WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
--------------- -----------------
COMMISSION FILE NUMBER: 1-13447
ANNALY MORTGAGE MANAGEMENT, INC.
(Exact name of Registrant as specified in its Charter)
MARYLAND 22-3479661
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
12 EAST 41ST STREET, SUITE 700
NEW YORK, NEW YORK
(Address of principal executive offices)
10017
(Zip Code)
(212) 696-0100
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of stock, as of the last practicable date:
Class Outstanding at May 11, 2001
Common Stock, $.01 par value 44,619,958
ANNALY MORTGAGE MANAGEMENT, INC.
FORM 10-Q
INDEX
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Statements of Financial Condition- March 31, 2001 (Unaudited) and December 31, 2000 1
Statements of Operations (Unaudited) for the quarters ended March 31, 2001 and 2000 2
Statements of Stockholders' Equity (Unaudited) for the quarter ended March 31, 2001 3
Statements of Cash Flows (Unaudited) for the quarters ended March 31, 2001 and 2000 4
Notes to Financial Statements (Unaudited) 5-10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-21
Item 3. Quantitative and Qualitative Disclosure about Market Risk 22-23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
ANNALY MORTGAGE MANAGEMENT, INC
STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 2001 DECEMBER 31,
(UNAUDITED) 2000
----------------------- ------------------------
ASSETS
Cash and cash equivalents $ 43,183 $ 113,061
Mortgage-Backed Securities, at fair value 3,500,609,873 1,978,219,376
Receivable for Mortgage-Backed Securities Sold - 44,933,631
Accrued interest receivable 22,104,991 11,502,482
Other assets 323,179 260,238
----------------------- ------------------------
Total assets $3,523,081,226 $2,035,028,788
======================= ========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Repurchase agreements $3,118,300,000 $1,628,359,000
Payable for Mortgage-Backed Securities purchased 129,913,257 258,798,138
Accrued interest payable 14,694,685 8,314,414
Dividends payable 7,710,437 3,630,745
Accounts payable 579,765 284,105
----------------------- ------------------------
Total liabilities 3,271,198,144 1,899,386,402
----------------------- ------------------------
Stockholders' Equity:
Common stock: par value $.01 per share; 100,000,000
Authorized, 25,701,458 and 14,522,978 shares issued
and outstanding, respectively 257,015 145,230
Additional paid-in capital 247,158,796 147,844,861
Accumulated other comprehensive loss 3,150,882 (13,044,259)
Retained earnings 1,316,389 696,554
----------------------- ------------------------
Total stockholders' equity 251,883,082 135,642,386
----------------------- ------------------------
Total liabilities and stockholders' equity $3,523,081,226 $2,035,028,788
======================= ========================
See notes to financial statements
1
ANNALY MORTGAGE MANAGEMENT, INC
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
(UNAUDITED)
FOR THE QUARTER FOR THE QUARTER
ENDED MARCH 31, ENDED MARCH 31,
2001 2000
---------------------- ----------------------
INTEREST INCOME:
Mortgage-Backed Securities $42,434,398 $24,615,767
Other interest income 23 1,015
---------------------- ----------------------
Total interest income 42,434,421 24,616,782
INTEREST EXPENSE:
Repurchase agreements 33,453,077 19,292,954
---------------------- ----------------------
NET INTEREST INCOME 8,981,344 5,323,828
GAIN ON SALE OF MORTGAGE-BACKED SECURITIES 269,478 106,853
GENERAL AND ADMINISTRATIVE
EXPENSES 920,549 582,319
---------------------- ----------------------
NET INCOME $ 8,330,273 $4,848,362
---------------------- ----------------------
OTHER COMPREHENSIVE INCOME
Unrealized gain on available-for-sale securities 16,464,619 3,362,139
Less: reclassification adjustment for net gains
included in net income (269,478) (106,853)
---------------------- ----------------------
Other comprehensive gain 16,195,141 3,255,286
---------------------- ----------------------
COMPREHENSIVE INCOME $24,525,414 $8,103,648
====================== ======================
NET INCOME PER SHARE:
Basic $0.38 $0.35
====================== ======================
Diluted $0.37 $0.35
====================== ======================
AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 21,851,481 13,660,539
====================== ======================
Diluted 22,535,210 13,971,112
====================== ======================
See notes to financial statements
2
ANNALY MORTGAGE MANAGEMENT, INC
STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE QUARTER ENDED MARCH 31, 2001
(UNAUDITED)
ACCUMULATED
COMMON ADDITIONAL OTHER
STOCK PAID-IN COMPREHENSIVE RETAINED COMPREHENSIVE
PAR VALUE CAPITAL INCOME EARNINGS INCOME TOTAL
----------- ------------- ------------- ------------ -------------- -------------
BALANCE, DECEMBER 31, 2000 $145,230 $147,844,861 $696,554 ($13,044,259) $135,642,386
Net Income $8,330,273 8,330,273
Other comprehensive income:
Unrealized net losses on securities,
net of reclassification adjustment 16,195,141 16,195,141
-------------
Comprehensive income $24,525,414 24,525,414
=============
Exercise of stock options 259 113,973 114,232
Proceeds from direct purchase 26 27,601 27,627
Proceeds from offerings 111,500 99,172,361 99,283,861
Dividends declared for the quarter
ended March 31, 2001,
$0.30 per average share (7,710,438) (7,710,438)
---------- ------------- ------------ -------------- -------------
BALANCE, MARCH 31, 2001 $257,015 $247,158,796 $1,316,389 $3,150,882 $251,883,082
========== ============= ============ ============== =============
See notes to financial statements
3
ANNALY MORTGAGE MANAGEMENT, INC
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE QUARTER ENDED FOR THE QUARTER ENDED
MARCH 31, MARCH 31,
2001 2000
----------------------- -------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $8,330,273 $4,848,362
Adjustments to reconcile net income to net cash
Provided by operating activities:
Amortization of mortgage premiums and discounts, net 2,213,482 474,706
Gain on sale of mortgage-backed securities (269,478) (106,853)
(Increase) decrease in accrued interest receivable (10,602,509) 87,894
Increase in other assets (62,941) (18,295)
Increase (decrease) in accrued interest payable 6,380,270 (1,242,894)
Increase in accounts payable 295,660 107,795
----------------------- -------------------------
Net cash provided by operating activities 6,284,757 4,150,715
----------------------- -------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Mortgage-Backed Securities (1,838,388,423) (88,428,685)
Proceeds from sale of Mortgage-Backed Securities 151,888,090 69,782,632
Principal payments of Mortgage-Backed Securities 94,409,723 31,185,932
----------------------- -------------------------
Net cash (used in) provided by in investing activities (1,592,090,610) 12,539,879
----------------------- -------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements 7,026,473,527 3,101,832,500
Principal payments on repurchase agreements (5,536,532,527) (3,116,140,750)
Proceeds from exercise of stock options 114,232 138,496
Proceeds from direct purchase 27,627 2,316,617
Net proceeds from offerings 99,283,861
Dividends paid (3,630,745) (4,753,461)
----------------------- -------------------------
Net cash provided by (used in) financing activities 1,585,735,975 (16,606,598)
----------------------- -------------------------
Net increase in cash and cash equivalents (69,878) 83,996
Cash and cash equivalents, beginning of period 113,061 71,918
----------------------- -------------------------
Cash and cash equivalents, end of period $43,183 $155,914
======================= =========================
Supplemental disclosure of cash flow Information:
Interest paid $27,072,806 $20,535,848
======================= =========================
Noncash financing activities:
Net change in unrealized losses on available-for-sale securities $16,195,141 $3,255,286
======================= =========================
Dividends declared, not yet paid $7,710,437 $4,864,891
======================= =========================
See notes to financial statements
4
ANNALY MORTGAGE MANAGEMENT, INC
NOTES TO FINANCIAL STATEMENTS
FOR THE QUARTERS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Annaly Mortgage Management, Inc. (the "Company") was incorporated in
Maryland on November 25, 1996. The Company commenced its operations of
purchasing and managing an investment portfolio of Mortgage-Backed Securities on
February 18, 1997, upon receipt of the net proceeds from the private placement
of equity capital. An initial public offering was completed on October 14, 1997.
A summary of the Company's significant accounting policies follows:
BASIS OF PRESENTATION - The accompanying unaudited financial statements
have been prepared in conformity with the instructions to Form 10-Q and Article
10, Rule 10-01 of Regulation S-X for interim financial statements. The interim
financial statements for the three and six month periods are unaudited; however,
in the opinion of the Company's management, all adjustments, consisting only of
normal recurring accruals, necessary for a fair statement of the results of
operations have been included. These unaudited financials statements should
be read in conjunction with the audited financial statements included in the
Company's Annual Report on form 10-K for the year ended December 31, 2000. The
nature of the Company's business is such that the results of any interim period
are not necessarily indicative of results for a full year.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents includes cash on
hand and money market funds. The carrying amounts of cash equivalents
approximates their value.
MORTGAGE-BACKED SECURITIES - The Company invests primarily in mortgage
pass-through certificates, collateralized mortgage obligations and other
mortgage-backed securities representing interests in or obligations backed by
pools of mortgage loans (collectively, "Mortgage-Backed Securities").
Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities, requires the Company to
classify its investments as either trading investments, available-for-sale
investments or held-to-maturity investments. Although the Company generally
intends to hold most of its Mortgage-Backed Securities until maturity, it may,
from time to time, sell any of its Mortgage-Backed Securities as part of its
overall management of its balance sheet. Accordingly, this flexibility requires
the Company to classify all of its Mortgage-Backed Securities as
available-for-sale. All assets classified as available-for-sale are reported at
fair value, based on market prices provided by certain dealers who make markets
in these financial instruments, with unrealized gains and losses excluded from
earnings and reported as a separate component of stockholders' equity.
Unrealized losses on Mortgage-Backed Securities that are considered
other than temporary, as measured by the amount of decline in fair value
attributable to factors other than temporary, are recognized in income and the
cost basis of the Mortgage-Backed Securities is adjusted. There were no such
adjustments for the quarters ended March 31, 2001 and 2000.
Interest income is accrued based on the outstanding principal amount of
the Mortgage-Backed Securities and their contractual terms. Premiums and
discounts associated with the purchase of the Mortgage-Backed Securities are
amortized into interest income over the lives of the securities using the
interest method.
Mortgage-Backed Securities transactions are recorded on the trade date.
Purchases of newly issued securities are recorded when all significant
uncertainties regarding the characteristics of the securities are removed,
generally shortly before settlement date. Realized gains and losses on
Mortgage-Backed Securities transactions are determined on the specific
identification basis.
CREDIT RISK - At March 31, 2001 and December 31, 2000, the Company has
limited its exposure to credit losses on its portfolio of Mortgage-Backed
Securities by only purchasing securities issued by Federal Home Loan Mortgage
Corporation ("FHLMC"), Federal National Mortgage Association ("FNMA"), or
Government National Mortgage Association ("GNMA"). The payment of principal and
interest on the FHLMC and FNMA Mortgage-Backed Securities are guaranteed by
those respective agencies and the payment of principal and interest on the GNMA
Mortgage-Backed Securities are backed by the full-faith-and-credit of the U.S.
government. At March 31, 2001 and December 31, 2000 all of the Company's
Mortgage-Backed Securities have an implied "AAA" rating.
INCOME TAXES - The Company has elected to be taxed as a Real Estate
Investment Trust ("REIT") and intends to comply with the provisions of the
Internal Revenue Code of 1986, as amended (the "Code") with respect
5
thereto. Accordingly, the Company will not be subjected to Federal income tax to
the extent of its distributions to shareholders and as long as certain asset,
income and stock ownership tests are met.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS - The Company adopted the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, as mended by SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date for FASB Statement No. 133, and No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, and as interpreted by the
FASB and the Derivatives Implementation Group through Statement No. 133,
Implementation Issues, as of January 1, 2000. The Company has no derivative
instruments or any embedded derivative instruments that require bifurcation.
Management has determined that the adoption of SFAS No. 133 has no material
effect on the Company's financial statements.
2. MORTGAGE-BACKED SECURITIES
The following table pertains to the Company's Mortgage-Backed
Securities classified as available-for-sale as of March 31, 2001, which are
carried at their fair value:
FEDERAL HOME LOAN FEDERAL NATIONAL GOVERNMENT NATIONAL TOTAL MORTGAGE-BACKED
MORTGAGE CORPORATION MORTGAGE ASSOCIATION MORTGAGE ASSOCIATION SECURITIES
---------------------- ------------------------ ----------------------- ----------------------
Mortgage-Backed
Securities, gross $1,600,586,715 $1,759,057,654 $95,791,676 $3,455,436,045
Unamortized discount (490,812) (1,124,041) - (1,614,853)
Unamortized premium 17,357,448 24,741,975 1,538,376 43,637,799
---------------------- ------------------------ ----------------------- ----------------------
Amortized cost 1,617,453,351 1,782,675,588 97,330,052 3,497,458,991
Gross unrealized gains 8,660,660 3,943,915 1,400 12,605,975
Gross unrealized losses (3,493,168) (5,656,760) (305,165) (9,455,093)
---------------------- ------------------------ ----------------------- ----------------------
Estimated fair value $1,622,620,843 $1,780,962,743 $97,026,287 $3,500,609,873
====================== ======================== ======================= ======================
AMORTIZED COST GROSS UNREALIZED GAIN GROSS UNREALIZED LOSS ESTIMATED FAIR VALUE
---------------------- ------------------------ ----------------------- ----------------------
Adjustable rate $2,532,199,780 $9,849,706 ($6,380,918) $2,535,668,568
Fixed rate 965,259,211 2,756,269 (3,074,175) 964,941,305
---------------------- ------------------------ ----------------------- ----------------------
Total $3,497,458,991 $12,605,975 ($9,455,093) $3,500,609,873
====================== ======================== ======================= ======================
6
The following table pertains to the Company's Mortgage-Backed
Securities classified as available-for-sale as of December 31, 2000, which are
carried at their fair value:
FEDERAL HOME LOAN FEDERAL NATIONAL GOVERNMENT NATIONAL TOTAL MORTGAGE-BACKED
MORTGAGE CORPORATION MORTGAGE ASSOCIATION MORTGAGE ASSOCIATION SECURITIES
---------------------- ------------------------ ----------------------- ----------------------
Mortgage-Backed
Securities, gross $1,029,045,622 $853,777,836 $85,143,889 $1,967,967,347
Unamortized discount (221,944) (767,116) - (989,060)
Unamortized premium 11,203,043 11,569,619 1,512,687 24,285,349
---------------------- ------------------------ ----------------------- ----------------------
Amortized cost 1,040,026,721 864,580,339 86,656,576 1,991,263,636
Gross unrealized gains 2,220,525 798,984 - 3,019,509
Gross unrealized losses (5,426,076) (9,503,333) (1,134,360) (16,063,769)
---------------------- ------------------------ ----------------------- ----------------------
Estimated fair value $1,036,821,170 $855,875,990 $85,522,216 $1,978,219,376
====================== ======================== ======================= ======================
AMORTIZED COST GROSS UNREALIZED GAIN GROSS UNREALIZED LOSS ESTIMATED FAIR VALUE
---------------------- ------------------------ ----------------------- ----------------------
Adjustable rate $1,475,409,337 $ 12,565 ($7,819,597) $1,467,602,305
Fixed rate 515,854,299 3,006,944 (8,244,172) 510,617,071
---------------------- ------------------------ ----------------------- ----------------------
Total $1,991,263,636 $3,019,509 ($16,063,769) $1,978,219,376
====================== ======================== ======================= ======================
The adjustable rate Mortgage-Backed Securities are limited by periodic
caps (generally interest rate adjustments are limited to no more than 1% every
six months) and lifetime caps. The weighted average lifetime cap was 11.6% at
March 31, 2001 and 10.6% at December 31, 2000.
During the quarter ended March 31, 2001, the Company realized $269,478
in gains from sales of Mortgage-Backed Securities. During the quarter ended
March 31, 2000, the Company realized $106,853 in gains from sales of
Mortgage-Backed Securities.
3. REPURCHASE AGREEMENTS
The Company had outstanding $3,118,300,000 and $1,682,359,000 of
repurchase agreements with a weighted average borrowing rate of 5.22% and 6.55%
and a weighted average remaining maturity of 26 days and 29 days as of March 31,
2001 and December 31, 2000, respectively.
7
At March 31, 2001 and December 31, 2000, the repurchase agreements had
the following remaining maturities:
MARCH 31, 2001 DECEMBER 31, 2000
--------------------------- ---------------------------
Within 30 days $2,020,207,000 $1,135,886,000
30 to 59 days 915,161,000 363,810,000
60 to 89 days 92,596,000 48,845,000
90 to 119 days - -
Over 120 days 90,336,000 79,818,000
--------------------------- ---------------------------
Total $3,118,300,000 $1,628,359,000
=========================== ===========================
4. COMMON STOCK
During the quarter ended March 31, 2001, 25,913 options were exercised
or shares granted under the long-term compensation plan at $114,232. Also, 2,567
shares were purchased in the dividend reinvestment and direct purchase program
at $27,627. Offerings for 11,150,000 shares were completed during the quarter
for approximate net proceeds or $99.3 million. During the quarter ended March
31, 2000, the number of stock options exercised was 34,624, with an aggregate
purchase price of $138,496. The number of shares issued in the direct purchase
plan was 283,749 with an aggregate purchase price of $2,316,617.
During the Company's quarter ending March 31, 2001, the Company
declared dividends to shareholders totaling $7,710,438 or $0.30 per share, which
was paid on April 30, 2001. During the Company's quarter ending March 31, 2000,
the Company declared dividends to shareholders totaling $4,864,891, or $0.35 per
share, which was paid on April 28, 2000.
5. EARNINGS PER SHARE (EPS)
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting No. 128, Earnings Per Share (SFAS No.
128), which requires dual presentation of basic EPS and diluted EPS on the face
of the income statement for all entities with complex capital structures. SFAS
No. 128 also requires a reconciliation of the numerator and denominator of basic
EPS and diluted EPS computation. For the quarter ended March 31, 2001, the
reconciliation is as follows:
For the Quarter Ended March 31, 2001
------------------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
Net income $8,330,273
-----------------
Basic earnings per share 8,330,273 21,851,481 $0.38
==================
Effect of dilutive securities:
Dilutive stock options 683,729
----------------- ------------------
Diluted earnings per share $8,330,273 22,535,210 $0.37
================= ================== ==================
Options to purchase 868,296 shares were outstanding during the year and
were dilutive as the exercise price of between $4.00 and $10.00 was less than
the average stock price for the year of $10.64. Options to purchase
8
10,084 shares of stock were outstanding and not considered dilutive. The
exercise price of between $10.75 and $11.25 was greater than the average stock
price for the year of $10.64.
For the quarter ended March 31, 2000, the reconciliation is as follows:
For the Quarter Ended March 31, 2000
------------------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
Net income $4,848,362
-----------------------
Basic earnings per share 4,848,362 13,660,539 $0.35
========================
Effect of dilutive securities: 310,573
Dilutive stock options
----------------------- -----------------------
Diluted earnings per share $4,848,362 13,971,112 $0.35
======================= ======================= ========================
Options to purchase 354,256 shares were outstanding during the year and
were dilutive as the exercise price (between $4.00 and $8.13) was less than the
average stock price for the year for the Company of $8.26. Options to purchase
455,176 shares of stock were outstanding and not considered dilutive. The
exercise price (between $8.63 and $11.25) was greater than the average stock
price for the year of $8.26.
6. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income. Statement No. 130 requires the reporting of
comprehensive income in addition to net income from operations. Comprehensive
income is a more inclusive financial reporting methodology that includes
disclosure of certain financial information that historically has not been
recognized in the calculation of net income. The Company at March 31, 2001 and
December 31, 2000 held securities classified as available-for-sale. At March 31,
2001, the net unrealized gain totaled $3,150,882. and at December 31, 2000, the
net unrealized loss totaled $13,044,259.
7. LEASE COMMITMENTS
The Corporation has a noncancelable lease for office space, which
commenced in April 1998 and expires in December 2007.
The Corporation's aggregate future minimum lease payments are as
follows:
2001 $97,868
2002 100,515
2003 110,261
2004 113,279
2005 116,388
2006 119,590
2007 122,888
-------------
Total remaining lease payments $780,789
=============
9
8. RELATED PARTY TRANSACTION
Included in "Other Assets" on the Balance sheet is an investment in
Annaly International Money Management, Inc. On June 24, 1998, the Company
acquired 99,960 nonvoting shares, at a cost of $49,980. The officers and
directors of Annaly International Money Management Inc. are also officers and
directors of the Company.
9. INTEREST RATE RISK
The primary market risk to the Company is interest rate 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 also can affect the value of the
mortgage-backed securities and the Company's ability to realize gains from the
sale of these assets.
The Company seeks to manage the extent to which net income changes as a
function of changes in interest rates by matching adjustable-rate assets with
variable-rate borrowings. In addition, although the Company has not done so to
date, the Company may seek to mitigate the potential impact on net income of
periodic and lifetime coupon adjustment restrictions in the portfolio of
mortgage-backed securities by entering into interest rate agreements such as
interest rate caps and interest rate swaps.
Changes in interest rates may also have an effect on the rate of
mortgage principal prepayments and, as a result, prepayments on mortgage-backed
securities. The Company will seek to mitigate the effect of changes in the
mortgage principal repayment rate by balancing assets purchased at a premium
with assets purchased at a discount. To date, the aggregate premium exceeds the
aggregate discount on the mortgage-backed securities. As a result, prepayments,
which result in the expensing of unamortized premium, will reduce net income
compared to what net income would be absent such prepayments.
10. SUBSEQUENT EVENT
The Company completed a secondary offering of 17,000,000 shares of
company common stock on April 30, 2001. The aggregate net proceeds to the
Company after deducting expenses are estimated to be $175.5 million. On May 3,
2001, the underwriter exercised an option to purchase 1,918,500 additional
shares of common stock to cover over-allotments. The aggregate net proceeds to
the Company from the exercise of the underwriter's option were $19.8 million.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a real estate investment trust that owns and manages a portfolio
of mortgage-backed securities. Our principal business objective is to generate
net income for distribution to our stockholders from the spread between the
interest income on our mortgage-backed securities and the costs of borrowing to
finance our acquisition of mortgage-backed securities.
RESULTS OF OPERATIONS: FOR THE QUARTER ENDED MARCH 31, 2001 AND 2000
NET INCOME SUMMARY
For the quarter ended March 31, 2001, our GAAP net income was $8.3
million, or $0.38 basic earnings per average share, as compared to $4.8 million,
or $0.35 basic earnings per average share, for the quarter ended March 31, 2000.
We compute our GAAP net income per share by dividing net income by the weighted
average number of shares of outstanding common stock during the period, which
was 21,851,481 for the quarter ended March 31, 2001 and 13,660,539 for the
quarter ended March 31, 2000. Dividends per weighted average number of shares
outstanding for the quarter ended March 31, 2001 was $.30 per share, or $7.7
million in total. Dividends per weighted average number of shares outstanding
for the quarter ended March 31, 2000 was $.35 per share, or $4.9 million in
total. Our return on average equity was 17.20% for the quarter ended March 31,
2001 and 18.28% for the quarter ended March 31, 2000.
NET INCOME SUMMARY
(dollars in the thousands, except for per share data)
Quarter ended Quarter ended
March 31, 2001 March 31, 2000
-------------------------- --------------------------
Interest Income $42,434 $ 24,617
Interest Expense 33,453 19,293
-------------------------- --------------------------
Net Interest Income 8,981 5,324
Gain on Sale of Mortgage-Backed Securities 269 106
General and Administrative Expenses 920 582
-------------------------- --------------------------
Net Income $ 8,330 $ 4,848
========================== ==========================
Average Number of Basic Shares Outstanding 21,851,481 13,660,539
Average Number of Diluted Shares Outstanding 22,535,210 13,971,112
Basic Net Income Per Share $ 0.38 $ 0.35
Diluted Net Income Per Share $ 0.37 $ 0.35
Average Total Assets $2,779,055 $1,455,521
Average Equity $193,763 $106,119
Annualized Return on Average Assets 1.20% 1.33%
Annualized Return on Average Equity 17.20% 18.28%
Interest Income and Average Earning Asset Yield
We had average earning assets of $2.5 billion and $1.5 billion for the
quarters ended March 31, 2001 and 2000, respectively. Our primary source of
income for the quarters ended March 31, 2001 and 2000 was interest
11
income. A portion of our income was generated by gains on the sales of our
mortgage-backed securities. Our interest income was $42.4 million for the
quarter ended March 31, 2001 and $24.6 million for the quarter ended March 31,
2000. Our yield on average earning assets was 6.78% and 6.80% for the same
respective periods. Our average earning asset balance increased by $1.1 billion
and interest income increased by $17.8 million for the quarter ended March 31,
2001 as compared to the quarter ended March 31, 2000, due to the substantial
increase in the asset base resulting from the inflow of capital in the first
quarter offerings. The table below shows our average balance of cash equivalents
and mortgage-backed securities, the yields we earned on each type of earning
asset, our yield on average earning assets and our interest income for the
quarter ended March 31, 2001, the year ended December 31, 2000 and the four
quarters in 2000.
AVERAGE EARNING ASSET YIELD
Yield on
Average Yield on Average Yield on
Average Mortgage- Average Average Mortgage- Average
Cash Backed Earning Cash Backed Earning Interest
Equivalents Securities Assets Equivalents Securities Assets Income
----------- ----------- ------- ----------- ---------- -------- -------
(dollars in thousands)
For the Quarter Ended March 31, 2001 $2 $2,502,088 $2,502,090 4.93% 6.78% 6.78% $42,434
- -----------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2000 $263 $1,564,228 $1,564,491 4.1.8% 7.02% 7.02% $109,750
For the Quarter Ended December 31, 2000 $394 $1,741,985 $1,742,379 5.08% 7.16% 7.15% $31,160
For the Quarter Ended September 30, 2000 $188 $1,590,497 $1,590,685 5.43% 7.10% 7.10% $28,239
For the Quarter Ended June 30, 2000 $243 $1,476,283 $1,476,526 3.29% 6.97% 6.97% $25,734
For the Quarter Ended March 31, 2000 $226 $1,448,148 $1,448,374 1.79% 6.80% 6.80% $24,617
The constant prepayment rate (or CPR) on our mortgage-backed securities
for the quarter ended March 31, 2001 was 19.8% and for the quarter ended March
31, 2000 was 9.6%. CPR is an assumed rate of prepayment for our mortgage-backed
securities, expressed as an annual rate of prepayment relative to the
outstanding principal balance of our mortgage-backed securities. CPR does not
purport to be either a historical description of the prepayment experience of
our mortgage-backed securities or a prediction of the anticipated rate of
prepayment of our mortgage-backed securities.
Principal prepayments had a negative effect on our earning asset yield
for the quarters ended March 31, 2001 and 2000 because we adjust our rates of
premium amortization and discount accretion monthly based upon the effective
yield method, which takes into consideration changes in prepayment speeds.
INTEREST EXPENSE AND THE COST OF FUNDS
We anticipate that our largest expense will be the cost of borrowed
funds. We had average borrowed funds of $2.4 billion and total interest expense
of $33.5 million for the quarter ended March 31, 2001. We had average borrowed
funds of $1.3 billion and total interest expense of $19.3 million for the
quarter ended March 31, 2000. Our average cost of funds was 5.68% for the
quarter ended March 31, 2001 and 5.80% for the quarter ended March 31, 2000. The
cost of funds rate decreased 0.12% and the average borrowed funds increased by
$1.1 billion for the quarter ended March 31, 2001 when compared to the quarter
ended March 31, 2000; consequently, interest expense increased by 73.4%.
With our current asset/liability management strategy, changes in our
cost of funds are expected to be closely correlated with changes in short-term
LIBOR, although we may choose to extend the maturity of our liabilities at any
time. Our average cost of funds was 0.17% above average one-month LIBOR for the
quarter ended March 31, 2001 and 0.12% below average one-month LIBOR for the
quarter ended March 31, 2000. We generally have structured our borrowings to
adjust with one-month LIBOR because we believe that one-month LIBOR may continue
to be lower than six-month LIBOR in the present interest rate environment.
During the quarter ended March 31, 2001, average one-month LIBOR, was 5.51%,
which was 0.33% higher than average six-month LIBOR, which was 5.18%. During the
quarter ended March 31, 2000, average one-month LIBOR, was
12
5.92%, 0.40% lower than average six-month LIBOR, which was 6.32%.
The table below shows our average borrowed funds and average cost of
funds as compared to average one-month and average six-month LIBOR for the
quarter ended March 31, 2001, the year ended December 31, 2000 and the four
quarters in 2000.
AVERAGE COST OF FUNDS
Average
One-Month Average Cost Average Cost
LIBOR of Funds of Funds
Relative to Relative to Relative to
Average Average Average Average Average Average Average
Borrowed Interest Cost of One-Month Six-Month Six-Month One-Month Six-Month
Funds Expense Funds LIBOR LIBOR LIBOR LIBOR LIBOR
-------- -------- ------- --------- --------- ----------- ------------ ------------
(dollars in thousands)
For the Quarter Ended
March 31, 2001 $2,355,658 $33,453 5.68% 5.51% 5.18% 0.33% 0.17% 0.50%
- ------------------------------------------------------------------------------------------------------------------------
For the Year Ended
December 31, 2000 $1,449,999 $92,902 6.41% 6.41% 6.66% (0.25%) - (0.25%)
For the Quarter Ended
December 31, 2000 $1,632,564 $27,377 6.71% 6.65% 6.62% 0.03% 0.06% 0.09%
For the Quarter Ended
September 30, 2000 $1,477,112 $24,779 6.71% 6.62% 6.84% (0.22%) 0.09% (0.13%)
For the Quarter Ended
June 30, 2000 $1,360,419 $21,453 6.30% 6.46% 6.84% (0.38%) (0.16%) (0.54%)
For the Quarter Ended
March 31, 2000 $1,329,900 $19,293 5.80% 5.92% 6.32% (0.40%) (0.12%) (0.52%)
NET INTEREST RATE AGREEMENT EXPENSE
We have not entered into any interest rate agreements to date. As part
of our asset/liability management process, we may enter into interest rate
agreements such as interest rate caps, floors or swaps. These agreements would
be entered into with the intent to reduce interest rate or prepayment risk and
would be designed to provide us income and capital appreciation in the event of
certain changes in interest rates. However, even after entering into these
agreements, we would still be exposed to interest rate and prepayment risks. We
review the need for interest rate agreements on a regular basis consistent with
our capital investment policy.
NET INTEREST INCOME
Our net interest income, which equals interest income less interest
expense, totaled $9.0 million for the quarter ended March 31, 2001 and $5.3
million for the quarter ended March 31, 2000. Our net interest income increased
because of the increased asset size of the company. Our net interest spread,
which equals the yield on our average assets for the period less the average
cost of funds for the period, was 1.10% for the quarter ended March 31, 2001 as
compared to 1.00% for the quarter ended March 31, 2000. This 0.10% increase in
spread income is reflected in the increase in net interest income. Net interest
margin, which equals net interest income divided by average total assets, was
1.29% on an annualized basis for the quarter ended March 31, 2001 and 1.47% for
the quarter ended March 31, 2000. The principal reason that net interest margin
exceeded net interest spread is that average interest earning assets exceeded
average interest bearing liabilities. A portion of our assets is funded with
equity rather than borrowings. We did not have any interest rate agreement
expenses to date.
The table below shows our interest income by earning asset type,
average earning assets by type, total interest income, interest expense, average
repurchase agreements, average cost of funds, and net interest income for the
quarter ended March 31, 2001, the year ended December 31, 2000, and the four
quarters in 2000.
13
GAAP NET INTEREST INCOME
Average Interest Yield on Average
Mortgage- Income on Average Balance
Backed Mortgage Total Interest of Average Net
Securities Backed Average Cash Interest Earning Repurchase Interest Cost of Interest
Held Securities Equivalents Income Assets Agreements Expense Funds Income
---------- ---------- ------------ -------- -------- ---------- -------- ------- --------
(dollars in the thousands)
For the Quarter
Ended March 31, 2001 $2,502,088 $42,434 $2 - 6.78% $2,355,658 $33,453 5.68% $8,981
- -------------------------------------------------------------------------------------------------------------------------
For the Year Ended
December 31, 2000 $1,564,228 $109,739 $263 $109,750 7.02% $1,449,999 $92,902 6.41% $16,848
For the Quarter
Ended December 31, 2000 $1,741,985 $31,154 $394 $31,160 7.16% $1,632,564 $27,377 6.71% $3,783
For the Quarter
Ended September 30, 2000 $1,590,497 $28,237 $188 $28,239 7.10% $1,447,112 $24,779 6.71% $3,460
For the Quarter
Ended June 30, 2000 $1,476,283 $25,732 $243 $25,734 6.97% $1,360,419 $21,453 6.30% $4,282
For the Quarter
Ended March 31, 2000 $1,448,148 $24,616 $226 $24,617 6.80% $1,329,900 $19,293 5.80% $5,323
GAINS AND LOSSES ON SALES OF MORTGAGE-BACKED SECURITIES
For the quarter ended March 31, 2001, we sold mortgage-backed
securities with an aggregate historical amortized cost of $151.6 million for an
aggregate gain of $269,478. For the quarter ended March 31, 2000, we sold
mortgage-backed securities with an aggregate historical amortized cost of $69.8
million for an aggregate gain of $106,853. The difference between the sale price
and the historical amortized cost of our mortgage-backed securities is a
realized gain and increases income accordingly. We do not expect to sell assets
on a frequent basis, but may from time to time sell existing assets to move into
new assets, which our management believes might have higher risk-adjusted
returns, or to manage our balance sheet as part of our asset/liability
management strategy.
CREDIT LOSSES
We have not experienced credit losses on our mortgage-backed securities
to date. We have limited our exposure to credit losses on our mortgage-backed
securities by purchasing only securities, issued or guaranteed by FNMA, FHLMC or
GNMA, which, although not rated, carry an implied "AAA" rating.
GENERAL AND ADMINISTRATIVE EXPENSES
G&A expenses were $920,549 for the quarter ended March 31, 2001 and
$582,319 for the quarter ended March 31, 2000. G&A expenses as a percentage of
average assets was 0.13% and 0.16% on an annualized basis for the quarters ended
March 31, 2001 and 2000, respectively. The Company is internally managed and
continues to be a low cost provider. Due to the increase in average assets,
Annaly is able to take advantage of economies of scale. Even though G&A expenses
increased by $338,230 for the quarter ended March 31, 2001, when compared to the
quarter ended March 31, 2000, G&A as a percentage of average assets declined.
14
GAAP G&A EXPENSES AND OPERATING EXPENSE RATIOS
Total G&A Total G&A
Expenses/Average Expenses/Average
Total G&A Assets Equity
Expenses (annualized) (annualized)
--------- ---------------- ----------------
(dollars in the thousands)
For the Quarter Ended
March 31, 2001 $921 0.13% 1.90%
- ----------------------- ---------------- ----------------- -------------------
For the Year Ended
December 31, 2000 $2,286 0.14% 1.94%
For the Quarter Ended
December 31, 2000 $670 0.14% 2.11%
For the Quarter Ended
September 30, 2000 $527 0.13% 1.84%
For the Quarter Ended
June 30, 2000 $507 0.15% 1.85%
For the Quarter Ended
March 31, 2000 $582 0.16% 2.19%
NET INCOME AND RETURN ON AVERAGE EQUITY
Our net income was $8.3 million for the quarter ended March 31, 2001
and $4.8 million for the quarter ended March 31, 2000. Our return on average
equity was 17.2% for the quarter ended March 31, 2001 and 18.3% for the quarter
ended March 31, 2000. The increase in net income is a direct result of the
increase in capital from the offerings in the first quarter of 2001. As
previously mentioned, the new capital allowed us to grow the balance sheet and
ultimately grow earnings. The table below shows our net interest income, gain on
sale of mortgage-backed securities and G&A expenses each as a percentage of
average equity, and the return on average equity for the quarters ended March
31, 2001, the year ended December 31, 2000, and for the four quarters in 2000.
COMPONENTS OF RETURN ON AVERAGE EQUITY
(Ratios for all Quarters are annualized)
Gain on Sale of
Net Interest Mortgage-Backed G&A Return on
Income/Average Securities/Average Expenses/Average Average
Equity Equity Equity Equity
-------------- ------------------ ---------------- ---------
For the Quarter Ended March 31, 2001 18.54% 0.56% 1.90% 17.20%
- -------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2000 14.31% 1.72% 1.94% 14.09%
For the Quarter Ended December 30, 2000 11.90% 3.09% 2.11% 12.88%
For the Quarter Ended September 30, 2000 12.08% 3.05% 1.84% 13.29%
For the Quarter Ended June 30, 2000 15.61% 0.24% 1.85% 14.00%
For the Quarter Ended March 31, 2000 20.07% 0.40% 2.19% 18.28%
FINANCIAL CONDITION
MORTGAGE-BACKED SECURITIES
All of our mortgage-backed securities at March 31, 2001 were
adjustable-rate or fixed-rate mortgage-backed securities backed by single-family
mortgage loans. All of the mortgage assets underlying these mortgage-backed
securities were secured with a first lien position on the underlying
single-family properties. All our mortgage-backed securities were FHLMC, FNMA or
GNMA mortgage pass-through certificates or CMOs, which
15
carry an implied "AAA" rating. We mark-to-market all of our earning assets at
liquidation value.
We accrete discount balances as an increase in interest income over the
life of discount mortgage-backed securities and we amortize premium balances as
a decrease in interest income over the life of premium mortgage-backed
securities. At March 31, 2001 and 2000, we had on our balance sheet a total of
$1.6 million and $1.2 million respectively, of unamortized discount (which is
the difference between the remaining principal value and current historical
amortized cost of our mortgage-backed securities acquired at a price below
principal value) and a total of $43.6 million and $23.0 million, respectively,
of unamortized premium (which is the difference between the remaining principal
value and the current historical amortized cost of our mortgage-backed
securities acquired at a price above principal value).
We received mortgage principal repayments of $94.4 million for the
quarter ended March 31, 2001 and $31.2 million for the quarter ended March 31,
2000. Given our current portfolio composition, if mortgage principal prepayment
rates were to increase over the life of our mortgage-backed securities, all
other factors being equal, our net interest income would decrease during the
life of these mortgage-backed securities as we would be required to amortize our
net premium balance into income over a shorter time period. Similarly, if
mortgage principal prepayment rates were to decrease over the life of our
mortgage-backed securities, all other factors being equal, our net interest
income would increase during the life of these mortgage-backed securities, as we
would amortize our net premium balance over a longer time period.
The table below summarizes our mortgage-backed securities at March 31,
2001, December 31, 2000, September 30, 2000, June 30, 2000, and March 31, 2000.
MORTGAGE-BACKED SECURITIES
Estimated
Amortized Fair Weighted
Net Amortized Cost/Principal Estimated Value/Principal Average
Principal Value Premium Cost Value Fair Value Value Yield
--------------- ------- --------- -------------- ---------- --------------- --------
(dollars in thousands)
At March 31, 2001 $3,455,436 $42,023 $3,497,459 101.22% $3,500,610 101.31% 6.43%
- ----------------------------------------------------------------------------------------------------------------------
At December 31, 2000 $1,967,967 $23,296 $1,991,263 101.18% $1,978,219 100.52% 7.09%
At September 30, 2000 $1,669,997 $21,878 $1,691,875 101.31% $1,664,136 99.65% 7.23%
At June 30, 2000 $1,464,968 $20,893 $1,485,861 101.43% $1,450,853 99.04% 7.32%
At March 31, 2000 $1,448,875 $21,826 $1,470,701 101.51% $1,436,389 99.14% 7.02%
The tables below set forth certain characteristics of our
mortgage-backed securities. The index level for adjustable-rate mortgage-backed
securities is the weighted average rate of the various short-term interest rate
indices, which determine the coupon rate.
ADJUSTABLE-RATE MORTGAGE-BACKED SECURITY CHARACTERISTICS
Weighted Principal Value
Weighted Average Weighted at Period End
Average Weighted Weighted Term to Weighted Average as % of Total
Principal Coupon Average Average Net Next Average Asset Mortgage-Backed
Value Rate Index Level Margin Adjustment Lifetime Cap Yield Securities
--------- -------- ----------- ----------- ---------- ------------ -------- ---------------
(dollars in thousands)
At March 31, 2001 $2,495,296 7.01% 5.14% 1.87% 26 months 11.57% 6.35% 72.21%
- --------------------------------------------------------------------------------------------------------------------------
At December 31, 2000 $1,454,356 7.61% 5.76% 1.85% 15 months 11.47% 7.24% 73.90%
At September 30, 2000 $1,203,268 7.64% 5.93% 1.71% 13 months 11.01% 7.36% 72.05%
At June 30, 2000 $986,046 7.53% 6.02% 1.51% 9 months 10.41% 7.46% 67.31%
At March 31, 2000 $957,419 7.18% 5.63% 1.55% 10 months 10.59% 7.06% 66.08%
16
FIXED-RATE MORTGAGE-BACKED SECURITY CHARACTERISTICS
Principal Value
Weighted Weighted as % of Total
Average Coupon Average Mortgage-Backed
Principal Value Rate Asset Yield Securities
--------------- -------------- ----------- ---------------
(dollars in thousands)
At March 31, 2001 $960,140 6.79% 6.69% 27.79%
- -------------------------------------------------------------------------------------------
At December 31, 2000 $513,611 6.62% 6.68% 26.10%
At September 30, 2000 $466,729 6.58% 6.92% 27.95%
At June 30, 2000 $478,922 6.58% 7.05% 32.69%
At March 31, 2000 $491,456 6.58% 7.04% 33.92%
At March 31, 2001 and December 31, 2000 we held mortgage-backed
securities with coupons linked to the one-year, three-year, and five-year
Treasury indices, one-month LIBOR, 12 month cumulative avereage one-year
treasury, and the six-month CD rate.
ADJUSTABLE-RATE MORTGAGE-BACKED SECURITIES BY INDEX
MARCH 31, 2001
12 Month
Cumulative 1-Year 3-Year
One-Month Six-Month CD Ave. 1-Year Treasury Treasury 5-Year
LIBOR Rate Treasury Index Index Treasury Index
--------- ------------ ----------- -------- -------- --------------
Weighted Average Adjustment
Frequency 1 mo. 6 mo. 1 mo. 12 mo. 36 mo. 60 mo.
Weighted Average Term to Next
Adjustment 1 mo. 1 mo. 1 mo. 36 mo. 16 mo. 38 mo.
Weighted Average Annual Period Cap None 1.00% None 2.00% 2.00% 1.76%
Weighted Average Lifetime Cap at
March 31, 2001 9.11% 11.36% 10.60% 12.40% 12.66% 12.44%
Mortgage Principal Value as
Percentage of Mortgage-Backed
Securities at March 31, 2001 17.59% 0.64% 1.04% 49.26% 3.06% 0.62%
ADJUSTABLE-RATE MORTGAGE-BACKED SECURITIES BY INDEX
DECEMBER 31, 2000
3-Year
One-Month Six-Month 1-Year Treasury 5-Year
LIBOR CD Rate Treasury Index Index Treasury Index
--------- --------- -------------- -------- --------------
Weighted Average Adjustment Frequency 1 mo. 6 mo. 12 mo. 36 mo. 60 mo.
Weighted Average Term to Next Adjustment 1 mo. 2 mo. 23 mo. 20 mo. 40 mo.
Weighted Average Annual Period Cap None 1.00% 1.98% 2.00% 1.76%
Weighted Average Lifetime Cap at
December 31, 2000 9.11% 11.37% 12.61% 13.24% 12.42%
Mortgage Principal Value as Percentage of
Mortgage-Backed Securities at
December 31, 2000 24.08% 1.21%% 44.52% 2.97% 1.12%
17
INTEREST RATE AGREEMENTS
Interest rate agreements are assets that are carried on a balance sheet
at estimated liquidation value. We have not entered into any interest rate
agreements since our inception.
BORROWINGS
To date, our debt has consisted entirely of borrowings collateralized
by a pledge of our mortgage-backed securities. These borrowings appear on our
balance sheet as repurchase agreements. At March 31, 2001, we had established
uncommitted borrowing facilities in this market with twenty lenders in amounts,
which we believe, are in excess of our needs. All of our mortgage-backed
securities are currently accepted as collateral for these borrowings. However,
we limit our borrowings, and thus our potential asset growth, in order to
maintain unused borrowing capacity and thus increase the liquidity and strength
of our balance sheet.
For the quarters ended March 31, 2001 and 2000, the term to maturity of
our borrowings ranged from one day to 6 months, with a weighted average original
term to maturity of 57 days at March 31, 2001. At March 31, 2001, the weighted
average cost of funds for all of our borrowings was 5.22% and the weighted
average term to next rate adjustment was 26 days. At March 31, 2000, the term to
maturity ranged from one day to 3 months, with a weighted average original term
of 55 days. The weighted average cost of funds for all of our borrowings 5.96%
and weighted average term to the next adjustment was 31 days.
LIQUIDITY
Liquidity, which is our ability to turn non-cash assets into cash,
allows us to purchase additional mortgage-backed securities and to pledge
additional assets to secure existing borrowings should the value of our pledged
assets decline. Potential immediate sources of liquidity for us include cash
balances and unused borrowing capacity. Unused borrowing capacity will vary over
time as the market value of our mortgage-backed securities varies. Our balance
sheet also generates liquidity on an on-going basis through mortgage principal
repayments and net earnings held prior to payment as dividends. Should our needs
ever exceed these on-going sources of liquidity plus the immediate sources of
liquidity discussed above, we believe that our mortgage-backed securities could
in most circumstances be sold to raise cash. The maintenance of liquidity is one
of the goals of our capital investment policy. Under this policy, we limit asset
growth in order to preserve unused borrowing capacity for liquidity management
purposes.
STOCKHOLDERS' EQUITY
We use "available-for-sale" treatment for our mortgage-backed
securities; we carry these assets on our balance sheet at estimated market value
rather than historical amortized cost. Based upon this "available-for-sale"
treatment, our equity base at March 31, 2001 was $251.9 million, or $9.80 per
share. If we had used historical amortized cost accounting, our equity base at
March 31, 2001 would have been $248.7 million, or $9.67 per share. Our equity
base at March 31, 2000 was $108.9 million, or $7.84 per share. If we had used
historical amortized cost accounting, our equity base at March 31, 2000 would
have been $143.3 million, or $10.31 per share. During the quarter ended March
31, 2001, the Company raised $99.3 million in offerings. During the quarter
ended March 31, 2001, the Company raised additional capital in the amount of
$2.3 million through its direct purchase program.
With our "available-for-sale" accounting treatment, unrealized
fluctuations in market values of assets do not impact our GAAP or taxable income
but rather are reflected on our balance sheet by changing the carrying value of
the asset and stockholders' equity under "Accumulated Other Comprehensive Income
(Loss)." By accounting for our assets in this manner, we hope to provide useful
information to stockholders and creditors and to preserve flexibility to sell
assets in the future without having to change accounting methods.
18
As a result of this mark-to-market accounting treatment, our book value
and book value per share are likely to fluctuate far more than if we used
historical amortized cost accounting. As a result, comparisons with companies
that use historical cost accounting for some or all of their balance sheet may
not be meaningful.
The table below shows unrealized gains and losses on the
mortgage-backed securities in our portfolio.
UNREALIZED GAINS AND LOSSES
(dollars in thousands)
At March 31, At December 31,
2001 2000
------------------------ ------------------------
Unrealized Gain $12,606 $ 3,020
Unrealized Loss (9,455) (16,064)
------------------------ ------------------------
Net Unrealized Gain (Loss) $3,151 ($13,044)
======================== ========================
Net Unrealized Gain (Loss) as % of Mortgage-
Backed Securities Principal Value 0.09% (0.66%)
Net Unrealized Gain (Loss) as % of Mortgage-
Backed Securities Amortized Cost 0.09% (0.66%)
Unrealized changes in the estimated net market value of mortgage-backed
securities have one direct effect on our potential earnings and dividends:
positive market-to-market changes increase our equity base and allow us to
increase our borrowing capacity while negative changes tend to limit borrowing
capacity under our capital investment policy. A very large negative change in
the net market value of our mortgage-backed securities might impair our
liquidity position, requiring us to sell assets with the likely result of
realized losses upon sale. "Unrealized Gains on Available for Sale Securities"
was $3.2 million, or 0.09% of the amortized cost of our mortgage-backed
securities at March 31, 2001. "Unrealized Losses on Available for Sale
Securities" was $13.0 million or 0.66% of the amortized cost of our
mortgage-backed securities at December 31, 2000.
The table below shows our equity capital base as reported and on a
historical amortized cost basis at March 31, 2001, December 31,2000, September
30, 2000, June 30, 2000 and March 31,2000. Issuances of common stock, the level
of GAAP earnings as compared to dividends declared, and other factors influence
our historical cost equity capital base. The GAAP reported equity capital base
is influenced by these factors plus changes in the "Net Unrealized Losses on
Assets Available for Sale" account.
STOCKHOLDERS' EQUITY
Net Unrealized Historical
Historical Gains (Losses) on GAAP Reported Amortized Cost GAAP Reported
Amortized Cost Assets Available Equity Base Equity Per Equity (Book
Equity Base for Sale (Book Value) Share Value) Per Share
-------------- ----------------- ------------- -------------- ----------------
(dollars in thousands, except per share data)
At March 31, 2001 $248,732 $3,151 $251,883 $9.67 $9.80
- ------------------------------------------------------------------------------------------------------------
At December 31, 2000 $148,686 ($13,044) $135,642 $10.24 $9.34
At September 30, 2000 $146,446 ($27,739) $118,707 $10.24 $8.30
At June 30, 2000 $145,448 ($35,008) $110,440 $10.24 $7.77
At March 31, 2000 $143,279 ($34,313) $108,966 $10.31 $7.84
19
LEVERAGE
Our debt-to-GAAP reported equity ratio at March 31, 2001 and, 2000 was
12.4:1 and 12:1, respectively. We generally expect to maintain a ratio of
debt-to-equity of between 8:1 and 12:1, although the ratio may vary from this
range from time to time based upon various factors, including our management's
opinion of the level of risk of our assets and liabilities, our liquidity
position, our level of unused borrowing capacity and over-collateralization
levels required by lenders when we pledge assets to secure borrowings.
Our target debt-to-GAAP reported equity ratio is determined under our
capital investment policy. Should our actual debt-to-equity ratio increase above
the target level due to asset acquisition or market value fluctuations in
assets, we will cease to acquire new assets. Our management will, at that time,
present a plan to our Board of Directors to bring us back to our target
debt-to-equity ratio; in many circumstances, this would be accomplished in time
by the monthly reduction of the balance of our mortgage-backed securities
through principal repayments.
ASSET/LIABILITY MANAGEMENT AND EFFECT OF CHANGES IN INTEREST RATES
We continually review our asset/liability management strategy with
respect to interest rate risk, mortgage prepayment risk, credit risk and the
related issues of capital adequacy and liquidity. We seek attractive
risk-adjusted stockholder returns while maintaining a strong balance sheet.
We seek to manage the extent to which our net income changes as a
function of changes in interest rates by matching adjustable-rate assets with
variable-rate borrowings. In addition, although we have not done so to date, we
may seek to mitigate the potential impact on net income of periodic and lifetime
coupon adjustment restrictions in our portfolio of mortgage-backed securities by
entering into interest rate agreements such as interest rate caps and interest
rate swaps.
Changes in interest rates may also have an effect on the rate of
mortgage principal prepayments and, as a result, prepayments on mortgage-backed
securities. We will seek to mitigate the effect of changes in the mortgage
principal repayment rate by balancing assets we purchase at a premium with
assets we purchase at a discount. To date, the aggregate premium exceeds the
aggregate discount on our mortgage-backed securities. As a result, prepayments,
which result in the expensing of unamortized premium, will reduce our net income
compared to what net income would be absent such prepayments.
INFLATION
Virtually all of our assets and liabilities are financial in nature. As
a result, interest rates and other factors drive our performance far more than
does inflation. Changes in interest rates do not necessarily correlate with
inflation rates or changes in inflation rates. Our financial statements are
prepared in accordance with GAAP and our dividends based upon our net income as
calculated for tax purposes; in each case, our activities and balance sheet are
measured with reference to historical cost or fair market value without
considering inflation.
OTHER MATTERS
We calculate that our qualified REIT assets, as defined in the Internal
Revenue Code, are 99.4% and 99.5% of our total assets at March 31, 2001 and
2000, as compared to the Internal Revenue Code requirement that at least 75% of
our total assets be qualified REIT assets. We also calculate that 99.4% and
99.5% of our revenue qualifies for the 75% source of income test, and 100% of
its revenue qualifies for the 95% source of income test, under the REIT rules
for the years ended March 31, 2001 and 2000, respectively. We also met all REIT
requirements regarding the ownership of our common stock and the distribution of
our net income. Therefore, as of March 31, 2001 and 2000, we believe that we
qualified as a REIT under the Internal Revenue Code.
We at all times intend to conduct our business so as not to become
regulated as an investment company under the Investment Company Act. If we were
to become regulated as an investment company, then our use of leverage would be
substantially reduced. The Investment Company Act exempts entities that are
"primarily engaged in the business of purchasing or otherwise acquiring
mortgages and other liens on and interests in real
20
estate" (qualifying interests). Under current interpretation of the staff of the
SEC, in order to qualify for this exemption, we must maintain at least 55% of
our assets directly in qualifying interests. In addition, unless certain
mortgage securitites represent all the certificates issued with respect to an
underlying pool of mortgages, the mortgage-backed securities may be treated as
securities separate from the underlying mortgage loans and, thus, may not be
considered qualifying interests for purposes of the 55% requirement. We
calculate that as of March 31, 2001 and 2000 we were in compliance with this
requirement.
21
ITEM. 2 QUANTITATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and equity prices. The
primary market risk to which we are exposed is interest rate risk, which is
highly sensitive to many factors, including governmental monetary and tax
policies, domestic and international economic and political considerations and
other factors beyond our control. Changes in the general level of interest rates
can affect our net interest income, which is the difference between the interest
income earned on interest-earning assets and the interest expense incurred in
connection with our interest-bearing liabilities, by affecting the spread
between our interest-earning assets and interest-bearing liabilities. Changes in
the level of interest rates also can affect the value of our mortgage-backed
securities and our ability to realize gains from the sale of these assets. We
may utilize a variety of financial instruments, including interest rate swaps,
caps, floors and other interest rate exchange contracts, in order to limit the
effects of interest rates on our operations. If we use these types of
derivatives to hedge the risk of interest-earning assets or interest-bearing
liabilities, we may be subject to certain risks, including the risk that losses
on a hedge position will reduce the funds available for payments to holders of
securities and that the losses may exceed the amount we invested in the
instruments. To date, we have not purchased any hedging instruments.
Our profitability and the value of our portfolio may be adversely
affected during any period as a result of changing interest rates. The following
table quantifies the potential changes in net interest income and portfolio
value should interest rates go up or down 200 basis points, assuming the yield
curves of the rate shocks will be parallel to each other and the current yield
curve. All changes in income and value are measured as percentage changes from
the projected net interest income and portfolio value at the base interest rate
scenario. The base interest rate scenario assumes interest rates at March 31,
2001 and various estimates regarding prepayment and all activities are made at
each level of rate shock. Actual results could differ significantly from these
estimates.
Projected Percentage Change in Projected Percentage Change in
Change in Interest Rate Net Interest Income Portfolio Value
- --------------------------------------------------------------------------------------------------------
- -200 Basis Points 69% 2%
- -100 Basis Points 32% 1%
- -50 Basis Points 16% 1%
Base Interest Rate
+50 Basis Points (20%) (1%)
+100 Basis Points (40%) (2%)
+200 Basis Points (81%) (6%)
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with the timing and
magnitude of the repricing of assets and liabilities. We attempt to control
risks associated with interest rate movements. Methods for evaluating interest
rate risk include an analysis of our interest rate sensitivity "gap", which is
the difference between interest-earning assets and interest-bearing liabilities
maturing or repricing within a given time period. A gap is considered positive
when the amount of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive liabilities. A gap is considered negative when the
amount of interest-rate sensitive liabilities exceeds interest-rate sensitive
assets. During a period of rising interest rates, a negative gap would tend to
adversely affect net interest income, while a positive gap would tend to result
in an increase in net interest income. During a period of falling interest
rates, a negative gap would tend to result in an increase in net interest
income, while a positive gap would tend to affect net
22
interest income adversely. Because different types of assets and liabilities
with the same or similar maturities may react differently to changes in overall
market rates or conditions, changes in interest rates may affect net interest
income positively or negatively even if an institution were perfectly matched in
each maturity category.
The following table sets forth the estimated maturity or repricing of
our interest-earning assets and interest-bearing liabilities at March 31, 2001.
The amounts of assets and liabilities shown within a particular period were
determined in accordance with the contractual terms of the assets and
liabilities, except adjustable-rate loans, and securities are included in the
period in which their interest rates are first scheduled to adjust and not in
the period in which they mature. Mortgage-backed securities reflect estimated
prepayments that were estimated based on analyses of broker estimates, the
results of a prepayment model that we utilized and empirical data. Our
management believes that these assumptions approximate actual experience and
considers them reasonable; however, the interest rate sensitivity of our assets
and liabilities in the table could vary substantially if different assumptions
were used or actual experience differs from the historical experience on which
the assumptions are based.
(IN THOUSANDS)
More than 1 3 Years and
Within 3 Months 4-12 Months Year to 3 Years Over Total
---------------- ----------------- ---------------- ---------------- --------------
(in thousands)
Rate Sensitive Assets:
Mortgage-Backed Securities 647,058 298,173 625,285 1,884,920 3,455,436
Rate Sensitive Liabilities:
Repurchase Agreements 3,027,964 90,336 3,118,300
---------------- ----------------- ---------------- ---------------- --------------
Interest rate sensitivity gap (2,380,906) 207,837 625,285 1,884,920 337,136
================ ================= ================ ================ ==============
Cumulative rate sensitivity gap (2,380,906) (2,173,069) (1,547,784) 337,136
================ ================= ================ ================ ==============
Cumulative interest rate
sensitivity gap as a percentage of
total rate-sensitive assets (69%) (62%) (45%) 10%
Our analysis of risks is based on management's experience, estimates, models and
assumptions. These analyses rely on models which utilize estimates of fair value
and interest rate sensitivity. Actual economic conditions or implementation of
investment decisions by our management may produce results that differ
significantly form the estimates and assumptions used in our models and the
projected results shown in the above tables and in this report. These analyses
contain certain forward-looking statements and are subject to the safe harbor
statement set forth under the heading, "Special Note Regarding Forward-Looking
Statements."
23
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 1 - Financial Data Schedule
(b) Reports
None
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SIGNATURES
Pursuant to the requirements 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.
ANNALY MORTGAGE MANAGEMENT, INC.
Dated: May 11, 2001 By:/s/ Michael A.J. Farrell
-------------------------
Michael A.J. Farrell
Chairman of the Board and Chief Executive Officer
(authorized officer of registrant)
Dated: May 11, 2001 By:/s/ Kathryn F. Fagan
---------------------
Kathryn F. Fagan
Chief Financial Officer and Treasurer
(principal accounting officer)