Market Overview

Annaly Capital Management, Inc. Reports Results for the 3rd Quarter 2012

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NEW YORK--(BUSINESS WIRE)--

Annaly Capital Management, Inc. (NYSE: NLY) today reported GAAP net income for the quarter ended September 30, 2012 of $224.8 million or $0.22 per average common share as compared to GAAP net loss of $921.8 million or $0.98 per average common share for the quarter ended September 30, 2011, and GAAP net loss of $91.2 million or $0.10 per average common share for the quarter ended June 30, 2012.

Without the effect of the unrealized gains or losses on interest rate swaps and Agency interest-only mortgage-backed securities and net loss on extinguishment of 4% Convertible Senior Notes Due 2015 (the “4% Convertible Notes”), net income for the quarter ended September 30, 2012, was $449.8 million or $0.45 per average common share as compared to $622.8 million or $0.65 per average common share for the quarter ended September 30, 2011, and $546.2 million or $0.55 per average common share for the quarter ended June 30, 2012.

During the quarter ended September 30, 2012, the Company disposed of $7.3 billion of investments, resulting in a realized gain of $142.2 million. During the quarter ended September 30, 2011, the Company disposed of $3.9 billion of investments, resulting in a realized gain of $91.7 million. During the quarter ended June 30, 2012, the Company disposed of $6.4 billion of investments, resulting in a realized gain of $94.8 million.

Common dividends declared for the quarters ended September 30, 2012, September 30, 2011, and June 30, 2012 were $0.50, $0.60, and $0.55 per common share, respectively. The Company distributes dividends based on its current estimate of taxable earnings per common share, not GAAP earnings. Taxable and GAAP earnings will typically differ due to items such as non-taxable unrealized and realized gains and losses, differences in premium amortization and discount accretion, and non-deductible general and administrative expenses.

The annualized dividend yield on the Company's common stock for the quarter ended September 30, 2012, based on the September 30, 2012, closing price of $16.84, was 11.88%, as compared to 14.43% for the quarter ended September 30, 2011, and 13.11% for the quarter ended June 30, 2012.

During the quarter ended September 30, 2012, the Company issued 18.4 million shares of 7.50% Series D Cumulative Redeemable Preferred Stock for net proceeds of $445.5 million.

During the quarter ended September 30, 2012, the Company repurchased approximately $280.7 million of the outstanding $600.0 million of its 4.00% Convertible Senior Notes for $357.2 million. The 4% Convertible Senior Notes are convertible into shares of common stock at a conversion rate that increases as the Company pays dividends. As a result, this repurchase will reduce future dilution to common shareholders.

On a GAAP basis, the Company produced an annualized return on average equity for the quarter ended September 30, 2012 of 5.39% and an annualized loss on average equity for the quarters ended September 30, 2011 and June 30, 2012 of 24.65% and 2.26%, respectively. Without the effect of the unrealized gains or losses on interest rate swaps and Agency interest-only mortgage-backed securities and net loss on extinguishment of 4% Convertible Senior Notes, the Company provided an annualized return on average equity for the quarters ended September 30, 2012, September 30, 2011, and June 30, 2012, of 10.78%, 16.66% and 13.56%, respectively.

Wellington Denahan-Norris, Chief Executive Officer of Annaly, commented on the Company's results. “The active involvement of policymakers in the mortgage market, particularly the Federal Reserve's latest, open-ended, large scale asset purchase program, has introduced unique challenges for all investors. These policy decisions will have consequences in a wide range of markets, not just Agency mortgage-backed securities. We continue to pursue a conservative stance in these conditions, as we assess relative value opportunities across asset classes, on both sides of our balance sheet and throughout our business.”

For the quarter ended September 30, 2012, the annualized yield on average interest-earning assets was 2.54% and the annualized cost of funds on average interest-bearing liabilities, including the net interest payments on interest rate swaps, was 1.52%, which resulted in an average interest rate spread of 1.02%. This was a 106 basis point decrease from the 2.08% annualized interest rate spread for the quarter ended September 30, 2011, and a 52 basis point decrease from the 1.54% average interest rate spread for the quarter ended June 30, 2012. At September 30, 2012, the weighted average yield on investment securities was 2.79% and the weighted average cost of funds on borrowings, including the net interest payments on interest rate swaps, was 1.55%, which resulted in an interest rate spread of 1.24%. Leverage at September 30, 2012, September 30, 2011, and June 30, 2012 was 6.0:1, 5.5:1 and 6.0:1, respectively.

Fixed-rate Agency mortgage-backed securities and debentures comprised 93% of the Company's portfolio at September 30, 2012. Adjustable-rate Agency mortgage-backed securities and debentures comprised 7% of the Company's portfolio. At September 30, 2012, the Company had entered into interest rate swaps with a notional amount of $46.7 billion, or 38% of the Company's Agency mortgage-backed securities and debentures. Changes in the unrealized gains or losses on the interest rate swaps are reflected in the Company's consolidated statements of comprehensive income. The purpose of the interest rate swaps is to mitigate the risk of rising interest rates that affect the Company's cost of funds. Since the Company receives a floating rate on the notional amount of the swaps, the intended effect of the swaps is to lock in a spread relative to the cost of financing. As of September 30, 2012, the swap portfolio had a weighted average pay rate of 2.23%, a weighted average receive rate of 0.27% and weighted average years to maturity of 4.93 years. As of September 30, 2012, substantially all of the Company's Investment Securities were Fannie Mae, Freddie Mac and Ginnie Mae mortgage-backed securities and debentures.

The following table summarizes portfolio information for the Company:

     

September 30,
2012

   

September 30,
2011

    June 30, 2012  
Leverage at period-end   6.0:1     5.5:1     6.0:1

Fixed-rate Agency mortgage-backed securities and

  debentures as a percentage of portfolio

93%

90%

92%

Adjustable-rate Agency mortgage-backed securities and

  debentures as a percentage of portfolio

7%

9%

7%

Floating-rate Agency mortgage-backed securities and

  debentures as a percentage of portfolio

-

1%

1%

Notional amount of interest rate swaps as a percentage of

  Investment Securities

38%

40%

41%

Annualized yield on average interest-earning assets during

  the quarter

2.54%

3.71%

3.04%

Annualized cost of funds on average interest-bearing

  liabilities during the quarter

1.52%

1.63%

1.50%
Annualized interest rate spread during the quarter 1.02% 2.08% 1.54%

Weighted average yield on investment securities at

  period-end

2.79% 3.58% 3.17%

Weighted average cost of funds on interest-bearing liabilities at

  period-end

1.55%

1.62%

1.58%

Interest rate spread at period-end 1.24% 1.96% 1.59%

Weighted average days to maturity on interest-bearing liabilities at

  period-end

220 130 216

Weighted average receive rate on interest rate swaps at period-end

0.27% 0.25% 0.30%
Weighted average pay rate on interest rate swaps at period-end 2.23% 2.57% 2.29%
 

The following table summarizes certain characteristics of the Company's interest rate swaps as of September 30, 2012:

Maturity         Current Notional    

Weighted Average

Pay Rate

   

Weighted

Average

Receive Rate

   

Weighted Average Years

to Maturity

          (dollars in thousands)  
0 - 3 years $17,758,800 2.26% 0.28% 1.97
3 - 6 years 20,273,660 1.85% 0.26% 3.95
6 - 10 years 4,650,000 2.80% 0.29% 7.71
Greater than 10 years   4,064,250     3.37%     0.26%     19.59  
Total / Weighted Average   $46,746,710     2.23%     0.27%     4.93  
 

The following table presents the maturities of repurchase agreements at September 30, 2012:

Maturity        

Principal
Balance

     

Weighted
Average Rate

   
(dollars in thousands)    
Within 30 days $30,820,191 0.43%
30 to 59 days 18,726,669 0.43%
60 to 89 days 4,795,439 0.41%
90 to 119 days 11,309,846 0.49%
Over 120 days(1)   35,381,001       0.93%    
Total   $101,033,146       0.61%    
       

(1)

   

Of the total repurchase agreements, approximately 11% have a remaining maturity over 1 year.

 

The Constant Prepayment Rate for the quarters ended September 30, 2012, September 30, 2011, and June 30, 2012 was 20%, 18% and 19%, respectively. The weighted average purchase price of the Company's Agency mortgage-backed securities and debentures at September 30, 2012, September 30, 2011 and June 30, 2012 was 103.7%, 102.3% and 103.2%, respectively. The net amortization of premiums and accretion of discounts on Agency mortgage-backed securities and debentures for the quarters ended September 30, 2012, September 30, 2011, and June 30, 2012 was $455.8 million, $201.0 million, and $302.8 million, respectively. The total net premium and discount balance at September 30, 2012, September 30, 2011, and June 30, 2012, was $5.4 billion, $3.4 billion, and $4.5 billion, respectively.

General and administrative expenses as a percentage of average assets was 0.19%, 0.24% and 0.21% for the quarters ended September 30, 2012, September 30, 2011, and June 30, 2012, respectively. At September 30, 2012, September 30, 2011, and June 30, 2012, the Company had a common stock book value per share of $16.60, $16.22 and $16.23, respectively.

At September 30, 2012, September 30, 2011, and June 30, 2012, the Company's wholly-owned registered investment advisors had under management approximately $12.8 billion, $12.2 billion and $12.4 billion in net assets, respectively, and $20.0 billion, $21.8 billion and $20.5 billion in gross assets, respectively. For the quarters ended September 30, 2012, September 30, 2011, and June 30, 2012, investment advisory and other fee income was $21.0 million, $20.8 million and $21.9 million, respectively.

Annaly's principal business objective is to generate net income for distribution to its shareholders from its Investment Securities and from dividends it receives from its subsidiaries.

The Company will hold the 2012 third quarter earnings conference call on November 6, 2012 at 9:00 a.m. EDT. The number to call is 877-883-0383 for domestic calls and 412-902-6506 for international calls. The conference passcode is 5452041. The replay number is 877-344-7529 for domestic calls and 412-317-0088 for international calls and the conference passcode is 10019907. The replay is available for 48 hours after the earnings call. There will be a web cast of the call on www.annaly.com. If you would like to be added to the e-mail distribution list, please visit www.annaly.com, click on Investor Relations, then select Email Alerts and complete the email notification form.

This news release and our public documents to which we refer contain or incorporate by reference certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements which are based on various assumptions (some of which are beyond our control) may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “anticipate,” “continue,” or similar terms or variations on those terms or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, changes in interest rates, changes in the yield curve, changes in prepayment rates, the availability of mortgage-backed securities and other securities for purchase, the availability of financing and, if available, the terms of any financing, changes in the market value of our assets, changes in business conditions and the general economy, our ability to consummate any contemplated investment opportunities, changes in government regulations affecting our business, our ability to maintain our qualification as a REIT for federal income tax purposes, our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended, and risks associated with the broker-dealer business of our subsidiary, and risks associated with the investment advisory business of our subsidiaries, including the removal by clients of assets they manage, their regulatory requirements and competition in the investment advisory business. For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in our most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q. We do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

 
 

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(dollars in thousands, except share and per share data)

           
 

September 30,

2012

(Unaudited)

 

June 30,

2012

(Unaudited)

 

March 31,

2012

(Unaudited)

 

 

December 31,

2011(1)

 

September 30,

2011

(Unaudited)

 
ASSETS
 
Cash and cash equivalents $ 2,264,854 $ 924,374 $ 932,761 $ 994,198 $ 3,473,866
Reverse repurchase agreements 1,612,384 2,025,471 2,540,601 860,866 360,315
Investments, at fair value:
U.S. Treasury Securities 2,242,039 1,998,363 2,622,714 928,547 172,892
Securities borrowed 1,602,692 1,465,327 1,122,453 928,732 1,052,810
Agency mortgage-backed securities 129,597,714 118,500,649 110,291,712 104,251,055 106,588,710
Agency debentures 2,935,538 1,250,506 1,499,127 889,580 824,092
Investments in affiliates 224,899 203,057 225,818 211,970 209,374
Equity securities - - 4,470 3,891 3,929
Corporate debt, held for investment 64,928 60,638 50,806 52,073 27,988
Receivable for investments sold 470,266 1,320,996 454,278 - 402,817
Accrued interest and dividends receivable 434,026 420,390 418,489 409,023 410,862
Receivable from Prime Broker 3,272 3,272 3,272 3,272 3,272
Receivable for advisory and service fees 20,271 20,743 19,608 19,550 19,656
Intangible for customer relationships 9,146 9,714 10,281 10,807 11,531
Goodwill 55,417 55,417 55,417 42,030 42,030
Other derivative contracts, at fair value 559 3,717 321 113 1,450
Other assets     38,595       41,937       29,412       24,295       26,112    
 
Total assets   $ 141,576,600     $ 128,304,571     $ 120,281,540     $ 109,630,002     $ 113,631,706    
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Liabilities:
U.S. Treasury Securities sold, not yet purchased, at fair value $ 1,418,750 $ 1,884,922 $ 2,577,905 $ 826,912 $ 549,505
Repurchase agreements 101,033,146 96,760,797 91,720,865 84,097,885 86,495,905
Securities loaned, at fair value 1,248,968 1,113,107 876,849 804,901 907,061
Payable for investments purchased 16,107,038 7,387,410 5,708,412 4,315,796 5,852,986
Convertible Senior Notes 999,749 1,245,915 524,420 539,913 557,045
Accrued interest payable 181,502 174,819 129,108 138,965 128,371
Dividends payable 487,237 535,898 534,401 552,806 581,752
Interest rate swaps, at fair value 2,926,461 2,822,264 2,211,048 2,552,687 2,540,558
Accounts payable and other liabilities     83,086       94,853       57,927       7,223       74,837    
 
Total liabilities     124,485,937       112,019,985       104,340,935       93,837,088       97,688,020    
 

6.00% Series B Cumulative Convertible Preferred Stock: 4,600,000
 shares authorized, 0, 0, 0, 1,331,849, and 1,389,249, shares issued
 and outstanding, respectively

   

 

-

     

 

-

     

 

-

     

 

32,272

     

 

33,664

   
 
Stockholders' Equity:

7.875% Series A Cumulative Redeemable Preferred
 Stock: 7,412,500 authorized, issued and outstanding

177,088

177,088

177,088

177,088

177,088

7.625% Series C Cumulative Redeemable Preferred
 Stock: 12,650,000, 12,650,000, 0, 0, and 0 authorized, respectively,
 12,000,000, 12,000,000, 0, 0, and 0 issued and outstanding,
 respectively

290,514 290,514 - - -

7.50% Series D Cumulative Redeemable Preferred Stock:
 18,400,000, 0, 0, 0, and 0 authorized, issued and outstanding,
 respectively

445,457 - - - -

Common stock, par value $.01 per share, 1,956,937,500,
 1,975,337,500, 1,956,937,500, 1,987,987,500, and 1,987,987,500
 authorized, respectively, 974,799,779, 974,684,401, 974,325,338,
 970,161,647, and 969,913,060 issued and outstanding, respectively

9,748

9,747

9,743

9,702

9,699

Additional paid-in capital 15,144,200 15,168,020 15,127,882 15,068,870 15,042,361
Accumulated other comprehensive income 4,069,607 3,413,320 2,766,430 3,008,988 3,073,488
Accumulated deficit     (3,045,951 )     (2,774,103 )     (2,140,538 )     (2,504,006 )     (2,392,614 )  
 
Total stockholders' equity     17,090,663       16,284,586       15,940,605       15,760,642       15,910,022    

Total liabilities, Series B Cumulative Convertible Preferred Stock and

 stockholders' equity

 

$

141,576,600

   

$

128,304,571

   

$

120,281,540

   

$

109,630,002

   

$

113,631,706

   

 

      (1)     Derived from the audited consolidated financial statements at December 31, 2011.

 
 

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(dollars in thousands, except share and per share data)

   
  For the quarters ended  
September 30,   June 30,   March 31,   December 31,   September 30,
  2012   2012     2012     2011   2011  
Interest income:
Investments $ 754,096 $ 876,229 $ 850,959 $ 844,874 $ 926,558
U.S. Treasury Securities 4,588 7,397 1,418 1,082 2,302
Securities loaned     2,581       2,698       2,518       1,744       1,942    
Total interest income     761,265       886,324       854,895       847,700       930,802    
 
Interest expense:
Repurchase agreements 158,150 139,579 113,914 114,989 109,014
Convertible Senior Notes 18,026 18,965 14,727 12,552 8,798
U.S. Treasury Securities sold, not yet purchased 3,739 5,801 2,644 1,214 2,109
Securities borrowed     1,978       2,098       2,060       1,378       1,496    
Total interest expense     181,893       166,443       133,345       130,133       121,417    
 
Net interest income     579,372       719,881       721,550       717,567       809,385    
 
Other income (loss):
Investment advisory and other fee income 21,034 21,929 20,766 20,460 20,828
Net gains (losses) on disposal of investments 142,172 94,837 80,299 80,657 91,668
Net loss on extinguishment of Convertible Senior Notes (87,328 ) - - - -
Dividend income from affiliates 7,097 6,621 7,521 8,283 8,706
Net gains (losses) on trading assets 1,368 1,105 5,256 6,356 1,942

Net unrealized gains (losses) on interest-only Agency mortgage-
  backed securities

(33,563

)

(26,103

)

30,877

(67,612

)

(39,321

)

Income from underwriting     -       -       -       19       2,772    
Subtotal     50,780       98,389       144,719       48,163       86,595    
Realized gains (losses) on interest rate swaps(1) (224,272 ) (222,002 ) (219,340 ) (227,638 ) (231,849 )
Realized gain (loss) on termination of interest rate swaps - - (2,385 ) - -
Unrealized gains (losses) on interest rate swaps     (104,197 )     (611,215 )     341,639       (12,139 )     (1,505,333 )  
Subtotal     (328,469 )     (833,217 )     119,914       (239,777 )     (1,737,182 )  
Total other income (loss)     (277,689 )     (734,828 )     264,633       (191,614 )     (1,650,587 )  
 
Expenses:
Compensation expense 52,310 53,536 59,014 54,340 57,629
Other general and administrative expenses     10,694       11,020       8,901       8,754       7,565    
Total general and administrative expenses     63,004       64,556       67,915       63,094       65,194    
 
Income before income taxes 238,679 (79,503 ) 918,268 462,859 (906,396 )
 
Income taxes     (13,921 )     (11,656 )     (16,462 )     (17,297 )     (15,417 )  
 
Net income (loss) 224,758 (91,159 ) 901,806 445,562 (921,813 )
 
Dividends on preferred stock     9,367       6,508       3,938       4,148       4,172    
 
Net income (loss) available (related) to common shareholders   $ 215,391       ($97,667 )   $ 897,868     $ 441,414       ($925,985 )  
 

Net income (loss) per share available (related) to common
  shareholders:

Basic   $ 0.22       ($0.10 )   $ 0.92     $ 0.46       ($0.98 )  
Diluted   $ 0.22       ($0.10 )   $ 0.89     $ 0.44       ($0.98 )  
 
Weighted average number of common shares outstanding:
Basic     974,729,078       974,555,392       971,727,701       970,056,491       948,545,975    
Diluted     997,007,829       974,555,392       1,010,588,609       1,011,495,682       948,545,975    
 
Net income (loss)   $ 224,758       ($91,159 )   $ 901,806     $ 445,562       ($921,813 )  
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale securities 798,269 741,727 (162,259 ) 16,157 1,115,325

Reclassification adjustment for net (gains) losses included in net
  income (loss)

   

(141,982

)

   

(94,837

)

   

(80,299

)

   

(80,657

)

   

(91,668

)

 
Other comprehensive income (loss)     656,287       646,890       (242,558 )     (64,500 )     1,023,657    
Comprehensive income (loss)   $ 881,045     $ 555,731     $ 659,248     $ 381,062     $ 101,844    

 

(1)

   

Interest expense related to the Company's interest rate swaps is recorded in Realized gains (losses) on interest rate swaps on the Consolidated Statements of Comprehensive Income.

 
 

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(dollars in thousands, except share and per share data)

     
  For the nine months ended  
  September 30, 2012     September 30, 2011  
Interest income:    
Investments $ 2,481,284 $ 2,713,141
U.S. Treasury Securities 13,403 13,624
Securities loaned     7,797         5,153    
Total interest income     2,502,484         2,731,918    
 
Interest expense:
Repurchase agreements 411,643 311,780
Convertible Senior Notes 51,718 22,465
U.S. Treasury Securities sold, not yet purchased 12,184 11,867
Securities borrowed     6,136         4,081    
Total interest expense     481,681         350,193    
 
Net interest income     2,020,803         2,381,725    
 
Other income (loss):
Investment advisory and other fee income 63,729 58,745
Net gains (losses) on disposal of investments 317,308 126,189
Net loss on extinguishment of Convertible Senior Notes (87,328 ) -
Dividend income from affiliates 21,239 23,233
Net gains (losses) on trading assets 7,729 15,042
Net unrealized gains (losses) on interest-only Agency mortgage- backed securities (28,789 ) (39,045 )
Income from underwriting     -         5,599    
Subtotal     293,888         189,763    
Realized gains (losses) on interest rate swaps(1) (665,614 ) (654,757 )
Realized gain (loss) on termination of interest rate swaps (2,385 ) -
Unrealized gains (losses) on interest rate swaps     (373,773 )       (1,802,968 )  
Subtotal     (1,041,772 )       (2,457,725 )  
Total other income (loss)     (747,884 )       (2,267,962 )  
 
Expenses:
Compensation expense 164,860 151,911
Other general and administrative expenses     30,615         22,339    
Total general and administrative expenses     195,475         174,250    

Income before income taxes and income from equity
  method investment in affiliate

1,077,444 (60,487 )
 
Income taxes (42,039 ) (41,754 )
 
Income (loss) from equity method investment in affiliate     -         1,140    
 
Net income (loss) 1,035,405 (101,101 )
 
Dividends on preferred stock     19,813         12,706    
 
Net income (loss) available (related) to common shareholders   $ 1,015,592         ($113,807 )  
 

Net income (loss) per share available (related) to common
  shareholders:

Basic   $ 1.04         ($0.14 )  
Diluted   $ 1.00         ($0.14 )  
 
Weighted average number of common shares outstanding:
Basic     973,674,586         841,912,810    
Diluted     1,035,365,251         841,912,810    
 
Net income (loss)   $ 1,035,405         ($101,101 )  
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale securities 1,377,737 2,020,737
Unrealized losses on interest rate swaps - 14,298

Reclassification adjustment for net (gains) losses included in net
  income (loss)

   

(317,118

)

     

(126,189

)

 
Other comprehensive income (loss)     1,060,619         1,908,846    
Comprehensive income (loss)   $ 2,096,024       $ 1,807,745    

 

(1)

   

Interest expense related to the Company's interest rate swaps is recorded in Realized gains (losses) on interest rate swaps on the Consolidated Statements of Comprehensive Income.

 

Annaly Capital Management, Inc.
Investor Relations
1-888-8Annaly
www.annaly.com

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