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NLY > SEC Filings for NLY > Form 10-Q on 8-May-2014All Recent SEC Filings




Quarterly Report

Item 2. Management's Discussion and Analysis


Special Note Regarding Forward-Looking     opportunities and other corporate
Statements                                 transactions, changes in governmental
                                           regulations affecting our business,
Certain statements contained in this       our ability to maintain our
quarterly report, and certain              classification as a real estate
statements contained in our future         investment trust (or REIT) for federal
filings with the Securities and            income tax purposes, our ability to
Exchange Commission (the SEC or the        maintain our exemption from
Commission), in our press releases or      registration under the Investment
in our other public or stockholder         Company Act of 1940, as amended (or
communications may not be based on         Investment Company Act), and risks
historical facts and are                   associated with the business of our
"forward-looking statements" within        subsidiaries, including the investment
the meaning of Section 27A of the          advisory businesses of our subsidiary,
Securities Act of 1933, as amended,        and risks associated with the broker
and Section 21E of the Securities          dealer business of our subsidiary. For
Exchange Act of 1934, as amended.          a discussion of the risks and
Forward-looking statements, which are      uncertainties which could cause actual
based on various assumptions, (some of     results to differ from those contained
which are beyond our control) may be       in the forward-looking statements, see
identified by reference to a future        the information under the caption
period or periods, or by the use of        "Risk Factors" contained in our most
forward-looking terminology, such as       recent annual report on Form 10-K. We
"may," "will," "believe," "expect,"        do not undertake and specifically
"anticipate," "continue," or similar       disclaim any obligation, to publicly
terms or variations on those terms, or     release the result of any revisions
the negative of those terms. Actual        which may be made to any
results could differ materially from       forward-looking statements to reflect
those set forth in forward-looking         the occurrence of anticipated or
statements due to a variety of             unanticipated events or circumstances
factors, including, but not limited        after the date of such statements.
to, changes in interest rates, changes
in the yield curve, changes in             This Management's Discussion and
prepayment rates, the availability of      Analysis of Financial Condition and
mortgage-backed securities and other       Results of Operations should be read
securities for purchase, the               in conjunction with our most recent
availability of financing, and, if         annual report on Form 10-K. All
available, the terms of any financing,     references to "Annaly," "we," "us" or
changes in the market value of our         "our" mean Annaly Capital Management,
assets, changes in business conditions     Inc. and all entities owned by us,
and the general economy, our ability       except where it is made clear that the
to grow the commercial mortgage            term means only the parent
business, credit risks related to our      company. Refer to the Glossary of
investments in commercial real estate      Terms for definitions of commonly used
assets and corporate debt, our ability     terms in this quarterly report on Form
to consummate any contemplated             10-Q.

Item 2. Management's Discussion and Analysis

Overview 35 Business Environment 35 Economic Environment 35 Financial Regulatory Reform 36 Results of Operations 36 Net Income (Loss) Summary 36 Non-GAAP Financial Measures 37 Core Earnings Summary 38 Economic Interest Expense and Economic Net Interest Income 38 Interest Income and Average Earning Asset Yield 39 Economic Interest Expense and the Cost of Interest-Bearing Liabilities 39 Economic Net Interest Income 40 Other Income 40 General and Administrative Expenses 41 Unrealized Gains and Losses 42 Net Income (Loss) and Return on Average Equity 42 Financial Condition 42 Investment Securities 43 Contractual Obligations 44 Off-Balance Sheet Arrangements 45 Capital Management 45 Stockholders' Equity 46 Common and Preferred Stock 46 Distributions to Stockholders 47 Leverage and Capital 47 Risk Management 47 Risk Appetite 47 Governance 48 Description of Risks 48 Liquidity Risk Management 49 Funding 49 Excess Liquidity 50 Maturity Profile 51 Stress Testing 52 Liquidity Management Policies 52 Investment/Market Risk Management 52 Credit and Counterparty Risk Management 53 Operational Risk Management 54 Compliance, Regulatory and Legal Risk Management 55 Critical Accounting Policies 55 Valuation of Financial Instruments 55 Agency Mortgage-backed Securities and Debentures 55 Interest Rate Swaps 55 Revenue Recognition 55 Use of Estimates 55 Glossary of Terms 56

Item 2. Management's Discussion and Analysis

Overview                                   We own a portfolio of real estate
                                           related investments. We use our
We are a leading mortgage REIT that is     capital coupled with borrowed funds to
externally managed by Annaly               invest in real estate related
Management Company LLC (or Manager).       investments, earning the spread
Our common stock is listed on the New      between the yield on our assets and
York Stock Exchange under the symbol       the cost of our borrowings and hedging
"NLY." Since our founding in 1997, we      activities.
have strived to generate net income
for distribution to our stockholders       We are primarily organized around the
through the prudent selection and          following operations:
management of our investments.

Annaly, the parent company                Invests primarily in various types of
                                          Agency mortgage-backed securities and
                                          related derivatives to hedge these
Annaly Commercial Real Estate Group,      Wholly-owned subsidiary that was
Inc. (or ACREG) (formerly known           acquired during the second quarter of
as CreXus Investment Corp. (or CreXus))   2013 and specializes in acquiring,
                                          financing and managing commercial
                                          mortgage loans and other commercial
                                          real estate debt, commercial
                                          mortgage-backed securities and other
                                          commercial real estate-related assets.
RCap Securities, Inc.                     Wholly-owned subsidiary that operates
                                          as a broker-dealer, and is a member of
                                          the Financial Industry Regulatory
Fixed Income Discount Advisory Company    Wholly-owned subsidiary that manages an
(or FIDAC)                                affiliated REIT for which it earns fee
Annaly Middle Market Lending LLC          Wholly-owned subsidiary that engages in
                                          corporate middle market lending
Shannon Funding LLC                       Wholly-owned subsidiary that acquires
                                          residential mortgage loans and provides
                                          warehouse financing to residential
                                          mortgage originators in the United

Our asset portfolio totaled $79.5          Business Environment
billion as of March 31, 2014, which
includes $398.1 million of commercial      We have begun selectively adding
real estate securitized loans held in      Agency mortgage-backed securities to
a consolidated trust, compared to          our portfolio in the first quarter of
$75.1 billion as of December 31, 2013,     2014. We remain somewhat cautious as
reflecting an increase in Investment       the Federal Reserve (or Fed) has begun
Securities. ACREG represented              to wind down their purchases of Agency
approximately 2.1% of our asset            MBS. Additionally, further financial
portfolio as of March 31, 2014.            and housing regulatory reform is
                                           likely, and its effect on our business
We recorded a net loss of $203.4           is unclear.
million, or $0.23 per average basic
common share, for the quarter ended        Economic Environment
March 31, 2014 compared to net income
of $870.3 million, or $0.90 per basic      Economic growth, as measured by real
share, for the same period in 2013.        gross domestic product (or GDP),
Leverage at March 31, 2014 and             increased slightly by 0.1 percent on a
December 31, 2013 was 5.2:1 and 5.0:1,     seasonally-adjusted annualized rate in
respectively. At March 31, 2014 and        the first quarter of 2014.  The
December 31, 2013 the Company's            decline in pace of growth is likely
capital ratio was 15.2% and 15.1%,         partially due to unusually harsh
respectively. At March 31, 2014 and        weather conditions throughout the
December 31, 2013, the Company had a       United States, with the recent trend
common stock book value per share of       of 1-3 percent growth intact.
$12.30 and $12.13, respectively.           Employment growth was also steady
                                           throughout the quarter though
                                           similarly impacted by weather,
                                           averaging just below the recent trend
                                           of 200,000 jobs added per month, as
                                           measured by the Bureau of Labor
                                           Services. The annual growth in the

Item 2. Management's Discussion and Analysis

Fed's preferred price measure, or core
PCE which is defined as personal           coupon and the 10-year U.S. Treasury,
consumption expenditure prices             which had widened amidst volatility
excluding food and energy prices,          during the second quarter of 2013,
continued to run below expectations at     steadied through the end of the year
1.1 percent in February 2014. The          and first quarter of 2014. The higher
Federal Open Market Committee (FOMC or     level of mortgage rates resulted in
the Committee) continues to note that      decreased prepayment speeds and lower
"inflation persistently below its 2        mortgage originations.
percent objective could pose risks to
economic performance," but expects         Financial Regulatory Reform
that inflation will eventually trend
back towards its objective.                Uncertainty remains surrounding
                                           financial regulatory reform and its
Noting the cumulative progress toward      impact on the markets and the broader
maximum employment and an improving        economy. In particular, the government
labor market outlook, on January 29,       is attempting to change its
2014, the Fed announced that beginning     involvement through the Agencies in
in February 2014, it will add to its       the mortgage market. There have been
holdings of longer-term U.S. Treasury      numerous legislative initiatives
securities at a pace of $35 billion        introduced regarding the Agencies, and
per month rather than $40 billion per      it is unclear which approach, if any,
month, and will add to its holdings of     may become law. In addition,
Agency mortgage-backed securities at a     regulators remain focused on the
pace of $30 billion per month rather       wholesale funding markets, bank
than $35 billion per month. The FOMC       capital levels and shadow banking. It
continued the slowing of their pace of     is difficult to predict the ultimate
asset purchases in their March 18-19,      legislative and other regulatory
2014 meeting, reducing their purchases     outcomes of these efforts. We continue
of U.S. Treasuries to $30 billion per      to monitor these legislative and
month, and Agency mortgage-backed          regulatory developments and evaluate
securities to $25 billion per month.       their potential impact on our
In their April 30 meeting, the FOMC        business.
elected to further reduce their
purchases of U.S. Treasuries to $25        Results of Operations
billion per month, and Agency
mortgage-backed securities to $20          The results of our operations are
billion per month. In a further            affected by various factors, many of
modification to their policy rate          which are beyond our control. Certain
guidance, the FOMC removed the             of such risks and uncertainties are
language surrounding a specific            described herein (see "Special Note
unemployment rate threshold altogether     Regarding Forward-Looking Statements")
at their March meeting, in favor of a      and in Part I, Item 1A. "Risk factors"
broader assessment of "a wide range of     of our most recent annual report on
information." In addition, they            Form 10-K.
provided guidance on the expected
future path of their federal funds         Net Income (Loss) Summary
rate target, saying they anticipate
"even after employment and inflation       For the quarter ended March 31, 2014,
are near mandate-consistent levels,        we recorded a net loss of $203.4
economic conditions may, for some          million, or $0.23 per average basic
time, warrant keeping the target           common share, as compared to net
federal funds rate below levels the        income of $870.3 million, or $0.90 per
Committee views as normal in the           average basic common share, for the
longer run." In her first post-FOMC        quarter ended March 31, 2013. We
press conference Chairman Yellen           attribute the majority of the change
reiterated the Committee's commitment      in net income (loss) for the quarter
to accommodative monetary policy after     ended March 31, 2014 from the quarter
a "series of years in which growth has     ended March 31, 2013 to the change in
proven disappointing" and a "shallower     unrealized gains (losses) on interest
glide path" to the first federal funds     rate swaps, which resulted in an
increase. The 10-year Treasury, which      unrealized loss of $348.9 million for
closed to yield 3.03 percent on            the quarter ended March 31, 2014
December 31, 2013 correspondingly fell     compared to an unrealized gain of
to yield 2.72 percent on March 31,         $325.7 million for the same period in
2014. Volatility, as measured by the       2013. The change in the fair value of
Merrill Lynch MOVE index, similarly        interest rate swaps was primarily
declined during the same period from       attributable to the downtrend in
73.55 to 61.81.                            forward interest rates experienced
                                           during the quarter ended March 31,
In response to the Fed's taper             2014 compared to rising interest rates
decision and improved economic             during the same period in 2013. In
outlook, long-term rates, benchmarked      addition, net gains (losses) on
by the 10-year U.S. Treasury,              trading assets resulted in a loss of
initially rose through the end of the      $146.2 million for the quarter ended
year before steadying in the first         March 31, 2014 compared to a gain of
quarter of 2014. The mortgage basis,       $1.5 million for the same period in
or spread between the 30-year Agency       2013, net gains on
mortgage-backed securities current

Item 2. Management's Discussion and Analysis

disposal of investments decreased          2014 compared to an unrealized gain of
$103.1 million for the same                $80.1 million for the same period in
comparative period and the change in       2013.
unrealized gains (losses) on
interest-only Agency mortgage-backed       The following table presents our net
securities resulted in an unrealized       income (loss) summary for the quarters
loss of 20.8 million for the quarter       ended March 31, 2014 and 2013.
ended March 31,

                                                                  For the Quarter Ended March 31,
                                                                 2014                       2013
                                                              (dollars in thousands, except per share
Interest income                                             $       655,901          $           737,217
Interest expense                                                    124,971                      177,590
Net interest income                                                 530,930                      559,627
Other income (loss)                                                (682,902 )                    368,370
General and administrative expenses                                  47,378                       51,912
Income (loss) before income taxes                                  (199,350 )                    876,085
Income taxes                                                          4,001                        5,807
Net income (loss)                                                  (203,351 )                    870,278
Dividends on preferred stock                                         17,992                       17,992
Net income (loss) available (related) to
common stockholders                                         $      (221,343 )        $           852,286
Net income (loss) per share available (related) to common
Basic                                                       $         (0.23 )        $              0.90
Diluted                                                     $         (0.23 )        $              0.89
Weighted average number of common shares outstanding:
Basic                                                           947,458,813                  947,249,901
Diluted                                                         947,458,813                  994,815,169

Other information:
Average total assets                                        $    82,168,619          $       129,477,076
Average equity                                              $    12,484,884          $        15,615,407
Return on average total assets                                        (0.99 %)                      2.69 %
Return on average equity                                              (6.52 %)                     22.29 %

                                           Core earnings is defined as net income
                                           (loss) excluding gains or losses on
                                           disposals of investments and
                                           termination of interest rate swaps,
We use daily balances to calculate         unrealized gains or losses on interest
average Interest Earning Assets and        rate swaps and Agency interest-only
Interest Bearing Liabilities. For the      mortgage-backed securities and net
purpose of computing net interest          gains and losses on trading assets.
income and ratios relating to cost of
funds measures throughout this report,     We believe that core earnings, core
interest expense includes interest         earnings per average basic common
expense on interest rate swaps, which      share, economic interest expense and
is recorded in the Consolidated            economic net interest income provide
Statements of Comprehensive Income         meaningful information to consider, in
(Loss) as Realized gains (losses) on       addition to the respective amounts
interest rate swaps.                       prepared in accordance with GAAP. The
                                           non-GAAP measures help us to evaluate
Non-GAAP Financial Measures                our financial position and performance
                                           without the effects of certain
This Management Discussion and             transactions and GAAP adjustments that
Analysis section contains analysis and     are not necessarily indicative of our
discussion of non-GAAP measurements.       current investment portfolio and
The non-GAAP measurements include the      operations.
                                           Our presentation of the economic value
? core earnings;                           of our investment strategy has
? core earnings per average basic          important limitations. Other market
common share;                              participants may calculate core
? economic interest expense; and           earnings, core earnings per average
? economic net interest income.            basic common share, economic interest
                                           expense and economic net interest
                                           income differently than we calculate
                                           them, making comparative analysis

Item 2. Management's Discussion and Analysis

Although we believe that the               March 31, 2014 compared to $296.4
calculation of the economic value of       million, or $0.29 per average basic
our investment strategy described          common share, for the same period in
above helps evaluate and measure our       2013. We attribute the majority of the
financial position and performance         decrease in core earnings for the
without the effects of certain             quarter ended March 31, 2014 from the
transactions, it is of limited             quarter ended March 31, 2013 to a
usefulness as an analytical                decline in economic net interest
tool. Therefore, the economic value of     income of $63.7 million for the
our investment strategy should not be      quarter ended March 31, 2014 compared
viewed in isolation and is not a           to the same period in 2013, primarily
substitute for net income (loss), net      attributable to a decline in average
income (loss) per basic share              Interest Earning Assets to $81.9
available (related) to common              billion from $124.4 billion.
stockholders, interest expense and net
interest income computed in accordance     The following table provides GAAP
with GAAP.                                 measures of net income (loss) and net
                                           income (loss) per basic share
Core Earnings Summary                      available to common stockholders for
                                           the quarters ended March 31, 2014 and
Our core earnings were $239.7 million,     2013 and details with respect to
or $0.23 per average basic common          reconciling the aforementioned line
share, for the quarter ended               items on a non-GAAP basis:

                                                             For the Quarter Ended March 31,
                                                                2014                 2013
                                                            (dollars in thousands, except per
                                                                       share data)
GAAP net income (loss)                                      $   (203,351 )       $    870,278
Realized (gains) losses on termination of interest rate
swaps                                                              6,842               16,378
Unrealized (gains) losses on interest rate swaps                 348,942             (325,734 )
Net (gains) losses on disposal of investments                    (79,710 )           (182,843 )
Net (gains) losses on trading assets                             146,228               (1,549 )
Net unrealized (gains) losses on interest-only Agency
mortgage-backed securities                                        20,793              (80,127 )
Core earnings                                               $    239,744         $    296,403

GAAP net income per average basic common share              $      (0.23 )       $       0.90
Core earnings per average basic common share                $       0.23         $       0.29

Economic Interest Expense and Economic     composed of interest expense on our
Net Interest Income                        Interest Bearing Liabilities plus
                                           interest expense on interest rate
We believe the economic value of our       swaps, reflects total contractual
investment strategy is depicted by the     interest payments.
economic net interest income we earn.
We calculate economic net interest         The following table provides GAAP
income by determining our GAAP net         measures of interest expense and net
interest income and reducing it by         interest income and details with
. . .
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