UNITED STATES SECURITIES AND EXCHANGE COMMISSION
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: SEPTEMBER 30, 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 November 9, 2001
Common Stock, $.01 par value 59,762,511
ANNALY MORTGAGE MANAGEMENT, INC.
FORM 10-Q
INDEX
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Statements of Financial Condition- September 30, 2001 (Unaudited) and December 31, 2000 1
Statements of Operations (Unaudited) for the quarters and nine months ended September 30, 2001 and 2000 2
Statements of Stockholders' Equity (Unaudited) for the nine months ended September 30, 2001 3
Statements of Cash Flows (Unaudited) for the quarters and nine months ended September 30, 2001 and 2000 4
Notes to Financial Statements (Unaudited) 5-11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-23
Item 3. Quantitative and Qualitative Disclosure about Market Risk 24-25
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
ANNALY MORTGAGE MANAGEMENT, INC
STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30,
2001 DECEMBER 31,
(UNAUDITED) 2000
--------------- ---------------
ASSETS
Cash and cash equivalents $ 849,658 $ 113,061
Mortgage-Backed Securities, at fair value 6,428,852,659 1,978,219,376
Receivable for Mortgage-Backed Securities sold 61,977,199 44,933,631
Accrued interest receivable 36,580,296 11,502,482
Other assets 259,330 260,238
--------------- ---------------
Total assets $ 6,528,519,142 $ 2,035,028,788
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Repurchase agreements $ 5,521,302,906 $ 1,628,359,000
Payable for Mortgage-Backed Securities purchased 275,430,810 258,798,138
Accrued interest payable 19,784,272 8,314,414
Dividends payable 26,893,130 3,630,745
Other liabilities 1,570,417 --
Accounts payable 1,493,019 284,105
--------------- ---------------
Total liabilities 5,846,474,554 1,899,386,402
--------------- ---------------
Stockholders' Equity:
Common stock: par value $.01 per share; 100,000,000
authorized, 59,755,018 and 14,522,978 shares issued
and outstanding, respectively 597,550 145,230
Additional paid-in capital 623,277,645 147,844,861
Accumulated other comprehensive gain (loss) 56,676,820 (13,044,259)
Retained earnings 1,492,573 696,554
--------------- ---------------
Total stockholders' equity 682,044,588 135,642,386
--------------- ---------------
Total liabilities and stockholders' equity $ 6,528,519,142 $ 2,035,028,788
=============== ===============
See notes to financial statements
1
ANNALY MORTGAGE MANAGEMENT, INC
STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE FOR THE QUARTER FOR THE NINE FOR THE NINE
QUARTER ENDED ENDED SEPTEMBER MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
---------------- ----------------- ----------------- ------------------
INTEREST INCOME:
Mortgage-Backed Securities
and cash equivalents $ 75,774,532 $ 28,239,125 $ 182,998,604 $ 78,590,427
INTEREST EXPENSE:
Repurchase agreements 48,620,332 24,779,096 127,357,375 65,525,066
---------------- ---------------- ----------------- ------------------
NET INTEREST INCOME 27,154,200 3,460,029 55,641,229 13,065,361
GAIN ON SALE OF
MORTGAGE-BACKED
SECURITIES 1,184,399 872,949 1,935,813 1,044,576
GENERAL AND
ADMINISTRATIVE
EXPENSES 1,993,431 526,881 4,306,758 1,616,522
---------------- ---------------- ----------------- ------------------
NET INCOME 26,345,168 3,806,097 53,270,284 12,493,415
---------------- ---------------- ----------------- ------------------
OTHER COMPREHENSIVE INCOME
Unrealized gain on available-
for-sale securities 53,001,163 8,141,933 71,656,892 10,873,992
Less: reclassification adjustment
for net gains included in net income (1,184,399) (872,949) (1,935,813) (1,044,576)
---------------- ---------------- ----------------- ------------------
Other comprehensive income 51,816,764 7,268,984 69,721,079 9,829,416
---------------- ---------------- ----------------- ------------------
COMPREHENSIVE INCOME $ 78,161,932 $ 11,075,081 $ 122,991,363 $ 22,322,831
================ ================ ================= ==================
NET INCOME PER SHARE:
Basic $ 0.58 $ 0.27 $ 1.51 $ 0.89
================ ================ ================= ==================
Diluted $ 0.57 $ 0.26 $ 1.49 $ 0.87
================ ================ ================= ==================
AVERAGE NUMBER OF
SHARES OUTSTANDING:
Basic 45,503,179 14,238,680 35,260,086 13,980,602
================ ================ ================= ==================
Diluted 45,959,693 14,529,142 35,768,890 14,274,552
================ ================ ================= ==================
See notes to financial statements
2
ANNALY MORTGAGE MANAGEMENT, INC
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTMEBER 30, 2001
(UNAUDITED)
COMMON ADDITIONAL
STOCK PAID-IN COMPREHENSIVE
PAR VALUE CAPITAL INCOME
-------------------- ------------------ --------------------
BALANCE, DECEMBER 31, 2000 $145,230 $147,844,861
Net Income $8,330,273
Other comprehensive income:
Unrealized net gains on securities,
net of reclassification adjustment 16,195,141
--------------------
Comprehensive income $24,525,414
====================
Exercise of stock options 259 113,973
Proceeds from direct purchase 26 27,601
Proceeds from offerings 111,500 99,172,361
Dividends declared for the quarter
ended March 31, 2001,
$0.35 per share
-------------------- ------------------
BALANCE, MARCH 31, 2001 $257,015 $247,158,796
Net Income $18,594,843
Other comprehensive income:
Unrealized net gains on securities,
net of reclassification adjustment 1,709,173
--------------------
Comprehensive income $20,304,016
====================
Exercise of stock options 549 306,532
Proceeds from direct purchase 18 24,285
Proceeds from offering 189,185 195,113,590
Dividends declared for the quarter
ended June 30, 2001,
$0.40 per share
-------------------- ------------------
BALANCE, JUNE 30, 2001 $446,767 $442,603,203
Net Income $26,345,168
Other comprehensive income:
Unrealized net gains on securities,
net of reclassification adjustment 51,816,765
--------------------
Comprehensive income: $78,161,933
====================
Exercise of stock options 867 1,195,336
Proceeds from offering 149,916 179,479,106
Dividends declared for the quarter
ended September 30, 2001
$0.45 per share
-------------------- ------------------
BALANCE, SEPTEMBER 30, 2001 $597,550 $623,277,645
==================== ==================
OTHER
RETAINED COMPREHENSIVE
EARNINGS INCOME TOTAL
--------------------- ----------------------- -------------------
BALANCE, DECEMBER 31, 2000 $696,554 ($13,044,259) $135,642,386
Net Income 8,330,273
Other comprehensive income:
Unrealized net gains on securities,
net of reclassification adjustment 16,195,141
Comprehensive income 24,525,414
Exercise of stock options 114,232
Proceeds from direct purchase 27,627
Proceeds from offerings 99,283,861
Dividends declared for the quarter
ended March 31, 2001,
$0.35 per share (7,710,438) (7,710,438)
--------------------- ----------------------- -------------------
BALANCE, MARCH 31, 2001 $1,316,389 $3,150,882 $251,883,082
Net Income 18,594,843
Other comprehensive income:
Unrealized net gains on securities,
net of reclassification adjustment 1,709,173
Comprehensive income 20,304,016
Exercise of stock options 307,081
Proceeds from direct purchase 24,303
Proceeds from offering 195,302,775
Dividends declared for the quarter
ended June 30, 2001,
$0.40 per share (17,870,697) (17,870,697)
--------------------- ----------------------- -------------------
BALANCE, JUNE 30, 2001 $2,040,535 $4,860,055 $449,950,560
Net Income 26,345,168
Other comprehensive income:
Unrealized net gains on securities,
net of reclassification adjustment 51,816,765
Comprehensive income: 78,161,933
Exercise of stock options 1,196,203
Proceeds from offering 179,629,022
Dividends declared for the quarter
ended September 30, 2001
$0.45 per share (26,893,130) (26,893,130)
--------------------- -------------------
BALANCE, SEPTEMBER 30, 2001 $1,492,573 $56,676,820 $682,044,588
===================== ======================= ===================
3
ANNALY MORTGAGE MANAGEMENT, INC
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE QUARTER FOR THE QUARTER FOR THE NINE FOR THE NINE
ENDED ENDED MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
---------------- ---------------- ---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 26,345,168 $ 3,806,097 $ 53,270,284 $ 12,493,415
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of mortgage premiums
and discounts, net 8,685,442 826,937 17,623,231 1,821,548
Gain on sale of Mortgage-Backed
Securities (1,184,399) (872,949) (1,935,813) (1,044,576)
Market value adjustment on Long-Term
Repurchases agreement 445,323 445,323
Increase in accrued interest receivable (4,390,386) (3,167,957) (25,077,814) (3,208,885)
(Decrease) increase in other assets (41,939) 80,042 908 30,788
Increase in accrued interest
Payable 1,558,240 1,960,976 11,469,858 1,396,250
Increase in other liabilities and
accounts payable 686,695 86,367 1,208,914 193,594
---------------- ---------------- ---------------- ----------------
Net cash provided by operating
Activities 32,104,144 2,719,513 57,004,891 11,682,134
---------------- ---------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Mortgage-Backed Securities (1,924,645,073) (398,401,549) (5,911,153,730) (572,513,360)
Proceeds from sale of Mortgage-Backed
Securities 183,407,976 174,766,165 532,091,070 263,426,063
Principal payments of Mortgage-Backed
Securities 506,300,833 43,138,679 982,052,142 112,862,956
---------------- ---------------- ---------------- ----------------
Net cash used in investing
activities (1,234,936,264) (180,496,705) (4,397,010,518) (196,224,341)
---------------- ---------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements 13,193,781,000 3,505,042,341 31,869,707,527 10,021,252,841
Principal payments on repurchase
Agreements (12,153,169,000) (3,323,778,841) (27,975,638,527) (9,828,603,091)
Proceeds from exercise of stock options 1,196,203 1,617,516 146,621
Proceeds from dividend reinvestment and
share purchase -- 767,479 51,930 5,667,569
Net Proceeds from offerings 179,629,022 -- 474,215,658 --
Dividends paid (17,870,698) (4,262,403) (29,211,880) (13,880,755)
---------------- ---------------- ---------------- ----------------
Net cash provided by financing
activities 1,203,566,527 177,768,576 4,340,742,224 184,583,185
---------------- ---------------- ---------------- ----------------
Net increase (decrease) in cash and cash
equivalents 734,407 (8,616) 736,597 40,978
Cash and cash equivalents, beginning of
period 115,251 121,512 113,061 71,918
---------------- ---------------- ---------------- ----------------
Cash and cash equivalents, end of period $ 849,658 $ 112,896 $ 849,658 $ 112,896
================ ================ ================ ================
Supplemental disclosure of cash flow Information:
Interest paid $ 47,062,092 $ 22,818,120 $ 115,887,517 $ 64,128,816
================ ================ ================ ================
Noncash financing activities:
Net change in unrealized gains on
available-for-sale securities $ 51,816,764 $ 7,268,984 $ 69,721,079 $ 9,829,416
================ ================ ================ ================
Dividends declared, not yet paid $ 26,893,130 $ 3,574,858 $ 26,893,130 $ 3,574,858
================ ================ ================ ================
See notes to financial statements
4
ANNALY MORTGAGE MANAGEMENT, INC
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001
(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 nine 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 nine months ended September 30, 2001 and the year ended December 31, 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.
5
CREDIT RISK - At September 30, 2001 and December 31, 2000, the Company had
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 September 30, 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 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.
2. MORTGAGE-BACKED SECURITIES
The following table pertains to the Company's Mortgage-Backed Securities
classified as available-for-sale as of September 30, 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 $3,277,663,017 $2,911,635,970 $86,202,420 $6,275,501,407
Unamortized discount (1,779,766) (736,201) - (2,515,967)
Unamortized premium 46,286,763 51,323,500 1,580,136 99,190,399
---------------------- ------------------------ ----------------------- ----------------------
Amortized cost 3,322,170,014 2,962,223,269 87,782,556 6,372,175,839
Gross unrealized gains 43,692,732 23,626,395 139,934 67,459,061
Gross unrealized losses (5,340,923) (5,229,927) (211,391) (10,782,241)
---------------------- ------------------------ ----------------------- ----------------------
Estimated fair value $3,360,521,823 $2,980,619,737 $87,711,099 $6,428,852,659
====================== ======================== ======================= ======================
AMORTIZED COST GROSS UNREALIZED GAIN GROSS UNREALIZED LOSS ESTIMATED FAIR VALUE
---------------------- ------------------------ ----------------------- ----------------------
Adjustable rate $4,874,854,432 $32,870,251 ($10,782,241) $4,896,942,442
Fixed rate 1,497,321,407 34,588,810 -0- 1,531,910,217
---------------------- ------------------------ ----------------------- ----------------------
Total $6,372,175,839 $67,459,061 ($10,782,241) $6,428,852,659
====================== ======================== ======================= ======================
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:
TOTAL
FEDERAL HOME LOAN FEDERAL NATIONAL GOVERNMENT NATIONAL 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 11.5% at
September 30, 2001 and 11.5% at December 31, 2000.
During the nine months ended September 30, 2001, the Company realized
$1,935,813 in gains from sales of Mortgage-Backed Securities. During the nine
months ended September 30, 2000, the Company realized $1,044,576 in gains from
sales of Mortgage-Backed Securities.
3. REPURCHASE AGREEMENTS
The Company had outstanding $5,521,302,906 and $1,682,359,000 of repurchase
agreements with a weighted average borrowing rate of 3.44% and 6.55% and a
weighted average remaining maturity of 74 days and 29 days as of September 30,
2001 and December 31, 2000, respectively.
At September 30, 2001 and December 31, 2000, the repurchase agreements had
the following remaining maturities:
SEPTEMBER 30, 2001 DECEMBER 31, 2000
--------------------------- ---------------------------
Within 30 days $4,402,672,000 $1,135,886,000
30 to 59 days 629,348,000 363,810,000
60 to 89 days - 48,845,000
90 to 119 days 18,202,000 -
Over 120 days 471,080,906 79,818,000
--------------------------- ---------------------------
Total $5,521,302,906 $1,628,359,000
=========================== ===========================
7
4. OTHER LIABILITIES
As of September 30, 2001, the Company had a repurchase agreement with a
buyer's right to extend. The buyer may extend this transaction, in whole or in
part, on the repurchase date for an additional period of three months. The Buyer
will additionally have the right to successively extend this transaction for
additional periods of three months, but the final repurchase date will in any
case be no later than July 19, 2006. The aggregate fair value was a $1,570,417
liability included in other liabilities on the Statement of Financial Condition.
During the quarter, the net change in the fair value was $445,323, which was
included in interest expense.
5. COMMON STOCK
During the nine months ended September 30, 2001, 167,502 options were
exercised or shares granted under the long-term compensation plan totaled
$1,196,203. Also, 4,438 shares were purchased in the dividend reinvestment and
direct purchase program an aggregate purchase price of $51,931. The Company
completed an offering of common stock on September 26, 2001 issuing 14,991,600
shares, with aggregate net proceeds of $179.6 million. An offering of common
stock during the second quarter of 2001 was completed issuing 18,918,500 shares,
with aggregate net proceeds of $195.3 million. Additional offerings for
11,150,000 shares were completed during the first quarter for aggregate net
proceeds of $99.3 million. During the year ended December 31, 2000, the number
of stock options exercised was 47,499, with an aggregate purchase price of
$198,762. The number of shares issued in the dividend reinvestment and direct
purchase plan was 894,163 with an aggregate purchase price of $7,392,859 during
the year ended December 31, 2000.
During the Company's quarter ending September 30, 2001, the Company
declared dividends to shareholders totaling $26,893,130 or $0.45 per share,
which was paid on October 30, 2001. During the year ended December 31, 2000, the
Company declared dividends to shareholders totaling $16,333,252, or $1.15 per
share, of which $12,702,507 was paid during the year and $3,630,745 was paid on
January 30, 2001.
6. 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 September 30, 2001, the reconciliation is as follows:
For the Quarter Ended September 30, 2001
------------------------------------------------------------------------
Income Shares (Denominator) Per-Share
(Numerator) Amount
Net income $26,345,168
-----------------------
Basic earnings per share $26,345,168 45,503,179 $0.58
========================
Effect of dilutive securities:
Dilutive stock options 456,514
----------------------- -----------------------
Diluted earnings per share $26,345,168 45,959,693 $0.57
======================= ======================= ========================
8
For the nine months ended September 30, 2001, the reconciliation is as
follows:
For the Nine Months Ended September 30, 2001
------------------------------------------------------------------------
Income Shares (Denominator) Per-Share
(Numerator) Amount
Net income $53,270,284
-----------------------
Basic earnings per share $53,270,284 35,260,086 $1.51
========================
Effect of dilutive securities:
Dilutive stock options 508,804
----------------------- -----------------------
Diluted earnings per share $53,270,284 35,768,890 $1.49
======================= ======================= ========================
Options to purchase 735,485 shares were outstanding during the quarter
ended September 30, 2001 and were dilutive as the exercise price of between
$4.00 and $13.69 was less than the average stock price for the quarter of
$13.75. Options to purchase 729,235 shares were outstanding during the nine
months ended September 30, 2001 and were dilutive as the exercise price of
between $4.00 and $11.25 was less than the average stock price for the nine
months of $12.18. Options to purchase 6,250 shares of stock were outstanding and
not considered dilutive. The exercise price of $13.69 was greater than the
average stock price for the nine months of $12.18
For the quarter ended September 30, 2000, the reconciliation is as follows:
For the Quarter Ended September 30, 2000
-----------------------------------------------------------------------------
Income Shares (Denominator) Per-Share
(Numerator) Amount
Net income $3,806,097
---------------------------
Basic earnings per share $3,806,097 14,238,680 $0.27
=========================
Effect of dilutive securities:
Dilutive stock options 290,462
--------------------------- -----------------------
Diluted earnings per share $3,806,097 14,529,142 $0.26
=========================== ======================= =========================
For the nine months ended September 30, 2000, the reconciliation is as
follows:
For the Nine Months Ended September 30, 2000
------------------------------------------------------------------------
Income Shares (Denominator) Per-Share
(Numerator) Amount
Net income $12,493,415
-----------------------
Basic earnings per share $12,493,415 13,980,602 $0.89
========================
Effect of dilutive securities:
Dilutive stock options 293,950
----------------------- -----------------------
Diluted earnings per share $12,493,415 14,274,552 $0.87
======================= ======================= ========================
9
Options to purchase 346,756 shares were outstanding during the quarter
ended September 30, 2000 and dilutive, as the exercise price (between $4.00 and
$8.125) was less than the average stock price for the three month period for the
Company of $8.62. Options to purchase 452,676 shares of stock were outstanding
during the period and are not considered dilutive. The exercise price (between
$8.94 and $11.25) was greater than the average stock price for the three month
period of $8.62. Options to purchase 346,756 shares were outstanding during the
nine months ended September 30, 2000 and dilutive, as the exercise price
(between $4.00 and $8.125) was less than the average stock price for the nine
month period for the Company of $8.51. Options to purchase 452,676 shares of
stock were outstanding during the period and are not considered dilutive. The
exercise price (between $8.63 and $11.25) was greater than the average stock
price for the three month period of $8.51.
7. 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 September 30, 2001
and December 31, 2000 held securities classified as available-for-sale. At
September 30, 2001, the net unrealized gain totaled $56,676,820 and at December
31, 2000, the net unrealized loss totaled $13,044,259.
8. 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
============
10. 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.
11. 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.
10
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.
11
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 QUARTERS ENDED SEPTEMBER 30, 2001 AND 2000
NET INCOME SUMMARY
For the quarter ended September 30, 2001, our GAAP net income was $26.3
million, or $0.58 basic earnings per average share, as compared to $3.8 million,
or $0.27 basic earnings per average share, for the quarter ended September 30,
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 45,503,179 for the quarter ended September 30, 2001 and 14,238,680 for
the quarter ended September 30, 2000. Dividends per shares outstanding for the
quarter ended September 30, 2001 was $0.45 per share, or $26.9 million in total.
Dividends per shares outstanding for the quarter ended September 30, 2000 was
$0.25 per share, or $3.6 million in total. Our annualized return on average
equity was 23.26% for the quarter ended September 30, 2001 and 13.29% for the
quarter ended September 30, 2000.
For the nine months ended September 30, 2001, our GAAP net income was $53.3
million, or $1.51 basic earnings per average share, as compared to $12.5
million, or $0.89 basic earnings per average share, for the nine months ended
September 30, 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 35,260,086 for the nine months ended September 30,
2001 and 13,980,602 for the nine months ended September 30, 2000. Dividends per
actual shares outstanding for the nine months ended September 30, 2001 was $1.15
per share, or $52.5 million in total. Our annualized return on average equity
was 18.78% for the nine months ended September 30, 2001 and 14.91% for the nine
months ended September 30, 2000.
NET INCOME SUMMARY
(dollars in the thousands, except for per share data)
NINE MONTHS NINE MONTHS
QUARTER ENDED QUARTER ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
---------------- ----------------- ---------------- -----------------
Interest Income $75,774 $28,239 $182,998 $78,590
Interest Expense 48,620 24,779 127,357 65,525
---------------- ----------------- ---------------- -----------------
Net Interest Income 27,154 3,460 55,641 13,065
Gain on Sale of Mortgage-Backed Securities 1,184 873 1,936 1,045
General and Administrative Expenses 1,993 527 4,307 1,617
---------------- ----------------- ---------------- -----------------
Net Income $26,345 $ 3,806 $53,270 $12,493
================ ================= ================ =================
Average Number of Basic Shares Outstanding 45,503,179 14,238,680 35,260,086 13,980,602
Average Number of Diluted Shares Outstanding 45,959,693 14,529,142 35,768,890 14,274,552
Basic Net Income Per Share $0.58 $0.27 $1.51 $0.89
Diluted Net Income Per Share $0.57 $0.26 $1.49 $0.87
Average Total Assets $6,069,419 $1,620,094 $4,424,237 $1,569,205
Average Equity $453,104 $114,573 $378,179 $111,755
12
Annualized Return on Average Assets 1.74% 0.94% 1.61% 1.06%
Annualized Return on Average Equity 23.26% 13.29% 18.78% 14.91%
INTEREST INCOME AND AVERAGE EARNING ASSET YIELD
We had average earning assets of $5.3 billion and $1.6 billion for the
quarters ended September 30, 2001 and 2000, respectively. Our primary source of
income for the quarters ended September 30, 2001 and 2000 was interest income. A
portion of our income was generated by gains on the sales of our mortgage-backed
securities. Our interest income was $75.8 million for the quarter ended
September 30, 2001 and $28.2 million for the quarter ended September 30, 2000.
Our yield on average earning assets was 5.76% and 7.10% for the same respective
periods. Our average earning asset balance increased by $3.7 billion and
interest income increased by $47.6 million for the quarter ended September 30,
2001 as compared to the quarter ended September 30, 2000, due to the substantial
increase in the asset base resulting from the inflow of capital during the nine
months.
We had average earning assets of $4.0 billion and $1.5 billion for the nine
months ended September 30, 2001 and 2000, respectively. Our interest income was
$183.0 million for the nine months ended September 30, 2001 and $78.6 million
for the nine months ended September 30, 2000. Our yield on average earning
assets was 6.09% and 6.96% for the same respective periods. Our average earning
asset balance increased by $2.5 billion and interest income increased by $104.4
million for the nine months ended September 30, 2001 as compared to the nine
months ended September 30, 2000, due to equity offerings in the first, second
and third quarters.
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 quarters
ended September 30, 2001, June 30, 2001, and 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 September 30, 2001 $2 $5,263,231 $5,263,233 2.77% 5.76% 5.76% $75,774
For the Quarter Ended June 30, 2001 $2 $4,256,864 $4,256,866 3.72% 6.09% 6.09% $64,790
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 September 30, 2001 was 25% and for the quarter ended September
30, 2000 was 12%. 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 and nine months ended September 30, 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.
13
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 $5.0 billion and total interest expense of
$48.6 million for the quarter ended September 30, 2001. We had average borrowed
funds of $1.5 billion and total interest expense of $24.8 million for the
quarter ended September 30, 2000. Our average cost of funds was 3.89% for the
quarter ended September 30, 2001 and 6.71% for the quarter ended September 30,
2000. The cost of funds rate decreased 282 basis points and the average borrowed
funds increased by $3.5 billion for the quarter ended September 30, 2001 when
compared to the quarter ended September 30, 2000. Due to the increase of $3.5
billion in the average repurchase balance, interest expense increased by 96%,
even though the cost of funds rate declined by 282 basis points.
We had average borrowed funds of $3.8 billion and total interest expense of
$127.4 million for the nine months ended September 30, 2001. We had average
borrowed funds of $1.4 billion and total interest expense of $65.5 million for
the nine months ended September 30, 2000. Our average cost of funds was 4.47%
for the nine months ended September 30, 2001 and 6.29% for the nine months ended
September 30, 2000. The cost of funds rate decreased 182 basis points and the
average borrowed funds increased by $2.4 billion for the nine months ended
September 30, 2001 when compared to the nine months ended September 30, 2000.
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 0.34% above average one-month LIBOR for the
quarter ended September 30, 2001 and 0.09% greater than average one-month LIBOR
for the quarter ended September 30, 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 nine-month LIBOR in the present interest
rate environment. During the quarter ended September 30, 2001, average one-month
LIBOR, was 3.55%, which was 0.08% higher than average six-month LIBOR, which was
3.47%. During the quarter ended September 30, 2000, average one-month LIBOR, was
6.62%, 0.220% lower than average nine-month LIBOR, which was 6.84%.
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 quarters
ended September 30, 2001, June 30, 2001, and 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
September 30, 2001 $4,997,922 $48,620 3.89% 3.55% 3.47% 0.08% 0.34% 0.42%
For the Quarter Ended
June 30, 2001 $4,035,022 $45,284 4.49% 4.27% 4.12% 0.15% 0.22% 0.37%
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%)
14
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 $27.2 million for the quarter ended September 30, 2001 and $3.5
million for the quarter ended September 30, 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 1.87% for the quarter ended September
30, 2001 as compared to 0.39% for the quarter ended September 30, 2000. This
1.48% 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 1.79% on an annualized basis for the quarter ended September
30, 2001 and 0.85% for the quarter ended June 30, 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.
Our net interest income, which equals interest income less interest
expense, totaled $55.6 million for the nine months ended September 30, 2001 and
$13.1 million for the nine months ended September 30, 2000. Our net interest
income increased as a direct result of the equity offerings during the nine
month ended September 30, 2001. 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 1.62% for the nine months ended September 30, 2001 as compared to
0.65% for the nine months ended September 30, 2000. This 0.77% increase in
interest rate spread is reflected in the increase in net interest income.
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
quarters ended September 30, 2001, June 30, 2001, and March 31, 2001, the year
ended December 31, 2000, and the four quarters in 2000.
15
GAAP NET INTEREST INCOME
Average
Mortgage-Backed Interest Income on Yield on Average
Securities Mortgage-Backed Average Cash Total Interest Interest Earning
Held Securities Equivalents Income Assets
---- ---------- ----------- ------ ------
(dollars in the thousands)
For the Quarter Ended
September 30, 2001 $5,263,231 $75,774 $2 $75,774 5.76%
For the Quarter Ended
June 30, 2001 $4,256,864 $64,790 $2 $64,790 6.09%
For the Quarter Ended
March 31, 2001 $2,502,088 $42,434 $2 $42,434 6.78%
- ---------------------------------------------------------------------------------------------------------------------------
For the Year Ended
December 31, 2000 $1,564,228 $109,739 $263 $109,750 7.02%
For the Quarter Ended
December 31, 2000 $1,741,985 $31,154 $394 $31,160 7.16%
For the Quarter Ended
September 30, 2000 $1,590,497 $28,237 $188 $28,239 7.10%
For the Quarter Ended
June 30, 2000 $1,476,283 $25,732 $243 $25,734 6.97%
For the Quarter Ended
March 31, 2000 $1,448,148 $24,616 $226 $24,617 6.80%
Average Net
Average Balance of Interest Cost of Interest
Repurchase Agreements Expense Funds Income
--------------------- ------- ----- ------
For the Quarter Ended
September 30, 2001 $4,997,922 $48,620 3.89% $27,154
For the Quarter Ended
June 30, 2001 $4,035,022 $45,284 4.49% $19,506
For the Quarter Ended
March 31, 2001 $2,355,658 $33,453 5.68% $8,981
- ---------------------------------------------------------------------------------------------
For the Year Ended
December 31, 2000 $1,449,999 $92,902 6.41% $16,848
For the Quarter Ended
December 31, 2000 $1,632,564 $27,377 6.71% $3,783
For the Quarter Ended
September 30, 2000 $1,447,112 $24,779 6.71% $3,460
For the Quarter Ended
June 30, 2000 $1,360,419 $21,453 6.30% $4,282
For the Quarter Ended
March 31, 2000 $1,329,900 $19,293 5.80% $5,323
GAINS AND LOSSES ON SALES OF MORTGAGE-BACKED SECURITIES
For the quarter ended September 30, 2001, we sold mortgage-backed
securities with an aggregate historical amortized cost of $182.2 million for an
aggregate gain of $1.2 million. For the quarter ended September 30, 2000, we
sold mortgage-backed securities with an aggregate historical amortized cost of
$174.0 million for an aggregate gain of $872,949. For the nine months ended
September 30, 2001, we sold mortgage-backed securities with an aggregate
historical amortized cost of $530.1 million for an aggregate gain of $1.9
million. For the nine months ended September 30, 2000, we sold mortgage-backed
securities with an aggregate historical amortized cost of $262.4 million for an
aggregate gain of $1.0 million. 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 $2.0 million for the quarter ended September 30, 2001 and
$526,881 for the quarter ended September 30, 2000. G&A expenses as a percentage
of average assets was 0.13% on an annualized basis for the both quarters ended
September 30, 2001 and 2000, respectively. The Company is internally managed and
continues to be a low cost provider. G&A expenses were $4.3 million for the nine
months ended September 30, 2001 and $1.6 million for the nine months ended
September 30, 2000. Due to the increase in average assets, Annaly is able to
take advantage of economies of scale. Even though G&A expenses increased for the
quarter and the nine months ended September 30, 2001, when compared to the
quarter and nine months ended September 30, 2000, G&A as a percentage of average
assets remained unchanged.
16
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
September 30, 2001 $1,993 0.13% 1.76%
For the Quarter Ended
June 30, 2001 $1,393 0.12% 1.44%
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 $26.3 million for the quarter ended September 30, 2001
and $3.8 million for the quarter ended September 30, 2000. Our return on average
equity was 23.3% for the quarter ended September 30, 2001 and 13.3% for the
quarter ended September 30, 2000.
Our net income was $53.3 million for the nine months ended September 30,
2001 and $12.5 million for the nine months ended September 30, 2000. Our return
on average equity was 18.8% for the nine months ended September 30, 2001 and
14.9% for the nine months ended September 30, 2000. The increase in net income
is a direct result of the increase in capital from the offerings completed in
the first , second and third quarters 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 September 30,
2001, June 30, 2001, and 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 September 30, 2001 23.97% 1.05% 1.76% 23.26%
For the Quarter Ended June 30, 2001 20.37% 0.50% 1.45% 19.42%
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 31, 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%
17
FINANCIAL CONDITION
MORTGAGE-BACKED SECURITIES
All of our mortgage-backed securities at September 30, 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 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 September 30, 2001 and December 31, 2000, we had on our balance
sheet a total of $2.5 million and $1.0 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 $99.2 million and $24.3 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 $506.3 million for the quarter
ended September 30, 2001 and $43.1 million for the quarter ended September 30,
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 September 30,
2001, June 30, 2001 and 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 September 30, 2001 $6,275,501 $96,674 $6,372,175 101.54% $6,428,853 102.44% 5.17%
At June 30, 2001 $5,498,235 $69,193 $5,567,428 101.26% $5,572,288 101.34% 5.75%
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.
18
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 September 30, 2001 $4,789,570 6.24% 4.31% 1.93% 27 months 11.46% 4.76% 76.32%
At June 30, 2001 $3,997,580 6.47% 4.60% 1.87% 26 months 11.37% 5.38% 72.71%
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%
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 September 30, 2001 $1,485,931 6.88% 6.48% 23.68%
At June 30, 2001 $1,500,655 6.83% 6.71% 27.29%
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 September 30, 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 average one-year
treasury, and the six-month CD rate.
ADJUSTABLE-RATE MORTGAGE-BACKED SECURITIES BY INDEX
---------------------------------------------------
SEPTEMBER 30, 2001
------------------
12 Month
Cumulative 1-Year 3-Year 5-Year
One-Month Six-Month Ave. 1-Year Treasury Treasury Treasury
LIBOR CD Rate Treasury Index Index 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. 37 mo. 14 mo. 33 mo.
Weighted Average Annual Period Cap None 1.00% None 1.98% 2.00% 1.79%
Weighted Average Lifetime Cap at
September 30, 2001 9.07% 11.38% 10.63% 12.26% 12.93% 12.44%
Mortgage Principal Value as Percentage of
Mortgage-Backed Securities at September 30, 2001 18.68% 0.29% 1.33% 54.11% 1.65% 0.25%
19
ADJUSTABLE-RATE MORTGAGE-BACKED SECURITIES BY INDEX
---------------------------------------------------
DECEMBER 31, 2000
-----------------
1-Year 3-Year 5-Year
One-Month Six-Month Treasury Treasury Treasury
LIBOR CD Rate Index Index 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%
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 September 30, 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 quarter ended September 30, 2001 the term to maturity of our
borrowings ranged from one day to three years, with a weighted average original
term to maturity of 112 days. At September 30, 2001, the weighted average cost
of funds for all of our borrowings was 3.44% and the weighted average term to
next rate adjustment was 74 days. At September 30, 2000, the term to maturity
ranged from one day to 3 months, with a weighted average original term of 46
days. The weighted average cost of funds for all of our borrowings 6.57% and
weighted average term to the next adjustment was 18 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 September 30, 2001 was $682.0 million, or $11.41 per share. If we
had used historical amortized cost accounting, our equity base at September 30,
2001 would have been $625.4 million, or $10.47 per share. Our equity base at
September 30, 2000 was $118.7 million, or $8.30 per share. If we had used
historical
20
amortized cost accounting, our equity base at September 30, 2000 would have been
$146.4 million, or $10.24 per share. During the quarter ended September 30,
2001, the Company raised $179.6 in a secondary offering. For the nine months
ended September 30, 2001, the Company raised a total of $474.2 million in
capital.
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.
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 September At At At
30, June 30, March 31, December 31,
2001 2001 2001 2000
---------------- -------------- ------------------ ---------------
Unrealized Gain $67,459 $19,322 $12,606 $ 3,020
Unrealized Loss (10,782) (14,462) (9,455) (16,064)
---------------- -------------- ------------------ ---------------
Net Unrealized Gain (Loss) $56,677 $4,860 $3,151 ($13,044)
================ ============== ================== ===============
Net Unrealized Gain (Loss) as % of Mortgage-
Backed Securities Principal Value 0.90% 0.08% 0.09% (0.66%)
Net Unrealized Gain (Loss) as % of Mortgage-
Backed Securities Amortized Cost 0.90% 0.08% 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 $56.7 million, or 0.90% of the amortized cost of our mortgage-backed
securities at September 30, 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 September 30, 2001, June 30, 2001, 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.
21
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 September 30, 2001 $625,368 $56,677 $682,045 $10.47 $11.41
At June 30, 2001 $445,091 $4,860 $449,951 $9.96 $10.07
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
LEVERAGE
Our debt-to-GAAP reported equity ratio at September 30, 2001 and, 2000 was
8.1:1 and 12.9:1, 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.
22
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% of our total assets at September 30, 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 100% of our revenue
qualifies for the 75% source of income test and for the 95% source of income
test, under the REIT rules for the years ended September 30, 2001 and 2000. We
also met all REIT requirements regarding the ownership of our common stock and
the distribution of our net income. Therefore, as of September 30, 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 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 September
30, 2001 and 2000 we were in compliance with this requirement.
23
ITEM. 3 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 September
30, 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 16% 2%
- -100 Basis Points 8% 1%
- -50 Basis Points 4% 1%
Base Interest Rate
+50 Basis Points (7%) (1%)
+100 Basis Points (15%) (2%)
+200 Basis Points (32%) (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 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
24
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 September 30, 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 $1,280,975 $345,081 $1,098,769 $3,550,677 $6,275,502
Rate Sensitive Liabilities:
Repurchase Agreements 5,032,020 18,202 471,081 5,521,303
---------------- ----------------- ---------------- ---------------- --------------
Interest rate sensitivity gap ($3,751,045) $326,879 $627,688 $3,550,677 $754,199
================ ================= ================ ================ ==============
Cumulative rate sensitivity gap ($3,751,045) ($3,424,166) ($2,796,478) $754,199
================ ================= ================ ================ ==============
Cumulative interest rate
sensitivity gap as a percentage of
total rate-sensitive assets (60%) (55%) (45%) 12%
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."
25
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The Company filed a Form 8-K on August 29, 2001 with respect
to Deloitte and Touche LLC consent to use their name and incorporate by
reference the 2000 Form 10K in the prospectus supplement.
The Company filed a Form 8-K on September 21, 2001 with
respect to press release announcing the dividend resolution.
The following current report on Form 8-K was filed by the
Company subsequent to the third quarter 2001:
The Company filed a Form 8-K on October 2, 2001 with respect
to the Company's entering into an underwriting agreement with UBS
Warburg LLC.
26
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: November 13, 2001 By: /s/ Michael A.J. Farrell
------------------------
Michael A.J. Farrell
Chairman of the Board and Chief Executive Officer
(authorized officer of registrant)
Dated: November 13, 2001 By: /s/ Kathryn F. Fagan
---------------------
Kathryn F. Fagan
Chief Financial Officer and Treasurer
(principal accounting officer)
27