ANNALY CAPITAL MANAGEMENT INC - Quarter Report: 2022 March (Form 10-Q)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 | ||
FORM 10-Q
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: March 31, 2022
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)
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 | ||||||
| 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 | ||||||
| 6.75% Series I Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock | NLY.I | New York Stock Exchange | ||||||
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 ☑
The number of shares of the registrant’s Common Stock outstanding on April 22, 2022 was 1,461,012,252.
| ANNALY CAPITAL MANAGEMENT, INC. | |||||
| FORM 10-Q | |||||
| TABLE OF CONTENTS | |||||
| Page | |||||
Item 1. Financial Statements | |||||
Consolidated Statements of Financial Condition at March 31, 2022 (Unaudited) and December 31, 2021 (Derived from the audited consolidated financial statements at December 31, 2021) | |||||
Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the three months ended March 31, 2022 and 2021 | |||||
Consolidated Statements of Stockholders’ Equity (Unaudited) for the three months ended March 31, 2022 and 2021 | |||||
Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2022 and 2021 | |||||
Note 9. Sale of Commercial Real Estate Business | 26 | ||||
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, | ||||||||||
| 2022 | 2021 (1) | ||||||||||
| (Unaudited) | |||||||||||
| Assets | |||||||||||
Cash and cash equivalents (includes pledged assets of $830,546 and $1,222,505, respectively) (2) | $ | 955,840 | $ | 1,342,090 | |||||||
Securities (includes pledged assets of $54,705,431 and $56,675,447, respectively) (3) | 60,727,637 | 63,655,674 | |||||||||
Loans, net (includes pledged assets of $2,778,141 and $2,462,776, respectively) (4) | 3,617,818 | 4,242,043 | |||||||||
| Mortgage servicing rights | 1,108,937 | 544,562 | |||||||||
| Interests in MSR | 85,653 | 69,316 | |||||||||
| Assets transferred or pledged to securitization vehicles | 7,809,307 | 6,086,308 | |||||||||
| Assets of disposal group held for sale | — | 194,138 | |||||||||
| Derivative assets | 964,075 | 170,370 | |||||||||
| Receivable for unsettled trades | 407,225 | 2,656 | |||||||||
| Principal and interest receivable | 246,739 | 234,983 | |||||||||
| Goodwill and intangible assets, net | 23,110 | 24,241 | |||||||||
| Other assets | 238,793 | 197,683 | |||||||||
| Total assets | $ | 76,185,134 | $ | 76,764,064 | |||||||
| Liabilities and stockholders’ equity | |||||||||||
| Liabilities | |||||||||||
| Repurchase agreements | $ | 52,626,503 | $ | 54,769,643 | |||||||
| Other secured financing | 914,255 | 903,255 | |||||||||
| Debt issued by securitization vehicles | 6,711,953 | 5,155,633 | |||||||||
| Participations issued | 775,432 | 1,049,066 | |||||||||
| Liabilities of disposal group held for sale | — | 154,956 | |||||||||
| Derivative liabilities | 826,972 | 881,537 | |||||||||
| Payable for unsettled trades | 1,992,568 | 147,908 | |||||||||
| Interest payable | 80,870 | 91,176 | |||||||||
| Dividends payable | 321,423 | 321,142 | |||||||||
| Other liabilities | 456,388 | 94,423 | |||||||||
| Total liabilities | 64,706,364 | 63,568,739 | |||||||||
| Stockholders’ equity | |||||||||||
Preferred stock, par value $0.01 per share, 63,500,000 authorized, issued and outstanding | 1,536,569 | 1,536,569 | |||||||||
Common stock, par value $0.01 per share, 2,936,500,000 authorized, 1,461,012,252 and 1,459,736,258 issued and outstanding, respectively | 14,610 | 14,597 | |||||||||
| Additional paid-in capital | 20,321,952 | 20,313,832 | |||||||||
| Accumulated other comprehensive income (loss) | (2,465,482) | 958,410 | |||||||||
| Accumulated deficit | (7,980,407) | (9,653,582) | |||||||||
| Total stockholders’ equity | 11,427,242 | 13,169,826 | |||||||||
| Noncontrolling interests | 51,528 | 25,499 | |||||||||
| Total equity | 11,478,770 | 13,195,325 | |||||||||
| Total liabilities and equity | $ | 76,185,134 | $ | 76,764,064 | |||||||
(1)Derived from the audited consolidated financial statements at December 31, 2021. | |||||||||||
(2)Includes cash of consolidated Variable Interest Entities (“VIEs”) of $8.6 million and $16.2 million at March 31, 2022 and December 31, 2021, respectively. | |||||||||||
(3)Excludes $38.5 million and $44.2 million at March 31, 2022 and December 31, 2021, respectively, of Agency mortgage-backed securities and $709.0 million and $350.4 million at March 31, 2022 and December 31, 2021, respectively, of non-Agency mortgage-backed securities in consolidated VIEs pledged as collateral and eliminated from the Company’s Consolidated Statements of Financial Condition. | |||||||||||
(4)Includes $1.9 million and $2.3 million of residential mortgage loans held for sale at March 31, 2022 and December 31, 2021, 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, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net interest income | |||||||||||
| Interest income | $ | 655,850 | $ | 763,378 | |||||||
| Interest expense | 74,922 | 75,973 | |||||||||
| Net interest income | 580,928 | 687,405 | |||||||||
| Net servicing income | |||||||||||
| Servicing and related income | $ | 34,715 | 9,229 | ||||||||
| Servicing and related expense | 3,757 | 2,297 | |||||||||
| Net servicing income | 30,958 | 6,932 | |||||||||
| Other income (loss) | |||||||||||
| Net gains (losses) on investments and other | (159,804) | 38,405 | |||||||||
| Net gains (losses) on derivatives | 1,642,028 | 1,169,383 | |||||||||
| Loan loss (provision) reversal | (608) | 139,620 | |||||||||
| Business divestiture-related gains (losses) | (354) | (249,563) | |||||||||
| Other, net | 3,058 | 6,536 | |||||||||
| Total other income (loss) | 1,484,320 | 1,104,381 | |||||||||
| General and administrative expenses | |||||||||||
| Compensation and management fee | 33,002 | 31,518 | |||||||||
| Other general and administrative expenses | 12,762 | 16,387 | |||||||||
| Total general and administrative expenses | 45,764 | 47,905 | |||||||||
| Income (loss) before income taxes | 2,050,442 | 1,750,813 | |||||||||
| Income taxes | 26,548 | (321) | |||||||||
| Net income (loss) | 2,023,894 | 1,751,134 | |||||||||
| Net income (loss) attributable to noncontrolling interests | 1,639 | 321 | |||||||||
| Net income (loss) attributable to Annaly | 2,022,255 | 1,750,813 | |||||||||
| Dividends on preferred stock | 26,883 | 26,883 | |||||||||
| Net income (loss) available (related) to common stockholders | $ | 1,995,372 | $ | 1,723,930 | |||||||
| Net income (loss) per share available (related) to common stockholders | |||||||||||
| Basic | $ | 1.37 | $ | 1.23 | |||||||
| Diluted | $ | 1.36 | $ | 1.23 | |||||||
| Weighted average number of common shares outstanding | |||||||||||
| Basic | 1,461,363,637 | 1,399,210,925 | |||||||||
| Diluted | 1,462,451,965 | 1,400,000,727 | |||||||||
| Other comprehensive income (loss) | |||||||||||
| Net income (loss) | $ | 2,023,894 | $ | 1,751,134 | |||||||
| Unrealized gains (losses) on available-for-sale securities | (3,568,679) | (1,428,927) | |||||||||
| Reclassification adjustment for net (gains) losses included in net income (loss) | 144,787 | 56,823 | |||||||||
| Other comprehensive income (loss) | (3,423,892) | (1,372,104) | |||||||||
| Comprehensive income (loss) | (1,399,998) | 379,030 | |||||||||
| Comprehensive income (loss) attributable to noncontrolling interests | 1,639 | 321 | |||||||||
| Comprehensive income (loss) attributable to Annaly | (1,401,637) | 378,709 | |||||||||
| Dividends on preferred stock | 26,883 | 26,883 | |||||||||
| Comprehensive income (loss) attributable to common stockholders | $ | (1,428,520) | $ | 351,826 | |||||||
| 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, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Preferred stock | ||||||||||||||
Beginning of period | $ | 1,536,569 | $ | 1,536,569 | ||||||||||
| End of period | $ | 1,536,569 | $ | 1,536,569 | ||||||||||
| Common stock | ||||||||||||||
Beginning of period | $ | 14,597 | $ | 13,982 | ||||||||||
Issuance | 8 | — | ||||||||||||
Stock-based award activity | 5 | 3 | ||||||||||||
| End of period | $ | 14,610 | $ | 13,985 | ||||||||||
| Additional paid-in capital | ||||||||||||||
Beginning of period | $ | 20,313,832 | $ | 19,750,818 | ||||||||||
Issuance | 6,096 | — | ||||||||||||
Stock-based award activity | 2,024 | 4,008 | ||||||||||||
| End of period | $ | 20,321,952 | $ | 19,754,826 | ||||||||||
| Accumulated other comprehensive income (loss) | ||||||||||||||
Beginning of period | $ | 958,410 | $ | 3,374,335 | ||||||||||
Unrealized gains (losses) on available-for-sale securities | (3,568,679) | (1,428,927) | ||||||||||||
Reclassification adjustment for net gains (losses) included in net income (loss) | 144,787 | 56,823 | ||||||||||||
| End of period | $ | (2,465,482) | $ | 2,002,231 | ||||||||||
| Accumulated deficit | ||||||||||||||
| Beginning of period | $ | (9,653,582) | $ | (10,667,388) | ||||||||||
Net income (loss) attributable to Annaly | 2,022,255 | 1,750,813 | ||||||||||||
Dividends declared on preferred stock (1) | (26,883) | (26,883) | ||||||||||||
Dividends and dividend equivalents declared on common stock and stock-based awards (1) | (322,197) | (308,346) | ||||||||||||
| End of period | $ | (7,980,407) | $ | (9,251,804) | ||||||||||
| Total stockholder’s equity | $ | 11,427,242 | $ | 14,055,807 | ||||||||||
| Noncontrolling interests | ||||||||||||||
Beginning of period | $ | 25,499 | $ | 13,480 | ||||||||||
Net income (loss) attributable to noncontrolling interests | 1,639 | 321 | ||||||||||||
Equity contributions from (distributions to) noncontrolling interests | 24,390 | (2,013) | ||||||||||||
| End of period | $ | 51,528 | $ | 11,788 | ||||||||||
| Total equity | $ | 11,478,770 | $ | 14,067,595 | ||||||||||
(1) Refer to the “Capital Stock” Note 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, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net income (loss) | $ | 2,023,894 | $ | 1,751,134 | |||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities | |||||||||||
| Amortization of premiums and discounts of investments, net | (11,770) | (9,960) | |||||||||
| Amortization of securitized debt premiums and discounts and deferred financing costs | (3,074) | (3,588) | |||||||||
| Depreciation, amortization and other noncash expenses | 4,746 | 8,408 | |||||||||
| Net (gains) losses on investments and derivatives | (1,544,765) | (1,287,535) | |||||||||
| Business divestiture-related (gains) losses | 354 | 249,563 | |||||||||
| Income from unconsolidated joint ventures | (8,384) | (1,025) | |||||||||
| Loan loss provision (reversal) | 608 | (139,620) | |||||||||
| Payments on purchases of loans held for sale | — | (969) | |||||||||
| Proceeds from sales and repayments of loans held for sale | 994 | 3,067 | |||||||||
| Net receipts (payments) on derivatives | 856,299 | 435,107 | |||||||||
| Net change in | |||||||||||
| Other assets | (5,266) | (31,236) | |||||||||
| Interest receivable | (8,069) | 9,386 | |||||||||
| Interest payable | (10,657) | (89,000) | |||||||||
| Other liabilities | 734,238 | 170,818 | |||||||||
| Net cash provided by (used in) operating activities | 2,029,148 | 1,064,550 | |||||||||
| Cash flows from investing activities | |||||||||||
| Payments on purchases of securities | (5,061,300) | (5,478,414) | |||||||||
| Proceeds from sales of securities | 2,393,169 | 2,852,764 | |||||||||
| Principal payments on securities | 3,047,356 | 4,986,008 | |||||||||
| Payments on purchases and origination of loans | (2,194,285) | (651,397) | |||||||||
| Proceeds from sales of loans | 4,215 | 46,171 | |||||||||
| Principal payments on loans | 605,626 | 683,451 | |||||||||
| Payments on purchases of MSR | (421,012) | — | |||||||||
| Payments on purchases of interests in MSR | (4,913) | — | |||||||||
| Investments in real estate | — | (746) | |||||||||
| Proceeds from sales of real estate | — | 4,265 | |||||||||
| Proceeds from reverse repurchase agreements | 2,100,000 | 8,634,313 | |||||||||
| Payments on reverse repurchase agreements | (2,100,000) | (8,634,313) | |||||||||
| Distributions in excess of cumulative earnings from unconsolidated joint ventures | — | 290 | |||||||||
| Net cash provided by (used in) investing activities | (1,631,144) | 2,442,392 | |||||||||
| Cash flows from financing activities | |||||||||||
| Proceeds from repurchase agreements and other secured financing | 839,715,390 | 534,607,127 | |||||||||
| Payments on repurchase agreements and other secured financing | (841,845,524) | (537,932,992) | |||||||||
| Proceeds from issuances of securitized debt | 2,293,500 | 251,379 | |||||||||
| Principal payments on securitized debt | (398,843) | (357,224) | |||||||||
| Net proceeds from stock offerings, direct purchases and dividend reinvestments | 6,104 | — | |||||||||
| Proceeds from participations issued | 676,499 | 183,067 | |||||||||
| Payments on repurchases of participations issued | (888,343) | (40,434) | |||||||||
| Principal payments on participations issued | (17,370) | (1,293) | |||||||||
| Net principal receipts (payments) on mortgages payable | — | (330) | |||||||||
| Net contributions (distributions) from (to) noncontrolling interests | 24,390 | (2,013) | |||||||||
| Settlement of stock-based awards in satisfaction of withholding tax requirements | (1,977) | (596) | |||||||||
| Dividends paid | (348,080) | (334,543) | |||||||||
| Net cash provided by (used in) financing activities | (784,254) | (3,627,852) | |||||||||
| Net (decrease) increase in cash and cash equivalents | $ | (386,250) | $ | (120,910) | |||||||
| Cash and cash equivalents including cash pledged as collateral, beginning of period | 1,342,090 | 1,243,703 | |||||||||
| Cash and cash equivalents including cash pledged as collateral, end of period | $ | 955,840 | $ | 1,122,793 | |||||||
| Supplemental disclosure of cash flow information | |||||||||||
| Interest received | $ | 565,361 | $ | 783,900 | |||||||
| Dividends received | $ | — | $ | 33 | |||||||
| Interest paid (excluding interest paid on interest rate swaps) | $ | 57,138 | $ | 116,028 | |||||||
| Net interest received (paid) on interest rate swaps | $ | (66,918) | $ | (133,628) | |||||||
| Taxes received (paid) | $ | (677) | $ | — | |||||||
| Noncash investing and financing activities | |||||||||||
| Receivable for unsettled trades | $ | 407,225 | $ | 144,918 | |||||||
| Payable for unsettled trades | $ | 1,992,568 | $ | 1,070,080 | |||||||
| Net change in unrealized gains (losses) on available-for-sale securities, net of reclassification adjustment | $ | (3,423,892) | $ | (1,372,104) | |||||||
| Dividends declared, not yet paid | $ | 321,423 | $ | 307,671 | |||||||
| See notes to consolidated financial statements. | |||||||||||
4
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 | ||
Annaly Capital Management, Inc. (the “Company” or “Annaly”) is a Maryland corporation that commenced operations on February 18, 1997. The Company is a leading diversified capital manager with investment strategies across mortgage finance. The Company owns a portfolio of real estate related investments, including mortgage pass-through certificates, collateralized mortgage obligations, credit risk transfer (“CRT”) securities, other securities representing interests in or obligations backed by pools of mortgage loans, residential mortgage loans and mortgage servicing rights (“MSR”). The Company’s principal business objective is to generate net income for distribution to its stockholders and optimize its returns through prudent management of its diversified investment strategies.
The Company is an internally-managed company that 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”).
The Company’s 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 and complementary investments within the Agency market, including Agency commercial mortgage-backed securities. | ||||
| Annaly Residential Credit Group | Invests primarily in non-Agency residential whole loans and securitized products within the residential and commercial markets. | ||||
| Annaly Mortgage Servicing Rights Group | Invests in MSR, which provide the right to service residential loans in exchange for a portion of the interest payments made on the loans. | ||||
In March 2021, the Company announced that it had entered into a definitive agreement to sell and exit its Commercial Real Estate (“CRE”) business. As of March 31, 2022, the assets held for sale and the associated liabilities were transferred. Refer to the “Sale of Commercial Real Estate Business” Note for additional information.
In April 2022, the Company announced that it had entered into a definitive agreement to sell substantially all of the assets that comprise the Annaly Middle Market Lending ("MML") portfolio, including assets held on balance sheet as well as assets managed for third parties. Subject to customary closing conditions, the sale of the MML business is expected to be completed by the second quarter of 2022. Refer to the "Subsequent Events" Note for additional information.
2. BASIS OF PRESENTATION | ||
The accompanying consolidated financial statements and related notes of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).
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, 2021 (the “2021 Form 10-K”). The consolidated financial information as of December 31, 2021 has been derived from audited consolidated financial statements included in the Company’s 2021 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.
Beginning with the quarter ended March 31, 2022, in light of the continued growth of its mortgage servicing rights portfolio, the Company enhanced its financial disclosures by separately reporting servicing income and servicing expense in its Consolidated Statements of Comprehensive Income (Loss). Servicing income and servicing expense were previously included within Other income (loss). As a result of this change, prior periods have been adjusted to conform to the current presentation.
In addition, the Company consolidated certain line items in its Consolidated Statements of Comprehensive Income (Loss) in an effort to streamline and simplify its financial presentation. Amounts previously reported under Net interest component of interest rate swaps, Realized gains (losses) on termination or maturity of interest rate swaps, Unrealized gains (losses) on interest rate swaps and Net gains (losses) on other derivatives are combined into a single line item titled Net gains (losses) on derivatives. Similarly, amounts previously reported under Net gains (losses) on disposal of investments and other and Net unrealized gains (losses) on instruments measured at fair value through earnings are combined into a single line item titled Net
5
gains (losses) on investments and other. As a result of these changes, prior periods have been adjusted to conform to the current presentation.
Beginning with the quarter ended June 30, 2021, the Company began classifying certain portfolio activity- or volume-related expenses (including but not limited to brokerage and commission fees, due diligence costs and securitization expenses) as Other, net rather than Other general and administrative expenses in the Consolidated Statements of Comprehensive Income (Loss) to better reflect the nature of the items. As such, prior periods have been conformed to the current presentation. Other general and administrative expenses for the three months ended March 31, 2021 decreased by $1.8 million and Other, net decreased by the same amounts for the three months ended March 31, 2021. These reclassifications had no effect on the reported net income (loss) in the Company’s Consolidated Statements of Comprehensive Income (Loss).
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 | ||
The Company’s significant accounting policies are described below or are included elsewhere in these notes to the consolidated financial statements.
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.
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 Other assets with income or loss included in Other, net.
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 $0.8 billion and $1.2 billion at March 31, 2022 and December 31, 2021, respectively.
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 FVO in order to simplify the accounting treatment for certain financial instruments. Items for which the FVO has been elected are presented at fair value in the Consolidated Statements of Financial Condition and any change in fair value is recorded in Net gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss). For additional information regarding financial instruments for which the Company has elected the FVO 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.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
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 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 recognized 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 derivatives. 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 measures compensation expense for stock-based awards at fair value, which is generally based on the grant-date fair value of the Company’s common stock. Compensation expense is recognized ratably over the vesting or requisite service period of the award. Stock-based awards that contain market-based conditions are valued using a model.
Compensation expense for awards with performance conditions is recognized based on the probable outcome of the performance condition at each reporting date. Compensation expense for awards with market conditions is recognized irrespective of the probability of the market condition being achieved and is not reversed if the market condition is not met. Stock-based awards that do not require future service (i.e., vested awards) are expensed immediately. Forfeitures are recorded when they occur. The Company generally issues new shares of common stock upon delivery of stock-based awards.
Interest Income - The Company recognizes interest income primarily on Residential Securities (as defined in the “Securities” Note), residential mortgage loans, commercial investments and reverse repurchase agreements. Interest accrued but not paid is recognized as Interest receivable on the Consolidated Statements of Financial Condition. Interest income is presented as a separate line item on the Consolidated Statements of Comprehensive Income (Loss). Refer to the “Interest Income and Interest Expense” Note for further discussion.
For its securities, 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 interest-only securities, multifamily and reverse mortgages), taking into account 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).
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. Refer to the “Interest Income and Interest Expense” Note for further discussion on interest.
The Company has made an accounting policy election not to measure an allowance for loans losses on corporate debt for accrued interest receivable. If interest receivable is deemed to be uncollectible or not collected within 120 days for corporate debt carried at amortized cost, it is written off through a reversal of interest income. Any interest written off that is recovered is recognized as interest income.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
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.
| Standard | Description | Effective Date | Effect on the Financial Statements or Other Significant Matters | ||||||||
| Standard that has been adopted | |||||||||||
ASU 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting | This ASU provides optional, temporary relief to accounting for contract modifications resulting from reference rate reform. | January 1, 2020 | The Company has elected to retrospectively apply the practical expedients to modifications of qualifying contracts as continuation of the existing contract rather than as a new contract. The adoption had no immediate impact and is not expected to have a material impact on the Company’s consolidated financial statements as the guidance continues to be applied to contract modifications until the ASU’s termination date. | ||||||||
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
4. FINANCIAL INSTRUMENTS | ||
The following table presents characteristics for certain of the Company’s financial instruments at March 31, 2022 and December 31, 2021.
Financial Instruments (1) | |||||||||||||||||
| Balance Sheet Line Item | Type / Form | Measurement Basis | March 31, 2022 | December 31, 2021 | |||||||||||||
| Assets | (dollars in thousands) | ||||||||||||||||
| Securities | Agency mortgage-backed securities (2) | Fair value, with unrealized gains (losses) through other comprehensive income | $ | 57,257,909 | $ | 59,939,383 | |||||||||||
| Securities | Agency mortgage-backed securities (3) | Fair value, with unrealized gains (losses) through earnings | 529,232 | 586,222 | |||||||||||||
| Securities | Residential credit risk transfer securities | Fair value, with unrealized gains (losses) through earnings | 845,809 | 936,228 | |||||||||||||
| Securities | Non-agency mortgage-backed securities | Fair value, with unrealized gains (losses) through earnings | 1,737,333 | 1,663,336 | |||||||||||||
| Securities | Commercial real estate debt investments - CMBS | Fair value, with unrealized gains (losses) through earnings | 348,666 | 521,440 | |||||||||||||
| Securities | Commercial real estate debt investments - credit risk transfer securities | Fair value, with unrealized gains (losses) through earnings | 8,688 | 9,065 | |||||||||||||
| Total securities | 60,727,637 | 63,655,674 | |||||||||||||||
| Loans, net | Residential mortgage loans | Fair value, with unrealized gains (losses) through earnings | 1,650,151 | 2,272,072 | |||||||||||||
| Loans, net | Residential mortgage loan warehouse facility | Fair value, with unrealized gains (losses) through earnings | — | 980 | |||||||||||||
| Loans, net | Corporate debt, held for investment | Amortized cost | 1,967,667 | 1,968,991 | |||||||||||||
| Total loans, net | 3,617,818 | 4,242,043 | |||||||||||||||
| Interests in MSR | Interest in net servicing cash flows | Fair value, with unrealized gains (losses) through earnings | 85,653 | 69,316 | |||||||||||||
| Assets transferred or pledged to securitization vehicles | Agency mortgage-backed securities | Fair value, with unrealized gains (losses) through other comprehensive income | 544,991 | 589,873 | |||||||||||||
| Assets transferred or pledged to securitization vehicles | Residential mortgage loans | Fair value, with unrealized gains (losses) through earnings | 7,264,316 | 5,496,435 | |||||||||||||
| Total assets transferred or pledged to securitization vehicles | 7,809,307 | 6,086,308 | |||||||||||||||
| Liabilities | |||||||||||||||||
| Repurchase agreements | Repurchase agreements | Amortized cost | 52,626,503 | 54,769,643 | |||||||||||||
| Other secured financing | Loans | Amortized cost | 914,255 | 903,255 | |||||||||||||
| Debt issued by securitization vehicles | Securities | Fair value, with unrealized gains (losses) through earnings | 6,711,953 | 5,155,633 | |||||||||||||
| Participations issued | Participations issued | Fair value, with unrealized gains (losses) through earnings | 775,432 | 1,049,066 | |||||||||||||
(1) Receivable for unsettled trades, Principal and interest receivable, Payable for unsettled trades, Interest payable and Dividends payable are accounted for at cost. Interests in MSR are considered financial assets whereas directly held MSR are servicing assets or obligations. (2) Includes Agency pass-through, collateralized mortgage obligation (“CMO”) and multifamily securities. (3) Includes interest-only securities and reverse mortgages. | |||||||||||||||||
5. SECURITIES | ||
The Company’s investments in securities include agency, credit risk transfer, non-agency and commercial mortgage-backed securities. All of the debt securities are classified as available-for-sale. Available-for-sale debt securities are carried at fair value, with changes in fair value recognized in other comprehensive income, unless the fair value option is elected in which case changes in fair value are recognized in Net gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss). Transactions for regular-way securities are recorded on trade date, including to-be-announced (“TBA”) securities that meet the regular-way securities scope exception from derivative accounting. Gains and losses on disposals of securities are recorded on trade date based on the specific identification method.
Impairment – Management evaluates available-for-sale securities and held-to-maturity debt securities for 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
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
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) as a securities loss provision and reflected as an allowance for credit losses on securities on the Consolidated Statements of Financial Condition, 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. For the three months ended March 31, 2021, the Company recognized a $0.4 million impairment on a commercial mortgage-backed security that was sold subsequently in 2021.
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 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, prime jumbo 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 residential 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 (“CMBS”) are classified as available-for-sale and reported at fair value with any credit loss recognized through an allowance for credit losses and any other unrealized gains and losses reported as a component of Other comprehensive income (loss). Management evaluates its Commercial Securities for impairment at least quarterly. The Company elected the fair value option for all other Commercial Securities, including conduit and credit CMBS, 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, excluding securities transferred or pledged to securitization vehicles, for the three months ended March 31, 2022:
| Agency Securities | Residential Credit Securities | Commercial Securities | Total | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
Beginning balance January 1, 2022 | $ | 60,525,605 | $ | 2,599,564 | $ | 530,505 | $ | 63,655,674 | |||||||||||||||
| Purchases | 6,160,670 | 372,464 | — | 6,533,134 | |||||||||||||||||||
Sales and transfers | (2,583,651) | (177,561) | (169,224) | (2,930,436) | |||||||||||||||||||
| Principal paydowns | (2,910,094) | (132,519) | (773) | (3,043,386) | |||||||||||||||||||
| (Amortization) / accretion | 24,656 | 890 | 4 | 25,550 | |||||||||||||||||||
| Fair value adjustment | (3,430,045) | (79,696) | (3,158) | (3,512,899) | |||||||||||||||||||
Ending balance March 31, 2022 | $ | 57,787,141 | $ | 2,583,142 | $ | 357,354 | $ | 60,727,637 | |||||||||||||||
10
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The following tables present the Company’s securities portfolio, excluding securities transferred or pledged to securitization vehicles, that were carried at their fair value at March 31, 2022 and December 31, 2021:
| March 31, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Principal / Notional | Remaining Premium | Remaining Discount | Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | |||||||||||||||||||||||||||||||||||
| Agency | (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
| Fixed-rate pass-through | $ | 54,859,660 | $ | 3,047,099 | $ | (79,126) | $ | 57,827,633 | $ | 136,232 | $ | (2,585,619) | $ | 55,378,246 | |||||||||||||||||||||||||||
| Adjustable-rate pass-through | 284,000 | 5,581 | (660) | 288,921 | 8,490 | (1,639) | 295,772 | ||||||||||||||||||||||||||||||||||
| CMO | 110,247 | 1,827 | — | 112,074 | 103 | (1,898) | 110,279 | ||||||||||||||||||||||||||||||||||
| Interest-only | 1,784,533 | 435,220 | — | 435,220 | 149 | (192,355) | 243,014 | ||||||||||||||||||||||||||||||||||
Multifamily(1) | 6,805,912 | 280,406 | (6,099) | 1,785,614 | 8,223 | (68,736) | 1,725,101 | ||||||||||||||||||||||||||||||||||
| Reverse mortgages | 33,287 | 3,414 | — | 36,701 | — | (1,972) | 34,729 | ||||||||||||||||||||||||||||||||||
| Total agency securities | $ | 63,877,639 | $ | 3,773,547 | $ | (85,885) | $ | 60,486,163 | $ | 153,197 | $ | (2,852,219) | $ | 57,787,141 | |||||||||||||||||||||||||||
| Residential credit | |||||||||||||||||||||||||||||||||||||||||
Credit risk transfer (2) | $ | 848,990 | $ | 7,899 | $ | (570) | $ | 854,879 | $ | 3,304 | $ | (12,374) | $ | 845,809 | |||||||||||||||||||||||||||
| Alt-A | 81,711 | 33 | (16,943) | 64,801 | 2,121 | (2,344) | 64,578 | ||||||||||||||||||||||||||||||||||
Prime (3) | 299,044 | 9,405 | (14,304) | 263,750 | 6,396 | (20,334) | 249,812 | ||||||||||||||||||||||||||||||||||
| Subprime | 158,423 | 298 | (15,359) | 143,362 | 5,642 | (4,479) | 144,525 | ||||||||||||||||||||||||||||||||||
| NPL/RPL | 1,097,310 | 877 | (3,357) | 1,094,830 | 736 | (20,558) | 1,075,008 | ||||||||||||||||||||||||||||||||||
Prime jumbo (>=2010 vintage) (4) | 1,391,118 | 13,143 | (14,778) | 217,179 | 2,851 | (16,620) | 203,410 | ||||||||||||||||||||||||||||||||||
| Total residential credit securities | $ | 3,876,596 | $ | 31,655 | $ | (65,311) | $ | 2,638,801 | $ | 21,050 | $ | (76,709) | $ | 2,583,142 | |||||||||||||||||||||||||||
| Total Residential Securities | $ | 67,754,235 | $ | 3,805,202 | $ | (151,196) | $ | 63,124,964 | $ | 174,247 | $ | (2,928,928) | $ | 60,370,283 | |||||||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||||||||||||||||||||
| Commercial Securities | $ | 363,046 | $ | — | $ | (96) | $ | 362,950 | $ | — | $ | (5,596) | $ | 357,354 | |||||||||||||||||||||||||||
| Total securities | $ | 68,117,281 | $ | 3,805,202 | $ | (151,292) | $ | 63,487,914 | $ | 174,247 | $ | (2,934,524) | $ | 60,727,637 | |||||||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||
| Principal / Notional | Remaining Premium | Remaining Discount | Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | |||||||||||||||||||||||||||||||||||
| Agency | (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
| Fixed-rate pass-through | $ | 54,432,252 | $ | 3,008,185 | $ | (18,314) | $ | 57,422,123 | $ | 1,349,125 | $ | (474,643) | $ | 58,296,605 | |||||||||||||||||||||||||||
| Adjustable-rate pass-through | 305,211 | 1,965 | (2,124) | 305,052 | 16,223 | (2) | 321,273 | ||||||||||||||||||||||||||||||||||
| CMO | 114,533 | 1,888 | — | 116,421 | 5,277 | — | 121,698 | ||||||||||||||||||||||||||||||||||
| Interest-only | 1,912,415 | 456,683 | — | 456,683 | 428 | (163,197) | 293,914 | ||||||||||||||||||||||||||||||||||
Multifamily (1) | 5,671,138 | 273,553 | — | 1,453,946 | 15,330 | (16,563) | 1,452,713 | ||||||||||||||||||||||||||||||||||
| Reverse mortgages | 36,807 | 3,550 | — | 40,357 | — | (955) | 39,402 | ||||||||||||||||||||||||||||||||||
| Total agency investments | $ | 62,472,356 | $ | 3,745,824 | $ | (20,438) | $ | 59,794,582 | $ | 1,386,383 | $ | (655,360) | $ | 60,525,605 | |||||||||||||||||||||||||||
| Residential credit | |||||||||||||||||||||||||||||||||||||||||
Credit risk transfer (2) | $ | 924,101 | $ | 8,754 | $ | (1,176) | $ | 927,555 | $ | 9,641 | $ | (968) | $ | 936,228 | |||||||||||||||||||||||||||
| Alt-A | 83,213 | 31 | (17,133) | 66,111 | 3,627 | (251) | 69,487 | ||||||||||||||||||||||||||||||||||
Prime (3) | 323,062 | 9,841 | (14,757) | 268,117 | 10,853 | (3,529) | 275,441 | ||||||||||||||||||||||||||||||||||
| Subprime | 170,671 | 349 | (16,111) | 154,909 | 8,285 | (118) | 163,076 | ||||||||||||||||||||||||||||||||||
| NPL/RPL | 987,415 | 950 | (1,698) | 986,667 | 2,739 | (5,968) | 983,438 | ||||||||||||||||||||||||||||||||||
Prime jumbo (>=2010 vintage) (4) | 299,783 | 5,680 | (6,410) | 172,598 | 4,272 | (4,976) | 171,894 | ||||||||||||||||||||||||||||||||||
| Total residential credit securities | $ | 2,788,245 | $ | 25,605 | $ | (57,285) | $ | 2,575,957 | $ | 39,417 | $ | (15,810) | $ | 2,599,564 | |||||||||||||||||||||||||||
| Total Residential Securities | $ | 65,260,601 | $ | 3,771,429 | $ | (77,723) | $ | 62,370,539 | $ | 1,425,800 | $ | (671,170) | $ | 63,125,169 | |||||||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||||||||||||||||||||
| Commercial Securities | $ | 533,071 | $ | — | $ | (127) | $ | 532,944 | $ | 165 | $ | (2,604) | $ | 530,505 | |||||||||||||||||||||||||||
| Total securities | $ | 65,793,672 | $ | 3,771,429 | $ | (77,850) | $ | 62,903,483 | $ | 1,425,965 | $ | (673,774) | $ | 63,655,674 | |||||||||||||||||||||||||||
(1) Principal/Notional amount includes $5.3 billion and $4.5 billion of Agency Multifamily interest-only securities as of March 31, 2022 and December 31, 2021, respectively. (2) Principal/Notional amount includes $1.4 million and $4.1 million of a CRT interest-only security as of March 31, 2022 and December 31, 2021, respectively. (3) Principal/Notional amount includes $30.4 million and $50.0 million of Prime interest-only securities as of March 31, 2022 and December 31, 2021, respectively. (4) Principal/Notional amount includes $1.2 billion and $126.5 million of Prime Jumbo interest-only securities as of March 31, 2022 and December 31, 2021, respectively. | |||||||||||||||||||||||||||||||||||||||||
11
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The following table presents the Company’s Agency mortgage-backed securities portfolio, excluding securities transferred or pledged to securitization vehicles, by issuing Agency at March 31, 2022 and December 31, 2021:
| March 31, 2022 | December 31, 2021 | ||||||||||
| Investment Type | (dollars in thousands) | ||||||||||
| Fannie Mae | $ | 46,824,563 | $ | 48,404,991 | |||||||
| Freddie Mac | 9,819,001 | 10,880,033 | |||||||||
| Ginnie Mae | 1,143,577 | 1,240,581 | |||||||||
| Total | $ | 57,787,141 | $ | 60,525,605 | |||||||
Actual maturities of the Company’s Residential Securities are generally shorter than stated contractual maturities because actual maturities of the portfolio are affected by periodic payments and prepayments of principal on the underlying mortgages.
The following table summarizes the Company’s Residential Securities, excluding securities transferred or pledged to securitization vehicles, at March 31, 2022 and December 31, 2021, according to their estimated weighted average life classifications:
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Estimated Fair Value | Amortized Cost | Estimated Fair Value | Amortized Cost | ||||||||||||||||||||
| Estimated weighted average life | (dollars in thousands) | ||||||||||||||||||||||
| Less than one year | $ | 181,054 | $ | 180,846 | $ | 253,129 | $ | 250,689 | |||||||||||||||
| Greater than one year through five years | 4,123,236 | 4,160,292 | 16,155,017 | 15,766,307 | |||||||||||||||||||
| Greater than five years through ten years | 51,112,733 | 53,521,509 | 45,470,212 | 45,102,607 | |||||||||||||||||||
| Greater than ten years | 4,953,260 | 5,262,317 | 1,246,811 | 1,250,936 | |||||||||||||||||||
| Total | $ | 60,370,283 | $ | 63,124,964 | $ | 63,125,169 | $ | 62,370,539 | |||||||||||||||
The estimated weighted average lives of the Residential Securities at March 31, 2022 and December 31, 2021 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, 2022 and December 31, 2021.
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||
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 | $ | 37,098,530 | $ | (1,402,053) | 1,838 | $ | 22,828,156 | $ | (475,064) | 571 | |||||||||||||||||||||||||
| 12 Months or more | 12,118,518 | (1,238,095) | 301 | 383,815 | (10,960) | 19 | |||||||||||||||||||||||||||||
| Total | $ | 49,217,048 | $ | (2,640,148) | 2,139 | $ | 23,211,971 | $ | (486,024) | 590 | |||||||||||||||||||||||||
(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 have an actual or implied credit rating that is the same as that of the U.S. government. The investments are not considered to be 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, 2022 and 2021, the Company disposed of $2.8 billion and $3.0 billion of Residential Securities, respectively. The following table presents the Company’s net gains (losses) from the disposal of Residential Securities for the three months ended March 31, 2022 and 2021.
| Gross Realized Gains | Gross Realized Losses | Net Realized Gains (Losses) | |||||||||||||||
| For the three months ended | (dollars in thousands) | ||||||||||||||||
| March 31, 2022 | $ | 1,565 | $ | (146,056) | $ | (144,491) | |||||||||||
| March 31, 2021 | $ | 4,646 | $ | (65,340) | $ | (60,694) | |||||||||||
12
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
6. LOANS | ||
The Company invests in residential and corporate loans. Loans are classified as either held for investment or held for sale. Loans are eligible to be accounted for under the fair value option. If loans are elected under the fair value option, they are carried at fair value with changes in fair value recognized in earnings. Otherwise, loans held for investment are carried at cost less impairment and loans held for sale are accounted for at the lower of cost or fair value.
Excluding loans transferred or pledged to securitization vehicles and loan warehouse facilities, as of March 31, 2022 and December 31, 2021, the Company reported $1.7 billion and $2.3 billion, respectively, of loans for which the fair value option was elected. If the Company intends to sell or securitize the loans and the securitization vehicle is not expected to be consolidated, the loans are classified as held for sale. If loans are held for sale and the fair value option was not elected, they are accounted for at the lower of cost or fair value. Any origination fees and costs or purchase premiums or discounts are deferred and recognized upon sale. The Company determines the fair value of loans held for sale on an individual loan basis. The carrying value of the Company’s residential loans held for sale was $1.9 million and $2.3 million at March 31, 2022 and December 31, 2021, respectively.
Allowance for Losses – The Company evaluates the need for a loss reserve on each of its loans classified as held-for-investment, which primarily include corporate debt, where the fair value option is not elected. Allowance for loan losses are written off in the period the loans are deemed uncollectible.
Given the unique nature of each underlying borrower and any collateral, the Company assesses an allowance for each individual loan held for investment. An allowance is established at origination or acquisition that reflects management’s estimate of the total expected credit loss over the expected life of the loan. In estimating the lifetime expected credit losses, management utilizes a probability of default and loss given default methodology (“Loss Given Default methodology”), which considers projected economic conditions over the reasonable and supportable forecast period. The forecast incorporates primarily market-based assumptions including, but not limited to, forward interest rate curves, unemployment rate estimates and certain indexes sourced from third party vendors. For any remaining period of the expected life of the loan after the reasonable and supportable period, the Company reverts to historical losses on a straight-line basis. Management uses third party vendors’ loan pool data for loans with similar risk characteristics to estimate historical losses given the limited loss history of the Company’s loan portfolio. Changes in the lifetime expected credit loss are reflected in Loan loss (provision) reversal in the Consolidated Statements of Comprehensive Income (Loss).
For loans experiencing credit deterioration, the Company may use a different methodology to determine the expected credit losses such as a discounted cash flow analysis. For collateral-dependent loans, if foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for any selling costs, if applicable. Additionally, the Company may elect the practical expedient for a financial asset for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty by measuring the allowance as the difference between the fair value of the collateral, less costs to sell, if applicable, and the amortized cost basis of the financial asset at the reporting date.
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.
The Company recorded net loan loss (provisions) reversals of ($0.6) million and $139.6 million for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022 and December 31, 2021, the Company’s loan loss allowance was $28.5 million and $27.9 million, respectively.
13
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The following table presents the activity of the Company’s loan investments, including loans held for sale and excluding loans transferred or pledged to securitization vehicles and loan warehouse facilities, for the three months ended March 31, 2022:
| Residential | Corporate Debt | Total | |||||||||||||||
| (dollars in thousands) | |||||||||||||||||
Beginning balance January 1, 2022 | $ | 2,272,072 | $ | 1,968,991 | $ | 4,241,063 | |||||||||||
| Purchases / originations | 2,025,930 | 171,697 | 2,197,627 | ||||||||||||||
Sales and transfers (1) | (2,550,155) | — | (2,550,155) | ||||||||||||||
| Principal payments | (34,284) | (174,238) | (208,522) | ||||||||||||||
Gains / (losses) (2) | (60,654) | (608) | (61,262) | ||||||||||||||
| (Amortization) / accretion | (2,758) | 1,825 | (933) | ||||||||||||||
Ending balance March 31, 2022 | $ | 1,650,151 | $ | 1,967,667 | $ | 3,617,818 | |||||||||||
(1) Includes securitizations, syndications and transfers to securitization vehicles. Includes transfer of residential loans to securitization vehicles with a carrying value of $2.5 billion during the three months ended March 31, 2022. (2) Includes loan loss allowances. | |||||||||||||||||
The Company’s corporate loans also have off-balance-sheet credit exposure related to unfunded loan commitments, including revolvers, delayed draw term loans and future funding commitments that are not unconditionally cancellable by the Company. The Company utilizes the same methodology in calculating the liability related to the expected credit losses on these exposures as it does for the calculation of the allowance for loan losses. In determining the estimate of credit losses for off-balance-sheet credit exposures, the Company will consider the contractual period in which the entity is exposed to credit risk and the likelihood that funding will occur, if material. Estimated credit losses for off-balance-sheet credit exposures are included in Other liabilities on the Company’s Consolidated Statements of Financial Condition.
Residential
The Company’s residential mortgage loans are primarily comprised of performing adjustable-rate and fixed-rate whole loans. The Company’s residential loans are accounted for under the fair value option with changes in fair value reflected in Net gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss). 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. 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 and excluding loan warehouse facilities, at March 31, 2022 and December 31, 2021:
| March 31, 2022 | December 31, 2021 | |||||||
| (dollars in thousands) | ||||||||
| Fair value | $ | 8,914,467 | $ | 7,768,507 | ||||
| Unpaid principal balance | $ | 9,097,860 | $ | 7,535,855 | ||||
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, 2022 and 2021 for these investments, excluding loan warehouse facilities:
| For the Three Months Ended | |||||||||||
| March 31, 2022 | March 31, 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Interest income | $ | 73,465 | $ | 37,109 | |||||||
Net gains (losses) on disposal of investments (1) | (7,338) | (5,220) | |||||||||
Net unrealized gains (losses) on instruments measured at fair value through earnings (1) | (415,248) | 22,455 | |||||||||
| Total included in net income (loss) | $ | (349,121) | $ | 54,344 | |||||||
(1) These amounts are presented in the line item Net gains (losses) on investments and other on the Consolidated Statements of Comprehensive Income (Loss) | |||||||||||
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, 2022 and December 31, 2021 for the residential mortgage loans, including loans transferred or pledged to securitization vehicles:
| Geographic Concentrations of Residential Mortgage Loans | ||||||||||||||
| March 31, 2022 | December 31, 2021 | |||||||||||||
| Property location | % of Balance | Property location | % of Balance | |||||||||||
| California | 48.4% | California | 50.2% | |||||||||||
| New York | 11.6% | New York | 10.9% | |||||||||||
| Florida | 6.8% | Florida | 6.1% | |||||||||||
| All other (none individually greater than 5%) | 33.2% | All other (none individually greater than 5%) | 32.8% | |||||||||||
| 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, 2022 and December 31, 2021:
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
Portfolio Range | Portfolio Weighted Average | Portfolio Range | Portfolio Weighted Average | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Unpaid principal balance | $1 - $4,396 | $496 | $1 - $4,382 | $513 | |||||||||||||||||||
| Interest rate | 0.75% - 15.00% | 4.02% | 0.75% - 9.24% | 4.04% | |||||||||||||||||||
| Maturity | 7/1/2029 - 4/1/2062 | 4/8/2051 | 7/1/2029 - 12/1/2061 | 12/22/2050 | |||||||||||||||||||
| FICO score at loan origination | 588 - 832 | 762 | 604 - 831 | 762 | |||||||||||||||||||
| Loan-to-value ratio at loan origination | 7% - 103% | 66% | 8% - 103% | 66% | |||||||||||||||||||
At March 31, 2022 and December 31, 2021, approximately 13% and 16%, respectively, of the carrying value of the Company’s residential mortgage loans, including loans transferred or pledged to securitization vehicles, were adjustable-rate.
The Company participates in an arrangement that provides a residential mortgage loan warehouse facility to a third-party originator. The Company has elected to apply the fair value option to this lending facility in order to simplify the accounting and keep the accounting consistent with other residential credit financial instruments with similar characteristics. At March 31, 2022 and December 31, 2021, the fair value and carrying value of this warehouse facility was $0 and $1.0 million, respectively, and reported as Loans, net in the Consolidated Statements of Financial Condition. As of March 31, 2022, the lending facility was not on nonaccrual status nor past due.
Commercial
As of December 31, 2021, commercial real estate loans are reported in Assets of disposal group held for sale in the Consolidated Statements of Financial Condition and classified as held for sale. Refer to the “Sale of Commercial Real Estate Business” Note for additional information on the transaction.
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 to eight 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’s internal risk rating rubric for corporate debt has nine categories as depicted below:
15
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
| Risk Rating - Corporate Debt | Description | ||||
| 1-5 / Performing | Meets all present contractual obligations. | ||||
| 6 / Performing - Closely Monitored | Meets all present contractual obligations but exhibits a defined weakness in either leverage or liquidity, but not both. Loans at this rating will require closer monitoring, but where we expect no loss of interest or principal. | ||||
| 7 / Substandard | A loan that has a defined weakness in either leverage and/or liquidity, and which may require substantial changes to strengthen the asset. Loans at this rating level have a higher probability of loss, although no determination of the amount or timing of a loss is yet possible. | ||||
| 8 / Doubtful | A loan that has missed a scheduled principal or interest payment or is otherwise deemed a non-earning account. The probability of loss is increasingly certain due to significant performance issues. | ||||
| 9 / Loss | Considered uncollectible. | ||||
Management assesses each loan at least quarterly and assigns an internal risk rating based on its evaluation of the most recent financial information produced by the borrower and consideration of economic conditions. See below for a tabular disclosure of the amortized cost basis of the Company’s corporate debt held for investment by year of origination and internal risk rating.
There was no provision for loan loss recorded on corporate loans using a discounted cash flow methodology for the three months ended March 31, 2022 and 2021.
For the three months ended March 31, 2022 and 2021 the Company recorded a net loan loss (provision) reversal on corporate loans of ($0.6) million and $6.2 million, respectively, based upon its Loss Given Default methodology.
At March 31, 2022 and December 31, 2021, the Company had unfunded corporate loan commitments of $284.5 million and $278.9 million, respectively. At March 31, 2022 and December 31, 2021, the liability related to the expected credit losses on the unfunded corporate loan commitments was $2.5 million and $2.3 million, respectively.
The Company invests in corporate loans through its Annaly Middle Market Lending Group. The industry and rate attributes of the portfolio at March 31, 2022 and December 31, 2021 are as follows:
16
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
| Industry Dispersion | |||||||||||
| March 31, 2022 | December 31, 2021 | ||||||||||
Total (1) | Total (1) | ||||||||||
| (dollars in thousands) | |||||||||||
| Computer Programming, Data Processing & Other Computer Related Services | $ | 464,921 | $ | 437,257 | |||||||
| Management & Public Relations Services | 229,097 | 263,187 | |||||||||
| Industrial Inorganic Chemicals | 155,728 | 156,292 | |||||||||
| Miscellaneous Industrial & Commercial | 96,789 | 93,619 | |||||||||
| Miscellaneous Health & Allied Services, not elsewhere classified | 96,104 | 64,133 | |||||||||
| Public Warehousing & Storage | 95,037 | 94,179 | |||||||||
| Electronic Components & Accessories | 92,166 | 92,261 | |||||||||
| Surgical, Medical & Dental Instruments & Supplies | 80,391 | 80,786 | |||||||||
| Drugs | 67,244 | — | |||||||||
| Research, Development & Testing Services | 62,689 | 59,311 | |||||||||
| Engineering, Architectural & Surveying | 50,023 | 49,088 | |||||||||
| Offices & Clinics of Doctors of Medicine | 49,910 | 50,017 | |||||||||
| Medical & Dental Laboratories | 48,603 | 30,199 | |||||||||
| Insurance Agents, Brokers & Service | 43,360 | 43,598 | |||||||||
| Telephone Communications | 42,651 | 42,589 | |||||||||
| Electrical Work | 42,611 | 42,617 | |||||||||
| Miscellaneous Equipment Rental & Leasing | 32,367 | 32,346 | |||||||||
| Home Health Care Services | 28,600 | 28,660 | |||||||||
| Metal Forgings & Stampings | 27,514 | 27,483 | |||||||||
| Legal Services | 26,146 | 26,105 | |||||||||
| Petroleum & Petroleum Products | 20,705 | 21,434 | |||||||||
| Sanitary Services | 20,410 | 20,453 | |||||||||
| Grocery Stores | 19,646 | 19,745 | |||||||||
| Coating, Engraving & Allied Services | 17,742 | 17,705 | |||||||||
| Chemicals & Allied Products | 14,626 | 14,657 | |||||||||
| Mailing, Reproduction, Commercial Art & Photography & Stenographic | 12,431 | 12,388 | |||||||||
| Machinery, Equipment & Supplies | 10,323 | 10,814 | |||||||||
| Offices & Clinics of Other Health Practitioners | 10,068 | 10,083 | |||||||||
| Schools & Educational Services, not elsewhere classified | 9,765 | 9,781 | |||||||||
| Metal Cans & Shipping Containers | — | 118,204 | |||||||||
| Total | $ | 1,967,667 | $ | 1,968,991 | |||||||
(1) All middle market lending positions are floating rate. | |||||||||||
The table below reflects the Company’s aggregate positions by their respective place in the capital structure of the borrowers at March 31, 2022 and December 31, 2021.
| March 31, 2022 | December 31, 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| First lien loans | $ | 1,471,546 | $ | 1,391,217 | |||||||
Second lien loans (1) | 496,121 | 577,774 | |||||||||
| Total | $ | 1,967,667 | $ | 1,968,991 | |||||||
(1) Includes mezzanine positions. | |||||||||||
17
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The following tables represent a rollforward of the activity for the Company’s corporate debt investments held for investment at March 31, 2022 and December 31, 2021:
| March 31, 2022 | |||||||||||||||||
| First Lien | Second Lien | Total | |||||||||||||||
| (dollars in thousands) | |||||||||||||||||
Beginning balance (January 1, 2022) (1) | $ | 1,391,217 | $ | 577,774 | $ | 1,968,991 | |||||||||||
| Originations & advances | 154,396 | 17,301 | 171,697 | ||||||||||||||
| Principal payments | (74,251) | (99,987) | (174,238) | ||||||||||||||
| Amortization & accretion of (premium) discounts | 885 | 940 | 1,825 | ||||||||||||||
| Allowance for loan losses | |||||||||||||||||
| Beginning allowance | (17,341) | (10,579) | (27,920) | ||||||||||||||
| Current period (allowance) reversal | (701) | 93 | (608) | ||||||||||||||
| Ending allowance | (18,042) | (10,486) | (28,528) | ||||||||||||||
Net carrying value (March 31, 2022) | $ | 1,471,546 | $ | 496,121 | $ | 1,967,667 | |||||||||||
| December 31, 2021 | |||||||||||||||||
| First Lien | Second Lien | Total | |||||||||||||||
| (dollars in thousands) | |||||||||||||||||
Beginning balance (January 1, 2021) (1) | $ | 1,489,125 | $ | 750,805 | $ | 2,239,930 | |||||||||||
| Originations & advances | 1,506,705 | 66,013 | 1,572,718 | ||||||||||||||
Sales and transfers (2) | (1,122,275) | (83,690) | (1,205,965) | ||||||||||||||
| Principal payments | (492,884) | (169,057) | (661,941) | ||||||||||||||
| Amortization & accretion of (premium) discounts | 9,120 | 3,497 | 12,617 | ||||||||||||||
| Allowance for loan losses | |||||||||||||||||
| Beginning allowance | (18,767) | (20,785) | (39,552) | ||||||||||||||
| Current period (allowance) reversal | 1,426 | 10,206 | 11,632 | ||||||||||||||
| Ending allowance | (17,341) | (10,579) | (27,920) | ||||||||||||||
Net carrying value (December 31, 2021) | $ | 1,391,217 | $ | 577,774 | $ | 1,968,991 | |||||||||||
(1) Excludes loan loss allowances. (2) Includes syndications. | |||||||||||||||||
The following table provides the amortized cost basis of corporate debt held for investment as of March 31, 2022 by vintage year and internal risk rating.
Amortized Cost Basis by Risk Rating and Vintage (1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Risk Rating | Vintage | ||||||||||||||||||||||||||||||||||||||||||||||
| Total | 2022 | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| 1-5 / Performing | $ | 1,797,943 | $ | 55,565 | $ | 641,746 | $ | 342,945 | $ | 221,796 | $ | 358,884 | $ | 138,903 | $ | 38,104 | |||||||||||||||||||||||||||||||
| 6 / Performing - Closely Monitored | 65,000 | — | 22,522 | 26,146 | 16,332 | — | — | — | |||||||||||||||||||||||||||||||||||||||
| 7 / Substandard | 104,724 | — | — | 10,323 | 9,276 | 85,125 | — | — | |||||||||||||||||||||||||||||||||||||||
| 8 / Doubtful | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| 9 / Loss | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 1,967,667 | $ | 55,565 | $ | 664,268 | $ | 379,414 | $ | 247,404 | $ | 444,009 | $ | 138,903 | $ | 38,104 | |||||||||||||||||||||||||||||||
(1) The amortized cost basis excludes accrued interest and includes deferred fees on unfunded loans. As of March 31, 2022, the Company had $9.7 million of accrued interest receivable on corporate loans, which is reported in Principal and interest receivable in the Consolidated Statements of Financial Condition, and $0.8 million of deferred loan fees on unfunded loans, which is reported in Loans, net in the Consolidated Statements of Financial Condition. | |||||||||||||||||||||||||||||||||||||||||||||||
18
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
7. MORTGAGE SERVICING RIGHTS | ||
The Company owns variable interests in entities that invest in MSR and Interests in MSR. Refer to the “Variable Interest Entities” Note for a detailed discussion on this topic.
MSR represent the rights and obligations 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 MSR. The Company generally intends to hold the MSR as investments and elected to account for all of its investments in MSR 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 gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss).
Interests in MSR represent agreements to purchase all, or a component of, net servicing cash flows. A third party acts as a master servicer for the loans providing the net servicing cash flows represented by the Interests in MSR. The Company accounts for its Interests in MSR at fair value with change in fair value presented in Net gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss). Cash flows received for Interests in MSR are recorded in Other, net in the Consolidated Statements of Comprehensive Income (Loss).
The following tables present activity related to MSR and Interests in MSR for the three months ended March 31, 2022 and 2021:
| Mortgage Servicing Rights | Three Months Ended | ||||||||||
| March 31, 2022 | March 31, 2021 | ||||||||||
| (dollars in thousands) | |||||||||||
| Fair value, beginning of period | $ | 544,562 | $ | 100,895 | |||||||
Purchases (1) | 421,012 | — | |||||||||
| Change in fair value due to: | |||||||||||
Changes in valuation inputs or assumptions (2) | 158,963 | 27,673 | |||||||||
| Other changes, including realization of expected cash flows | (15,600) | (15,488) | |||||||||
| Fair value, end of period | $ | 1,108,937 | $ | 113,080 | |||||||
(1) Includes adjustments to original purchase price from early payoffs, defaults, or loans that were delivered but were deemed to not be acceptable. (2) Principally represents changes in discount rates and prepayment speed inputs used in valuation model, primarily due to changes in interest rates. | |||||||||||
| Interests in MSR | Three Months Ended | ||||
| March 31, 2022 | |||||
| (dollars in thousands) | |||||
| Beginning balance | $ | 69,316 | |||
Purchases (1) | 4,913 | ||||
| Gain (loss) included in net income | 11,424 | ||||
Ending balance March 31, 2022 | $ | 85,653 | |||
(1) Includes adjustments to original purchase price from early payoffs, defaults, or loans that were delivered but were deemed to not be acceptable. | |||||
19
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
8. VARIABLE INTEREST ENTITIES | ||
Multifamily Securitization
In March 2020, the Company repackaged Fannie Mae guaranteed multifamily mortgage-backed securities with a principal cut-off balance of $0.5 billion and retained interest-only securities with a notional balance of $0.5 billion. At the inception of this arrangement, the Company determined that it was the primary beneficiary based upon its involvement in the design of this VIE and through the retention of a significant variable interest in the VIE. The Company elected the fair value option for the financial liabilities of this VIE in order to simplify the accounting; however, the financial assets were not eligible for the fair value option as it was not elected at purchase.
Residential Securitizations
The Company also invests in residential mortgage-backed securities issued by entities that are VIEs because they do not have sufficient equity at risk for the entities to finance their activities without additional subordinated financial support from other parties, but the Company is not the primary beneficiary because it does not have the power to direct the activities that most significantly impact the VIEs’ economic performance. For these entities, the Company’s maximum exposure to loss is the amortized cost basis of the securities it owns and it does not provide any liquidity arrangements, guarantees or other commitments to these VIEs. See the “Securities” Note for further information on Residential Securities.
OBX Trusts
The entities in the table below 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.
| Securitization | Date of Closing | Face Value at Closing | ||||||
| (dollars in thousands) | ||||||||
| OBX 2018-1 | March 2018 | $ | 327,162 | |||||
| OBX 2018-EXP1 | August 2018 | $ | 383,451 | |||||
| OBX 2018-EXP2 | October 2018 | $ | 384,027 | |||||
| OBX 2019-INV1 | January 2019 | $ | 393,961 | |||||
| OBX 2019-EXP1 | April 2019 | $ | 388,156 | |||||
| OBX 2019-INV2 | June 2019 | $ | 383,760 | |||||
| OBX 2019-EXP2 | July 2019 | $ | 463,405 | |||||
| OBX 2019-EXP3 | October 2019 | $ | 465,492 | |||||
| OBX 2020-INV1 | January 2020 | $ | 374,609 | |||||
| OBX 2020-EXP1 | February 2020 | $ | 467,511 | |||||
| OBX 2020-EXP2 | July 2020 | $ | 489,352 | |||||
| OBX 2020-EXP3 | September 2020 | $ | 514,609 | |||||
| OBX 2021-NQM1 | March 2021 | $ | 257,135 | |||||
| OBX 2021-J1 | April 2021 | $ | 353,840 | |||||
| OBX 2021-NQM2 | June 2021 | $ | 376,004 | |||||
| OBX 2021-J2 | July 2021 | $ | 382,483 | |||||
| OBX 2021-NQM3 | August 2021 | $ | 356,474 | |||||
| OBX 2021-INV1 | September 2021 | $ | 320,199 | |||||
| OBX 2021-J3 | October 2021 | $ | 453,650 | |||||
| OBX 2021-INV2 | October 2021 | $ | 343,571 | |||||
| OBX 2021-INV3 | November 2021 | $ | 470,576 | |||||
| OBX 2021-NQM4 | November 2021 | $ | 542,836 | |||||
| OBX 2022-NQM1 | January 2022 | $ | 556,696 | |||||
| OBX 2022-INV1 | January 2022 | $ | 377,275 | |||||
| OBX 2022-INV2 | February 2022 | $ | 466,686 | |||||
| OBX 2022-NQM2 | February 2022 | $ | 439,421 | |||||
| OBX 2022-INV3 | March 2022 | $ | 330,823 | |||||
| OBX 2022-NQM3 | March 2022 | $ | 315,843 | |||||
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
As of March 31, 2022 and December 31, 2021, a total carrying value of $6.2 billion and $4.6 billion, respectively, of bonds were held by third parties and the Company retained $892.5 million and $780.8 million, respectively, 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 $3.4 million and $0.7 million of costs during the three months ended March 31, 2022 and 2021, respectively, in connection with these securitizations that were expensed as incurred. The contractual principal amount of the OBX Trusts’ debt held by third parties was $6.5 billion and $4.6 billion at March 31, 2022 and December 31, 2021, respectively.
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.
Credit Facility VIEs
In June 2016, a consolidated subsidiary of the Company entered into a credit facility with a third party financial institution. As of March 31, 2022 and December 31, 2021, the borrowing limit on this facility was $675.0 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 $716.4 million and $692.6 million at March 31, 2022 and December 31, 2021, respectively. The transfers did not qualify for sale accounting and are reflected as an intercompany secured borrowing that is eliminated upon consolidation. At March 31, 2022 and December 31, 2021, the subsidiary had an intercompany receivable of $455.5 million and $433.3 million, respectively, which eliminates upon consolidation and a secured financing of $455.5 million and $433.3 million, respectively, to the third party financial institution.
In July 2017, a consolidated subsidiary of the Company entered into a credit facility with a third party financial institution. As of March 31, 2022 and December 31, 2021, the borrowing limit on this facility was $234.2 million and $400.0 million, respectively. 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 $396.6 million and $402.9 million at March 31, 2022 and December 31, 2021, respectively, which continue to be reflected in the Company’s Consolidated Statements of Financial Condition under Loans, net. At March 31, 2022 and December 31, 2021, the subsidiary had a secured financing of $234.2 million and $238.2 million, respectively, to the third party financial institution.
In January 2019, a consolidated subsidiary of the Company entered into a credit facility with a third party financial institution. As of March 31, 2022 and December 31, 2021, the borrowing limit on this facility was $400.0 million. The Company has pledged as collateral for this facility corporate loans with a carrying amount of $362.4 million and $368.0 million at March 31, 2022 and December 31, 2021, respectively. As of March 31, 2022 and December 31, 2021, the subsidiary had a secured financing of $224.6 million and $231.8 million, respectively, to the third party financial institution.
MSR VIEs
The Company owns variable interests in an entity that invests in MSR 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.
The Company also owns variable interests in entities that invest in Interests in MSR. These entities are VIEs because they do not have sufficient equity at risk to finance their activities and the Company is the primary beneficiary because it has power to remove the decision makers with or without cause and holds substantially all of the variable interests in the entities.
The Company’s exposure to the obligations of its VIEs is generally limited to the Company’s investment in the VIEs of $2.5 billion at March 31, 2022. 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.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The statements of financial condition of the Company’s VIEs, excluding the multifamily securitization, credit facility VIEs and OBX Trusts as the transfers of loans or securities 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, 2022 and December 31, 2021 are as follows:
| March 31, 2022 | |||||
| MSR VIEs | |||||
| Assets | (dollars in thousands) | ||||
| Cash and cash equivalents | $ | 8,570 | |||
| Loans | 1,897 | ||||
| Mortgage servicing rights | 9,101 | ||||
| Interests in MSR | 85,653 | ||||
| Other assets | 11,600 | ||||
| Total assets | $ | 116,821 | |||
| Liabilities | |||||
| Payable for unsettled trades | 2,155 | ||||
| Other liabilities | 6,100 | ||||
| Total liabilities | $ | 8,255 | |||
| December 31, 2021 | |||||
| MSR VIEs | |||||
| Assets | (dollars in thousands) | ||||
| Cash and cash equivalents | $ | 16,187 | |||
| Loans | 2,347 | ||||
| Mortgage servicing rights | 7,254 | ||||
| Interests in MSR | 69,316 | ||||
| Other assets | 10,406 | ||||
| Total assets | $ | 105,510 | |||
| Liabilities | |||||
| Payable for unsettled trades | 1,911 | ||||
| Other liabilities | 14,582 | ||||
| Total liabilities | $ | 16,493 | |||
Corporate Debt Funds
The Company manages parallel funds investing in senior secured first and second lien corporate loans (the “Fund Entities”). The Fund Entities are considered VIEs because the investors do not have substantive liquidation, kick-out or participating rights. The fees that the Company earns are not considered variable interests of the VIE. The Company is not the primary beneficiary of the Fund Entities and therefore does not consolidate the Fund Entities. During the three months ended March 31, 2022 and 2021, the Company transferred $0 and $15.1 million, respectively, of loans for cash. The loan transfers were accounted for as sales.
Residential Credit Fund
The Company manages a fund investing in participations in residential mortgage loans. The residential credit fund is deemed to be a VIE because the entity does not have sufficient equity at risk to permit the legal entity to finance its activities without additional subordinated financial support provided by any parties, including equity holders, as capital commitments are not considered equity at risk. The Company is not the primary beneficiary and does not consolidate the residential credit fund as its only interest in the fund is the management and performance fees that it earns, which are not considered variable interests in the entity. As of March 31, 2022 and December 31, 2021, the Company had outstanding participating interests in residential mortgage loans of $0.8 billion and $1.0 billion, respectively. These transfers do not meet the criteria for sale accounting and are accounted for as secured borrowings, thus the residential loans are reported as Loans, net and the associated liability is reported as Participations issued in the Consolidated Statements of Financial Condition. The Company elected to fair value the participations issued through earnings to more accurately reflect the economics of the transfers as the underlying loans are carried at fair value through earnings.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
9. SALE OF COMMERCIAL REAL ESTATE BUSINESS | ||
On March 25, 2021, the Company entered into a definitive agreement to sell substantially all of the assets that comprise its CRE business to Slate Asset Management L.P. and Slate Grocery REIT (together, “Slate”) for $2.33 billion. The transaction included equity interests, loan assets and associated liabilities, and CMBS (other than commercial CRTs). The Company also sold nearly all of the remaining CRE business assets that are not included in the transaction with Slate. Certain employees who primarily supported the CRE business joined Slate in connection with the sale. In connection with the execution of the definitive agreement to sell the CRE business, during the three months ended March 31, 2021, the Company performed an assessment of goodwill, which was related to the Company’s 2013 acquisition of CreXus Investment Corp., and recognized an impairment of $71.8 million. During the three months ended March 31, 2021, the Company reported Business divestiture-related gains (losses) of ($249.6) million, in its Consolidated Statements of Comprehensive Income (Loss) which includes the aforementioned goodwill impairment as well as valuation adjustments resulting from classifying the assets as held for sale and estimated transaction costs. In addition, as a result of classifying the loans as held for sale, the previously recognized allowance for loan losses of $135.0 million, which includes $5.1 million on unfunded loan commitments, was reversed during the three months ended March 31, 2021. As of March 31, 2022, the assets held for sale and the associated liabilities were transferred to Slate.
10. DERIVATIVE INSTRUMENTS | ||
Derivative instruments include, but are not limited to, interest rate swaps, options to enter into interest rate swaps (“swaptions”), TBA derivatives, options on TBA securities (“MBS options”), U.S. Treasury and Eurodollar futures contracts and certain forward purchase commitments. The Company may also enter into other types of mortgage derivatives such as interest-only securities, credit derivatives referencing the commercial mortgage-backed securities index and synthetic total return swaps.
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 Net gains (losses) on derivatives 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 recognized 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 derivatives. 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, 2022 and December 31, 2021, ($1.5) billion and ($0.4) billion, respectively, of variation margin was reported as an adjustment 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. The Company may have outstanding interest rate swap agreements where the floating leg is linked to the London Interbank Offered Rate (“LIBOR”), the overnight index swap rate or another index. 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
23
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
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. The Company’s swaptions 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 (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 are estimated using internal pricing models and compared to the counterparty market values.
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.
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 a commercial mortgage-backed securities index, such as the CMBX index, and synthetic total return swaps.
The table below summarizes fair value information about our derivative assets and liabilities at March 31, 2022 and December 31, 2021:
| Derivatives Instruments | March 31, 2022 | December 31, 2021 | ||||||||||||
| Assets | (dollars in thousands) | |||||||||||||
| Interest rate swaptions | $ | 213,882 | $ | 105,710 | ||||||||||
| TBA derivatives | 24,757 | 52,693 | ||||||||||||
| Futures contracts | 724,696 | 9,028 | ||||||||||||
| Purchase commitments | 484 | 1,779 | ||||||||||||
Credit derivatives (1) | 256 | 1,160 | ||||||||||||
| Total derivative assets | $ | 964,075 | $ | 170,370 | ||||||||||
| Liabilities | ||||||||||||||
| Interest rate swaps | $ | 481,696 | $ | 747,036 | ||||||||||
| TBA derivatives | 336,212 | 3,916 | ||||||||||||
| Futures contracts | 5,850 | 129,134 | ||||||||||||
| Purchase commitments | 73 | 870 | ||||||||||||
Credit derivatives (1) | 3,141 | 581 | ||||||||||||
| Total derivative liabilities | $ | 826,972 | $ | 881,537 | ||||||||||
(1) The maximum potential amount of future payments is the notional amount of credit derivatives in which the Company sold protection of $410.0 million and $400.0 million at March 31, 2022 and December 31, 2021, respectively, plus any coupon shortfalls on the underlying tranche. As of March 31, 2022 and December 31, 2021 the credit derivative tranches referencing the basket of bonds had a range of ratings between AAA and AA. | ||||||||||||||
The following table summarizes certain characteristics of the Company’s interest rate swaps at March 31, 2022 and December 31, 2021:
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
| March 31, 2022 | |||||||||||||||||||||||
| Maturity | Current Notional (1)(2) | Weighted Average Pay Rate | Weighted Average Receive Rate | Weighted Average Years to Maturity (3) | |||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
0 - 3 years | $ | 29,179,850 | 0.36 | % | 0.53 | % | 0.75 | ||||||||||||||||
3 - 6 years | 4,343,000 | 0.83 | % | 0.32 | % | 3.83 | |||||||||||||||||
6 - 10 years | 11,042,400 | 1.54 | % | 0.47 | % | 9.01 | |||||||||||||||||
Greater than 10 years | 1,915,000 | 3.45 | % | 0.34 | % | 16.90 | |||||||||||||||||
| Total / Weighted average | $ | 46,480,250 | 0.70 | % | 0.50 | % | 3.66 | ||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| Maturity | Current Notional (1)(2) | Weighted Average Pay Rate | Weighted Average Receive Rate | Weighted Average Years to Maturity (3) | |||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
0 - 3 years | $ | 32,709,300 | 0.25 | % | 0.06 | % | 1.10 | ||||||||||||||||
3 - 6 years | 2,780,000 | 0.21 | % | 0.07 | % | 3.46 | |||||||||||||||||
6 - 10 years | 9,118,000 | 1.43 | % | 0.13 | % | 9.05 | |||||||||||||||||
Greater than 10 years | 1,300,000 | 4.04 | % | 0.11 | % | 18.70 | |||||||||||||||||
| Total / Weighted average | $ | 45,907,300 | 0.59 | % | 0.08 | % | 3.32 | ||||||||||||||||
(1) As of March 31, 2022, 17%, 46% and 37% of the Company’s interest rate swaps were linked to LIBOR, the Federal funds rate and the Secured Overnight Financing Rate, respectively. As of December 31, 2021, 18%, 53% and 29% of the Company’s interest rate swaps were linked to LIBOR, the Federal funds rate and the Secured Overnight Financing Rate, respectively. (2) There were no forward starting swaps at March 31, 2022 and December 31, 2021. (3) At March 31, 2022 and December 31, 2021, the weighted average years to maturity of payer interest rate swaps is offset by the weighted average years to maturity of receiver interest rate swaps. As such, the net weighted average years to maturity for each maturity bucket may fall outside of the range listed. | |||||||||||||||||||||||
The following table summarizes certain characteristics of the Company’s swaptions at March 31, 2022 and December 31, 2021:
| March 31, 2022 | ||||||||||||||||||||||||||||||||
| Current Underlying Notional | Weighted Average Underlying Fixed Rate | Weighted Average Underlying Floating Rate | Weighted Average Underlying Years to Maturity | Weighted Average Months to Expiration | ||||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||
| Long pay | $4,050,000 | 2.00% | 3M LIBOR | 9.40 | 16.50 | |||||||||||||||||||||||||||
| Long receive | $1,000,000 | 1.49% | 3M LIBOR | 11.45 | 17.49 | |||||||||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||||||||
| Current Underlying Notional | Weighted Average Underlying Fixed Rate | Weighted Average Underlying Floating Rate | Weighted Average Underlying Years to Maturity | Weighted Average Months to Expiration | ||||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||
| Long pay | $4,050,000 | 2.00% | 3M LIBOR | 9.65 | 19.50 | |||||||||||||||||||||||||||
| Long receive | $2,000,000 | 1.47% | 3M LIBOR | 10.95 | 11.38 | |||||||||||||||||||||||||||
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The following table summarizes certain characteristics of the Company’s TBA derivatives at March 31, 2022 and December 31, 2021:
| March 31, 2022 | |||||||||||||||||||||||
| Purchase and sale contracts for derivative TBAs | Notional | Implied Cost Basis | Implied Market Value | Net Carrying Value | |||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Purchase contracts | $ | 18,885,000 | $ | 18,596,163 | $ | 18,284,708 | $ | (311,455) | |||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| Purchase and sale contracts for derivative TBAs | Notional | Implied Cost Basis | Implied Market Value | Net Carrying Value | |||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Purchase contracts | $ | 20,133,000 | $ | 20,289,856 | $ | 20,338,633 | $ | 48,777 | |||||||||||||||
The following table summarizes certain characteristics of the Company’s futures derivatives at March 31, 2022 and December 31, 2021:
| March 31, 2022 | |||||||||||||||||
| Notional - Long Positions | Notional - Short Positions | Weighted Average Years to Maturity | |||||||||||||||
| (dollars in thousands) | |||||||||||||||||
U.S. Treasury futures - 2 year | $ | — | $ | (7,477,200) | 1.98 | ||||||||||||
U.S. Treasury futures - 5 year | — | (5,240,900) | 4.40 | ||||||||||||||
U.S. Treasury futures - 10 year and greater | — | (15,028,000) | 6.94 | ||||||||||||||
| Total | $ | — | $ | (27,746,100) | 5.12 | ||||||||||||
| December 31, 2021 | |||||||||||||||||
| Notional - Long Positions | Notional - Short Positions | Weighted Average Years to Maturity | |||||||||||||||
| (dollars in thousands) | |||||||||||||||||
U.S. Treasury futures - 2 year | $ | — | $ | (7,509,200) | 1.96 | ||||||||||||
U.S. Treasury futures - 5 year | — | (5,644,900) | 4.38 | ||||||||||||||
U.S. Treasury futures - 10 year and greater | — | (9,381,000) | 6.84 | ||||||||||||||
| Total | $ | — | $ | (22,535,100) | 4.60 | ||||||||||||
The Company presents derivative contracts on a gross basis on the Consolidated Statements of Financial Condition. Derivative contracts may contain legally enforceable provisions that allow for netting or setting off receivables and payables with each counterparty.
The following tables present information about derivative assets and liabilities that are subject to such provisions and can be offset on our Consolidated Statements of Financial Condition at March 31, 2022 and December 31, 2021, respectively.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
| March 31, 2022 | |||||||||||||||||||||||
| Amounts Eligible for Offset | |||||||||||||||||||||||
| Gross Amounts | Financial Instruments | Cash Collateral | Net Amounts | ||||||||||||||||||||
| Assets | (dollars in thousands) | ||||||||||||||||||||||
| Interest rate swaptions, at fair value | $ | 213,882 | $ | — | $ | — | $ | 213,882 | |||||||||||||||
| TBA derivatives, at fair value | 24,757 | (22,571) | — | 2,186 | |||||||||||||||||||
| Futures contracts, at fair value | 724,696 | (5,850) | — | 718,846 | |||||||||||||||||||
| Purchase commitments | 484 | — | — | 484 | |||||||||||||||||||
| Credit derivatives | 256 | (256) | — | — | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Interest rate swaps, at fair value | $ | 481,696 | $ | — | $ | (35,387) | $ | 446,309 | |||||||||||||||
| TBA derivatives, at fair value | 336,212 | (22,571) | (1,220) | 312,421 | |||||||||||||||||||
| Futures contracts, at fair value | 5,850 | (5,850) | — | — | |||||||||||||||||||
| Purchase commitments | 73 | — | — | 73 | |||||||||||||||||||
| Credit derivatives | 3,141 | (256) | (2,885) | — | |||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| Amounts Eligible for Offset | |||||||||||||||||||||||
| Gross Amounts | Financial Instruments | Cash Collateral | Net Amounts | ||||||||||||||||||||
| Assets | (dollars in thousands) | ||||||||||||||||||||||
| Interest rate swaptions, at fair value | $ | 105,710 | $ | — | $ | — | $ | 105,710 | |||||||||||||||
| TBA derivatives, at fair value | 52,693 | (3,876) | — | 48,817 | |||||||||||||||||||
| Futures contracts, at fair value | 9,028 | (9,028) | — | — | |||||||||||||||||||
| Purchase commitments | 1,779 | — | — | 1,779 | |||||||||||||||||||
| Credit derivatives | 1,160 | (516) | — | 644 | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Interest rate swaps, at fair value | $ | 747,036 | $ | — | $ | (77,607) | $ | 669,429 | |||||||||||||||
| TBA derivatives, at fair value | 3,916 | (3,876) | (40) | — | |||||||||||||||||||
| Futures contracts, at fair value | 129,134 | (9,028) | (120,106) | — | |||||||||||||||||||
| Purchase commitments | 870 | — | — | 870 | |||||||||||||||||||
| Credit derivatives | 581 | (516) | (65) | — | |||||||||||||||||||
The effect of interest rate swaps on the Consolidated Statements of Comprehensive Income (Loss) is as follows:
Net Interest Component of Interest Rate Swaps (1) | Realized Gains (Losses) on Termination of Interest Rate Swaps (1) | Unrealized Gains (Losses) on Interest Rate Swaps (1) | |||||||||||||||
| For the three months ended | (dollars in thousands) | ||||||||||||||||
| March 31, 2022 | $ | (62,541) | $ | — | $ | 1,323,439 | |||||||||||
| March 31, 2021 | $ | (79,747) | $ | — | $ | 772,262 | |||||||||||
(1) Included in Net gains (losses) on derivatives on the Consolidated Statements of Comprehensive Income (Loss). | |||||||||||||||||
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The effect of other derivative contracts on the Company’s Consolidated Statements of Comprehensive Income (Loss) is as follows:
| Three Months Ended March 31, 2022 | |||||||||||||||||
| Derivative Instruments | Realized Gain (Loss) | Unrealized Gain (Loss) | Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Derivatives | ||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| Net TBA derivatives | $ | (756,139) | $ | (360,231) | $ | (1,116,370) | |||||||||||
| Net interest rate swaptions | (14,450) | 122,622 | 108,172 | ||||||||||||||
| Futures | 553,154 | 838,952 | 1,392,106 | ||||||||||||||
| Purchase commitments | — | (499) | (499) | ||||||||||||||
| Credit derivatives | 1,060 | (3,339) | (2,279) | ||||||||||||||
Total | $ | 381,130 | |||||||||||||||
| Three Months Ended March 31, 2021 | |||||||||||||||||
| Derivative Instruments | Realized Gain (Loss) | Unrealized Gain (Loss) | Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Derivatives | ||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| Net TBA derivatives | $ | (287,889) | $ | (342,228) | $ | (630,117) | |||||||||||
| Net interest rate swaptions | (22,210) | 305,990 | 283,780 | ||||||||||||||
| Futures | 296,164 | 517,133 | 813,297 | ||||||||||||||
| Purchase commitments | — | (1,907) | (1,907) | ||||||||||||||
| Credit derivatives | 1,631 | 9,023 | 10,654 | ||||||||||||||
| Total | $ | 475,707 | |||||||||||||||
Certain of the Company’s derivative contracts are subject to International Swaps and Derivatives Association Master Agreements or other similar agreements which may contain provisions that grant counterparties certain rights with respect to the applicable agreement upon the occurrence of certain events such as (i) a decline in stockholders’ equity in excess of specified thresholds or dollar amounts over set periods of time, (ii) the Company’s failure to maintain its REIT status, (iii) the Company’s failure to comply with limits on the amount of leverage, and (iv) the Company’s stock being delisted from the New York Stock Exchange.
Upon the occurrence of any one of items (i) through (iv), or another default under the agreement, the counterparty to the applicable agreement has a right to terminate the agreement in accordance with its provisions. The aggregate fair value of all derivative instruments with the aforementioned features were in a net asset position at March 31, 2022.
11. FAIR VALUE MEASUREMENTS | ||
The Company follows fair value guidance in accordance with GAAP to account for its financial instruments and MSR that are accounted for at fair value. The fair value of a financial instrument and MSR is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
GAAP requires classification of financial instruments and MSR into a three-level hierarchy based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
If the inputs used to measure the financial instrument and MSR fall within different levels of the hierarchy, the categorization is based on the lowest priority input that is significant to the fair value measurement of the instrument. Financial assets and liabilities recorded at fair value on the Consolidated Statements of Financial Condition or disclosed in the related notes are categorized based on the inputs to the valuation techniques as follows:
28
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets and liabilities in active markets.
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – inputs to the valuation methodology are unobservable and significant to overall fair value.
The Company designates its securities as trading, available-for-sale or held-to-maturity depending upon the type of security and the Company’s intent and ability to hold such security to maturity. Securities classified as available-for-sale and trading are reported at fair value on a recurring basis.
The following is a description of the valuation methodologies used for instruments carried at fair value. These methodologies are applied to assets and liabilities across the three-level fair value hierarchy, with the observability of inputs determining the appropriate level.
Futures contracts are valued using quoted prices for identical instruments in active markets and are classified as Level 1.
Residential Securities, interest rate swaps, swaptions and other derivatives are valued using quoted prices or internally estimated prices for similar assets using internal models. The Company incorporates common market pricing methods, including a spread measurement to the Treasury curve as well as underlying characteristics of the particular security including coupon, prepayment speeds, periodic and life caps, rate reset period and expected life of the security in its estimates of fair value. Fair value estimates for residential mortgage loans are generated by a discounted cash flow model and are primarily based on observable market-based inputs including discount rates, prepayment speeds, delinquency levels, and credit losses. Management reviews and indirectly corroborates its estimates of the fair value derived using internal models by comparing its results to independent prices provided by dealers in the securities and/or third party pricing services. Certain liquid asset classes, such as Agency fixed-rate pass-throughs, may be priced using independent sources such as quoted prices for TBA securities.
Residential Securities, residential mortgage loans, interest rate swap and swaption markets, TBA derivatives and MBS options are considered to be active markets such that participants transact with sufficient frequency and volume to provide transparent pricing information on an ongoing basis. The liquidity of the Residential Securities, residential mortgage loans, interest rate swaps, swaptions, TBA derivatives and MBS options markets and the similarity of the Company’s securities to those actively traded enable the Company to observe quoted prices in the market and utilize those prices as a basis for formulating fair value measurements. Consequently, the Company has classified Residential Securities, residential mortgage loans, interest rate swaps, swaptions, TBA derivatives and MBS options as Level 2 inputs in the fair value hierarchy.
The fair value of commercial mortgage-backed securities classified as available-for-sale is determined based upon quoted prices of similar assets in recent market transactions and requires the application of judgment due to differences in the underlying collateral. Consequently, commercial real estate debt investments carried at fair value are classified as Level 2.
For the fair value of debt issued by securitization vehicles, refer to the “Variable Interest Entities” Note for additional information.
The Company classifies its investments in MSR and Interests in MSR as Level 3 in the fair value measurements hierarchy. Fair value estimates for these investments are obtained from models, which use significant unobservable inputs in their valuations. These valuations primarily utilize discounted cash flow models that incorporate unobservable market data inputs including discount rates, prepayment rates, delinquency levels and costs to service. Model valuations are then compared to valuations obtained from third party pricing providers. Management reviews the valuations received from third party pricing providers and uses them as a point of comparison to modeled values. The valuation of MSR and Interests in MSR require significant judgment by management and the third party pricing providers. Assumptions used for which there is a lack of observable inputs may significantly impact the resulting fair value and therefore the Company’s financial statements.
The following tables present the estimated fair values of financial instruments and MSR measured at fair value on a recurring basis. There were no transfers between levels of the fair value hierarchy during the periods presented.
29
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
| March 31, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets | (dollars in thousands) | ||||||||||||||||||||||
| Securities | |||||||||||||||||||||||
| Agency mortgage-backed securities | $ | — | $ | 57,787,141 | $ | — | $ | 57,787,141 | |||||||||||||||
| Credit risk transfer securities | — | 845,809 | — | 845,809 | |||||||||||||||||||
| Non-Agency mortgage-backed securities | — | 1,737,333 | — | 1,737,333 | |||||||||||||||||||
| Commercial mortgage-backed securities | — | 357,354 | — | 357,354 | |||||||||||||||||||
| Loans | |||||||||||||||||||||||
| Residential mortgage loans | — | 1,650,151 | — | 1,650,151 | |||||||||||||||||||
| Mortgage servicing rights | — | — | 1,108,937 | 1,108,937 | |||||||||||||||||||
| Interests in MSR | — | — | 85,653 | 85,653 | |||||||||||||||||||
| Assets transferred or pledged to securitization vehicles | — | 7,809,307 | — | 7,809,307 | |||||||||||||||||||
| Derivative assets | |||||||||||||||||||||||
| Other derivatives | 724,696 | 239,379 | — | 964,075 | |||||||||||||||||||
| Total assets | $ | 724,696 | $ | 70,426,474 | $ | 1,194,590 | $ | 72,345,760 | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Debt issued by securitization vehicles | — | 6,711,953 | — | 6,711,953 | |||||||||||||||||||
| Participations issued | — | 775,432 | — | 775,432 | |||||||||||||||||||
| Derivative liabilities | |||||||||||||||||||||||
| Interest rate swaps | — | 481,696 | — | 481,696 | |||||||||||||||||||
| Other derivatives | 5,850 | 339,426 | — | ||||||||||||||||||||