Annaly Capital Management, Inc. Reports Results For The 2nd Quarter 2012

Annaly Capital Management, Inc. (NYSE: NLY) today reported GAAP net loss for the quarter ended June 30, 2012 of $91.2 million or $0.10 per average common share as compared to GAAP net income of $120.8 million or $0.14 per average common share for the quarter ended June 30, 2011, and GAAP net income of $901.8 million or $0.92 per average common share for the quarter ended March 31, 2012.

Without the effect of the unrealized gains or losses on interest rate swaps and Agency interest-only mortgage-backed securities, net income for the quarter ended June 30, 2012, was $546.2 million or $0.55 per average common share as compared to $587.5 million or $0.71 per average common share for the quarter ended June 30, 2011, and $529.3 million or $0.54 per average common share for the quarter ended March 31, 2012.

During the quarter ended June 30, 2012, the Company disposed of $6.4 billion of Agency mortgage-backed securities and debentures, resulting in a realized gain of $94.8 million. During the quarter ended June 30, 2011, the Company disposed of $1.7 billion of Agency mortgage-backed securities and debentures, resulting in a realized gain of $7.3 million. During the quarter ended March 31, 2012, the Company disposed of $5.3 billion of Agency mortgage-backed securities and debentures, resulting in a realized gain of $80.3 million.

Common dividends declared for the quarters ended June 30, 2012, June 30, 2011, and March 31, 2012 were $0.55, $0.65, 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 June 30, 2012, based on the June 30, 2012, closing price of $16.78, was 13.11%, as compared to 14.41% for the quarter ended June 30, 2011, and 13.91% for the quarter ended March 31, 2012.

During the quarter ended June 30, 2012, the Company issued $750.0 million in aggregate principal amount of 5.00% Convertible Senior Notes due 2015. During the quarter the Company also issued 12 million shares of 7.625% Series C Cumulative Redeemable Preferred Stock for net proceeds of $290.5 million.

On a GAAP basis, the Company produced an annualized loss on average equity for the quarter ended June 30, 2012 of 2.26% and an annualized return on average equity for the quarters ended June 30, 2011 and March 31, 2012 of 3.60% and 22.73%, respectively. Without the effect of the unrealized gains or losses on interest rate swaps and Agency interest-only mortgage-backed securities, the Company provided an annualized return on average equity for the quarters ended June 30, 2012, June 30, 2011, and March 31, 2012, of 13.56%, 17.50% and 13.34%, respectively.

Michael A.J. Farrell, Chairman, Chief Executive Officer and President of Annaly, commented on the Company’s results: “We continue to monitor and evaluate the challenges facing the Euro countries and their institutions, regulatory uncertainty about the function and structure of the global financial system and election-year brinksmanship on fiscal and tax policy. In addition, we see long-term risks related to the general direction of monetary policy and its effect on the financial markets. Our concerns about embedded risks in the markets continues to be reflected in the way we manage the Company. We believe our stance maintains our flexibility while continuing to generate attractive risk-adjusted returns for our shareholders.”

For the quarter ended June 30, 2012, the annualized yield on average interest-earning assets was 3.04% and the annualized cost of funds on average interest-bearing liabilities, including the net interest payments on interest rate swaps, was 1.50%, which resulted in an average interest rate spread of 1.54%. This was a 91 basis point decrease from the 2.45% annualized interest rate spread for the quarter ended June 30, 2011, and a 17 basis point decrease from the 1.71% average interest rate spread for the quarter ended March 31, 2012. At June 30, 2012, the weighted average yield on investment securities was 3.17% and the weighted average cost of funds on borrowings, including the net interest payments on interest rate swaps, was 1.58%, which resulted in an interest rate spread of 1.59%. Beginning with the quarter ended June 30, 2011, net interest payments on interest rate swaps, reflected in the consolidated statements of comprehensive income as realized gains (losses) on interest rate swaps, are included in the summary table presentation of cost of funds and interest rate spread. This change does not affect GAAP or taxable net income, shareholders’ equity, cash flows or earnings per share. Leverage at June 30, 2012, June 30, 2011, and March 31, 2012 was 6.0:1, 5.7:1 and 5.8:1, respectively.

Fixed-rate mortgage-backed securities and Agency debentures comprised 92% of the Company’s portfolio at June 30, 2012. The balance of the mortgage-backed securities and Agency debentures was comprised of 7% adjustable-rate mortgage-backed securities and Agency debentures and 1% LIBOR floating-rate collateralized mortgage obligations. At June 30, 2012, the Company had entered into interest rate swaps with a notional amount of $46.2 billion, or 41% 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 June 30, 2012, the swap portfolio had a weighted average pay rate of 2.29%, a weighted average receive rate of 0.30% and weighted average years to maturity of 4.91 years. As of June 30, 2012, substantially all of the Company’s Investment Securities were Fannie Mae, Freddie Mac and Ginnie Mae mortgage-backed securities and debentures.

“Market conditions continue to warrant a conservative approach to our portfolio,” said Wellington Denahan-Norris, Annaly’s Vice Chairman, Chief Investment Officer and Chief Operating Officer. “We continue to strengthen and extend the tenor of our liabilities while maintaining leverage at a relatively low level. After taking into account the effect of interest rate swaps, our portfolio of mortgage-backed securities and Agency debentures was comprised of 42% floating-rate, 7% adjustable-rate and 51% fixed-rate assets.”

The following table summarizes portfolio information for the Company:
June 30, 2012   June 30, 2011   March 31, 2012
Leverage at period-end 6.0:1   5.7:1   5.8:1
Fixed-rate Agency mortgage-backed securities and

debentures as a percentage of portfolio
92%

89%
91%
Adjustable-rate Agency mortgage-backed securities and

debentures as a percentage of portfolio
7%

10%
8%
Floating-rate Agency mortgage-backed securities and

debentures as a percentage of portfolio
1%

1%
1%
Notional amount of interest rate swaps as a percentage of

Investment Securities
41%

38%
40%
Annualized yield on average interest-earning assets during

the quarter

3.04%

4.04%

3.23%
Annualized cost of funds on average interest-bearing

liabilities during the quarter
1.50%

1.59%
1.52%
Annualized interest rate spread during the quarter 1.54% 2.45% 1.71%
Weighted average yield on investment securities at

period-end
3.17% 3.73% 3.21%
Weighted average cost of funds on interest-bearing liabilities at

period-end

1.58%

1.69%

1.51%
Interest rate spread at period-end 1.59% 2.07% 1.70%
Weighted average days to maturity on interest-bearing liabilities at

period-end
216 130 127
Weighted average receive rate on interest rate swaps at period-end 0.30% 0.21% 0.31%
Weighted average pay rate on interest rate swaps at period-end 2.29% 2.79% 2.42%
 

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

      Weighted  

 

 
Weighted Average Average Weighted Average Years

Maturity

Current Notional
Pay Rate Receive Rate to Maturity
    (dollars in thousands)
0 - 3 years $14,628,700 2.43% 0.31% 1.74
3 - 6 years 23,088,120 1.89% 0.29% 3.91
6 - 10 years 4,450,000 2.90% 0.32% 7.55
Greater than 10 years 4,038,250   3.36%   0.30%   19.16
Total / Weighted Average $46,205,070   2.29%   0.30%   4.91
 

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

Weighted Average
Maturity Balance

Rate
(dollars in thousands)
Within 30 days $32,549,648

0.40%
30 to 59 days 22,134,932

0.40%
60 to 89 days 5,302,260

0.55%
90 to 119 days 11,125,373

0.37%

Over 120 days (1)
     

25,648,584
         

1.10%
Total       $96,760,797          

0.59%

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

 

The Constant Prepayment Rate for the quarters ended June 30, 2012, June 30, 2011, and March 31, 2012 was 19%, 11% and 19%, respectively. The weighted average purchase price of the Company’s Agency mortgage-backed securities and debentures at June 30, 2012, June 30, 2011 and March 31, 2012 was 103.2%, 102.1% and 102.9%, respectively. The net amortization of premiums and accretion of discounts on Agency mortgage-backed securities and debentures for the quarters ended June 30, 2012, June 30, 2011, and March 31, 2012 was $302.8 million, $126.5 million, and $280.3 million, respectively. The total net premium and discount balance at June 30, 2012, June 30, 2011, and March 31, 2012, was $4.5 billion, $3.0 billion, and $3.8 billion, respectively.

General and administrative expenses as a percentage of average assets was 0.21%, 0.23% and 0.24% for the quarters ended June 30, 2012, June 30, 2011, and March 31, 2012, respectively. At June 30, 2012, June 30, 2011, and March 31, 2012, the Company had a common stock book value per share of $16.23, $16.55 and $16.18, respectively.

At June 30, 2012, June 30, 2011, and March 31, 2012, the Company’s wholly-owned registered investment advisors had under management approximately $12.4 billion, $13.1 billion and $12.4 billion in net assets, respectively, and $20.5 billion, $23.0 billion and $20.0 billion in gross assets, respectively. For the quarters ended June 30, 2012, June 30, 2011, and March 31, 2012, investment advisory and other fee income was $21.9 million, $20.7 million and $20.8 million, respectively.

Annaly manages assets on behalf of institutional and individual investors worldwide. The Company’s principal business objective is to generate net income for distribution to investors from its Investment Securities and from dividends it receives from its subsidiaries.

The Company will hold the 2012 second quarter earnings conference call on Thursday August 2, 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 7769917. The replay number is 877-344-7529 for domestic calls and 412-317-0088 for international calls and the conference passcode is 10016746. 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)
 
June 30, March 31, September 30, June 30,
2012 2012 December 31, 2011 2011
(Unaudited)   (Unaudited)  

2011 (1)
  (Unaudited)   (Unaudited)
ASSETS
 
Cash and cash equivalents $ 924,374 $ 932,761 $ 994,198 $ 3,473,866 $ 401,844
Reverse repurchase agreements 2,025,471 2,540,601 860,866 360,315 593,865
Investments, at fair value:
U.S. Treasury Securities 1,998,363 2,622,714 928,547 172,892 748,118
Securities borrowed 1,465,327 1,122,453 928,732 1,052,810 519,929
Agency mortgage-backed securities 118,500,649 110,291,712 104,251,055 106,588,710 96,773,448
Agency debentures 1,250,506 1,499,127 889,580 824,092 703,093
Investments in affiliates 203,057 225,818 211,970 209,374 261,659
Equity securities - 4,470 3,891 3,929 -
Corporate debt, held for investment 60,638 50,806 52,073 27,988 27,982
Receivable for investments sold 1,320,996 454,278 - 402,817 40,751
Accrued interest and dividends receivable 420,390 418,489 409,023 410,862 386,160
Receivable from Prime Broker 3,272 3,272 3,272 3,272 3,272
Receivable for advisory and service fees 20,743 19,608 19,550 19,656 19,666
Intangible for customer relationships 9,714 10,281 10,807 11,531 12,141
Goodwill 55,417 55,417 42,030 42,030 42,030
Other derivative contracts, at fair value 3,717 321 113 1,450 767
Other assets   41,937       29,412       24,295       26,112       22,282  
 
Total assets $ 128,304,571     $ 120,281,540     $ 109,630,002     $ 113,631,706     $ 100,557,007  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Liabilities:
U.S. Treasury Securities sold, not yet purchased, at fair value $ 1,884,922 $ 2,577,905 $ 826,912 $ 549,505 $ 491,740
Repurchase agreements 96,760,797 91,720,865 84,097,885 86,495,905 78,447,165
Securities loaned, at fair value 1,113,107 876,849 804,901 907,061 447,330
Payable for investments purchased 7,387,410 5,708,412 4,315,796 5,852,986 4,824,618
Convertible Senior Notes 1,245,915 524,420 539,913 557,045 600,000
Accrued interest payable 174,819 129,108 138,965 128,371 122,753
Dividends payable 535,898 534,401 552,806 581,752 539,970
Interest rate swaps, at fair value 2,822,264 2,211,048 2,552,687 2,540,558 1,035,215
Accounts payable and other liabilities   94,853       57,927       7,223       74,837       78,895  
 
Total liabilities   112,019,985       104,340,935       93,837,088       97,688,020       86,587,686  
 

6.00% Series B Cumulative Convertible Preferred Stock: 4,600,000 shares authorized, 0, 0, 1,331,849, 1,389,249, and 1,649,047 shares issued and outstanding, respectively
 

 

-
     

 

-
     

 

32,272
     

 

33,664
     

 

39,959
 
 
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, 0, 0, 0, and 0 authorized, respectively, 12,000,000, 0, 0, 0, and 0 issued and outstanding, respectively
290,514 - - - -

Common stock, par value $.01 per share, 1,975,337,500, 1,987,987,500, 1,987,987,500, 1,987,987,500, and 1,987,987,500 authorized, respectively, 974,684,401, 974,325,338, 970,161,647, 969,913,060 and 831,047,443 issued and outstanding, respectively

9,747

9,743

9,702

9,699

8,310
Additional paid-in capital 15,168,020 15,127,882 15,068,870 15,042,361 12,579,012
Accumulated other comprehensive income 3,413,320 2,766,430 3,008,988 3,073,488 2,049,831
Accumulated deficit   (2,774,103 )     (2,140,538 )     (2,504,006 )     (2,392,614 )     (884,879 )
 
Total stockholders’ equity   16,284,586       15,940,605       15,760,642       15,910,022       13,929,362  

Total liabilities, Series B Cumulative Convertible Preferred Stock and stockholders’ equity

$

128,304,571
   

$

120,281,540
   

$

109,630,002
   

$

113,631,706
   

$

100,557,007
 
(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

June 30,
  March 31,   December 31,  

September 30,
  June 30,
2012   2012   2011   2011   2011
Interest income:
Investments $876,229 $850,959 $844,874 $926,558 $948,703
U.S. Treasury Securities 7,397 1,418 1,082 2,302 6,497
Securities loaned 2,698   2,518   1,744   1,942   1,868
Total interest income 886,324   854,895   847,700   930,802   957,068
 
Interest expense:
Repurchase agreements 139,579 113,914 114,989 109,014 100,164
Convertible Senior Notes 18,965 14,727 12,552 8,798 6,900
U.S. Treasury Securities sold, not yet purchased 5,801 2,644 1,214 2,109 4,772
Securities borrowed 2,098   2,060   1,378   1,496   1,484
Total interest expense 166,443   133,345   130,133   121,417   113,320
 
Net interest income 719,881   721,550   717,567   809,385   843,748
 
Other income (loss):
Investment advisory and other fee income 21,929 20,766 20,460 20,828 20,710

Net gains (losses) on sales of Agency mortgage-backed securities and debentures

94,837

80,299

80,657

91,668

7,336
Dividend income from affiliates 6,621 7,521 8,283 8,706 8,230

Net gains (losses) on trading assets
1,105 5,256 6,356 1,942 (5,712)

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

(26,103)

30,877

(67,612)

(39,321)

276
Income (expense) from underwriting (8)   (8)   19   2,772   (77)
Subtotal 98,381   144,711   48,163   86,595   30,763
Realized gains (losses) on interest rate swaps (1) (222,002) (219,340) (227,638) (231,849) (216,760)
Realized gain (loss) on termination of interest rate swaps - (2,385) - - -

Unrealized gains (losses) on interest rate swaps
(611,215)   341,639   (12,139)   (1,505,333)   (466,943)
Subtotal (833,217)   119,914   (239,777)   (1,737,182)   (683,703)
Total other income (loss) (734,836)   264,625   (191,614)   (1,650,587)   (652,940)
 
Expenses:
Compensation expense 53,536 59,014 54,340 57,629 49,752
Other general and administrative expenses 11,012   8,893   8,754   7,565   7,477
Total general and administrative expenses 64,548   67,907   63,094   65,194   57,229
 
Income before income taxes (79,503) 918,268 462,859 (906,396) 133,579
 
Income taxes (11,656)   (16,462)   (17,297)   (15,417)   (12,762)
 
Net income (loss) (91,159) 901,806 445,562 (921,813) 120,817
 
Dividends on preferred stock 6,508   3,938   4,148   4,172   4,267
 
Net income (loss) available (related) to common shareholders ($97,667)   $897,868   $441,414   ($925,985)   $116,550
 

Net income (loss) per share available (related) to common shareholders:
Basic ($0.10)   $0.92   $0.46   ($0.98)   $0.14
Diluted ($0.10)   $0.89   $0.44   ($0.98)   $0.14
 
Weighted average number of common shares outstanding:
Basic 974,555,392   971,727,701   970,056,491   948,545,975   822,623,370
Diluted 974,555,392   1,010,588,609   1,011,495,682   948,545,975   827,754,731
 
Net income (loss) ($91,159)   $901,806   $445,562   ($921,813)   $120,817
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale securities 741,727 (162,259) 16,157 1,115,325 1,047,639

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

(94,837)
 

(80,299)
 

(80,657)
 

(91,668)
 

(7,336)
Other comprehensive income (loss) 646,890   (242,558)   (64,500)   1,023,657   1,040,303
Comprehensive income (loss) $555,731   $659,248   $381,062   $101,844   $1,161,120

 
(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 six months ended
June 30, 2012   June 30, 2011
Interest income:  
Investments $1,727,188 $1,786,583
U.S. Treasury Securities 8,815 11,322
Securities loaned 5,216   3,211
Total interest income 1,741,219   1,801,116
 
Interest expense:
Repurchase agreements 253,493 202,766
Convertible Senior Notes 33,692 13,667
U.S. Treasury Securities sold, not yet purchased 8,445 9,758
Securities borrowed 4,158   2,585
Total interest expense 299,788   228,776
 
Net interest income 1,441,431   1,572,340
 
Other income (loss):
Investment advisory and other fee income 42,695 37,917
Net gains (losses) on sales of Agency mortgage-backed securities and debentures 175,136 34,521
Dividend income from affiliates 14,142 14,527

Net gains (losses) on trading assets
6,361 13,100
Net unrealized gains (losses) on interest-only Agency mortgage- backed securities 4,774 276
Income (expense) from underwriting (16)   2,827
Subtotal 243,092   103,168
Realized gains (losses) on interest rate swaps (1) (441,342) (422,908)
Realized gain (loss) on termination of interest rate swaps (2,385) -
Unrealized gains (losses) on interest rate swaps (269,576)   (297,635)
Subtotal (713,303)   (720,543)
Total other income (loss) (470,211)   (617,375)
 
Expenses:
Compensation expense 112,550 94,282
Other general and administrative expenses 19,905   14,774
Total general and administrative expenses 132,455   109,056

Income before income taxes and income from equity

method investment in affiliate
838,765 845,909
 
Income taxes (28,118) (26,337)
 
Income (loss) from equity method investment in affiliate -   1,140
 
Net income (loss) 810,647 820,712
 
Dividends on preferred stock 10,446   8,534
 
Net income (loss) available (related) to common shareholders $800,201   $812,178
 
Net income (loss) per share available (related) to common

shareholders:
Basic $0.82   $1.03
Diluted $0.78   $1.00
 
Weighted average number of common shares outstanding:
Basic 973,141,546   787,712,527
Diluted 1,052,888,301   827,622,301
 
Net income (loss) $810,647   $820,712
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale securities 579,468 905,412
Unrealized losses on interest rate swaps - 14,298

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

(175,136)
 

(34,521)
Other comprehensive income (loss) 404,332   885,189
Comprehensive income (loss) $1,214,979   $1,705,901

 
(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.

Copyright Business Wire 2010

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