ANNALY CAPITAL MANAGEMENT INC - Quarter Report: 2019 March (Form 10-Q)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 |
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2019
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _________________
COMMISSION FILE NUMBER: 1-13447
ANNALY CAPITAL MANAGEMENT, INC.
(Exact Name of Registrant as Specified in its Charter)
MARYLAND | 22-3479661 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
1211 AVENUE OF THE AMERICAS | |
NEW YORK, NEW YORK | 10036 |
(Address of principal executive offices) | (Zip Code) |
(212) 696-0100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☑ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company ☐ | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
Common Stock, par value $0.01 per share | NLY | New York Stock Exchange |
7.625% Series C Cumulative Redeemable Preferred Stock | NLY.C | New York Stock Exchange |
7.50% Series D Cumulative Redeemable Preferred Stock | NLY.D | New York Stock Exchange |
6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock | NLY.F | New York Stock Exchange |
6.50% Series G Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock | NLY.G | New York Stock Exchange |
8.125% Series H Cumulative Redeemable Preferred Stock | NLY.H | New York Stock Exchange |
The number of shares of the registrant’s Common Stock outstanding on April 30, 2019 was 1,456,197,143.
ANNALY CAPITAL MANAGEMENT, INC. | |
FORM 10-Q | |
TABLE OF CONTENTS | |
Page | |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS |
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (dollars in thousands, except per share data) | |||||||
March 31, | December 31, | ||||||
2019 | 2018 (1) | ||||||
(Unaudited) | |||||||
Assets | |||||||
Cash and cash equivalents (includes pledged assets of $1,338,507 and $1,581,775, respectively) (2) | $ | 1,522,605 | $ | 1,735,749 | |||
Securities (includes pledged assets of $95,845,559 and $87,193,316, respectively) (3) | 104,993,271 | 92,623,788 | |||||
Loans, net (includes pledged assets of $2,243,369 and $2,997,051, respectively) (4) | 3,879,324 | 4,585,975 | |||||
Mortgage servicing rights (includes pledged assets of $3,260 and $3,616, respectively) | 500,745 | 557,813 | |||||
Assets transferred or pledged to securitization vehicles | 4,365,300 | 3,833,200 | |||||
Real estate, net | 734,239 | 739,473 | |||||
Derivative assets | 148,178 | 200,503 | |||||
Reverse repurchase agreements | 523,449 | 650,040 | |||||
Receivable for unsettled trades | 1,574,251 | 68,779 | |||||
Interest receivable | 390,930 | 357,365 | |||||
Goodwill and intangible assets, net | 98,551 | 100,854 | |||||
Other assets | 441,706 | 333,988 | |||||
Total assets | $ | 119,172,549 | $ | 105,787,527 | |||
Liabilities and stockholders’ equity | |||||||
Liabilities | |||||||
Repurchase agreements | $ | 88,554,170 | $ | 81,115,874 | |||
Other secured financing | 4,144,623 | 4,183,311 | |||||
Debt issued by securitization vehicles | 3,693,766 | 3,347,062 | |||||
Mortgages payable | 510,386 | 511,056 | |||||
Derivative liabilities | 775,980 | 889,750 | |||||
Payable for unsettled trades | 4,763,376 | 583,036 | |||||
Interest payable | 424,391 | 570,928 | |||||
Dividends payable | 434,431 | 394,129 | |||||
Other liabilities | 89,982 | 74,580 | |||||
Total liabilities | 103,391,105 | 91,669,726 | |||||
Stockholders’ equity | |||||||
Preferred stock, par value $0.01 per share, 75,950,000 authorized, 73,400,00 issued and outstanding | 1,778,168 | 1,778,168 | |||||
Common stock, par value $0.01 per share, 1,924,050,000 authorized, 1,448,103,248 and 1,313,763,450 issued and outstanding, respectively | 14,481 | 13,138 | |||||
Additional paid-in capital | 20,112,875 | 18,794,331 | |||||
Accumulated other comprehensive income (loss) | (319,376 | ) | (1,979,865 | ) | |||
Accumulated deficit | (5,809,931 | ) | (4,493,660 | ) | |||
Total stockholders’ equity | 15,776,217 | 14,112,112 | |||||
Noncontrolling interests | 5,227 | 5,689 | |||||
Total equity | 15,781,444 | 14,117,801 | |||||
Total liabilities and equity | $ | 119,172,549 | $ | 105,787,527 |
(1) | Derived from the audited consolidated financial statements at December 31, 2018. |
(2) | Includes cash of consolidated Variable Interest Entities (“VIEs”) of $40.7 million and $30.4 million at March 31, 2019 and December 31, 2018, respectively. |
(3) | Excludes $273.4 million and $83.6 million at March 31, 2019 and December 31, 2018, respectively, of non-Agency mortgage-backed securities and $246.6 million and $224.3 million at March 31, 2019 and December 31, 2018, respectively, of commercial mortgage-backed securities in consolidated VIEs pledged as collateral and eliminated from the Company’s Consolidated Statements of Financial Condition. |
(4) | Includes $101.3 million and $97.5 million of residential mortgage loans held for sale, $42.0 million and $42.2 million of commercial mortgage loans held for sale and $44.5 million and $0 of corporate loans held for sale at March 31, 2019 and December 31, 2018, respectively. |
See notes to consolidated financial statements.
1
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (dollars in thousands, except per share data) (Unaudited) | |||||||
For The Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Net interest income | |||||||
Interest income | $ | 866,186 | $ | 879,487 | |||
Interest expense | 647,695 | 367,421 | |||||
Net interest income | 218,491 | 512,066 | |||||
Realized and unrealized gains (losses) | |||||||
Net interest component of interest rate swaps | 134,035 | (48,160 | ) | ||||
Realized gains (losses) on termination or maturity of interest rate swaps | (588,256 | ) | 834 | ||||
Unrealized gains (losses) on interest rate swaps | (390,556 | ) | 977,285 | ||||
Subtotal | (844,777 | ) | 929,959 | ||||
Net gains (losses) on disposal of investments | (93,916 | ) | 13,468 | ||||
Net gains (losses) on other derivatives | (115,159 | ) | (47,145 | ) | |||
Net unrealized gains (losses) on instruments measured at fair value through earnings | 47,629 | (51,593 | ) | ||||
Loan loss provision | (5,703 | ) | — | ||||
Subtotal | (167,149 | ) | (85,270 | ) | |||
Total realized and unrealized gains (losses) | (1,011,926 | ) | 844,689 | ||||
Other income (loss) | 30,502 | 34,023 | |||||
General and administrative expenses | |||||||
Compensation and management fee | 44,833 | 44,529 | |||||
Other general and administrative expenses | 38,904 | 17,981 | |||||
Total general and administrative expenses | 83,737 | 62,510 | |||||
Income (loss) before income taxes | (846,670 | ) | 1,328,268 | ||||
Income taxes | 2,581 | 564 | |||||
Net income (loss) | (849,251 | ) | 1,327,704 | ||||
Net income (loss) attributable to noncontrolling interests | (101 | ) | (96 | ) | |||
Net income (loss) attributable to Annaly | (849,150 | ) | 1,327,800 | ||||
Dividends on preferred stock | 32,494 | 33,766 | |||||
Net income (loss) available (related) to common stockholders | $ | (881,644 | ) | $ | 1,294,034 | ||
Net income (loss) per share available (related) to common stockholders | |||||||
Basic | $ | (0.63 | ) | $ | 1.12 | ||
Diluted | $ | (0.63 | ) | $ | 1.12 | ||
Weighted average number of common shares outstanding | |||||||
Basic | 1,398,614,205 | 1,159,617,848 | |||||
Diluted | 1,398,614,205 | 1,160,103,185 | |||||
Other comprehensive income (loss) | |||||||
Net income (loss) | $ | (849,251 | ) | $ | 1,327,704 | ||
Unrealized gains (losses) on available-for-sale securities | 1,599,398 | (1,879,479 | ) | ||||
Reclassification adjustment for net (gains) losses included in net income (loss) | 61,091 | 5,419 | |||||
Other comprehensive income (loss) | 1,660,489 | (1,874,060 | ) | ||||
Comprehensive income (loss) | 811,238 | (546,356 | ) | ||||
Comprehensive income (loss) attributable to noncontrolling interests | (101 | ) | (96 | ) | |||
Comprehensive income (loss) attributable to Annaly | 811,339 | (546,260 | ) | ||||
Dividends on preferred stock | 32,494 | 33,766 | |||||
Comprehensive income (loss) attributable to common stockholders | $ | 778,845 | $ | (580,026 | ) |
See notes to consolidated financial statements.
2
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY | ||||||||
(dollars in thousands) (Unaudited) | ||||||||
For The Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Preferred stock | ||||||||
Beginning of period | $ | 1,778,168 | $ | 1,720,381 | ||||
Issuance | — | 411,335 | ||||||
Redemption | — | (408,548 | ) | |||||
End of period | $ | 1,778,168 | $ | 1,723,168 | ||||
Common stock | ||||||||
Beginning of period | $ | 13,138 | $ | 11,596 | ||||
Issuance | 1,342 | — | ||||||
Direct purchase and dividend reinvestment | 1 | 1 | ||||||
End of period | $ | 14,481 | $ | 11,597 | ||||
Additional paid-in capital | ||||||||
Beginning of period | $ | 18,794,331 | $ | 17,221,265 | ||||
Stock compensation expense | 178 | 133 | ||||||
Issuance | 1,317,475 | — | ||||||
Redemption of preferred stock | — | (3,952 | ) | |||||
Direct purchase and dividend reinvestment | 891 | 745 | ||||||
End of period | $ | 20,112,875 | $ | 17,218,191 | ||||
Accumulated other comprehensive income (loss) | ||||||||
Beginning of period | $ | (1,979,865 | ) | $ | (1,126,020 | ) | ||
Unrealized gains (losses) on available-for-sale securities | 1,599,398 | (1,879,479 | ) | |||||
Reclassification adjustment for net gains (losses) included in net income (loss) | 61,091 | 5,419 | ||||||
End of period | $ | (319,376 | ) | $ | (3,000,080 | ) | ||
Accumulated deficit | ||||||||
Beginning of period | $ | (4,493,660 | ) | $ | (2,961,749 | ) | ||
Net income (loss) attributable to Annaly | (849,150 | ) | 1,327,800 | |||||
Dividends declared on preferred stock (1) | (32,494 | ) | (33,766 | ) | ||||
Dividends and dividend equivalents declared on common stock and share-based awards (1) | (434,627 | ) | (347,897 | ) | ||||
End of period | $ | (5,809,931 | ) | $ | (2,015,612 | ) | ||
Total stockholder’s equity | $ | 15,776,217 | $ | 13,937,264 | ||||
Noncontrolling interests | ||||||||
Beginning of period | $ | 5,689 | $ | 6,100 | ||||
Net income (loss) attributable to noncontrolling interests | (101 | ) | (96 | ) | ||||
Equity contributions from (distributions to) noncontrolling interests | (361 | ) | (333 | ) | ||||
End of period | $ | 5,227 | $ | 5,671 | ||||
Total equity | $ | 15,781,444 | $ | 13,942,935 | ||||
(1) See Note titled “Capital Stock” for dividends per share for each class of shares. |
See notes to consolidated financial statements.
3
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||
(dollars in thousands) | |||||||
For The Three Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Cash flows from operating activities | |||||||
Net income (loss) | $ | (849,251 | ) | $ | 1,327,704 | ||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities | |||||||
Amortization of premiums and discounts of investments, net | 246,150 | 92,976 | |||||
Amortization of securitized debt premiums and discounts and deferred financing costs | (3,627 | ) | 408 | ||||
Depreciation, amortization and other noncash expenses | 7,072 | 5,822 | |||||
Net (gains) losses on disposals of investments | 93,916 | (13,468 | ) | ||||
Net (gains) losses on investments and derivatives | 458,086 | (878,547 | ) | ||||
Income from unconsolidated joint ventures | 1,960 | 618 | |||||
Loan loss provision | 5,703 | — | |||||
Payments on purchases of loans held for sale | (49,070 | ) | (37,190 | ) | |||
Proceeds from sales and repayments of loans held for sale | 44,817 | 30,178 | |||||
Net receipts (payments) on derivatives | (633,221 | ) | 951,021 | ||||
Net change in | |||||||
Other assets | (107,040 | ) | (42,361 | ) | |||
Interest receivable | (29,491 | ) | (2,963 | ) | |||
Interest payable | (146,537 | ) | 31,628 | ||||
Other liabilities | 18,436 | (132,910 | ) | ||||
Net cash provided by (used in) operating activities | (942,097 | ) | 1,332,916 | ||||
Cash flows from investing activities | |||||||
Payments on purchases of residential securities | (18,374,100 | ) | (3,718,947 | ) | |||
Proceeds from sales of residential securities | 7,822,334 | 463,214 | |||||
Principal payments on residential securities | 2,343,383 | 2,696,245 | |||||
Payments on purchases of MSRs | — | (249 | ) | ||||
Payments on purchases of corporate debt | (125,351 | ) | (230,103 | ) | |||
Proceeds from sales of corporate debt | 179,112 | — | |||||
Principal payments on corporate debt | 33,545 | 92,820 | |||||
Originations and purchases of commercial real estate investments | (269,489 | ) | (91,647 | ) | |||
Proceeds from sales of commercial real estate investments | 41,013 | 9,556 | |||||
Principal repayments on commercial real estate investments | 578,031 | 130,555 | |||||
Proceeds from sales of real estate | 6,661 | — | |||||
Proceeds from reverse repurchase agreements | 28,107,306 | 20,050,112 | |||||
Payments on reverse repurchase agreements | (27,980,715 | ) | (20,250,571 | ) | |||
Distributions in excess of cumulative earnings from unconsolidated joint ventures | 241 | 2,813 | |||||
Payments on purchases of residential mortgage loans held for investment | (373,745 | ) | (167,124 | ) | |||
Proceeds from repayments of residential mortgage loans held for investment | 107,783 | 67,384 | |||||
Net cash provided by (used in) investing activities | (7,903,991 | ) | (945,942 | ) | |||
Cash flows from financing activities | |||||||
Proceeds from repurchase agreements and other secured financing | 1,411,469,975 | 1,299,589,620 | |||||
Principal payments on repurchase agreements and other secured financing | (1,404,070,367 | ) | (1,299,277,944 | ) | |||
Proceeds from issuances of securitized debt | 905,265 | 279,203 | |||||
Principal repayments on securitized debt | (561,955 | ) | (317,773 | ) | |||
Payment of deferred financing cost | (1,781 | ) | — | ||||
Net proceeds from stock offerings, direct purchases and dividend reinvestments | 1,319,709 | 412,081 | |||||
Redemptions of preferred stock | — | (412,500 | ) | ||||
Principal payments on mortgages payable | (722 | ) | — | ||||
Net contributions (distributions) from (to) noncontrolling interests | (361 | ) | (333 | ) | |||
Dividends paid | (426,819 | ) | (381,642 | ) | |||
Net cash provided by (used in) financing activities | 8,632,944 | (109,288 | ) | ||||
Net (decrease) increase in cash and cash equivalents | $ | (213,144 | ) | $ | 277,686 | ||
Cash and cash equivalents including cash pledged as collateral, beginning of period | 1,735,749 | 706,589 | |||||
Cash and cash equivalents including cash pledged as collateral, end of period | $ | 1,522,605 | $ | 984,275 | |||
Supplemental disclosure of cash flow information | |||||||
Interest received | $ | 1,079,294 | $ | 1,017,534 | |||
Dividends received | $ | 2,116 | $ | 1,650 | |||
Interest paid (excluding interest paid on interest rate swaps) | $ | 633,805 | $ | 320,988 | |||
Net interest paid on interest rate swaps | $ | 34,663 | $ | 39,206 | |||
Taxes received (paid) | $ | (30 | ) | $ | 2 | ||
Noncash investing activities | |||||||
Receivable for unsettled trades | $ | 1,574,251 | $ | 45,126 | |||
Payable for unsettled trades | $ | 4,763,376 | $ | 91,327 | |||
Net change in unrealized gains (losses) on available-for-sale securities, net of reclassification adjustment | $ | 1,660,489 | $ | (1,874,060 | ) | ||
Noncash financing activities | |||||||
Dividends declared, not yet paid | $ | 434,431 | $ | 347,897 |
See notes to consolidated financial statements.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
1. DESCRIPTION OF BUSINESS |
The Company’s four investment groups are primarily comprised of the following:
Investment Groups | Description |
Annaly Agency Group | Invests in Agency mortgage-backed securities (“MBS”) collateralized by residential mortgages which are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. |
Annaly Residential Credit Group | Invests primarily in non-Agency residential mortgage assets within securitized products and residential mortgage loan markets. |
Annaly Commercial Real Estate Group | Originates and invests in commercial mortgage loans, securities, and other commercial real estate debt and equity investments. |
Annaly Middle Market Lending Group | Provides financing to private equity-backed middle market businesses across the capital structure. |
The Company has elected to be taxed as a Real Estate Investment Trust (“REIT”) as defined under the Internal Revenue Code of 1986, as amended, and regulations promulgated thereunder (the “Code”).
2. BASIS OF PRESENTATION |
The accompanying consolidated financial statements and related notes are unaudited and should be read in conjunction with the audited consolidated financial statements included in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the “2018 Form 10-K”). The consolidated financial information as of December 31, 2018 has been derived from audited consolidated financial statements included in the Company’s 2018 Form 10-K.
The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported balance sheet amounts and/or disclosures at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
In the opinion of management, all normal, recurring adjustments have been included for a fair presentation of this interim financial information. Interim period operating results may not be indicative of the operating results for a full year.
3. SIGNIFICANT ACCOUNTING POLICIES |
Principles of Consolidation – The consolidated financial statements include the accounts of the entities where the Company has a controlling financial interest. In order to determine whether the Company has a controlling financial interest, it first evaluates whether an entity is a voting interest entity (“VOE”) or a variable interest entity (“VIE”). All intercompany balances and transactions have been eliminated in consolidation.
Voting Interest Entities – A VOE is an entity that has sufficient equity and in which equity investors have a controlling financial interest. The Company consolidates VOEs where it has a majority of the voting equity of such VOE.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
Variable Interest Entities – A VIE is defined as an entity in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. A VIE is required to be consolidated by its primary beneficiary, which is defined as the party that has both (i) the power to control the activities that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.
The Company performs ongoing reassessments of whether changes in the facts and circumstances regarding the Company’s involvement with a VIE causes the Company’s consolidation conclusion to change. Refer to the “Variable Interest Entities” Note for further information.
Equity Method Investments - For entities that are not consolidated, but where the Company has significant influence over the operating or financial decisions of the entity, the Company accounts for the investment under the equity method of accounting. In accordance with the equity method of accounting, the Company will recognize its share of earnings or losses of the investee in the period in which they are reported by the investee. The Company also considers whether there are any indicators of other-than-temporary impairment of joint ventures accounted for under the equity method. These investments are included in Real estate, net and Other assets with income or loss included in Other income (loss).
Cash and Cash Equivalents – Cash and cash equivalents include cash on hand, cash held in money market funds on an overnight basis and cash pledged as collateral with counterparties. Cash deposited with clearing organizations is carried at cost, which approximates fair value. Cash and securities deposited with clearing organizations and collateral held in the form of cash on margin with counterparties to the Company’s interest rate swaps and other derivatives totaled $1.3 billion and $1.6 billion at March 31, 2019 and December 31, 2018.
Equity Securities – The Company may invest in equity securities that are not accounted for under the equity method or do not result in consolidation. These equity securities are required to be reported at fair value with unrealized gains and losses reported in the Consolidated Statements of Comprehensive Income (Loss) as Net unrealized gains (losses) on instruments measured at fair value through earnings, unless the securities do not have readily determinable fair values. For such equity securities without readily determinable fair values, the Company has elected to carry the securities at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. For equity securities carried at fair value through earnings, dividends are recorded in earnings on the declaration date. Dividends from equity securities without readily determinable fair values are recognized as income when received to the extent they are distributed from net accumulated earnings.
Fair Value Measurements and the Fair Value Option – The Company reports various investments at fair value, including certain eligible financial instruments elected to be accounted for under the fair value option (“FVO”). The Company chooses to elect the fair value option in order to simplify the accounting treatment for certain financial instruments. If an item is accounted for at fair value, including financial instruments elected under the FVO, it is presented at fair value in the Consolidated Statements of Financial Condition and any change in fair value is recorded in Net unrealized gains (losses) on instruments measured at fair value through earnings in the Consolidated Statements of Comprehensive Income (Loss). For additional information regarding financial instruments for which the Company has elected the fair value option see the table in the “Financial Instruments” Note.
Refer to the “Fair Value Measurements” Note for a complete discussion on the methodology utilized by the Company to estimate the fair value of certain financial instruments.
Offsetting Assets and Liabilities - The Company elected to present all derivative instruments on a gross basis as discussed in the “Derivative Instruments” Note. Reverse repurchase and repurchase agreements are presented net in the Consolidated Statements of Financial Condition if they are subject to netting agreements and they meet the offsetting criteria. Please see below and refer to the “Secured Financing” Note for further discussion on reverse repurchase and repurchase agreements.
Derivative Instruments – Derivatives are accounted for in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging, which requires recognition of all derivatives as either assets or liabilities at fair value in the Consolidated Statements of Financial Condition with changes in fair value recognized in the Consolidated Statements of Comprehensive Income (Loss). The changes in the estimated fair value are presented within Net gains (losses) on other derivatives with the exception of interest rate swaps which are separately presented. None of the Company’s derivative transactions have been designated as hedging instruments for accounting purposes. Refer to the “Derivative Instruments” Note for further discussion.
Stock Based Compensation – The Company is required to measure and recognize in the consolidated financial statements the compensation cost relating to share-based payment transactions. The Company recognizes compensation expense ratably over the requisite service period for the entire award.
Interest Income - The Company recognizes coupon income, which is a component of interest income, based upon the outstanding principal amounts of the financial instruments and their contractual terms. In addition, the Company amortizes or accretes premiums or discounts into interest income for its Agency mortgage-backed securities (other than multifamily securities), taking into account
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
estimates of future principal prepayments in the calculation of the effective yield. The Company recalculates the effective yield as differences between anticipated and actual prepayments occur. Using third-party model and market information to project future cash flows and expected remaining lives of securities, the effective interest rate determined for each security is applied as if it had been in place from the date of the security’s acquisition. The amortized cost of the security is then adjusted to the amount that would have existed had the new effective yield been applied since the acquisition date, which results in a cumulative premium amortization adjustment in each period. The adjustment to amortized cost is offset with a charge or credit to interest income. Changes in interest rates and other market factors will impact prepayment speed projections and the amount of premium amortization recognized in any given period.
Premiums or discounts associated with the purchase of Agency interest-only securities, reverse mortgages and residential credit securities are amortized or accreted into interest income based upon current expected future cash flows with any adjustment to yield made on a prospective basis.
Premiums and discounts associated with the purchase of residential mortgage loans and with those transferred or pledged to securitization trusts are primarily amortized or accreted into interest income over their estimated remaining lives using the effective interest rates inherent in the estimated cash flows from the mortgage loans. Amortization of premiums and accretion of discounts are presented in Interest income in the Consolidated Statements of Comprehensive Income (Loss). Refer to the “Interest Income and Interest Expense” Note for further discussion of interest income.
Income Taxes – The Company has elected to be taxed as a REIT and intends to comply with the provisions of the Code, with respect thereto. As a REIT, the Company will not incur federal income tax to the extent that it distributes its taxable income to its stockholders. The Company and certain of its direct and indirect subsidiaries have made separate joint elections to treat these subsidiaries as taxable REIT subsidiaries (“TRSs”). As such, each of these TRSs is taxable as a domestic C corporation and subject to federal, state and local income taxes based upon its taxable income. Refer to the “Income Taxes” Note for further discussion on income taxes.
Recent Accounting Pronouncements
The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”). ASUs not listed below were not applicable, not expected to have a significant impact on the Company’s consolidated financial statements when adopted or did not have a significant impact on the Company’s consolidated financial statements upon adoption.
7
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
Standard | Description | Effective Date | Effect on the Financial Statements or Other Significant Matters | |
Standards that are not yet adopted | ||||
ASU 2016-13 Financial instruments - Credit losses (Topic 326): Measurement of credit losses on financial instruments | This ASU updates the existing incurred loss model to a current expected credit loss (“CECL”) model for financial assets and net investments in leases that are not accounted for at fair value through earnings. The amendments affect certain loans, held-to-maturity debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures and any other financial assets not excluded from the scope. There are also limited amendments to the impairment model for available-for-sale debt securities. | January 1, 2020 (early adoption permitted) | The Company plans to adopt the new standard on its effective date. While the Company is continuing to assess the impact the ASU will have on the consolidated financial statements, the measurement of expected credit losses under the CECL model will be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts of the financial assets in scope of the model. The Company has decided to apply a probability of default methodology to loans that will be impacted by the adoption and is continuing to assess the impact on the consolidated financial statements and determine appropriate internal controls and financial statement disclosures. Further, based on the amended guidance for available-for-sale debt securities, the Company: | |
• | will be required to use an allowance approach to recognize credit impairment, with the allowance to be limited to the amount by which the security’s fair value is less than its amortized cost basis; | |||
• | may not consider the length of time fair value has been below amortized cost, and | |||
• | may not consider recoveries of fair value after the balance sheet date when assessing whether a credit loss exists. | |||
Standard | Description | Effective Date | Effect on the Financial Statements or Other Significant Matters | |
Standards that were adopted | ||||
ASU 2017-01 Business combinations (Topic 805): Clarifying the definition of a business | This update provides a screen to determine and a framework to evaluate when a set of assets and activities is a business. | January 1, 2018 | The amendments are expected to result in fewer transactions being accounted for as business combinations. | |
ASU 2016-15 Statement of cash flows (Topic 230): Classification of certain cash receipts and cash payments | This update provides specific guidance on certain cash flow classification issues, including classification of cash receipts and payments that have aspects of more than one class of cash flows. If cash flows cannot be separated by source or use, the appropriate classification should depend on the activity that is likely to be the predominant source or use of cash flows. | January 1, 2018 | As a result of adopting this standard, the Company reclassified its cash flows on reverse repurchase and repurchase agreements entered into by Arcola Securities, Inc. (“Arcola”) from operating activities to investing and financing activities, respectively, in the Consolidated Statements of Cash Flows. The Company applied the retrospective transition method, which resulted in reclassification of comparative periods. |
8
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
4. FINANCIAL INSTRUMENTS |
Financial Instruments (1) | |||||||||
Balance Sheet Line Item | Type / Form | Measurement Basis | March 31, 2019 | December 31, 2018 | |||||
Assets | (dollars in thousands) | ||||||||
Securities | Agency mortgage-backed securities (2) | Fair value, with unrealized gains (losses) through other comprehensive income | $ | 102,222,237 | $ | 89,840,322 | |||
Securities | Agency mortgage-backed securities (3) | Fair value, with unrealized gains (losses) through earnings | 871,289 | 912,673 | |||||
Securities | Credit risk transfer securities | Fair value, with unrealized gains (losses) through earnings | 607,945 | 552,097 | |||||
Securities | Non-agency mortgage-backed securities | Fair value, with unrealized gains (losses) through earnings | 1,116,569 | 1,161,938 | |||||
Securities | Commercial real estate debt investments - CMBS | Fair value, with unrealized gains (losses) through other comprehensive income | 96,566 | 138,242 | |||||
Securities | Commercial real estate debt investments - CMBS (4) | Fair value, with unrealized gains (losses) through earnings | 78,665 | 18,516 | |||||
Total securities | 104,993,271 | 92,623,788 | |||||||
Loans, net | Residential mortgage loans | Fair value, with unrealized gains (losses) through earnings | 1,311,720 | 1,359,806 | |||||
Loans, net | Commercial real estate debt and preferred equity, held for investment | Amortized cost | 722,962 | 1,296,803 | |||||
Loans, net | Commercial loans held for sale, net | Lower of amortized cost or fair value | 42,035 | 42,184 | |||||
Loans, net | Corporate debt | Amortized cost | 1,758,082 | 1,887,182 | |||||
Loans, net | Corporate debt held for sale, net | Lower of amortized cost or fair value | 44,525 | — | |||||
Total loans, net | 3,879,324 | 4,585,975 | |||||||
Assets transferred or pledged to securitization vehicles | Residential mortgage loans | Fair value, with unrealized gains (losses) through earnings | 1,425,668 | 1,094,831 | |||||
Assets transferred or pledged to securitization vehicles | Commercial mortgage loans | Fair value, with unrealized gains (losses) through earnings | 2,939,632 | 2,738,369 | |||||
Total assets transferred or pledged to securitization vehicles | 4,365,300 | 3,833,200 | |||||||
Reverse repurchase agreements | Reverse repurchase agreements | Amortized cost | 523,449 | 650,040 | |||||
Liabilities | |||||||||
Repurchase agreements | Repurchase agreements | Amortized cost | 88,554,170 | 81,115,874 | |||||
Other secured financing | Loans | Amortized cost | 4,144,623 | 4,183,311 | |||||
Debt issued by securitization vehicles | Securities | Fair value, with unrealized gains (losses) through earnings | 3,693,766 | 3,347,062 | |||||
Mortgages payable | Loans | Amortized cost | 510,386 | 511,056 | |||||
(1) Receivable for unsettled trades, Interest receivable, Payable for unsettled trades, Interest payable and Dividends payable are accounted for at cost. (2) Includes Agency pass-through, collateralized mortgage obligation (“CMO”) and multifamily securities. (3) Includes interest-only securities and reverse mortgages. (4) Includes conduit CMBS. |
5. SECURITIES |
9
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
Other-Than-Temporary Impairment – Management evaluates available-for-sale securities and held-to-maturity debt securities for other-than-temporary impairment at least quarterly, and more frequently when economic or market conditions warrant such evaluation.
When the fair value of an available-for-sale security is less than its amortized cost, the security is considered impaired. For securities that are impaired, the Company determines if it (1) has the intent to sell the security, (2) is more likely than not that it will be required to sell the security before recovery of its amortized cost basis, or (3) does not expect to recover the entire amortized cost basis of the security. Further, the security is analyzed for credit loss (the difference between the present value of cash flows expected to be collected and the amortized cost basis). The credit loss, if any, will then be recognized in the Consolidated Statements of Comprehensive Income (Loss), while the balance of losses related to other factors will be recognized as a component of Other comprehensive income (loss). When the fair value of a held-to-maturity security is less than the cost, the Company performs an analysis to determine whether it expects to recover the entire cost basis of the security. There was no other-than-temporary impairment recognized for the three months ended March 31, 2019 and 2018.
Agency Mortgage-Backed Securities - The Company invests in mortgage pass-through certificates, collateralized mortgage obligations and other MBS representing interests in or obligations backed by pools of residential or multifamily mortgage loans and certificates. Many of the underlying loans and certificates are guaranteed by the Government National Mortgage Association (“Ginnie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”) or the Federal National Mortgage Association (“Fannie Mae”) (collectively, “Agency mortgage-backed securities”).
Agency mortgage-backed securities may include forward contracts for Agency mortgage-backed securities purchases or sales of a generic pool, on a to-be-announced basis (“TBA securities”). TBA securities without intent to accept delivery (“TBA derivatives”), are accounted for as derivatives as discussed in the “Derivative Instruments” Note.
CRT Securities - CRT securities are risk sharing instruments issued by Fannie Mae and Freddie Mac, and similarly structured transactions arranged by third party market participants. CRT securities are designed to synthetically transfer mortgage credit risk from Fannie Mae and Freddie Mac to private investors.
Non-Agency Mortgage-Backed Securities- The Company invests in non-Agency mortgage-backed securities such as those issued in prime loan, Alt-A loan, subprime loan, non-performing loan (“NPL”) and re-performing loan (“RPL”) securitizations.
Agency mortgage-backed securities, non-Agency mortgage-backed securities and CRT securities are referred to herein as “Residential Securities.” Although the Company generally intends to hold most of its Residential Securities until maturity, it may, from time to time, sell any of its Residential Securities as part of the overall management of its portfolio.
Commercial Mortgage-Backed Securities (“Commercial Securities”) - Certain commercial mortgage-backed securities are classified as available-for-sale and reported at fair value with unrealized gains and losses reported as a component of Other comprehensive income (loss). Management evaluates such Commercial Securities for other-than-temporary impairment at least quarterly. The Company elected the fair value option on certain Commercial Securities, including conduit commercial mortgage-backed securities, to simplify the accounting where the unrealized gains and losses on these financial instruments are recorded through earnings.
The following represents a rollforward of the activity for the Company’s securities:
March 31, 2019 | |||||||||||
Residential Securities | Commercial Securities | Total | |||||||||
(dollars in thousands) | |||||||||||
Beginning balance January 1 | $ | 92,467,030 | $ | 156,758 | $ | 92,623,788 | |||||
Purchases | 23,649,271 | 98,633 | 23,747,904 | ||||||||
Sales | (10,456,466 | ) | (39,834 | ) | (10,496,300 | ) | |||||
Principal paydowns | (2,343,260 | ) | (42,859 | ) | (2,386,119 | ) | |||||
Amortization / accretion | (247,447 | ) | 78 | (247,369 | ) | ||||||
Fair value adjustment | 1,748,912 | 2,455 | 1,751,367 | ||||||||
Ending balance March 31 | $ | 104,818,040 | $ | 175,231 | $ | 104,993,271 |
10
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The following tables present the Company’s Residential Investment Securities portfolio that was carried at their fair value at March 31, 2019 and December 31, 2018:
March 31, 2019 | |||||||||||||||||||||||||||
Principal / Notional | Remaining Premium | Remaining Discount | Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | |||||||||||||||||||||
Agency | (dollars in thousands) | ||||||||||||||||||||||||||
Fixed-rate pass-through | $ | 92,064,633 | $ | 4,060,260 | $ | (41,614 | ) | $ | 96,083,279 | $ | 789,557 | $ | (1,118,629 | ) | $ | 95,754,207 | |||||||||||
Adjustable-rate pass-through | 4,046,258 | 204,672 | (1,317 | ) | 4,249,613 | 7,395 | (104,972 | ) | 4,152,036 | ||||||||||||||||||
CMO | 10,699 | 50 | — | 10,749 | 199 | — | 10,948 | ||||||||||||||||||||
Interest-only | 5,522,373 | 1,070,160 | — | 1,070,160 | 1,900 | (239,282 | ) | 832,778 | |||||||||||||||||||
Multifamily | 2,186,848 | 18,783 | (5,249 | ) | 2,200,382 | 104,664 | — | 2,305,046 | |||||||||||||||||||
Reverse mortgages | 34,415 | 4,031 | — | 38,446 | 68 | (3 | ) | 38,511 | |||||||||||||||||||
Total agency securities | $ | 103,865,226 | $ | 5,357,956 | $ | (48,180 | ) | $ | 103,652,629 | $ | 903,783 | $ | (1,462,886 | ) | $ | 103,093,526 | |||||||||||
Residential credit | |||||||||||||||||||||||||||
CRT | $ | 593,949 | $ | 24,891 | $ | (16,883 | ) | $ | 601,957 | $ | 9,488 | $ | (3,500 | ) | $ | 607,945 | |||||||||||
Alt-A | 215,630 | 374 | (30,467 | ) | 185,537 | 12,926 | (95 | ) | 198,368 | ||||||||||||||||||
Prime | 312,534 | 2,205 | (21,319 | ) | 293,420 | 16,786 | (179 | ) | 310,027 | ||||||||||||||||||
Subprime | 393,362 | 1,480 | (61,911 | ) | 332,931 | 38,800 | (446 | ) | 371,285 | ||||||||||||||||||
NPL/RPL | 3,431 | — | (22 | ) | 3,409 | 27 | — | 3,436 | |||||||||||||||||||
Prime jumbo (>=2010 vintage) | 220,289 | 1,070 | (4,626 | ) | 216,733 | 3,004 | (915 | ) | 218,822 | ||||||||||||||||||
Prime jumbo (>=2010 vintage) Interest-only | 837,030 | 12,445 | — | 12,445 | 2,517 | (331 | ) | 14,631 | |||||||||||||||||||
Total residential credit securities | $ | 2,576,225 | $ | 42,465 | $ | (135,228 | ) | $ | 1,646,432 | $ | 83,548 | $ | (5,466 | ) | $ | 1,724,514 | |||||||||||
Total residential securities | $ | 106,441,451 | $ | 5,400,421 | $ | (183,408 | ) | $ | 105,299,061 | $ | 987,331 | $ | (1,468,352 | ) | $ | 104,818,040 | |||||||||||
Commercial | |||||||||||||||||||||||||||
Commercial securities | $ | 180,992 | $ | 497 | $ | (9,513 | ) | $ | 171,976 | $ | 3,546 | $ | (291 | ) | $ | 175,231 | |||||||||||
Total securities | $ | 106,622,443 | $ | 5,400,918 | $ | (192,921 | ) | $ | 105,471,037 | $ | 990,877 | $ | (1,468,643 | ) | $ | 104,993,271 | |||||||||||
December 31, 2018 | |||||||||||||||||||||||||||
Principal / Notional | Remaining Premium | Remaining Discount | Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | |||||||||||||||||||||
Agency | (dollars in thousands) | ||||||||||||||||||||||||||
Fixed-rate pass-through | $ | 81,144,650 | $ | 3,810,808 | $ | (36,987 | ) | $ | 84,918,471 | $ | 264,443 | $ | (2,130,362 | ) | $ | 83,052,552 | |||||||||||
Adjustable-rate pass-through | 4,835,983 | 247,981 | (1,337 | ) | 5,082,627 | 7,127 | (151,770 | ) | 4,937,984 | ||||||||||||||||||
CMO | 11,113 | 53 | — | 11,166 | 55 | — | 11,221 | ||||||||||||||||||||
Interest-only | 6,007,008 | 1,179,855 | — | 1,179,855 | 1,446 | (307,412 | ) | 873,889 | |||||||||||||||||||
Multifamily | 1,802,292 | 12,329 | (5,332 | ) | 1,809,289 | 32,753 | (3,477 | ) | 1,838,565 | ||||||||||||||||||
Reverse mortgages | 34,650 | 4,175 | — | 38,825 | 69 | (110 | ) | 38,784 | |||||||||||||||||||
Total agency investments | $ | 93,835,696 | $ | 5,255,201 | $ | (43,656 | ) | $ | 93,040,233 | $ | 305,893 | $ | (2,593,131 | ) | $ | 90,752,995 | |||||||||||
Residential credit | |||||||||||||||||||||||||||
CRT | $ | 542,374 | $ | 28,444 | $ | (15,466 | ) | $ | 555,352 | $ | 7,879 | $ | (11,134 | ) | $ | 552,097 | |||||||||||
Alt-A | 202,889 | 349 | (31,238 | ) | 172,000 | 10,559 | (198 | ) | 182,361 | ||||||||||||||||||
Prime | 353,108 | 2,040 | (23,153 | ) | 331,995 | 12,821 | (830 | ) | 343,986 | ||||||||||||||||||
Subprime | 423,166 | 1,776 | (65,005 | ) | 359,937 | 35,278 | (594 | ) | 394,621 | ||||||||||||||||||
NPL/RPL | 3,431 | — | (30 | ) | 3,401 | 37 | — | 3,438 | |||||||||||||||||||
Prime jumbo (>=2010 vintage) | 225,567 | 1,087 | (4,691 | ) | 221,963 | 1,439 | (2,744 | ) | 220,658 | ||||||||||||||||||
Prime jumbo (>=2010 vintage) Interest-only | 860,085 | 12,820 | — | 12,820 | 4,054 | — | 16,874 | ||||||||||||||||||||
Total residential credit securities | $ | 2,610,620 | $ | 46,516 | $ | (139,583 | ) | $ | 1,657,468 | $ | 72,067 | $ | (15,500 | ) | $ | 1,714,035 | |||||||||||
Total residential securities | $ | 96,446,316 | $ | 5,301,717 | $ | (183,239 | ) | $ | 94,697,701 | $ | 377,960 | $ | (2,608,631 | ) | $ | 92,467,030 | |||||||||||
Commercial | |||||||||||||||||||||||||||
Commercial securities | $ | 155,921 | $ | 9,778 | $ | (9,740 | ) | $ | 155,959 | $ | 1,659 | $ | (860 | ) | $ | 156,758 | |||||||||||
Total securities | $ | 96,602,237 | $ | 5,311,495 | $ | (192,979 | ) | $ | 94,853,660 | $ | 379,619 | $ | (2,609,491 | ) | $ | 92,623,788 |
11
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The following table presents the Company’s Agency mortgage-backed securities portfolio by issuing Agency concentration at March 31, 2019 and December 31, 2018:
March 31, 2019 | December 31, 2018 | ||||||
Investment Type | (dollars in thousands) | ||||||
Fannie Mae | $ | 66,385,692 | $ | 60,270,432 | |||
Freddie Mac | 36,564,254 | 30,397,556 | |||||
Ginnie Mae | 143,580 | 85,007 | |||||
Total | $ | 103,093,526 | $ | 90,752,995 |
Actual maturities of the Company’s Residential Securities are generally shorter than stated contractual maturities because actual maturities of the portfolio are generally affected by periodic payments and prepayments of principal on the underlying mortgages.
The following table summarizes the Company’s Residential Securities at March 31, 2019 and December 31, 2018, according to their estimated weighted average life classifications:
March 31, 2019 | December 31, 2018 | ||||||||||||||
Estimated Fair Value | Amortized Cost | Estimated Fair Value | Amortized Cost | ||||||||||||
Estimated weighted average life | (dollars in thousands) | ||||||||||||||
Less than one year | $ | 13,863 | $ | 14,032 | $ | 13,447 | $ | 13,670 | |||||||
Greater than one year through five years | 16,081,685 | 16,091,945 | 11,710,172 | 11,928,973 | |||||||||||
Greater than five years through ten years | 87,693,108 | 88,181,059 | 80,202,479 | 82,218,464 | |||||||||||
Greater than ten years | 1,029,384 | 1,012,025 | 540,932 | 536,594 | |||||||||||
Total | $ | 104,818,040 | $ | 105,299,061 | $ | 92,467,030 | $ | 94,697,701 |
The estimated weighted average lives of the Residential Securities at March 31, 2019 and December 31, 2018 in the table above are based upon projected principal prepayment rates. The actual weighted average lives of the Residential Securities could be longer or shorter than projected.
The following table presents the gross unrealized losses and estimated fair value of the Company’s Agency mortgage-backed securities, accounted for as available-for-sale where the fair value option has not been elected, by length of time that such securities have been in a continuous unrealized loss position at March 31, 2019 and December 31, 2018.
March 31, 2019 | December 31, 2018 | ||||||||||||||||||||
Estimated Fair Value (1) | Gross Unrealized Losses (1) | Number of Securities (1) | Estimated Fair Value (1) | Gross Unrealized Losses (1) | Number of Securities (1) | ||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||
Less than 12 months | $ | 12,188,284 | $ | (197,039 | ) | 89 | $ | 22,418,036 | $ | (432,352 | ) | 713 | |||||||||
12 Months or more | 42,463,903 | (1,026,562 | ) | 1,513 | 43,134,843 | (1,853,257 | ) | 1,476 | |||||||||||||
Total | $ | 54,652,187 | $ | (1,223,601 | ) | 1,602 | $ | 65,552,879 | $ | (2,285,609 | ) | 2,189 | |||||||||
(1) Excludes interest-only mortgage-backed securities and reverse mortgages. |
The decline in value of these securities is solely due to market conditions and not the quality of the assets. Substantially all of the Agency mortgage-backed securities are “AAA” rated or carry an implied “AAA” rating. The investments are not considered to be other-than-temporarily impaired because the Company currently has the ability and intent to hold the investments to maturity or for a period of time sufficient for a forecasted market price recovery up to or beyond the cost of the investments, and it is not more likely than not that the Company will be required to sell the investments before recovery of the amortized cost bases, which may be maturity.
During the three months ended March 31, 2019 and 2018, the Company disposed of $10.5 billion and $463.4 million of Residential Securities, resulting in net realized gains (losses) of ($92.5) million and $13.0 million, respectively.
12
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
6. LOANS |
Nonaccrual Status – If collection of a loan’s principal or interest is in doubt or the loan is 90 days or more past due, interest income is not accrued. For nonaccrual status loans carried at fair value or held for sale, interest is not accrued, but is recognized on a cash basis. For nonaccrual status loans carried at amortized cost, if collection of principal is not in doubt, but collection of interest is in doubt, interest income is recognized on a cash basis. If collection of principal is in doubt, any interest received is applied against principal until collectability of the remaining balance is no longer in doubt; at that point, any interest income is recognized on a cash basis. Generally, a loan is returned to accrual status when the borrower has resumed paying the full amount of the scheduled contractual obligation, if all principal and interest amounts contractually due are reasonably assured of repayment within a reasonable period of time and there is a sustained period of repayment performance by the borrower.
Allowance for Losses – The Company evaluates the need for a loss reserve on its loans. A provision for loan losses may be established when it is probable the Company will not collect amounts contractually due or all amounts previously estimated to be collectible. Management assesses the credit quality of the portfolio and adequacy of loan loss reserves on a quarterly basis, or more frequently as necessary. Significant judgment is required in this analysis. Depending on the expected recovery of its investment, the Company considers the estimated net recoverable value of the loans as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the competitive landscape where the borrower conducts business. To determine if loan loss allowances are required on investments in corporate debt, the Company reviews the monthly and/or quarterly financial statements of the borrowers, verifies loan compliance packages, if applicable, and analyzes current results relative to budgets and sensitivities performed at inception of the investment. Because these determinations are based upon projections of future economic events, which are inherently subjective, the amounts ultimately realized may differ materially from the carrying value as of the reporting date.
The Company may be exposed to various levels of credit risk depending on the nature of its investments and credit enhancements, if any, supporting its assets. The Company’s core investment process includes procedures related to the initial approval and periodic monitoring of credit risk and other risks associated with each investment. The Company’s investment underwriting procedures include evaluation of the underlying borrowers’ ability to manage and operate their respective properties or companies. Management reviews loan-to-value metrics at origination or acquisition of a new investment and if events occur that trigger re-evaluation by management.
Management generally reviews the most recent financial information produced by the borrower, which may include, but is not limited to, net operating income (“NOI”), debt service coverage ratios, property debt yields (net cash flow or NOI divided by the amount of outstanding indebtedness), loan per unit and rent rolls relating to each of the Company’s commercial real estate loans and preferred equity interests (“CRE Debt and Preferred Equity Investments”), and may consider other factors management deems important. Management also reviews market pricing to determine each borrower’s ability to refinance their respective assets at the maturity of each loan, economic trends (both macro and those affecting the property specifically), and the supply and demand of competing projects in the sub-market in which each subject property is located. Management monitors the financial condition and operating results of its borrowers and continually assesses the future outlook of the borrower’s financial performance in light of industry developments, management changes and company-specific considerations.
The Company’s internal loan risk ratings are based on the guidance provided by the Office of the Comptroller of the Currency for commercial real estate lending. The Company’s internal risk rating categories include “Performing”, “Performing - Closely Monitored”, “Performing - Special Mention”, “Substandard”, “Doubtful” or “Loss”. Performing loans meet all present contractual obligations. Performing - Closely Monitored loans meet all present contractual obligations, but are transitional or could be exhibiting some weakness in both leverage and liquidity. Performing - Special Mention loans meet all present contractual obligations, but exhibit potential weakness that deserves management’s close attention and if uncorrected, may result in deterioration of repayment prospects. Substandard loans are inadequately protected by sound worth and paying capacity of the obligor or of the collateral pledged with a distinct possibility that loss will be sustained if some of the deficiencies are not corrected. Doubtful loans are Substandard loans whereby collection of all contractual principal and interest is highly questionable or improbable. Loss loans are considered uncollectible.
For the three months ended March 31, 2019, the Company recorded a loan loss provision of $5.7 million.
13
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
As of March 31, 2019 and December 31, 2018, the Company’s loan loss provision was $9.2 million and $3.5 million, respectively. There was no provision for loan loss recorded as of and for three months ended March 31, 2018.
The following table presents the activity of the Company’s loan investments, including loans held for sale, for the three months ended March 31, 2019:
Residential | Commercial | Corporate | Total | ||||||||||||
(dollars in thousands) | |||||||||||||||
Beginning balance January 1, 2019 | $ | 1,359,806 | $ | 1,338,987 | $ | 1,887,182 | $ | 4,585,975 | |||||||
Purchases | 425,488 | 165,258 | 125,351 | 716,097 | |||||||||||
Sales and transfers (1) | (444,963 | ) | (733,922 | ) | (179,112 | ) | (1,357,997 | ) | |||||||
Principal Payments | (32,676 | ) | (534 | ) | (33,545 | ) | (66,755 | ) | |||||||
Gains / (losses) | 4,460 | (5,703 | ) | — | (1,243 | ) | |||||||||
Amortization / accretion | (395 | ) | 911 | 2,731 | 3,247 | ||||||||||
Ending balance March 31, 2019 | $ | 1,311,720 | $ | 764,997 | $ | 1,802,607 | $ | 3,879,324 | |||||||
(1) Includes securitizations, syndications and transfers to securitization vehicles. |
The carrying value of the Company’s residential loans held for sale was $101.3 million and $97.5 million at March 31, 2019 and December 31, 2018, respectively. The carrying value of the Company’s commercial loans held for sale was $42.0 million and $42.2 million at March 31, 2019 and December 31, 2018, respectively. The carrying value of the Company’s corporate loans held for sale was $44.5 million at March 31, 2019.
Residential
The Company’s residential mortgage loans are primarily comprised of performing adjustable-rate and fixed-rate whole loans. Additionally, the Company consolidates a collateralized financing entity that securitized prime adjustable-rate jumbo residential mortgage loans. The Company also consolidates securitization trusts in which it had purchased subordinated securities because it also has certain powers and rights to direct the activities of such trusts. Please refer to the “Variable Interest Entities” Note for further information related to the Company’s consolidated Residential Mortgage Loan Trusts.
The following table presents the fair value and the unpaid principal balances of the residential mortgage loan portfolio, including loans transferred or pledged to securitization vehicles, at March 31, 2019 and December 31, 2018:
March 31, 2019 | December 31, 2018 | |||||
(dollars in thousands) | ||||||
Fair value | $ | 2,737,388 | $ | 2,454,637 | ||
Unpaid principal balance | $ | 2,686,557 | $ | 2,425,657 |
The following table provides information regarding the line items and amounts recognized in the Consolidated Statements of Comprehensive Income (loss) for the three months ended March 31, 2019 and 2018 for these investments:
For the Three Months Ended | |||||||
March 31, 2019 | March 31, 2018 | ||||||
(dollars in thousands) | |||||||
Interest income | $ | 29,991 | $ | 13,495 | |||
Net gains (losses) on disposal of investments | (5,223 | ) | (1,758 | ) | |||
Net unrealized gains (losses) on instruments measured at fair value through earnings | 17,821 | (9,864 | ) | ||||
Total included in net income (loss) | $ | 42,589 | $ | 1,873 |
14
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The following table provides the geographic concentrations based on the unpaid principal balances at March 31, 2019 and December 31, 2018 for the residential mortgage loans, including loans transferred or pledged to securitization vehicles:
Geographic Concentrations of Residential Mortgage Loans | ||||
March 31, 2019 | December 31, 2018 | |||
Property location | % of Balance | Property location | % of Balance | |
California | 54.2% | California | 53.7% | |
Florida | 6.7% | Florida | 7.1% | |
New York | 6.1% | New York | 6.6% | |
All other (none individually greater than 5%) | 33.0% | All other (none individually greater than 5%) | 32.6% | |
Total | 100.0% | 100.0% |
The following table provides additional data on the Company’s residential mortgage loans, including loans transferred or pledged to securitization vehicles, at March 31, 2019 and December 31, 2018:
March 31, 2019 | December 31, 2018 | ||||||
Portfolio Range | Portfolio Weighted Average | Portfolio Range | Portfolio Weighted Average | ||||
(dollars in thousands) | |||||||
Unpaid principal balance | $1 - $3,448 | $457 | $0 - $3,500 | $457 | |||
Interest rate | 2.00% - 9.25% | 4.85% | 2.00% - 7.75% | 4.72% | |||
Maturity | 1/1/2028 - 1/1/2059 | 6/24/2046 | 1/1/2028 - 11/1/2058 | 1/11/2046 | |||
FICO score at loan origination | 505 - 823 | 752 | 505 - 823 | 752 | |||
Loan-to-value ratio at loan origination | 8% - 111% | 68% | 8% - 111% | 68% |
At March 31, 2019 and December 31, 2018, approximately 45% and 47%, respectively, of the carrying value of the Company’s residential mortgage loans, including loans transferred or pledged to securitization vehicles, were adjustable-rate.
Commercial
The Company’s commercial real estate loans are comprised of adjustable-rate and fixed-rate loans. The difference between the principal amount of a loan and proceeds at acquisition is recorded as either a discount or premium. Commercial real estate loans that are designated as held for investment and are originated or purchased by the Company are carried at their outstanding principal balance, net of unamortized origination fees and costs, premiums or discounts, less an allowance for losses, if necessary. Origination fees and costs, premiums or discounts are amortized into interest income over the life of the loan.
Preferred equity interests are designated as held for investment and are carried at their outstanding principal balance, net of unamortized origination fees and costs, premiums or discounts, less a reserve for estimated losses, if necessary.
At March 31, 2019, and December 31, 2018, approximately 90% and 88%, respectively, of the carrying value of the Company’s CRE Debt and Preferred Equity Investments, including loans transferred or pledged to securitization vehicles and excluding commercial loans held for sale, were adjustable-rate.
At March 31, 2019 and December 31, 2018, commercial real estate investments held for investment were comprised of the following:
March 31, 2019 | December 31, 2018 | ||||||||||||||||||||
Outstanding Principal | Carrying Value (1) | Percentage of Loan Portfolio (2) | Outstanding Principal | Carrying Value (1) | Percentage of Loan Portfolio (2) | ||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||
Senior mortgages | $ | 405,968 | $ | 403,497 | 27.6 | % | $ | 988,248 | $ | 981,202 | 75.6 | % | |||||||||
Senior securitized mortgages (3) | 739,058 | 733,864 | 50.1 | % | — | — | — | % | |||||||||||||
Mezzanine loans | 329,262 | 319,465 | 22.3 | % | 319,663 | 315,601 | 24.4 | % | |||||||||||||
Total | $ | 1,474,288 | $ | 1,456,826 | 100.0 | % | $ | 1,307,911 | $ | 1,296,803 | 100.0 | % |
(1) | Carrying value includes unamortized origination fees of $8.3 million and $7.6 million at March 31, 2019 and December 31, 2018, respectively. |
(2) | Based on outstanding principal. |
(3) | Assets of consolidated VIEs. |
15
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The following tables represent a rollforward of the activity for the Company’s commercial real estate investments held for investment at March 31, 2019 and December 31, 2018:
March 31, 2019 | |||||||||||||||
Senior Mortgages | Senior Securitized Mortgages (1) | Mezzanine Loans | Total | ||||||||||||
(dollars in thousands) | |||||||||||||||
Net carrying value (January 1, 2019) | $ | 981,202 | $ | — | $ | 315,601 | $ | 1,296,803 | |||||||
Originations & advances (principal) | 148,341 | 739,058 | 18,274 | 905,673 | |||||||||||
Principal payments | (385 | ) | — | — | (385 | ) | |||||||||
Transfers | (730,235 | ) | — | (8,675 | ) | (738,910 | ) | ||||||||
Net (increase) decrease in origination fees | 3,815 | (5,488 | ) | (184 | ) | (1,857 | ) | ||||||||
Amortization of net origination fees | 759 | 294 | 152 | 1,205 | |||||||||||
Allowance for loan losses | — | — | (5,703 | ) | (5,703 | ) | |||||||||
Net carrying value (March 31, 2019) | $ | 403,497 | $ | 733,864 | $ | 319,465 | $ | 1,456,826 |
December 31, 2018 | |||||||||||||||
Senior Mortgages | Mezzanine Loans | Preferred Equity | Total | ||||||||||||
(dollars in thousands) | |||||||||||||||
Net carrying value (January 1, 2018) | $ | 625,900 | $ | 394,442 | $ | 8,985 | $ | 1,029,327 | |||||||
Originations & advances (principal) | 575,953 | 52,224 | — | 628,177 | |||||||||||
Principal payments | (216,849 | ) | (127,575 | ) | (9,000 | ) | (353,424 | ) | |||||||
Net (increase) decrease in origination fees | (6,624 | ) | (370 | ) | — | (6,994 | ) | ||||||||
Amortization of net origination fees | 2,822 | 376 | 15 | 3,213 | |||||||||||
Allowance for loan losses | — | (3,496 | ) | — | (3,496 | ) | |||||||||
Net carrying value (December 31, 2018) | $ | 981,202 | $ | 315,601 | $ | — | $ | 1,296,803 |
(1) | Assets of consolidated VIEs. |
The following table provides the internal loan risk ratings of commercial real estate investments held for investment as of March 31, 2019 and December 31, 2018.
March 31, 2019 | ||||||||||||||||||||||||||||||||||
Internal Ratings | ||||||||||||||||||||||||||||||||||
Investment Type | Outstanding Principal | Percentage of CRE Debt and Preferred Equity Portfolio | Performing | Performing - Closely Monitored | Performing - Special Mention | Substandard (1) | Doubtful (2) | Loss | Total | |||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||
Senior mortgages | $ | 405,968 | 27.6 | % | $ | 276,479 | $ | 65,099 | $ | — | $ | 64,390 | $ | — | $ | — | $ | 405,968 | ||||||||||||||||
Senior securitized mortgages (3) | 739,058 | 50.1 | % | 466,258 | 217,800 | 55,000 | — | — | — | 739,058 | ||||||||||||||||||||||||
Mezzanine loans | 329,262 | 22.3 | % | 139,721 | 49,538 | 96,400 | — | 43,603 | — | 329,262 | ||||||||||||||||||||||||
Total | $ | 1,474,288 | 100.0 | % | $ | 882,458 | $ | 332,437 | $ | 151,400 | $ | 64,390 | $ | 43,603 | — | $ | 1,474,288 |
16
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
December 31, 2018 | ||||||||||||||||||||||||||||||||||
Internal Ratings | ||||||||||||||||||||||||||||||||||
Investment Type | Outstanding Principal | Percentage of CRE Debt and Preferred Equity Portfolio | Performing | Performing - Closely Monitored | Performing - Special Mention | Substandard (1) | Doubtful (2) | Loss | Total | |||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||
Senior mortgages | $ | 988,248 | 75.6 | % | $ | 653,066 | $ | 215,792 | $ | 55,000 | $ | 64,390 | $ | — | $ | — | $ | 988,248 | ||||||||||||||||
Mezzanine loans | 319,663 | 24.4 | % | 140,776 | 38,884 | 96,400 | 36,603 | 7,000 | — | 319,663 | ||||||||||||||||||||||||
Total | $ | 1,307,911 | 100.0 | % | $ | 793,842 | $ | 254,676 | $ | 151,400 | $ | 100,993 | $ | 7,000 | $ | — | $ | 1,307,911 |
(1) | The Company rated one loan as of March 31, 2019 and two loans as of December 31, 2018 as Substandard. The Company evaluated whether an impairment exists and determined in each case that, based on quantitative and qualitative factors, the Company expects repayment of contractual amounts due. |
(2) | The Company rated two loans as Doubtful and evaluated for impairment for which a loan loss allowance of $5.7 million was recognized for the three months ended March 31, 2019. The Company rated one loan as Doubtful and evaluated for impairment for which a loan loss allowance of $3.5 million was recognized for the three months ended December 31, 2018. |
(3) | Assets of consolidated VIEs. |
Corporate Debt
The Company’s investments in corporate loans typically take the form of senior secured loans primarily in first or second lien positions. The Company’s senior secured loans generally have stated maturities of five to seven years. In connection with these senior secured loans the Company receives a security interest in certain assets of the borrower and such assets support repayment of such loans. Senior secured loans are generally exposed to less credit risk than more junior loans given their seniority to scheduled principal and interest and priority of security in the assets of the borrower. Interest income from coupon payments is accrued based upon the outstanding principal amounts of the debt and its contractual terms. Premiums and discounts are amortized or accreted into interest income using the effective interest method.
The Company invests in corporate loans through its Annaly Middle Market Lending Group. The industry and rate attributes of the portfolio at March 31, 2019 and December 31, 2018 are as follows:
17
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
Industry Dispersion | |||||||||||||||||||||||
March 31, 2019 | December 31, 2018 | ||||||||||||||||||||||
Fixed Rate | Floating Rate | Total | Fixed Rate | Floating Rate | Total | ||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||
Aircraft and parts | $ | — | $ | 41,394 | $ | 41,394 | $ | — | $ | 41,342 | $ | 41,342 | |||||||||||
Arrangement of transportation of freight & cargo | — | 21,715 | 21,715 | — | 21,632 | 21,632 | |||||||||||||||||
Coating, engraving and allied services | — | 54,532 | 54,532 | — | 57,223 | 57,223 | |||||||||||||||||
Computer programming, data processing & other computer related services | — | 282,060 | 282,060 | — | 242,185 | 242,185 | |||||||||||||||||
Drugs | — | 35,926 | 35,926 | — | 35,882 | 35,882 | |||||||||||||||||
Electrical work | — | 41,598 | 41,598 | — | 41,760 | 41,760 | |||||||||||||||||
Electronic components & accessories | — | 24,083 | 24,083 | — | 24,059 | 24,059 | |||||||||||||||||
Engineering, architectural & surveying | — | 109,823 | 109,823 | — | 80,748 | 80,748 | |||||||||||||||||
Grocery stores | — | 23,394 | 23,394 | — | 23,431 | 23,431 | |||||||||||||||||
Insurance agents, brokers and services | — | 48,661 | 48,661 | — | 48,942 | 48,942 | |||||||||||||||||
Mailing, reproduction, commercial art and photography, and stenographic | — | 14,819 | 14,819 | — | 14,843 | 14,843 | |||||||||||||||||
Management and public relations services | — | 312,807 | 312,807 | — | 487,046 | 487,046 | |||||||||||||||||
Medical and dental laboratories | — | 26,811 | 26,811 | — | 26,858 | 26,858 | |||||||||||||||||
Metal cans & shipping containers | — | 118,385 | 118,385 | — | 118,248 | 118,248 | |||||||||||||||||
Miscellaneous business services | — | 19,581 | 19,581 | — | 19,622 | 19,622 | |||||||||||||||||
Miscellaneous equipment rental and leasing | — | 49,674 | 49,674 | — | 49,552 | 49,552 | |||||||||||||||||
Miscellaneous health and allied services, not elsewhere classified | — | 69,217 | 69,217 | — | 56,003 | 56,003 | |||||||||||||||||
Miscellaneous plastic products | — | 10,037 | 10,037 | — | 9,953 | 9,953 | |||||||||||||||||
Motor vehicles and motor vehicle equipment | — | 16,417 | 16,417 | — | 16,563 | 16,563 | |||||||||||||||||
Motor vehicles and motor vehicle parts and supplies | — | 28,984 | 28,984 | — | 29,046 | 29,046 | |||||||||||||||||
Nonferrous foundries (castings) | — | 12,933 | 12,933 | — | 12,948 | 12,948 | |||||||||||||||||
Offices and clinics of doctors of medicine | — | 97,841 | 97,841 | — | 97,877 | 97,877 | |||||||||||||||||
Offices of clinics and other health practitioners | — | 21,051 | 21,051 | — | 21,100 | 21,100 | |||||||||||||||||
Public warehousing and storage | — | 97,245 | 97,245 | — | 84,278 | 84,278 | |||||||||||||||||
Research, development and testing services | — | 45,676 | 45,676 | — | 33,381 | 33,381 | |||||||||||||||||
Schools and educational services, not elsewhere classified | — | 19,809 | 19,809 | — | 19,805 | 19,805 | |||||||||||||||||
Services allied with the exchange of securities | — | — | — | — | 14,877 | 14,877 | |||||||||||||||||
Surgical, medical, and dental instruments and supplies | — | 96,768 | 96,768 | — | 96,607 | 96,607 | |||||||||||||||||
Telephone communications | — | 61,366 | 61,366 | — | 61,371 | 61,371 | |||||||||||||||||
Total | $ | — | $ | 1,802,607 | $ | 1,802,607 | $ | — | $ | 1,887,182 | $ | 1,887,182 |
The table below reflects the Company’s aggregate positions by their respective place in the capital structure of the borrowers at March 31, 2019 and December 31, 2018.
March 31, 2019 | December 31, 2018 | ||||||
(dollars in thousands) | |||||||
First lien loans | $ | 1,232,524 | $ | 1,346,356 | |||
Second lien loans | 570,083 | 540,826 | |||||
Total | $ | 1,802,607 | $ | 1,887,182 |
7. MORTGAGE SERVICING RIGHTS |
The Company owns variable interests in an entity that invests in MSRs; refer to the “Variable Interest Entities” Note for a detailed discussion on this topic.
MSRs represent the rights associated with servicing pools of residential mortgage loans. The Company and its subsidiaries do not originate or directly service residential mortgage loans. Rather, these activities are carried out by duly licensed subservicers who perform substantially all servicing functions for the loans underlying the MSRs. The Company intends to hold the MSRs as investments and elected to account for all of its investments in MSRs at fair value. As such, they are recognized at fair value on the accompanying Consolidated Statements of Financial Condition with changes in the estimated fair value presented as a component of Net unrealized gains (losses) on instruments measured at fair value through earnings in the Consolidated Statements
18
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
of Comprehensive Income (Loss). Servicing income, net of servicing expenses, is reported in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).
The following table presents activity related to MSRs for three months ended March 31, 2019 and 2018:
March 31, 2019 | March 31, 2018 | ||||||
(dollars in thousands) | |||||||
Fair value, beginning of period | $ | 557,813 | $ | 580,860 | |||
Change in fair value due to | |||||||
Changes in valuation inputs or assumptions (1) | (43,089 | ) | 36,674 | ||||
Other changes, including realization of expected cash flows | (13,979 | ) | (21,156 | ) | |||
Fair value, end of period | $ | 500,745 | $ | 596,378 | |||
(1) Principally represents changes in discount rates and prepayment speed inputs used in valuation model, primarily due to changes in interest rates. |
For the three months ended March 31, 2019 and 2018, the Company recognized $27.8 million and $28.5 million of net servicing income from MSRs in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).
8. VARIABLE INTEREST ENTITIES |
The Company has investments in Freddie Mac securitizations (“FREMF Trusts”) which are structured as pass-through entities that receive principal and interest on the underlying collateral and distribute those payments to the certificate holders. The FREMF Trusts are VIEs and the Company is considered to be the primary beneficiary as a result of its ability to replace the special servicer without cause through its ownership of the Class C Certificates and its current designation as the directing certificate holder. The FREMF Trusts are included in the “Commercial Trusts” in the tables below.
The Company purchased approximately $94 million of a subordinated tranche in a securitization trust in 2018. As the directing holder, the Company can remove the special servicer with or without cause as well as direct activities that are considered to be most significant to the economic performance of the trust. As such, the Company was determined to be the primary beneficiary and consolidates the trust. The trust is included in “Commercial Trusts” in the tables below.
Upon consolidation, the Company elected the fair value option for the financial assets and liabilities of the Commercial Trusts in order to avoid an accounting mismatch, and to represent more faithfully the economics of its interest in the entities. The fair value option requires that changes in fair value be reflected in the Company’s Consolidated Statements of Comprehensive Income (Loss). The Company applied the practical expedient under ASU 2014-07, whereby the Company determines whether the fair value of the financial assets or financial liabilities is more observable as a basis for measuring the less observable financial instruments. The Company has determined that the fair value of the financial liabilities of the Commercial Trusts are more observable, since the prices for these liabilities are primarily available from third-party pricing services utilized for multifamily mortgage-backed securities, while the individual assets of the trusts are inherently less capable of precise measurement given their illiquid nature and the limitations on available information related to these assets. Given that the Company’s methodology for valuing the financial assets of the Commercial Trusts are an aggregate fair value derived from the fair value of the financial liabilities, the Company has determined that the fair value of each of the financial assets in their entirety should be classified in Level 2 of the fair value measurement hierarchy.
The Commercial Trusts mortgage loans had an aggregate unpaid principal balance of $2.2 billion at March 31, 2019. At March 31, 2019, there were no loans 90 days or more past due or on nonaccrual status. There is no gain or loss attributable to instrument-specific credit risk of the underlying loans or securitized debt securities at March 31, 2019 based upon the Company’s process of monitoring events of default on the underlying mortgage loans.
In February 2019, the Company closed NLY 2019-FL2 a managed commercial real estate collateralized loan obligation (“CLO”) securitization with a face value of $857.3 million, which provides non-recourse financing to the Company collateralized by certain commercial real estate mortgage loans originated by the Company. As of March 31, 2019 a total of $629.0 million of notes were held by third parties and the Company retained or purchased $228.5 million of subordinated notes and preferred shares, which eliminate upon consolidation. The Company has determined that it is the primary beneficiary because it has the right to direct the servicer as well as remove the special servicer without cause and it holds variable interests that could be potentially significant to the CLO. The transfers of loans to the CLO did not qualify for sale accounting because the Company maintains effective control over the loans. The Company elected the fair value option for the financial liabilities issued by the CLO in order to simplify the accounting; however, the commercial loans continue to be carried at amortized cost as they were not eligible for the fair value option as it was not elected at origination of the loans. The Company incurred $8.3 million of costs in connection with the CLO
19
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
that were expensed as incurred during the three months ended March 31, 2019. The aggregate unpaid principal balance of loans in the CLO was $739.1 million at March 31, 2019 and there were no loans 90 days or more past due or on nonaccrual status. There is no gain or loss attributable to instrument-specific credit risk of the debt securities at March 31, 2019 based upon the Company’s process of monitoring events of default on the underlying mortgage loans. The contractual principal amount of the CLO debt held by third parties was $628.9 million at March 31, 2019.
The Company consolidates a securitization trust, which is included in “Residential Trusts” in the tables below, that issued residential mortgage-backed securities that are collateralized by residential mortgage loans that had been transferred to the trust by one of the Company’s subsidiaries. The Company owns the subordinate securities, and a subsidiary of the Company continues to be the master servicer. As such, the Company is deemed to be the primary beneficiary of the residential mortgage trust and consolidates the entity. The Company has elected the fair value option for the financial assets and liabilities of this VIE, but has not elected to apply the practical expedient under ASU 2014-13 as prices of both the financial assets and financial liabilities of the residential mortgage trust are available from third-party pricing services. The contractual principal amount of the residential mortgage trust’s debt held by third parties was $82.8 million at March 31, 2019.
In March 2018, the Company closed OBX 2018-1, with a face value of $327.5 million. In July 2018, the Company closed OBX 2018-EXP1 with a face value of 383.4 million. In October 2018, the Company closed OBX 2018-EXP2 with a face value of $384.0 million. In January 2019, the Company closed OBX 2019-INV1, with a face value of $394.0 million. The OBX 2018-1 Trust, the OBX 2018-EXP1 Trust, the OBX 2018-EXP2 Trust and the OBX 2019-INV1 Trust are referred to collectively as the “OBX Trusts”. These securitizations represent financing transactions which provide non-recourse financing to the Company that are collateralized by residential mortgage loans purchased by the Company. As of March 31, 2019, a total of $966.4 million of bonds were held by third parties and the Company retained $363.0 million of mortgage-backed securities, which were eliminated in consolidation. The Company is deemed to be the primary beneficiary and consolidates the OBX Trusts because it has power to direct the activities that most significantly impact the OBX Trusts’ performance and holds a variable interest that could be potentially significant to these VIEs. The Company has elected the fair value option for the financial assets and liabilities of these VIEs, but has not elected the practical expedient under ASU 2014-13 as prices of both the financial assets and financial liabilities of the residential mortgage trusts are available from third-party pricing services. The Company incurred $1.7 million and $1.5 million of costs in connection with these securitizations that were expensed as incurred during the three months ended March 31, 2019 and 2018, respectively. The contractual principal amount of the OBX Trusts’ debt held by third parties was $963.4 million at March 31, 2019.
Although the residential mortgage loans have been sold for bankruptcy and state law purposes, the transfers of the residential mortgage loans to the OBX Trusts did not qualify for sale accounting and are reflected as intercompany secured borrowings that are eliminated upon consolidation.
In June 2016, a consolidated subsidiary of the Company entered into a credit facility with a third party financial institution. As of March 31, 2019, the borrowing limit on this facility was $400.0 million. The subsidiary was deemed to be a VIE and the Company was determined to be the primary beneficiary due to its role as collateral manager and because it holds a variable interest in the entity that could potentially be significant to the entity. The Company has pledged as collateral for this facility corporate loans with a carrying amount of $555.4 million at March 31, 2019. The transfers did not qualify for sale accounting and are reflected as an intercompany secured borrowing that is eliminated upon consolidation. At March 31, 2019, the subsidiary had an intercompany receivable of $350.1 million, which eliminates upon consolidation and an Other secured financing of $350.1 million to the third party financial institution.
In July 2017, a consolidated subsidiary of the Company entered into a $150.0 million credit facility with a third party financial institution. The subsidiary was deemed to be a VIE and the Company was determined to be the primary beneficiary due to its role as servicer and because it holds a variable interest in the entity that could potentially be significant to the entity. The Company has transferred corporate loans to the subsidiary with a carrying amount of $233.8 million at March 31, 2019, which continue to be reflected in the Company’s Consolidated Statements of Financial Condition in Loans. At March 31, 2019, the subsidiary had an Other secured financing of $148.5 million to the third party financial institution.
In January 2019, a consolidated subsidiary of the Company (the “Borrower”) entered into a $200.0 million credit facility with a third party financial institution. As of March 31, 2019, the Borrower had not drawn on the credit facility.
The Company also owns variable interests in an entity that invests in MSRs and has structured its operations, funding and capitalization into pools of assets and liabilities, each referred to as a “silo.” Owners of variable interests in a given silo are entitled to all of the returns and subjected to the risk of loss on the investments and operations of that silo and have no substantive recourse to the assets of any other silo. While the Company previously held 100% of the voting interests in this entity, in August 2017, the Company sold 100% of such interests, and entered into an agreement with the entity’s affiliated portfolio manager giving the Company the power over the silo in which it owns all of the beneficial interests. As a result, the Company is considered to be the primary beneficiary and consolidates this silo.
20
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The Company’s exposure to the obligations of its VIEs is generally limited to the Company’s investment in the VIEs of $2.1 billion at March 31, 2019. Assets of the VIEs may only be used to settle obligations of the VIEs. Creditors of the VIEs have no recourse to the general credit of the Company. The Company is not contractually required to provide and has not provided any form of financial support to the VIEs. No gains or losses were recognized upon consolidation of existing VIEs. Interest income and expense are recognized using the effective interest method.
The statements of financial condition of the Company’s VIEs, excluding the CLO, credit facility VIEs and OBX Trusts as the transfers of loans did not meet the criteria to be accounted for as sales, that are reflected in the Company’s Consolidated Statements of Financial Condition at March 31, 2019 and December 31, 2018 are as follows:
March 31, 2019 | |||||||||||
Commercial Trusts | Residential Trusts | MSR Silo | |||||||||
Assets | (dollars in thousands) | ||||||||||
Cash and cash equivalents | $ | — | $ | — | $ | 40,714 | |||||
Loans | — | — | 101,344 | ||||||||
Assets transferred or pledged to securitization vehicles | 2,205,768 | 101,994 | — | ||||||||
Mortgage servicing rights | — | — | 500,744 | ||||||||
Interest receivable | 11,269 | 540 | — | ||||||||
Derivative assets | — | — | 15 | ||||||||
Other assets | — | — | 27,290 | ||||||||
Total assets | $ | 2,217,037 | $ | 102,534 | $ | 670,107 | |||||
Liabilities | |||||||||||
Debt issued by securitization vehicles (non-recourse) | $ | 2,016,202 | $ | 82,220 | $ | — | |||||
Other secured financing | — | — | 57,667 | ||||||||
Payable for unsettled trades | — | — | 15,924 | ||||||||
Interest payable | 4,334 | 196 | — | ||||||||
Other liabilities | — | 179 | 1,736 | ||||||||
Total liabilities | $ | 2,020,536 | $ | 82,595 | $ | 75,327 |
December 31, 2018 | |||||||||||
Commercial Trusts | Residential Trusts | MSR Silo | |||||||||
Assets | (dollars in thousands) | ||||||||||
Cash and cash equivalents | $ | — | $ | — | $ | 30,444 | |||||
Loans | — | — | 97,464 | ||||||||
Assets transferred or pledged to securitization vehicles | 2,738,369 | 105,003 | — | ||||||||
Mortgage servicing rights | — | — | 557,813 | ||||||||
Interest receivable | 11,451 | 539 | — | ||||||||
Other assets | — | 4 | 28,756 | ||||||||
Total assets | $ | 2,749,820 | $ | 105,546 | $ | 714,477 | |||||
Liabilities | |||||||||||
Debt issued by securitization vehicles (non-recourse) | $ | 2,509,264 | $ | 71,324 | $ | — | |||||
Other secured financing | — | — | 68,385 | ||||||||
Interest payable | 4,594 | 238 | — | ||||||||
Other liabilities | — | — | 1,975 | ||||||||
Total liabilities | $ | 2,513,858 | $ | 71,562 | $ | 70,360 |
The geographic concentrations of credit risk exceeding 5% of the total loan unpaid principal balances related to the Company’s VIEs, excluding the credit facility VIEs, OBX Trusts and CLO, at March 31, 2019 are as follows:
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
Securitized Loans at Fair Value Geographic Concentration of Credit Risk
Commercial Trusts | Residential Trusts | |||||||||||||||
Property Location | Principal Balance | % of Balance | Property Location | Principal Balance | % of Balance | |||||||||||
(dollars in thousands) | ||||||||||||||||
Texas | $ | 546,190 | 17.9 | % | California | $ | 45,023 | 44.5 | % | |||||||
California | 461,478 | 15.1 | % | Texas | 13,261 | 13.1 | % | |||||||||
Maryland | 407,266 | 13.4 | % | Washington | 7,466 | 7.4 | % | |||||||||
Virginia | 349,921 | 11.5 | % | Illinois | 7,197 | 7.1 | % | |||||||||
Pennsylvania | 280,201 | 9.2 | % | Florida | 5,165 | 5.1 | % | |||||||||
Other (1) | 1,005,457 | 32.9 | % | Other (1) | 23,155 | 22.8 | % | |||||||||
Total | $ | 3,050,513 | 100.0 | % | $ | 101,267 | 100.0 | % |
(1) | No individual state greater than 5%. |
9. REAL ESTATE |
Real estate investments are depreciated using the straight-line method over the estimated useful lives of the assets, summarized as follows:
Category | Term |
Building and building improvements | 1 - 44 years |
Furniture and fixtures | 1 - 4 years |
There was no real estate acquired in settlement of residential mortgage loans at March 31, 2019 or December 31, 2018 other than real estate held by securitization trusts that the Company was required to consolidate. The Company would be considered to have received physical possession of residential real estate property collateralizing a residential mortgage loan, so that the loan is derecognized and the real estate property would be recognized, if either (i) the Company obtains legal title to the residential real estate property upon completion of a foreclosure or (ii) the borrower conveys all interest in the residential real estate property to the Company to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement.
Real estate investments, including REO, that do not meet the criteria to be classified as held for sale are separately presented in the Consolidated Statements of Financial Condition as held for investment. Real estate held for sale is reported at the lower of its carrying value or its estimated fair value less estimated costs to sell. Once a property is determined to be held for sale, depreciation is no longer recorded.
The Company’s real estate portfolio (REO and real estate held for investment) is reviewed on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value of its operating real estate may be impaired or that its carrying value may not be recoverable. A property’s value is considered impaired if the Company’s estimate of the aggregate future undiscounted cash flows to be generated by the property is less than the carrying value of the property. In conducting this review, the Company considers U.S. macroeconomic factors, including real estate sector conditions, together with asset specific and other factors. To the extent impairment has occurred and is considered to be other than temporary, the loss will be measured as the excess of the carrying amount of the property over the calculated fair value of the property.
The Company acquired real estate holdings in connection with the MTGE Acquisition during the year ended December 31, 2018; refer to the “Acquisition of MTGE Investment Corp.” Note for additional information. There were no acquisitions of new real estate holdings during the three months ended March 31, 2019. The company sold one of its wholly owned triple net leased properties during the three months ended March 31, 2019 for $6.7 million and recognized a gain on sale of $2.7 million.
The weighted average amortization period for intangible assets and liabilities at March 31, 2019 is 5.0 years. Above market leases and leasehold intangible assets are included in Intangible assets, net and below market leases are included in Other liabilities in the Consolidated Statements of Financial Condition.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
March 31, 2019 | December 31, 2018 | ||||||
Real estate, net | (dollars in thousands) | ||||||
Land | $ | 128,114 | $ | 128,742 | |||
Buildings and improvements | 578,067 | 581,320 | |||||
Furniture, fixtures and equipment | 12,333 | 11,602 | |||||
Subtotal | 718,514 | 721,664 | |||||
Less: accumulated depreciation | (72,008 | ) | (67,026 | ) | |||
Total real estate held for investment, at amortized cost, net | 646,506 | 654,638 | |||||
Equity in unconsolidated joint ventures | 87,733 | 84,835 | |||||
Total real estate, net | $ | 734,239 | $ | 739,473 |
Depreciation expense was $5.8 million and $3.7 million for the three months ended March 31, 2019 and 2018, respectively and is included in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).
Rental Income
The minimum rental amounts due under leases are generally either subject to scheduled fixed increases or adjustments. The leases generally also require that the tenants reimburse the Company for certain operating costs. Rental income is included in Other income (loss) in the Company’s Consolidated Statements of Comprehensive Income (Loss).
Approximate future minimum rents to be received over the next five years and thereafter for non-cancelable operating leases in effect at March 31, 2019 for consolidated investments in real estate are as follows:
March 31, 2019 | |||
(dollars in thousands) | |||
2019 (remaining) | $ | 38,061 | |
2020 | 45,616 | ||
2021 | 44,314 | ||
2022 | 40,459 | ||
2023 | 37,635 | ||
Later years | 208,841 | ||
Total | $ | 414,926 |
10. DERIVATIVE INSTRUMENTS |
In connection with the Company’s investment/market rate risk management strategy, the Company economically hedges a portion of its interest rate risk by entering into derivative financial instrument contracts, which include interest rate swaps, swaptions and futures contracts. The Company may also enter into TBA derivatives, MBS options and U.S. Treasury or Eurodollar futures contracts, certain forward purchase commitments and credit derivatives to economically hedge its exposure to market risks. The purpose of using derivatives is to manage overall portfolio risk with the potential to generate additional income for distribution to stockholders. These derivatives are subject to changes in market values resulting from changes in interest rates, volatility, Agency mortgage-backed security spreads to U.S. Treasuries and market liquidity. The use of derivatives also creates exposure to credit risk relating to potential losses that could be recognized if the counterparties to these instruments fail to perform their obligations under the stated contract. Additionally, the Company may have to pledge cash or assets as collateral for the derivative transactions, the amount of which may vary based on the market value and terms of the derivative contract. In the case of market agreed coupon (“MAC”) interest rate swaps, the Company may make or receive a payment at the time of entering into such interest rate swaps, which represents fair value of these swaps, to compensate for the out of market nature of such interest rate swaps. Subsequent changes in fair value from inception of these interest rate swaps are reflected within Unrealized gains (losses) on interest rate swaps in the Consolidated Statements of Comprehensive Income (Loss). Similar to other interest rate swaps, the Company may have to pledge cash or assets as collateral for the MAC interest rate swap transactions. In the event of a default by the counterparty, the Company could have difficulty obtaining its pledged collateral as well as receiving payments in accordance with the terms of the derivative contracts.
Derivatives are accounted for in accordance with FASB ASC 815, Derivatives and Hedging, which requires recognition of all derivatives as either assets or liabilities at fair value in the Consolidated Statements of Financial Condition with changes in fair value recognized in the Consolidated Statements of Comprehensive Income (Loss). The changes in the estimated fair value are presented within Net gains (losses) on other derivatives with the exception of interest rate swaps which are separately presented. None of the Company’s derivative transactions have been designated as hedging instruments for accounting purposes.
The Company also maintains collateral in the form of cash on margin with counterparties to its interest rate swaps and other derivatives. In accordance with a clearing organization’s rulebook, the Company presents the fair value of centrally cleared interest rate swaps net of variation margin pledged under such transactions. At March 31, 2019, $126.0 million of variation margin was reported as a reduction to interest rate swaps, at fair value.
Interest Rate Swap Agreements – Interest rate swap agreements are the primary instruments used to mitigate interest rate risk. In particular, the Company uses interest rate swap agreements to manage its exposure to changing interest rates on its repurchase agreements by economically hedging cash flows associated with these borrowings. Interest rate swap agreements may or may not be cleared through a derivatives clearing organization (“DCO”). Uncleared interest rate swaps are fair valued using internal pricing models and compared to the counterparty market values. Centrally cleared interest rate swaps, including MAC interest rate swaps, are generally fair valued using the DCO’s market values. If an interest rate swap is terminated, the realized gain (loss) on the interest rate swap would be equal to the difference between the cash received or paid and fair value.
Swaptions – Swaptions are purchased or sold to mitigate the potential impact of increases or decreases in interest rates. Interest rate swaptions provide the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future. They are not centrally cleared. The premium paid or received for swaptions is reported as an asset or liability in the Consolidated Statements of Financial Condition. If a swaption expires unexercised, the realized gain (loss) on the swaption would be equal to the premium received or paid. If the Company sells or exercises a swaption, the realized gain or loss on the swaption would be equal to the difference between the cash received or the fair value of the underlying interest rate swap received and the premium paid.
The fair value of swaptions is estimated using internal pricing models and compared to the counterparty market value.
TBA Dollar Rolls – TBA dollar roll transactions are accounted for as a series of derivative transactions. The fair value of TBA derivatives is based on methods similar to those used to value Agency mortgage-backed securities.
MBS Options – MBS options are generally options on TBA contracts, which help manage mortgage market risks and volatility while providing the potential to enhance returns. MBS options are over-the-counter traded instruments and those written on current-coupon mortgage-backed securities are typically the most liquid. MBS options are measured at fair value using internal pricing models and compared to the counterparty market value at the valuation date.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
Futures Contracts – Futures contracts are derivatives that track the prices of specific assets or benchmark rates. Short sales of futures contracts help to mitigate the potential impact of changes in interest rates on the portfolio performance. The Company maintains margin accounts which are settled daily with Futures Commission Merchants (“FCMs”). The margin requirement varies based on the market value of the open positions and the equity retained in the account. Futures contracts are fair valued based on exchange pricing.
Forward Purchase Commitments – The Company may enter into forward purchase commitments with counterparties whereby the Company commits to purchasing residential mortgage loans at a particular price, provided the residential mortgage loans close with the counterparties. The counterparties are required to deliver the committed loans on a “best efforts” basis.
Credit Derivatives – The Company may enter into credit derivatives referencing the commercial mortgage-backed securities index, such as the CMBX index, and synthetic total return swaps. Refer to the section titled “Glossary of Terms” located in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information related to the CMBX index.
The table below summarizes fair value information about our derivative assets and liabilities at March 31, 2019 and December 31, 2018:
Derivatives Instruments | March 31, 2019 | December 31, 2018 | ||||||
Assets | (dollars in thousands) | |||||||
Interest rate swaps | $ | 26,020 | $ | 48,114 | ||||
Interest rate swaptions | 8,250 | 7,216 | ||||||
TBA derivatives | 106,960 | 141,688 | ||||||
Futures contracts | 357 | — | ||||||
Purchase commitments | 2,434 | 844 | ||||||
Credit derivatives (1) | 4,157 | 2,641 | ||||||
$ | 148,178 | $ | 200,503 | |||||
Liabilities | ||||||||
Interest rate swaps | $ | 509,485 | $ | 420,365 | ||||
TBA derivatives | 5,212 | — | ||||||
Futures contracts | 260,354 | 462,309 | ||||||
Purchase commitments | 478 | 33 | ||||||
Credit derivatives (1) | 451 | 7,043 | ||||||
$ | 775,980 | $ | 889,750 |
(1) | The notional amount of the credit derivatives in which the Company purchased protection was $45.0 million and $30.0 million at March 31, 2019 and December 31, 2018, respectively. The maximum potential amount of future payments is the notional amount of credit derivatives in which the Company sold protection of $346.0 million and $451.0 million at March 31, 2019 and December 31, 2018, respectively, plus any coupon shortfalls on the underlying tranche. The credit derivative tranches referencing the basket of bonds had a range of ratings between AAA and BBB-. |
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The following table summarizes certain characteristics of the Company’s interest rate swaps at March 31, 2019 and December 31, 2018:
March 31, 2019 | |||||||||||
Maturity | Current Notional (1) | Weighted Average Pay Rate | Weighted Average Receive Rate | Weighted Average Years to Maturity | |||||||
(dollars in thousands) | |||||||||||
0 - 3 years | $ | 32,201,400 | 1.93 | % | 2.66 | % | 1.46 | ||||
3 - 6 years | 13,567,000 | 2.12 | % | 2.63 | % | 4.22 | |||||
6 - 10 years | 18,112,000 | 2.52 | % | 2.70 | % | 8.94 | |||||
Greater than 10 years | 3,578,000 | 3.59 | % | 2.58 | % | 17.81 | |||||
Total / Weighted average | $ | 67,458,400 | 2.20 | % | 2.66 | % | 4.77 | ||||
December 31, 2018 | |||||||||||
Maturity | Current Notional (1) | Weighted Average Pay Rate | Weighted Average Receive Rate | Weighted Average Years to Maturity | |||||||
(dollars in thousands) | |||||||||||
0 - 3 years | $ | 31,900,200 | 1.84 | % | 2.73 | % | 1.21 | ||||
3 - 6 years | 16,603,200 | 2.29 | % | 2.70 | % | 4.30 | |||||
6 - 10 years | 18,060,900 | 2.57 | % | 2.56 | % | 8.62 | |||||
Greater than 10 years | 3,901,400 | 3.63 | % | 2.59 | % | 17.33 | |||||
Total / Weighted average | $ | 70,465,700 | 2.17 | % | 2.68 | % | 4.26 |
(1) | There were no forward starting swaps at March 31, 2019 and December 31, 2018. |
The following table presents swaptions outstanding at March 31, 2019 and December 31, 2018.
March 31, 2019 | ||||||||||
Current Underlying Notional | Weighted Average Underlying Pay Rate | Weighted Average Underlying Receive Rate | Weighted Average Underlying Years to Maturity | Weighted Average Months to Expiration | ||||||
(dollars in thousands) | ||||||||||
Long | $2,800,000 | 3.12% |