Annaly Capital Management, Inc. Reports Results For The 2nd Quarter 2013

Sixth graph, third sentence should read (end of quotation): We are prepared to be opportunistic given our low leverage, strong liquidity and sizeable capital position (sted: We are prepared to be opportunistic given our low leverage, strong liquidity and sizeable capital production).

The corrected release reads:

ANNALY CAPITAL MANAGEMENT, INC. REPORTS RESULTS FOR THE 2ND QUARTER 2013

Annaly Capital Management, Inc. (NYSE: NLY) today reported GAAP net income for the quarter ended June 30, 2013 of $1.6 billion or $1.71 per average common share as compared to GAAP net income of $870.3 million or $0.90 per average common share for the quarter ended March 31, 2013, 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, net loss on extinguishment of the 4% Convertible Senior Notes due 2015 (the “4% Convertible Notes”), impairment of goodwill and loss on previously held equity interest in CreXus Investment Corp. (“CreXus”), net income for the quarter ended June 30, 2013 was $460.6 million or $0.47 per average common share as compared to $464.4 million or $0.47 per average common share for the quarter ended March 31, 2013, and $546.2 million or $0.55 per average common share for the quarter ended June 30, 2012.

Agency mortgage-backed securities, Agency debentures, and corporate debt are considered Investment Securities. During the quarter ended June 30, 2013, the Company disposed of $14.8 billion of Investment Securities, resulting in a realized gain of $148.0 million. During the quarter ended March 31, 2013, the Company disposed of $17.2 billion of Investment Securities, resulting in a realized gain of $182.8 million. During the quarter ended June 30, 2012, the Company disposed of $6.4 billion of Investment Securities, resulting in a realized gain of $94.8 million.

Common dividends declared for the quarters ended June 30, 2013, March 31, 2013, and June 30, 2012 were $0.40, $0.45, 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, 2013, based on the June 30, 2013 closing price of $12.57, was 12.73%, as compared to 11.33% for the quarter ended March 31, 2013, and 13.11% for the quarter ended June 30, 2012.

On a GAAP basis, the Company produced an annualized return on average equity for the quarter ended June 30, 2013 of 45.87%, an annualized return on average equity for the quarter ended March 31, 2013 of 22.29%, and an annualized loss on average equity for the quarter ended June 30, 2012 of 2.26%. Without the effect of the unrealized gains or losses on interest rate swaps and Agency interest-only mortgage-backed securities, net loss on extinguishment of the 4% Convertible Notes, impairment of goodwill and loss on previously held equity interest in CreXus, the Company provided an annualized return on average equity for the quarters ended June 30, 2013, March 31, 2013, and June 30, 2012, of 12.90%, 11.90%, and 13.56%, respectively. Leverage at June 30, 2013, March 31, 2013, and June 30, 2012, was 6.2:1, 6.6:1 and 6.0:1, respectively. Leverage includes loan participations and mortgage payable which are non-recourse to the Company.

Wellington J. Denahan, Chairman and Chief Executive Officer of Annaly, commented on the Company’s results. “While the resulting sell-off in the bond market put pressure on asset values during the 2nd quarter, I believe that our focus on prudent risk management and the evolution of our capital allocation strategy has helped protect our portfolio and positions Annaly to take advantage of current market opportunities. We are prepared to be opportunistic given our low leverage, strong liquidity and sizeable capital position.”

For the quarter ended June 30, 2013, the annualized yield on average interest-earning assets was 2.51% and the annualized cost of funds on average interest-bearing liabilities, including the net interest payments on interest rate swaps, was 1.53%, which resulted in an average interest rate spread of 0.98%. This was a 7 basis point increase from the 0.91% average interest rate spread for the quarter ended March 31, 2013, and a 56 basis point decrease from the 1.54% average interest rate spread for the quarter ended June 30, 2012.

Fixed-rate Agency mortgage-backed securities and debentures comprised 92% of the Company’s Investment Securities portfolio at June 30, 2013. Adjustable-rate Agency mortgage-backed securities and debentures comprised 8% of the Company’s Investment Securities portfolio. At June 30, 2013, the Company had entered into interest rate swaps with a notional amount of $48.5 billion, or 53% 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 cost of financing. As of June 30, 2013, the swap portfolio had a weighted average pay rate of 2.05%, a weighted average receive rate of 0.22% and weighted average years to maturity of 5.04. As of June 30, 2013, 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:
    June 30, 2013     March 31, 2013     June 30, 2012
Leverage at period-end * 6.2:1     6.6:1     6.0:1

Fixed-rate Agency mortgage-backed securities and debentures as a percentage of portfolio
92% 92% 92%

Adjustable-rate Agency mortgage-backed securities and debentures as a percentage of portfolio
8% 8% 7%

Floating-rate Agency mortgage-backed securities and debentures as a percentage of portfolio
- - 1%

Notional amount of interest rate swaps as a percentage of Investment Securities
53% 46% 41%

Annualized yield on average interest-earning assets during the quarter

2.51%

2.37%

3.04%

Annualized cost of funds on average interest-bearing liabilities during the quarter
1.53% 1.46% 1.50%
Annualized interest rate spread during the quarter 0.98% 0.91% 1.54%

Weighted average days to maturity on interest-bearing liabilities at period-end
196 202 216

Weighted average receive rate on interest rate swaps at period-end
0.22% 0.23% 0.30%

Weighted average pay rate on interest rate swaps at period-end
2.05% 2.08% 2.29%
 
* Includes loan participations and mortgage payable which are non-recourse to the Company.
 

The following table summarizes certain characteristics of the Company’s interest rate swaps at June 30, 2013:
    Current     Weighted Average     Weighted Average     Weighted Average Years to
Maturity Notional Pay Rate Receive Rate Maturity

 
         

(dollars in thousands)
           
0 - 3 years $ 21,567,050 1.94 % 0.21 % 2.18
3 - 6 years 14,738,490 1.69 % 0.23 % 3.99
6 - 10 years 7,700,000 2.31 % 0.25 % 7.53
Greater than 10 years   4,466,750     3.32 %     0.22 %     18.08
Total / Weighted Average $ 48,472,290     2.05 %     0.22 %     5.04
 

The following table presents the maturities of repurchase agreements at June 30, 2013:
Maturity     Principal Balance     Weighted Average Rate

 

 
 

(dollars in thousands)
     
Within 30 days $ 32,749,247 0.42 %
30 to 59 days 18,675,058 0.41 %
60 to 89 days 2,827,502 0.58 %
90 to 119 days 6,522,227 0.37 %
Over 120 days (1)   20,623,301     1.27 %
Total $ 81,397,335     0.64 %

(1) Of the total repurchase agreements, approximately 13% have a remaining maturity over 1 year.

The Constant Prepayment Rate for the quarters ended June 30, 2013, March 31, 2013, and June 30, 2012, was 16%, 18% and 19%, respectively. The weighted average purchase price of the Company’s Agency mortgage-backed securities and debentures at June 30, 2013, March 31, 2013, and June 30, 2012, was 103.7%, 103.9% and 103.2%, respectively. The net amortization of premiums and accretion of discounts on Agency mortgage-backed securities and debentures for the quarters ended June 30, 2013, March 31, 2013, and June 30, 2012, was $320.2 million, $421.1 million, and $302.8 million, respectively. The total net premium and discount balance on Agency mortgage-backed securities and debentures at June 30, 2013, March 31, 2013, and June 30, 2012, was $5.3 billion, $5.4 billion, and $4.5 billion, respectively. At June 30, 2013, March 31, 2013, and June 30, 2012, the Company had a common stock book value per share of $13.03, $15.19 and $16.23, 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 prepares a supplement to provide additional quarterly information for the benefit of its shareholders. The supplement can be found at the Company’s website in the Investor Relations section under “Quarterly Supplemental Information”.

The Company will hold the 2013 second quarter earnings conference call on August 8, 2013 at 10:00 a.m. EDT. The number to call is 888-317-6003 for domestic calls and 412-317-6061 for international calls. The conference passcode is 4925037. The replay number is 877-344-7529 for domestic calls and 412-317-0088 for international calls and the conference passcode is 10031615. 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, our ability to integrate the commercial mortgage business, 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,

2013

(Unaudited)
   

March 31,

2013

(Unaudited)
   

 

December 31,

2012 (1)
   

September 30,

2012

(Unaudited)
   

June 30,

2012

(Unaudited)
ASSETS
 
Cash and cash equivalents $ 725,537 $ 1,862,550 $ 615,789 $ 2,264,854 $ 924,374
Reverse repurchase agreements 171,234 4,933,465 1,811,095 1,612,384 2,025,471
Investments, at fair value:
U.S. Treasury securities - 1,645,930 752,076 2,242,039 1,998,363
Securities borrowed 2,425,024 2,688,485 2,160,942 1,602,692 1,465,327
Agency mortgage-backed securities 92,487,318 108,256,671 123,963,207 129,597,714 118,500,649
Agency debentures 3,306,473 3,970,279 3,009,568 2,935,538 1,250,506
Investments in affiliates 134,948 267,547 234,120 224,899 203,057
Commercial real estate investments 1,005,560 - - - -
Corporate debt, held for investment 61,682 66,539 63,944 64,928 60,638
Receivable for investments sold 1,499,140 1,292,478 290,722 470,266 1,320,996
Accrued interest and dividends receivable 340,671 388,665 419,259 434,026 420,390
Receivable from Prime Broker - - - 3,272 3,272
Receivable for investment advisory income 10,374 12,817 17,730 20,271 20,743
Intangible for customer relationships 6,474 6,731 6,989 9,146 9,714
Goodwill 102,783 55,417 55,417 55,417 55,417
Interest rate swaps, at fair value 38,950 - - - -
Other derivatives 91,270 - 9,830 559 3,717
Other assets   61,146         54,282         41,607         38,595         41,937  
 
Total assets $ 102,468,584       $ 125,501,856       $ 133,452,295       $ 141,576,600       $ 128,304,571  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Liabilities:
U.S. Treasury securities sold, not yet purchased, at fair value $ - $ 611,167 $ 495,437 $ 1,418,750 $ 1,884,922
Repurchase agreements 81,397,335 100,322,942 102,785,697 101,033,146 96,760,797
Securities loaned, at fair value 2,284,245 2,330,060 1,808,315 1,248,968 1,113,107
Payable for investments purchased 2,833,214 3,203,461 8,256,957 16,107,038 7,387,410
Payable for share buyback program - - 141,149 - -
Convertible Senior Notes 824,229 824,902 825,541 999,749 1,245,915
Mortgage payable 19,361 - - - -
Participation sold 14,324 - - - -
Accrued interest payable 164,190 175,749 186,896 181,502 174,819
Dividends payable 396,888 426,173 432,154 487,237 535,898
Interest rate swaps, at fair value 1,189,178 2,259,173 2,584,907 2,926,461 2,822,264
Accounts payable and other liabilities 82,316 37,048 10,798 83,086 94,853
Other derivatives   -         4,812         -         -         -  
 
Total liabilities   89,205,280         110,195,487         117,527,851         124,485,937         112,019,985  
 
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 authorized, 12,000,000 issued and outstanding
290,514 290,514 290,514 290,514 290,514

7.50% Series D Cumulative Redeemable Preferred Stock: 18,400,000, 18,400,000, 18,400,000, 18,400,000 and 0 authorized, issued and outstanding, respectively
445,457 445,457 445,457 445,457 -

Common stock, par value $0.01 per share, 1,956,937,500, 1,956,937,500, 1,956,937,500, 1,956,937,500, and 1,975,337,500, authorized, 947,483,487, 947,293,099, 947,213,204, 974,799,779,and 974,684,401, issued and outstanding, respectively

9,475

9,473

9,472

9,748

9,747
Additional paid-in capital 14,754,681 14,746,579 14,740,774 15,144,200 15,168,020
Accumulated other comprehensive income (loss) (1,289,246 ) 2,003,248 3,053,242 4,069,607 3,413,320
Accumulated deficit   (1,124,665 )       (2,365,990 )       (2,792,103 )       (3,045,951 )       (2,774,103 )
 
Total stockholders’ equity   13,263,304         15,306,369         15,924,444         17,090,663         16,284,586  
 
Total liabilities and stockholders’ equity $ 102,468,584       $ 125,501,856       $ 133,452,295       $ 141,576,600       $ 128,304,571  
 
(1) Derived from the audited consolidated financial statements at December 31, 2012.
 

   

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,
  2013         2013         2012         2012         2012  
Interest income:
Investment Securities $ 686,577 $ 724,820 $ 748,122 $ 751,739 $ 874,984
U.S. Treasury securities 7,242 5,996 3,819 4,588 7,397
Securities loaned 2,302 2,612 2,106 2,581 2,698
Commercial real estate investments 13,906 - - - -
Reverse repurchase agreements 2,775 3,636 2,449 2,225 1,122
Other   134         153         165         132         123  
Total interest income   712,936         737,217         756,661         761,265         886,324  
Interest expense:
Repurchase agreements 141,945 157,064 165,600 158,150 139,579
Convertible Senior Notes 16,364 15,813 15,503 18,026 18,965
U.S. Treasury securities sold, not yet purchased 4,075 2,788 2,930 3,739 5,801
Securities borrowed 1,737 1,925 1,458 1,978 2,098
Participation sold   134         -         -         -         -  
Total interest expense   164,255         177,590         185,491         181,893         166,443  
Net interest income   548,681         559,627         571,170         579,372         719,881  
 
Other income (loss):
Investment advisory income 12,187 13,408 18,773 20,915 21,810
Net gains (losses) on disposal of investments 147,998 182,843 114,831 142,172 94,837
Net loss on extinguishment of 4% Convertible Senior Notes - - (75,012 ) (87,328 ) -
Dividend income from affiliates 4,048 6,431 7,097 7,097 6,621
Net gains (losses) on trading assets 54,046 1,549 15,181 1,368 1,105

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

111,521

80,127

(31,148

)

(33,563

)

(26,103

)
Impairment of goodwill (23,987 ) - - - -
Loss on previously held equity interest in CreXus (18,896 ) - - - -
Other income (loss)   7,192         132         161         119         119  
Subtotal   294,109         284,490         49,883         50,780         98,389  
Realized gains (losses) on interest rate swaps (1) (212,727 ) (225,476 ) (228,155 ) (224,272 ) (222,002 )
Realized gains (losses) on termination of interest rate swaps (35,649 ) (16,378 ) - - -
Unrealized gains (losses) on interest rate swaps   1,109,022         325,734         341,554         (104,197 )       (611,215 )
Subtotal   860,646         83,880         113,399         (328,469 )       (833,217 )
Total other income (loss)   1,154,755         368,370         163,282         (277,689 )       (734,828 )
 
General and administrative expenses:
Compensation and management fee 43,764 38,443 25,842 52,310 53,536
Other general and administrative expenses   21,367         13,469         14,242         10,694         11,020  
Total general and administrative expenses   65,131         51,912         40,084         63,004         64,556  
 
Income (loss) before income taxes 1,638,305 876,085 694,368 238,679 (79,503 )
 
Income taxes   92         5,807         (6,127 )       13,921         11,656  
 
Net income (loss) 1,638,213 870,278 700,495 224,758 (91,159 )
 
Dividends on preferred stock   17,992         17,992         19,717         9,367         6,508  
 
Net income (loss) available (related) to common shareholders $ 1,620,221       $ 852,286       $ 680,778       $ 215,391         ($97,667 )
 

Net income (loss) per share available (related) to common shareholders:
Basic $ 1.71       $ 0.90       $ 0.70       $ 0.22         ($0.10 )
Diluted $ 1.64       $ 0.87       $ 0.68       $ 0.22         ($0.10 )
 
Weighted average number of common shares outstanding:
Basic   947,411,380         947,249,901         970,602,863         974,729,078         974,555,392  
Diluted   995,229,637         994,815,169         1,017,925,849         997,007,829         974,555,392  
 
Net income (loss) $ 1,638,213       $ 870,278       $ 700,495       $ 224,758         ($91,159 )
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale securities (3,144,496 ) (867,151 ) (894,972 ) 798,269 741,727

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

(147,998

)
     

(182,843

)
     

(121,393

)
     

(141,982

)
     

(94,837

)
Other comprehensive income (loss)   (3,292,494 )       (1,049,994 )       (1,016,365 )       656,287         646,890  
Comprehensive income (loss)   ($1,654,281 )       ($179,716 )       ($315,870 )     $ 881,045       $ 555,731  

 

(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, 2013     June 30, 2012
Interest income:    
Investment Securities $ 1,411,397 $ 1,725,408
U.S. Treasury securities 13,238 8,815
Securities loaned 4,914 5,216
Commercial real estate investments 13,906 -
Reverse repurchase agreements 6,411 1,544
Other   287         236  
Total interest income   1,450,153         1,741,219  
Interest expense:
Repurchase agreements 299,009 253,493
Convertible Senior Notes 32,177 33,692
U.S. Treasury securities sold, not yet purchased 6,863 8,445
Securities borrowed 3,662 4,158
Participation sold   134         -  
Total interest expense   341,845         299,788  
Net interest income   1,108,308         1,441,431  
 
Other income (loss):
Investment advisory income 25,595 42,450
Net gains (losses) on disposal of investments 330,841 175,136
Dividend income from affiliates 10,479 14,142
Net gains (losses) on trading assets 55,595 6,361

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

191,648

4,774
Impairment of goodwill (23,987 ) -
Loss on previously held equity interest in CreXus (18,896 ) -
Other income (loss)   7,324         245  
Subtotal   578,599         243,108  
Realized gains (losses) on interest rate swaps (1) (438,203 )       (441,342 )
Realized gains (losses) on termination of interest rate swaps (52,027 )       (2,385 )
Unrealized gains (losses) on interest rate swaps   1,434,756         (269,576 )
Subtotal   944,526         (713,303 )
Total other income (loss)   1,523,125         (470,195 )
 
General and administrative expenses:
Compensation and management fee 82,207 112,550
Other general and administrative expenses   34,836         19,921  
Total general and administrative expenses   117,043         132,471  
 
Income (loss) before income taxes 2,514,390 838,765
 
Income taxes   5,899         28,118  
 
Net income (loss) 2,508,491 810,647
 
Dividends on preferred stock   35,984         10,446  
 
Net income (loss) available (related) to common shareholders $ 2,472,507       $ 800,201  
 
Net income (loss) per share available (related) to common

shareholders:
Basic $ 2.61       $ 0.82  
Diluted $ 2.51       $ 0.78  
 
Weighted average number of common shares outstanding:
Basic   947,331,087         973,141,546  
Diluted   995,151,942         1,052,888,301  
 
Net income (loss) $ 2,508,491       $ 810,647  
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale securities (4,011,647 ) 579,468

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

(330,841

)
     

(175,136

)
Other comprehensive income (loss)   (4,342,488 )       404,332  
Comprehensive income (loss)   ($1,833,997 )     $ 1,214,979  

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