 415,444 | 254,894 | (62,021) | ||||||||||||||
Core earnings (excluding PAA) (8) | $ | 1,696,167 | $ | 1,575,396 | $ | 1,574,920 | |||||||||||
Dividends on preferred stock | 142,036 | 136,576 | 129,312 | ||||||||||||||
Core earnings (excluding PAA) attributable to common stockholders (8) | $ | 1,554,131 | $ | 1,438,820 | $ | 1,445,608 | |||||||||||
GAAP net income (loss) per average common share | $ | (0.73) | $ | (1.60) | $ | (0.06) | |||||||||||
Core earnings (excluding PAA) per average common share (8) | $ | 1.10 | $ | 1.00 | $ | 1.20 | |||||||||||
GAAP return (loss) on average equity | (6.31) | % | (14.11) | % | 0.38 | % | |||||||||||
Core return on average equity (excluding PAA) (8) | 12.03 | % | 10.28 | % | 10.99 | % | |||||||||||
For the Years Ended December 31, | |||||||||||
2019 | 2018 | 2017 | |||||||||
(dollars in thousands, except per share data) | |||||||||||
GAAP net income (loss) | $ | (2,163,091 | ) | $ | 54,148 | $ | 1,569,016 | ||||
Net income (loss) attributable to noncontrolling interests | (226 | ) | (260 | ) | (588 | ) | |||||
Net income (loss) attributable to Annaly | (2,162,865 | ) | 54,408 | 1,569,604 | |||||||
Adjustments to exclude reported realized and unrealized (gains) losses | |||||||||||
Realized (gains) losses on termination or maturity of interest rate swaps | 1,442,964 | (1,409 | ) | 160,133 | |||||||
Unrealized (gains) losses on interest rate swaps | 1,210,276 | (424,081 | ) | (512,918 | ) | ||||||
Net (gains) losses on disposal of investments | 47,944 | 1,124,448 | 3,938 | ||||||||
Net (gains) losses on other derivatives | 680,770 | 403,001 | (261,438 | ) | |||||||
Net unrealized (gains) losses on instruments measured at fair value through earnings | (36,021 | ) | 158,082 | 39,684 | |||||||
Loan loss provision | 16,569 | 3,496 | — | ||||||||
Adjustments to exclude components of other (income) loss | |||||||||||
Depreciation and amortization expense related to commercial real estate (1) | 40,058 | 20,278 | — | ||||||||
Non-core (income) loss allocated to equity method investments (2) | 21,385 | (12,665 | ) | — | |||||||
Non-core other (income) loss (3) | — | 44,525 | — | ||||||||
Adjustments to exclude components of general and administrative expenses and income taxes | |||||||||||
Transaction expenses and non-recurring items (4) | 19,284 | 65,416 | — | ||||||||
Income tax effect of non-core income (loss) items | (5,961 | ) | 4,220 | — | |||||||
Adjustments to add back components of realized and unrealized (gains) losses | |||||||||||
TBA dollar roll income and CMBX coupon income (5) | 123,818 | 276,986 | 334,824 | ||||||||
MSR amortization (6) | (77,719 | ) | (79,764 | ) | (66,667 | ) | |||||
Core earnings (7) | 1,320,502 | 1,636,941 | 1,267,160 | ||||||||
Less | |||||||||||
Premium amortization adjustment cost (benefit) | 254,894 | (62,021 | ) | 141,836 | |||||||
Core earnings (excluding PAA) (7) | $ | 1,575,396 | $ | 1,574,920 | $ | 1,408,996 | |||||
Dividends on preferred stock | 136,576 | 129,312 | 109,635 | ||||||||
Core earnings attributable to common stockholders (7) | $ | 1,183,926 | $ | 1,507,629 | $ | 1,157,525 | |||||
Core earnings attributable to common stockholders (excluding PAA) (7) | $ | 1,438,820 | $ | 1,445,608 | $ | 1,299,361 | |||||
GAAP net income (loss) per average common share | $ | (1.60 | ) | $ | (0.06 | ) | $ | 1.37 | |||
Core earnings per average common share (7) | $ | 0.83 | $ | 1.25 | $ | 1.09 | |||||
Core earnings (excluding PAA) per average common share (7) | $ | 1.00 | $ | 1.20 | $ | 1.22 | |||||
GAAP return (loss) on average equity | (14.11 | )% | 0.38 | % | 11.73 | % | |||||
Core return on average equity (excluding PAA) (7) | 10.28 | % | 10.99 | % | 10.54 | % |
For the Years Ended December 31, | |||||||||||||||||
2020 | 2019 | 2018 | |||||||||||||||
(dollars in thousands) | |||||||||||||||||
Premium amortization expense | $ | 1,375,461 | $ | 1,113,786 | $ | 705,926 | |||||||||||
Less: PAA cost (benefit) | 415,444 | 254,894 | (62,021) | ||||||||||||||
Premium amortization expense (excluding PAA) | $ | 960,017 | $ | 858,892 | $ | 767,947 | |||||||||||
For the Years Ended December 31, | |||||||||||
2019 | 2018 | 2017 | |||||||||
(dollars in thousands) | |||||||||||
Premium amortization expense | $ | 1,113,786 | $ | 705,926 | $ | 879,305 | |||||
Less: PAA cost (benefit) | 254,894 | (62,021 | ) | 141,836 | |||||||
Premium amortization expense (excluding PAA) | $ | 858,892 | $ | 767,947 | $ | 737,469 | |||||
For the Years Ended December 31, | |||||||||||
2019 | 2018 | 2017 | |||||||||
(per average common share) | |||||||||||
Premium amortization expense | $ | 0.78 | $ | 0.58 | $ | 0.82 | |||||
Less: PAA cost (benefit) | 0.17 | (0.05 | ) | 0.13 | |||||||
Premium amortization expense (excluding PAA) | $ | 0.61 | $ | 0.63 | $ | 0.69 | |||||
GAAP Interest Income | PAA Cost (Benefit) | Interest Income (excluding PAA) (1) | |||||||||||||||
For the years ended | (dollars in thousands) | ||||||||||||||||
December 31, 2020 | $ | 2,229,625 | $ | 415,444 | $ | 2,645,069 | |||||||||||
December 31, 2019 | $ | 3,787,297 | $ | 254,894 | $ | 4,042,191 | |||||||||||
December 31, 2018 | $ | 3,332,563 | $ | (62,021) | $ | 3,270,542 | |||||||||||
(1) Represents a non-GAAP financial measure. Refer to disclosures within this section above for additional information on non-GAAP financial measures. |
GAAP Interest Income | PAA Cost (Benefit) | Interest Income (excluding PAA) | |||||||||
For the years ended | (dollars in thousands) | ||||||||||
December 31, 2019 | $ | 3,787,297 | $ | 254,894 | $ | 4,042,191 | |||||
December 31, 2018 | $ | 3,332,563 | $ | (62,021 | ) | $ | 3,270,542 | ||||
December 31, 2017 | $ | 2,493,126 | $ | 141,836 | $ | 2,634,962 |
GAAP Interest Expense | Add: Net Interest Component of Interest Rate Swaps | Economic Interest Expense (1) | GAAP Net Interest Income | Less: Net Interest Component of Interest Rate Swaps | Economic Net Interest Income (1) | Add: PAA Cost (Benefit) | Economic Net Interest Income (excluding PAA) (1) | ||||||||||||||||||||||||||||||||||||||||
For the years ended | (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2020 | $ | 899,112 | $ | 207,877 | $ | 1,106,989 | $ | 1,330,513 | $ | 207,877 | $ | 1,122,636 | $ | 415,444 | $ | 1,538,080 | |||||||||||||||||||||||||||||||
December 31, 2019 | $ | 2,784,875 | $ | (351,375) | $ | 2,433,500 | $ | 1,002,422 | $ | (351,375) | $ | 1,353,797 | $ | 254,894 | $ | 1,608,691 | |||||||||||||||||||||||||||||||
December 31, 2018 | $ | 1,897,860 | $ | (100,553) | $ | 1,797,307 | $ | 1,434,703 | $ | (100,553) | $ | 1,535,256 | $ | (62,021) | $ | 1,473,235 | |||||||||||||||||||||||||||||||
(1) Represents a non-GAAP financial measure. Refer to disclosures within this section above for additional information on non-GAAP financial measures. |
GAAP Interest Expense | Add: Net Interest Component of Interest Rate Swaps (1) | Economic Interest Expense | GAAP Net Interest Income | Less: Net Interest Component of Interest Rate Swaps (1) | Economic Net Interest Income | Add: PAA Cost (Benefit) | Economic Net Interest Income (excluding PAA) | ||||||||||||||||||||||||
For the years ended | (dollars in thousands) | ||||||||||||||||||||||||||||||
December 31, 2019 | $ | 2,784,875 | $ | (351,375 | ) | $ | 2,433,500 | $ | 1,002,422 | $ | (351,375 | ) | $ | 1,353,797 | $ | 254,894 | $ | 1,608,691 | |||||||||||||
December 31, 2018 | $ | 1,897,860 | $ | (100,553 | ) | $ | 1,797,307 | $ | 1,434,703 | $ | (100,553 | ) | $ | 1,535,256 | $ | (62,021 | ) | $ | 1,473,235 | ||||||||||||
December 31, 2017 | $ | 1,008,354 | $ | 325,739 | $ | 1,334,093 | $ | 1,484,772 | $ | 325,739 | $ | 1,159,033 | $ | 141,836 | $ | 1,300,869 |
Experienced CPR (1) | Long-term CPR (2) | ||||||||||
For the years ended | |||||||||||
December 31, 2020 | 20.2% | 16.4% | |||||||||
December 31, 2019 | 12.7% | 13.9% | |||||||||
December 31, 2018 | 9.3% | 10.1% |
Experienced CPR (1) | Long-term CPR (2) | ||
December 31, 2019 | 12.7% | 13.9% | |
December 31, 2018 | 9.3% | 10.1% | |
December 31, 2017 | 10.6% | 10.4% |
Average Interest Earning Assets (1) | Interest Income (excluding PAA) (2) | Average Yield on Interest Earning Assets (excluding PAA) (2) | Average Interest Bearing Liabilities | Economic Interest Expense (2)(3) | Average Economic Cost of Interest Bearing Liabilities (2)(3) | Economic Net Interest Income (excluding PAA) (2) | Net Interest Spread (excluding PAA) (2) | ||||||||||||||||||||||||||||||||||||||||||||||
For the years ended | (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2020 | $91,198,821 | $2,645,069 | 2.90% | $82,719,182 | $1,106,989 | 1.34% | $1,538,080 | 1.56 | % | ||||||||||||||||||||||||||||||||||||||||||||
December 31, 2019 | $120,389,507 | $4,042,191 | 3.36% | $108,355,575 | $2,433,500 | 2.25% | $1,608,691 | 1.11 | % | ||||||||||||||||||||||||||||||||||||||||||||
December 31, 2018 | $103,227,574 | $3,270,542 | 3.17% | $88,216,125 | $1,797,307 | 2.04% | $1,473,235 | 1.13 | % | ||||||||||||||||||||||||||||||||||||||||||||
(1) Based on amortized cost. (2) Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information. (3) Average economic cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities. Average interest bearing liabilities reflects the average balances during the period. Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps. |
Average Interest Earning Assets (1) | Interest Income (excluding PAA) (2) | Average Yield on Interest Earning Assets (excluding PAA) (2) | Average Interest Bearing Liabilities | Economic Interest Expense (2)(3) | Average Cost of Interest Bearing Liabilities (3) | Economic Net Interest Income (excluding PAA) (2) | Net Interest Spread (excluding PAA) (2) | |||||||||
For the years ended | (dollars in thousands) | |||||||||||||||
December 31, 2019 | $120,389,507 | $4,042,191 | 3.36% | $108,355,575 | $2,433,500 | 2.25% | $1,608,691 | 1.11 | % | |||||||
December 31, 2018 | $103,227,574 | $3,270,542 | 3.17% | $88,216,125 | $1,797,307 | 2.04% | $1,473,235 | 1.13 | % | |||||||
December 31, 2017 | $89,648,025 | $2,634,962 | 2.94% | $76,321,069 | $1,334,093 | 1.75% | $1,300,869 | 1.19 | % | |||||||
(1) Based on amortized cost. (2) Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information. (3) Average cost on interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities. Average interest bearing liabilities reflects the average amortized cost during the period. Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps. |
Interest Income (excluding PAA) (1) | TBA Dollar Roll and CMBX Coupon Income (2) | Interest Expense | Net Interest Component of Interest Rate Swaps | Subtotal | Average Interest Earnings Assets | Average TBA Contract and CMBX Balances | Subtotal | Net Interest Margin (excluding PAA) (1) | |||||||||||||||||||||||||||||||||||||||||||||
For the years ended | (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2020 | $2,645,069 | 355,547 | (899,112) | (207,877) | $1,893,627 | $91,198,821 | 17,442,023 | $108,640,844 | 1.74% | ||||||||||||||||||||||||||||||||||||||||||||
December 31, 2019 | $4,042,191 | 123,818 | (2,784,875) | 351,375 | $1,732,509 | $120,389,507 | 10,953,117 | $131,342,624 | 1.32% | ||||||||||||||||||||||||||||||||||||||||||||
December 31, 2018 | $3,270,542 | 276,986 | (1,897,860) | 100,553 | $1,750,221 | $103,227,574 | 12,115,869 | $115,343,443 | 1.52% |
Interest Income (excluding PAA) (1) | TBA Dollar Roll and CMBX Coupon Income (2) | Interest Expense | Net Interest Component of Interest Rate Swaps | Subtotal | Average Interest Earnings Assets | Average TBA Contract and CMBX Balances | Subtotal | Net Interest Margin (excluding PAA) (1) | |||||||||
For the years ended | (dollars in thousands) | ||||||||||||||||
December 31, 2019 | $4,042,191 | 123,818 | (2,784,875) | 351,375 | $1,732,509 | $120,389,507 | 10,953,117 | $131,342,624 | 1.32% | ||||||||
December 31, 2018 | $3,270,542 | 276,986 | (1,897,860) | 100,553 | $1,750,221 | $103,227,574 | 12,115,869 | $115,343,443 | 1.52% | ||||||||
December 31, 2017 | $2,634,962 | 334,824 | (1,008,354) | (371,108) | $1,590,324 | $89,648,025 | 15,416,045 | $105,064,070 | 1.51% |
Average Interest Bearing Liabilities | Interest Bearing Liabilities at Period End | Economic Interest Expense | Average Cost of Interest Bearing Liabilities (1) | Average One- Month LIBOR | Average Six- Month LIBOR | Average One-Month LIBOR Relative to Average Six- Month LIBOR | Average Cost of Interest Bearing Liabilities Relative to Average One- Month LIBOR | Average Cost of Interest Bearing Liabilities Relative to Average Six-Month LIBOR | |||||||||||||||||||||||||||||||||||||||||||||
For the years ended | (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2020 | $ | 82,719,182 | $ | 71,435,295 | $ | 1,106,989 | 1.34 | % | 0.52 | % | 0.69 | % | (0.17 | %) | 0.82 | % | 0.65 | % | |||||||||||||||||||||||||||||||||||
December 31, 2019 | $ | 108,355,575 | $ | 111,819,229 | $ | 2,433,500 | 2.25 | % | 2.22 | % | 2.32 | % | (0.10 | %) | 0.03 | % | (0.07 | %) | |||||||||||||||||||||||||||||||||||
December 31, 2018 | $ | 88,216,125 | $ | 88,646,247 | $ | 1,797,307 | 2.04 | % | 2.02 | % | 2.49 | % | (0.47 | %) | 0.02 | % | (0.45 | %) | |||||||||||||||||||||||||||||||||||
(1) Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information. |
Average Interest Bearing Liabilities | Interest Bearing Liabilities at Period End | Economic Interest Expense (1) | Average Cost of Interest Bearing Liabilities | Average One- Month LIBOR | Average Six- Month LIBOR | Average One-Month LIBOR Relative to Average Six- Month LIBOR | Average Cost of Interest Bearing Liabilities Relative to Average One- Month LIBOR | Average Cost of Interest Bearing Liabilities Relative to Average Six-Month LIBOR | |||||||||||||||||||||
For the years ended | (dollars in thousands) | ||||||||||||||||||||||||||||
December 31, 2019 | $ | 108,355,575 | $ | 111,819,229 | $ | 2,433,500 | 2.25 | % | 2.22 | % | 2.32 | % | (0.10 | %) | 0.03 | % | (0.07 | %) | |||||||||||
December 31, 2018 | $ | 88,216,125 | $ | 88,646,247 | $ | 1,797,307 | 2.04 | % | 2.02 | % | 2.49 | % | (0.47 | %) | 0.02 | % | (0.45 | %) | |||||||||||
December 31, 2017 | $ | 76,321,069 | $ | 84,505,642 | $ | 1,334,093 | 1.75 | % | 1.11 | % | 1.48 | % | (0.37 | %) | 0.64 | % | 0.27 | % | |||||||||||
(1) Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps. Prior to the three months ended March 31, 2018, economic interest expense included the net interest component of interest rate swaps used to hedge cost of funds. Beginning with the three months ended March 31, 2018, as a result of changes to our hedging portfolio, this metric reflects the net interest component of all interest rate swaps. |
For the Years Ended December 31, | |||||||||||||||||
2020 | 2019 | 2018 | |||||||||||||||
(dollars in thousands) | |||||||||||||||||
Net gains (losses) on interest rate swaps (1) | $ | (3,030,037) | $ | (2,301,865) | $ | 526,043 | |||||||||||
Net gains (losses) on disposal of investments and other | 661,513 | (47,944) | (1,124,448) | ||||||||||||||
Net gains (losses) on other derivatives | 756,305 | (680,770) | (403,001) | ||||||||||||||
Net unrealized gains (losses) on instruments measured at fair value through earnings | (303,024) | 36,021 | (158,082) | ||||||||||||||
Loan loss provision | (147,581) | (16,569) | (3,496) | ||||||||||||||
Total | $ | (2,062,824) | $ | (3,011,127) | $ | (1,162,984) | |||||||||||
(1) Includes the net interest component of interest rate swaps, realized gains (losses) on termination or maturity of interest rate swaps and unrealized gains (losses) on interest rate swaps. |
For the Years Ended December 31, | |||||||||||
2019 | 2018 | 2017 | |||||||||
(dollars in thousands) | |||||||||||
Net gains (losses) on interest rate swaps (1) | $ | (2,301,865 | ) | $ | 526,043 | $ | (18,323 | ) | |||
Net gains (losses) on disposal of investments | (47,944 | ) | (1,124,448 | ) | (3,938 | ) | |||||
Net gains (losses) on other derivatives | (680,770 | ) | (403,001 | ) | 261,438 | ||||||
Net unrealized gains (losses) on instruments measured at fair value through earnings | 36,021 | (158,082 | ) | (39,684 | ) | ||||||
Loan loss provision | (16,569 | ) | (3,496 | ) | — | ||||||
Total | $ | (3,011,127 | ) | $ | (1,162,984 | ) | $ | 199,493 | |||
(1) Includes the net interest component of interest rate swaps, realized gains (losses) on termination or maturity of interest rate swaps and unrealized gains (losses) on interest rate swaps. |
Total G&A Expenses (1) | Total G&A Expenses/Average Assets (1) | Total G&A Expenses/Average Equity (1) | |||||||
For the years ended | (dollars in thousands) | ||||||||
December 31, 2019 | $ | 301,634 | 0.24 | % | 1.97 | % | |||
December 31, 2018 | $ | 329,873 | 0.32 | % | 2.30 | % | |||
December 31, 2017 | $ | 224,124 | 0.25 | % | 1.68 | % |
Total G&A Expenses (1) | Total G&A Expenses/Average Assets (1) | Total G&A Expenses/Average Equity (1) | |||||||||||||||
For the years ended | (dollars in thousands) | ||||||||||||||||
December 31, 2020 | $ | 239,198 | 0.24 | % | 1.70 | % | |||||||||||
December 31, 2019 | $ | 301,634 | 0.24 | % | 1.97 | % | |||||||||||
December 31, 2018 | $ | 329,873 | 0.32 | % | 2.30 | % |
Economic Net Interest Income/ Average Equity (1) | Realized and Unrealized Gains and Losses/Average Equity (2) | Other Income (Loss)/Average Equity | G&A Expenses/ Average Equity | Income Taxes/ Average Equity | Return on Average Equity | ||||||||||||||||||||||||||||||
For the years ended | |||||||||||||||||||||||||||||||||||
December 31, 2020 | 7.96 | % | (13.15 | %) | 0.38 | % | (1.70 | %) | 0.20 | % | (6.31 | %) | |||||||||||||||||||||||
December 31, 2019 | 8.83 | % | (21.93 | %) | 0.89 | % | (1.97 | %) | 0.07 | % | (14.11 | %) | |||||||||||||||||||||||
December 31, 2018 | 10.71 | % | (8.81 | %) | 0.76 | % | (2.30 | %) | 0.02 | % | 0.38 | % | |||||||||||||||||||||||
(1) Economic net interest income includes the net interest component of interest rate swaps. (2) Realized and unrealized gains and losses excludes the net interest component of interest rate swaps. |
Economic Net Interest Income/ Average Equity (1) | Realized and Unrealized Gains and Losses/Average Equity (2) | Other Income (Loss)/Average Equity | G&A Expenses/ Average Equity | Income Taxes/ Average Equity | Return on Average Equity | ||||||||||||
For the years ended | |||||||||||||||||
December 31, 2019 | 8.83 | % | (21.93 | %) | 0.89 | % | (1.97 | %) | 0.07 | % | (14.11 | %) | |||||
December 31, 2018 | 10.71 | % | (8.81 | %) | 0.76 | % | (2.30 | %) | 0.02 | % | 0.38 | % | |||||
December 31, 2017 | 8.67 | % | 3.93 | % | 0.86 | % | (1.68 | %) | (0.05 | %) | 11.73 | % | |||||
(1) Economic net interest income includes the net interest component of interest rate swaps. Prior to the three months ended March 31, 2018, economic interest expense included the net interest component of interest rate swaps used to hedge cost of funds. Beginning with the three months ended March 31, 2018, as a result of changes to our hedging portfolio, this metric reflects the net interest component of all interest rate swaps. (2) Realized and unrealized gains and losses excludes the net interest component of interest rate swaps. |
December 31, 2020 | December 31, 2019 | ||||||||||
(dollars in thousands) | |||||||||||
Unrealized gain | $ | 3,378,523 | $ | 2,267,577 | |||||||
Unrealized loss | (4,188) | (129,386) | |||||||||
Accumulated other comprehensive income (loss) | $ | 3,374,335 | $ | 2,138,191 | |||||||
December 31, 2019 | December 31, 2018 | ||||||
(dollars in thousands) | |||||||
Unrealized gain | $ | 2,267,577 | $ | 306,037 | |||
Unrealized loss | (129,386 | ) | (2,285,902 | ) | |||
Accumulated other comprehensive income (loss) | $ | 2,138,191 | $ | (1,979,865 | ) | ||
Residential | Commercial | |||||||||||||||||||||||||||||||||||||||||||||||||
Agency MBS and MSRs | TBAs (1) | Residential CRTs | Non-Agency MBS and Residential Mortgage Loans (2) | CRE Debt & Preferred Equity Investments | Investments in CRE | Corporate Debt | Total (3) | |||||||||||||||||||||||||||||||||||||||||||
Assets | (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||
Fair value/carrying value | $ | 74,788,301 | $ | 20,373,197 | $ | 532,403 | $ | 4,567,253 | $ | 3,619,245 | $ | 656,314 | $ | 2,239,930 | $ | 86,403,446 | ||||||||||||||||||||||||||||||||||
Debt | ||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase agreements | 62,744,910 | 20,277,088 | 245,686 | 1,235,162 | 599,481 | — | — | 64,825,239 | ||||||||||||||||||||||||||||||||||||||||||
Other secured financing | 4,434 | — | — | 25,987 | — | — | 887,455 | 917,876 | ||||||||||||||||||||||||||||||||||||||||||
Debt issued by securitization vehicles | 573,413 | — | — | 2,617,000 | 2,462,569 | — | — | 5,652,982 | ||||||||||||||||||||||||||||||||||||||||||
Participations issued | — | — | — | 39,198 | — | — | — | 39,198 | ||||||||||||||||||||||||||||||||||||||||||
Net forward purchases | 865,081 | — | — | 3,076 | — | — | — | 868,157 | ||||||||||||||||||||||||||||||||||||||||||
Mortgages payable | — | — | — | — | — | 426,256 | — | 426,256 | ||||||||||||||||||||||||||||||||||||||||||
Net equity allocated | $ | 10,600,463 | $ | 96,109 | $ | 286,717 | $ | 646,830 | $ | 557,195 | $ | 230,058 | $ | 1,352,475 | $ | 13,673,738 | (4) | |||||||||||||||||||||||||||||||||
Net equity allocated (%) | 78 | % | 1 | % | 2 | % | 5 | % | 4 | % | 1 | % | 10 | % | 100 | % | ||||||||||||||||||||||||||||||||||
Debt/net equity ratio | 6.1:1 | NM | 0.9:1 | 6.1:1 | 5.5:1 | 1.9:1 | 0.7:1 | 5.1:1 | (5) | |||||||||||||||||||||||||||||||||||||||||
(1) Fair value/carrying value represents implied market value and repurchase agreements represent the cost basis. (2) Includes loans held for sale, net. (3) Excludes the TBA asset, debt and equity balances. (4) Net Equity Allocated, as disclosed in the above table, excludes non-portfolio related activity and may differ from stockholders’ equity per the Consolidated Statements of Financial Condition. (5) Represents the debt/net equity ratio as determined using amounts on the Consolidated Statements of Financial Condition. NM Not meaningful. |
Residential | Commercial | |||||||||||||||||||||||||||||||
Agency MBS and MSRs | TBAs (1) | CRTs | Non-Agency MBS and Residential Mortgage Loans (2) | CRE Debt & Preferred Equity Investments | Investments in CRE | Corporate Debt | Total (3) | |||||||||||||||||||||||||
Assets | (dollars in thousands) | |||||||||||||||||||||||||||||||
Fair value/carrying value | $ | 114,394,033 | $ | 6,892,270 | $ | 531,322 | $ | 5,382,029 | $ | 4,224,234 | $ | 725,638 | $ | 2,144,850 | $ | 127,402,106 | ||||||||||||||||
Debt | ||||||||||||||||||||||||||||||||
Repurchase agreements | 99,591,465 | 6,888,405 | 268,738 | 1,024,528 | 855,997 | — | — | 101,740,728 | ||||||||||||||||||||||||
Other secured financing | 2,476,709 | — | — | 1,086,409 | 64,189 | — | 828,393 | 4,455,700 | ||||||||||||||||||||||||
Debt issued by securitization vehicles | 997,167 | — | — | 2,022,372 | 2,603,262 | — | — | 5,622,801 | ||||||||||||||||||||||||
Net forward purchases | 440,231 | — | — | 18,364 | — | — | — | 458,595 | ||||||||||||||||||||||||
Mortgages payable | — | — | — | — | — | 485,005 | — | 485,005 | ||||||||||||||||||||||||
Net equity allocated | $ | 10,888,461 | $ | 3,865 | $ | 262,584 | $ | 1,230,356 | $ | 700,786 | $ | 240,633 | $ | 1,316,457 | $ | 14,639,277 | (4) | |||||||||||||||
Net equity allocated (%) | 74 | % | — | % | 2 | % | 8 | % | 5 | % | 2 | % | 9 | % | 100 | % | ||||||||||||||||
Debt/net equity ratio | 9.5:1 | NM | 1.0:1 | 3.4:1 | 5.0:1 | 2.0:1 | 0.6:1 | 7.1:1 | (5) | |||||||||||||||||||||||
(1) Fair value/carrying value represents implied market value and repurchase agreements represent the cost basis. (2) Includes loans held for sale, net. (3) Excludes the TBA asset, debt and equity balances. (4) Net Equity Allocated, as disclosed in the above table, excludes non-portfolio related activity and may differ from stockholders’ equity per the Consolidated Statements of Financial Condition. (5) Represents the debt/net equity ratio as determined using amounts on the Consolidated Statements of Financial Condition. NM Not meaningful. |
December 31, 2019 | December 31, 2018 | December 31, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Estimated Fair Value | Estimated Fair Value | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Agency | (dollars in thousands) | Agency | (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed-rate pass-through | $ | 108,723,414 | $ | 83,052,552 | Fixed-rate pass-through | $ | 71,302,578 | $ | 108,723,414 | |||||||||||||||||||||||||||||||||||||||||||||
Adjustable-rate pass-through | 1,524,331 | 4,937,984 | Adjustable-rate pass-through | 477,516 | 1,524,331 | |||||||||||||||||||||||||||||||||||||||||||||||||
CMO | 160,016 | 11,221 | CMO | 149,767 | 160,016 | |||||||||||||||||||||||||||||||||||||||||||||||||
Interest-only | 708,562 | 873,889 | Interest-only | 421,909 | 708,562 | |||||||||||||||||||||||||||||||||||||||||||||||||
Multifamily | 1,717,197 | 1,838,565 | Multifamily | 1,663,507 | 1,717,197 | |||||||||||||||||||||||||||||||||||||||||||||||||
Reverse mortgages | 59,847 | 38,784 | Reverse mortgages | 51,782 | 59,847 | |||||||||||||||||||||||||||||||||||||||||||||||||
Total agency securities | $ | 112,893,367 | $ | 90,752,995 | Total agency securities | $ | 74,067,059 | $ | 112,893,367 | |||||||||||||||||||||||||||||||||||||||||||||
Residential credit | Residential credit | |||||||||||||||||||||||||||||||||||||||||||||||||||||
CRT | $ | 531,322 | $ | 552,097 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Residential CRT | Residential CRT | $ | 532,403 | $ | 531,322 | |||||||||||||||||||||||||||||||||||||||||||||||||
Alt-A | 151,383 | 182,361 | Alt-A | 80,328 | 151,383 | |||||||||||||||||||||||||||||||||||||||||||||||||
Prime | 276,257 | 343,986 | Prime | 181,509 | 276,257 | |||||||||||||||||||||||||||||||||||||||||||||||||
Prime Interest-only | 3,167 | — | Prime Interest-only | 1,240 | 3,167 | |||||||||||||||||||||||||||||||||||||||||||||||||
Subprime | 348,979 | 394,621 | Subprime | 188,433 | 348,979 | |||||||||||||||||||||||||||||||||||||||||||||||||
NPL/RPL | 164,268 | 3,438 | NPL/RPL | 475,847 | 164,268 | |||||||||||||||||||||||||||||||||||||||||||||||||
Prime jumbo (>= 2010 vintage) | 184,664 | 220,658 | Prime jumbo (>= 2010 vintage) | 43,283 | 184,664 | |||||||||||||||||||||||||||||||||||||||||||||||||
Prime jumbo (>= 2010 vintage) interest-only | 7,150 | 16,874 | Prime jumbo (>= 2010 vintage) interest-only | 1,552 | 7,150 | |||||||||||||||||||||||||||||||||||||||||||||||||
Total residential credit securities | $ | 1,667,190 | $ | 1,714,035 | Total residential credit securities | $ | 1,504,595 | $ | 1,667,190 | |||||||||||||||||||||||||||||||||||||||||||||
Total Residential Securities | $ | 114,560,557 | $ | 92,467,030 | Total Residential Securities | $ | 75,571,654 | $ | 114,560,557 | |||||||||||||||||||||||||||||||||||||||||||||
December 31, 2019 | December 31, 2018 | ||||||
Residential Securities (1) | (dollars in thousands) | ||||||
Principal amount | $ | 107,412,143 | $ | 89,579,223 | |||
Net premium | 4,309,668 | 3,925,803 | |||||
Amortized cost | 111,721,811 | 93,505,026 | |||||
Amortized cost / principal amount | 104.01 | % | 104.38 | % | |||
Carrying value | 113,841,402 | 91,575,882 | |||||
Carrying value / principal amount | 105.99 | % | 102.23 | % | |||
Weighted average coupon rate | 3.91 | % | 3.90 | % | |||
Weighted average yield | 3.07 | % | 3.17 | % | |||
Adjustable-rate Residential Securities (1) | |||||||
Principal amount | $ | 2,513,310 | $ | 6,020,096 | |||
Weighted average coupon rate | 4.13 | % | 3.47 | % | |||
Weighted average yield | 3.52 | % | 2.87 | % | |||
Weighted average term to next adjustment | 13 Months | 19 Months | |||||
Weighted average lifetime cap (2) | 8.24 | % | 8.04 | % | |||
Principal amount at period end as % of total residential securities | 2.34 | % | 6.72 | % | |||
Fixed-rate Residential Securities (1) | |||||||
Principal amount | $ | 104,898,833 | $ | 83,559,127 | |||
Weighted average coupon rate | 3.90 | % | 3.93 | % | |||
Weighted average yield | 3.06 | % | 3.19 | % | |||
Principal amount at period end as % of total residential securities | 97.66 | % | 93.28 | % | |||
Interest-only Residential Securities | |||||||
Notional amount | $ | 5,447,193 | $ | 6,867,093 | |||
Net premium | 876,129 | 1,192,675 | |||||
Amortized cost | 876,129 | 1,192,675 | |||||
Amortized cost / notional amount | 16.08 | % | 17.37 | % | |||
Carrying value | 719,155 | 891,148 | |||||
Carrying value / notional amount | 13.20 | % | 12.98 | % | |||
Weighted average coupon rate | 3.29 | % | 3.10 | % | |||
Weighted average yield | 1.73 | % | 1.73 | % | |||
(1) Excludes interest-only mortgage-backed securities. (2) Excludes non-Agency mortgage-backed securities and CRT securities as this attribute is not applicable to these asset classes. |
December 31, 2020 | December 31, 2019 | ||||||||||
Residential Securities (1) | (dollars in thousands) | ||||||||||
Principal amount | $ | 68,521,464 | $ | 107,412,143 | |||||||
Net premium | 3,280,439 | 4,309,668 | |||||||||
Amortized cost | 71,801,903 | 111,721,811 | |||||||||
Amortized cost / principal amount | 104.79 | % | 104.01 | % | |||||||
Carrying value | 75,116,466 | 113,841,402 | |||||||||
Carrying value / principal amount | 109.62 | % | 105.99 | % | |||||||
Weighted average coupon rate | 3.58 | % | 3.91 | % | |||||||
Weighted average yield | 2.86 | % | 3.07 | % | |||||||
Adjustable-rate Residential Securities (1) | |||||||||||
Principal amount | $ | 1,257,966 | $ | 2,513,310 | |||||||
Weighted average coupon rate | 3.20 | % | 4.13 | % | |||||||
Weighted average yield | 5.20 | % | 3.52 | % | |||||||
Weighted average term to next adjustment | 15 Months | 13 Months | |||||||||
Weighted average lifetime cap (2) | 0.41 | % | 8.24 | % | |||||||
Principal amount at period end as % of total residential securities | 1.84 | % | 2.34 | % | |||||||
Fixed-rate Residential Securities (1) | |||||||||||
Principal amount | $ | 67,263,498 | $ | 104,898,833 | |||||||
Weighted average coupon rate | 3.58 | % | 3.90 | % | |||||||
Weighted average yield | 2.82 | % | 3.06 | % | |||||||
Principal amount at period end as % of total residential securities | 98.16 | % | 97.66 | % | |||||||
Interest-only Residential Securities | |||||||||||
Notional amount | $ | 3,642,143 | $ | 5,447,193 | |||||||
Net premium | 602,790 | 876,129 | |||||||||
Amortized cost | 602,790 | 876,129 | |||||||||
Amortized cost / notional amount | 16.55 | % | 16.08 | % | |||||||
Carrying value | 455,188 | 719,155 | |||||||||
Carrying value / notional amount | 12.50 | % | 13.20 | % | |||||||
Weighted average coupon rate | 3.99 | % | 3.29 | % | |||||||
Weighted average yield | NM | 1.73 | % | ||||||||
(1) Excludes interest-only mortgage-backed securities. (2) Excludes non-Agency mortgage-backed securities and CRT securities as this attribute is not applicable to these asset classes. NM Not meaningful. |
Payment Structure | Investment Characteristics | ||||||||||||||||||||||||||||||||||||||||
Product | Total | Senior | Subordinate | Coupon | Credit Enhancement | 60+ Delinquencies | 3M VPR (1) | ||||||||||||||||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||
Agency credit risk transfer | $ | 508,685 | $ | — | $ | 508,685 | 4.03 | % | 1.28 | % | 4.66 | % | 44.40 | % | |||||||||||||||||||||||||||
Private label credit risk transfer | 23,718 | — | 23,718 | 4.81 | % | 0.97 | % | 0.86 | % | 43.63 | % | ||||||||||||||||||||||||||||||
Alt-A | 80,328 | 25,286 | 55,042 | 3.73 | % | 9.70 | % | 17.40 | % | 18.86 | % | ||||||||||||||||||||||||||||||
Prime | 181,509 | 12,128 | 169,381 | 4.44 | % | 7.02 | % | 8.94 | % | 30.73 | % | ||||||||||||||||||||||||||||||
Prime interest-only | 1,240 | 1,240 | — | 0.47 | % | — | % | 5.21 | % | 45.03 | % | ||||||||||||||||||||||||||||||
Subprime | 188,433 | 96,468 | 91,965 | 1.85 | % | 17.95 | % | 14.08 | % | 8.80 | % | ||||||||||||||||||||||||||||||
Re-performing loan securitizations | 467,702 | 227,558 | 240,144 | 4.34 | % | 30.93 | % | 28.12 | % | 9.95 | % | ||||||||||||||||||||||||||||||
Non-performing loan securitizations | 8,145 | 8,145 | — | 3.67 | % | 32.18 | % | 82.18 | % | 3.70 | % | ||||||||||||||||||||||||||||||
Prime jumbo (>=2010 vintage) | 43,283 | — | 43,283 | 3.87 | % | 3.35 | % | 4.23 | % | 51.33 | % | ||||||||||||||||||||||||||||||
Prime jumbo (>=2010 vintage) interest-only | 1,552 | 1,552 | — | 0.35 | % | — | 4.59 | % | 53.22 | % | |||||||||||||||||||||||||||||||
Total/weighted average (2) | $ | 1,504,595 | $ | 372,377 | $ | 1,132,218 | 3.88 | % | 13.86 | % | 14.62 | % | 28.20 | % | |||||||||||||||||||||||||||
(1) Represents the 3 month voluntary prepayment rate (“VPR”). | |||||||||||||||||||||||||||||||||||||||||
(2) Total investment characteristics exclude the impact of IOs. |
Bond Coupon | |||||||||||||||||||||||||||||
Product | ARM | Fixed | Floater | Interest-Only | Estimated Fair Value | ||||||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||||||||
Agency credit risk transfer | $ | — | $ | — | $ | 508,594 | $ | 91 | $ | 508,685 | |||||||||||||||||||
Private label credit risk transfer | — | — | 23,718 | — | 23,718 | ||||||||||||||||||||||||
Alt-A | 18,133 | 48,629 | 13,566 | — | 80,328 | ||||||||||||||||||||||||
Prime | 40,859 | 135,887 | 4,763 | — | 181,509 | ||||||||||||||||||||||||
Prime interest-only | — | — | — | 1,240 | 1,240 | ||||||||||||||||||||||||
Subprime | 7,486 | 71,776 | 108,939 | 232 | 188,433 | ||||||||||||||||||||||||
Re-performing loan securitizations | — | 467,702 | — | — | 467,702 | ||||||||||||||||||||||||
Non-performing loan securitizations | — | 8,145 | — | — | 8,145 | ||||||||||||||||||||||||
Prime jumbo (>=2010 vintage) | — | 43,283 | — | — | 43,283 | ||||||||||||||||||||||||
Prime jumbo (>=2010 vintage) interest-only | — | — | — | 1,552 | 1,552 | ||||||||||||||||||||||||
Total | $ | 66,478 | $ | 775,422 | $ | 659,580 | $ | 3,115 | $ | 1,504,595 | |||||||||||||||||||
Payment Structure | Investment Characteristics | ||||||||||||||||||||||
Product | Total | Senior | Subordinate | Coupon | Credit Enhancement | 60+ Delinquencies | 3M VPR (1) | ||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||
Agency credit risk transfer | $ | 508,643 | $ | — | $ | 508,643 | 5.67 | % | 1.00 | % | 0.43 | % | 22.58 | % | |||||||||
Private label credit risk transfer | 22,679 | — | 22,679 | 7.25 | % | — | % | 0.21 | % | 17.67 | % | ||||||||||||
Alt-A | 151,383 | 82,005 | 69,378 | 4.49 | % | 12.41 | % | 8.51 | % | 13.66 | % | ||||||||||||
Prime | 276,257 | 78,289 | 197,968 | 4.38 | % | 7.64 | % | 4.12 | % | 20.08 | % | ||||||||||||
Prime interest-only | 3,167 | 3,167 | — | 0.47 | % | — | % | 0.44 | % | 40.67 | % | ||||||||||||
Subprime | 348,979 | 118,352 | 230,627 | 2.58 | % | 9.05 | % | 21.74 | % | 6.97 | % | ||||||||||||
Re-performing loan securitizations | 164,268 | — | 164,268 | 4.19 | % | 23.37 | % | 13.64 | % | 6.19 | % | ||||||||||||
Prime jumbo (>=2010 vintage) | 184,664 | 145,901 | 38,763 | 3.95 | % | 15.92 | % | 0.19 | % | 32.12 | % | ||||||||||||
Prime jumbo (>=2010 vintage) interest-only | 7,150 | 7,150 | — | 0.37 | % | — | 0.13 | % | 19.45 | % | |||||||||||||
Total/weighted average | $ | 1,667,190 | $ | 434,864 | $ | 1,232,326 | 4.62 | % | 8.87 | % | 8.02 | % | 33.00 | % | |||||||||
(1) Represents the 3 month voluntary prepayment rate (“VPR”). |
Bond Coupon | |||||||||||||||||||
Product | ARM | Fixed | Floater | Interest-Only | Estimated Fair Value | ||||||||||||||
(dollars in thousands) | |||||||||||||||||||
Agency credit risk transfer | $ | — | $ | — | $ | 508,643 | $ | — | $ | 508,643 | |||||||||
Private label credit risk transfer | — | — | 22,679 | — | 22,679 | ||||||||||||||
Alt-A | 30,636 | 102,855 | 17,892 | — | 151,383 | ||||||||||||||
Prime | 68,448 | 177,827 | 29,982 | — | 276,257 | ||||||||||||||
Prime interest-only | — | — | — | 3,167 | 3,167 | ||||||||||||||
Subprime | — | 26,914 | 322,065 | — | 348,979 | ||||||||||||||
Re-performing loan securitizations | — | 164,268 | — | — | 164,268 | ||||||||||||||
Prime jumbo (>=2010 vintage) | — | 184,664 | — | — | 184,664 | ||||||||||||||
Prime jumbo (>=2010 vintage) interest-only | — | — | — | 7,150 | 7,150 | ||||||||||||||
Total | $ | 99,084 | $ | 656,528 | $ | 901,261 | $ | 10,317 | $ | 1,667,190 | |||||||||
Within One Year | One to Three Years | Three to Five Years | More than Five Years | Total | |||||||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||||||||
Repurchase agreements | $ | 64,641,177 | $ | 184,062 | $ | — | $ | — | $ | 64,825,239 | |||||||||||||||||||
Interest expense on repurchase agreements (1) | 41,588 | 2,861 | — | — | 44,449 | ||||||||||||||||||||||||
Other secured financing | 30,420 | — | 887,456 | — | 917,876 | ||||||||||||||||||||||||
Interest expense on other secured financing (1) | 20,112 | 39,190 | 15,868 | — | 75,170 | ||||||||||||||||||||||||
Debt issued by securitization vehicles (principal) | — | — | 167,670 | 5,481,520 | 5,649,190 | ||||||||||||||||||||||||
Interest expense on debt issued by securitization vehicles | 133,669 | 267,338 | 267,338 | 2,833,063 | 3,501,408 | ||||||||||||||||||||||||
Participations issued (principal) | — | — | — | 37,365 | 37,365 | ||||||||||||||||||||||||
Interest expense on participations issued | 1,669 | 3,338 | 3,338 | 44,989 | 53,334 | ||||||||||||||||||||||||
Mortgages payable (principal) | 9,706 | 41,325 | 289,124 | 89,495 | 429,650 | ||||||||||||||||||||||||
Interest expense on mortgages payable | 18,426 | 34,211 | 26,184 | 58,885 | 137,706 | ||||||||||||||||||||||||
Long-term operating lease obligations | 3,918 | 7,724 | 6,757 | — | 18,399 | ||||||||||||||||||||||||
Total | $ | 64,900,685 | $ | 580,049 | $ | 1,663,735 | $ | 8,545,317 | $ | 75,689,786 | |||||||||||||||||||
(1) Interest expense on repurchase agreements and other secured financing calculated based on rates at December 31, 2020. |
Within One Year | One to Three Years | Three to Five Years | More than Five Years | Total | |||||||||||||||
(dollars in thousands) | |||||||||||||||||||
Repurchase agreements | $ | 101,740,728 | $ | — | $ | — | $ | — | $ | 101,740,728 | |||||||||
Interest expense on repurchase agreements (1) | 362,099 | — | — | — | 362,099 | ||||||||||||||
Other secured financing | 1,469,833 | 2,157,474 | 828,393 | — | 4,455,700 | ||||||||||||||
Interest expense on other secured financing (1) | 109,485 | 66,182 | 56,397 | — | 232,064 | ||||||||||||||
Debt issued by securitization vehicles (principal) | — | — | — | 5,584,552 | 5,584,552 | ||||||||||||||
Interest expense on debt issued by securitization vehicles | 182,432 | 239,565 | 231,007 | 3,165,240 | 3,818,244 | ||||||||||||||
Mortgages payable (principal) | 22,696 | 39,850 | 7,824 | 420,261 | 490,631 | ||||||||||||||
Interest expense on mortgages payable | 19,512 | 38,429 | 37,678 | 139,444 | 235,063 | ||||||||||||||
Long-term operating lease obligations | 3,799 | 7,780 | 7,724 | 2,895 | 22,198 | ||||||||||||||
Total | $ | 103,910,584 | $ | 2,549,280 | $ | 1,169,023 | $ | 9,312,392 | $ | 116,941,279 | |||||||||
(1) Interest expense on repurchase agreements and other secured financing calculated based on rates at December 31, 2019. |
December 31, 2020 | December 31, 2019 | ||||||||||
Stockholders’ equity | (dollars in thousands) | ||||||||||
7.50% Series D cumulative redeemable preferred stock | — | 445,457 | |||||||||
6.95% Series F fixed-to-floating rate cumulative redeemable preferred stock | 696,910 | 696,910 | |||||||||
6.50% Series G fixed-to-floating rate cumulative redeemable preferred stock | 411,335 | 411,335 | |||||||||
6.75% Series I fixed-to-floating rate cumulative redeemable preferred stock | 428,324 | 428,324 | |||||||||
Common stock | 13,982 | 14,301 | |||||||||
Additional paid-in capital | 19,750,818 | 19,966,923 | |||||||||
Accumulated other comprehensive income (loss) | 3,374,335 | 2,138,191 | |||||||||
Accumulated deficit | (10,667,388) | (8,309,424) | |||||||||
Total stockholders’ equity | $ | 14,008,316 | $ | 15,792,017 | |||||||
December 31, 2019 | December 31, 2018 | ||||||
Stockholders’ equity | (dollars in thousands) | ||||||
7.625% Series C cumulative redeemable preferred stock | — | 169,466 | |||||
7.50% Series D cumulative redeemable preferred stock | 445,457 | 445,457 | |||||
6.95% Series F fixed-to-floating rate cumulative redeemable preferred stock | 696,910 | 696,910 | |||||
6.50% Series G fixed-to-floating rate cumulative redeemable preferred stock | 411,335 | 411,335 | |||||
8.125% Series H cumulative redeemable preferred stock | — | 55,000 | |||||
6.75% Series I fixed-to-floating rate cumulative redeemable preferred stock | 428,324 | — | |||||
Common stock | 14,301 | 13,138 | |||||
Additional paid-in capital | 19,966,923 | 18,794,331 | |||||
Accumulated other comprehensive income (loss) | 2,138,191 | (1,979,865 | ) | ||||
Accumulated deficit | (8,309,424 | ) | (4,493,660 | ) | |||
Total stockholders’ equity | $ | 15,792,017 | $ | 14,112,112 | |||
For the Years Ended | ||||||||||||||
December 31, 2020 | December 31, 2019 | |||||||||||||
(dollars in thousands) | ||||||||||||||
Shares issued through direct purchase and dividend reinvestment program | 166,000 | 180,000 | ||||||||||||
Amount raised from direct purchase and dividend reinvestment program | $ | 1,175 | $ | 1,795 |
For the Years Ended | ||||||||
December 31, 2019 | December 31, 2018 | |||||||
(dollars in thousands) | ||||||||
Shares issued through direct purchase and dividend reinvestment program | 180,000 | 302,000 | ||||||
Amount raised from direct purchase and dividend reinvestment program | $ | 1,795 | $ | 3,144 |
Risk Parameter | Description | |||||||
Portfolio Composition | We will maintain a portfolio comprised of target assets approved by our Board and in accordance with our capital allocation policy. | |||||||
Leverage | We generally expect to maintain an economic leverage ratio no greater than 10:1. | |||||||
Liquidity Risk | We will seek to maintain an unencumbered asset portfolio sufficient to meet our liquidity needs under adverse market conditions. | |||||||
Interest Rate Risk | We will seek to manage interest rate risk to protect the portfolio from adverse rate movements utilizing derivative instruments targeting both income and capital preservation. | |||||||
Credit Risk | We will seek to manage credit risk by making investments which conform within our specific investment policy parameters and optimize risk-adjusted returns. | |||||||
Capital Preservation | We will seek to protect our capital base through disciplined risk management practices. | |||||||
Compliance | We will seek to comply with regulatory requirements needed to maintain our REIT status and our exemption from registration under the Investment Company Act. |
Risk | Description | |||||||
Capital, Liquidity and Funding Risk | Risk to earnings, capital or business resulting from our inability to meet our obligations when they come due without incurring unacceptable losses because of inability to liquidate assets or obtain adequate funding. | |||||||
Investment/Market Risk | Risk to earnings, capital or business resulting in the decline in value of our assets or an increase in the costs of financing caused by changes in market variables, such as interest rates, which affect the values of investment securities and other investment instruments. | |||||||
Credit Risk | Risk to earnings, capital or business resulting from an obligor’s failure to meet the terms of any contract or otherwise failure to perform as agreed. This risk is present in lending and investing activities. | |||||||
Counterparty Risk | Risk to earnings, capital or business resulting from a counterparty’s failure to meet the terms of any contract or otherwise failure to perform as agreed. This risk is present in funding, hedging and investing activities. | |||||||
Operational Risk | Risk to earnings, capital, reputation or business arising from inadequate or failed internal processes or systems (including proprietary and third party models), human factors or external events. | |||||||
Compliance, Regulatory and Legal Risk | Risk to earnings, capital, reputation or conduct of business arising from violations of, or nonconformance with internal and external applicable rules and regulations, losses resulting from lawsuits or adverse judgments, or from changes in the regulatory environment that may impact our business model. |
Element | Description | |||||||
Funding | Availability of diverse and stable sources of funds. | |||||||
Excess Liquidity | Excess liquidity primarily in the form of unencumbered assets and cash. | |||||||
Maturity Profile | Diversity and tenor of liabilities and modest use of leverage. | |||||||
Stress Testing | Scenario modeling to measure the resiliency of our liquidity position. | |||||||
Liquidity Management Policies | Comprehensive policies including monitoring, risk limits and an escalation protocol. |
Repurchase Agreements | Reverse Repurchase Agreements | |||||||||||||||||||||||||||||||||||||
Repurchase Agreements | Reverse Repurchase Agreements | Average Daily Amount Outstanding | Ending Amount Outstanding | Average Daily Amount Outstanding | Ending Amount Outstanding | |||||||||||||||||||||||||||||||||
Average Daily Amount Outstanding | Ending Amount Outstanding | Average Daily Amount Outstanding | Ending Amount Outstanding | |||||||||||||||||||||||||||||||||||
Quarter ended | (dollars in thousands) | |||||||||||||||||||||||||||||||||||||
For the three months ended | For the three months ended | (dollars in thousands) | ||||||||||||||||||||||||||||||||||||
December 31, 2020 | December 31, 2020 | $ | 65,528,297 | $ | 64,825,239 | $ | 210,484 | $ | — | |||||||||||||||||||||||||||||
September 30, 2020 | September 30, 2020 | 67,542,187 | 64,633,447 | 286,792 | — | |||||||||||||||||||||||||||||||||
June 30, 2020 | June 30, 2020 | 68,468,813 | 67,163,598 | 183,423 | — | |||||||||||||||||||||||||||||||||
March 31, 2020 | March 31, 2020 | 96,756,341 | 72,580,183 | 461,123 | — | |||||||||||||||||||||||||||||||||
December 31, 2019 | $ | 102,760,107 | $ | 101,740,728 | $ | 1,006,487 | $ | — | December 31, 2019 | 102,760,107 | 101,740,728 | 1,006,487 | — | |||||||||||||||||||||||||
September 30, 2019 | 108,389,796 | 102,682,104 | 1,459,070 | — | September 30, 2019 | 108,389,796 | 102,682,104 | 1,459,070 | — | |||||||||||||||||||||||||||||
June 30, 2019 | 101,983,828 | 105,181,241 | 3,478,510 | — | June 30, 2019 | 101,983,828 | 105,181,241 | 3,478,510 | — | |||||||||||||||||||||||||||||
March 31, 2019 | 87,781,404 | 88,554,170 | 3,937,769 | 523,449 | March 31, 2019 | 87,781,404 | 88,554,170 | 3,937,769 | 523,449 | |||||||||||||||||||||||||||||
December 31, 2018 | 83,984,254 | 81,115,874 | 2,741,022 | 650,040 | December 31, 2018 | 83,984,254 | 81,115,874 | 2,741,022 | 650,040 | |||||||||||||||||||||||||||||
September 30, 2018 | 79,214,382 | 79,073,026 | 2,330,519 | 1,234,704 | ||||||||||||||||||||||||||||||||||
June 30, 2018 | 80,582,681 | 75,760,655 | 2,929,470 | 259,762 | ||||||||||||||||||||||||||||||||||
March 31, 2018 | 80,770,663 | 78,015,431 | 2,064,862 | 200,459 | ||||||||||||||||||||||||||||||||||
December 31, 2017 | 78,755,896 | 77,696,343 | 1,295,652 | — |
December 31, 2020 | |||||||||||||||||
Principal Balance | Weighted Average Rate | % of Total | |||||||||||||||
(dollars in thousands) | |||||||||||||||||
1 day | $ | — | — | % | — | % | |||||||||||
2 to 29 days | 30,841,837 | 0.29 | % | 46.9 | % | ||||||||||||
30 to 59 days | 10,567,655 | 0.42 | % | 16.1 | % | ||||||||||||
60 to 89 days | 8,568,836 | 0.30 | % | 13.0 | % | ||||||||||||
90 to 119 days | 2,154,733 | 0.23 | % | 3.3 | % | ||||||||||||
Over 119 days (1) | 13,610,054 | 0.49 | % | 20.7 | % | ||||||||||||
Total | $ | 65,743,115 | 0.35 | % | 100.0 | % | |||||||||||
December 31, 2019 | |||||||||
Principal Balance | Weighted Average Rate | % of Total | |||||||
(dollars in thousands) | |||||||||
1 day | $ | — | — | % | — | % | |||
2 to 29 days | 37,382,530 | 2.15 | % | 35.2 | % | ||||
30 to 59 days | 15,300,157 | 2.00 | % | 14.4 | % | ||||
60 to 89 days | 22,207,736 | 1.97 | % | 20.9 | % | ||||
90 to 119 days | 10,020,505 | 1.97 | % | 9.4 | % | ||||
Over 119 days (1) | 21,285,500 | 2.02 | % | 20.1 | % | ||||
Total | $ | 106,196,428 | 2.05 | % | 100.0 | % | |||
Weighted Average Rate | |||||||||||||||||||||||
Principal Balance | As of Period End | For the Quarter | Weighted Average Days to Maturity (1) | ||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||
Repurchase agreements | $ | 64,825,239 | 0.32 | % | 0.35 | % | 64 | ||||||||||||||||
Other secured financing (2) | 917,876 | 2.22 | % | 2.96 | % | 1,353 | |||||||||||||||||
Debt issued by securitization vehicles (3) | 5,649,190 | 2.13 | % | 1.95 | % | 9,013 | |||||||||||||||||
Participations issued (3) | 37,365 | 4.47 | % | 4.70 | % | 11,664 | |||||||||||||||||
Mortgages payable (3) | 429,650 | 4.41 | % | 4.07 | % | 2,982 | |||||||||||||||||
Total indebtedness | $ | 71,859,320 | |||||||||||||||||||||
Weighted Average Rate | |||||||||||
Principal Balance | As of Period End | For the Quarter | Weighted Average Days to Maturity (1) | ||||||||
(dollars in thousands) | |||||||||||
Repurchase agreements | $ | 101,740,728 | 2.03 | % | 2.10 | % | 65 | ||||
Other secured financing (2) | 4,455,700 | 2.48 | % | 2.70 | % | 620 | |||||
Securitized debt of consolidated VIEs (3) | 5,584,552 | 3.23 | % | 3.28 | % | 7,627 | |||||
Mortgages payable (3) | 490,631 | 4.07 | % | 3.98 | % | 4,594 | |||||
Total indebtedness | $ | 112,271,611 | |||||||||
Encumbered Assets | Unencumbered Assets | Total | |||||||||
Financial assets | (dollars in thousands) | ||||||||||
Cash and cash equivalents | $ | 1,648,545 | $ | 202,184 | $ | 1,850,729 | |||||
Investments, at carrying value (1) | |||||||||||
Agency mortgage-backed securities (2) | 108,407,075 | 5,169,789 | 113,576,864 | ||||||||
Credit risk transfer securities | 342,629 | 188,693 | 531,322 | ||||||||
Non-agency mortgage-backed securities | 942,606 | 193,262 | 1,135,868 | ||||||||
Residential mortgage loans (2) | 3,909,642 | 336,519 | 4,246,161 | ||||||||
MSRs | 3,336 | 374,742 | 378,078 | ||||||||
Commercial real estate debt investments (2) | 2,584,967 | 33,176 | 2,618,143 | ||||||||
Commercial real estate debt and preferred equity, held for investment (2) | 1,151,073 | 455,018 | 1,606,091 | ||||||||
Corporate debt | 1,412,769 | 732,081 | 2,144,850 | ||||||||
Other assets (3) | — | 252,578 | 252,578 | ||||||||
Total financial assets | $ | 120,402,642 | $ | 7,938,042 | $ | 128,340,684 | |||||
Encumbered Assets | Unencumbered Assets | Total | |||||||||||||||
Financial assets | (dollars in thousands) | ||||||||||||||||
Cash and cash equivalents | $ | 1,137,809 | $ | 105,894 | $ | 1,243,703 | |||||||||||
Investments, at carrying value (1) | |||||||||||||||||
Agency mortgage-backed securities (2) | 66,929,821 | 6,874,366 | 73,804,187 | ||||||||||||||
Credit risk transfer securities | 349,323 | 183,080 | 532,403 | ||||||||||||||
Non-agency mortgage-backed securities | 735,420 | 236,772 | 972,192 | ||||||||||||||
Residential mortgage loans (2) | 3,438,972 | 156,089 | 3,595,061 | ||||||||||||||
MSRs | 5,541 | 95,354 | 100,895 | ||||||||||||||
Commercial real estate debt investments (2) | 2,052,642 | 194,173 | 2,246,815 | ||||||||||||||
Commercial real estate debt and preferred equity, held for investment (2) | 1,217,329 | 155,101 | 1,372,430 | ||||||||||||||
Corporate debt | 1,596,536 | 643,394 | 2,239,930 | ||||||||||||||
Other assets (3) | — | 69,472 | 69,472 | ||||||||||||||
Total financial assets | $ | 77,463,393 | $ | 8,713,695 | $ | 86,177,088 | |||||||||||
Carrying Value (1) | |||
Liquid assets | (dollars in thousands) | ||
Cash and cash equivalents | $ | 1,850,729 | |
Residential Securities (2) (3) | 114,121,074 | ||
Residential mortgage loans (4) | 1,647,787 | ||
Commercial real estate debt investments (5) | 273,023 | ||
Commercial real estate debt and preferred equity, held for investment (6) | 536,385 | ||
Corporate debt, held for investment (7) | 1,600,652 | ||
Total liquid assets | $ | 120,029,650 | |
Percentage of liquid assets to carrying amount of encumbered and unencumbered financial assets (8) | 98.92 | % |
Carrying Value (1)
(1)Carrying value approximates the market value of assets. The assets listed in this table include $71.7 billion of assets that have been pledged as collateral against existing liabilities at December 31, 2020. Please refer to the Encumbered and Unencumbered Assets table for related information. (2)The amounts reflected in the table above are on a settlement date basis and may differ from the total positions reported on the Consolidated Statements of Financial Condition. (3)Excludes securitized Agency mortgage-backed securities of consolidated VIEs carried at fair value of $0.6 billion (4)Excludes securitized residential mortgage loans transferred or pledged to consolidated VIEs carried at fair value of $3.2 billion. (5)Excludes securitized commercial mortgage loans of consolidated VIEs carried at fair value of $2.2 billion. (6)Excludes senior securitized commercial mortgage loans of consolidated VIEs carried at fair value of $0.9 billion. (7)Excludes certain second lien loans. (8)Denominator is computed based on the carrying amount of encumbered and encumbered financial assets, excluding assets transferred or pledged to securitization vehicles of $6.9 billion. 78 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis Maturity Profile We consider the profile of our assets, liabilities and derivatives when managing both liquidity risk as well as investment/market risk employing a measurement of both the maturity gap and interest rate sensitivity gap. We determine the amount of liquid assets that are required to be held by monitoring several liquidity metrics. We utilize several modeling techniques to analyze our current and potential obligations including the expected cash flows from our assets, liabilities and derivatives. The following table illustrates the expected final maturities and cash flows of our assets, liabilities and derivatives. The table is based on a static portfolio and assumes no reinvestment of asset cash flows and no future liabilities are entered into. In assessing the maturity of our assets, liabilities and off balance sheet obligations, we use the stated maturities, or our prepayment expectations for assets and liabilities that exhibit prepayment characteristics. Cash and cash equivalents are included in the ‘Less than 3 Months’ maturity bucket, as they are typically held for a short period of time. With respect to each maturity bucket, our maturity gap is considered negative when the amount of maturing liabilities exceeds the amount of maturing assets. A negative gap increases our liquidity risk as we must enter into future liabilities. Our interest rate sensitivity gap is the difference between The interest rate sensitivity of our assets and liabilities in the following table at December 31, 79
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis
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. 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 risk indicators. Both quantitative and qualitative targets are utilized to measure the ongoing stability and condition of the liquidity position, and include the level and composition of unencumbered assets, as well as 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 market conditions. The metrics assist in assessing our liquidity conditions and are integrated into our escalation protocol. 80 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis Investment/Market Risk Management One of the primary risks we are subject to is investment/market risk. Changes in the level of interest rates can affect our net interest income, which is the difference between the income we earn on our We simulate a wide variety of interest rate scenarios in evaluating our risk. Scenarios are run to capture our sensitivity to changes in interest rates, spreads and the shape of the yield curve. We also consider the assumptions affecting our analysis such as those related to prepayments. In addition to predefined interest rate scenarios, we utilize Value-at-Risk measures to estimate potential losses in the portfolio over various time horizons utilizing various confidence levels. The following tables estimate the potential changes in economic net interest income over a twelve month period and the immediate effect on our portfolio market value (inclusive of derivative instruments), should interest rates instantaneously increase or decrease by 25, 50 or 75 basis points, and the effect of portfolio market value if mortgage option-adjusted spreads instantaneously increase or decrease by 5, 15 or 25 basis points (assuming shocks are parallel and instantaneous). All changes to income and portfolio market value are measured as percentage changes from the projected net interest income and portfolio value at the base interest rate scenario. The net interest income simulations incorporate the interest expense effect of rate resets on liabilities and derivatives as well as the amortization expense and reinvestment of principal based on the prepayments on our securities, which varies based on the level of rates. The results assume no management actions in response to the rate or spread changes. The following table presents estimates at December 31,
Credit Risk Management Key risk parameters have been established to specify our credit risk appetite. We While we do not expect to encounter credit risk in our Agency mortgage-backed securities, we face credit risk on the non-Agency mortgage-backed securities and CRT securities in our portfolio. In addition, we are also exposed to credit risk on 81 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis residential mortgage loans, commercial real estate investments and corporate debt. MSR values may also be impacted if overall costs to service the underlying mortgage loans increase due to borrower performance. We are subject to risk of loss if an issuer or borrower fails to perform its contractual obligations. We have established policies and procedures for mitigating credit risk, including establishing and reviewing limits for credit exposure. We will originate or purchase 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. Our management monitors the overall portfolio risk and determines estimates of provision for loss. Additionally, ALCO has oversight of Our portfolio composition, based on balance sheet values, at December 31,
82
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 counterparty risk relating to potential losses that could be recognized if the counterparties to these agreements fail to perform their obligations under the contracts. In the event of default by a counterparty, we could have difficulty obtaining our assets pledged as collateral. A significant portion of our investments are financed with repurchase agreements by pledging our Residential Securities and certain commercial real estate investments as collateral to the applicable lender. The collateral we pledge generally exceeds the amount of the borrowings under each agreement. If the counterparty to the repurchase agreement defaults on its obligations and we are not able to recover our pledged asset, we are at risk of losing the over-collateralization or haircut. The amount of this exposure is the difference between the amount loaned to us plus interest due to the counterparty and the fair value of the collateral pledged by us to the lender including accrued interest receivable on such collateral. We also use interest rate swaps and other derivatives to manage interest rate risk. Under these agreements, we pledge securities and cash as collateral or settle variation margin payments as part of a margin arrangement. If a counterparty were to default on its obligations, we would be exposed to a loss to a derivative counterparty to the extent that the amount of our securities or cash pledged exceeded the unrealized loss on the associated derivative and we were not able to recover the excess collateral. Additionally, we would be exposed to a loss to a derivative counterparty to the extent that our unrealized gains on derivative instruments exceeded the amount of the counterparty’s securities or cash pledged to us. We monitor our exposure to counterparties across several dimensions including by type of arrangement, collateral type, counterparty type, ratings and geography. Additionally, ALCO has oversight of The following table summarizes our exposure to counterparties by geography at December 31,
Operational Risk Management We are subject to operational risk in each of our business and support functions. Operational risk may arise from internal or external sources including human error, fraud, systems issues, process change, vendors, business interruptions and other external events. Model risk considers potential errors with a model’s results due to uncertainty in model parameters and inappropriate methodologies used. The result of these risks may include financial loss and reputational damage. We manage operational risk through a variety of tools including policies and procedures that cover topics such as business continuity, personal conduct, cybersecurity and vendor management. Other tools include testing, including disaster recovery testing; systems controls, including access controls; training, including cybersecurity awareness training; and monitoring, which includes the use of key risk indicators. Employee-level lines of defense against operational risk include proper segregation of incompatible duties, activity-level internal controls over financial reporting, the empowerment of business units to identify and mitigate operational risk sources, testing by our internal audit staff, and our overall governance framework. We have established a Cybersecurity Committee to help mitigate cybersecurity risks. The role of the committee is to oversee cyber risk assessments, monitor applicable key risk indicators, review cybersecurity training procedures, oversee our Cybersecurity Incident Response Plan and engage third parties to conduct periodic penetration testing. Our cybersecurity risk assessment includes an evaluation of cyber risk related to sensitive data held by third parties on their systems. The Cybersecurity Committee periodically reports to the ERC, and the Board via the BRC and the BAC. There is no assurance that these efforts will effectively mitigate cybersecurity risk and mitigation efforts are not an assurance that no cybersecurity incidents will occur. We ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis Compliance, Regulatory and Legal Risk Management Our business is organized as a REIT, and we seek to continue to meet the requirements for taxation as a REIT. The determination that we are a REIT requires an analysis of various factual matters and circumstances. Accordingly, we closely monitor our REIT status within our risk management program. We also regularly assess our risk management in respect of our regulated and licensed subsidiaries, which include our registered broker-dealer subsidiary Arcola and our subsidiary that is registered with the SEC as an investment adviser under the Investment Advisers Act. The financial services industry is highly regulated and receives significant attention from regulators, which may impact both our company as well as our business strategy. We proactively monitor the potential impact regulation may have both directly and indirectly on us. We maintain a process to actively monitor both actual and potential legal action that may affect us. Our risk management framework is designed to identify, measure and monitor these risks under the oversight of the ERC. We currently rely on the exemption from registration provided by Section 3(c)(5)(C) of the Investment Company Act, and we seek to continue to meet the requirements for this exemption from registration. The determination that we qualify for this exemption from registration depends on various factual matters and circumstances. Accordingly, in conjunction with our legal department, we closely monitor our compliance with Section 3(c)(5)(C) within our risk management program. The monitoring of this risk is also under the oversight of the ERC. As a result of the Dodd-Frank Act, the U.S. Commodity Futures Trading Commission (“CFTC”) gained jurisdiction over the regulation of interest rate swaps. The CFTC has asserted that this causes the operators of mortgage real estate investment trusts that use swaps as part of their business model to fall within the statutory definition of Commodity Pool Operator (“CPO”), and, absent relief from the Division of Swap Dealer and Intermediary Oversight or the CFTC, to register as CPOs. On December 7, 2012, as a result of numerous requests for no-action relief from the CPO registration requirement for operators of mortgage real estate investment trusts, the Division of Swap Dealer and Intermediary Oversight of the CFTC issued no-action relief entitled “No-Action Relief from the Commodity Pool Operator Registration Requirement for Commodity Pool Operators of Certain Pooled Investment Vehicles Organized as Mortgage Real Estate Investment Trusts” that permits a CPO to receive relief by filing a claim to perfect the use of the relief. A claim submitted by a CPO will be effective upon filing, so long as the claim is materially complete. The conditions that must be met relate to initial margin and premiums requirements, net income derived annually from commodity interest positions that are not qualifying hedging transactions, marketing of interests in the mortgage real estate investment trust to the public, and identification of the entity as a mortgage real estate investment trust in its federal tax filings with the Internal Revenue Service. While we disagree with the CFTC’s position that mortgage REITs that use swaps as part of their business model fall within the statutory definition of a CPO, we have submitted a claim for the relief set forth in the no-action relief entitled “No-Action Relief from the Commodity Pool Operator Registration Requirement for Commodity Pool Operators of Certain Pooled Investment Vehicles Organized as Mortgage Real Estate Investment Trusts” and believe we meet the criteria for such relief set forth therein. Critical Accounting Policies and Estimates Our critical accounting policies that require us to make significant judgments or estimates are described below. For more information on these critical accounting policies and other significant accounting policies, see “Significant Accounting Policies” in the Notes to the Consolidated Financial Statements. Valuation of Financial Instruments Residential Securities There is an active market for our Agency mortgage-backed securities, CRT securities and non-Agency mortgage-backed securities. Since we primarily invest in securities that can be valued using actively quoted prices for actively traded assets, there is a high degree of observable inputs and less subjectivity in measuring fair value. Internal fair values are determined using quoted prices from the TBA securities market, the Treasury curve and the underlying characteristics of the individual securities, which may include coupon, periodic and life caps, reset dates and the expected life of the security. While prepayment rates may be difficult to predict and require estimation and judgment in the valuation of Agency mortgage-backed securities, we use several third party models to validate prepayment speeds used in fair value measurements of residential securities. All internal fair values are compared to external pricing sources and/or dealer quotes to determine reasonableness. Additionally, securities used as collateral for repurchase agreements are priced daily by counterparties to ensure sufficient collateralization, providing additional verification of our internal pricing. 84 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis Residential Mortgage Loans There is an active market for the residential whole loans in which we invest. Since we primarily invest in residential loans that can be valued using actively quoted prices for similar assets, there are observable inputs in measuring fair value. Internal fair values are determined using quoted prices for similar market transactions, the swap curve and the underlying characteristics of the individual loans, which may include loan term, coupon, and reset dates. While prepayment rates may be difficult to predict and are a significant estimate requiring judgment in the valuation of residential whole loans, we validate prepayment speeds against those provided by independent pricing analytic providers specializing in residential mortgage loans. Internal fair values are generally compared to external pricing sources to determine reasonableness. MSRs Fair value estimates for our investment in MSRs are obtained from models, which use significant unobservable inputs in their valuations. These valuations primarily utilize discounted cash flow models that incorporate unobservable market data inputs including prepayment rates, delinquency levels, costs to service and discount rates. Model valuations are then compared to valuations obtained from third-party pricing providers. Management reviews the valuations received from third-party pricing providers and uses them as a point of comparison to modeled values. The valuation of MSRs requires significant judgment by management and the third-party pricing providers. Commercial Real Estate Investments The fair value of commercial mortgage-backed securities classified as available-for-sale is determined based upon quoted prices of similar assets in recent market transactions and requires the application of judgment due to differences in the underlying collateral. These securities must also be evaluated for Interest Rate Swaps We use the overnight indexed swap (“OIS”) curve as an input to value substantially all of our uncleared interest rate swaps. We believe using the OIS curve, which reflects the interest rate typically paid on cash collateral, enables us to most accurately determine the fair value of uncleared interest rate swaps. Consistent with market practice, we exchange collateral (also called margin) based on the fair values of our interest rate swaps. Through this margining process, we may be able to compare our recorded fair value with the fair value calculated by the counterparty or derivatives clearing organization, providing additional verification of our recorded fair value of the uncleared interest rate swaps. We value our cleared interest rate swaps using the prices provided by the derivatives clearing organization. Revenue Recognition Interest income from coupon payments is accrued based on the outstanding principal amounts of the Residential Securities and their contractual terms. Premiums and discounts associated with the purchase of the Residential Securities are amortized or accreted into interest income over the projected lives of the securities using the interest method. To aid in determining projected lives of the securities, we use third-party model and market information to project prepayment speeds. Our prepayment speed projections incorporate underlying loan characteristics (i.e., coupon, term, original loan size, original loan-to-value ratio, etc.) and market data, including interest rate and home price index forecasts and expert judgment. Prepayment speeds vary according to the type of investment, conditions in the financial markets and other factors and cannot be predicted with any certainty. Changes to model assumptions, including interest rates and other market data, as well as periodic revisions to the model will cause changes in the results. Adjustments are made for actual prepayment activity as it relates to calculating the effective yield. Gains or losses on sales of Residential Securities are recorded on trade date based on the specific identification method. 85 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis Consolidation of Variable Interest Entities Determining whether an entity has a controlling financial interest in a VIE requires significant judgment related to assessing the purpose and design of the VIE and determination of the activities that most significantly impact its economic performance. We must also identify explicit and implicit variable interests in the entity and consider our involvement in both the design of the VIE and its ongoing activities. To determine whether consolidation of the VIE is required, we must apply judgment to assess whether we have the power to direct the most significant activities of the VIE and whether we have either the rights to receive benefits or the obligation to absorb losses that could be potentially significant to the VIE. Use of Estimates The use of GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis
Adjustable-Rate Loan / Security A loan / security on which interest rates are adjusted at regular intervals according to predetermined criteria. The adjustable interest rate is tied to an objective, published interest rate index. Agency Refers to a federally chartered corporation, such as the Federal National Mortgage Association, or the Federal Home Loan Mortgage Corporation, or an agency of the U.S. Government, such as the Government National Mortgage Association. Agency Mortgage-Backed Securities Refers to residential mortgage-backed securities that are issued or guaranteed by an Agency. Amortization Liquidation of a debt through installment payments. Amortization also refers to the process of systematically reducing a recognized asset or liability (e.g., a purchase premium or discount for a debt security) with an offset to earnings. Average GAAP Cost of Interest Bearing Liabilities and Average Economic Cost of Interest Bearing Liabilities Average GAAP cost of interest bearing liabilities represents annualized interest expense divided by average interest bearing liabilities. Average interest bearing liabilities reflects the average balances during the period. Average economic cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities. Average Life On a mortgage-backed security, the average time to receipt of each dollar of principal, weighted by the amount of each principal prepayment, based on prepayment assumptions. Average yield on interest earning assets represents annualized interest income divided by average interest earning assets. Average interest earning assets reflects the average amortized cost of our investments during the period. Average yield on interest earning assets (excluding PAA) is calculated using annualized interest income (excluding PAA).
Basis Point (“bp”) One hundredth of one percent, used in expressing differences in interest rates. One basis point is 0.01% of yield. For example, a bond’s yield that changed from 3.00% to 3.50% would be said to have moved 50 basis points. Benchmark A bond or an index referencing a basket of bonds whose terms are used for comparison with other bonds of similar maturity. The global financial market typically looks to U.S. Treasury securities as benchmarks. Beneficial Owner One who benefits from owning a security, even if the security’s title of ownership is in the name of a broker or bank. B-Note Subordinate mortgage notes and/or subordinate mortgage loan participations. B-Piece The most subordinate commercial mortgage-backed security bond class. Board Refers to the board of directors of Annaly. Bond The written evidence of debt, bearing a stated rate or stated rates of interest, or stating a formula for determining that rate, and maturing on a date certain, on which date and upon presentation a fixed sum of money plus interest (usually represented by interest coupons attached to the bond) is payable to the holder or owner. Bonds are long-term securities with an original maturity of greater than one year. Book Value Per Share Calculated by summing common stock, additional paid-in capital, accumulated other comprehensive income (loss) and accumulated deficit and dividing that number by the total common shares outstanding. Broker Generic name for a securities firm engaged in both buying and selling securities on behalf of customers or its own account.
Capital Buffer Includes unencumbered financial assets which can be either sold or utilized as collateral to meet liquidity needs. 87 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis 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. A negative carry is when the rate on the funds borrowed is greater than the rate on the securities that are being financed. CMBX The CMBX index is a synthetic tradable index referencing a basket of 25 CMBS of a particular rating and vintage. The CMBX index allows investors to take a long position (referred to as selling protection) or short position (referred to as purchasing protection) on the respective basket of CMBS securities and is structured as a “pay-as-you-go” contract whereby the protection seller receives and the protection buyer pays a standardized running coupon on the contracted notional amount. Additionally, the protection seller is obligated to pay to the protection buyer the amount of principal losses and/or coupon shortfalls on the underlying CMBS securities as they occur. Collateral Securities, cash or property pledged by a borrower or party to a derivative contract to secure payment of a loan or derivative. If the borrower fails to repay the loan or defaults under the derivative contract, the secured party may take ownership of the collateral. Collateralized Loan Obligation (“CLO”) A securitization collateralized by loans and other debt instruments. Collateralized Mortgage Obligation (“CMO”) A multiclass bond backed by a pool of mortgage pass-through securities or mortgage loans. Commodity Futures Trading Commission (“CFTC”) An independent U.S. federal agency established by the Commodity Futures Trading Commission Act of 1974. The CFTC regulates the swaps, commodity futures and options markets. Its goals include the promotion of competitive and efficient futures markets and the protection of investors against manipulation, abusive trade practices and fraud. Commercial Mortgage-Backed Security Securities collateralized by a pool of mortgages on commercial real estate in which all principal and interest from the mortgages flow to certificate holders in a defined sequence or manner. Constant Prepayment Rate (“CPR”) The percentage of outstanding mortgage loan principal that prepays in one year, based on the annualization of the Single Monthly Mortality, which reflects the outstanding mortgage loan principal that prepays in one month. Convexity A measure of the change in a security’s duration with respect to changes in interest rates. The more convex a security is, the more its duration will change with interest rate changes. Core Earnings (excluding PAA) and Core Earnings (excluding PAA) Per Average Common Share Core earnings (excluding PAA) is defined as the sum of (a) economic net interest income, (b) TBA dollar roll income and CMBX coupon income, (c) realized amortization of MSRs, (d) other income (loss) (excluding depreciation period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency mortgage-backed securities. Core earnings 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. 88 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis 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.
Dealer Person or organization that underwrites, trades and sells securities, e.g., a principal market-maker in securities. Default Risk Possibility that a bond issuer will fail to pay principal or interest when due. Derivative A financial product that derives its value from the price, price fluctuations and price expectations of an underlying instrument, index or reference pool (e.g. futures contracts, options, interest rate swaps, interest rate swaptions and certain to-be-announced securities). Discount Price When the dollar price is below face value, it is said to be selling at a discount. Duration The weighted maturity of a fixed-income investment’s cash flows, used in the estimation of the price sensitivity of fixed-income securities for a given change in interest rates.
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 comprised of GAAP interest expense and the net interest component of interest rate swaps. Economic Leverage Ratio (Economic Debt-to-Equity Ratio) Calculated as the sum of recourse debt, cost basis of TBA and CMBX derivatives outstanding and net forward purchases (sales) of investments divided by total equity. Recourse debt consists of repurchase agreements and other secured financing (excluding certain non-recourse credit facilities). Economic Net Interest Income Non-GAAP financial measure that is composed of GAAP net interest income less Economic Interest Expense. 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.
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 generally 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. 89 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis Financial Industry Regulatory Authority, Inc. (“FINRA”) FINRA is a non-governmental organization tasked with regulating all business dealings conducted between dealers, brokers and all public investors. Fixed-Rate Mortgage A mortgage featuring level monthly payments, determined at the outset, which remain constant over the life of the mortgage. Fixed Income Clearing Corporation (“FICC”) The FICC is an agency that deals with the confirmation, settlement and delivery of fixed-income assets in the U.S. The agency ensures the systematic and efficient settlement of U.S. Government securities and mortgage-backed security transactions in the market. Floating Rate Bond A bond for which the interest rate is adjusted periodically according to a predetermined formula, usually linked to an index. Floating Rate CMO A CMO tranche which pays an adjustable rate of interest tied to a representative interest rate index such as the LIBOR, the Constant Maturity Treasury or the Cost of Funds Index. Freddie Mac Federal Home Loan Mortgage Corporation. Futures Contract A legally binding agreement to buy or sell a commodity or financial instrument in a designated future month at a price agreed upon at the initiation of the contract by the buyer and seller. Futures contracts are standardized according to the quality, quantity, and delivery time and location for each commodity. A futures contract differs from an option in that an option gives one of the counterparties a right and the other an obligation to buy or sell, while a futures contract represents an obligation of both counterparties, one to deliver and the other to accept delivery. A futures contract is part of a class of financial instruments called derivatives.
GAAP U.S. generally accepted accounting principles. Ginnie Mae Government National Mortgage Association.
Hedge An investment made with the intention of minimizing the impact of adverse movements in interest rates or securities prices.
In-the-Money Description for an option that has intrinsic value and can be sold or exercised for a profit; a call option is in-the-money when the strike price (execution price) is below the market price of the underlying security. Interest Bearing Liabilities Refers to repurchase agreements, debt issued by securitization vehicles Interest Earning Assets Refers to Residential Securities, U.S. Treasury securities, reverse repurchase agreements, commercial real estate debt and preferred equity interests, residential mortgage loans and corporate debt. Average Interest-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. 90 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis International Swaps and Derivatives Association (“ISDA”) Master Agreement Standardized contract developed by ISDA used as an umbrella under which bilateral derivatives contracts are entered into. Inverse IO Bond An interest-only bond whose coupon is determined by a formula expressing an inverse relationship to a benchmark rate, such as LIBOR. As the benchmark rate changes, the IO coupon adjusts in the opposite direction. When the benchmark rate is relatively low, the IO pays a relatively high coupon payment, and vice versa. Investment/Market Risk Risk to earnings, capital or business resulting in the decline in value of our assets caused from changes in market variables, such as interest rates, which affect the values of Residential Securities and other investment instruments. Investment Advisers Act Refers to the Investment Advisers Act of 1940, as amended. Investment Company Act Refers to the Investment Company Act of 1940, as amended.
Leverage The use of borrowed money to increase investing power and economic returns. Leverage Ratio (Debt-to-Equity Ratio) Calculated as total debt to total stockholders’ equity. For purposes of calculating this ratio total debt includes repurchase agreements, other secured financing, debt issued by securitization vehicles, participations issued and mortgages payable. Certain credit facilities (included within other secured financing), debt issued by securitization vehicles, participations issued and mortgages payable are non-recourse to us. LIBOR (London Interbank Offered Rate) The rate banks charge each other for short-term Eurodollar loans. LIBOR is frequently used as the base for resetting rates on floating-rate securities and the floating-rate legs of interest rate swaps. Liquidity Risk Risk to earnings, capital or business arising from our inability to meet our obligations when they come due without incurring unacceptable losses because of inability to liquidate assets or obtain adequate funding. Long-Term CPR Our projected prepayment speeds for certain Agency mortgage-backed securities using third-party model and market information. Our prepayment speed projections incorporate underlying loan characteristics (e.g., coupon, term, original loan size, original loan-to-value ratio, etc.) and market data, including interest rate and home price index forecasts. Changes to model assumptions, including interest rates and other market data, as well as periodic revisions to the model will cause changes in the results. Long-Term Debt Debt which matures in more than one year.
Market Agreed Coupon (“MAC”) Interest Rate Swap An interest rate swap contract structure with pre-defined, market agreed terms, developed by SIFMA and ISDA with the purpose of promoting liquidity and simplified administration. Monetary Policy Action taken by the Federal Open Market Committee of the Federal Reserve System to influence the money supply or interest rates. Mortgage-Backed Security (“MBS”) A security representing a direct interest in a pool of mortgage loans. The pass-through issuer or servicer collects the payments on the loans in the pool and “passes through” the principal and interest to the security holders on a pro rata basis. Mortgage Loan A mortgage loan granted by a bank, thrift or other financial institution that is based solely on real estate as security and is not insured or guaranteed by a government agency. Mortgage Servicing Rights (“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.
NAV Net asset value. Net Interest Income Represents interest income earned on our portfolio investments, less interest expense paid for borrowings. Net Interest Margin and Net Interest Margin (excluding PAA) 91 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis our interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swaps divided by the sum of average Net Interest Spread and Net Interest Spread (excluding PAA) Non-Performing Loan (“NPL”) A loan that is close to defaulting or is in default. Notional Amount A stated principal amount in a derivative contract on which the contract is based.
Operational Risk Risk to earnings, capital, reputation or business arising from inadequate or failed internal processes or systems, human factors or external events. Option Contract A contract in which the buyer has the right, but not the obligation, to buy or sell an asset at a set price on or before a given date. Buyers of call options bet that a security will be worth more than the price set by the option (the strike price), plus the price they pay for the option itself. Buyers of put options bet that the security’s price will drop below the price set by the option. An option is part of a class of financial instruments called derivatives, which means these financial instruments derive their value from the worth of an underlying investment. Original Face The face value or original principal amount of a security on its issue date. Out-of-the-Money Description for an option that has no intrinsic value and would be worthless if it expired today; for a call option, this situation occurs when the strike price is higher than the market price of the underlying security; for a put option, this situation occurs when the strike price is less than the market price of the underlying security. Overnight Index Swaps (“OIS”) An interest rate swap in which a fixed rate is exchanged for an overnight floating rate. Over-The-Counter (“OTC”) Market A securities market that is conducted by dealers throughout the country through negotiation of price rather than through the use of an auction system as represented by a stock exchange.
Par Price equal to the face amount of a security; 100%. Par Amount The principal amount of a bond or note due at maturity. Also known as par value. Pass-Through Security A securitization structure where a GSE or other entity “passes” the amount collected from the borrowers every month to the investor, after deducting fees and expenses. Pool A collection of mortgage loans assembled by an originator or master servicer as the basis for a security. In the case of Ginnie Mae, Fannie Mae, or Freddie Mac mortgage pass-through securities, pools are identified by a number assigned by the issuing agency. Premium The amount by which the price of a security exceeds its principal amount. When the dollar price of a bond is above its face value, it is said to be selling at a premium. Premium Amortization Adjustment (“PAA”) The cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency mortgage-backed securities. Prepayment The unscheduled partial or complete payment of the principal amount outstanding on a mortgage loan or other debt before it is due. Prepayment Risk The risk that falling interest rates will lead to increased prepayments of mortgage or other loans, forcing the investor to reinvest at lower prevailing rates. Prepayment Speed The estimated rate at which mortgage borrowers will pay off the mortgages that underlie an MBS. Prime Rate The indicative interest rate on loans that banks quote to their best commercial customers. 92 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis Principal and Interest The term used to refer to regularly scheduled payments or prepayments of principal and payments of interest on a mortgage or other security.
Rate Reset The adjustment of the interest rate on a floating-rate security according to a prescribed formula. Real Estate Investment Trust (“REIT”) A special purpose investment vehicle that provides investors with the ability to participate directly in the ownership or financing of real-estate related assets by pooling their capital to purchase and manage mortgage loans and/or income property. Recourse Debt Debt on which the economic borrower is obligated to repay the entire balance regardless of the value of the pledged collateral. By contrast, the economic borrower’s obligation to repay non-recourse debt is limited to the value of the pledged collateral. Recourse debt consists of repurchase agreements and other secured financing (excluding certain non-recourse credit facilities). Reinvestment Risk The risk that interest income or principal repayments will have to be reinvested at lower rates in a declining rate environment. Re-Performing Loan (“RPL”) A type of loan in which payments were previously delinquent by at least 90 days but have resumed. Repurchase Agreement The sale of securities to investors with the agreement to buy them back at a higher price after a specified time period; a form of short-term borrowing. For the party on the other end of the transaction (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement. Residential Securities Refers to Agency mortgage-backed securities, CRT securities and non-Agency mortgage-backed securities. Residual In securitizations, the residual is the tranche that collects any cash flow from the collateral that remains after obligations to the other tranches have been met. Return on Average Equity Calculated by taking earnings divided by average stockholders’ equity. Reverse Repurchase Agreement Refer to Repurchase Agreement. The buyer of securities effectively provides a collateralized loan to the seller. Risk Appetite Statement Defines the types and levels of risk we are willing to take in order to achieve our business objectives, and reflects our risk management philosophy.
Secondary Market Ongoing market for bonds previously offered or sold in the primary market. Secured Overnight Financing Rate (“SOFR”) Broad measure of the cost of borrowing cash overnight collateralized by Treasury securities and was chosen by the Alternative Reference Rate Committee as the preferred benchmark rate to replace dollar LIBOR in coming years. Settlement Date The date securities must be delivered and paid for to complete a transaction. Short-Term Debt Generally, debt which matures in one year or less. However, certain securities that mature in up to three years may be considered short-term debt. Spread When buying or selling a bond through a brokerage firm, investors will be charged a commission or spread, which is the difference between the market price and cost of purchase, and sometimes a service fee. Spreads differ based on several factors including liquidity.
Target Assets Includes Agency mortgage-backed securities, to-be-announced forward contracts, CRT securities, MSRs, non-Agency mortgage-backed securities, residential mortgage loans, commercial real estate investments, and corporate debt. Taxable REIT Subsidiary (“TRS”) An entity that is owned directly or indirectly by a REIT and has jointly elected with the REIT to be treated as a TRS for tax purposes. Annaly and certain of its direct and indirect subsidiaries have made separate joint elections to treat these subsidiaries as TRSs. 93 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis To-Be-Announced Securities (“TBAs”) A contract for the purchase or sale of a mortgage-backed security to be delivered at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date but does not include a specified pool number and number of pools. TBA Dollar Roll Income TBA dollar roll income is defined as the difference in price between two TBA contracts with the same terms but different settlement dates. The TBA contract settling in the later month typically prices at a discount to the earlier month contract with the difference in price commonly referred to as the “drop”. TBA dollar roll income represents the equivalent of interest income on the underlying security less an implied cost of financing. Total Return Investment performance measure over a stated time period which includes coupon interest, interest on interest, and any realized and unrealized gains or losses. Total Return Swap A derivative instrument where one party makes payments at a predetermined rate (either fixed or variable) while receiving a return on a specific asset (generally an equity index, loan or bond) held by the counterparty.
Unencumbered Assets Assets on our balance sheet which have not been pledged as collateral against an existing liability. U.S. Government-Sponsored Enterprise (“GSE”) Obligations Obligations of Agencies originally established or chartered by the U.S. government to serve public purposes as specified by the U.S. Congress, such as Fannie Mae and Freddie Mac; these obligations are not explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the U.S. government.
Value-at-Risk (“VaR”) A statistical technique which measures the potential loss in value of an asset or portfolio over a defined period for a given confidence interval. Variable Interest Entity (“VIE”) An entity in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Variation Margin Cash or securities provided by a party to collateralize its obligations under a transaction as a result of a change in value of such transaction since the trade was executed or the last time collateral was provided. Volatility A statistical measure of the variance of price or yield over time. Volatility is low if the price does not change very much over a short period of time, and high if there is a greater change. Voting Interest Entity (“VOE”) An entity that has sufficient equity to finance its activities without additional subordinated financial support from other parties and in which equity investors have a controlling financial interest.
Warehouse Lending A line of credit extended to a loan originator to fund mortgages extended by the loan originators to property purchasers. The loan typically lasts from the time the mortgage is originated to when the mortgage is sold into the secondary market, whether directly or through a securitization. Warehouse lending can provide liquidity to the loan origination market. Weighted Average Coupon The weighted average interest rate of the underlying mortgage loans or pools that serve as collateral for a security, weighted by the size of the principal loan balances. Weighted Average Life (“WAL”) The assumed weighted average amount of time that will elapse from the date of a security’s issuance until each dollar of principal is repaid to the investor. The WAL will change as the security ages and depending on the actual realized rate at which principal, scheduled and unscheduled, is paid on the loans underlying the MBS.
Yield-to-Maturity The expected rate of return of a bond if it is held to its maturity date; calculated by taking into account the current market price, stated redemption value, coupon payments and time to maturity and assuming all coupons are reinvested at the same rate; equivalent to the internal rate of return. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Quantitative and qualitative disclosures about market risk are contained within the section titled “Risk Management” of Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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.
None.
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 Annaly 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 Annaly in reports it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. There have been no changes in our internal controls over financial reporting that occurred during the three months ended December 31, Management’s Annual Report On Internal Control Over Financial Reporting Management of Annaly 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, Annaly’s CEO and CFO and effected by the Annaly’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 Annaly; •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 Annaly are being made only in accordance with authorizations of management and directors of Annaly; and •provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Annaly’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. 95 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Annaly’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, Based on the Annaly’s management’s evaluation under the framework in Internal Control—Integrated Framework (2013), Annaly’s management concluded that its internal control over financial reporting was effective as of December 31, ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Annaly Capital Management, Inc. and Subsidiaries Opinion on Internal Control We have audited Annaly Capital Management, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 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, 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’s Annual 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 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
None. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES PART III
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, 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,
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,
Equity Compensation Plan Information On May Since the adoption of the The following table provides information as of December 31,
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, ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
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,
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, ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES PART IV
(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 istatement 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 101 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 102 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 103 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
* Exhibit Numbers 10.2, 10.3, † Submitted electronically herewith. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
None. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
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, We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the 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. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
F-1 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
/s/ Ernst & Young LLP We have served as the Company’s auditor since 2012. New York, NY February F-2 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
(1)Includes cash of consolidated Variable Interest Entities (“VIEs”) of $22.2 million and $67.5 million at December 31, 2020 and 2019, respectively.
(3)Includes $47.0 million and $66.7 million of residential mortgage loans held for sale. See notes to consolidated financial statements. F-3 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
See notes to consolidated financial statements. F-4 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
See notes to consolidated financial statements. F-5 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
See notes to consolidated financial statements. F-6 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
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 optimize its returns through prudent management of its diversified investment strategies. The Company’s
The Company is an internally-managed company that 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”). Prior to the closing of the Internalization (as defined in Note 19) on June 30, 2020, the Company was externally managed by Annaly Management Company LLC (the “Former Manager”).
The accompanying consolidated financial statements and related notes of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported balance sheet amounts and/or disclosures 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. Certain line items in the Company’s Consolidated Statements of Cash Flows were aggregated to simplify presentation. Prior periods have been adjusted to conform to the current presentation.
The Company’s significant accounting policies are described below or are included elsewhere in these notes to the Consolidated Financial Statements. Principles of Consolidation – The consolidated financial statements include the accounts of the entities where the Company has a controlling financial interest. In order to determine whether the Company has a controlling financial interest, it first evaluates whether an entity is a voting interest entity (“VOE”) or a variable interest entity (“VIE”). All intercompany balances and transactions have been eliminated in consolidation. Voting Interest Entities – A VOE is an entity that has sufficient equity and in which equity investors have a controlling financial interest. The Company consolidates VOEs where it has a majority of the voting equity of such VOE. Variable Interest Entities – 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 VIE is required to be consolidated by its primary beneficiary, which is defined as the party that has both (i) the power to control the activities that most significantly impact the VIE’s F-7 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements economic performance and (ii) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. 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 to change. Refer to the “Variable Interest Entities” Note for further information. Equity Method Investments - For entities that are not consolidated, but where the Company has significant influence over the operating or financial decisions of the entity, the Company accounts for the investment under the equity method of accounting. In accordance with 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. These investments are included in real estate, net and Other assets with income or loss included in Other income (loss). 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 is carried at cost, which approximates fair value. 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 $1.1 billion and $1.6 billion at December 31, Equity Securities – The Company may invest in equity securities that are not accounted for under the equity method or do not result in consolidation. These equity securities are required to be reported at fair value with unrealized gains and losses reported in the Consolidated Statements of Comprehensive Income (Loss) as Net unrealized gains (losses) on instruments measured at fair value through earnings, unless the securities do not have readily determinable fair values. For such equity securities without readily determinable fair values, the Company has elected to carry the securities at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. For equity securities carried at fair value through earnings, dividends are recorded in earnings on the declaration date. Dividends from equity securities without readily determinable fair values are recognized as income when received to the extent they are distributed from net accumulated earnings. Fair Value Measurements and the Fair Value Option – The Company reports various investments at fair value, including certain eligible financial instruments elected to be accounted for under the fair value option (“FVO”). The Company chooses to elect the fair value option in order to simplify the accounting treatment for certain financial instruments. Items for which the fair value option has been elected are presented at fair value in the Consolidated Statements of Financial Condition and any change in fair value is recorded in Net unrealized gains (losses) on instruments measured at fair value through earnings in the Consolidated Statements of Comprehensive Income (Loss). For additional information regarding financial instruments for which the Company has elected the fair value option see the table in the “Financial Instruments” Note. Refer to the “Fair Value Measurements” Note for a complete discussion on the methodology utilized by the Company to estimate the fair value of certain financial instruments. Offsetting Assets and Liabilities - The Company elected to present all derivative instruments on a gross basis as discussed in the “Derivative Instruments” Note. Reverse repurchase and repurchase agreements are presented net in the Consolidated Statements of Financial Condition if they are subject to netting agreements and they meet the offsetting criteria. Please see below and refer to the “Secured Financing” Note for further discussion on reverse repurchase and repurchase agreements. Derivative Instruments – 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). The changes in the estimated fair value are presented within Net gains (losses) on other derivatives with the exception of interest rate swaps which are separately presented. None of the Company’s derivative transactions have been designated as hedging instruments for accounting purposes. Refer to the “Derivative Instruments” Note for further discussion. F-8 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements Interest Income - The Company recognizes interest income primarily on Residential Securities, residential mortgage loans, commercial investments and reverse repurchase agreements. Interest accrued but not paid is recognized as Interest receivable on the Consolidated Statements of Financial Condition. Interest income is presented as a separate line item on the Consolidated Statements of Comprehensive Income (Loss). Refer to the “Interest Income and Interest Expense” Note for further discussion. For its securities, the Company recognizes coupon income, which is a component of interest income, based upon the outstanding principal amounts of the financial instruments and their contractual terms. In addition, the Company amortizes or accretes premiums or discounts into interest income for its Agency mortgage-backed securities (other than interest-only securities, multifamily and reverse mortgages), 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. Premiums and discounts associated with the purchase of residential mortgage loans and with those transferred or pledged to 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). If collection of a loan’s principal or interest is in doubt or the loan is 90 days or more past due, interest income is 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 remaining 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 interest 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 borrower. Refer to the “Interest Income and Interest Expense” Note for further discussion on interest. The Company has made an accounting policy election not to measure an allowance for loans losses for accrued interest receivable. If interest receivable is deemed to be uncollectible or not collected within 90 days of its contractual due date for commercial loans or 120 days for corporate debt carried at amortized cost, it is written off through a reversal of interest income. Any interest written off that is recovered is recognized as interest income. Refer to the “Interest Income and Interest Expense” Note for further discussion of interest income. 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. As a REIT, the Company will not incur federal income tax to the extent that it distributes its taxable income to its stockholders. The Company and certain of its direct and indirect subsidiaries 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 its taxable income. Refer to the “Income Taxes” Note for further discussion on income taxes. Recent Accounting Pronouncements The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”). ASUs not listed below were not applicable, not expected to have a significant impact on the Company’s consolidated financial statements when adopted or did not have a significant impact on the Company’s consolidated financial statements upon adoption. F-9 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
F-10 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
The following table presents characteristics for certain of the Company’s financial instruments at December 31,
The Company’s investments in securities include agency, credit risk transfer, non-agency and commercial mortgage-backed securities. All of the debt securities are classified as available-for-sale. Available-for-sale securities are carried at fair value, with changes in fair value recognized in other comprehensive income, unless the fair value option is elected in which case changes in fair value are recognized in Net unrealized gains (losses) on instruments measured at fair value through earnings in the Consolidated Statements of Comprehensive Income (Loss). Transactions for securities are recorded on trade date, including F-11 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements TBA securities that meet the regular-way securities scope exception from derivative accounting. Gains and losses on disposals of securities are recorded on trade date based on the specific identification method. 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) Agency Mortgage-Backed Securities - The Company invests in mortgage pass-through certificates, collateralized mortgage obligations and other MBS representing interests in or obligations backed by pools of residential or multifamily mortgage loans and certificates. Many of the underlying loans and certificates are 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”). 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”). TBA securities without intent to accept delivery (“TBA derivatives”), are accounted for as derivatives as discussed in the “Derivative Instruments” Note. 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. Non-Agency Mortgage-Backed Securities- The Company invests in non-Agency mortgage-backed securities such as those issued in prime loan, Alt-A loan, subprime loan, non-performing loan (“NPL”) and re-performing loan (“RPL”) securitizations. Agency mortgage-backed securities, non-Agency mortgage-backed securities and residential CRT securities are referred to herein as “Residential Securities.” Although the Company generally intends to hold most of its Residential Securities until maturity, it may, from time to time, sell any of its Residential Securities as part of the overall management of its portfolio. Commercial Mortgage-Backed Securities (“Commercial Securities”) - Certain 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). Management evaluates such Commercial Securities for The following represents a rollforward of the activity for the Company’s securities, excluding securities transferred or pledged to securitization vehicles, for the year ended December 31,
F-12 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements The following tables present the Company’s securities portfolio, excluding securities transferred or pledged to securitization vehicles, that was carried at their fair value at December 31, 2020 and 2019:
(1) Principal/Notional amount includes $354.6 million and $0 million of an Agency CMBS interest-only security as of December 31, 2020 and December 31, 2019,
F-13 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements (2) Principal/Notional amount includes $10.7 million and $14.9 million of a CRT interest-only security as of December 31, 2020 and December 31, 2019, respectively. The following table presents the Company’s Agency mortgage-backed securities portfolio, excluding securities transferred or pledged to securitization vehicles, by issuing Agency at December 31,
Actual maturities of the Company’s Residential Securities are generally shorter than stated contractual maturities because actual maturities of the portfolio are affected by periodic payments and prepayments of principal on the underlying mortgages. The following table summarizes the Company’s Residential Securities, excluding securities transferred or pledged to securitization vehicles, at December 31,
The estimated weighted average lives of the Residential Securities at December 31, The following table presents the gross unrealized losses and estimated fair value of the Company’s Agency mortgage-backed securities, 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,
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 During the F-14 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
The Company invests in residential, commercial and corporate loans. Loans are classified as either held for investment or held for sale. Loans are also eligible to be accounted for under the fair value option. Excluding loans transferred or pledged to securitization vehicles, as of December 31, Allowance for Losses – The Company evaluates the need for a loss reserve on each of its Given the unique nature of each underlying borrower and any collateral, the Company assesses an allowance for each individual loan held-for-investment. A provision is established at origination or acquisition that reflects management’s estimate of the total expected credit loss over the expected life of the loan. In estimating the lifetime expected credit losses, management utilizes a probability of default and loss given default methodology (“Loss Given Default methodology”), which considers projected economic conditions over the reasonable and supportable forecast period. The forecast incorporates primarily market-based assumptions including, but not limited to, forward interest rate curves, unemployment rate estimates and certain indexes sourced from third party vendors. For any remaining period of the expected life of the loan after the reasonable and supportable period, the Company reverts to historical losses on a straight-line basis. Management uses third-party vendors’ loan pool data for loans with similar risk characteristics to estimate historical losses given the limited loss history of the Company’s loan portfolio. Changes in the lifetime expected credit loss are reflected in Loan loss provision in the Consolidated Statements of Comprehensive Income (Loss). For loans experiencing credit deterioration, the Company may 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 this analysis. Depending on the expected recovery of its investment, the Company considers the estimated net recoverable value of the loans 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 these 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. The Company may be exposed to various levels of credit risk depending on the nature of its 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 or companies. Management reviews loan-to-value metrics at origination or acquisition of a new investment and if events occur that trigger re-evaluation by management. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements The Company recorded loan loss provisions of $147.6 million, $16.6 million and $3.5 million for the years ended December 31, As of December 31, The following table presents the activity of the Company’s loan investments, including loans held for sale and excluding loans transferred or pledged to securitization vehicles, for the year ended December 31,
The carrying value of the Company’s residential loans held for sale was The Company also has off-balance-sheet credit exposures related to unfunded loan commitments, including revolvers, delayed draw term loans and Residential The Company’s residential mortgage loans are primarily comprised of performing adjustable-rate and fixed-rate whole loans. The Company’s residential loans are accounted for under the fair value option with changes in fair value reflected in Net unrealized gains (losses) on instruments measured at fair value through earnings in the Statements of Comprehensive Income. Additionally, 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 because it also has certain powers and rights to direct the activities of such trusts. Refer to the “Variable Interest Entities” Note for further information related to the Company’s consolidated residential mortgage loan trusts. The following table presents the fair value and the unpaid principal balances of the residential mortgage loan portfolio, including loans transferred or pledged to securitization vehicles, at December 31,
F-16 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements The following table provides information regarding the line items and amounts recognized in the Consolidated Statements of Comprehensive Income (Loss) for December 31,
The following table provides the geographic concentrations based on the unpaid principal balances at December 31,
The following table provides additional data on the Company’s residential mortgage loans, including loans transferred or pledged to securitization vehicles, at December 31,
At December 31, 2020 and 2019, approximately 37% and Commercial The Company’s commercial real estate loans are comprised of adjustable-rate and fixed-rate loans. 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 and preferred equity interests 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 or discounts are amortized into interest income over the life of the loan. Management generally reviews the most recent financial information and metrics derived therefrom 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 commercial real estate loans and preferred equity interests (“CRE Debt and Preferred Equity Investments”), and may consider other factors management deems important. Management also reviews market pricing to assess each borrower’s ability to refinance their respective assets at the maturity of each loan, in addition to economic trends (both macro and those affecting the property specifically), and the supply and demand of competing projects in the sub-market in which each subject F-17 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements property is located. Management monitors the financial condition and operating results of its borrowers and continually assesses the future outlook of the borrower’s financial performance in light of industry developments, management changes and company-specific considerations. 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 rubric for commercial loans has nine categories as depicted below:
Management assesses each loan at least quarterly and assigns an internal risk rating based on its evaluation of the most recent financial information produced by the borrower and consideration of economic conditions. See below for a tabular disclosure of the amortized cost basis of the Company’s commercial loans by year of origination and internal risk rating. The Company’s commercial loans are collateral-dependent and, as such, for loans experiencing credit deterioration, the Company is required to record an allowance based upon the fair value of the underlying collateral if foreclosure is probable or if the practical expedient is elected. For the year ended December 31, 2020, the Company recorded a loan loss provision on impaired commercial loans of $78.4 million with a principal balance and carrying value, net of allowances of $181.2 million and $113.6 million, respectively, based upon the fair value of the underlying collateral. The Company uses a discounted cash flow or market based valuation technique based upon the underlying property to project property cash flows. In projecting these cash flows, the Company reviewed the borrower financial statements, rent rolls, economic trends and other factors management deems important. These nonrecurring fair value measurements are considered to be in level three of the fair value measurement hierarchy as there are unobservable inputs, which are significant to the overall fair value. For the year ended December 31, 2019, the Company recorded a loan loss provision of $9.2 million on commercial loans with a principal balance and carrying value, net of allowances of $43.6 million and $30.9 million, respectively. As a result of the implementation of the Loss Given Default methodology under the modified retrospective method, a cumulative effect loan loss allowance of $7.8 million was recorded on January 1, 2020. For the year ended December 31, 2020, the Company recorded a net loan loss provision of $54.8 million based upon its Loss Given Default methodology recorded in Loan loss provision in the Consolidated Statements of Comprehensive Income (Loss). During the year ended December 31, 2020, the Company modified 5 commercial loans with a carrying value of $243.8 million at December 31, 2020. The maturity dates on 4 commercial loans were extended and 1 commercial loan was granted a 120 day forbearance. Additionally, as part of the restructuring 2 loans had partial paydowns totaling $4.5 million. The loan loss allowance recorded for these commercial loans was $23.6 million at December 31, 2020. Future funding commitments on the restructured loans total $4.1 million. At December 31, 2020 and December 31, 2019, the amortized cost basis of commercial loans on nonaccrual status was $46.8 million and $175.2 million, respectively. For the years ended December 31, 2020 and 2019, the Company recognized interest income on commercial loans on nonaccrual status of $2.1 million and ($0.1) million, respectively. At December 31, 2020 and December 31, 2019, the Company had unfunded commercial real estate loan commitments of $99.3 million and $181.4 million respectively. At December 31, 2020, the liability related to the expected credit losses on the unfunded commercial loan commitments was $5.1 million. At December 31, 2020 and 2019, approximately 94% and F-18 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements The sector attributes of the Company’s commercial real estate investments held for investment, including loans transferred or pledged to securitization vehicles, at December 31, 2020 and December 31, 2019 were as follows:
At December 31,
(1) Carrying value includes unamortized origination fees of $4.9 million and $8.3 million at December 31, 2020 and 2019, respectively.
The following tables represent a rollforward of the activity for the Company’s commercial real estate investments held for investment at December 31,
F-19 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
The following table provides the internal loan risk ratings of commercial real estate investments held for investment as of December 31,
(1) The amortized cost basis excludes accrued interest. As of December 31, 2020, the Company had $3.8 million of accrued interest receivable on commercial loans which is reported in Principal and (2) Includes 2 commercial mezzanine loans for which the Company recorded a full loan loss allowance of $46.6 million.
Corporate Debt The Company’s investments in corporate loans 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 five to seven years. In connection with these senior secured loans, the Company receives a security interest in certain assets of the borrower and such assets support repayment of such loans. Senior secured loans are generally exposed to less credit risk than more junior loans given their seniority to scheduled principal and interest and priority of security in the assets of the borrower. 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 effective interest method. F-20 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements The Company’s internal risk rating rubric for corporate debt has nine categories as depicted below:
Management assesses each loan at least quarterly and assigns an internal risk rating based on its evaluation of the most recent financial information produced by the borrower and consideration of economic conditions. See below for a tabular disclosure of the amortized cost basis of the Company’s corporate debt held for investment by year of origination and internal risk rating. For the year ended December 31, 2020, the Company recorded a loan loss provision of $4.5 million on impaired corporate loans using a discounted cash flow methodology. During the year ended December 31, 2020, the loan was restructured and the Company received $2.8 million of second lien debt and $4.8 million of equity. As a result of the restructuring, $19.6 million of first lien debt was written off and As a result of the implementation of the Loss Given Default methodology under the modified retrospective method, a cumulative effect loan loss allowance on corporate loans of $29.7 million was recorded on January 1, 2020. For the year ended December 31, 2020, the Company recorded a net loan loss provision on corporate loans of $9.9 million, based upon its Loss Given Default methodology. As of December 31, 2020 and December 31, 2019, the amortized cost basis of corporate loans on nonaccrual status was $0.0 and $12.2 million, respectively. For the years ended December 31, At December 31, 2020 and December 31, 2019, the Company had unfunded corporate loan commitments of $87.3 million and $81.2 million, respectively. At December 31, 2020, the liability related to the expected credit losses on the unfunded corporate loan commitments was $0.7 million. F-21 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements The Company invests in corporate loans through its Annaly Middle Market Lending Group. The industry and rate attributes of the portfolio at December 31,
The table below reflects the Company’s aggregate positions by their respective place in the capital structure of the borrowers at December 31,
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements The following tables represent a rollforward of the activity for the Company’s corporate debt investments held for investment at December 31, 2020 and December 31, 2019:
(1) Excludes loan loss allowances. (2) Includes syndications.
The following table provides the amortized cost basis of corporate debt held for investment as of December 31, 2020 by vintage year and internal risk rating.
(1) The amortized cost basis excludes accrued interest and includes deferred loan fees on unfunded loans. As of December 31, 2020, the Company had $11.0 million of accrued interest receivable on corporate loans, which is reported in Principal and interest receivable in the Consolidated Statements of Financial Condition, and $1.4 million of deferred loan fees on unfunded loans, which is reported in Loans, net in the Consolidated Statements of Financial Condition. F-23 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
The Company owns variable interests in an entity that invests in MSRs. Refer to the “Variable Interest Entities” Note for a detailed discussion on this topic. MSRs represent the rights associated with servicing pools of residential mortgage loans. The Company and its subsidiaries do not originate or directly service residential 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 intends to hold the MSRs as investments and 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 instruments 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). The following table presents activity related to MSRs for the years ended December 31,
For the years ended December 31,
Commercial Trusts The Company has invested in subordinate mortgage-backed securities issued by commercial securitization trusts (“Commercial Trusts”) and determined that it is the primary beneficiary as a result of its ability to replace the special servicer without cause through its ownership of the subordinate securities and its current designation as the directing certificate holder. Information regarding these securitization trusts are summarized in the table below.
Upon consolidation, the Company elected the fair value option for the financial assets and liabilities of the Commercial Trusts in order to avoid an accounting mismatch, and to represent more faithfully 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 applied the practical expedient under ASU 2014-07, 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 Commercial Trusts are more observable, since the prices for these liabilities are primarily available from third-party pricing services utilized for F-24 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements multifamily and commercial 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 Commercial 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. The Commercial Trusts mortgage loans had an aggregate unpaid principal balance of $2.3 billion and Commercial Securitizations The Company also invests in commercial mortgage-backed securities issued by entities that are VIEs because they do not have sufficient equity at risk for the entities to finance their activities without additional subordinated financial support from other parties, but the Company is not the primary beneficiary because it does not have the power to direct the activities that most significantly impact the VIEs’ economic performance. For these entities, the Company’s maximum exposure to loss is the amortized cost basis of the securities it owns and it does not provide any liquidity arrangements, guarantees or other commitments to these VIEs. See the “Securities” Note for further information on Commercial Securities. Collateralized Loan Obligation In February 2019, the Company closed NLY 2019-FL2, a managed commercial real estate collateralized loan obligation (“CLO”) securitization with a face value of $857.3 million, which provides non-recourse financing to the Company collateralized by certain commercial real estate mortgage loans originated by the Company. As of December 31, Multifamily Securitization In November 2019, the Company repackaged Fannie Mae guaranteed multifamily mortgage-backed securities with a principal cut-off balance of $1.0 billion and retained interest only securities with a notional balance of $1.0 billion and senior securities with a principal balance of $28.5 Residential Trusts The Company consolidates a securitization trust, which is included in “Residential Trusts” in the tables below, that issued residential mortgage-backed securities that are collateralized by residential mortgage loans that had been transferred to the trust by one of the Company’s subsidiaries. The Company owns the subordinate securities, and a subsidiary of the Company continues to be the master servicer. As such, the Company is deemed to be the primary beneficiary of the residential mortgage trust and consolidates the entity. The Company has elected the fair value option for the financial assets and liabilities of this F-25 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements VIE, but has not elected to apply the practical expedient under ASU 2014-13 as prices of both the financial assets and financial liabilities of the residential mortgage trust are available from third-party pricing services. The contractual principal amount of the residential mortgage trust’s debt held by third parties was Residential Securitizations The Company also invests in residential mortgage-backed securities issued by entities that are VIEs because they do not have sufficient equity at risk for the entities to finance their activities without additional subordinated financial support from other parties, but the Company is not the primary beneficiary because it does not have the power to direct the activities that most significantly impact the VIEs’ economic performance. For these entities, the Company’s maximum exposure to loss is the amortized cost basis of the securities it owns and it does not provide any liquidity arrangements, guarantees or other commitments to these VIEs. See the “Securities” Note for further information on Residential Securities. OBX Trusts The entities in the table below are referred to collectively as the “OBX Trusts.” These securitizations represent financing transactions which provide non-recourse financing to the Company that are collateralized by residential mortgage loans purchased by the Company.
As of December 31, Although the residential mortgage loans have been sold for bankruptcy and state law purposes, the transfers of the residential mortgage loans to the OBX Trusts did not qualify for sale accounting and are reflected as intercompany secured borrowings that are eliminated upon consolidation. Credit Facility VIEs In June 2016, a consolidated subsidiary of the Company entered into a credit facility with a third party financial institution. As of December 31, F-26 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements In July 2017, a consolidated subsidiary of the Company entered into a credit facility with a third party financial institution. As of December 31, corporate loans to the subsidiary with a carrying amount of In January 2019, a consolidated subsidiary of the Company (the “Borrower”) entered into a $300.0 million credit facility with a third party financial institution. At of December 31, 2020 and 2019, the Borrower had an Other secured financing of $236.6 million and $157.5 million, respectively, to the third party financial institution. MSR Silo 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 subjected to the risk of loss on the investments and operations of that silo and have no substantive recourse to the assets of any other silo. While the Company previously held 100% of the voting interests in this entity, in August 2017, the Company sold 100% of such interests, and entered into an agreement with the entity’s affiliated portfolio manager giving the Company the power over the silo in which it owns all of the beneficial interests. As a result, the Company is considered to be the primary beneficiary and consolidates this silo. The Company’s exposure to the obligations of its VIEs is generally limited to the Company’s investment in the VIEs of The statements of financial condition of the Company’s VIEs, excluding the CLO, multifamily securitizations, credit facility VIEs
F-27 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
The geographic concentrations of credit risk exceeding 5% of the total loan unpaid principal balances related to the Company’s VIEs, excluding the credit facility VIEs, multifamily securitizations, OBX Trusts and CLO, at December 31, Securitized Loans at Fair Value Geographic Concentration of Credit Risk
(1) No individual state greater than 5%. Corporate Debt Transfers The Company manages parallel funds investing in senior secured first and second lien corporate loans (the “Fund Entities”). The Fund Entities are considered VIEs because the investors do not have substantive liquidation, kick-out or participating rights. The fees that the Company earns are not considered variable interests of the VIE. The Company is not the primary beneficiary of the Fund Entities and therefore does not consolidate the Fund Entities. During the year ended December 31, 2020, the Company transferred $159.3 million of loans for cash. The loan transfers were accounted for as sales. Residential Credit Fund The Company manages a fund investing in participations in residential mortgage loans. The residential credit fund is deemed to be a VIE because the entity does not have sufficient equity at risk to permit the legal entity to finance its activities without additional subordinated financial support provided by any parties, including equity holders, as capital commitments are not considered equity at risk. The Company is not the primary beneficiary and does not consolidate the residential credit fund as its only interest in the r fund is the management and performance fees that it earns, which are not considered variable interests in the entity. During the year ended December 31, 2020 the Company issued participating interests in residential mortgage loans of $39.2 million to the residential credit fund. These transfers do not meet the criteria for sale accounting and are accounted for as secured borrowing, thus the residential loans are reported as Loans, net and the associated liability is reported as Participations issued in the Consolidated Statements of Financial Condition at December 31, 2020. The Company elected to fair value the participations issued through earnings to more accurately reflect the economics of the transfers as the underlying loans are carried at fair value through earnings. F-28 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
Real estate investments 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 are expensed as incurred. Major replacements and improvements that extend the useful life of the asset are capitalized and depreciated over their useful life. Real estate investments are depreciated using the straight-line method over the estimated useful lives of the assets, summarized as follows:
There was 0 real estate acquired in settlement of residential mortgage loans at December 31, 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. Real estate investments, including REO, that do not meet the criteria to be classified as held for sale are 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. During the year ended December 31, 2020, the Company took title of 2 commercial real estate properties for $79.8 million through foreclosure or deed-in-lieu of foreclosure. There were 0 new acquisitions of The weighted average amortization period for intangible assets and liabilities at December 31,
F-29 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements Depreciation expense was 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. Rental income is included in Other income (loss) in the Company’s Consolidated Statements of Comprehensive Income (Loss). Approximate future minimum rents to be received over the next five years and thereafter for non-cancelable operating leases in effect at December 31,
Derivative instruments include, but are not limited to, interest rate swaps, options to enter into interest rate swaps (“swaptions”), TBA derivatives, options on TBA securities (“MBS options”), U.S. Treasury and Eurodollar futures contracts and certain forward purchase commitments. The Company may also enter into other types of mortgage derivatives such as interest-only securities, credit derivatives referencing the commercial mortgage-backed securities index and synthetic total return swaps. In connection with the Company’s investment/market rate risk management strategy, the Company economically hedges a portion of its interest rate risk by entering into derivative financial instrument contracts, which include interest rate swaps, swaptions and futures contracts. The Company may also enter into TBA derivatives, MBS options and U.S. Treasury or Eurodollar futures contracts, certain forward purchase commitments and credit derivatives to economically hedge its exposure to market risks. The purpose of using derivatives is to manage overall portfolio risk with the potential to generate additional income for distribution to stockholders. These derivatives are subject to changes in market values resulting from changes in interest rates, volatility, Agency mortgage-backed security spreads to U.S. Treasuries and market liquidity. The use of derivatives also creates exposure to credit risk relating to potential losses that could be recognized if the counterparties to these instruments fail to perform their obligations under the stated contract. Additionally, the Company may have to pledge cash or assets as collateral for the derivative transactions, the amount of which may vary based on the market value and terms of the derivative contract. In the case of market agreed coupon (“MAC”) interest rate swaps, the Company may make or receive a payment at the time of entering into such interest rate swaps, which represents fair value of these swaps, to compensate for the out of market nature of such interest rate swaps. Subsequent changes in fair value from inception of these interest rate swaps are reflected within Unrealized gains (losses) on interest rate swaps in the Consolidated Statements of Comprehensive Income (Loss). Similar to other interest rate swaps, the Company may have to pledge cash or assets as collateral for the MAC interest rate swap transactions. In the event of a default by the counterparty, the Company could have difficulty obtaining its pledged collateral, as well as, receiving payments in accordance with the terms of the derivative contracts. Derivatives are accounted for in accordance with FASB ASC 815, Derivatives and Hedging, which requires recognition of all derivatives as either assets or liabilities at fair value in the Consolidated Statements of Financial Condition with changes in fair value recognized in the Consolidated Statements of Comprehensive Income (Loss). The changes in the estimated fair value are presented within Net gains (losses) on other derivatives with the exception of interest rate swaps which are separately presented. None of the Company’s derivative transactions have been designated as hedging instruments for accounting purposes. The Company also maintains collateral in the form of cash on margin with counterparties to its interest rate swaps and other derivatives. In accordance with a clearing organization’s rulebook, the Company presents the fair value of centrally cleared interest rate swaps net of variation margin pledged under such transactions. At December 31, 2020 and 2019, $1.5 billion and 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 F-30 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements agreements by economically hedging cash flows associated with these borrowings. The Company may enter into interest rate swap agreements where the floating leg is linked to the London Interbank Offered Rate (“LIBOR”), the overnight index swap rate or another index. Interest rate swap agreements may or may not be cleared through a derivatives clearing organization (“DCO”). Uncleared interest rate swaps are fair valued using internal pricing models and compared to the counterparty market values. Centrally cleared interest rate swaps, including MAC interest rate swaps, are generally fair valued using the DCO’s market values. If an interest rate swap is terminated, the realized gain (loss) on the interest rate swap would be equal to the difference between the cash received or paid and fair value. Swaptions – Swaptions are purchased or sold to mitigate the potential impact of increases or decreases in interest rates. Interest rate swaptions provide the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future. The Company’s swaptions are not centrally cleared. The premium paid or received for swaptions is reported as an asset or liability in the Consolidated Statements of Financial Condition. If a swaption expires unexercised, the realized gain (loss) on the swaption would be equal to the premium received or paid. If the Company sells or exercises a swaption, the realized gain The fair value of swaptions are estimated using internal pricing models and compared to the counterparty market values. TBA Dollar Rolls – TBA dollar roll transactions are accounted for as a series of derivative transactions. The fair value of TBA derivatives is based on methods similar to those used to value Agency mortgage-backed securities. MBS Options – MBS options are generally options on TBA contracts, which help manage mortgage market risks and volatility while providing the potential to enhance returns. MBS options are over-the-counter traded instruments and those written on current-coupon mortgage-backed securities are typically the most liquid. MBS options are measured at fair value using internal pricing models and compared to the counterparty market value at the valuation date. Futures Contracts – Futures contracts are derivatives that track the prices of specific assets or benchmark rates. Short sales of futures contracts help to mitigate the potential impact of changes in interest rates on the portfolio performance. The Company maintains margin accounts which are settled daily with Futures Commission Merchants (“FCMs”). The margin requirement varies based on the market value of the open positions and the equity retained in the account. Futures contracts are fair valued based on exchange pricing. Forward Purchase Commitments – The Company may enter into forward purchase commitments with counterparties whereby the Company commits to purchasing residential mortgage loans at a particular price, provided the residential mortgage loans close with the counterparties. The counterparties are required to deliver the committed loans on a “best efforts” basis. Credit Derivatives – The Company may enter into credit derivatives referencing The table below summarizes fair value information about our derivative assets and liabilities at December 31, 2020 and 2019:
(1) The notional amount of the credit derivatives in which the Company purchased protection was $0.0 and $10.0 million at December 31, 2020 and December 31, 2019, respectively. The maximum potential amount of future payments is the notional amount of credit derivatives in which the Company sold protection of $504.0 million and
F-31 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements The following table summarizes certain characteristics of the Company’s interest rate swaps at December 31,
(1)As of December 31, 2020, 17%, 72% and 11% of the Company’s interest rate swaps were linked to LIBOR, the Federal funds rate
swaps were linked to LIBOR and the overnight index swap rate, respectively. (2)There were 0 forward starting swaps at December 31, 2020 and December 31, 2019. (3) As of December 31, 2020, the weighted average years to maturity of payer interest rate swaps is offset by the weighted average years to maturity of receiver interest rate swaps. As such, the net weighted average years to maturity for each maturity bucket may fall outside of the range listed. The following table presents swaptions outstanding at December 31,
F-32
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements The following table summarizes certain characteristics of the Company’s TBA derivatives at December 31,
The following table summarizes certain characteristics of the Company’s futures derivatives at December 31,
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. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements The following tables present information about derivative assets and liabilities that are subject to such provisions and can be offset on our Consolidated Statements of Financial Condition at December 31,
The effect of interest rate swaps on the Consolidated Statements of Comprehensive Income (Loss) is as follows:
F-34 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements The effect of other derivative contracts on the Company’s Consolidated Statements of Comprehensive Income (Loss) is as follows:
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,
The Company follows fair value guidance in accordance with GAAP to account for its financial instruments and MSRs that are accounted for at fair value. The fair value of a financial instrument and MSR is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP requires classification of financial instruments and MSRs into a three-level hierarchy based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments and MSRs fall within different levels of the hierarchy, the categorization is based on the lowest priority input that is significant to the fair value measurement of the instrument. Financial assets and liabilities recorded at fair value on the Consolidated Statements of Financial Condition or disclosed in the related notes are categorized based on the inputs to the valuation techniques as follows: Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets and liabilities in active markets. F-35 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 – inputs to the valuation methodology are unobservable and significant to overall fair value. The Company designates its securities as trading, available-for-sale or held-to-maturity depending upon the type of security and the Company’s intent and ability to hold such security to maturity. Securities classified as available-for-sale and trading are reported at fair value on a recurring basis. The following is a description of the valuation methodologies used for instruments carried at fair value. These methodologies are applied to assets and liabilities across the three-level fair value hierarchy, with the observability of inputs determining the appropriate level. Futures contracts are valued using quoted prices for identical instruments in active markets and are classified as Level 1. Residential Securities, interest rate swaps, swaptions and other derivatives are valued using quoted prices or internally estimated prices for similar assets using internal models. The Company incorporates common market pricing methods, including a spread measurement to the Treasury curve as well as underlying characteristics of the particular security including coupon, prepayment speeds, periodic and life caps, rate reset period and expected life of the security in its estimates of fair value. Fair value estimates for residential mortgage loans are generated by a discounted cash flow model and are primarily based on observable market-based inputs including discount rates, prepayment speeds, delinquency levels, and credit losses. Management reviews and indirectly corroborates its estimates of the fair value derived using internal models by comparing its results to independent prices provided by dealers in the securities and/or third party pricing services. Certain liquid asset classes, such as Agency fixed-rate pass-throughs, may be priced using independent sources such as quoted prices for TBA securities. Residential Securities, residential mortgage loans, interest rate swap and swaption markets, TBA derivatives and MBS options are considered to be active markets such that participants transact with sufficient frequency and volume to provide transparent pricing information on an ongoing basis. The liquidity of the Residential Securities, residential mortgage loans, interest rate swaps, swaptions, TBA derivatives and MBS options markets and the similarity of the Company’s securities to those actively traded enable the Company to observe quoted prices in the market and utilize those prices as a basis for formulating fair value measurements. Consequently, the Company has classified Residential Securities, residential mortgage loans, interest rate swaps, swaptions, TBA derivatives and MBS options as Level 2 inputs in the fair value hierarchy. The fair value of commercial mortgage-backed securities classified as available-for-sale is determined based upon quoted prices of similar assets in recent market transactions and requires the application of judgment due to differences in the underlying collateral. Consequently, commercial real estate debt investments carried at fair value are classified as Level 2. For the fair value of debt issued by securitization vehicles, refer to the 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 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 and MSRs measured at fair value on a recurring basis. There were no transfers between levels of the fair value hierarchy during the periods presented. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
Quantitative Information about Level 3 Fair Value Measurements The Company considers unobservable inputs to be those for which market data is not available and that are developed using the best information available to us about the assumptions that market participants would use when pricing the asset. Relevant inputs vary depending on the nature of the instrument being measured at fair value. The sensitivities of significant unobservable inputs along with interrelationships between and among the significant unobservable inputs and their impact on the fair value measurements are described below. The effect of a change in a particular assumption in the sensitivity analysis below is considered independently from changes in any other assumptions. In practice, simultaneous changes in assumptions may not always have a linear effect on the inputs discussed below. Interrelationships may also exist between observable and F-37 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements 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.
The following table summarizes the estimated fair values for financial assets and liabilities that are not carried at fair value at December 31,
Commercial real estate debt and preferred equity, held for investment, corporate debt, held for investment and mortgages payable are valued using Level 3 inputs. The carrying values of repurchase agreements and short term other secured financing approximates fair value and are considered Level 2 fair value measurements. Long term other secured financing are valued using Level 2 inputs.
Goodwill The Company’s acquisitions are accounted for using the acquisition method if the acquisition is deemed to be a business. Under the acquisition method, net assets and results of operations of acquired companies are included in the consolidated financial statements from the date of acquisition. The purchase prices are allocated to the assets acquired, including identifiable intangible assets, and the liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired is recognized as goodwill. Conversely, any excess of the fair value of the net assets acquired over the purchase price is recognized as a bargain purchase gain. F-38 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements The Company tests goodwill for impairment on an annual basis or more frequently when events or circumstances may make it more likely than not that an impairment has occurred. If a qualitative analysis indicates that there may be an impairment, a quantitative analysis is performed. The quantitative impairment test for goodwill Intangible assets, net Finite life intangible assets are amortized over their expected useful lives. The following table presents the activity of finite lived intangible assets for the year ended December 31,
Reverse Repurchase and Repurchase Agreements – The Company finances a significant portion of its assets with repurchase agreements. At the inception of each transaction, the Company assessed each of the specified criteria in ASC 860, Transfers and Servicing, and has determined that each of the financing agreements meet the specified criteria in this guidance. The Company enters into reverse repurchase agreements to earn a yield on excess cash balances. The Company obtains collateral in connection with the reverse repurchase agreements in order to mitigate credit risk exposure to its counterparties. Reverse repurchase agreements and repurchase agreements with the same counterparty and the same maturity are presented net in the Consolidated Statements of Financial Condition when the terms of the agreements meet the criteria to permit netting. The Company reports cash flows on repurchase agreements as financing activities and cash flows on reverse repurchase agreements as investing activities in the Consolidated Statements of Cash Flows. The Company had outstanding At December 31,
F-39 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
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,
Other Secured Financing - The Company Investments pledged as collateral under secured financing arrangements and interest rate swaps, excluding residential and senior securitized commercial mortgage loans of consolidated VIEs, had an estimated fair value and accrued interest of $70.6 billion and $0.2 billion, respectively, at December 31, 2020 and $112.8 billion and $357.9 million, respectively, at December 31, F-40 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements Mortgage loans payable at December 31,
The following table details future mortgage loan principal payments at December 31,
F-41 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
(A) Common Stock The following table provides a summary of the Company’s common shares authorized and issued and outstanding at December 31,
During the year ended December 31, 2019, the Company closed the public offering of an original issuance of 75.0 million shares of common stock for proceeds of $730.5 million before deducting offering expenses. In connection with the offering, the Company granted the underwriters a In June 2019, the Company announced that its board of directors (“Board”) had authorized the repurchase of up to $1.5 billion of its outstanding shares of common stock, which expired on December 31, 2020 (the “Prior Share Repurchase Program”). In December 2020, the Company announced that its Board authorized the repurchase of up to $1.5 billion of its outstanding common shares through December 31, The following table provides a summary of activity related to the Company’s Direct Purchase and Dividend Reinvestment Program.
In January 2018, the Company entered into separate Distribution Agency Agreements (collectively, the “Sales Agreements”) with each of Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith, Incorporated, Barclays Capital Inc., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, Keefe, Bruyette & Woods, Inc., RBC Capital Markets, LLC and UBS Securities LLC (the “Sales Agents”). The Company may offer and sell shares of its common stock, having an aggregate offering price of up to $1.5 billion from time to time through any of the Sales Agents. (B) Preferred Stock The following is a summary of the Company’s cumulative redeemable preferred stock outstanding at December 31, ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements
Each series of preferred stock has a par value of $0.01 per share and a liquidation and redemption price of $25.00, plus accrued and unpaid dividends through their redemption date. Through December 31, During the year ended December 31, 2020, the Company redeemed all 18.4 million of its issued and outstanding shares of 7.50% Series D Cumulative Redeemable Preferred Stock (“Series D Preferred Stock”) for $460.0 million. The cash redemption amount for each share of Series D Preferred Stock was $25.00. During the year ended December 31, 2019, the Company redeemed all 7.0 million of its issued and outstanding shares of 7.625% Series C Cumulative Redeemable Preferred Stock (“Series C Preferred Stock”) for $175.0 million. The cash redemption amount for each share of Series C Preferred Stock was $25.00 plus accrued and unpaid dividends to, but not including, the redemption date of July 21, 2019. During the year ended December 31, 2019, the Company redeemed all 2.2 million of its issued and outstanding shares of 8.125% Series H Cumulative Redeemable Preferred Stock (“Series H Preferred Stock”) for $55.0 million. The cash redemption amount for each share of Series H Preferred Stock was $25.00 plus accrued and unpaid dividends to, but not including, the redemption date of May 31, 2019. During the year ended December 31, 2019, the Company issued 17.7 million shares of its 6.750% Series I Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (“Series I Preferred Stock”) for gross proceeds of $442.5 million before deducting the underwriting discount and other estimated offering expenses. The Series D Cumulative Redeemable Preferred Stock, Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, Series G Preferred Stock and Series I Preferred Stock rank senior to the common stock of the Company. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements The following table provides a summary of the Company’s dividend distribution activity for the periods presented:
Employees, Directors and other service providers of the Company are eligible to participate in the Company’s 2020 Equity Incentive Plan (the “Plan”), which provides for equity-based compensation in the form of stock options, share appreciation rights, dividend equivalent rights, restricted shares, restricted stock units (“RSUs”), and other share-based awards. The Company has the ability to award up to an aggregate of 125,000,000 shares under the terms of the Plan, subject to adjustment for any awards that were outstanding under the Company’s 2010 Equity Incentive Plan (the “Prior Plan”, collectively the “Plans") on the effective date of the Plan and subsequently expire, terminate, or are surrendered or forfeited. No new awards are permitted to be made under the Prior Plan, although existing awards remain effective. Restricted Stock Units The Company grants RSUs (including RSUs subject to performance conditions (“PSUs”)) to employees, which are generally valued based on the closing price of the underlying shares on the date of grant. For RSUs that vest, the underlying shares of common stock are delivered (net of required withholding tax) as outlined in the applicable award agreements. PSUs are subject to the Company’s achievement of specified performance criteria and the number of awards that vest can range from 0 to 150% of the grant amount. Award agreements generally provide that vesting is accelerated in certain circumstances, such as death and disability. Delivery of the underlying shares of common stock, which generally occurs over a three-year period, is conditioned on the grantees satisfying certain vesting and other requirements outlined in the award agreements. F-44 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements The following table sets forth activity related to the Company’s RSUs and PSUs awarded under the Plans:
The Company recognized stock based compensation expense of $3.7 million for the year ended December 31, 2020. As of December 31, 2020, there was $9.0 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements. This cost is expected to be recognized over a weighted average period of 2.24 years.
Refer to the note titled “Significant Accounting Policies” for details surrounding the Company’s accounting policy related to net interest income on securities and loans. The following table summarizes the interest income recognition methodology for Residential Securities:
F-45 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements The following presents the components of the Company’s interest income and interest expense for the years ended December 31, 2020, 2019
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, 2020, 2019
For the year ended December 31, F-46 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements The Company and certain of its direct and indirect subsidiaries, including Annaly TRS, Inc. and certain subsidiaries of Mountain Merger Sub Corp., have made separate joint elections to treat these subsidiaries as TRSs. As such, each of these TRSs is taxable as a domestic C corporation and subject to federal, state and local income taxes based upon their taxable income. The provisions of ASC 740, Income Taxes (“ASC 740”), clarify the accounting for uncertainty in income taxes recognized in financial statements and prescribe a recognition threshold and measurement attribute for uncertain tax positions taken or expected to be taken on a tax return. ASC 740 also requires that interest and penalties related to unrecognized tax benefits be recognized in the financial statements. The Company does not have any unrecognized tax benefits that would affect its financial position. Thus, no accruals for penalties and interest were deemed necessary at December 31, 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 years ended December 31, 2020, 2019 The primary risks to the Company are capital, liquidity and funding risk, 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 or liquidating some of the existing collateral to reduce borrowing levels. The Company may seek to mitigate the potential financial impact by entering into interest rate agreements such as interest rate swaps, interest rate swaptions and other hedges. Weakness in the mortgage market, the shape of the yield curve 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, which exclude CRT securities issued by Freddie Mac and Fannie Mae, is guaranteed by those respective agencies and the payment of principal and interest on Ginnie Mae Agency mortgage-backed securities is backed by the full faith and credit of the U.S. government. Substantially all of the Company’s Agency mortgage-backed securities have an actual or implied “AAA” rating. The Company faces credit risk on the portions of its portfolio which are not guaranteed by the respective Agency or by the full faith and credit of the U.S. government. The Company is exposed to credit risk on CRE Debt and Preferred Equity Investments, real estate investments, commercial mortgage-backed securities, residential mortgage loans, CRT securities, other non-Agency mortgage-backed securities and corporate debt. MSR values may also be adversely impacted 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, maintaining qualifying collateral and continually assessing the creditworthiness of issuers, borrowers, tenants and counterparties. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements On February 12, 2020, the Company entered into an internalization agreement (the “Internalization Agreement”) with the Former Manager Prior to the closing of the Internalization, the Former Manager, under the Management Agreement For the Prior to At December 31, F-48 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements The Company adopted ASU 2016-02, Leases (Topic 842) on January 1, 2019 with no impact to retained earnings or other components of equity. The Company’s operating leases are primarily comprised of a corporate office lease with a remaining lease term of Supplemental information related to leases as of and for the year ended December 31,
The following table provides details related to maturities of lease liabilities:
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 0 material contingencies at December 31, Arcola is the Company’s wholly owned and consolidated broker-dealer. Arcola is subject to regulations of the securities business that include but are not limited to trade practices, use and safekeeping of funds and securities, capital structure, recordkeeping and conduct of directors, officers and employees. F-49 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements Arcola is a member of various clearing organizations with which it maintains cash required to conduct its day-to-day clearance activities. Arcola enters into reverse repurchase agreements and repurchase agreements as part of its matched book trading activity. Reverse repurchase agreements are recorded on settlement date at the contractual amount and are collateralized by mortgage-backed or other securities. Arcola generates income from the spread between what is earned on the reverse repurchase agreements and what is paid on the matched repurchase agreements. Arcola’s policy is to obtain possession of collateral with a market value in excess of the principal amount loaned under reverse repurchase agreements. To ensure that the market value of the underlying collateral remains sufficient, collateral is valued daily, and Arcola will require counterparties to deposit additional collateral, when necessary. All reverse repurchase activities are transacted under master repurchase agreements or other documentation that give Arcola the right, in the event of default, to liquidate collateral held and in some instances, to offset receivables and payables with the same counterparty. As a member of the Financial Industry Regulatory Authority (“FINRA”), Arcola is required to maintain a minimum net capital balance. At December 31,
F-50 SCHEDULE III Schedule III - Real Estate and Accumulated Depreciation (dollars in thousands)
The following table presents our real estate activity during the periods presented:
F-51 SCHEDULE IV
(1) Represents third-party priority liens. (2) LIBOR represents the one month London Interbank Offer Rate. (3) Assumes all extension options are exercised. F-52
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.
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.
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